The Morning Brief: SEC Brings First Case Under Whistleblower Rule

Albany, New York–based hedge fund firm Paradigm Capital Management and its owner, Candace King Weir, agreed to pay $2.2 million to settle Securities and Exchange Commission charges that she broke rules prohibiting certain kinds of transactions and then retaliated against an employee who reported these activities to the regulator. In its announcement, the SEC said this is the first time it has brought a case since the Dodd-Frank Wall Street Reform and Consumer Protection Act empowered it to charge firms and people that retaliate against whistleblowers who report potential violations of securities laws.

“Weir conducted transactions between Paradigm and a broker-dealer she also owns while trading on behalf of a hedge fund client,” the SEC alleges. The regulator says these kinds of principal transactions “pose conflicts between the interests of the adviser and the client,” so advisers “must disclose that they are participating on both sides of the trade and obtain the client’s consent.” The SEC says Paradigm failed to do this.

The regulator claims that when Paradigm found out that its head trader reported potential misconduct to the SEC, “the firm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation.”

The firm pulled him from his head trader position, assigned him the job of investigating the conduct he reported to the SEC, changed his job to a full-time compliance assistant, took away his supervisory responsibilities “and otherwise marginalized him,” the SEC alleges.

A manager’s refusal to provide transparency is the single greatest reason for investors to pass on a hedge fund, according to Deutsche Bank’s Global Prime Finance group’s third annual Operational Due Diligence Survey. It identified the five most frequently cited red flags for hedge fund investors, which are an unwillingness to provide transparency, inadequate compliance policies, poor segregation of duties, lack of experience in critical roles and inappropriate valuation policies.

“Investors and regulators require more robust operating infrastructure across all levels of a hedge fund’s business,” the bank’s report states. It also found that emerging managers are more likely to provide greater transparency. The survey polled 70 investor entities globally who have poured a combined $730 billion into hedge funds. These investors include consultants, endowments, public pensions, government organizations, insurance companies, funds of funds, private banks and family offices.

The average hedge fund posted a 1.25 percent gain in May, the first positive monthly gain since February, according to London-based industry tracker Preqin. Emerging markets funds led the way last month with a 2.91 percent gain, their largest average monthly return since January 2013. Although event-driven funds generated their smallest gain in May, they remain the best performing strategy for the year-to-date, up 4.37 percent, according to Preqin. After losing money in April, activist funds posted their eighth gain in nine months and their best month since October. They are up, on average, by 3.36 percent for the year.

The Credit Suisse Hedge Fund Index rose 1.13 percent in May, bringing its gain for the year to 1.86 percent. Event Driven is the top performing strategy, led by distressed, up 4.95 percent year-to-date.—
New York–based hedge fund firm GoldenTree Asset Management a
nnounced the opening of a Singapore office. It also said it hired Shahriar Saadullah as managing director to run business development in Asia Pacific. He reports to Kathy Sutherland, GoldenTree’s head of global business development. The firm managed $8.6 billion in hedge fund assets at year-end, according to Alpha’s Hedge Fund 100 ranking.

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