Monday, June 16, 2014
Landmark SEC Whistleblower Program Victory
Labaton Sucharow Client Reported Securities Violations by Paradigm Capital Management Leading to Successful SEC Enforcement Action
NEW YORK (June 16, 2014) – Labaton Sucharow LLP, which established the first national practice exclusively dedicated to representing Securities and Exchange Commission (SEC) whistleblowers, announces that the SEC today filed a precedent-setting enforcement action charging Paradigm Capital Management and Candace King Weir, the firm's CEO, with engaging in prohibited and undisclosed principal transactions, among other violations. Paradigm Capital Management and Weir agreed to pay more than $2.18 million to settle the SEC's charges.
Jordan A. Thomas, Chair of Labaton Sucharow's Whistleblower Representation Practice, represented an anonymous whistleblower who was instrumental in bringing Paradigm's wrongdoing to the attention of the SEC.
According to the SEC's order instituting proceedings, Weir caused Paradigm, a New York-based hedge fund advisory firm, to engage in at least 83 principal transactions with an affiliated broker-dealer, C.L. King, when trading on behalf of a hedge fund client. Paradigm was required to disclose these principal trades to its hedge fund client; instead, Paradigm sought to fulfill its disclosure and consent obligations using a "conflicts committee," which the SEC found was itself conflicted and lacked the necessary independence to fulfill these obligations. Accordingly, Paradigm failed to properly disclose at least 83 principal trades—which were designed to reduce investors' tax liability—to the hedge fund's investors.
"Investors have a right to know and be protected when their advisor is pulling the strings on both sides of a transaction, especially when those transactions involve small, illiquid securities," said Thomas, counsel for the SEC whistleblower. "Clients tend to get a bad deal when firms do this, due to self-dealing and other conflicts of interest. These types of securities violations are often difficult for the SEC to detect and prosecute without a source on the inside—that's what makes the SEC Whistleblower Program such a game changer."
Due to the unique protections and incentives offered by the SEC Whistleblower Program, Labaton Sucharow's client reported possible securities violations at Paradigm to the SEC. This important investor protection program has broad international reach and offers eligible whistleblowers the ability to report anonymously and the opportunity to earn substantial monetary awards—regardless of nationality. To ensure that adequate funds are available to pay awards, Congress has established a replenishing Investor Protection Fund, which has a current balance in excess of $450 million.
"I often advise my clients that it's not always easy or glamorous to be a corporate whistleblower, but the SEC has their back and the ability to remain anonymous when reporting possible securities violations can make doing the right thing a lot easier," said Thomas, who as a former Assistant Director in the Enforcement Division of the SEC, played a leadership role in the development of the SEC Whistleblower Program. "Each time the SEC has issued a whistleblower award, awareness of the program has grown and other knowledgeable individuals have chosen to break their silence and come forward. In the coming years, based upon my experience at the SEC and now in private practice, I believe enforcement records will be broken and many of the Commission's most significant enforcement actions will be the result of courageous whistleblowers."
Labaton Sucharow would like to acknowledge the Outten & Golden law firm for its counsel in this matter.