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Case 3-4
Hewlett-Packard1
Legal Settlement
On December 8, 2006, California’s attorney general announced a settlement with Hewlett-Packard (HP) over its
corporate spying scandal. The civil settlement involved a lawsuit the state filed against the computer giant in Santa
Clara County Superior Court. Under the agreement, HP will pay $13.5 million to create a “privacy and piracy” fund
to help state and local law enforcement fight privacy and intellectual property violations. The rest of the money will
go to damages and to pay for the investigation.
The scandal broke in September when HP acknowledged in an SEC filing that investigators probing internal HP
leaks to the media had gained access to board members’ personal phone records by impersonating the board
members, a practice known as “pretexting.” HP’s investigators also conducted physical and electronic surveillance
of board members and reporters, according to HP documents.
Pretexting violates a California criminal law banning the use of “false and fraudulent pretenses” to obtain
confidential information from a phone company, stated Attorney General Bill Lockyer. California civil law also
considers criminal acts unlawful business practices, which was the basis of the state’s civil action.
Mark V. Hurd, HP’s chair and chief executive, hailed the deal. “We are pleased to settle this matter with the
attorney general and are committed to ensuring that HP regains its standing as a global leader in corporate ethics and
responsibility,” he said.
The HP Investigation
An article in January 2006, by CNET reporter, Dawn Kawamoto, discussed confidential information available only
to HP’s Board. The CNET article reignited the leak investigation. Recognizing the potential legal problems that
board-level leaks could pose for HP, Chairwoman Patricia Dunn immediately initiated a new investigation of the
leak and expressed her urgency to HP’s general counsel, Ann Baskins. The second and far more intrusive
investigation extended from January through March and included the following:
1The case is The 1199 SEIU Greater New York Pension Fund, et al. v. Patricia C. Dunn, et al., CA No. 06-071186,
Santa Clara County Superior Court (San Jose).
Reviewing the company email accounts, company phone records
and computer hard drives of every member of HP’s “Executive
Council”;
Hiring a private investigation firm, which in turn subcontracted out
the job of obtaining private telephone records of select Board
members and nine journalists, including Dawn Kawamoto, the
CNET reporter who had written the January 2006 article;
Surreptitiously following Kawamoto and suspected Board members
in public (and apparently searching through their trash);
Setting up a “sting” in which investigators sent Kawamoto an email
containing fake tips about HP and an attachment whose tracking
software would trace the email’s path after it reached Kawamoto’s
computer.
Insider Trading
HP investors sued some of the computer maker’s directors, claiming they sold $38 million in company stock shortly
before publicly acknowledging an internal probe into boardroom leaks. The directors, including CEO Mark Hurd,
exercised options and sold shares during a 2 1/2-week period beginning August 21, 2006. HP began its internal
investigation after boardroom discussions about ex-CEO Carly Fiorina were quoted in news stories.
The flap over the probe cost Chairwoman Dunn and two HP executives their jobs and sparked investigations by
U.S. regulators. The company said on November 16 that the SEC stepped up its examination of the company’s
tactics and the Federal Communications Commission had requested documents related to the leak probe.
California prosecutors had charged Dunn, HP’s former CEO, with conspiracy and fraud for directing the
boardroom spying. They also charged Kevin Hunsaker, an in-house lawyer and former director of ethics, as well as
three private investigators who participated in the probe.
Board members, worried about negative publicity over the leak probe, took steps to protect the company’s stock
by approving a $6 billion share buyback program less than a month before the spying became public. That brought
the amount of shares HP was authorized to buy back to $11.7 billion, according to the complaint. The investors
alleged that the share buybacks were prompted by defendants’ illegal misconduct.
Ethics Compliance Officer
Having a chief ethics officer didn't help HP. Chairwoman Dunn lost her job after hiring private investigators to
find leakers on HP's board. The spying scandal that ensued led to Dunn's indictment and an investigation by the
House Energy and Commerce Committee. Even CEO Mark Hurd, who had replaced Dunn as chair, has been
implicated in the scandal. And it all happened under the watch of Kevin Hunsaker, HP's senior counsel and chief
ethics officer. He resigned in September 2006.
Corporate Governance and Ethics Issues
The original lawsuit claimed “breach of fiduciary responsibilities” by HP executives. It alleged that the executives’
spylike tactics to uncover boardroom leaks harmed the company. The suit claimed that the group engaged in insider
trading just before news of the spying incident became public. Specifically, the suit claims that they sold off $41.3
million worth of stock two weeks before the scandal broke. The lawsuit also alleged that the group approved stock
buybacks in the months preceding the scandal in an effort “to keep the company’s stock price propped up while
insiders were selling.”
HP also agreed to strengthen in-house monitoring to ensure that future investigations launched by HP or its -
contractors would comply with legal and ethical standards and protect privacy rights. HP further agreed to hire an
independent director, expand the duties of its chief ethics officer and chief privacy officer, beef up staff ethics
training, and create a compliance council to set policies for ethics programs.
In the lawsuit, Attorney General Bill Lockyer was quoted as saying:
With its governance reforms, this settlement should help guide companies across the country as they seek to
protect confidential business information without violating corporate ethics or privacy rights. The new fund
will help ensure that when businesses cross the legal line they will be held accountable. Fortunately, Hewlett-
Packard is not Enron. I commend the firm for cooperating instead of stonewalling, for taking instead of
shirking responsibility, and for working with my office to expeditiously craft a creative resolution.
The settlement’s corporate governance reforms aimed to strengthen in-house monitoring and oversight to ensure
compliance with legal and ethical standards, and protection of privacy rights, during any investigations launched by
HP or outside firms hired by HP. “This settlement creates a template for other companies seeking to protect
confidential business information without violating corporate ethics or privacy rights,” stated Lockyer.
Major Governance Reforms
The major governance reforms included the following:
• A new independent director will serve as the board’s watchdog on compliance with ethical and legal
requirements. The director will have specific responsibilities in carrying out that oversight function, and report
violations to the board, other responsible HP officials, and the attorney general.
• HP’s chief ethics and compliance officer (CECO) will have expanded oversight and reporting duties. The CECO
will review HP’s investigation practices and make recommendations to the board on how to improve the practices
by July 31, 2007. The CECO, who previously reported only to the general counsel, now also will report to the
board’s audit committee. Additionally, the CECO will have authority to retain independent legal advisors.
• HP will expand the duties and responsibilities of its chief privacy officer to include review of the firm’s
investigation protocols to ensure they protect privacy and comply with ethical requirements.
• HP will establish a new Compliance Council, headed by the CECO and also comprised of the chief privacy
officer, deputy general counsel for compliance, head of internal audit, and ethics and compliance liaisons. The
council will develop and maintain policies and procedures governing HP’s ethics and compliance program, and
provide periodic reports to the CEO, audit committee, and board.
• HP will beef up the ethics and conflict-of-interest components of its training program. The training redesign will
be directed and monitored by the CECO, Compliance Council, independent director, and chief privacy officer. HP
also will create a separate code of conduct, for use by outside investigators that addresses privacy and business
ethics issues.
Video Link: http://www.youtube.com/watch?v=8a2TgJW9Y1s
Questions
1. The original lawsuit filed in the HP case claimed that the executives breached their fiduciary
responsibilities. What are the fiduciary responsibilities of executives and members of the board of directors to
shareholders? How were these obligations violated in the HP case?
It is the fiduciary responsibility of executive and members of the board of directors to act for the sole benefit of the
shareholders in all situations. This includes to exercise due care and loyalty to the interests of the shareholders. The
shareholders rely on and trust their investments with the executives and members of the board. In the HP case these
2. Describe how “ethical fading” influenced the actions taken in the pretexting scandal including those
identified in the HP investigation. Are there similarities between the actions of management in the HP case
and those in the Challenger Shuttle Disaster?
Ethical fading occurs when people are so focused on other aspects of a pending decision that its ethical aspects fade
from view. Like with the Challenger Shuttle Disaster, Patricia Dunn and Ann Baskins became so concerned with
3. Recently, in 2011, Hewlett-Packard Vice President and Chief Ethics and Compliance Officer Jon Hoak
talked about renewing H-P's commitment to a culture of integrity at a meeting with members of the Business
and Organizational Ethics Partnership at the Markkula Center for Applied Ethics at Santa Clara University.
In his presentation that addressed the pretexting scandal, Hoak said “The people involved were only
concerned about whether pretexting was legal. Nobody asked, 'Even if it's legal, is it the right thing to do?'"
What is the relationship between legality and what is the right thing to do in making business decisions?
Laws create a minimum set of standards. Ethical people often go beyond what the law required because the law
cannot cover every situation a person might encounter. Ethical people often do less than is permitted by the law and
