SEC Settles $2.2 Million Enforcement Action Following Whistleblower Complaint by [Jordan Thomas][Prior Firm] Client

  • June 16, 2014

Today, the SEC charged the Albany-based investment advisory firm Paradigm Capital and its owner, Candace Weir, with violating the federal securities laws by engaging in prohibited and undisclosed principal transactions on at least 83 separate occasions, among other charges. Paradigm and Weir agreed to pay total sanctions of approximately $2.2 million to settle the charges. The SEC began investigating Paradigm after a [Jordan Thomas][prior firm] client – who has chosen to remain anonymous – reported possible misconduct at the firm to the SEC. 

According to the SEC’s order, Paradigm, at the direction of Weir, engaged in a series of transactions with a broker-dealer called C.L. King when trading on behalf of a hedge fund client. C.L. King is also controlled and majority-owned by Weir, meaning that affiliated entities stood on both sides of these transactions. Under Section 206(3) of the Investment Advisers Act, an adviser like Paradigm must disclose such principal transactions to their client – here, the hedge fund – and obtain client consent before proceeding. Paradigm failed to satisfy these important disclosure and consent obligations, which are designed to ensure that clients are protected from self-dealing and possible conflicts of interest.

Additionally, Paradigm failed to disclose in its Form ADV that a “conflicts committee” – which it had ostensibly established for the purpose of mitigating possible conflicts like those posed by the principal transactions – was itself conflicted. According to Julie Riewe, the co-chief of the SEC Enforcement Division’s Asset Management Unit, “Paradigm’s use of a conflict committee denied its hedge fund client the effective disclosure and consent to which it was entitled. Advisors to pooled investment vehicles need to ensure that any mechanism developed to address conflicts in principal transactions actually mitigates those conflicts.”

We’re very pleased that this case resulted in a successful settlement for the SEC: it’s one of a growing number of signs that the SEC Whistleblower Program is effectively helping the SEC detect, investigate and prosecute securities violations that might otherwise have remained under the radar. The process of being an SEC whistleblower isn’t often easy, but, as this settlement shows, coming forward can make a difference both for the SEC and for investors.

By Jordan Thomas and Vanessa De Simone

Named one of the top whistleblower practices/attorneys in the country by The New York Times, Wall Street Journal, NPR and The New Yorker
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