While hunting the Red Squirrel across the globe, Special Agent Buck Rockgut contacts the penguins with a warning that the diabolical squirrel has a brainwashed sleeper agent among them, but is cut off before he could tell them who it is.
The penguins receive a mysterious box. Before they could open it, Skipper suspects that the box could have something dangerous inside. To test his hypothesis, Skipper chucks the box into the Lemur Habitat, causing King Julien to investigate it. He opens the box, revealing a wrist communication device of source, prompting Skipper to steal it back. Back at the base, the device turns on, revealing a video message from Buck Rockgut. He tries to warn the penguins that the Red Squirrel had somehow brainwashed one of them into being a sleeper agent, but he accidentally goes offline before he could tell them who it is. As various mishaps soon plague the penguins, ranging from the Penguin Car falling apart during a test run and their food being poisoned, they begin to suspect each other of being the forewarned saboteur. Skipper continually denies that possibility of a sleeper being among them, stating that if it were true, it would mean he failed as a leader. But as he takes a bite out of a fish sandwich, it explodes, causing the penguins to start accusing each, which quickly devolves into chaos as the penguins attack and try to kill each other.
To end the madness, Kowalski purposes that he traces Rockgut's video signal hoping to reestablish communication to discover the identity of the sleeper, finding that it had originated from a minor league baseball stadium over in Brooklyn. When the team travels there, they find Rockgut. The penguins accuse him of faking the whole thing in retaliation for the penguins having sent him on a wild goose chance looking for Red in the nonexistent land of Grrfurjiclestan (pronounced "GUR-fer-JICK-al-STAN"). When Private questions Kowalski on how they figured it out, Kowalski explains that it happened on the subway ride to there from Manhattan while Private was busy people-watching.
However, the Red Squirrel then shows up and it's revealed that Rockgut himself was Red's sleeper agent, and that it was all part of his plan to trap and destroy America's greatest penguin commandos (Skipper, Private, Rico and Kowalski). Rockgut's then ordered to take out the penguins with a T-shirt cannon. While taking cover, Kowalski realizes that the Red Squirrel can command Rockgut through simply snapping his fingers. Unfortunately, since they don't have fingers to snap, they try fighting but are no match for such firepower. However, the penguins manage to confuse Rockgut by wearing eye patches and imitating the Red Squirrel's voice (with Kowalski doing a perfect imitation), into thinking they were also Red Squirrels. And since Rockgut sees the Red Squirrel everywhere, he becomes overwhelmed and passes out. The real Red is then captured.
After that, Rockgut forgives the penguins about "Grrfurjiclestan" and is ready to capture Penguin Enemy Number 2, White Widow, the Albino Spider Monkey. Private says that White Widow is in "Newfakeplacesberg". Rockgut heads out and the penguins glare at Private.