California investigating HP board fracas
After company probe into boardroom leaks, one director was asked to resign, another protested.
By Grace Wong, staff writer

NEW YORK ( -- Hewlett-Packard is being investigated by California's attorney general for obtaining phone records during an internal investigation into company leaks, according to a filing the PC maker made with the Securities and Exchange Commission Wednesday.

Shares of HP (Charts) slid about 1 percent on the news.


Board Chairman Patricia Dunn initiated an internal investigation into company leaks after CEO Carly Fiorina left the company in February 2005, HP said in the filing.

HP said it hired an investigator to obtain phone records of certain calls between its directors and individuals outside the company as part of the probe, which resulted in fingering longtime board member George Keyworth as the source of the leaks.

California's attorney general wants "information concerning the processes employed in the investigations into the leaks," HP said in the filing. The company said it plans to cooperate fully with that request.

Keyworth was asked to resign but has refused to do so. HP said it will not renominate him to its 10-member board.

Venture capitalist Thomas Perkins, also a board member at HP, resigned from his post on the board last May over disagreements with how the investigation was handled. The filing said Perkins claimed phone and e-mail records were improperly recorded and objected to the issue being brought before the full board.

HP said no recording or eavesdropping was used and that its investigators used "pretexting" - a practice where someone pretends to be someone else in order to access personal confidential information - to obtain the phone records.

California Attorney General Bill Lockyer said pretexting potentially could be criminally prosecuted as a misdemeanor or felony, but his office hasn't made a decision whether to do so with HP.

The investigation raises some concerns for HP shareholders, according to Paul Hodgson, a senior research associate at the Corporate Library, a corporate governance research firm.

"If the board can't come to enough of a public agreement to identify who is leaking information, it indicates the board is not working as one," he said. That's usually a sign the board may not function well when it comes to forming a unified corporate strategy, he added.

Whether HP acted illegally or not, accessing a board member's phone records to find out the source of a leak is not a particularly ethical thing to do, he said.

The board fray comes just as new chief executive Mark Hurd has put HP back on track.

Since Hurd took over last April, he's slashed costs and helped turn around the company. HP's stock has soared about 34 percent in the past year.

Eric Ross, an analyst at ThinkEquity Partners, said any possible criminal investigation is going to be of interest to investors, but it is unlikely to have an impact on the company's day-to-day operations.

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