HP: Hewlett Packard's Corporate Governance Woes - 6

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Page Six of Six Pages

6. Hewlett Packard Corporate Governance Problems - Civil Charges Against HP and Insider Trading Charges Against Mark Hurd


» Threatened California State Civil Suit Settled
» Hewlett Packard Scandal Escalates to Spying on Dell Accusation
» HP Sued: Insider Trading and State Civil Suit - Did HP Bosses Profit During the Scandal?

Threatened California State Civil Suit Settled

Bill Lockyer December 7, 2006. California's Attorney General's Office announced that Hewlett-Packard will pay $14.5 million to settle a civil complaint it filed at Santa Clara County Superior Court - a complaint filed at the same time as the settlement. In addition to the felony charges brought against five individuals, California Attorney General Bill Lockyer, had earlier announced that he was considering a civil-suit against HP on the basis of damages suffered by individuals who were spied upon and whose phone records had been obtained by methods that are the subject of the felony charges.

Of the $14.5 million settlement, $13.5 million - will fund state and local investigations into privacy rights and intellectual property violations, $650,000 is in civil penalties, and $350,000 will go to cover the state's investigation and other costs.

The settlement includes an agreement that HP will "finance a new law enforcement fund to fight violations of privacy and intellectual-property rights," and adopt corporate governance reforms. "With its corporate 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 attorney general added that the new fund will help ensure that businesses will be held accountable when they step across legal boundaries.

As part of the settlement, HP will for five years:

• Continue to employ a chief ethics and compliance officer
• Expand the role of its chief privacy officer to review HP's investigation practices
• Expand its employee and vendor codes to ensure that they address ethical standards regarding investigations, and
• Retain an expert in the field of investigations to assist the company's chief ethics officer with regard to investigations.

HP recently appointed G. Kennedy Thompson, the CEO of Wachovia, as an independent director with the responsibility for reviewing and reporting on HP's compliance with legal and ethical requirements related to investigations.

Hewlett Packard Scandal Escalates to Spying on Dell Accusation

January 24, 2007. Karl Kamb Jr., a former HP vice president of business development and strategy, filed a counter suit in U.S. District Court for the Eastern District of Texas against HP, former HP Chairman Patricia Dunn and former HP attorney Kevin Hunsaker, saying that HP used the illegal tactic of pretexting in order to obtain his private phone records. If true, this would indicate that HP's practice of employing possibly illegal investigation tactics went beyond an effort to find the source of boardroom leaks.

The counter suit is in response to a suit by HP's suit against Kamb, another former HP employee and Byd:sign, a rival rival flat-screen TV company that HP claims Kamb started while still working at HP. HP are seeking $100 million dollars as part of their law suit.

Included in the counter claim is the allegation that in 2002, HP hired Katsumi Iizuka, a president of Dell Japan until 1995, to supply information on Dell's plans to enter the printer business and that "senior HP management" signed off on the payments to Iizuka.

On a January 24, 2007 U.S. District Court Judge Michael Schneider ordered Kamb to withdraw his counterclaim against HP and to resubmit it under seal. He also issued a restraining order barring parties in the case from discussing the counterclaim allegations with the media.

HP Sued: Insider Trading and State Civil Suit - Did HP Bosses Profit During the Scandal?

January 31, 2007. On November 30, 2006, a lawsuit against HP was filed in state court in San Jose, California on behalf of investors including a union pension fund.
Mark Hurd, HP Current Chair & CEO
The lawsuit alleged that HP CEO Mark Hurd, together with other senior executives and directors sold about $41.3 million of HP stock in a two-and-a-half week period in 2006, preceding HP's public disclosure about its involvement in a potentially damaging investigation. Hurd is said to have sold $1.4 million worth of stock options on August 25, the same day he was interviewed by HP attorneys about the company's investigation into news leaks.

The lawsuit contends that the defendants sold shares because they knew "the market's perception of HP would be significantly damaged when (not if) the market became aware of the full extent of distrust and acrimony among board members, the outlandish smear campaign tactics the acrimony had spurned and the illegality of the investigatory tactics being used."

The suit alleged that in addition to the sales of shares by insiders, Hewlett Packard's board approved stock buybacks of about $10 billion "to keep the company's stock price propped up while insiders were selling."

HP responded by saying that the lawsuit "represents a transparent effort to exploit issues related to HP's recent investigation for personal gain" and that "HP will defend itself vigorously".

On December 12, 2006, members of Congress Bart Stupak and John Dingell wrote asking Hurd to explain his actions. In a December 21, 2006 reply (made public on January 19, 2007) Hurd states that his August 25, 2006 sale of shares underlying 100,000 options was made in the regular course of an investment strategy, represented only 5 percent of his HP holdings, and did not cause the stock price to decline.

In April 2005, the timing of Hurd's sale of NCR stock was also questioned. Hurd was CEO of NCR from March 2003 to March 2005. In that sale, Hurd made $2.3 million by selling NCR stock in the two months prior to being named HP's CEO. Following the announcement of Hurd's resignation from NCR, NCR's stock fell 17 percent to $31.40 a share.

In 2006, Hurd received $10 million dollars in direct compensation: $8.6 million dollars in bonuses and a salary of $1.4 million dollars.