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The HP Pretexting Predicament News leaks seemed to plague Hewlett-Packard. The first leaks…

The HP Pretexting Predicament News leaks seemed to plague Hewlett-Packard.

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The first leaks surrounded the ouster of chairwoman and chief executive Carly Fiorina. In the midst of this internal turmoil, theWall Street Journalpublished an article with details of closed-door board discussions about the planned management reorganization. An external legal counsel interviewed board members but did not succeed in identifying the leak. Evidence of more leaks appeared a year later as news organizations once again described the deliberations of closed board and senior management meetings in extensive detail. It was clear that someone from inside was leaking information. In addition to board members, reporters from such publications as theNew York Times, Wall Street Journal, BusinessWeek, and CNET became targets of the ensuing investigation into ten different leaks. The methods used to try to plug these news leaks led eventually to a board shake-up, which included the departure of nonexecutive chairwoman Patricia Dunn.

The Investigation Into

THE LEAKS

Investigating board members is a difficult proposition. As the source of the potential leaks, the board could not supervise what was essentially an investigation of themselves. Neither could the employees handle the investigation, because that would have put them in the untenable position of investigating their own bosses.1

Left with few options, HP board chairwoman Dunn turned the investigation over to a network of private investigators. According to Dunn, she could not supervise the investigation, because she was a potential target.2

Dunn asked the head of corporate security to handle the investigation, as this was the person who handled employee investigations, but he still had conflicts of interest as an employee of the board.3 So the company outsourced the investigation to a network of outside investigators, telling them to conduct it within the confines of the law.4

In one sense, the investigation was successful because evidence pointed to one board member, George Keyworth, as the source of seven of the ten leaks. Keyworth admitted that he was the source of the leaks: the board asked him to resign, but he refused, at which point the company said it would not nominate him for reelection. Keyworth subsequently resigned. The investigation did not uncover the source of the remaining three leaks, but it seemed that the problem was resolved.

The Fallout From

The Investigation

The HP investigation into news leaks may be a case of the cure being worse than the disease.

Although the primary source of the leaks was uncovered, questions remained about the process of the investigations. One board member, Thomas J. Perkins, resigned from the board in protest over the way in which the investigation and notification of the outcome was handled. He had wanted the matter handled privately rather than aired in front of the entire board. Perkins sought information about how Hewlett-Packard investigated the leaks, asserting that phone and e-mail communications had been recorded improperly.5

HP indicated that, although no recording or eavesdropping occurred, investigators had used a form of“pretexting” to elicit phone records.

Pretexting is a way of obtaining information by disguising one’s identify. In this case, investigators used pretexting to obtain phone records of not only HP board members but also reporters who covered the story. In addition, investigators followed board members and journalists and watched their homes. They also planted false messages with journalists in an effort to get them to reveal their sources inadvertently through tracking software included in the fake messages.6

At the time of this investigation, pretexting was in a gray area of legality. Dunn reported that she consulted lawyers before approving the investigation, and they told her that pretexting was within the law.7

Months later, a law was passed due largely to the furor over the Hewlett Packard investigation, as a result of which pretexting became illegal. The Telephone Records and Privacy Protection Act of 2006 specifically outlaws the use of fraud to obtain billing records and other information from phone companies about their customers.8Of course, the new law is not retroactive, and so it does not impact the Hewlett- Packard controversy.

Opinions varied over what the consequences, if any, should be for Chairwoman Dunn. According to Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware,“I think it’s going to be very hard for her to stay. This was a mess created in the boardroom and someone has to be responsible.”

In contrast, Yale School of Management professor Jeffrey Sonnenfeld opined that Ms. Dunn should be given credit for acting against boardroom cronyism and that dismissing her would show “nothing but cowardice.”9

On September 22, 2006, Patricia Dunn handed in her immediate resignation at the request of the Hewlett-Packard board. In her defense, she said that, although she was responsible for identifying the leaks, she did not suggest the specific methods to be used. She said that those who performed the investigation“let me and the company down.”10

Ms. Dunn’s lawyer added that she“went to theright people and she was assured that what they were doing was legal.11Mark V. Hurd, who served as CEO throughout the process of the investigations, succeeded Ms. Dunn. His involvement in the investigations was peripheral, as he was an employee of the board. However, e-mail and cell phone records show that he approved the“sting” operation that sent false messages and tracking software by e-mail to reporters.12In addition, the company’s investigators gave Mr. Hurd a copy of their report on their operations, but Mr. Hurd did not read it.“I could have and I should have,”said Mr. Hurd.13Questions for Discussion

1. What are the ethical issues in this case?

2. Who are the stakeholders impacted by this situation? How would you rank their claims?

3. Was the investigation into the recurring news leaks ethical? Why or why not? What actions would you recommend that a company in a similar situation take?

4. What should happen to the people involved in the situation? Should Ms. Dunn have been asked to resign? Should Mr. Hurd be able to remain and be given the role of board chairman?

5. Where do you draw the line between personal privacy and an organization’s right to know?

If something unethical is happening, to what extents should an organization be able to go to determine who is at fault?

Case Endnotes

1. Damon Darlin, Julie Cresswell, and Eric Dash,“H.P. Chairwoman Aims Not to Be the Scapegoat,”New York Times(September 9, 2006), C1.

2. Damon Darlin,“Deeper Spying Seen in Hewlett Packard Review,”New York Times(September 18, 2006), A1.

3. Darlin, Cresswell, and Dash, C1.

4. Darlin, A1.

5. China Martens,“SEC Filing Shows Board Infighting, Leaks at HP,”Computer World Management(September 6, 2006), www .computerworld.com.

6. Ellen Nakashima and Yuke Noguchi,“HP CEO Allowed‘Sting’ of Reporter,”Washington Post(September 21, 2006), A1.

7. Matt Richtel,“Charges Dismissed in Hewlett Packard Spying Case,”New York Times(March 15, 2007), C1.

8. K. C. Jones,“It’s Official: Pretexting Is Illegal,”InformationWeek (January 18, 2007), www.informationweek.com.

9. Darlin, Cresswell, and Dash, C1.

10. Damon Darlin and Matt Richtel,“Chairwoman Leaves Hewlett In Spying Furor,”New York Times(September 22, 2006), A1.

11.Ibid.

12. Nakashima and Noguchi, A1.

13. Darlin and Richtel, A1.

Q3

Dick Grasso and the NYSE: Is It a Crime to Be Paid Well?

The former New York Stock Exchange (NYSE) Chairman Richard A. (Dick) Grasso has a personal story that is well known in Wall Street circles. His father left his family when Grasso was an infant, and so he was raised in a blue-collar neighborhood by a single mother and two unmarried aunts. After dropping out of Pace University and then serving two years in the Army, Grasso joined the NYSE as a clerk in the stock lists department. Rising through the ranks, Grasso eventually became the NYSE chairman and CEO in 1995.1

THE PAY PACKAGE

On August 27, 2003, the details of Dick Grasso’s compensation package were made public. In the four-year contract approved by NYSE directors, Grasso would receive a lump sum of $139.5 million in deferred compensation and pension benefits. Two weeks later, on September 9, the NYSE revealed that Grasso had also been promised $48 million more that did not include his base pay or his $2.4 million annual bonus.2The disclosure of the package created an instant uproar. In addition to NYSE directors and seat holders, large institutional investors expressed their dismay. The Securities and Exchange Commission (SEC) began an investigation as individual investors expressed outrage at the size of his compensation package.

THE CRITICS

When critics compared Grasso’s pay to that of other executives who are responsible for regulation of the securities industry, they found it excessive. Robert Glauber is chairman and chief executive of the National Association of Securities Dealers, which is responsible for regulating NASDAQ as well as many brokerage firms. His compensation package was about $2 million.

SEC chairman William Donaldson makes $142,000 annually. Furthermore, when Donaldson headed the NYSE, he earned $1.5 million (1991) and $1.65 million (1992).3Critics also noted that Grasso’s 2001 pay package of $30.5 million was nearly equal to the NYSE’s net income that year. They found Grasso’s one-time bonus of $5 million for leadership on September 11 to be inappropriate. From the mayor of the city to firefighters and police officers, many exhibited leadership, but he was the only one to receive a bonus in compensation.4Others point to Grasso’s failure to reform the internal governance at NYSE, with the board members being handpicked in a time when independence is expected.5Phil Angelides, head of the California Public Employees’ Retirement System (Calpers), found it“particularly troubling”that Grasso received his largest payouts at a time when corporate scandals were rocking the markets.6

THE DEFENDERS

Those who defend Grasso’s compensation point to the success of the NYSE: 1,549 of its 2,800 companies were added under his watch.7Kenneth Langone, who chaired the NYSE compensation committee from June 1999 to June 2003, declared,“The guy earned every penny we paid him.”8He pointed to Grasso’s successful handling of the Y2K concerns and the September 11 terrorist attacks and praised Grasso for helping increase the value of the NYSE’s seats. During Grasso’s tenure, the price of a seat rose from $810,000 to $1.9 million, reaching $2.65 million at one point in 1999.9Others have noted Grasso’s success at expanding the NYSE’s global listings and securing the NYSE’s position as the world’s leading stock market.10AWall Street Journaleditorial opined that Grasso should not be faulted for taking compensation awarded him by the board: The compensation committee was filled with financial services executives who knew what they were awarding him.11In his own defense, Grasso wrote:

My record at the NYSE speaks for itself. The value of a membership seat nearly tripled during my tenure as chairman, soaring to more than $2 million from $700,000. The income to seat owners leasing their seats to others likewise jumped to $300,000 from $100,000. Under my leadership, the NYSE significantly increased its market share. It nearly doubled the number of listed companies, and the great majority of the near-500 non-U.S. companies now on the NYSE were listed during my tenure. I proudly oversaw the implementation of the Big Board’s technology platform, widely regarded as one of the most sophisticated in the world. Even in the late 1990s, when the dot-com craze gave the technology-laden NASDAQ the edge, the NYSE reigned supreme.12

THE FALLOUT

On September 17, 2003, less than a month after the pay package was disclosed, Grasso was ousted from his position. A NYSE press release explained Grasso’s firing by saying that the pay deal had inflicted“serious damage”on the stock exchange’s reputation.13In January 2004, the NYSE asked New York attorney general Elliott Spitzer to investigate. In February 2004, the NYSE demanded that Grasso return $120 million, which they felt Grasso had manipulated the board into providing. Two weeks later, Grasso responded that he would not return any of the compensation in question. In May 2004, Spitzer filed a lawsuit against Grasso, the NYSE, and former NYSE compensation committee chairman Kenneth Langone, claiming that the size of the pay package violated the laws regarding compensation in notfor- profit organizations.14The suit charged that the pay package resulted from Grasso’s manipulation and intimidation of an unaware board of directors and that Langone helped mislead the directors into voting for a package that appeared smaller than it was.15The suit also demanded that Grasso return more than $100 million and forego any future payments.16Arguing that the NYSE is not a charity and that the compensation committee members are all high-level financial executives who are not easily duped, Grasso vowed to fight the lawsuit.17TheWall Street Journalnoted that his choice of Brendan Sullivan, who successfully defended Oliver North, as his attorney was indicative of a plan to fight rather than settle.18At this writing, the case is still in progress. In early 2007,Grasso said that the costs fromthe lawsuit may have exceeded $100 million—almost as much as New York State was trying to get back from him. According to Grasso, the lawsuit was about honor rather thanmoney, and so he planned to continue his fight.19Grasso’s cause gained some momentum in May 2007 when the Appellate Division for New York State’s Supreme Court threw out four of the six elements of the case. However, Attorney General Andrew Cuomo indicated that he planned to continue the fight that former attorney general Elliot Spitzer had begun.20

Questions for Discussion

1. What are the ethical issues in this case?

2. Who are the stakeholders impacted by this situation? How would you rank their claims?

3. What is your reaction to Richard Grasso’s compensation package? What criteria are bringing you to your conclusion?

4. Do you agree with the firing of Richard Grasso? Do you agree with Attorney General Spitzer’s lawsuit? Who is to blame for this situation? Who are the victims? Irrespective of what the courts decide, who do you think is in the wrong?

5. What changes would you make so that this problem would not happen again?

Case Endnotes

1. Gary Weiss,“The $140,000,000 Man,”BusinessWeek

(September 15, 2003), 84–90.

2. Kate Kelly,“Langone Says NYSE Wasn’t Misled on Pay of Ex-Chief Grasso,”Wall Street Journal(June 15, 2004), C1.

3. Suzanne Craig and Kate Kelly,“Large Investors Call for Grasso to Leave NYSE,”Wall Street Journal(September 17, 2003), C1.

4.Ibid.

5. Weiss, 84–90.

6. Craig and Kelly, C1.

7. Weiss, 84–90.

8. Kelly, C1.

9.Ibid.

10. Weiss, 84–90.

11.“Spitzer v. Grasso,”Wall Street Journal(May 25, 2004), A16.

12. Richard A. Grasso,“My Vindication Will Come in a Courtroom,”Wall Street Journal(May 25, 2004), A16.

13. Charles Gasparino,“Dick Grasso Defending the Exchange Rate,”Newsweek (July 26, 2004), 8.

14. Kara Scannell,“Grasso’s Millions: Spitzer’s Winning Streak Heads for Court,”Wall Street Journal(May 25, 2004), C6.

15. Kate Kelly,“Money Brawl: Grasso v. Spitzer,”Wall Street Journal(July 21, 2004), C1.

16. Kelly, June 15, 2004, C1.

17. Gasparino, 8.

18. Scannell, C6.

19. AllanDodds Frank and Edgar Ortega,“Grasso Says Costs of NYSE Suit MayBe $100 Million,”Bloomberg.com, January 17, 2007.

20. Aaron Lucchetti and Paul Davies,“Will Grasso Get His Pay, After All?”Wall Street Journal(May 9, 2007), C1–C2.

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