Risk & Compliance

HP Settles with California AG

Deal with AG closes one aspect of the case, but HP and its executives still have a long road ahead.
Stephen TaubDecember 8, 2006

Hewlett-Packard has agreed to pay $14.5 million to settle civil charges of pretexting with California Attorney General Bill Lockyer. Under the deal, the computer giant, which was accused of illegally accessing phone records during its probe of boardroom leaks to the media, will finance a new law-enforcement fund to fight violations of privacy and intellectual-property rights and to adopt corporate-governance reforms.

“The Hewlett-Packard incident has helped shine a national spotlight on a major privacy protection problem,” said Lockyer in a statement. “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 settlement requires HP to pay $13.5 million to create a new Privacy and Piracy Fund within the Attorney General’s office that will run law-enforcement activities related to privacy and intellectual-property rights. In addition, HP will pay $650,000 in civil penalties and $350,000 to cover the Attorney General’s investigation and other costs.

Despite Thursday’s settlement, HP is not out of the woods yet regarding the board spying scandal. The company is still the subject of various governmental inquiries by the Securities and Exchange Commission, the Committee on Energy and Commerce of the U.S. House of Representatives, and the U.S. Attorney’s Office for the Northern District of California. Further, the company is the defendant in five stockholder derivative lawsuits allegedly based on the activities of the leak investigations. Four of the suits were filed in California and one was filed in Delaware.

In addition, on December 1 five HP executives were accused of insider trading in an amended complaint filed in late November. The suit accuses CFO Bob Wayman, CEO Mark Hurd, and directors Lucille Salhany and Lawrence Babbio of participating in board decisions to buy back the company’s stock to boost its price at the same time they and former in-house counsel Ann Baskins were selling $41.3 million worth of HP stock.

For now, however, the good news for HP investors is that the company will be instituting several major governance reforms as a result of the new settlement. For instance, HP agreed to a new independent director, who will serve as the board’s watchdog on matters of compliance regarding ethical and legal requirements. The director will have specific responsibilities in carrying out that oversight function, and will report violations to the board, other HP officials, and the AG. In addition, HP’s chief ethics and compliance officer 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.

HP also agreed to 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. It also will establish a new compliance council, headed by the CECO, which will comprise 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, according to the announcement.

“The settlement’s corporate governance reforms aim 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,” according to the press release. The “injunctive relief” provisions that impose the reforms will last five years.

“Fortunately, Hewlett-Packard is not Enron,” Lockyer said in a statement. “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.”