http://www.businessweek.com/stories/2006-09-11/charges-on-the-way-at-hewlett-packard

Technology

Charges on the Way at Hewlett-Packard?


Hewlett-Packard's scandal over controversial investigations into board leaks grew on Sept. 12 as California Attorney General Bill Lockyer said his office has enough to bring charges. In an interview on The NewsHour with Jim Lehrer, Lockyer said, "We currently have sufficient evidence to indict people both within Hewlett-Packard as well as outside."

Lockyer's office declined to elaborate on his comments, but sources close to the case tell BusinessWeek.com that charges could be handed down at any time. Previously, Lockyer had said crimes had definitely been committed, but he was not yet sure who committed them. HP declined comment but said it's cooperating with Lockyer's investigators.

Lockyer's comments followed HP's attempt earlier in the day to quell the furor over the way it investigated the personal phone records of both directors and nine journalists. Hewlett-Packard (HPQ) said on Sept. 12 that Patricia Dunn will step down as board chairman and be replaced by Chief Executive Mark Hurd. Dunn will remain a director despite a public furor over tactics used in the probe she began last year. The computer maker also announced that longtime director George Keyworth II, who has admitted to leaking information to the press, has resigned from the board.

Statements from the company, however, indicate that the wounds opened by Dunn's probe into board leaks may not heal instantly. Dunn has said her priority was finding the source of leaks that could damage the company. But during the probe that she set in motion, contractors for HP's outside private investigator used a possibly illegal tactic in which investigators posed as directors and journalists—including three writers at BusinessWeek—to gain access to phone records. In a videotaped message to employees on Sept. 12, Dunn acknowledged that the investigation was also directed at HP employees, extending beyond journalists and directors. "Techniques were practiced on…two employees and a number of individuals outside the company including journalists," Dunn said, according to a transcript of the address.

The announcement of the board changes, which one source says were driven by Hurd, seemed intended to help the company move past the controversy. But despite spending two long board sessions on Sept. 10 and 11 on the matter, it's clear they couldn't do much more than agree to disagree.

DEFENDS THE INVESTIGATION. "The invasion of my privacy and that of others was ill-conceived and inconsistent with HP's values," Keyworth said in a statement put out by HP. He said he was frequently asked by HP corporate-communications officials to speak to reporters and said he didn't disclose confidential or damaging information.

For her part, Dunn apologized for the investigation tactics, but continued to defend the probe itself. "These leaks had the potential to affect not only the stock price of HP but also that of other publicly traded companies," she said in a statement. Hurd said the tactics, however, won't be used again. "They have no place in HP," he said in the statement. He also apologized to former Director Tom Perkins for the intrusion into his privacy.

Perkins, whose resignation last May—after he found out his phone records had been fraudulently obtained—touched off the current imbroglio, said he applauded Keyworth for his "courage" in stepping down and thanked Dunn for her "grace" in letting HP move on. "This too shall pass," he said in the statement.

It just might, says Cowen & Co. analyst Louis Miscioscia. "The actions today are enough for them to move on," he says. "The fact that they're giving (Dunn) a little time keeping her on the board was the sign that the board members felt she didn't do anything wrong, as though she did what we asked her to do, but the results weren't the right results. Everyone felt that to some degree they were half right. This gives everyone a chance to save face and resolve the situation."

QUESTION OF LEGALITY. Indeed, the controversy doesn't seem to have affected HP's business so far. "I haven't talked to one customer who has said this has any impact on their buying intentions," says Crawford del Prete, an analyst with market researcher IDC. "I think we're going to move on pretty quickly." Investors also appear to be shrugging it off. HP's stock rose last Friday, Sept. 8, and rose again Sept. 11 and Sept. 12.

Still, the issue could present a sizable distraction for Hurd as he attempts to continue the turnaround that has lifted the stock 27% since the start of the year. At least five governmental agencies are jockeying to find out whether the investigation into the leaks was legal.

John Thompson, vice-chairman of the executive search firm Heidrick & Struggles, says the fact that Dunn remains on the board is puzzling, because she was responsible for the probe. "My hunch is that if this doesn't quiet down…ultimately she might have to step off the board entirely," he says.

Following inquiries from the California attorney general, the Justice Dept., and the Securities & Exchange Commission, congressional investigators have stepped in with a lengthy list of demands. It's unclear whether HP's Sept. 12 announcement will cause any of the bodies to rethink investigations that could take months, if not longer, to complete.

For its part, the Federal Communications Commission has asked phone service provider AT&T (T) for information on phone records obtained in relation to HP’s probe.

REPORTS REQUESTED. On Sept. 11, the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee asked Dunn for numerous details on HP's involvement in the practice, known as pretexting, where a person impersonates somoene else to obtain that person's phone records. The panel, which is chaired by Rep. Joe Barton (R-Tex.), wants to know who was targeted by HP and its consultants, and whose personal information HP investigators obtained or tried to obtain. The letter asks for information dating back to Jan. 1, 2005.

The panel also wants an accounting of all company employees with knowledge of the investigation; a copy of the company's contract with Wilson Sonsini Goodrich & Rosati, HP's outside counsel; any reports prepared by that firm; and copies of board minutes relating to the leak investigation.

Meanwhile, in a letter delivered yesterday to Senate Majority Leader Bill Frist, House Judiciary Committee Chairman James Sensenbrenner (R-Wisc.) pressed the Senate to move on legislation to outlaw pretexting. The House earlier this year, on a 409-0 vote, passed legislation that would make it a federal crime to fraudulently obtain consumer phone records. The legislation has been stalled in the Senate.

Congressional investigators also want the identity of the "outside consulting firm" mentioned in HP's Sept. 6 SEC filing, as well as of any other consultants or individuals hired by the company or its contractors, and copies of the agreements between HP and its consultants. "The committee is troubled" by the scandal, the letter reads, "particularly given that it involves HP—one of America's corporate icons."

MORE DEPARTURES? At this point, it's unclear whether the changes to the board, which include elevating director and former HP executive Richard Hackborn to be "lead independent director" starting in January, will satisfy corporate-governance experts.

On Sept. 11, Nell Minow, editor and cofounder of The Corporate Library llc, a governance consulting group in Portland, Me., said she thought Dunn should not be asked to resign, but that other board changes seemed inevitable.

She also recommended other steps that HP's announcement doesn't address. Minow said HP should release a full report on the investigations from a respected governance expert. Minow said that executives responsible for approving the fraudulent tactics used might also have to leave. "This could turn out to be good because they'll be free to make changes," Minow said. "It's definitely a multi-step process."


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