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What you need to know for 04/30/2017

Albany firm fined in whistleblower case

Albany firm fined in whistleblower case

An Albany-based hedge fund advisory firm is the first to be charged by the federal Securities and Ex

An Albany-based hedge fund advisory firm is the first to be charged by the federal Securities and Exchange Commission under enhanced anti-retaliation regulations against whistleblowers.

The SEC charged Paradigm Capital Management with engaging in prohibited transactions with an inherent conflict of interest, then retaliating against an employee who brought the trading activities to the SEC’s attention.

To settle the charges, Paradigm Capital Management and owner Candace King Weir of Loudonville agreed to pay the SEC $2.2 million.

Acting under a rule implemented in 2011 under the Dodd-Frank Act to protect whistleblowers, the SEC found that Paradigm engaged in retaliatory actions against the firm’s head trader, leading to his 2012 resignation, after learning he had reported the trades to the SEC.

“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” Andrew J. Ceresney, director of the SEC Enforcement Division, said in a Monday conference call. “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”

According to the SEC, Paradigm engaged in “prohibited principal transactions” with affiliated broker-dealer C.L. King & Associates while trading on behalf of hedge fund client PCM Partners L.P. II. The transactions were part of a strategy in place from 2009 to 2011, at least, to reduce the tax liability of investors.

According to the SEC’s order, Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client. These actions pose conflicts of interests, Ceresney said, and Paradigm “failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction.” In addition, a conflicts committee set up to protect clients had its own inherent conflicts.

According to the commission, after Paradigm learned of the head trader’s report to the SEC, he was removed from his position, had his job function changed to full-time compliance assistant, was stripped of his supervisory responsibilities and was otherwise marginalized.

The SEC did not identify him publicly.

“For whistleblowers to come forward, they must feel assured that they’re protected from retaliation and the law is on their side should it occur,” Sean McKessy, chief of the SEC’s Office of the Whistleblower, said in a statement. “We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”

Paradigm and Weir consented to the entry of the SEC order. Paradigm also agreed to retain an independent compliance consultant.

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