Candace King Weir and her hedge fund advisory firm Paradigm Capital Management will pay $2.2M to resolve Securities and Exchange Commission charges accusing the firm of executing prohibited principal transactions and acting against the whistleblower employee who notified the regulator about the conflicted activity. Weir is charged with causing the principal transactions to happen.
The agency contends that Weir facilitated the transactions between her firm and C.L. King & Associates, a brokerage firm that she also own, while trading for the hedge fund PCM Partners L.P. II. This type of transaction presents a conflict of interest between the client and adviser, and the latter is supposed to disclose that they are involved on both sides of the trade. The adviser also needs to get the client’s permission for this.
According to the Commission’s order, Paradigm did not give written disclosure to the hedge fund or obtain its consent. Paradigm’s head trader then reported the trading conduct.
Following the SEC investigation, the agency said that the hedge fund advisory firm had been involved in this type of trading strategy in a minimum of 83 principal transactions. The regulator says that the firm wanted to lower the tax liability of its investors that are hedge funds.
Weir would tell the advisory firm’s traders to sell the securities with unrealized losses from the hedge fund to a C.L. King proprietary trading account. The losses were then employed to offset realized gains made by the hedge fund. More than 45 securities positions were sold to the brokerage firm from the fund. 36 of them were bought back for the fund.
Because of Weir’s conflicted role, the SEC said even a written disclosure by Weir was not enough, nor was the establishment of a conflicts committee. The committee was comprised of executives that reported to Weir. The SEC also said there were other resulting conflicts from the committee. For example, Paradigm’s CFO, who was on the committee, was also C.L. King’s CFO. The regulator says that the conflicts committee denied its hedge fund client the proper disclosure and consent.
An SEC rule lets the agency file enforcement actions for whistleblower retaliation because of claims made about possible securities law violations. The Commission claims that Paradigm took retaliatory action after it found out that its former head trader made a whistleblower submission to the regulator. This included taking him out of his position, making him investigate the conduct he reported, switching his job to compliance assistant, taking away his supervisory duties, and marginalizing him in other ways.
Without admitting or denying the SEC findings, Weir and Paradigm agreed to the entry of the order finding that the violated certain sections of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. Both consented to cease and desist from future violations.
The SSEK Partners Group is a securities law firm that represents institutional investors and high net worth individuals in recouping their fraud losses.
SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower, SEC, June 16, 2014
Read the SEC Order (PDF)
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