SEC Imposes First-Ever Sanctions for Retaliation Against a Whistleblower
In previous posts, we reported on the SEC’s whistleblower program implemented as part of the Dodd-Frank Act. On June 16, 2014, the SEC took its program a step further and issued its first order alleging violations of the anti-retaliation provisions of the Act, Section 21F(h) of the Securities Exchange Act, 15 U.S.C. 78u-6(h), and SEC Rule 21F-2(b), 17 C.F.R. 240.21F-2(b).
The SEC’s administrative order alleges that a hedge fund called Paradigm Capital Management and its majority owner violated the anti-retaliation provisions by punishing the fund’s head trader for making a whistleblower submission to the SEC. Paradigm and its majority owner consented to the order, without admitting or denying the allegations. The whistleblower submission alleged that the fund had engaged in certain conflicted trades that were violations of the Investment Advisers Act. When the whistleblower notified the fund’s management that he had reported the alleged violations to the SEC, the fund, advised by counsel, took several steps including, among other things: (1) removing the whistleblower from the trading desk and suspending the whistleblower’s trading and supervisory responsibilities; (2) moving the whistleblower’s work station to an offsite location; (3) directing the whistleblower to prepare a report about potential misconduct at the fund, but providing him with access to 1,900 pages of paper files while denying access to reports from the fund’s computerized trading and account systems; (4) disciplining the whistleblower for emailing confidential material from his personal email address a month after granting him permission to use his personal email address for fund business; and (5) taking other actions viewed by the SEC as designed to marginalize the whistleblower. The whistleblower ended up resigning.
The SEC’s administrative order against Paradigm and its majority owner imposed monetary sanctions consisting of $1.7 million in disgorgement for the trading violations, prejudgment interest of $181,771, and a civil penalty of $300,000. The order does not specify what portion of the civil penalty applies to the alleged retaliation against the whistleblower as opposed to the trading violations. In a press conference, the SEC’s enforcement director declined to specify what portion of the civil penalty was for the retaliation. Nevertheless, the SEC’s action may signal increased scrutiny of employment actions taken in relation to employees who assume the role of whistleblowers.