The Securities and Exchange Commission on Monday charged Albany, N.Y.-based hedge fund advisory firm Paradigm Capital Management with engaging in prohibited principal transactions and then retaliating against the firm’s head trader, who reported the trading activity to the SEC.
The SEC charged Paradigm Capital Management and its owner, Candace King Weir, with causing the improper principal transactions. Paradigm and Weir agreed to pay $2.2 million in a settlement announced Monday.
A Commission rule adopted in 2011 under the Dodd-Frank Act authorized the SEC to bring enforcement actions based on retaliation against whistleblowers who report potential securities law violations to the agency.
The Monday action is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions.
SEC Enforcement Chief Andrew Ceresney said on a Monday conference call with reporters that the action highlights the fact that advisors must “properly manage conflicts” when engaging in principal transactions.
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 advisor and the client, and therefore advisors are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent, the SEC says.
“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,” the SEC said.