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HP faces crisis after mole hunt

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Dawn Kawamoto and Tom Krazit CNET News

Published: 06 Sep 2006 16:10 BST

Angered by information leaked to CNET News.com, HP launched an investigation of its own board members that caused one director to resign and is reportedly leading to another not being renominated to the position.

On 23 January, ZDNet UK's sister site CNET News.com reported that HP's directors and chief executive Mark Hurd met for several days at the Esmeralda Resort & Spa in Indian Wells, California to craft HP's long-term strategy. The article apparently angered HP chairwoman Patricia Dunn, leading her to authorise an investigation to determine the story's source.

But when Dunn informed fellow HP director Tom Perkins of her plans, Perkins, the chair of HP's corporate governance committee, told Dunn to simply ask the directors who was the source cited in the story and to seek an apology.

Perkins was stunned to learn at a board meeting in May that Dunn went ahead with the investigation nonetheless. That investigation allegedly revealed the identity of the source, whose name was disclosed to the directors. Perkins resigned in protest, despite the company determining he was not the source of the leak, two sources have confirmed.

A private investigator hired by HP allegedly hired a data broker to gather information on telephone calls made and received by the directors, sources said.

Sources say California's attorney general and federal investigators are investigating the possible use of "pretexting" in the investigation. Pretexting is the practice of obtaining phone records through deceptive means.

The technology giant is expected to file documents with the Securities and Exchange Commission as early as Wednesday, providing more details about Perkins' resignation, according to sources. Perkins has asked HP to provide more disclosure on the reasons he resigned.

The Wall Street Journal reported on its Web site on Tuesday afternoon that board member George Keyworth will not be renominated to the board because, the company claimed, he disclosed confidential information to the press. (CNET News.com has a policy of not commenting on the identity of sources who ask for and are granted anonymity.)

An HP representative declined to comment on the allegations regarding telephone records, but said the company plans to make a voluntary filing on Wednesday with the SEC concerning the resignation of Perkins that will also have more information on Keyworth. But the representative declined to comment on the specific information in the filing ahead of its release.

Perkins, over the last several months, had expressed concern to HP over its alleged actions in securing telephone logs of his private residence and of his long-distance calls, sources said. Perkins requested information from AT&T on whether his local and long-distance accounts had been accessed and was informed that, indeed, information had been obtained in January and in early February, according to sources.

With his concerns mounting, Perkins asked that the minutes of the 18 May board meeting be reflected in the Securities and Exchange Commission filing that addressed his resignation, sources said.

Perkins' attorney, Viet Dinh, an attorney with Bancroft & Associates in Washington, DC, declined to comment, other than noting: "Tom resigned over a fundamental disagreement with HP's corporate governance practices. HP has refused to disclose this, and Perkins will pursue the appropriate remedies."

HP announced the resignation of Perkins, a Silicon Valley icon, late on a Friday in May.

In a press release issued on 19 May, the company said that Perkins "resigned from its board of directors on May 18, 2006, with immediate effect."

State and federal investigators would be looking into whether pretexting occurred because it is sometimes illegal. The Federal Trade Commission has said since at least 1998 that it has the authority to investigate "deceptive acts" including pretexting, and it has filed lawsuits against some data brokers.

So have some state attorneys general, including California's Bill Lockyer, who alleged in a March 2006 lawsuit that a data broker violated state business regulations. (Section 17500 of California's business regulations prohibits anyone from making statements known to be "untrue or misleading", with violations punishable by six months in prison and fines of $2,500.)

The move by HP to investigate its own board members comes at a time when the company has been doing well, posting strong revenue and earnings growth after years of lacklustre performance. An HP representative declined to comment on both Keyworth and the Perkins resignation.

After cutting almost 15,000 jobs in a bid to dramatically cut costs, HP has moved to shore up its software business with the acquisition of companies such as Mercury Interactive. The company has also announced plans to consolidate its data centres and revamp its enterprise IT strategy, moving away from the poorly understood "Adaptive Enterprise" towards a new concept labelled "next-generation data centre architecture".

The early results have been very promising, with HP's stock outperforming competitors' and employee morale apparently on the upswing. Things appear to have gone very differently in the boardroom, however.

HP once counted Perkins as an employee: he did a stint as director of the fabled HP Labs. But Perkins' greatest contribution to Silicon Valley arguably came as a venture capitalist with Kleiner Perkins Caufield & Byers, which bankrolled names such as Sun, Google and Genentech.