On April 28, 2015 the SEC made its first whistleblower award in a matter where the unnamed whistleblower was the target of retaliation by his employer. (The Commission has made other awards related to disclosure of illegal behavior, but not retaliation, per se.) Paradigm Capital Management, a hedge fund advisory firm, allegedly processed transactions through a broker-dealer owned by Paradigm’s principal without making the proper disclosures to investors required by SEC regulations. The whistleblower was awarded the highest allowable bounty – 30% of the fines imposed on Paradigm ($600,000 of the $2.M collected by the SEC). In a speech Northwestern University Law School following the announcement of the award, SEC Chair, Mary Jo White, reiterated the SEC’s commitment to the whistleblower program, and its intolerance for companies determined to squash employees and others who bring forward information used to enforce SEC laws and regulations. In the announcement of the award, Sean McKessy, Chief of the SEC’s Office of the Whistleblower noted that, “My hope is that the award encourages potential whistleblowers to come forward in light of our demonstrated commitment to protect them against retaliatory conduct and make significant financial awards to whistleblowers who suffer employment hardships as a result of reporting possible securities law violations.” Notwithstanding Mr. McKessy’s assurances, it is reported that there major backlog in processing whistleblower awards – as much as 80%.
This award should be of interest to accounting firms that perform services for clients that report to the SEC. As we know from the March 2014 U.S. Supreme Court decision in Larson v. FRM, outside contractors, including accountants, lawyers and consultants, are protected from retaliation by their clients for whistleblowing. The Paradigm matter demonstrates that the SEC is serious about protecting whistleblowers, which presumably includes a registrant’s accountants and other service providers.