The HP Saga: Focus Shifting to the General Counsel

9 Sep ’06

As the saga deepens (company not only shocked, but now also “embarrassed”), calls for Dunn’s resignation, if not yet a symphony, are certainly a chorus. The FCC is now involved. A board meeting tomorrow may decide Dunn’s fate.

The WSJ ($$) yesterday focused on the role of outside counsel Larry Sonsini (something I mentioned yesterday), summarizing old news but also adding new information including information from an interview with Sonsini. Sonsini is pointing the finger at HP’s internal counsel:

Mr. Perkins asked Mr. Sonsini if he had “cleared” the monitoring beforehand. Mr. Sonsini replied that he hadn’t — that the probe was overseen by H-P’s legal department with outside experts — and that he was confident H-P’s general counsel, Ms. [Ann] Baskins, “had looked into the legality of every step of the inquiry and was satisfied that it was conducted properly.” An H-P spokesman said Ms. Baskins was unavailable for comment.

Mr. Sonsini agreed to look into the matter and responded on June 28, confirming that H-P had received information about phone calls made or received from directors’ cellular or home phones. “This was done through a third party that made pretext calls to phone service providers,” Mr. Sonsini wrote. “Apparently a common investigatory method which was confirmed with experts.”

Noting that there was no “secret spying” with listening or recording devices, Mr. Sonsini wrote, “It appears, therefore, that the process was well done and within legal limits.”

This appears to be a plain statement that the pretexting was not illegal. But further:

In an interview yesterday, Mr. Sonsini said that at the time he responded to Mr. Perkins’s query he and his firm hadn’t yet been asked by H-P to do a thorough investigation of the probe, and that he was only relaying the view of an H-P lawyer that the methods used were legal. “That was the conclusion that they gave me, and I reported that,” he said.

So, “that’s not my dog“, essentially – when he was asked to look into the matter, he simply ferried messages back and forth. No mention of whether when he reported to Perkins he told him that he was doing nothing more than relaying the conclusions of internal HP counsel.

Mr. Sonsini says H-P’s board subsequently asked his firm to review the legality of the leak probe. His firm concluded in a report that it couldn’t confirm that the methods were legal, he says. He and two other Wilson Sonsini lawyers said that H-P accurately reflected their findings this week in a filing with the Securities and Exchange Commission.

In that filing, H-P said a board committee investigating the matter was “advised by the committee’s outside counsel that the use of pretexting at the time of the investigation was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques” of outside investigators “complied in all respects with applicable law.” Mr. Sonsini declined to elaborate. He also said he wasn’t authorized to disclose the outside companies H-P used in its probe.

“Not generally unlawful” runs against the general grain of “legal expert” commentary that has been quoted in HP stories over the past few days, and it certainly runs into the brick wall of Viet Dinh’s comment I quoted yesterday:

“The facts are not totally in,’’ Dinh said. “But one thing that is clear is pretexting to get personal records is illegal under federal law and California law. Any lawyer who thinks that lying to get private telephone records is legal needs to evaluate his bar license.’’

and of course the opinion of the California AG, the guy with the jail: “A crime was committed,” the California attorney general, Bill Lockyer, said Thursday, though “who is charged and for what is still an open question.”

Assuming Dinh and the AG are right, Sonsini was wrong (unless the law changed in the course of events). Update: more on Sonsini’s involvement in a new article from American Lawyer.

Still, the more important legal issue on pretexting appears to be what legal advice, if any, was provided before the pretexting occurred, which, at least for now, takes us back to the General Counsel. The media has now specifically picked up on Baskins’ role. The NYT reports that her office led one of the investigations that involved pretexting.

The second investigation, in January 2006, was run by the office of H. P.’s general counsel, Ann Baskins. It also involved outside investigators, Ms. Dunn said, and private records were viewed in both investigations.

The NYT also has Dunn saying that “no one on the board “endorsed, understood or approved” of pretexting and that the company was putting new guidelines in place to prevent such practices in future investigations.” Kedrosky calls this unbelievable (way). Dunn is also insisting that at all times she relied on the advice of counsel (inside or outside?):

Nell Minow, co-founder of the Corporate Library, a corporate governance service company, said Ms. Dunn had told her that she had constantly consulted counsel and that she wanted it to be done legally. reports that Sonsini told Perkins that the investigation was managed by the GC’s office, and generally covers the ground described above, although mention is made of the involvement of an unidentified outside counsel (a mysterious one-armed outside counsel?):

Baskins, one of the most prominent female general counsel in the country, may figure into investigations now under way into how HP obtained phone records of its directors. Press accounts say Baskins had first asked Wilson Sonsini’s Larry Sonsini to investigate possible leaks, then later called on him to probe the methods used by an undisclosed third party in a subsequent investigation. That probe apparently included the checking of board members’ personal phone records.

In a June e-mail exchange with Perkins, Sonsini said he was not involved in the third-party investigation, according to documents posted Thursday on the Wall Street Journal Web site.

“The investigation was run by the HP legal department with outside experts. … I am sure that Ann Baskins looked into the legality of every step of the inquiry and was satisfied it was conducted properly,” Sonsini stated in one e-mail.

In a subsequent e-mail, he added that the investigatory methods had been checked with unidentified “outside counsel.”

The report is at best unclear about responsibility, but David Kirkpatrick of Fortune has called for Baskins’ resignation:

But that is not all. By all accounts, HP’s general counsel Ann Baskins showed extremely bad judgment during this affair. CEO Mark Hurd ought to fire her immediately, along with anyone else who is determined to have played a critical role in hiring or defending investigators who behaved improperly. If he does not, I expect that, too, will continue to vex the company and sully its reputation. And Hurd will certainly have to take other actions, probably extensive, to restore the company’s reputation.

Notably, CEO Hurd seems to be hinting that someone may go (“we will take the necessary action”).

Final odd note. HP is steadfastly refusing to identify the outside contractor that did the pretexting. Why? Everyone involved in this case is pointing the finger at someone else, why not point blame where it at least partly belongs? Improbable perhaps, but I’m going to speculate that the contractor’s retainer agreement contains a mutual non-disclosure obligation preventing disclosure of the existence of the retainer, an obligation that won’t permit disclosure until legal process requires it or the information otherwise becomes public. I can think of no good reason why the contractor should have the benefit of such a promise (the customer, HP, is obviously in a different position), but it wouldn’t be the first time such a detail was overlooked in a hasty legal review (by internal legal counsel? ouch!). Update: speculation confirmed

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