SEC Continues Whistleblower Program

¶ … Capital Management Blows Whistle A whistleblower in the classic sense of the word possesses a number of key characteristics. Some of these pertain to the fact that whistleblowers tend to believe that there are acts of impropriety at their workplace. In this respect most whistleblowers have a keen sense of ethics as well as a sense of social justice that helps to actuate them. There is a duality to the sort of ethical conviction that a whistleblower has.

Firstly, he or she must believe that his or her organization is making some sort of ethical violation in which they are taking advantage of other shareholders. Such shareholders include those in upper level management, those in conventional 'worker bee' roles, as well as public shareholders on the market and the extended friends and families of workers. Secondly, the whistleblower must consider the ethics of taking such information to an outside entity.

In doing so, he or she is traversing some of the ethical obligations of his or her company, which generally forbids disclosure of business practices and information to outside sources. Whistleblowers also tend to be independent and loyal, and strong believers in the way things are done as opposed to simply concerned with their results. The instance of whistle blowing in one publicly traded company that will be discussed in this document involves Paradigm Capital Management.

Last summer, a whistleblower reported to the SEC that the company was engaged in practices in which it should not have been engaged. Specifically, these transactions revolved around "prohibited principal transactions" (Waddell, 2015). In this particular instance, the individuals who functioned as the whistleblower and reported these occurrences to the SEC was one of Paradigm Capital's head traders.

The details of the issue that the whistleblower reported pertain to a conflict of interest in which Paradigm's owner, Candace King Weir, "conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of hedge fund client" (SEC, 2014). Weir was doing so as a means of taxation compensation and failed to provide disclosure to the client of her ownership status. The effect of the action on the company was that Weir agreed to pay $2.2million to the SEC.

The company then engaged in acts of retaliation against the whistleblower which eventually resulted in the whistleblower's resignation. Lastly, the whistleblower was awarded the full amount of 30% of the fine levied by the SEC, or $600,000 dollars, for his or her trouble in this incident (Waddell, 2015). The whistleblower was most assuredly justified in reporting the company's actions, which were unmistakably taking advantage of the trust and interest of its hedge fund client whose money was used to trade funds with the broker-dealer that Weir also owns.

Had Weir provided sufficient notice to this client that she was actually advising the client to invest in a firm that she also owns (since Paradigm is a hedge fund advisory firm), there would have been no need for a whistleblower to intervene. By failing to disclose such vital information, however, Weir was merely serving her own interests by advising a client to invest his or her capital into a broker firm that she owns.

Furthermore, the whistleblower was also justified in reporting this incident because it involved a substantial amount of money. Additionally, when Paradigm did form a committee for the purpose of providing written notification of these facts to the client, the committee was essentially composed of individuals who worked directly under Weir and one of whom worked for both of the companies that Weir owns.

Moreover, as a head trader for Paradigm, the whistleblower has a job to both the financial entity and to the SEC to maintain propriety in trading -- which is also why he or she was justified in reporting this incident. The whistleblower in this particular instance would be fully protected under the Sarbanes-Oxley Act. Firstly, this act was designed to grant greater levels of transparency and accountability to those who chose to invest in publicly traded companies. Paradigm certainly fits into this category.

Moreover, the hedge fund client was a member of the general public who genuinely believed that Weir's firm was representing his or her interests, and not that of the owner of Paradigm. As such, many of the stipulations of the Sarbanes-Oxley Act definitely pertain to this particular case. Still, the segment of that act while likely relates the most is Title V, which specifically pertains to conflicts of interest. As previously noted, the conflict of interest in Weir directing a client to invest.