HP settles pretexting case for $14.5M

Company to fund law enforcement effort to fight privacy violations

Hewlett-Packard Co. today took steps to resolve the controversy surrounding its pretexting scandal by agreeing to pay California $14.5 million to settle any state civil claims.

In the settlement with California Attorney General Bill Lockyer filed today in Santa Clara County Superior Court, HP also agreed to a number of internal changes -- some of which it has already made -- to ensure the company meets legal and ethical standards.

The state will use HP's money to fund investigations and prosecutions of privacy violators through a special "Privacy and Piracy Fund." All but $1 million of the settlement amount will go into the fund; the balance will be used to pay the state's investigation costs and statutory damages.

"The Hewlett-Packard incident has helped shine a national spotlight on a major privacy protection problem," Lockyer said in statement. "With its governance reforms, this settlement should help guide companies across the country as they seek to protect confidential business information without violating corporate ethics or privacy rights."

Lockyer also said he commended HP for "cooperating instead of stonewalling, for taking instead of shirking responsibility, and for working with my office to expeditiously craft a creative resolution."

"We are pleased to settle this matter with the attorney general and are committed to ensuring that HP regains its standing as a global leader in corporate ethics and responsibility," said Mark Hurd, HP chairman and CEO, in a statement.

HP is settling with the state without admission of liability, but the company is not out of hot water over the actions it took to determine the source of a boardroom leak.

The company acquired private telephone records of board members and reporters in an effort to root out the source of the leak. The company also faces a shareholder lawsuit, also filed in Santa Clara County, accusing Hurd and other executives of selling more than $40 million in stock just before and shortly after HP disclosed the pretexting to the U.S. Securities and Exchange Commission on Aug. 31.

There are also criminal charges against Patricia Dunn, the former HP chairman, and four others. The charges relate to the use of pretexting or the use of "false and fraudulent pretenses" to persuade telecommunications companies to turn over the phone billing records of 12 people, including journalists, HP board members and HP employees.

The settlement calls on HP to appoint a chief ethics and compliance officer, which it has already done, as well as retain an expert in the field of investigative practices to conduct a comprehensive review of HP's investigative practices. In its statement, HP also said it will create a compliance council and expand its ethical and vendor codes, in addition to taking various other steps.

The company had already hired Bart Schwartz, former chief of the criminal division in the Southern District of New York under then U.S. Attorney Rudolph Giuliani. The board's newest member, G. Kennedy Thompson, the CEO of Wachovia Corp., will, as an independent director, have responsibility for reporting to the board on HP's compliance with legal and ethical requirements related to the conduct of investigations, the company said.  

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