Dunn Resigns; HP CEO Hurd Apologizes for Investigation

CEO Mark Hurd speaks on the "pretexting" controversy that has been shaking Hewlett-Packard's executive ranks.

Investigators hired by Hewlett-Packard not only obtained telephone records through legally questionable means, but also went as far as to follow reporters and members of the board of directors, including one director traveling to Colorado, according to the company.

The disclosure came Sept. 22 during a press conference by President and CEO Mark Hurd, the first time an HP executive has commented directly on the controversy that has engulfed the Palo Alto, Calif., company for the past three weeks.

In addition, Hurd announced that Patricia Dunn, who was chairwoman of the board, has resigned immediately from the board, the third member to resign in the wake of the probe.

The announcement came less than two weeks after the company first announced that Dunn would step down as chairwoman in January, but remain on the board. Hurd was appointed chairman to replace Dunn.

Hurd also said Richard Hackborn is now the lead director and HP has hired attorney Bart Schwartz, a former federal prosecutor, as board counsel to conduct an independent review of the groups business procedures to ensure that this situation doesnt arise again.

Hurd, who at times sounded distraught, several times said that what started as a legitimate attempt to find out who was leaking information to the media changed into an investigation that used techniques contrary to HPs corporate ethics. He apologized to those who were investigated or otherwise impacted.

"Something that was being done with the best of intentions took a direction that we couldnt have anticipated," Hurd said. "The people of HP dont deserve this, and neither do the people who were impacted."

The controversy came to light earlier in September when HP filed the first documents with the Securities and Exchange Commission outlining its investigation into the leaks. Those documents were the first to say that the investigators hired by HP, Security Outsourcing Solutions, of Boston, used the practice of "pretexting" to obtain copies of private telephone records from directors and members of the media.

In pretexting, investigators use personal information—in this case, a part of a persons Social Security number—to convince the telephone company that they are that person in order to gain access to the records.

According to Mike Holstein, a lawyer with Morgan, Lewis & Bockius—a firm hired by Hurd Sept. 8 to investigate the internal probe—other techniques used included surveillance of reporters and board members.

/zimages/1/28571.gifClick here to read more about Dunns exit as HP chairwoman.

Since HP first filed the documents with the SEC, the story has snowballed, as unnamed sources close to HP and the governmental bodies investigating the company have leaked information regarding the probes. Most recent were stories indicating that Hurd—whom the company said was not involved in the internal investigation—in fact had had wider knowledge of what was happening.

During his press conference, Hurd said he had been unaware of much of what the HP-hired investigators were doing, even though both he and Dunn, as well as general counsel Ann Baskins, received an 18-page memo report in March. He said he did not read the report.

"I could have and I should have," he said.

Hurd said that because of the number of people involved in the internal investigation, and because many of them work outside of HP, he couldnt guarantee that all the facts will be known about what went on. However, the CEO said there were two phases of the internal investigation, which was spearheaded by Dunn. The first started in early 2005—during the last months of former CEO Carly Fiorinas tenure—after information from board meetings found its way into national newspapers. That phase was completed in July 2005, he said.

The second kicked off in January 2006, when information from board meetings was leaked to the press. In February, Hurd OKd a plan to send out a bogus e-mail to certain reporters in hopes of flushing out the source of the leaks.

Hurd said an e-mail he received in May with information pertaining to the investigation led him to contact HPs legal counsel to investigate.

The internal investigation concluded that board member George Keyworth had leaked the information to the media. Both Keyworth and Tom Perkins, who disagreed with HPs internal investigation, have resigned from the board.

Holstein said the investigators hired by HP were told that their techniques were allowed under the law.

Many industry observers initially said that while the controversy made for good news copy, the impact on HP customers and investors would be minimal, given that none of it related to the companys products or road maps, and that it was confined to the board of directors and hadnt spilled over into HPs executive ranks. And at first, few customers said they were worried about the unfolding drama, and HPs stock remained relatively unchanged.

However, that changed with the arrival of reports linking Hurd to the probe, saying that Hurd may have been kept up-to-date on the probe into the leaks and investigators hired by HP had sought a meeting with Hurd and Dunn to update them on the progress.

When those stories broke Sept. 21, HPs stock fell 5 percent. However, it bounced back in after-hours trading Sept. 22 following the press conference, rising 54 cents to 35.41.

Hurd will join a number of other HP officials, including Dunn, in testifying Sept. 28 before the Oversight and Investigations Subcommittee of the U.S. House Energy and Commerce Committee, which is probing the use of pretexting by HP investigators.

Other agencies, including the SEC and the California State Attorney Generals Office, also are investigating. A spokesperson with the attorney generals office has said that indictments are possible, but that the office doesnt have any evidence right now linking Hurd to any wrongdoing.

/zimages/1/28571.gifCEO Hurd consolidates control over Hewlett-Packard. Read more here.

The controversy comes at what had been a positive time for HP: The company has seen its profit margins and stock prices grow during Hurds first 18 months in charge, and all of the companys major business units are profitable.

Analysts said they dont foresee an immediate impact on HPs business because of the controversy, but added that the company needs to be careful as the case unfolds.

"The danger for HP is that the company has learned to do very well financially in markets that are commodity markets," said Charles King, an analyst with Pund-IT Research, in Hayward, Calif. "But customers have a lot of alternatives. If a company felt that they no longer wanted to be in business with HP, they wouldnt have to go far down the road to find someone who sells basically the same product."

"We still dont know all of the facts," said Gordon Haff, an analyst with Illuminata, in Nashua, N.H. "At some point—and I dont claim to know what that point is—you have to say the effects could be wider. Even if its nothing more than the serious distraction of the board of directors and senior executives, distractions are bad."

Hurd opened the press conference by reiterating that the controversy has nothing to do with the companys strategy or direction. Earlier the week of Sept. 18, HP hosted its annual HP Technology Forum user conference, and during his keynote, Hurd virtually ignored the maelstrom, except for a quick humorous aside.

However, during the Sept. 22 press conference, he said that both the news leaks and the ensuing investigations were important to the company. News leaks can hurt a companys financial performance, and the investigation has tarnished HPs reputation for ethical business behavior.

Pund-ITs King said he agreed. HP has mishandled this from the beginning, he said, first by not being completely open about the extent of the internal investigation, and then by being untruthful about all the parties involved. In addition, the company has tried to downplay the situation, saying that its nothing that hasnt been done before in other businesses.

"That kind of moral equivocation is a dangerous, slippery slope for a company to argue," he said.

If HP had come clean from the beginning—had it been forthcoming with investigators and the public, and had Dunn had stepped down immediately from the board—"I think the story would have been a week long," King said.

He also said this controversy is the latest example of how far the company has veered from its HP Way days, a drift that some saw happening during Fiorinas tenure.

"They really were a force for a different kind of corporate behavior," King said. "The whole HP Way was an issue of great pride for [the companys founders and early executives]. They were not like the rest of the crowd. They had a kind of … corporate morality that really set them apart."

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