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Whistleblower Given Large Award in SEC's First Retaliation Action

In its first settlement regarding a claim of retaliation against a whistleblower, the Securities and Exchange Commission ("SEC") awarded whistleblower James Nordgaard ("Nordgaard") $600,000, which was 30 percent of the commission's settlement with Nordgaard's former firm, Paradigm Capital Management, Inc.1 After blowing the whistle on Paradigm in 2014 for engaging in prohibited transactions, Nordgaard, who was the former head of trading at the hedge fund, experienced retaliatory actions such as demotion, rescinding of his responsibilities, and being "otherwise marginalized" until he eventually resigned from the firm. Paradigm and its owner, Candace King Weir ("Paradigm"), paid $2.2 million in total to settle the case with the SEC.2

The alleged illegal conduct was that "Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client."3 Because this can create a conflict of interest for Weir and the hedge fund client, Paradigm must properly disclose this fact to the client and obtain consent to continue with any transactions. According to the SEC's investigation, Paradigm engaged in at least 83 transactions between 2009 and 2011 with C.L. King, Weir's brokerage firm. "Weir directed Paradigm's traders to sell securities that had unrealized losses from the hedge fund to a proprietary account at C.L. King" in order to "reduce the tax liability of the firm's hedge fund investors."4

Paradigm attempted to meet the SEC's disclosure requirements by having a conflicts committee review the transactions, but the committee consisted of two of Weir's subordinates, which caused the committee itself to be conflicted and to fail in meeting the disclosure requirements. As part of the settlement with the SEC, Paradigm will also utilize an independent compliance consultant in order to better monitor its trading and disclosure practices.5

One of the biggest fears whistleblowers have is that their employer may retaliate against them for reporting information. By awarding Nordgaard the upper limit of a potential whistleblower award, 30 percent of the overall penalty payment, the SEC hopes that it will encourage other whistleblowers to not fear coming forward and know that they have the force of the law and the SEC behind them. Sean McKessy, head of the SEC's whistleblower division, has stated that he hopes to bring more retaliation claims like the Paradigm case.6 By pursuing more retaliation claims and graciously awarding whistleblowers, the SEC hopes to encourage people to continue to report potential securities law violations.

The legal team at SFMS has significant experience litigating securities matters. If you have any questions regarding this subject or this posting, please contact Valerie Chang (vchang@sfmslaw.com) or Michael Ols (mols@sfmslaw.com). We can also be reached toll-free at (866) 540-5505.

Shepherd Finkelman Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.

Sources:

1. http://www.fcpablog.com/blog/2015/4/29/sec-awards-paradigm-capital-whistleblower-600000-for-retalia.html#

2. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307

3. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307

4. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307

5. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307

6. http://www.law360.com/securities/articles/649463/sec-uses-firm-s-retaliation-to-market-tipster-program

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