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September 27-October 3, 2006

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Patricia Dunn and Mark Hurd

Photograph by Felipe Buitrago
If looks could kill: Former HP board chairwoman Patricia Dunn, who resigned last Friday, watches CEO Mark Hurd address reporters at a press conference in Palo Alto on the same day. Hurd said he will take over the chairmanship.


HP's scandal has taken on Nixonian proportions, with some eerie parallels

By Richard Koman

"There is a cancer on the presidency."—John Dean to Richard M. Nixon

"Pattie, you betrayed me."—Thomas J. Perkins to Patricia Dunn

TOM PERKINS didn't know the half of it. When the legendary venture capitalist slammed his briefcase in the midst of Hewlett-Packard's contentious May 18 board meeting, saying "I quit" and walking out of the room, he knew only that Dunn's investigators had "pretexted" director George A. Keyworth II to discover that he was the source of a leak to a CNET reporter.

Months later, he was to find out that he too was pretexted; AT&T documented that private investigators used his Social Security Number to get access to his private cell phone records. Still, as far as Perkins—or anyone but a few HP insiders—knew, that was the extent of the illegality.

But revelations since then show that HP was running an in-depth program of covert operations dating back to the end of former CEO Carly Fiorina's troubled reign. It involved the pretexting of not only HP's directors but also reporters, HP employees and the most powerful lawyer in the valley, Larry Sonsini.

Beyond that, HP internal documents show that HP planned to install spies in the San Francisco newsrooms of CNET and the Wall Street Journal and Dumpster-dived for the personal documents of CNET reporter Dawn Kawamoto.

Records show that HP's senior counsel for ethics—there's some irony for you—personally ran the operation and turned a blind eye to information that the investigation at best skated the line of legality and quite possibly was flat-out criminal behavior.

Dunn, who initially claimed that she was "appalled" to discover investigators had pretexted Perkins and others ("I don't know if it's illegal," she said, "but it's wrong."), was shown in a series of leaked emails to have been informed and to have approved virtually all of the covert operations. She was forced to resign from the board on Friday, two weeks after merely losing her chairmanship (and that was not to take effect until January).

Most amazingly, CEO Mark Hurd, who will shortly take over the chairmanship as well, admitted on Friday that he approved a bizarre plan to infect Kawamoto's computer with spyware that would identify who in the company the reporter was talking with. The plan was carried out, but the software failed to work.

Now, with Dunn out and Hurd double-talking—not to mention investigations by the California attorney general, the FBI, the FTC and the Securities and Exchange Commission, with a congressional inquiry scheduled for Thursday at which Dunn, Ann Baskins, Sonsini and Hurd have indicated they will appear—the valley is reeling.

"I've heard from six or seven top CEOs over the past week, asking me, 'What were they thinking? Were they insane?,'" says Mike Malone, a longtime valley watcher and author of the upcoming book on HP's early days, Bill and Dave: How Hewlett and Packard Built the World's Greatest Company. "I don't have an answer to that. I think they were out of their minds. My sneaking suspicion—when the story first came out I suspected this—is that it dated back to the Carly era. The place just went crazy. At the rank and file [level], people were unhappy (under Fiorina). At the top, there was dissension, paranoia, a house divided against itself."

Malone says that in the proxy fight with Walter Hewitt, every employee voted with Hewitt to oust Fiorina, but the institutional investors kept her in.

"The same kind of dissention you saw in the shareholder vote was reflected in the board of directors," he says. "Tom Perkins quit the board the day they fired her. It sounds like the dysfunctionality reached the board level and started this thing in motion. This weird search for a leaker took on a life of its own and nobody stepped up and stopped it."

Send in the Plumbers

An insular inner circle, obsessed with plugging leaks and giving scant thought to the legality, much less morality, of its actions. The whole HP scandal sounds increasingly like the Nixon White House, with:

  • Dunn playing the role of Bob Haldeman, who described himself as "Nixon's son of a bitch"
  • Perkins as John Dean, blowing the whistle on the sordid affair, but not knowing the full extent of the misfeasance
  • General counsel Baskins as Haldeman's right-hand man John Ehrlichman; her behavior showed "either a desire not to know or an extraordinary lack of foresight," Stanford professor of legal ethics Deborah Rhode told the Wall Street Journal
  • Kevin Husaker, HP's senior counsel for ethics, who ran the operation at the behest of Baskins, as Howard Hunt, the head plumber in the Nixon White House: Hunt organized the bugging of Democratic Headquarters at the Watergate and planned the break-in into Daniel Ellsberg's psychiatrist's office; Hunsaker approved pretexting operations, inquired about obtaining Perkins' text messages and ran the spyware sting operation on Kawamoto
  • Larry Sonsini as Henry Kissinger, both advisers who prod their employers on to actions of more and more dubious legality while seemingly avoiding leaving their own fingerprints at the scene of the crime
  • Email as the White House tapes: Back in the 1970s everyone was amazed that Nixon provided his own smoking-gun evidence against himself by taping so many conversations; in the 21st century, the dirty business was conducted by email and it's unlikely any 18-minute gap will have to be tolerated; HP has turned over reams of documents to the House Committee on Energy and Commerce and is expected to turn over thousands more.
  • Hurd a Tricky Dick?

    The sword of Damocles over all of this is whether Mark Hurd is playing Richard M. Nixon. By cutting Dunn's head off, has Hurd staunched the damage, or will the cancer continue to grow until it takes Hurd down too, pulls HP onto the funeral pyre of companies destroyed by malfeasance and permanently taints the entire valley with the taste of scandal, corruption and corporate intrigue?

    The case against Hurd is that he approved a sting operation against Kawamoto, which he admitted in a speech on Friday. The operation itself was pure cloak and dagger stuff. According to the Washington Post report, HP investigators hatched a scheme by which they made up a fictional HP employee named Jason. The team sent email purporting to be from Jason to Kawamoto saying that he was a digruntled senior level investigator who was "tired of broken promises, misguided initiatives and generally bad treatment" and wanted to pass information to her.

    The clincher comes on Feb. 23 in an email from Hunsaker to Dunn: "FYI, I spoke to Mark a few minutes ago and he is fine with both the concept and the content."

    So what happens to HP if Hurd—the guy who turned around HP from the dark days of Carly's departure to the company that just recently was getting rave reviews from Wall Street—can't ride this one out?

    "Hurd going down would be the worst thing," Malone said. "For that to happen, he would have had to knowingly sign off on criminal behavior. If he ever got one indication that it was illegal, he has to resign."

    Even if there are no criminal charges against HP executives, the door has been opened up to a range of civil actions that could drag the company through the headlines for years. One class action lawsuit has already been filed and, with HP's stock falling last week, Malone said, "If you can show a direct correlation between the stock falling and the actions of HP's executives and board, you can show loss and demand compensation."

    As a chronicler of the Hewlett and Packard era, Malone finds HP's actions a betrayal of the founders' famous "HP Way." While few Silicon Valley companies are above suspicion of corporate spying, HP was supposed to be one.

    "This is HP. You don't do that at HP. You don't skate along the line of legality. I don't see what the motivation is. ... What leaks were so threatening to HP they were willing to go that far?"

    The last word, Malone said, may go to Fiorina herself. It's clear that she launched the current HP era, and now presales of her book, Tough Choices, which hits the stores Oct. 9, look like it will be a huge bestseller.

    "Carly started all this and in the end she may be the winner," Malone says.

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