SEC’s First Anti-Retaliation Action Under Dodd-Frank Act Carries Warning for Employers

| Jason M. Knott

The Securities & Exchange Commission gained significant new enforcement powers in the Dodd-Frank Act of 2010.  Under the Act, the SEC can award bounties to whistleblowers who provide information leading to successful enforcement actions.  It has already exercised this power, making eight whistleblower awards since starting its whistleblower program in late 2011.  The Dodd-Frank Act also allows the SEC to sue an employer who retaliates against a whistleblower, but the SEC hasn’t previously taken that step. 

Ten days ago, that changed.  The SEC announced that it had charged Paradigm Capital Management and owner Candace King Weir with engaging in prohibited trades and retaliating against a head trader who reported the trades to the SEC, and that Paradigm and Weir had settled the charges for $2.2 million.  Without its new enforcement authority under Dodd-Frank, the SEC wouldn’t have been able to bring the retaliation charge. 

According to the SEC’s press release, Paradigm “removed [the whistleblower] from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him.” 

The formal order issued by the SEC further describes what happened to the whistleblower.  The day after the trader told Paradigm that he had reported these particular trades to the SEC, Paradigm removed him from his position.  The trader and Paradigm tried to negotiate a severance package, but when that fell through, Paradigm brought him back to investigate trades and work on compliance policies – but not to resume his head trading responsibilities. 

According to the SEC, these actions (and others) ran afoul of Dodd-Frank’s whistleblower provision, which prohibits “discharging, demoting, suspending, threatening, harassing, directly or indirectly, or in any other manner discriminating against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in, among other things, providing information to the Commission.”  At the time it removed the trader from his position, Paradigm said that it was doing so “because he executed trades that were reported to the Commission” and “Paradigm needed to investigate his actions.”  One can see why an employer might want to investigate an employee who has allegedly participated first-hand in trading misconduct.  Further, Paradigm also attempted to mitigate its action by keeping the trader’s salary and benefits the same.

However, the SEC rejected these justifications.  The SEC's approach shows that it is likely to pursue a retaliation claim against a company that changes an employee’s job responsibilities because that employee has blown the whistle to the SEC, even if the company tries to mitigate the harm or claims it has to suspend the employee to prevent further misconduct.  This could pose significant difficulties for employers, particularly if the employee has implicated himself in the illegal actions.  Given the Paradigm precedent, an employer may need to treat even that employee with kid gloves to avoid later charges of retaliation. 

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

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