The Securities and Exchange Commission has opened an investigation into one of the nation’s largest government contractors following claims that employees seeking to report fraud had to sign confidentiality statements barring them from disclosing the allegations to anyone, including federal prosecutors and investigators, according to lawyers in the case.
The federal judge in Washington overseeing the case against Halliburton and its former subsidiary, Kellogg Brown & Root, also ruled late last week that those confidentiality statements, collected during internal corporate fraud investigations, must be turned over to lawyers suing the companies on behalf of a whistleblower.
KBR, as the company is now known, filed an emergency motion March 7 to seal the ruling by U.S. District Judge James S. Gwin. Before handing down his ruling, the judge reviewed the internal files, calling them “eye-openers” because of the volume of fraud claims they contained.
Those claims did not come to light until a whistleblower filed suit against the company.
KBR had been trying to shield the confidentiality statements and other internal files from disclosure, saying they are protected by attorney-client privilege between KBR counsel and the company’s employees.
The judge dismissed that argument, ruling that the statements were collected as part of a corporate-wide policy and he ordered that they be turned over. As of Monday, a copy of the judge’s ruling had not been sealed and remained a part of the public file at the U.S. District courthouse.
“I’ve been notified that the SEC is opening an investigation into these practices at KBR,” said Stephen M. Kohn, an attorney for the whistleblower. “There is an overriding public interest for the SEC to stop these practices, not just by KBR, but by any publicly traded company that might be using the attorney-client privilege to cover up fraud.”
An SEC spokesman declined to confirm or deny the existence of an investigation.
“KBR has received a request for documents from the Securities and Exchange Commission, which is a standard operating practice as part of normal business operations,” said Richard Goins, KBR’s spokesman. “We will comply with their request in a timely fashion. As all document requests are non-public and confidential, we can neither confirm nor deny the request’s focus.”
Goins also said the corporation is discouraged by the judge’s ruling. In addition to seeking to seal the judge’s order, KBR is asking that an appeals court intervene.
“KBR is disappointed with the D.C. District Court’s ruling and certainly we respect the wishes of the court,” Goins said. “KBR is reviewing its possible avenues of response to this significant ruling.”
For decades, Halliburton has been one of the nation’s biggest government contractors. In 2006, the company spun off its subsidiary, Kellogg Brown & Root, into a stand-alone firm.
Between 2002 and 2011, KBR became the largest American contractor operating in Iraq and Afghanistan, winning nearly $40 billion worth of federal work, according to the U.S. Commission on Wartime Contracting.
Halliburton, which owned KBR at the time of the whistleblower’s fraud allegations, remains a defendant in the case. Halliburton has declined to comment on the case, saying that KBR is now a separate company.
The case was brought by Harry Barko, a former KBR employee who claimed that Halliburton and KBR inflated the costs of services provided to military bases under a multibillion-dollar service and supply contract in Iraq. The suit was filed in 2005, when Halliburton was the parent company of Kellogg Brown & Root.
The existence of the confidentiality statements surfaced last month during a deposition of a veteran attorney for KBR. He said the statements have been routinely collected as part of the company’s internal code of business conduct investigations. In part, those investigations are designed to surface fraud allegations and ensure they are reported to the proper authorities.
Lawyers for Barko are alleging that KBR subverted those investigations and instead used the confidentiality statements to cover up fraud allegations. The companies have denied the allegations raised by Barko and have filed motions to dismiss the case, calling the claims groundless.
Under the terms of the confidentiality statements, employees who speak about the allegations can be fired and sued by KBR. Barko’s lawyers say the statements appear to violate the False Claims Act, which mandates that federal contractors ensure that their employees are free to report fraud without retaliation.
They also said the statements may violate the Securities and Exchange Act, which makes it illegal for publicly traded corporations to prevent employees from reporting possible violations of securities laws.
Halliburton and KBR are both publicly traded companies.
The SEC prohibits corporations from preventing “an individual from communicating directly with the Commission staff about possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement,” according to agency regulations.
Last Thursday, Judge Gwin said he had reviewed KBR’s files and said they contained claims of fraud involving the corporation and one of its subcontractors in Jordan. Gwin said the reports include “both direct and circumstantial evidence” that the subcontractor “paid off KBR employees” and KBR employees steered work to the subcontractor.