[SOLVED] In January 2006, the chair of Hewlett-

In January 2006, the chair of Hewlett-Packard (HP), Patricia Dunn, hired a team of independent electronic-security experts to determine the source of leaked confidential details regarding HP’s long-term strategy. In September 2006, the press revealed that the independent experts spied on HP board members and several journalists. They obtained phone call records of HP board members and nine journalists, including reporters for CNET, the New York Times, and the Wall Street Journal, using an unethical and possibly illegal practice known as pretexting. Patricia Dunn claimed she did not know the methods the investigators used to determine the source of the leak but resigned after the scandal. Ten days earlier, George Keyworth, the director responsible for the leak, had resigned from HP’s board after twenty-one years of service.
Company Profile
HP, founded in 1939, operates in more than 170 countries and is the world’s largest seller of personal computers, offering a wide range of products and services, such as digital photography, digital entertainment, computing, and home printing. In addition, HP provides infrastructure and business offerings that span from handheld devices to some of the world’s most powerful super- computer installations. HP is among the world’s largest IT companies, with revenue totaling $107.7 billion for the four fiscal quarters ended January 31, 2008. In 2007, HP was ranked 14th in the Forbes 500 list. The company’s corporate headquarters is in Palo Alto, California.
Leak of Confidential Information and HP’s Investigation
Patricia Dunn joined HP’s board in 1998, and was elected nonexecutive chair in February 2005. She was CEO of Barclays Global Investors from 1995 to 2002. In January 2006, the online technology site CNET published an article about the long-term strategy at HP. The article quoted an anonymous source inside HP and contained information known only by the company’s directors. Following the CNET article, Dunn, with the assistance of HP security personnel and the company’s counsel’s office, authorized a team of independent electronic-security experts to investigate the origin of the leak. The investigation targeted the January 2006 communications of HP’s directors, including not only the records of phone calls and emails from HP but also the records from their personal accounts.
The consultants were not actually listening on the calls. They were just looking for a pattern of contacts. The investigation employed tactics that ranged from the controversial to the not necessarily legal. These tactics included using private investigators to impersonate HP’s board members and then to trick phone companies into handing over the calling records of those board members’ personal phone accounts. The records of nine journalists were similarly obtained. This technique is known as pretexting. With no more than a home address, an account number, or other pieces of personal information, an investigator or pretexter may obtain personal information from phone companies pretending be somebody else.
Resignation of Tom Perkins
The consultants discovered the origin of the leak, and in a board meeting held in May 2006, Patricia Dunn identified director George Keyworth, the longest-serving HP director, as the alleged leaker. He apologized and said to his fellow directors, “I would have told you all about this. Why didn’t you just ask?” On September 12, 2006, Keyworth’s public resignation letter apologizes and states his reasons for leaking information to CNET:
I acknowledge that I was a source for a CNET article that appeared in January 2006. I was frequently asked by HP corporate communications officials to speak with reporters—both on the record and on background— in an effort to provide the perspective of a longstanding board member with continuity over much of the company’s history. My comments were always praised by senior company officials as helpful to the company— which has always been my intention. The comments I made to the CNET reporter were, I believed, in the best interest of the company and also did not involve the disclosure of confidential or damaging information.
Immediately following the accusations, Keyworth left the board room, and another director, Tom Perkins, a renowned Silicon Valley venture capitalist and friend of the company founders, protested against the secret internal investigation, which he considered illegal, unethical, and a misplaced corporate priority on Dunn’s part. Perkins was chair of the board’s nominating and governance committee but had not been informed by Dunn of the surveillance, even though he knew that Dunn was attempting to discover the source of the leak.
After the board passed a motion asking Keyworth to resign, Perkins announced his own resignation. The next day, the company publicly announced Perkins’s resignation without disclosing the reasons for his departure. HP reported Perkins’s resignation to the SEC four days later, again giving no reason for his resignation.
In early August, after HP ignored his requests to take action, Perkins formally asked the SEC and prosecutors in California and New York to force HP to publicly file his written explanation for resigning. By early September, HP could not delay disclosing the scandal and made a filing to the SEC, laying out the pretexting story. At the same time, the story was released to the press by Perkins. On September 12, 2006, Keyworth publicly resigned from the board, and HP announced that Mark Hurd, HP chief executive officer and president, would replace Dunn as chair after the HP board meeting on January 18, 2007.
Congressional Hearings and Charges
On September 21, 2006, Mark Hurd, in an official HP press release, explained that “what began as an effort to prevent the leaks of confidential information from HP’s boardroom ended up heading in directions that were never anticipated.” A day later, Patricia Dunn resigned as an HP director, stating in her resignation letter the reasons for her departure and her involvement in the internal investigation:
I have resigned today at the request of the board. The unauthorized dis- closure of confidential information was a serious violation of our code of conduct. I followed the proper processes by seeking the assistance of HP security personnel. I did not select the people who conducted the investigation, which was undertaken after consultation with board members. I accepted the responsibility to identify the sources of those leaks, but I did not propose the specific methods of the investigation. I was a full subject of the investigation myself and my phone records were examined along with others. Unfortunately, the people HP relied upon to conduct this type of investigation let me and the company down.
A week later, on September 28, the par- ties involved appeared at the U.S. House of Representatives Energy and Commerce Committee Subcommittee on Oversight and Investigations. Ann Baskins, HP’s general counsel, resigned hours before she was to appear as a witness and refused to answer questions, invoking the Fifth Amendment, due to the ongoing criminal investigations. In the hearing, Dunn and Hurd testified extensively about the internal investigation. Dunn testified she never approved the use of questionable tactics, saying she was not aware that pretexting could involve the misrepresentation of someone’s identity to obtain phone records until late June or July (2006).
In October 2006, the California attorney general filed civil and criminal charges against the company, Patricia Dunn, and other HP employees. HP settled the lawsuit in December 2006, paying $14.5 million in fines and promising to improve its corporate governance practices. In June 2007, a California judge dismissed fraud charges against Patricia Dunn and other employees involved in the scandal.
At the same time, the journalists whose records were obtained by HP’s external consultants filed a lawsuit against the com- pany. Two years later, in February 2008, HP agreed to a financial settlement with the New York Times and three Business Week magazine journalists. The amount of the settlement was not disclosed, and the proceeds were donated to charity.
Questions
1. Should the chair of the board of directors be allowed to initiate investigations into weaknesses in a company’s internal control system?
2. Is the strategy of pretexting an accept- able means in order to obtain critical information that will strengthen a company’s internal control system?
The following legal advice was obtained on the subject by HP:
The committee was then advised by the committee’s outside counsel that the use of pretexting at the time of the investigation was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques employed by the out- side consulting firm and the party retained by that firm complied in all respects with applicable law. 1
3. Should the reasons for resignations from a board of directors always be made public?

Question: In January 2006, the chair of Hewlett-