HP Closes Chapter in Spy Saga With SEC Settlement

HP and the Securities and Exchange Commission (SEC) have reached a settlement on charges that HP misled investors by not disclosing that a board member had resigned over the spying tactics used by the former chairman of the board.

HP agreed to an SEC order that contains no penalties and admits no wrongdoing but contains a pledge that the company will not fail to provide such information to the public in the future.

The main issue at hand was the May 18, 2006, meeting of the HP board, at which Patricia Dunn, former chairman, disclosed that her internal investigation had shown that a board member, George Keyworth, was responsible for leaking information about private boardroom discussions to members of the media. The board asked Keyworth to resign at that meeting.

Full Disclosure Needed

At the same meeting, Thomas Perkins, who was a longtime director of the company, resigned after raising objections to the tactics that Dunn approved to ferret out the source of the leaks. Those techniques were later revealed to include pretexting to obtain phone records of board members and other covert activities.

The SEC noted that Federal securities laws dating to 1934 require a public company to disclose through an SEC filing what circumstances led to the departure of a board member if the disagreement focuses on the “operations, policies or practices” of the company.

At the time, HP reported only that Perkins, who is also founder of the famed venture capital firm Kleiner Perkins Caufield and Byers, had resigned. It was several weeks more before the story of Dunn’s investigation, which involved hiring outside private investigators to track phone calls, e-mails and personal meetings of board members, was revealed.

Rearview Mirror

The SEC found that Perkins’ clash focused on HP’s corporate governance and therefore was covered by the law.

“This action highlights the importance of the required disclosures regarding corporate governance issues,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement. “The Federal securities laws exist to ensure transparency, and investors have a right to know when a dispute among board members over operations, policies or practices causes a director to resign, as such a dispute may have far-reaching ramifications for the company.”

Even though the settlement did not include fines or other penalties, it should serve as a warning to other public companies, said Marc Fagel, associate regional director for the SEC’s San Francisco office.

“The company viewed this as a personal dispute between a director and the chairman, and opted to stay silent about the disagreement, but the failure to make the required disclosures deprived investors of important information,” he noted.

Though the scandal was fodder for newspaper headlines and juicy gossip among Silicon Valley insiders, it has left HP largely unscathed. One by one, a rash of outstanding legal and regulatory issues raised by the spying and resulting scandal have been put to rest by HP. Along the way, several top executives departed, along with three directors.

A judge dropped outstanding criminal charges against Dunn; most of the third parties charged with crimes pleaded out or had their charges dropped.

In December, HP agreed to settle criminal charges with the California attorney general’s office by paying US$13.5 million to help fund ongoing privacy enforcement activities.

Doing Fine

The lack of any real penalty against HP — or even the requirement that it admit it tried to hide the real reason for Perkin’s departure — sends a mixed message to other companies about the enforcement of the disclosure provision. However, any attempts to levy stiff fines or other sanctions could have been appealed, resulting in lengthy court proceedings.

“The entire HP episode has been an object lesson in corporate governance for many companies,” Gartner analyst Martin Reynolds told the E-Commerce Times. “This story has been a cautionary tale about knowing what investigative techniques are being used and in proper disclosure.”

Throughout the scandal, HP CEO Mark Hurd managed to avoid being drawn into the thick of things, an important distinction that has enabled HP to continue to focus on its long-term turnaround plans, plans that have helped propel it to the top of the PC world and have it on pace to break the $100 billion in revenue level this year.

In fact, HP made gains in the server space against rivals such as IBM and Dell, according to new IDC market data released this week. HP also landed a long-term contract — that could be worth as much as $5.6 billion — to provide technology and services to NASA over the next seven years.

HP has managed to find more growth than even the most optimistic analysts believed it could manage given the competitive nature of the PC industry and the limits to what gains can be found from cost-cutting, ThinkEquity Partners analyst Eric Ross told the E-Commerce Times. “At some point, growth is bound to slow, but so far Hurd’s plan has been carried out just as drawn up,” he noted.