Silicon Valley Watcher - reporting on the business of technology and media

Hewlett-Packard this afternoon confirmed it has had advanced talks with EDS, the Texas-based IT services company, about "a possible business combination." Shares in EDS soared 28 per cent boosting its market value to $12 billion according to Reuters. HP shares fell 5 per cent.

EDS's performance has been lackluster reports Reuters:

"Unless HP has some synergies where they can dramatically impact earnings growth of EDS, I'm not sure why they'd want to buy it," said Jim Huguet, co-chief executive at Great Companies LLC. He noted that EDS's earnings growth has averaged 2.8 percent.

"EDS is trading at about half its historical PE, so they're obviously seeing it as a value, which it is if you can generate earns growth at 15-20 percent. But my question is whether it will become a drain on Hewlett-Packard?"

In April, EDS reported a 62 percent decline in first quarter profit, though the results had topped Wall Street expectations. Despite the beat, analysts said EDS faced intense competition from Indian rivals and saw little catalyst for growth.

Foremski's Take:

• - HP CEO Mark Hurd is seeking to capitalize on HP's renewed momentum and take on rival IBM by beefing up IT services.
• - EDS has a solid IT services business with a lot of government contracts that could help balance out a possible recession in other industry sectors.
• - There might seem to be a large cultural difference between the two companies but Compaq, which HP acquired in 2002, was headquartered in Texas.
• - HP would still need to gain a high-end IT consultancy business in order to compete with IBM.
• - Another area that HP still needs to address is in its middleware software business.
• - The timing is quite good. It is best to try and complete such a large acquisition and integration during times of economic slowdown so that the combined entity is firing on all cylinders when boom times come around again.

Please see Dennis Howlett: HP to take out EDS: does it make sense?

Is it a good idea? Click here to leave your opinion.

I just got back from HP's Gaming Summit at Dogpatch Studios, which showcased some rather nifty gaming technologies from HP Labs (video is coming.)

During a panel discussion, Rahul Sood, chief technology officer at HP Gaming, and founder of Voodoo PC said that next generation PC games based on Microsoft's new DirectX 10 technology will do more to drive sales of Vista than anything else.

"DirectX 10 is going to provide a dramatically improved gaming experience that will drive adoption of Vista," said Mr Sood.

Some of the technologies on display or discussed were:

... a curved, seamless display that fills a gamer's field of view for an incredibly immersive visual experience and a way to superimpose multimedia digital experiences on physical landscapes so people could, for example, play a game throughout a city using wireless handheld devices. The company also demonstrated a "super projector" capable of high resolution, brightness, deep contrast and a wide color gamut, ideal for projecting games for multiple players on a big screen.

Panoply and Pluribus- using multiple projectors to create a seamless giant screen for game playing or other "immersive" applications. It doesn't require precise projector positioning, all the calibration and focusing is by computer.

Memory Spot - This is an intriguing technology, a small coin sized device that can store about 4MB of data and can be read by a computer. That's about all HP was willing to say about this technology, but promised more information and applications later this year.

Coffee Table Display - Imagine a large rectangular coffee table with a huge high definition touchscreen that lets users manipulate images, drag around virtual puzzle pieces, and also transforms into a virtual aquarium! Where do the coffee cups go, I asked Susie Wee, Lab Director of the HP Labs Mobile and Media Systems Lab (video will be posted soon.)

Also:

HP TouchSmart PC
» Fact sheet
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HP Labs Gaming Demonstrations

HP Labs researcher Mike Harville tries out a race car video game on a special curved screen designed to increase the realism and immersive experience for gamers.
» Image

Notes: Interestingly, I tried to video a panel discussion between representatives of Intel, HP, NVIDIA, Trion World, and Microsoft but after a few minutes I was told no videos were allowed. I asked why and was told that video camera made some of the panelists uncomfortable, yet they were in front of about 80 journalists(!)

The Chronicle's David Lazarus says the state's failure to prosecute Pattie Dunn or her pretexting henchmen sends a message that business as usual is just alright. He quotes a few privacy consultants:

"It's a mixed message," said Ray Everett-Church, a Silicon Valley privacy consultant. "On the one hand, we're being told that this is illegal. On the other, we're told that this is apparently a standard business practice."

"This seems to be a slap on the wrist for something that's pretty serious," said Christine Rosen, an associate professor at UC Berkeley's Haas School of Business. "For other companies, the message seems to be that these sorts of practices are going to be treated as a trivial thing," she said.

Lazarus says that Dunn and Mark Hurd managed to adequately shield themselves from the chain of command. "The lack of a clear chain of command in the corporate probe is what seems to have derailed much of the state's legal case."

Still, there are other investigations to come. Both the SEC and the US Attorney's Office are also pursuing charges against Dunn and other players.

California has dropped charges against Pattie Dunn, and charges against the three other defendants will be dismissed once they complete their community service.

NYT: Charges Dismissed in HP Spying Case

Good timing for Mark Hurd, who for the first time since the fiasco broke, was facing shareholders at the annual meeting.

“Let me assure you that no one is proud of what happened last year,” Mr. Hurd told shareholders. “We need to transform our board the same way we transformed the company.”

Exactly how that transformation takes place was the subject of investor debate. CALPers and other big investors wanted to be able to appoint some directors. Hurd was against that - and again, Hurd got his way.

They voted to re-elect all eight members of the current board, and voted down a proposal to allow stockholders to nominate up to two board candidates, leaving the responsibility with Mr. Hurd and the other directors.

That proposal, which gained about 39 percent of the shares voted on Wednesday, was fiercely opposed by H.P. executives, who said the board already accommodated shareholder input.

While there are still other investigation under way (notably at SEC), HP was escaped the storm. No one is going to jail, although a few people lost their jobs. Hurd is firmly in control and investors big and small must simply trust that HP culture has changed on a dime and it's smooth sailing ahead.

At a venture capital event in San Francisco Tuesday, Tom Perkins issued some stinging words for Patricia Dunn, and yesterday Dunn's lawyer struck back. The HP spying scandal ranks with the Iraq war for behavior that makes no sense for the stated reasons. Perkins offered a reason for the whole pretexting fiasco: an effort by the "compliance" directors to finally oust the "guidance" directors. CNET News.com explains:

In Perkins' view, HP's board was split between two types of directors: "guidance" directors like himself who wanted to spend board meetings concentrating on ways to beat Dell and IBM, and "compliance" directors who were obsessed with the Sarbanes-Oxley Act, social responsibility campaigns and regulatory issues that were less germane to the company's survival.

The scandal was the final act in a plan by the compliance directors to oust the guidance directors, he said. The fact that HP hired investigators to get the phone records of reporters and board members is a red herring in the whole drama, he said. Dunn was mostly after control, he added.

"In spite of being indicted on four counts by the California attorney general, it is clear that former Chairman Patti Dunn won the battle," Perkins said. "I see this embarrassing public mess as a culmination of a war over the control over the board of the company."

Dunn's lawyer, James Brosnahan, issued an angry email retort yesterday, sent out to major business news publications and published on PR Newswire. In its entirety, then:

Yesterday, a man named Tom Perkins attacked my client. He did so unfairly. He did so falsely when he knows she cannot answer him. The case brought by the former Attorney General at the insistence of Tom Perkins is pending in Santa Clara Superior Court. Mr. Perkins generated an attack on Patricia Dunn, hired lawyers, hired a public relations firm and all because his colleague on the Hewlett Packard board was found to be leaking information. Now he is attempting to further prejudice the public against Patricia Dunn. As Mr. Perkins and his lawyers know, because the case is pending, Patricia Dunn cannot answer Mr. Perkins' gratuitous attack. Mr. Perkins himself is a witness in the case. He will be sworn. He will be examined, and he will be impeached.

Mr. Perkins has rewritten the history of the Hewlett Packard board and attacked its competence. Others closer to that company can stand up and be counted if they wish. He has suggested that he alone cares about a profit. Rarely has a prominent businessman uttered such an immediate self-refuting statement. Hewlett Packard is Hewlett Packard and it seems to be getting along quite well without Mr. Perkins.

I am sorry that Patricia Dunn must endure Mr. Perkins' cowardly attacks, but he has made the biggest mistake of his career. He is a bully, and he is bullying the wrong people.

If Mr. Perkins truly wishes to have a public dialogue on these issues, he should join in the chorus of people who have urged that the criminal case against Ms. Dunn be dropped. In that event, Ms. Dunn would be free to respond personally to Mr. Perkins' attacks.

Finally, all of this was done, in part at least, to promote a book that he has coming out in October. He says he has a chapter in it on Hewlett Packard. When he gets to court, he will be cross-examined on every word.

The unlawful backdating of stock options and the failure to report is perhaps not the most riveting story on the business page. But when the details start to come out, what was done and what people said, it gets a little better. The details of Mercury Interactive's (now owned by HP) backdating shenanigans may not rise to the level of Enron traders' "Burn, baby, burn" comment, but they're still eye-opening.

Based on a shareholders lawsuit, which was unsealed, filed in the matter, the Chronicle reports a couple of tidbits. Other lawsuits are still sealed, although several newspapers are pursuing their release.

• Mercury executives used WhiteOut on options documents and joked about "magic backdating ink."

  A finance department employee e-mailed another regarding an employee's stock option grant: "I betcha that Sharlene (Abrams, a former CFO) will overrule these types of things ... and we will use her magic backdating ink. Let's see what happens!"
  

• According to a lawsuit, Abrams and Susan Skaer (former GC), faked a letter hiring drew up a fake letter hiring Douglas Smith as CFO on May 23, 2000, a date before he was actually hired.
  
• In January 2002, three board members approved for an option grant to Skaer. But Skaer or an assistant whited out the date the fax was sent and changed it to a low-price day, Nov. 5, 2001.
  

HP's earnings jumped ahead of expectations to 55 cents a share, up from 42 cents a year earlier. Net incomes for the quarter ending Jan. 31 was $1.5 billion, The Times reported. Shares dropped in after-hours on concerns about rising inventories.

Surprisingly strong: PC sales, which jumped 17 percent, three times the rate of the industry. HP's printing and imaging division jumped 7 percent. But the company is not firing on all cylinders. If PC growth drops out of the picture, things look substantially worse.

A. M. Sacconaghi, an analyst with Sanford C. Bernstein & Company, said without the computer sales, the company’s organic growth was only about 2 percent. “That’s a pretty anemic performance,” Mr. Sacconaghi said. “PCs were bailing out what was, quite frankly, a rather mediocre performance.”

I popped into HP's launch of its latest HP-UX operating system and new servers Tuesday evening. It was held at 111 Minna Art Gallery in San Francisco rather than Palo Alto, where HP usually does such things.

I would rather HP had held the launch in Palo Alto because then I wouldn't have gone to it. It was a deadly dull affair but I did get a chance to catch up with some of my colleagues, Don Clark, Dan Farber, Tom Saunders, Jean Baptiste, and friends at HP.

Up on the small stage there were three HP enterprise execs. One talked about the new version of HP-UX and how it makes everything 30 per cent faster. Another person talked about blade servers and more performance per watt than competitors. I also heard several times that Sun is not a very good enterprise company, (I will follow up on that lead later.)

Ann Livermore, HP Services chief was supposed to be there but did not show up. Was it bait-and-switch? I don't know but  it made me wonder: Why were the HP execs talking about operating systems and servers and not about IT solutions?

Whenever I used to hear Ann Livermore, or Carly Fiorina the message over the past seven years has been that HP is an IT solutions company. I didn't hear a thing about IT solutions, just a bunch of stuff about application performance from HP operating systems and servers. I didn't hear about any specific applications, just "average" applications, nothing about IT solutions of any kind.

HP, like a lot of enterprise companies seems to be stuck in the era of technology, which is very last century. Today, we have enough technology, what we don't have enough of is ways of using the technology in effective ways. Yet HP is still talking about hardware and software as if that was the thing that mattered the most.

Enterprises will not vault ahead in their competitive battles because they can run their applications 30 per cent faster.

Enterprises want IT that accelerates their bottom line by 30 per cent. That comes from clever IT solutions not from an operating system upgrade and a server blade swap, imho.

Mark Hurd exercised $1.37 million in options less than two weeks before HP disclosed its spying tactics in a SEC filing and congressional investigators want to know why. The sale does not appear to be part of a prescheduled program, AP reports. Indeed, seven other executives cashed out during that period, part of a three-week window where option holders are allowed to exercise their options.

The congressmen asked Hurd to explain the reason for the transaction, seeking an answer on "whether executives are cashing in ('bullet dodging') while in possession of potentially damaging material facts that shareholders do not know."

Dingell and Stupak also asked in the letter to "please inform us whether any other HP officers or directors engaged in similar transactions during this period."

Patricia Dunn is due to be in court Thursday afternoon to surrender to authorities and set an arraignment date. CA Attorney General Bill Locker charged her and four others on invasion of privacy and conspiracy charges yesterday. (See SVW: Charged! Dunn, Hunsaker indicted)

The hearing at Santa Clara Superior Court was due to start at 2 pm today.

At a news conference this morning, Lockyer said the investigation was ongoing and that more charges could be filed. All defendants other than Matthew DePante agreed to surrender, the AP reports.

These charges are being brought against the wrong person at the wrong time and for the wrong reasons," Dunn's lawyer, James Brosnahan, said.

Ron DeLia read the AP a statement:

"I am innocent of these charges," DeLia said. "I've been a professional private investigator for more than 30 years. I respect the law and I did not break the law in the HP investigation."

Carly Fiorina started HP down the road into covert investigations against board members, ordering probes in January 2005 into whom on the board was leaking to the press, she reveals in her book "Tough Choices," due for release on Tuesday, The New York Times reports.

Larry Sonsini, chairman of Wilson Sonsini, the company's outside law firm, conducted the probe by personally investigating every HP director after an article in The Wall Street Journal revealed an impending reorg. That probe identified Tom Perkins as the source of the article.

She doesn't mention pretexting and the California attorney general's office refused comment on whether it is looking into her actions.

Sonsini told Fiorina that Perkins had been "honest enough to admit" that he had spoken to the Journal.

Ms. Fiorina added, however, that she was deeply suspicious of another board member, George A. Keyworth II, also known as Jay, because of his behavior at a board meeting and during a related board conference call.

In a board conference call in which Sonsini revealed the results of his research, Fiorina writes, all but one board member - Keyworth - spoke up.

Ms. Fiorina asserts that when the Hewlett-Packard board began to turn against her leadership, she was blindsided.

“I was mystified by the board’s recent behavior,” she wrote. “I was suspicious of Jay’s heated denial when the leak first occurred and then his complete silence on our last call.”

Keyworth was central to Fiorina's firing. He, Dunn and Richard Hackborn confronted her in January 2005 and ordered her, on behalf of the board, to launch a massive reorg of the company and essentially abandon her strategic plan. She says she didn't believe they could order her to follow their demands and resisted.

A month later she was unceremoniously dismissed.

Ms. Fiorina describes being asked to leave what would be a final February meeting in Chicago while board members discussed her fate. She reveals particular bitterness about her firing.

After being asked to wait for three hours, none of the board members remained in the room when she returned to it, she wrote. She was greeted by Ms. Dunn, the new board chairwoman and the head of the board’s governance committee, who asked her to announce publicly that the decision to step down had been her own. Ms. Fiorina wrote that she refused.

California will indict HP's Patricia Dunn and Kevin Hunsaker, as well as three outside contractors, in criminal charges stemming from the HP spying scandal, The New York Times reports.

In addition to the two executives, California attorney general Bill Lockyer will indict Ronald L. DeLia, who worked directly with Hunsaker, Joseph DePante, owner of Action Research Group and Bryan Wagner, who worked for DePante.

The charges, all felonies:

• using of false or fraudulent pretenses to obtain confidential information from a public utility
• unauthorized access to computer data
• identity theft
• conspiracy to commit each of those crimes.

The US Attorney's office for Northern California may also file charges.

Emails released

BusinessWeek has some juicy emails from and to Hunsaker during the pretexting campaign. They were released by the House committee on Monday. Check Memo #2 especially.

Reporters reassigned CNET and AP have moved off the HP beat reporters who were pretexted, AP reports.

CNET's move involves not only Dawn Kawamoto, who was at the center of the scandal, but also Tom Krazit and Steve Shankland, who is married to AP reporter Rachel Konrad, who was also on the HP beat and was pretexted by the company.

The New York Times has barred John Markoff from covering the scandal directly but he may report on the company as part of his overall tech beat.

The rationale is to do away with conflicts of interest, as reporters whose privacy has been violated may be seen to have an axe to grind. Reporters and their companies may also have legal rights against the company that could be compromised.

But some outlets are keeping top writers with deep knowledge of the company on the beat. BusinessWeek's Peter Burrows has written a book and covered the company over many years. The move has already paid off, as Burrows scored the first interview with Hurd after Dunn was ushered out the door.

Burrows "has a deep knowledge of the company that serves BusinessWeek readers well," said Stephen J. Adler, the magazine's editor-in-chief. "He has always hewed to the highest ethical standards in his coverage of HP, and will continue to do so."

Dunn starting chemotherapy

It's been a really, really bad week for Dunn, a breast cancer survivor. Her doctor advised her to start a six-month program of chemo for advanced ovarian cancer, a source told the LA Times. She will be treated at UC San Francisco Comprehensive Cancer Center.

Rep. Joe Barton points out that Larry Sonsini signed off on the pretexting ops back in April, and demands to know how he didn't wave a red flag, rather than saying "such operations are not generally illegal." He and other reps have asked, why are so many principles refusing to testify today if the actions were so legal?

A common thread in the opening statements is that the public will expect HP's actions are common throughout the Valley and the whole corporate world and that public will fear that their own private records may be searched. "Is corporate America the next big brother, Rep. Tammy Baldwin said in her opening statements.

Most members of the subcommittee are pointing to an anti-pretexting bill the committee reported out this summer, which died in a "black hole" on the Hill. lt's pretty obvious that another bill will be passed and that House leadership will be hard-pressed to sit on it after all this.

By Richard Komanfor SiliconValleyWatcher

Rep. Joe Barton points out that Larry Sonsini signed off on the pretexting ops back in April, and demands to know how he didn't wave a red flag, rather than saying "such operations are not generally illegal." He and other reps have asked, why are so many principles refusing to testify today if the actions were so legal?

A common thread in the opening statements is that the public will expect HP's actions are common throughout the Valley and the whole corporate world and that public will fear that their own private records may be searched. "Is corporate America the next big brother, Rep. Tammy Baldwin said in her opening statements.

Most members of the subcommittee are pointing to an anti-pretexting bill the committee reported out this summer, which died in a "black hole" on the Hill. lt's pretty obvious that another bill will be passed and that House leadership will be hard-pressed to sit on it after all this.

UPDATE: Dunn will take the Fifth. What about Hurd?

How did Pattie Dunn come to work directly with Ron DeLia for HP's anti-spying probe? In her written testimony (PDF) today, she says she was pointed by Bob Wayman, then the acting CEO, to Kevin Huska, HP's global security chief. Huska referred her to DeLia, whom, she says, worked almost exclusively for HP. Thus, "I did not hird the private investigators who were involved in the Kona ... investigations. They were already under contract to HP when the leak investigation was initiated."

She relied on DeLia to understand the legality of the operation:

As a matter of course I asked Mr. Delia at every point of contact for his representation that everything being done was proper, legal and fully in compliance with HP's normal practices. ... At some point during the late spring of 2005, I became aware from Mr. Delia that phone records were accessed as a standard component of such investigations from HP. The clear impression I had from Mr. Delia was that such records could be obtained from publicly available sources in a legal and appropriate manner ... I now believe that not only I, but all of the executives upon whom I relied at HP ... were similarly confident that these records were accessed under fully legal circumstances.

To that point, Rep. Ed Whitfield said in his intro minutes ago: "If there are legitimate ways to get access to someone's personal phone records without their consent, short of a subpoena, I'd like to know about it."

Mark Hurd didn't get very good grades for his performance Friday. The Washington Post ran a story on Saturday quoting disapproving corporate government types.

Charles M. Elson, leader of the corporate governance center at the University of Delaware, said HP's culture "needs to be seriously reexamined and completely reworked." "It is inconceivable to me that top management could have been aware of this kind of activity and not taken steps to separate the company from it," Elson said. "Large organizations are based on ethics and integrity, and the tone comes right from the top."

Given that Hurd admitted to approving the sting operation on Dawn Kawamoto, and that he managed to avoid exposing himself to a report that would have apprised him of a range of unacceptable behavior, will Hurd be able to maintain leadership of the company that was once the definition of integrity in Silicon Valley?

For some perspective on that, I contacted Michael S. Malone, longtime Valley reporter, and the author of an upcoming book on HP, "Bill and Dave: How Hewlett and Packard Created the Greatest Company in the World," to be released this spring. Malone thinks Hurd will "dodge the bullet."

There's no paper trail showing that he signed off on the pretexting. And his behavior -- getting a verbal summary of the investigation at a meeting, but not reading the final report -- is consistent with the behavior of a CEO. He got the executive summary of things, Dunn was running the show, and he waited to hear the results.

Setting up a sting on a board member is stupid, but not illegal. So, unless there is something with his signature on it, or a witness who was in the room saying that he was informed of illegal activities, it'll be hard to make a case. No resignation; but the reputation of HP has been severely damaged on his watch. So, even if he's not out the door, he is on thin ice.

I'm not so sure. While it would be stupid for HP officials like Hunsaker and Gentilucci to fail to protect Hurd from knowledge about their illegal activities, they did an awful lot of stupid things and emails clearly show that they sought a meeting with Hurd. Indeed, Hunsaker emailed Dunn that Hurd had approved the sting operation. So while Hurd should have been protected, it's entirely within the realm of possibility that Hurd was clued into the pretexting, and that HP was skating on thin ice in its investigation.

There is still plenty more dirt to come out before this is all said and done and plenty of work for crystal balls. Malone's says Dunn will get some kind of fine, Sonsini a slap on the wrist from the Bar, and Hurd walks away, wounded but clean.

Mine says: Hurd goes down, Dunn, Baskins, Hunsaker, Gentilucci, DeLia and the smaller guys all face criminal charges, HP faces years of shareholder lawsuits and government investigations.

When the corruption starts at the top, you have to clean house with a firehose. HP needs a fiercely independent board who share a vision of returning HP to its proper place at the pinnacle of both integrity and performance. Because the connection to its storied past is so important, Walter Hewlett should return to the board, and no board member who countenanced Dunn's covert operations should remain. Perkins should return. Whether Hurd should remain is, I suppose, an open question; but to my mind his approval of a sting operation on a reporter makes him deeply suspect, no matter how nifty his turnaround of the company over the last five quarters.

Following Mark Hurd's Friday press conference and the testimony of his personal lawyer Michael Holston....The New York Times adds to the story ...

From NYT: Chairwoman Leaves Hewlett in Spying Furor

By DAMON DARLIN and MATT RICHTEL

. . . His voice shaking, Mr. Hurd said a review of the means used to trace leaks from the company’s board had produced “very disturbing” findings. He also conceded that “I could have, and I should have,” read a report prepared for him while the operation was under way.

. . .Two executives who supervised the effort were also reported to be leaving.

. . .  Mr. Hurd took no questions, with the company saying he did not want to pre-empt his testimony next week to a House subcommittee looking into the Hewlett-Packard affair.

. . .  Ms. Dunn said she had resigned at the request of the board. But she said that while she had the responsibility to identify the source of leaks, “I did not propose the specific methods,” and those who performed the investigation “let me and the company down.”

According to people briefed on Mr. Hurd’s plans, Kevin T. Hunsaker, its senior counsel and director of ethics, and Anthony R. Gentilucci, its Boston-based manager of global investigations, will leave the company. Mr. Hurd did not speak to this issue, and the company declined to comment.

. . . The moves by Hewlett-Packard on Friday were an attempt to get ahead of the torrent of daily disclosures about the spying operation and an acknowledgment of the irresponsibility, if not illegality, of the methods.

. . . Mr. Hunsaker, the lawyer and ethics officer, directed the 2006 phase of the investigation. Mr. Gentilucci, the Boston-based investigations officer, was involved in both the 2005 and 2006 phases of the investigation.

. . .Michael J. Holston, a partner in the firm, laid out some evidence to reporters Friday after Mr. Hurd’s comments. While noting that the firm’s review was not complete, he said Ms. Dunn had personally contacted and engaged Security Outsourcing Solutions, a tiny Boston-area investigative firm operated by Ronald R. DeLia, in the 2005 phase.

“For the first month or so of the investigation, Ms. Dunn worked directly with Ron DeLia from S.O.S.,” Mr. Holston said, and it was only two months later that the company’s own detectives were brought in.

. . . Ms. Dunn’s lawyer, James J. Brosnahan, reiterated that claim Friday. “She went to the right people, and she was assured that what they were doing was legal,” he said.

. . . A crucial document was a March 2006 report prepared by the company’s investigators and Mr. DeLia under the supervision of Mr. Hunsaker, a senior company lawyer. Mr. Hurd was given a copy of that report, but he said he did not read it. “I could have, and I should have,” he said.

. . . It was also sent to the company’s outside counsel, the powerful Silicon Valley firm of Wilson Sonsini Goodrich & Rosati, for review and comment, Mr. Holston said.

. . . Mr. Hunsaker never obtained a written legal opinion, according to people briefed on the company’s review of its investigation.

. . . Neither Mr. Hurd nor Mr. Holston indicated why the chief executive did not raise questions about the way the scheme was to be carried out.

Link to Chairwoman Leaves Hewlett in Spying Furor - New York Times

Mark Hurd transcript.

Michael Holston transcript.

Transcript of remarks made by Mark Hurd, CEO of Hewlett-Packard at a press conference on September 22 2006.

· Thanks Bob, and thanks for joining us today.
· I felt it was important to meet with you … there’s been an extensive amount written about us in the media and we’ve not really been in a position to respond with a higher certainty of the facts until now · And I know you have been clamoring for details.
· My goal from the beginning has been to be as transparent as possible but also as accurate as possible.
· I wanted the opportunity to share the facts, outline our actions and next steps within the constraints of the ongoing investigation.
· Before I begin, I want to reiterate that this has nothing to do with the strategy or operations of Hewlett-Packard or frankly the vast majority of the people of HP.
· The company has made tremendous progress in our business operations and this is a testament to the hard work and contributions of everyone at Hewlett-Packard.

Let me tell you why I haven’t communicated earlier and why I am speaking with you now.

Press conference transcript of remarks made at a September 22 press conference by Michael Holston, partner with law firm Morgan Lewis, legal counsel to Mark Hurd, CEO of Hewlett-Packard:

· Thanks Mark. Good afternoon.
· I’ve been asked by Mark to discuss the work that Morgan Lewis has done to date.
· Specifically I’ve been asked to explain the process that Morgan Lewis has used to uncover the facts behind the leak investigation and to present those facts to you, with a particular focus on the facts related to the issues that have been addressed in the media in the past few weeks.

· Before getting into the specifics, let me say that our investigation is not complete. There is still more work to be done.

· I was first retained by HP with regard to these issues on Sept. 8th.
· As I mentioned, the Firm has been asked to do an in-depth review of all the facts surrounding the investigation of the board leaks.
· The objective of the investigation is to get a comprehensive picture of what happened, when it happened and how it happened.
· In addition to this investigation, Morgan Lewis is also now handling all federal and state inquiries and investigations related to this matter.

III. Process:

· First, let me talk about the process. During the past two weeks:
o Morgan Lewis has collected more than a million pages of documents.
o We have reviewed many of those pages.
o We are committed to reviewing the remaining documents as fast we are able.
· The documents include internal HP documents and, to the extent we have been able to obtain them, documents from third parties who worked with HP in the leak investigation.

IV. High Level Overview:

· The investigation conducted by HP into the Board room leaks encompassed two phases: the first in early 2005 called Kona I; and the second in early 2006, which was called Kona II.

· Documents reviewed by Morgan Lewis show that certain HP executives and employees assisted in or were knowledgeable about the investigation.
· I will address the roles of various HP executives and employees in more detail in a few minutes.
· It is now clear that the investigation included tactics that ranged from the review of HP’s internal emails and instant messages, to the physical surveillance of an HP Board member and at least one journalist, to the "pretexting" of telephone call information of board members, HP employees and journalists.

By Richard Koman for SiliconValleyWatcher

HP CEO and soon-to-be chairman Mark Hurd was in the loop and approved spying operations on Cnet reporter Dawn Kawamoto, as well as five HP directors, the Washington Post and New York Times are reporting today. Both papers obtained internal emails showing that Hurd and Patricia Dunn jointly approved spying ops. While there's no direct email from Hurd, emails to and from Dunn show that the plan only went through with Hurd's approval.

The Times story shows that Hurd, as well as Patricia Dunn, OK'd spying on HP directors. Robert Sherbin, HP's director of communications, a key henchman in the project, emailed Dunn on Jan. 20 that "there's been another leak around the board." The same day he emailed Jim Fairbaugh, chief of global security, that "Mark believes the names worth looking at are (Richard) Hackborn, (Lawrence) Babbio, (Lucille) Salhany, (George) Keyworth and (Tom) Perkins."

Clearly, then, Dunn talked to Hurd and passed the message back to Sherbin. But that's nothing. Just when you thought your jaw couldn't drop any further on this story, today's Post report will knock your socks off.

The story details HP's attempts to infect Cnet reporter Dawn Kawamoto's computer with software that would track who she sends a planted email to. Dunn and Hurd enthusiastically approved the plan, according to emails obtained by the Post. Here's the timeline:

Jan. 26 - Kawamoto is sent an email from a fake HP employee named "Jabob," saying he wanted to pass her information about a fictional handheld device.

Jan. 28 - Lawyer Kevin Hunsaker, who was in charge of the investigation, and Anthony Gentilucci, global investigations manager, discuss Jacob's personality and the tone the email will take. They hatch a plan to establish Jacob's bona fides before springing the spyware on her.

Feb. 2 - Hunsaker briefs Dunn by PowerPoint presentation, including the email to Kawamoto.

Feb. 5 - Dunn emails Hunsaker: "This sounds promising. I will be in contact with Mark and come back to you with an indication of joint approval as soon as we connect."

Feb. 8 - Ronald DeLia, the outside contractor working with private investigators suggests bugging calls between Keyworth and Kawamoto.

Feb. 9 - Dunn emails Hunsaker and general counsel Ann O. Baskins: "I spoke with Mark and he is on board with the plan to use the info on new handheld. ... He also agrees that we should consider doing something with" a tip on a supposed HP data farm.

Feb. 16 - Kawamoto emails "Jacob" that she would be on vacation the next week. DeLia forwards her email, showing that her calls were actively tracked: "She has made numerous calls to a hotel in Disneyland."

Feb. 22 - Hunsaker emails Dunn and Baskins with a slide of the handheld device sent to Kawamoto. Dunn replies: "Kevin, I think this is very clever. As a matter of course anything that is going to potentially be seen outside HP should have Mark's approval as well."

Feb. 23 - Hunsaker emails Dunn. "FYI, I spoke to Mark a few minutes ago, and he is fine with both the concept and the content."

By Richard Koman for SiliconValleyWatcher

The Wall Street Journal has internal HP emails that show that chairman Pattie Dunn and general counsel Ann Baskins were intimately involved in the leak-plugging investigations - known internally as KONA and KONA II - and that they may well have known that pretexting was involved. The emails also detail some of the HP personnel involved in the probe.

On Aug. 6, 2005, HP's manager of global investigations, Tony Gentilucci (who contracted with Security Outsourcing Services' Ron DeLia, who hired the firms who did the actual pretexting) sent an email to Dunn, Baskins, Jim Fairbaugh and DeLia.

In the memo, Mr. Gentilucci updated Ms. Dunn and the others on several facets of the probe, including "intelligence gathering" on "interested parties" through "internal and external sources."

Mr. Gentilucci's memo described an intensive investigation in 2005, code-named Project KONA, in which H-P's security officials cultivated confidential "informants" to develop leads on which directors may have met with which journalists.

The memo says that Gentilucci intends to follow up on some leads provided by VP of media relations Robert Sherbin, including a sighting of George Keyworth, who was in fact the leaker, meeting with a Journal reporter in a San Francisco hotel a year prior.

In another section of the 2005 memo labeled "Update," Mr. Gentilucci wrote that a "tentative management briefing" on the investigation was scheduled for Aug. 31. It is unclear if this meeting took place. If it did, it raises the question of who else in H-P's management, including CEO Mark Hurd, knew about the extent of the leak probe in summer 2005. H-P has said Mr. Hurd was given a summary of the leak investigation's results in March of this year, but didn't focus on the evidence for those conclusions.

The key question for law enforcement officials is what did they know, and when did they know it. An email from HP security official Fred Adler to Kevin Hunsaker, an ethics attorney at HP and apparently the one guy at the center of the KONA operations, offers an internal opinion that HP couldn't get cellphone or text-messaging records legally "unless we either pay the bill or get consent."

Apparently Hunsaker wanted to get copies of Perkins' text messages because he rarely used his cellphone. He asked Adler if HP could "lawfully get text-message content, or is it the same as the cellphone records?" This question suggests that Adler had already answered that obtaining cellphone records would be illegal.

So in January, Hunsaker knew that obtaining cellphone records was likely illegal. Hunsaker reports to Baskins. Both Baskins and Dunn had been very much in the loop in the earlier investigation. Now in April, just before confronting Keyworth, Hunsaker sends an email to Gentilucci and DeLia, saying at Baskins' request he wants to "confirm the legality" of the operation.

Mr. Hunsaker's email described how personal phone records had been gathered through outside parties, noting that he was the only H-P employee who saw the fully compiled records. His email said H-P provided the names and phone numbers of the people it was targeting to Mr. DeLia, and he passed on the information to a "third party" and "they make the pretext calls." He said his own legal research, as well as that of an outside attorney, confirmed that pretexting was legal.

Outside attorney? Would that be Joe Kiernan, DeLia's attorney? The Times' reported over the weekend that Baskins relied on Kiernan for legal opinion about the legality of the operation. Now with all of the legal expertise at HP's disposal, including Wilson Sonsini, there's only one reason to have your henchman ask his spy for legal advice. Not an authentic interest in the correct answer but CYA.

By Richard Koman for SiliconValleyWatcher

The HP spying program is looking more and more like an out of control operation, especially after the revelation in the Wall Street Journal that HP pretexted Larry Sonsini himself.

There is precious little information about this. Buried on the jump page of a larger story, the Journal simply reports that a "person familiar with the matter" said Sonsini was pretexted.

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