News

HP Settles Pretexting Scandal with Fines

HP stock unscathed by scandal, but $14.5M settlement highlights legal woes.

• By The Associated Press
• December 08, 2006

HP agreed Thursday to pay $14.5 million to settle a lawsuit by California Attorney General Bill Lockyer alleging it engaged in unfair business practices in its crusade to unmask the source of boardroom leaks to the news media. The lawsuit was filed in Santa Clara Superior Court simultaneously with the settlement under a prearranged deal.

Lockyer acknowledged HP's cooperation in helping secure a swift resolution of the civil matter.

"It's a good example of the HP that we all grew up with, the old HP of Hewlett and Packard, the ethics and principles of corporate responsibility and good management practices," Lockyer said in an interview with The Associated Press. "We see those re-emerging in the way they dealt with this matter."

The state likely would have recovered far less if the case were taken to court, based on the limited penalties it could claim for each phone number that was illegally accessed during the leak probe, Lockyer said.

The vast majority of the settlement -- $13.5 million -- will fund state and local investigations into privacy rights and intellectual property violations, according to the lawsuit and settlement filed simultaneously in Santa Clara County Superior Court.

The remainder of the settlement amount consists of $650,000 in civil penalties and $350,000 to cover the state's investigation and other costs.

The lawsuit marks the first civil case brought by authorities against Palo Alto-based HP for the scandal that erupted in September and led to criminal charges against former chairwoman Patricia Dunn and four others.

Analysts said the company emerges looking better than ever and has resolved a major uncertainty in the minds of investors.

"It looks like they got off pretty easy, and that this is actually going to be a good thing for HP," said Roger Kay, who follows HP as president of market research firm Endpoint Technologies Associates. "It looks like they're in control of their destiny and have put at least some of this behind them."

HP also agreed to various governance reforms to be in place for five years, which Lockyer said will help protect privacy rights during any future HP investigations. Some of those reforms include the appointment of an independent director to monitor HP's compliance with privacy guidelines and additional training for investigative staff.

Hurd said in a statement that the company is "committed to ensuring that HP regains its standing as a global leader in corporate ethics and responsibility." The agreement did not include a finding of liability against HP.

Prosecutors said the company hired outside detectives who tricked phone companies into disclosing the private phone records of directors, journalists and others so the company could track the source of news leaks.

Revelations of the probe, disclosed in a regulatory filing, led to an exodus from the board, criminal charges, a congressional investigation, and ongoing federal probes by the FBI, the Securities and Exchange Commission, federal prosecutors and other agencies.

Dunn, who was ousted over the incident, former ethics chief Kevin Hunsaker and three outside investigators, Ronald DeLia, Matthew DePante and Bryan Wagner, have pleaded not guilty in Santa Clara County Superior Court to charges of identity theft and fraud for their roles.

The company's stock price has been relatively unaffected by the scandal, buoyed by strong earnings growth under CEO Mark Hurd and the belief that the turmoil had little affect on day-to-day operations.

Still, HP shares fell 28 cents to $39.86 Thursday on the New York Stock Exchange. News of a possible settlement was reported late Wednesday by CNet Networks Inc.'s News.com.

Details of the agreement were announced after the market closed, and HP shares gained a penny.