*NEWS*THE BOSS WHO SPIED ON HER BOARD

[Anonymous]

HP Scandal: The Boss Who Spied on Her Board
Suspicions and Spies in Silicon Valley
In
a business saga, how Pattie Dunn’s obsession with trying to root out
the source of press reports ended with the covert tracking of
directors’ phone records.
Sept. 
2006 – It was supposed to be an easygoing celebration of a coronation.
In early 2005, after Mark Hurd had been chosen to be Hewlett-Packard’s
new chief executive officer, he and his wife joined chairman of the
board Patricia Dunn and her husband at the Marin County home of
director Tom Perkins. Sitting on a lush hilltop overlooking the Golden
Gate, they dined and wined in honor of what they hoped would be a new
era for HP, an icon of Silicon Valley that had been through much recent
turmoil, including the ouster of high-profile CEO Carly Fiorina. After
dinner, they moved to the huge living room. Before a blazing hearth,
looking out at the stunning view of San Francisco Bay, Dunn wanted to
talk shop with Hurd. As Perkins tells the story—Dunn declined to
comment—the spouses were bored silly. So was Perkins. He went off to
his study to get his prized radio-controlled helicopter, and proceeded
to buzz Dunn’s head. The spouses were in stitches. Perkins circled the
toy helicopter for another mischievous pass. Dunn just kept on talking
about regulatory issues and other arcana of management. “Pattie!”
Perkins asked: “Didn’t you just hear something zooming over your head?”
Her answer: “I just thought it was the dishwasher running.”

The
funny little vignette suggested to Perkins that he and the chairman had
entirely different MOs. Little did he realize that about a year later
their styles and priorities would collide to create a boardroom scandal
that would shake the company that was once lionized in the Valley. At
the same time, it would mezmerize corporate America, as other business
leaders wondered how HP could have been involved in activity the
California attorney general calls “colossally stupid,” no matter how
well intentioned, and may well result in criminal charges.

HP
has now admitted to spying on its own directors’ personal phone records
in order to root out a leaker. It did so by using private investigators
who engaged in “pretexting”—calling up phone companies and
impersonating directors seeking their own records. HP late last week
additionally admitted to spying on the phone records of nine
journalists, including at The New York Times and Wall Street Journal,
some of which date to 2005. HP’s Dunn stands accused of orchestrating
the investigation. Perkins quit in a rage over the surveillance and
wants Dunn out as chairman; HP is painting him as an angry traitor with
a vendetta against Dunn. Lying, spying, name-calling,
finger-pointing—all of it is a tragicomedy that Shakespeare might’ve
penned had he gotten an M.B.A.

Perkins and Dunn surely are
contrasting archetypes in the rich backstory of Silicon Valley. At 74,
he’s the nonpareil behind-the-scenes venture capitalist with a
larger-than-life array of extracurriculars. His Kleiner Perkins
Caufield & Byers firm is the Medici of the Valley, bankrolling such
home runs as Genentech, Google, Netscape and Amazon. He performs the
financial alchemy of converting millions to billions when start-ups go
public, in the process making VCs like himself centimillionaires. Out
and about, he was the fifth husband of romance novelist Danielle Steel.
He’s just launched the 287-foot Maltese Falcon, the largest and most
expensive private sailboat ever built; last year he wrote his own bawdy
novel, “Sex and the Single Zillionaire”; in 1996 he was convicted of
involuntary manslaughter for his involvement in a sailing collision off
the coast of France that resulted in the death of another regatta
participant (he paid a $10,000 fine and individuals on the other boats
were convicted as well).

Dunn, 53, is less prominent in the
Valley’s Zeitgeist, yet is a success story in her own right, as well as
a profile in courage for her fight against cancer. She was raised in
Las Vegas, where her father did bookings for casinos. Her mother was a
showgirl at the Copacabana. While Dunn met the rich and famous, her
family didn’t have a lot of money. Her father died when she was 12, her
mother had emotional problems, and Dunn and her sister basically raised
their younger brother after they moved to the Bay Area. Dunn majored in
economics and journalism at Berkeley, and—your punch line here—hoped to
become an investigative reporter, her sister Debbie Lammers says. Dunn
eventually wound up as a temp typist at an investing firm that was
later acquired by Barclays, at which Dunn began her career climb.

In
recent years, as vice chairman of a division of Barclays, she has
become wealthy enough to own property in the East Bay and Hawaii, as
well as a Shiraz vineyard in Australia. But in the midst of her
Barclays and HP duties, she has faced repeated health crises. She was
diagnosed with breast cancer in 2000 and melanoma two years later.
Those struggles have been widely reported, but Dunn confirms that she
was diagnosed with Stage IV ovarian cancer in 2004. Last month, after
doctors discovered a malignant tumor in her liver, she underwent
extensive surgery. Dunn says she has kept the HP board apprised of her
health, and her sister says she marvels at Pattie’s “willpower” and
ability to “survive beyond doctors’ expectations.” Six weeks after her
2004 surgery, Dunn kept a promise to her family to hike across the
Sydney Harbor Bridge in Australia. Before her most recent surgery, she
stopped at her vacation home in Kona and played 27 holes of golf.

Dunn
is demonstrably tough. Whether she was wise is a different question.
“If I did anything stupid, it’s not because I have cancer or was
receiving chemotherapy,” she tells NEWSWEEK. Perkins himself calls her
“nobody’s fool”—deft at running annual meetings and a tough questioner.
Early in their time together on the HP board, Perkins and Dunn got
along and were actually allies: they were part of the team that lured
Hurd to HP from NCR. But their different outlooks as directors could
not help but emerge. Perkins, the venture capitalist, thought in broad
strategic strokes, preferring to leave the details to others. Dunn
thought the core of her job was to dot the I’s and cross the T’s—to
keep her board process-driven rather than personality-driven. It drove
Perkins nuts. It kept making him think of that helicopter. He recalls a
meeting in his office with her in which he wanted to discuss how to
compete better with Dell, IBM and others. According to Perkins, she was
fixated instead on her discovery that there were inconsistencies
between HP’s bylaws and the Corporate Directors Handbook. Those
inconsistencies then occupied hours of discussion at subsequent board
meetings. “Intel might be kicking the crap out of us,” Perkins says,
“but that didn’t seem to matter.”

That’s an overstatement. In
the new world of corporate governance after Enron and other business
implosions, good corporate governance isn’t just a swell idea, but a
legal requirement. And corporate watchdogs give the HP board high marks
for independence. The chairman deserves credit for the high marks.
Meanwhile, the company’s profits have risen, and its stock price has
soared. The supreme irony now, of course, is that being a stickler for
proper procedures doesn’t seem to have worked out so well for Pattie
Dunn. An obsession with leaks to reporters could have happened at any
company, especially at one with all the intrigue HP had faced during
Carly Fiorina’s tenure. It’s not a function of Silicon Valley and it’s
got nothing to do with the details of corporate minutiae. The
Dunn-Perkins mess is about what drives most conflict: human emotions.

The
HP board of directors has long been a leaky ship. During the embattled
reign of Fiorina—HP’s flashy CEO who was forced out nearly two years
ago—a blow-by-blow account of a board retreat, held off-site to discuss
the company’s most sensitive problems, appeared in The Wall Street
Journal. Furious, Fiorina laid down the law to board members: the leaks
had to stop. For a time it appeared that the leakers, whoever they
were, had gotten the message.

But then, in January 2006, the
online technology site CNET published an article about HP’s long-term
strategy. While the piece was upbeat and innocuous, it quoted an
anonymous HP source and contained information that could’ve come only
from a director. It was the last straw for Dunn, who by then had been
elected non-executive chairman of the board. Dunn was incensed that the
drip-drip-drip of information out of the boardroom continued. She
wanted to know the leaker’s identity, but she would not supervise an
investigation herself.

Dunn referred the matter to HP’s general
counsel. In turn, that office contracted out the investigation to
security experts who recruited private investigators who then took the
extraordinary step of spying on the phone records of all the directors
(including Dunn), as well as journalists (including the CNET reporter).
These were not the records of calls from HP offices, but the records of
calls made from personal accounts—like Perkins’s home in Marin County.
It was classic data mining: HP’s consultants weren’t actually listening
in on calls—all they had to do was look for a pattern of contacts.

It
is not uncommon for companies to monitor the phones and computers of
their employees. Indeed, in the wired age, most employees don’t realize
how much privacy they sacrifice. But pretexting goes a step beyond. The
investigators use your ID—typically, the last four digits of your
Social Security number—to obtain your phone records from unwitting
phone companies. Last week California Attorney General Bill Lockyer
said he has decided a crime was committed, though he hasn’t concluded
by whom.

In an interview with NEWSWEEK, Dunn says she was aware
HP was obtaining the phone records of suspected leakers as long ago as
2005. But she says she didn’t know about the pretexting until late
June, when she saw an e-mail to Perkins from HP’s outside counsel,
Larry Sonsini. “I was told it was all legal,” she says. She now
acknowledges that HP’s tactics were “appalling” and “embarrassing,” but
says the current “brouhaha” grew out of a personal dispute between her
and Perkins.

Dunn insists Perkins was just as eager to learn the
identity of the leaker as she was. “Tom was the most hawkish member of
the board for plugging the leaks, which he thought were coming from
management. He advocated the use of lie-detector tests.” Perkins
disagrees. He tells NEWSWEEK that Dunn brought up the idea of
lie-detector tests and that he volunteered to take one. “I thought it
would be a kick—great for my next novel,” he says. But he pointed out
that if word leaked out an HP director had to take a lie-detector test,
it would be a “catastrophe.”

It remains unclear exactly what
Dunn knew and when she knew it. The California attorney general will
want to know if Dunn intentionally avoided knowing about the details,
like a head of state who wants “plausible deniability” while ordering
an assassination plot. (An ancient model, cited by old CIA hands, is
Henry II. When he wanted to get rid of the Archbishop of Canterbury, he
simply muttered in front of his knights, “Will no one rid me of this
troublesome priest?”)

In any case, Dunn sprang the identity of
the leaker at a meeting of her fellow directors on May 18, at HP
headquarters in Palo Alto, Calif. Meeting in the nondescript
first-floor boardroom, Dunn laid out the surveillance and pointed out
the offending director, who acknowledged being the CNET leaker. He was
66-year-old George (Jay) Keyworth, a science adviser to President
Reagan and the longest-serving HP director. Thunderstruck, Keyworth
apologized but said to the board, “I would have told you all about
this. Why didn’t you just ask?” Keyworth was asked to leave the room
and did so. Close to 90 minutes of discussion followed. Hurd, the CEO,
reportedly was asked by one director how he would handle a leak by an
employee. “I would have no choice but to fire him,” Hurd replied.

Other
directors were noncommittal, according to Perkins. They included Larry
Babbio, the president of Verizon—the phone company that has
aggressively sought to protect the privacy of its customers’ records.
(Babbio, through a spokesman, declined to comment.) Perkins says he was
the only director who rose to take Dunn on directly. Perkins told the
directors he was enraged at the surveillance, which he called illegal,
unethical and a misplaced corporate priority. “Pattie, you betrayed
me,” he says he railed at Dunn. “You and I had an agreement that if we
found out who did this, we would handle it offline without disclosing
the name of the leaker.”

Dunn now charges that Perkins was just
trying to protect his friend Keyworth. “He’s angry that I stood in his
way to cover up the results of our investigation and the identity of
the leaker.” Perkins dismisses the charge as a red herring—corporate
spin to obscure larger issues. There may indeed be deeper issues at
work. Dunn tells NEWSWEEK that Perkins has been agitating to vote her
out as chairman for a while. At times, he had been. Inevitably their
styles just clashed. Perkins is used to being king of the hill, even
though he’s never been a CEO. Venture capitalists routinely call the
shots from behind the scenes in Silicon Valley, and Perkins is the most
powerful VC of them all.

Whatever Perkins’s motivations, he
acted as if he were onstage in a melodrama. After a divided board, by
secret written vote, passed a motion demanding that Keyworth resign,
Perkins picked up his papers, grabbed his briefcase, walked out and
zoomed off in his Porsche Carrera GT. “I quit!” he said as he stalked
out. “I’ll not be party to this. I’m resigning.” Keyworth re-entered
the room and learned he was being told to leave. He refused, saying it
was up to shareholders to make such a decision. “We can ask him, but we
can’t make him,” Ann Baskins, HP’s general counsel, told the board.
(Keyworth remains on the board even now, though HP announced last week
it would not recommend him for re-election by shareholders come March;
he declined to comment for this article.) After Perkins left the room,
the rest of the board’s agenda was scrapped and the meeting was thrown
into chaos.

When Perkins returned to his office, he soon got a
call from Sonsini, the best-known, most powerful lawyer in Silicon
Valley. Baskins had called Sonsini at his nearby office and asked him
to rush over. As Perkins tells it, Sonsini asked him, “How can I
characterize this, Tom? May I say you’re resigning for personal
reasons?””No, Larry, you cannot.””May I say it’s a disagreement with
Pattie?””Sure, but don’t you dare say I resigned to spend more time
with my children.”

In media mentions a few days after the May 18
meeting, Perkins’s resignation was noted, but without explanation or
any indication that his exit was a form of protest. This began nearly
four months of warfare between HP and Perkins about whether the
surveillance would ever come to public light. Any time a director
resigns from a public corporation, federal law requires the company to
disclose it in an SEC filing. If the director quits because of a major
“disagreement” with the company, the reason has to be disclosed as
well. HP reported Perkins’s resignation but not the reason for it. It
was the Perkins-Sonsini phone call, according to HP, that allowed the
company to give the SEC no explanation. “I gave them the opening not to
disclose,” Perkins now says. “I’m no SEC lawyer.” Sonsini did not
return calls from NEWSWEEK.

A few days later, Perkins was off to
south Florida to promote his bawdy novel. His publisher had set up a
contest with Romantic Times magazine, with the lucky winners getting a
chance to have dinner with bachelor Tom. From Daytona Beach he was off
to Istanbul, where he was preparing his superyacht for its sail trials
in the Mediterranean. He fumed that the reason for his resignation had
not yet come out, and he felt constrained from going public himself.
Over time, in e-mails with Sonsini and communications with the board,
he escalated his attempts to force SEC disclosure, as well as to get
federal and state officials to investigate HP’s spying on personal
phone records; the FTC, FCC and federal prosecutors have now begun
investigations. Perkins hired his own lawyer, Viet Dinh, a former Bush
administration lawyer who had helped draft the Patriot Act.

Perkins
had concluded that Dunn had to go. He even e-mailed her so. According
to Perkins, she told him no. (Dunn recalls only that “Tom wrote to
disinvite me from the launch party of his boat” on the Italian Riviera
in mid-July.) But Perkins was hardly all-consumed with the battle. The
day before his $100 million sailboat departed for its maiden voyage,
the government of Turkey threw him a reception at the Imperial Palace.
Perkins decked out the Falcon with signal flags adorning the deck from
bow to stern, across the tops of the three 190-foot masts. The playful
message spelled out in nautical-speak: “Rarely does one have the
privilege to witness vulgar ostentation displayed on such a scale.”

Perkins
came to learn more about HP’s use of pretexting. He discovered that he
himself was hacked. In an Aug. 11 letter to Perkins that he demanded,
an AT&T attorney explained that Perkins was a victim of pretexting
in January 2006, just at the time Dunn decided to find the leaker. The
AT&T letter explains that the unnamed pretexter who got details
about Perkins’s home-telephone usage was able to provide the last four
digits of Perkins’s Social Security number, and that was sufficient
identification for AT&T. The impersonator then persuaded a
customer-service rep to send the records electronically to an e-mail
account, mike@yahoo.com, that on its face had nothing to do with
Perkins. Records for Perkins’s long-distance AT&T account were
similarly obtained, but it was by redsox9855@yahoo.com. Both e-mail
accounts are registered to the same Internet Protocol address, but
AT&T says it doesn’t know the identity of the user.

In
mid-June, according to a letter Perkins sent to the full HP board,
Perkins contacted Sonsini and asked him to look into the Dunn
investigation. In an e-mail to Perkins obtained by NEWSWEEK, Sonsini
acknowledged that Dunn’s security consultants “did obtain information
regarding phone calls made and received by the cell or home numbers of
directors” and that it was “done through a third party that made
pretext calls to phone-service providers.” That was the first time
Perkins had heard the word “pretexting.”

Sonsini’s e-mail
emphasized that the consultants engaged in “no electronic
surveillance,” “no phone recording or eavesdropping” and “no recording,
review or monitoring of director e-mail.” His initial legal defense of
pretexting was that it is “apparently a common investigatory method”
and that “there was no ‘secret spying,’ i.e., no electronic gear,
listening devices, etc.” In its SEC filing last week, HP stated that
the outside counsel had concluded that the use of pretexting “was not
generally unlawful,” but that counsel “could not confirm that the
techniques” used by pretexters in the HP investigation “complied in all
respects with applicable law.”

Sonsini’s legal tiptoeing
intrigued Perkins for two reasons: it seemed to raise so many
non-issues in Perkins’s mind, and Perkins had also never heard of the
pretexting that Sonsini admitted to. But it was only after he says HP
then refused his repeated requests to take action that he eventually
decided to approach a host of government agencies, as well as
prosecutors in California and New York. By early September, HP
scrambled to go on the offensive, and made a filing last week to the
SEC, laying out the pretexting story for public consumption. The story
exploded in the press (first in a piece on NEWSWEEK.com). Dunn called
an emergency board meeting, which—by the time this story appears—may
have called for her resignation. Dunn, interviewed by NEWSWEEK on
Saturday, was philosophical. “My goal in this job was to help the board
overcome its conflicts. I was unsuccessful. I wanted to show that two
people at opposite ends of the spectrum could work together. That was
naive.”

Next week Dunn is scheduled to be inducted into the Bay
Area Business Hall of Fame. Perkins is already a member. Maybe the two
adversaries can reconnect at the induction ceremony—and exchange phone
numbers.

[Author]

September 19, 2006 at 11:14 AM