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Hewlett-Packard Chairman Steps Down Amid Media Leaks Scandal

September 12, 2006 at 6:30 PM EST
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SPENCER MICHELS: The Hewlett-Packard scandal has hit like a summer storm in the tranquil Silicon Valley — a storm that may well bring criminal indictments against some of the company’s officials or staff.

Today, it cost the H.P. chair her job. She announced she will step down in January. The change at the top came at the same time that the local U.S. attorney and a House congressional committee decided to launch their own investigations into H.P.’s alleged use of illegal methods to trace leaks of confidential board deliberations to the press.

California Attorney General Bill Lockyer says his investigation has determined serious violations of the law.

BILL LOCKYER, California Attorney General: Crimes have been committed. People’s identity was taken falsely. It’s a crime. People accessed computer records that have personal information. That’s a crime in California.

SPENCER MICHELS: What Lockyer is looking into are allegations that H.P. hired investigators who impersonated board members and reporters to get phone records, so the company could find out who on the board was leaking to the media. And the probe has already borne some results.

BILL LOCKYER: We currently have sufficient evidence to indict people, both within Hewlett-Packard, as well as contractors on the outside.

Pretexting, a new corporate tool?

Bill Lockyer
California Attorney General
We currently have sufficient evidence to indict people, both within Hewlett-Packard, as well as contractors on the outside.

SPENCER MICHELS: The illegal method used to obtain phone records is called pretexting.

Chris Hoofnagle is a specialist in privacy law at the University of California's Boalt Hall School of Law.

CHRIS HOOFNAGLE, Privacy Law Specialist, U.C. Berkeley Boalt Hall School Of Law: Pretexting is much like an identity theft. In identity theft, someone uses your personal information to steal your money or access to your accounts.

Pretexting is similar, but, instead of stealing money, what they're doing is, they're stealing information about you: where you live, the people with whom you talk on the telephone, etcetera.

SPENCER MICHELS: He says the H.P. case is an important one.

CHRIS HOOFNAGLE: This is a case that involves extremely powerful people having their telephone records essentially stolen by private investigators as part of an inquiry into their activities. And, if you think about it, your phone records reveal a lot about you. They reveal who your friends are, your political contacts.

SPENCER MICHELS: Attorney General Lockyer says the H.P. case reveals a potentially larger problem.

BILL LOCKYER: How often does this occur? We don't know that. Is it a common business practice? We all worry, in this electronic age, that privacy is routinely abridged.

A bump on the road to success

Peter Burrows
BusinessWeek
The company has come storming back. The company has done incredibly well. Investors are thrilled. The stock is up 70 percent. Employees are completely thrilled, feeling like they're working for that same old H.P. again.

SPENCER MICHELS: H.P., founded in a Palo Alto garage by Bill Hewett and David Packard, is one of the oldest and most respected high-tech firms in Silicon Valley, with annual sales of $90 billion.

The company itself has had a rough couple of years. Its merger with Compaq didn't produce good results at first, and, partly as a consequence, its CEO and chair, Carly Fiorina, one of the most visible and successful women in business, was fired in early 2005.

After her departure, with a $21 million severance package, the company then made a remarkable rebound with an array of products, including computers and printers.

BusinessWeek reporter Peter Burrows, who wrote a book about H.P. and Fiorina, credits the new CEO and soon-to-become board chairman, Mark Hurd, for the turnaround.

PETER BURROWS, BusinessWeek: The company has come storming back. The company has done incredibly well. Investors are thrilled. The stock is up 70 percent. Employees are completely thrilled, feeling like they're working for that same old H.P. again. And, you know, now, suddenly, we get this major issue with the board. And I think there's a lot of concerns that maybe this really isn't that old H.P.

SPENCER MICHELS: Hours before he learned that he was one of nine reporters whose phone records were spied on, Burrows, in his blog, called on H.P. to come clean. He said he was dissatisfied with the extent of H.P.'s response, but said that, now he's involved in the case, he can't comment on the investigation.

Burrows believes that what precipitated the company known for integrity into hiring investigators to spy on its own board members was a fundamental dispute on the board.

A scandal brought to light

Chris Hoofnagle
University of California
It depends on whether or not the people who hired the investigators knew or should have known that these illegal methods would be used. And that's going to be a very difficult thing to determine.

PETER BURROWS: There is a rift on the board between folks who feel like they need to upgrade the way the board is run and become more sort of focused on the processes that are a major function of governance these days.

And then you have got other people who say, well, you know what, that's not the best use of our time. The best use of a board's time is to help the CEO run the company and make smart decisions.

And I think that rift has been there for a while, and this is how it happened to be exposed.

SPENCER MICHELS: The scandal came to light when venture capitalist Thomas Perkins, who is regarded as one of the founders of Silicon Valley, resigned from H.P.'s board of directors. He complained about questionable ethics and dubious legality used by H.P. to identify Perkins' friend and longtime board member George Keyworth II as the source of the leak. Keyworth resigned from the board today.

Business and academic leaders, including Stanford law and business professor Joseph Grundfest, were intrigued by the scandal.

JOSEPH GRUNDFEST, Law and Business Professor, Stanford University: This is a hugely important case. This is a case that directors are going to be studying for years, in order to figure out what to do and what not to do. This is a fascinating situation, because it rings the corporate bell on so many different dimensions. You have got all of the soap opera involved, in terms of internal corporate politics.

SPENCER MICHELS: Attorney General Lockyer, who is running for state treasurer in November, says he's trying to determine what type of understanding H.P. had with private contractors.

A key question in the case is whether a company that hired another firm or vendor to do the investigation is liable if the second firm does something illegal.

BILL LOCKYER: Yes, a little suspicious -- just the fact that you have people subcontracting all around the country, multiple vendors, starting from Silicon Valley in California, and then bouncing all around the country. And you kind of wonder why people are doing that, except to kind of cover their tracks.

CHRIS HOOFNAGLE: Well, it depends on whether or not the people who hired the investigators knew or should have known that these illegal methods would be used.

And that's going to be a very difficult thing to determine. One is going to have to look at the communications of the Hewlett-Packard employees and their directors, and at the communications of the investigators who were hired and subcontracted in this case. So, it might be many months before it can be determined who actually broke the law here.

Eliminating a harmful leak

Joseph Grundfest
Stanford University Law School
Corporate directors owe several obligations to the corporation and their fellow directors. They owe duties of loyalty. They owe duties of care. They owe duties of good faith, and duties of candor.

SPENCER MICHELS: For its part, Hewlett-Packard has said very little publicly, although it has acknowledged that it was investigating leaks from board meetings.

The HP chairman, Patricia Dunn, said she was appalled to learn that false identities were used by investigators looking for information. And she said she was going to apologize to journalists whose phone records were being examined.

But the focus should not simply be about the company's investigative methods, according to Stanford's Grundfest. He claims, board member Keyworth's leaks violated corporate ethics, and possibly the law.

JOSEPH GRUNDFEST: Corporate directors owe several obligations to the corporation and their fellow directors. They owe duties of loyalty. They owe duties of care. They owe duties of good faith, and duties of candor.

By leaking to the press, in violation of corporate rules, and also by lying to fellow board members about those leaks, Mr. Keyworth has violated essentially all of those obligations.

SPENCER MICHELS: For all the problems swirling around H.P., Grundfest and other analysts see no permanent damage to the company or the high-tech industry. In fact, H.P. stock has remained strong throughout the crisis.