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The HP Shareholder Lawsuit - Updated
Sunday, September 17 2006 @ 01:32 AM EDT

Some are speaking out now to defend Patricia Dunn, stressing the company's need to protect confidentiality. There's a very good rundown in the UK's Times Online, which quotes Jack Welch, the former Chairman of GE, among others:
Welch said Dunn may be a ‘sort of innocent victim in my view’. Dunn ‘had a crisis in the boardroom, and she had to deal with it,’ said Welch. “Now how they dealt with that may be up for some discussion. But the idea that a leak is out there destroying the confidentiality of the company ... if you had an employee that gave away the secrets of the company, you would fire them, instantly.’

He added that to the best of his knowledge GE had never used a private investigator during his 20 years at the top.

That last is the key, I think. It isn't just the pretexting; it's the damage caused by hiring PIs in the first place.

Update: Groklaw member rcbixler noted this very interesting sidebar in IR Web Report, under the header, "Did HP's Keyworth Really Leak Anything?" which points out that it's only a leak if what is said is confidential:

A review of the original CNET News.com article which sparked HP’s notorious probe finds that it contains no more information than had already been disclosed by the company or reported by the media.

Indeed, shortly before the article ran, HP itself provided a wide range of information about the company’s strategy to investment analysts at the company’s major annual analyst day meeting on December 13, 2005 at which CEO Mark Hurd and five other senior executives gave analysts a complete overview of the company’s strategy. That was about three weeks before the board session in early January 2006.

If this is accurate, then other laws come into play, and it would explain what I read somewhere that Keyworth and HP are negotiating a settlement. You can't say awful things about someone in public if they are not true. There are laws about that. It inevitably also raises the question, what was this spying really all about? The longer it continues, the more out-of-control it seems, like a spinning egg that spins so fast it loses contact with the table and starts to jump. As you can see, I am taking advantage of the Royal Society opening up for the next two months its entire collection of scientific journals to the public.

A colleague of Dunn's defends her even more strongly, though:

On Friday Martin Taylor, former chief executive of Barclays and a colleague of HP’s fallen chairman Dunn, made an extraordinary intervention. In a letter to the Financial Times he expressed sympathy for any director confronted by boardroom leaks. ‘People who have not served on boards have no idea how cancerous the presence of a leaker can be,’ he wrote.

‘It makes the development and execution of strategy impossible and it utterly corrodes the personal confidence that allows companies to work effectively. I have bitter experience of this. If I could have nailed a culprit by pretending to be his mother-in-law I should have been sorely tempted.’

Personal confidence is likely not enhanced by knowing the company spies on its own people, I don't think, though. What else could one do, aside from violating someone's privacy rights? One investigator interviewed provided a suggestion -- confront the person you think is the leaker and ask for his phone records.

I thought you might like to see the shareholder's complaint against HP, just filed in Superior Court of California, Santa Clara County, and I know I said yesterday in a comment I'd have it for you today. But when I read it, it is so strongly worded and raises some new issues, that I felt a bit odd about publishing it on Groklaw until I have the defendants' answer to publish at the same time. I hope you understand when I tell you that after thinking about it and wrestling with the question all day, I finally decided to wait until I have both. Being first isn't important to me compared with being fair and human. I'd like to retain those qualities, no matter what. And my heart just couldn't do it.

I put myself in HP's shoes, and if it were me, even if I'd made a huge mistake, I'd feel bad about having these accusations in the air for so long before I had a chance to respond. The thing that makes this different from earlier issues in the story is that HP can't really say much outside of the court filings, now that it's in litigation, so it just doesn't feel right to me to publish the accusations in the complaint without publishing the answer at the same time. And, unlike SCO v. IBM, which is two companies suing each other, this litigation is about people, flesh and blood people, and that doesn't feel the same.

So I am sorry I spoke too soon, but because I did, I felt I had to explain. And you are free to get your own copy at the courthouse, of course. Meanwhile, while we wait, I can tell you some things about it, because other journalists have done so already, and I've also looked around and found some articles that will help you understand the issues raised. One of the issues in the complaint is the assertion that HP ought to have hired new counsel to handle the problems that surfaced when the spy probe came to light.

It's not like the usual shareholder lawsuit I've seen. The why of that is because HP's stock hasn't been affected in any major way by the scandal, and usually shareholder suits seek to redress such financial losses to a company. This one seeks changes in HP's corporate structure, asking the court to direct HP "to take all necessary actions to reform and improve its corporate governance and internal control procedures..." For example, it wants that the court order that "the Chairman of the Board be an independent and non-executive director of HP." Of course, it asks for punitive damages too, but the emphasis is on specific corporate changes. FT.com describes it as "a derivative suit on behalf of the company alleging breach of fiduciary duty, waste of corporate assets and other wrongdoing by HP executives and company directors involved in the debacle."

The lawsuit is against Patricia Dunn, Mark V. Hurd, Ann Baskins, the rest of HP's current Board of Directors, and both Security Outsourcing Solutions, Inc. and Ronald R. DeLia and Caroline F. DeLia, as well as "DOES 1-50". They'll fill in the blanks as more information surfaces. In fact, it probably already has, with the New York Times reporting another name [sub req'd], Anthony Gentilucci, who, they say, "is based in Boston as manager of global investigations for Hewlett-Packard Global Security Services" and who reportedly was involved in the investigation. If so, he could conceivably be one of the Does who will get a name. The two board members who resigned are not defendants.

There are four causes of action, breach of fiduciary duty, abuse of control, gross mismanagment, and waste of corporate assets. I think it would be accurate to say that the complaint views the spy escapade as one of the defendants seeking power for themselves, to the detriment of the company, and subjecting HP to an unnecessary risk of liability.

Here's the relief the complaint asks for:

PRAYER FOR RELIEF

WHEREFORE, plaintiff, on behalf of HP, demands judgment as follows:

A. Declaring that the Individual Defendants, and each of them, have committed breaches of their fiduciary duties to HP, abused their control, grossly mismanaged HP, and committed the illegal and improper actions complained of herein; been damaged by reason of the conduct complained of herein;

B. Requiring the Individual Defendants to pay HP the amounts by which the Company has been damaged by reason of the conduct complained of herein and to indemnify HP for any claims brought against HP by any of its officers, directors, employees, or by any third party;

C. Directing HP to take all necessary actions to reform and improve its corporate governance and internal control procedures to comply with the Sarbanes-Oxley Act, including, but not limited to, putting forward for a shareholder vote resolutions for amendments to the Company's Articles of Incorporation and Bylaws (collectively, "Articles") and taking such other action as may be necessary to place before shareholders for a vote the following Corporate Governance Policies:

(i) an amendment to the Company's Articles requiring that the Chairman of the Board be an independent and non-executive director of HP;

(ii) an amendment to the Company's Articles limiting the number of executive directors on the HP Board to two;

(iii) an amendment to the Company's Articles requiring increased board member independence standards, more stringent than those required by the NYSE rules;

(iv) an amendment to the Company's Articles requiring that all Board committees be comprised of independent directors;

(v) a proposal to strengthen the HP Board's supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the Board;

(vi) a provision to permit the shareholders of HP to nominate at least three candidates for election to the HP Board;

(vii) appropriately test and then strengthen the internal audit and control functions;

(viii) reform executive compensation;

(ix) require full compliance with Sarbanes-Oxley; and

(x) permit shareholders to question all executive directors of HP at the annual shareholder meeting and establish a more transparent process for receiving and evaluating shareholder proposals.

D. Ordering that the defendants personally bear their own legal fees in defending any and all claims arising out of these matters, whether asserted by stockholders or the government, and not be indemnified by the corporation or any insurance;

E. Awarding punitive damages;

F. Awarding plaintiff the costs and disbursements of this action, including reasonable attorneys' and experts' fees;

G. Granting extraordinary equitable and/or injunctive relief as permitted by law, equity, and state statutory provision sued hereunder, including enjoining defendants, their agents, counsel, employees and all persons acting in concert with them from further entrenching themselves and usurping control of the Company; and

H. Granting such other and further relief as this Court may deem just and proper.

The complaint asks for a jury trial, but this San Francisco Chronicle article quotes an expert, who says that usually lawsuits like this one get settled without ever making it to trial:

Michael Klausner, a law professor at Stanford University, said companies usually settle these cases by agreeing to make some governance changes "which often are purely cosmetic."

As part of the settlement, the plaintiff's attorney is usually entitled to a fee.

To prepare you, so you'll understand the complaint when I do publish it, I went looking for lawyers who have written about the situation. Here's the best explanation I could find of the email exchange between Larry Sonsini and Tom Perkins, in an article on the Corporate and Securities Law Blog. How, many lawyers have been asking, could Sonsini have originally told Perkins that the investigation and the pretexting was legal? This is Part V of its coverage of the HP situation, and I think it will help you to get the context and some of the nuances right. Here's the first in the series (keep in mind we know a few more facts than the attorney writing the blog had on that day, early in the scandal), and you can follow along with the rest of the series, if it interests you as it did me. It will help you very much to understand some of the allegations in the complaint.


  


The HP Shareholder Lawsuit - Updated | 168 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections Here
Authored by: feldegast on Sunday, September 17 2006 @ 01:43 AM EDT
If Required

---
IANAL
My posts are ©2004-2006 and released under the Creative Commons License
Attribution-Noncommercial 2.0
P.J. has permission for commercial use.

[ Reply to This | # ]

  • Jack Welsh - Authored by: Anonymous on Sunday, September 17 2006 @ 09:48 AM EDT
    • Jack Welsh - Authored by: PJ on Sunday, September 17 2006 @ 12:37 PM EDT
This suggestion is just silly
Authored by: Anonymous on Sunday, September 17 2006 @ 02:21 AM EDT

One investigator interviewed provided a suggestion -- confront the person you think is the leaker and ask for his phone records.

  1. If you haven't done an investigation, how do you know who is the leaker?
  2. Phone records may not provide any evidence. They are just one avenue of investigation. Confidential information may have been passed in other ways - email, conversation during a golf game, etc.
  3. Even if, by some miracle, you correctly guess the identity of the leaker, and by coincidence, he/she has done the leaking by phone, there are several ways the leaker can obscure the trail. Most people at that level have more than one phone in their name, including cellphones. The phone used for the leak can be discontinued, and the records for the others turned over, etc.

[ Reply to This | # ]

The HP Shareholder Lawsuit
Authored by: Anonymous on Sunday, September 17 2006 @ 02:43 AM EDT
"Breach of fiduciary duty" would have occurred if HP management had
left any (legal) stone unturned in locating the leaker and thereby preventing
damage to the corporation's competitive edge and stockholder value. Clearly
management acted on some bad advice and can be held accountable for doing so,
but their fundamental motives were to protect the company and its stockholders
and that should be taken into consideration. HP was a "family" kind
of company for many years but since its founders passed away it's looking more
and more like a dysfunctional family.

[ Reply to This | # ]

Legal question: standing
Authored by: hopethishelps on Sunday, September 17 2006 @ 02:55 AM EDT

IANAL, but the question that occurs to me is, do the shareholders who filed this lawsuit have standing? Usually, shareholder lawsuits allege that the company did something, or more usually failed to do something, that resulted in shareholders suffering a financial loss. For example: if I buy stock of company X and the share price of company X goes down, I lose money. Now, if that it went down because the Board releases information after I bought the stock, which it should have released before I bought the stock, I can argue that their failure to release the information at the proper time has damaged me financially. I therefore have standing to sue for recompense.

But in this case, it is not clear that the shareholders have suffered financial loss. So don't they have a problem arguing that they have standing to bring a lawsuit at all?

Can some lawyer comment?

[ Reply to This | # ]

I'm really not seeing why I should care
Authored by: Anonymous on Sunday, September 17 2006 @ 03:22 AM EDT
Isn't this just a bunch of corporate reptiles devouring each others' tails? How
does it effect anyone or anything that I care about?

[ Reply to This | # ]

Off Topic
Authored by: feldegast on Sunday, September 17 2006 @ 03:44 AM EDT
Please make links clickable

---
IANAL
My posts are ©2004-2006 and released under the Creative Commons License
Attribution-Noncommercial 2.0
P.J. has permission for commercial use.

[ Reply to This | # ]

Excellent judgement call, PJ
Authored by: MeinZy on Sunday, September 17 2006 @ 04:10 AM EDT
Waiting for the reply is the kind of solid, value based intuition we've come to
rely on at Groklaw. As repulsive as this affair may be, I believe you may have
gracefully reigned in any vestiges of a lynch mob. I probably could have been
persuaded to grab a rope. You've nudged me back on a path of civility.

Thanks

---
Zy -- 'Square peg in a round Earth' - But working on those corners

[ Reply to This | # ]

Corporate vs. public
Authored by: Anonymous on Sunday, September 17 2006 @ 05:34 AM EDT
I'm not an American, so I may be misguided, but I just don't get it. It seems to
me that the commenters trying to protect Patricia Dunn, claim that private good
somehow trumps public law? Are they trying to say, that whenever somebody feels
they can lose income, they are entitled to break the law? Or just the big
corporations get this privilege?

While I understand that companies have the right to protect their bussiness,
does that also mean that the executives somehow become victims, when they break
the law while protecting that bussiness?

[ Reply to This | # ]

The HP Shareholder Lawsuit
Authored by: Anonymous on Sunday, September 17 2006 @ 10:36 AM EDT
I wonder if the lengths that representatives of HP went to in tracking down the
leaks were influenced by the outcome of the Apple vs Does case covered here
earlier.

[ Reply to This | # ]

"it's a matter of trust"
Authored by: rcbixler on Sunday, September 17 2006 @ 11:51 AM EDT
Alex Simpson's blog has a lot of good information. In particular, I like this article entitled it's a matter of trust. To quote:
Innocent directors had their privacy violated. How can you have trust on the board after that, I ask? The pretexting was like cutting off your foot to remove a wart. Sometimes, you just have to live with the world the way it is, warts and all.
Another good reference from this article is its link to a sidebar piece entitled Did HP’s Keyworth Really “Leak” Anything?. To me, the astounding thing about the HP leak story is the lack of proportionality of the responce compared with the original "offence."

[ Reply to This | # ]

The HP Shareholder Lawsuit - Updated
Authored by: Fractalman on Sunday, September 17 2006 @ 03:51 PM EDT

Could you remind us (me anyway) what the original leak was? And with the original story link?

Thanks.

[ Reply to This | # ]

"HP uses the tired ‘but they did it too’ defense"
Authored by: Brian S. on Sunday, September 17 2006 @ 05:17 PM EDT

They all seem to miss the point: Even if everyone else is doing it, that doesn’t necessarily make it right.

Parents have long been telling their kids that they can’t stay out late just because their friends do. Some corporate leaders apparently missed that life lesson — and now must face the consequences......The “others do it” excuse has backfired elsewhere, too. Just look at the more than 125 companies that are now facing questions from regulators or prosecutors and those holding their own reviews about how they granted options...... MSNBC News



?

Brian S.

[ Reply to This | # ]

Another forgotten angle
Authored by: brian on Sunday, September 17 2006 @ 06:23 PM EDT
Well PJ, if you are going to cover it I agree about being
fair and giving all sides their due limelight. However,
there is one character conspicuously missing from this
little drama.

The phone company.

Sure, you hear all the nastiness surrounding Ms. Dunn et.
al. but where is the phone company that released the
records in all this? Are they typically in the habit of
handing out people's phone records to anybody who calls?
It takes two to tango and right now we are focusing on the
lead. I would just love to know how the phone company
defends giving out phone records without even checking
that the person they are giving them to is supposed to
have them.

B.

---
#ifndef IANAL
#define IANAL
#endif

[ Reply to This | # ]

A suggestion to HP employees [was] The HP Shareholder Lawsuit - Updated
Authored by: Anonymous on Sunday, September 17 2006 @ 10:07 PM EDT
"Slaughter House no. 5."

The time is ney to "get out!" This also applies to investors.

Toodles

[ Reply to This | # ]

HP isn't a person; it's people
Authored by: Anonymous on Monday, September 18 2006 @ 01:16 PM EDT
And that is why I applaud PJ's decision to wait and present balanced
representations from both sides. In the real world "HP" as such
doesn't exist. It's a label on a large group of people, most of whom did not
make a terrible mistake.

That's also why I think that the petition for specific performance is a much
better approach than asking for money damages. If done well, it strikes at the
root of the problem instead of going at it by indirection, and also it is
sharply directed at the wrongdoers and won't harm the innocents around them.
Suits to actually cure defects in corporate operation ought to be far more
common, and "gimmme a million dollars and I'll shut up" suits far less
common.

[ Reply to This | # ]

The HP Shareholder Lawsuit - Updated
Authored by: martianmike on Wednesday, September 20 2006 @ 01:08 PM EDT
Welch said Dunn may be a ‘sort of innocent victim in my view’. Dunn ‘had a crisis in the boardroom, and she had to deal with it,’ said Welch.

All I could think of is that this is pretty much like saying

Former President Nixon was a sort of innocent victim. He faced a re-election crisis. He had to deal with it.

Sometimes how we deal with things is important. Justifying means by referencing ends is self defeating. Generally we should only allow it when the alternative would be "sudden death", i.e. there would be no further chance to pursue an ethical resolution because the threat is so catastrophic. Even then we should be suspicious of it.

It isn't clear to me that this purported leaker threatened the immediate survival of the corporation, the immediate office of any ethical board member, nor in any direct sense anyone's life. This leaves little justification for using an unethical or illegal course to pursue the leaker.

---

Heinlien's Mike from Mars grokked something in fullness, he could "just disappear it". If we fully grok SCO?

[ Reply to This | # ]

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