HP Chairwoman Out in Spy Flap; CEO Contrite
The chairwoman of Hewlett-Packard Co. stepped down from its board of directors Friday as the company offered its fullest account yet of corporate spying that began with her attempts to plug boardroom leaks and ended in a scandal that has engulfed the Silicon Valley icon.
Patricia C. Dunn, who last week had agreed to give up her title as chairwoman in January, instead quit effective immediately. Chief Executive Mark V. Hurd succeeded her as chairman.
Speaking Friday before about 100 reporters at the company’s Palo Alto headquarters, Hurd said that the investigation’s intent was “absolutely proper” but that its methods -- including impersonating board members and reporters to get their private telephone records -- were not.
“On behalf of HP, I extend my sincere apologies to those journalists who were investigated and everyone who was impacted,” he said. “We believe that these were isolated instances of impropriety and not indicative of how we conduct business at HP.”
Hurd’s credibility is key to calming nerves on Wall Street, which reacted negatively this week to news reports that the CEO might have been more deeply involved in the investigation. Hurd is credited with turning around the company.
HP’s stock took a 5.2% hit Thursday, but stabilized Friday, rising 24 cents to $35.11. The shares gained 39 cents in late trading after Hurd’s remarks.
Dunn did not attend the session with the media. She has maintained that she relied on assurances by HP lawyers and outside counsel that the investigation was legal.
“Unfortunately, the people HP relied upon to conduct this type of investigation let me and the company down,” she said in a written statement. “I continue to have the best interests of HP at heart and thus I have accepted the board’s request to resign.”
The scandal apparently has cost at least two HP employees their jobs. Anthony Gentilucci, the head of the company’s global investigations unit, and Kevin T. Hunsaker, senior counsel and ethics director, are on their way out, said people familiar with the matter who didn’t want to be named because the discussion involved confidential personnel matters.
Gentilucci and Hunsaker were involved in overseeing the HP leak investigation, which came to light Sept. 6. The resulting scandal has triggered criminal investigations by the California attorney general and the FBI as well as probes by a congressional committee and the Securities and Exchange Commission.
California Atty. Gen. Bill Lockyer said Friday that his office had no evidence implicating Hurd in a crime, but he noted that the investigation wasn’t over. Lockyer has said that he has sufficient evidence to indict people inside and outside the company.
“We’re going to continue our investigation and go where the evidence leads us,” Lockyer spokesman Tom Dresslar said. “We’re not ruling anybody out.”
Hurd, wearing a black suit, a bright red tie and an expression of grim remorse, acknowledged Friday his direct role in the errant investigation but declined to take reporters’ questions, saying he would speak in detail next week before a U.S. House panel.
His comments capped a week of increasing pressure to fully disclose his role in the two-phased investigation, dubbed Kona I and Kona II. Dunn launched the effort in early 2005 after some board members concluded that reports in the Wall Street Journal, Business Week and the New York Times relied on leaked information.
The probe was suspended last year when it turned up no conclusive evidence. But Dunn restarted the investigation in January after other reports by the Journal and the online news site CNet renewed concerns that someone on the board was talking to reporters.
On Friday, Michael J. Holston, an outside attorney the company hired to review its internal investigation, provided an account that confirmed details recently reported by news outlets.
These included findings that investigators working for the company used a ruse known as pretexting -- pretending to be the account holders -- to obtain phone records of two current HP employees, seven current or former board members or their relatives and nine journalists.
Holston also described an attempt to plant “tracing” software in a reporter’s e-mail; physical surveillance of board members and journalists; and the possible searching of unidentified individuals’ trash.
Hurd acknowledged that he knew about the surveillance and the deception of reporters, at least one of whom attended Friday’s session.
But he downplayed his involvement in the probe, which was overseen by HP employees and conducted chiefly by a Boston-area private investigation firm, Security Outsourcing Solutions Inc., and Action Research Group Inc., a Florida data broker that it hired.
Hurd said he attended only “a brief portion of a meeting” in July 2005 at which preliminary results of the investigation were discussed. And he said he was presented with a verbal report at another meeting last March.
“I understand there is also a written report of the investigation addressed to me and others, but I did not read it,” he said. “I could have, and I should have.”
A 20-page internal report of the July 2005 meeting, obtained by The Times, details the extent of the initial investigation. It also shows that HP treated the search for boardroom leakers much as it might an engineering problem, complete with flow charts and investigative options analyzed by “risk of exposure,” “probability of success” and “implementation obstacles.”
The report -- a series of PowerPoint slides -- showed that private investigators working for the company analyzed relationships between board members and reporters, conducted unspecified “covert intelligence gathering” and scoured HP telephone and e-mail records.
It also warned of “investigative limitations” and raised concerns about legality.
“In regards to an investigation approach, careful considerations must be given to investigative methodologies as it concerns HP policy, guidelines, privacy issues and various state and federal laws,” it stated.
Potentially most damaging to Hurd’s credibility was his acknowledgment Friday that he had approved a sting operation designed to trick a CNet reporter into revealing her HP board source.
Holston said the ploy had involved sending an e-mail message that “appeared to be coming from a disgruntled senior executive, who was willing to share information with the journalist.”
A software “tracer” was attached to the e-mail. It was designed to alert investigators if the journalist forwarded the message to a board source. Investigators could not verify that it was activated, Holston said.
“The concept of sending the misinformation to the reporter and the content of the misinformation to be contained in the message of the e-mail was approved by Mark Hurd,” Holston said, but he noted that Hurd was never informed about the tracing software.
Holston also revealed Friday that Gentilucci, the company’s global investigations manager, had given an HP employee’s Social Security number to Security Outsourcing for use in pretexting phone records.
Security Outsourcing also used or gave to Action Research the Social Security numbers of three journalists and three current or former board members, Holston said.
Reaction to Friday’s disclosures was generally favorable, including from one of Dunn’s most vehement critics, venture capitalist Thomas J. Perkins, who resigned from the board in protest over the investigative methods she had approved.
“Mark Hurd has shown that he is the right man to take HP to new heights,” Perkins said in statement. He also said, “I would like to thank Pattie Dunn for stepping aside, allowing Mark Hurd to lead and HP to move on.”
Analysts also welcomed the company’s disclosures and its appointment of a former federal prosecutor, Bart M. Schwartz, to review the company’s investigative methods and standards of business conduct.
“What Hurd did was really important,” said Tim Bajarin, president of consulting firm Creative Strategies, who earlier had said the CEO’s appearance with the media would be his most important ever. “He stood up and took responsibility, apologized and said we’re going to get to the bottom of this.”
Bringing in Schwartz also demonstrates that the company is serious about taking strong measures to revamp internal controls and create a new process for future investigations, Bajarin said.
Analyst Rob Enderle of the Enderle Group said he was not convinced that Dunn was at fault for the rogue investigation, nor that her departure would soon quell the recent uproar.
“I think Dunn took a bullet for the team,” he said, “though I’m not convinced that’s going to be enough.”
james.granelli@latimes.com
jim.puzzanghera@latimes.com
Times staff writer Charles Piller in Palo Alto contributed to this report.
