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.
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.