Illustrations by Richard A. Chance
The day after Paul Singer’s hedge fund, Elliott Management Corp., disclosed it had increased its stake in aluminum-parts manufacturer Arconic to more than 10 percent, its private investigators hit the pavement.
It was January 26, 2017. The two sleuths, employed by Berkeley Research Group, were knocking on the doors of neighbors of Klaus Kleinfeld, Arconic’s then-CEO, in suburban Westchester County, New York. Claiming to be working for investors considering doing a deal with Kleinfeld, the men asked if the CEO was known to have loud parties. Later that evening, they were seen at Rye Grill & Bar, a local restaurant.
“They had the look of retired policemen,” one neighbor emailed Kleinfeld and his wife two days later. The men introduced themselves as “global investigations and strategic intelligence senior managing consultants” for Berkeley, emailed another neighbor.
Singer’s Elliott has an aggressive reputation, known to search for information on its opponents — a skill honed in its battles with sovereign debtors, including Argentina and Peru. In the political world, in 2015 a Singer-financed publication was the first to hire investigative firm Fusion GPS in what ultimately resulted in the infamous Steele dossier on President Donald Trump.
In recent years, though, Elliott has turned its tactics on corporate chieftains, becoming the most feared activist hedge fund around the globe. Last year, the $35 billion fund subjected 24 companies to its demands — far more than any other fund. And while it might be the most feared, it is far from alone. “The use of private investigators is par for the course in proxy contests,” says Kai Liekefett, partner and chair of the shareholder activism practice at Sidley Austin. “They’re just like political campaigns with their opposition research.”
But the Kleinfeld case remains an important example of the extreme lengths private investigators or researchers working for hedge funds — as well as their opponents — may go.
Some say it’s going too far. “We do still feel like there's a level of personal space that people ought to be entitled to, in particular in the business world, where the person is not a known criminal,” says Robert Brenner, chief operating officer and chief legal officer at K2 Intelligence, a top-tier investigative firm co-founded in 2009 by Jules Kroll, a pioneer in the business of corporate private eyes in the 1970s with the creation of Kroll, which has been sold several times and is now owned by Duff & Phelps.
Liekefett, meanwhile, calls Elliott’s behavior an effort “to intimidate the other side. It’s more about the shock effect.”
Such tactics are part of the shadowy world of private investigative services, populated by ex-cops, former lawyers and prosecutors, former investigative journalists, and onetime spies from the CIA, Mossad, and MI5. It isn’t just activist investors and their corporate prey who are hiring them, either. Long-short firms — notably short sellers — and private equity firms are also big clients, as are their investors.
Many investigators say they are governed by strict compliance rules that forbid them from engaging in certain practices, like obtaining material nonpublic information, getting law enforcement records, or pretending to be someone else — a legally murky tactic known in the trade as pretexting. The term has become so common in the hedge fund world that it even merited a mention in a recent episode of Billions, the hit Showtime show about a hedge fund mogul.
Yet seasoned professionals acknowledge off the record what they won’t acknowledge on: That the field is awash in unscrupulous characters who stretch the outer bounds of legality and morality, individuals willing to secretly record targets, pay off sources, hack, and steal, all covered by what one due diligence researcher calls an attitude of “don’t ask, don’t tell.”
Barakett said yes, came up with a price, and quickly wrote up a contract on the hotel concierge’s computer. He then went to a local bank and set up instructions to receive money from the client, hired some private investigators, and set to work.
As it turns out, the man Barakett was tasked with investigating — who used a variety of aliases (14 in total) — was in jail in the U.S. under a different name. He had also been convicted in France and indicted in Canada for securities fraud.
The investor was able to get his money back from the jailbird, and Due Diligence Consulting was born. “From there, word just spread,” Barakett recalls. (He won’t disclose his clients, but Dan Loeb’s Third Point is said to be one. A spokeswoman for the hedge fund declined to comment, saying there was “sensitivity at the mere mention of the topic.”)
The success of Due Diligence Consulting, or DDC, is proof that plenty of dirt can be found through strictly legal means, if people know where to look — and are patient enough to go through the public record.
As far back as his law school days, when he worked as a researcher for a law professor, Barakett says he began to realize how inconsistent and flawed some of the information from the various databases can be. Their weaknesses gave his firm a profitable niche. To prove the point, he points to a 2018 Wall Street Journal article stating that some 7 million felony convictions, about 25 percent of the total, are missing from a federal database. To fill those gaps, he says, “we’re using databases, but we’re going beyond the databases to the most original source of information possible under every name or variation connected with you everywhere you’ve ever been.” That might even mean contacting the local police department in every place a person has lived or worked.
Getting that information isn’t cheap. Florida-based DDC charges between $200 and $500 an hour. Lawyers who have hired private investigators say some investigators go as high as $750 per hour. Some may balk at paying, but Barakett says, “Our client is generally the type of firm or person that really wants to know as much as they possibly can — as long as it’s legal.”
DDC’s investigators, though licensed, do not go door to door interviewing people and don’t do stakeouts or engage in pretexting. They stick to the public record. A former lawyer, Barakett has a simple standard. The material “has to have been legally obtained and, if necessary, admissible in court.”
Listening to Barakett talk about some of his wildest cases gives some idea of how easy it is for people to fall through the cracks during cursory due diligence. For example, on its website, DDC says it once found that “the president of a large U.S. asset manager was arrested twice for major art theft” but was never charged due to the expiration of the statute of limitations.
The art theft case was a “thing of beauty,” Barakett recalls. The manager, who still runs $2 billion, was even discovered to have one of the stolen paintings in his office when a police investigator went to interview him regarding the second theft. (The man was in college at the time of the thefts, which were from the university.) DDC’s client, a family office considering making a big investment, “could not believe what we were telling them,” Barakett says. It decided to walk away.
Another case involved a Bear Stearns executive whose murder conviction had previously gone undetected because, Barakett suspects, a casual background check either did not look at records in every state he had lived in or checked the wrong name or date of birth. “Our client [an asset manager who was considering hiring the man for an IR position] could not believe it, and we showed him the proof,” he recalls.
Work for activist hedge funds is a particularly revealing task, according to Barakett. “I’m never surprised by what we find,” he says, mentioning a public company executive who had a “wife and kids in one city, and another wife and kids in another city in another — nonadjacent — state.” Another married CEO of a public company “had his gay lover on the payroll and was also living in a condo owned by the company,” Barakett says.
Such results have burnished the reputation of Barakett’s firm, a boutique that has grown solely by word of mouth. “He is one of my go-to private investigators,” says attorney Liekefett, who works on corporate defense in activist campaigns. “Peter used to work at an activist hedge fund and knows exactly what to look for. It’s often a race to hire him.”
“They research in a very discreet way,” Liekefett says. “We often instruct them not to talk to people unless it’s a crucial piece of information that’s not confirmed. Stick to publicly available sources, so the investigation is under the radar and not obvious to the other side.”
Lawyers like Liekefett are often tasked with hiring the investigators — for good reason. “The beauty of having the lawyer do it is that you have privilege protection,” Liekefett says, explaining that his client often doesn’t want the information discoverable in litigation. “Sometimes we are reluctant to use it publicly but can use it privately, in one-on-one conversations, with investors or with the activist.”
“We literally have found children out of wedlock,” he says, relaying the time an investigator found that a hedge fund activist seeking a board seat on his client’s company had fathered a child, then 16, out of wedlock — and that his wife did not know. “We had a conversation about a face-saving end to the campaign,” Liekefett says. He argues that “when we find that someone who wants to be a board member has been lying to us, in statements under oath, and to his wife, he may not be the best kind of candidate to sit on the board of the company.”
Of course, finding out someone is a murderer or a thief is one thing. But the personal lives of executives are in the zone of privacy that some say should be off limits. Moreover, it’s the kind of information that, if it comes out, could reflect poorly on the person revealing it, say investigators. That’s another good reason to keep everything behind the wall of privilege.
One researcher who’s been at it for years says, “It’s a numbers game. If you make enough calls and are relentless enough, it will work.” But, she says, “It’s tedious. If you message 20 people, maybe you engage with five of them. Two of them will want money — which we won’t pay — and three will talk to you. If they’ve made a lot of enemies, you will get people talking. They’re curious. They want to be in the loop. ‘What’s this guy up to?’”
It can be a challenge to be successful without resorting to what she considers unethical behavior — like paying for information.
“Calling doctors is the worst,” she adds. “Without the checkbook out, they just won’t talk” — the result, she suspects, of being used to being paid as consultants through expert networks.
Firms like the one she works for keep a low profile, with little to no social media presence. While the work product of a number of firms occasionally makes its way into the media as part of a short seller campaign or proxy battle — typically without any fingerprints linking the information to the hedge fund or the investigator — many are reluctant to talk about their process. (“I am not interested in giving the competition a roadmap of how to compete,” said one person in response to Institutional Investor’s inquiry.)
One firm that did agree to explain its process is Blue Heron Research Partners, founded in 2005 by former Fortune financial journalist David Rynecki. The firm follows strict rules, says Scott Nussbaum, its chief compliance officer. It employs many former journalists who do all of their work on the phone, though it does have private investigators on staff who do public records research. Blue Heron’s clients are typically long-short hedge funds or private equity funds.
“We are frequently tasked with helping a client understand the culture inside one of the firms they may be invested in, considering investing in, or buying outright,” says Nussbaum. “Maybe they want to get a sense of the sales culture. Maybe they want to get a sense of the financial culture. They want to get inside the heads of management.”
Nussbaum says Blue Heron employees will not misrepresent themselves or lie for a client. “And we will not knowingly violate any rules, regulations, or laws. We will keep our client's confidence very strictly. We will never disclose the name of our client or provide any identifying information that would allow somebody else to identify our clients. We will not say we are working for X if we're working for Y. We would just decline to answer a question or say we're not at liberty to say,” he explains.
The standard line for such investigators — just like those employed by the Berkeley gumshoes who knocked on Kleinfeld’s neighbors’ doors — is to say they are “working for investors.” That is not inaccurate, even though it can serve to mask the intent if the client is a short seller or activist.
Every interview at Blue Heron begins the same, explains Nussbaum. “We tell them who we are. We tell them the purpose of our call. We tell them that we're not looking for any MNPI [material nonpublic information], and we don't want to be in receipt of any. We ask them if they're under any obligations with respect to any nondisclosure agreements or confidentiality agreements and let them know we're not looking for any questions that might be in violation of any agreement they have in place. “
That’s where it can get tricky, he says, because sometimes midway through the call the person remembers that maybe they did sign an NDA after all. If it’s in the gray area, the lawyers get called in.
Blue Heron’s researchers also ask if the person being interviewed has an immediate family member who is an executive or employee at the company they’re talking about. Such people are off limits. The firm only contacts business relationships of the individual they are researching and does not track down social acquaintances, Nussbaum says.
The interviews are recorded (with the subject’s permission), transcribed, edited, and double-checked for potential legal problems before being sent back to the client. It is basically raw intelligence, with no analysis, according to Nussbaum.
By insisting that its researchers, who aren’t private investigators, do not misrepresent themselves, Blue Heron makes it clear that it does not engage in pretexting.
Therein lies the major distinction in the world of private investigators. “If you’re a licensed investigator, you can do something others can’t. You can give a pretext, and have the ability to do field work, whether undercover or not, versus being behind a desk and a computer,” says a lawyer who has hired private investigators to do just that.
In truth, it’s a lot more complicated than that.
To get a license as a private investigator, “People have to vouch for you for having been in the business and not done anything unethical. You have to disclose any lawsuits,” says Brenner, who was a special assistant U.S. attorney for the Southern District of New York, prosecuting organized crime and political corruption, as well as the first deputy commissioner in New York City before joining Kroll, then K2 Intelligence.
“It’s more akin to the ethics standard of when you pass the bar,” he says. Some tests may be required, though that is often waived for people in law enforcement or attorneys and investigative journalists.
In some states, a license is required to do interviews or run an asset search. In New York, for example, only licensed investigators can run pre-employment criminal and credit checks.
But even private investigators don’t have carte blanche to engage in pretexting. “There’s very little case law on this, and the restrictions do vary somewhat from state to state,” says Brenner.
As Blue Heron’s Nussbaum points out, just as insider trading laws and MNPI are “eye-of-the-beholder material, there is some element of eye of the beholder with respect to pretexting and where those lines are drawn and how they're determined.”
K2 Intelligence’s licensed investigators evaluate the law and the circumstances before ever approving the use of a pretext. “Generally, we would consider it to uncover a fraud, protect public safety, or ensure compliance with the court. We would not do it to get insider information,” says Brenner. For example, the firm would allow pretexting to buy counterfeit drugs while working for pharmaceutical company clients, he explains.
But there are certain areas off limits for everyone. “It’s a crime to pretext to get medical records, bank records, or tax records,” adds DDC’s Barakett.
Medical records are a specifically touchy area, which could be a reason one investigative firm says it refused to look into the health issues of railroad executive Hunter Harrison when he was leading a board slate in the CSX Corp. proxy battle being orchestrated by Paul Hilal’s activist fund Mantle Ridge, which won the fight and installed Harrison as CEO.
(Harrison’s health problems had unnerved investors in Canadian Pacific in 2015, when he was the CEO. His illness was never disclosed, but he later used an oxygen tank to help him breathe — even at a CSX annual meeting — and often worked from home. During the proxy battle, CSX said he refused to let an independent doctor review his medical records. Instead, his own doctor wrote a letter clearing him to work. He died a few months after joining CSX.)
“We said no. We didn't want to go there,” says the private investigator who turned down the assignment.
One type of impersonation that’s certainly illegal is posing as a law enforcement officer or another real person, like a journalist — a tactic some investigators have been aggressively using in financial battles.
Take, for example, an incident targeting well-known short seller Carson Block, founder of Muddy Waters Research. In October 2017, Block was approached by an individual claiming to be a Wall Street Journal reporter — William Horobin, who works out of its Paris bureau.
Sensing something was off, Block agreed to meet the man in a New York City hotel and videotaped him with his phone. According to the WSJ, the man wasn’t a reporter for the newspaper. Instead, the WSJ found it was Jean-Charles Brisard, a corporate intelligence consultant who lives in Switzerland and France and has worked for Groupe Casino, then a target of Muddy Waters’ short selling.
In the video of their encounter, which is now posted online, Block said, “I know you’re not the real Bill Horobin. Do you mind telling me who you really are?” The man admitted he wasn’t the WSJ reporter but said, “I wanted to meet you. There is no other way to meet you,” and then got up and left.
“It was pretty comical when he first sat down. He still has a French accent,” Block recounts. Horobin, Block knew, is British. “It was a Keystone Kops kind of move.”
During the Elliott proxy battle with Arconic, CEO Kleinfeld’s PR consultant Norbert Essing says he too received a call from someone claiming to be a WSJ reporter. In this case, Essing says, the name used was David Benoit, who was covering the proxy battle. Essing, who had spoken with Benoit in the past, says the man didn’t sound like the reporter and finally insisted he was not Benoit. “The guy said, ‘We warned you. Don’t go after Mr. Singer.’ And then he hung up,” according to a letter Essing’s attorney wrote Singer.
In response, Elliott’s general counsel, Richard Zabel — who joined the hedge fund in 2015 from the Manhattan U.S. attorney's office for the Southern District of New York, where he was the deputy to Preet Bharara — wrote the attorney that the firm knew nothing about the alleged incident and questioned the story’s credibility. Zabel also sent his own warning: “We will consider legal options if you or your client try to impugn Mr. Singer or Elliott in this or any similar manner.”
Berkeley Research, whose employees gave out business cards to Kleinfeld’s neighbors, did not respond to an inquiry.
Essing — who was apparently so rattled by the call that he forced this writer to prove she was a reporter — calls Elliott’s tactics “pure terror.” Elliott declined to comment for this story.
Kleinfeld left Arconic in the midst of the battle. Elliott ended up with several board seats, and Arconic hired a new CEO. But Elliott’s victory was short lived. The stock has since tanked — due in part to President Trump’s aluminum tariffs and also to a mammoth potential liability associated with a fire in a U.K. public housing tower that was insulated with flammable materials manufactured by Arconic.
For example, some investigators will apply for jobs at a company, especially warehouse jobs, to get access to more employees and try to glean information. “Sometimes they’ll even take the jobs, but that’s getting pretty expensive for the client,” says one short seller.
They may pretend to be employment recruiters and search resumes of people who’ve worked at a specific company and ask them to come in for an interview. Black Cube, the famous investigative firm run by former Israeli intelligence agents, is reported to have used this tactic.
“You have to make it seem like you’re really recruiting for the position,” the short seller says. “You can’t be too obvious about what you’re really trying to learn.” Some even hire recruiters to do the jobs for them.
“There’s an element of deception,” he acknowledges, saying his firm has also engaged in this tactic on its own. But in certain countries, like China, “nobody is going to talk to you just because you asked.”
The desire for gain seems to be the operative motivation. “There has to be an element of self-interest in it,” the short seller explains. His firm won’t pay people directly, thinking that taints the information. The recruitment gambit is a way of getting them to think maybe they’ll get hired if they “impress you with how smart they are.”
This person admits his firm “is probably engaging in the more hardcore research in the investor world,” but stakes out the moral high ground by saying he’s generally not going after personal information on people, like CEOs.
“We’re not blackmailing anybody or trying to find their weakness,” he explains. “We think the company has a problem, and we’re trying to build a case.”
The investigation also might involve surveillance. “Maybe they can fly drones for you or set up position to film or photograph or observe,” he says. In China, he says, he has investigators who can chat up security guards or low-level workers. “Sometimes they have an interesting perspective on what’s going on.”
This short seller might want a visual record, but he insists, “We’re not trying to find the chairman [with] hookers. It’s how many trucks are coming in and out of the facility in a given day. This is not a revenge business. I’m trying to figure out what’s going on.”
