CASE 01: Dubious Methods Used to Investigate Leaks

by Hewlett-Packard Board Members

On Sep 5 ,2006, Newsweek published a story revealing that HP chairman Patricia Dunn authorized an
internal investigation of HP board members beginning sometime in 2005. Dunn suspected one or more
board members of leaking information about HP’s long-term strategy to the news media. One such article
appeared on the technology Web site CNET in January 2006. Making such confidential information public
could have a significant impact on the competitiveness of the company and impact its share price.

Three private involved in the investigation allegedly engaged in PRETEXTING – the use of false
pretense – to gain access to the telephone records of HP directors, certain employees, and nine
journalists. The detectives allegedly obtained and used the targeted individuals’ Social Security number to
impersonate those individuals in calls to the phone company, with the goal of obtaining private phone
records.

The California state attorney general filed criminal charges against Dunn, Kevin Hunsaker – senior
legal counsel and director of ethics and standards of business conduct – and the 3 outside
investigators. Dunn admitted that she oversaw the investigation but said she never had any knowledge that
illegal methods were used. All charges were eventually dropped against Dunn. Hunsaker and two of the
detectives involved pleaded no contest to fraudulent wire communications, a misdemeanor. The judge
agreed to drop the charges if they completed 96 hours of community service. The 3rd detective charged in
the case agreed to act as a witness for the prosecution and thus escaped criminal proceedings.

Eventually, the state settled a separate civil complaint against the company. HP agreed to pay $14.5M
to cover fines and legal costs, and also agreed to strengthen its corporate governance practices. The
settlement did not involve any admission or conclusion of guilt on the part of HP.

When the scandal broke, one HP board member, Tom Perkins, resigned to protest the methods Dunn
used in the investigation. In the aftermath, Dunn and Hunsaker alsor resigned from the board. George
Keyworth, a 21-year member of the HP board of directors, was identified by Dunn as being the one who
leaked the information, and he also resigned.

Throughout the scandal, investors continued to show faith in HP, and the price of the stock rose
steadily from a level $32/share in July to over $43/share in early January 2007.

QUESTIONS:

1. Which is more disconcerting – the fact that a board member leaked confidential information about
the firm or the tactics used to investigate the leak? Defend your position.

ANSWER:
 2. Can the use of pretexting to gain information ever be justified? Is it considered legal under any
circumstances?

ANSWER: