Rooted in the American culture is a certain level of disdain for those who bite the hand that feeds them. Snitching on a friend, co-worker or neighbor is widely viewed as un-American or, at the very least, disloyal. The extent to which this contempt applies to employees ratting out employers is open to debate—or was open to debate until the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act with the addition of Section 21-F, Whistleblower Incentives and Protection.

Subsequently, the SEC adopted Rule 21F-17 to carry out what the SEC perceived to be Congress’ intent. This rule makes any action taken to impede an individual from freely communicating to the SEC regarding a possible securities law violation a punishable offense.

In the matter of…

KBR, Inc. (formerly Kellogg, Brown and Root), the SEC successfully argued that KBR’s confidentiality agreement represented a clear violation of Rule 21F-17 because, the confidentiality agreement required employees to gain the permission of the firm’s law department before they could discuss any alleged violations with anyone outside the firm … under penalty of disciplinary action up to and including termination.

It Is Puzzling

For those unfamiliar with KBR, Inc., it is a Houston-based global engineering and construction firm far from the concrete canyons of Wall Street, which makes this case so bewildering. KBR, like many other companies, conducts business with the U.S. government, particularly the military, for which it constructs, maintains and refurbishes housing and other facilities for military personnel.

KBR is a former Halliburton subsidiary and the $130,000 fine imposed by the SEC on April 1st, 2015 is neither the first nor the largest it has paid out to the federal government. KBR was fined $402 million for FCPA violations related to bribing Nigerian officials in 2007.

This appears to be a case of “once on the government’s radar, always on the government’s radar” because no specific instance of any incident involving an employee of KBR was ever cited by the SEC. The mere language of the confidentiality agreement was deemed sufficient to bring the action.

A Heads-up to Hedge Funds

The hedge fund industry is no stranger to confidentiality agreements. The SEC’s case against KBR, Inc. should be a clarion call for all hedge fund compliance officers to initiate a careful review of internal policies as well as confidentiality agreements used in the conduct of business. For obvious reasons, hedge funds that have had prior SEC violations should be especially quick to undertake a thorough review.

Closing Thoughts

Government has implemented what are arguably Orwellian rules, rewarding behaviors once considered unseemly, even offering cash rewards to encourage a whistleblower class, while imposing harsh financial penalties on businesses perceived to be discouraging people from doing so.

This is not to suggest that anyone should turn a blind eye toward wrong-doing in any business enterprise. Rather it is a question of the validity of the government’s methods for ferreting out this wrong-doing and what the implications are for our culture. For now, it is clear that not only can you whistle while you work, you can also garner a bonus.



The past several months bears witness to a dramatic rise in aggressive hedge fund activist attacks. This activism is not directed solely toward small, weak or poorly managed companies as one might expect. On the contrary, large, respected, successful enterprises are prime targets. Examples include Amgen, Sony, Proctor & Gamble, DuPont and Qualcomm to cite a few.

No fewer than 100 hedge funds are, or have recently engaged, in activism. Collectively, they have more than $200 billion in assets under management. These funds are highly sophisticated and increasingly experienced with analysts, traders and senior management on a par with the top investment banks.

These elite professionals craft persuasive white papers regarding a target corporation’s management, operations, capital structure or some combination thereof, to support their alternative strategy to increase shareholder value. For example, an alternative strategy may be a share buyback, an acquisition, or spin-off.

Corporations Fight Back

In a spirit reminiscent of the unofficial U.S. Marine slogan, Improvise, Adapt and Overcome, many corporations have undertaken proactive measures to counter possible activist attacks, should they occur. Forward looking CEOs and CFOs have created teams which usually include key officers, corporate counsel, a proxy soliciting firm and a public relations agency which meet regularly and even conduct “fire drills” to enhance their state of preparedness.

Other measures include implementing a stock watch service, monitoring 13F, 13D, 13G and Hart-Scott-Rodino Act filings. Parallel trading and activity in options, derivatives, corporate debt and similar non-equity securities can provide a heads-up to corporate executives.

Equally important, Boards of Directors are being made aware of activist tactics. Corporations have learned that a divided board can spell disaster when an activist-attack surfaces. Any daylight between the board and management will be exploited by an activist fund. For this reason, management keeps the board well-informed, providing them the necessary data to guard against activist subversion.

There Is No Downside

For corporations taking a proactive approach, there is no downside. As a result of hedge fund activism, corporations are paying closer attention to virtually every facet of business operations. Directors are better informed; shareholders are treated with greater deference, business strategies are thoroughly assessed, leverage is monitored closely, meaningful director evaluations are being made and public relations are effectively executed.

Corporate preparedness for an activist event is a combination of art and science. Activist hedge funds have forced corporations to review strategies, governance, executive compensation, director quality and a host of other business functions.

Although this makes life more difficult for activist hedge funds, the end result is in every shareholder’s best interest: competently run enterprises!

Unintended Consequences

Broadly speaking, activist hedge funds are regarded as a dark force. Activism is viewed as a negative strategy fostering little more than ill will, creating an unwelcome diversion from what the target corporation should be doing, which is running its business. However, corporations that have taken a proactive stance, have benefited from the threat activism poses. They have discovered their vulnerabilities and taken corrective action.

Hedge funds work their magic in mysterious ways.


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