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 user 2006-09-19 at 11:14:00 am Views: 81
  • #16471

    HP Scandal: The Boss Who Spied on Her Board
    Suspicions and Spies in Silicon Valley
    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.

    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.”

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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.”

    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.

    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

    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