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SEC Brings First Case of Whistleblower Retaliation

The SEC has settled its first case under its authority to bring cases for retaliation against whistleblowers.  According to Sean McKessy, chief of the SEC’s Office of the Whistleblower, “[w]e will continue to exercise our anti-retaliation authority and these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”

The whistleblower in the case was the investment adviser’s then-head trader.  After he disclosed that he had made a whistleblower report to the SEC, the order states that the whistleblower was “temporarily relieved” of his day to day duties and that his employer instructed him to prepare a report detailing the allegations he submitted to the SEC.  According to the SEC, the whistleblower was not able to return to his head trader position upon completion of the report and instead was made a full time compliance assistant, stripped of his supervisory responsibility, and “otherwise marginalized.”  The whistleblower ultimately resigned from the company. 

According to the SEC’s order, the substance of the whistleblower’s report pertained to certain principal transactions between the investment advisory firm where he worked and a broker dealer that were controlled by the same person.  Such principal transactions would have required the consent of the client, in this case the hedge fund.  However, the hedge fund’s general partner was also owned and controlled by the same person and could not, therefore, give consent.  In the absence of a board of directors, the investment adviser established a Conflicts Committee to approve the transactions; however, the SEC asserted that the Conflicts Committee was in itself conflicted.

The adviser and its owner agreed to settle the charges for $2.2 million, with $1.7 million of that amount being returned to affected investors.