HP settles with SEC in dispute arising from leak probe

May 24, 2007, 7:12 PM UTC
Fortune

Hewlett Packard (HPQ) reached a settlement with the Securities and Exchange Commission yesterday in a dispute that arose from HP’s now infamous, runaway leak probe of 2005 and 2006. The SEC found that HP had failed to properly disclose the reasons for board member Thomas Perkins’s abrupt resignation in May 2006, but it imposed no fine. HP admitted no wrongdoing, and agreed to “cease and desist” from such failures to disclose in the future. (The SEC filing is available here. )

The action signals to companies what is expected of them in the future. It also amounts to a mild, implicit rebuke of HP’s then general counsel Ann Baskins, who resigned last September, and the board’s then outside counsel, Larry Sonsini, of Wilson Sonsini Goodrich & Rosati, who presumably advised the company that no such disclosure was legally mandated. (The Wilson Sonsini firm declined comment; a comment from Baskins’s counsel was just solicited, and will be added to this post when received.)
Perkins resigned on May 18, 2006, when the head of HP’s audit committee revealed to the full board the identity of the board member who had been found to be the source of certain press leaks, George Keyworth, and the full board asked him to resign. Keyworth refused to resign, but Perkins immediately quit. HP then disclosed Perkins’s resignation, but not the reasons for it. The law requires that reasons be disclosed when a director resigns because of “a disagreement with the company . . . relating to the company’s operations, policies, or practices.”

Though Perkins later contended (and it was widely reported) that he had resigned due to his outrage over the methods HP had employed during its probe into the source of leaks — methods that, it was ultimately determined, included surveillance of board members and, most notoriously, tricking phone companies into revealing private phone records of directors and journalists (a practice now known as “pretexting”) — other board members, including chairman Patricia Dunn, said that the methodology of the probe hadn’t come up at the meeting. They said that Perkins had complained at the time only that Dunn had violated an agreement he said she’d had with him that the identity of the leaker, if determined, would not be disclosed to the full board, and that the leaker would only be asked to pledge not to do it again. (Dunn denied having ever had such an agreement with Perkins, and said she had been advised by counsel that such an agreement would be improper.) At the board meeting, Perkins protested that Dunn had “betrayed” him by breaching their agreement, according to Dunn’s later accounts before Congress and elsewhere.

In an Feb. 19, 2007, article in The New Yorker, available here, James Stewart reports on a conversation that Perkins and HP outside counsel Sonsini, who had not been present at the board meeting, had subsequently.

Shortly after Perkins returned to his office in San Francisco, Larry Sonsini, the outside counsel, called to discuss the resignation. Perkins had worked with Sonsini on various matters for forty years, and liked and trusted him.

“I hear you and Pattie had a real set-to,” Sonsini began. “Have you really resigned?”

“Yes, and I’m not going back,” Perkins answered.

A post-Enron reform requires that resignations by directors be reported to the S.E.C., and if the resignation stems from any disagreement with the company or the board the reasons must also be disclosed. Sonsini mentioned this, and added, “If it’s a personal matter, it doesn’t need to be disclosed. How would you characterize this? Is the dispute between you and the company?”

“No. It’s between me and Pattie. I can’t breathe the same air with that woman.”

“What should we say in the press release?”

“Just say I resigned. But please—don’t say I resigned to spend more time with my children.”

After this exchange, HP decided only to disclose Perkins’s resignation, providing no statement of reasons. (Stewart’s account is consistent with a less detailed account Sonsini gave before a U.S. House of Representatives subcommittee in September.)

In its cease and desist order, issued yesterday, the SEC makes no reference to Perkins’s subsequent claims that the methodology of the leak probe had played a role in his decision to resign. It finds, nonetheless, that disclosure was still required. In yesterday’s order the SEC writes that Perkins’s resignation was prompted by two board actions: “(1) the decision to present the leak investigation findings to the full Board; and (2) the decision by majority vote of the Board of Directors to ask the director identified in the leak investigation to resign.” The commission then concludes, “Mr. Perkins’ disagreement related to important corporate governance matters and HP policies regarding handling sensitive information, and thus constituted a disagreement over HP’s operations, policies or practices.”

Perkins’s counsel, issued the following statement on behalf of Perkins: “I am delighted that the HP boardroom drama is now satisfactorily concluded. Fortunately, it was never about hp itself — the company is going from strength to strength under chairman and CEO Mark Hurd’s leadership. I had the greatest training possible in formerly reporting directly to the two founders, and more recently the honor of serving on the board. I am proud of HP as the world’s biggest and best high-tech enterprise.”
My own earlier analysis of the disclosure issue, which the SEC obviously did not share, is available as a comment to Mark Obbie’s legal journalism blog here. A December 2006 American Lawyer article, entitled “Where Will the Troubles End for Sonsini and HP?,” which viewed HP’s and Sonsini’s handling of the disclosure issue as egregious, is here. A November 2006 Fortune magazine feature story profiling Sonsini (by me) is available here.