The SEC recently issued an Order against Paradigm Capital Management, Inc. (Paradigm), a registered investment adviser, and its principal for allegedly engaging in principal trades without effective client disclosure and consent, and for retaliating against an employee who reported such activity to the SEC.  According to the SEC, this is the first enforcement action it has taken for violations of the Dodd-Frank anti-retaliation provisions.

Dodd-Frank Anti-Retaliation Rules

Dodd-Frank prohibits an employer from retaliating against an employee for reporting potential violations to the SEC and/or assisting in any resulting enforcement action.  The Act also allows whistleblowers to reap a percentage of the monetary damages obtained by the SEC in a successful enforcement action.  In May 2011, the SEC adopted Rule 21F-2, which specifies the conditions for receiving anti-retaliation protection and whistleblower rewards under Dodd-Frank.  Under Rule 21F-2(b), an employee is entitled to anti-retaliation protection as a whistleblower if, among other things, he or she possesses a reasonable belief that the information he or she provided relates to a possible securities law violation.  Notably, an employee still may receive anti-retaliation protection as a whistleblower even if he ultimately is not entitled to a reward.

SEC Order

The SEC’s Order asserted that Paradigm violated the anti-retaliation provisions of Dodd-Frank by engaging in a series of retaliatory actions against a head trader who had reported improper principal trades to the SEC.  According to the Order, when the head trader informed Paradigm of his disclosures to the SEC, Paradigm immediately removed him from the trading desk and stripped him of his day-to-day trading and supervisory responsibilities.  In addition, Paradigm purportedly tasked the head trader with preparing a report on the alleged trading violations and instructed him to work offsite.  Despite his repeated requests, Paradigm allegedly refused to allow the head trader to resume his regular trading and supervisory role, ultimately resulting in his resignation.  The SEC found that Paradigm had no legitimate reason for changing the head trader’s functions or removing his supervisory responsibilities, concluding that Paradigm retaliated against him for reporting the principal trades to the SEC.

Without admitting or denying any wrongdoing, Paradigm and its principal agreed to pay disgorgement of $1.7 million, prejudgment interest of $181,771 and a civil penalty of $300,000.  The precise amount specifically attributed to the retaliation claim is not clear.  Paradigm and its principal also agreed to cease and desist from committing or causing further violations of Dodd-Frank’s anti-retaliation provisions, and to hire an independent compliance consultant to review its trading policies.

Implications

The Order against Paradigm is consistent with the SEC’s repeated statements that it intends to pursue anti-retaliation enforcement actions.  As the Chief of the SEC’s Office of the Whistleblower stated in a press release accompanying the SEC Order:

[the SEC] will continue to exercise [its] anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.

Employers should make concerted efforts to train managers to take all appropriate steps to comply with anti-retaliation policies and strengthen their internal whistleblower compliance programs and policies.  Here is a reference to our Top 10 steps to paring the risks.

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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.