Posted by Michael Heaton on 04/18/2016

In a March press release, the Securities and Exchange Commission (SEC) announced the payment of almost $2 million to three whistleblowers. 

A whistleblower who voluntarily provided original information that prompted the SEC to open its investigation received the largest of the three awards.  That whistleblower, who will receive about $1.8 million, continued to provide valuable information throughout the investigation.  The other two whistleblowers will receive approximately $65,000 each for providing information after the investigation started.

According to the press release, the SEC’s whistleblower program has now paid more than $57 million to 26 whistleblowers since the program’s inception in 2011.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. 

In another recent case, the SEC charged an Albany, N.Y.-based hedge fund advisory firm with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.   This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions.  The SEC also charged the firm’s owner with causing the improper principal transactions. 

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges.

According to the SEC’s order instituting a settled administrative proceeding, Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client.  Such principal transactions pose conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent.  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.

These cases highlight the increased emphasis the agency has placed on whistleblower protection pursuant to the requirements of the Dodd-Frank Act. The SEC has also conducted limited scope examinations to assess compliance with provisions governing whistleblowing.

Firms should review their policies and procedures that pertain to confidentiality and whistleblowing topics, their Code of Ethics, and confidentiality and non-disparagement clauses in employment and separation agreements. The Office of the Whistleblower has additional news and resources available.