Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

HP Boardroom Leaks and Disclosure

While corporate disclosure in offer documents and to a lesser
extent in annual reports is reasonably informative and neutral,
material event disclosure still tends to consist of sanitized half
truths. I have spent some time comparing:

  • the Form
    filed with the US SEC by the Hewlett Packard Company on
    September 6, 2006 about its investigation of board room leaks,
  • the news report (“Leak, Inquiry and Resignation Rock a
    Boardroom” by Damon Darlin) about the same event in the
    New York Times of September 7, 2006

The New York Times reports that Thomas Perkins resigned
from the HP Board in protest when he found that HP had used private
detectives to monitor telephone calls by board members. It also
reports that these detectives approached the phone company with the
last four digits of Perkins’ social security number and tricked
them into “revealing the multidigit code that would allow a
person to set up an online account for access to billing statements
”. Using this the detectives viewed the list of his phone
calls. According to the news report, Perkins regards this as
“possible fraud, identity theft and misappropriation of personal

The same events are described in HP’s SEC filing as follows:
“the Chairman of the Board, and ultimately an internal group
within HP, working with a licensed outside firm specializing in
investigations, conducted investigations into possible sources of the
leaks of confidential information at HP. … some form of
‘pretexting’ for phone record information, a technique used by
investigators to obtain information by disguising their identity, had
been used. … The Committee was then
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 employed by the outside consulting firm
and the party retained by that firm complied in all respects with
applicable law.”

The SEC filing also asserts that the “Date of Earliest Event
Reported” in the filing is August 31, 2006. Since the
“pretexting” in question happened in May 2006 or earlier
and had not previously been disclosed by HP, it would appear
that this statement at least is false. Probably, HP wants to avoid an
impression that it was tardy in filing the Form 8-K. Or perhaps, HP
wants to claim that what is being disclosed is not all the sordid mess
about the undercover investigation, but that as a result of
the investigations, the Board decided on August 31, 2006 not to
renominate George Keyworth who was reportedly the source of the

The Form 8-K filed by HP appears to me to be excessively sanitized
to the extent of failing to communicate the gravity of the
events. For example, “disguising their identity” is quite
different from impersonating somebody else. It is evident that
material event disclosure has a long way to go
even in the US. In countries like India, the state of affairs is much


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