Wednesday, September 13, 2006, 9/13/2006 07:57:00 AM

HP Boardroom Spying Takes Down Chairman

From the New York Times (subscription required), the full details of the fallout at Hewlett-Packard from the illegal investigation of leaks on the company's board. The chairman, Patricia Dunn, is stepping down and the California Attorney General is indicating that criminal charges against company insiders are on the horizon. The US Attorney for the Northern District of California is also conducting an inquiry.

This story follows up our earlier postings here and here. (And, in case you're not subscribed to the New York Times, you can read the report from the San Jose Mercury News here.)

We now know the name of the private investigation firm, Security Outsourcing Solutions, that engaged in the improper and possibly illegal tactics. (A great name, but they're probably going to have to change it now.)

There are still a lot of unanswered questions here and most relate to the standards to which companies that hire private investigators will be held. Let's posit three different pre-investigation scenarios at HP. Someone on the board is leaking internal company information to the press and the company wants to find out who it is. The obvious course is to hire a private investigator. In scenario 1, the private investigator tells the company executives "I'll be using "pretexting," i.e. lying about my identity in order to obtain private information about the possible leakers. In scenario 2, the company and the investigator engage in a "don't ask me how I'm going to do it" dance. In scenario 3, the subject of the methods of the private investigator isn't discussed at all.

The question is "what's illegal"?

In scenario 1, the company has explicit knowledge and criminal liability appears fairly clear. In scenario 3, it would seem difficult to prove knowing intent to break the law on the part of the company. Scenario 2 is the toughest call (and, I'm guessing, probably what happened at HP). Can you hire a private investigator and then do a "see no evil" to escape criminal culpability? I suspect we're going to find out.

Now, there may be a big difference between what's criminally culpable and what's moral and ethical for a Board member in the era of Sarbanes-Oxley. We'll leave that to others to sort out.

Another interesting issue concerns scenario 4. What happens if the company knows nothing about how the investigation is conducted, but then the investigator comes forward with a report that indicates that laws were broken during the course of the investigation?

Again, the lesson is that companies need to be careful when hiring private investigators and board members should expect to be held to a high standard.

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