HP settles with California in spy scandal

State says it has made a deal with PC maker over civil charges related to methods used in an HP leak investigation.

The California Attorney General's Office said Thursday that Hewlett-Packard will pay $14.5 million to settle civil charges related to the company's now infamous spy scandal.

As part of the settlement, which was first reported by CNET News.com on Wednesday, HP will "finance a new law enforcement fund to fight violations of privacy and intellectual-property rights," and adopt corporate governance reforms, the Attorney General's office said in a statement.

"The Hewlett-Packard incident has helped shine a national spotlight on a major privacy protection problem," Attorney General Bill Lockyer said in a statement. "With its governance reforms, this settlement should help guide companies across the country as they seek to protect confidential business information without violating corporate ethics or privacy rights."

Lockyer said the new fund will help ensure that when businesses cross the legal line, they will be held accountable. He also applauded the company.

"Fortunately, Hewlett-Packard is not Enron," he said. "I commend the firm for cooperating instead of stonewalling, for taking instead of shirking responsibility, and for working with my office to expeditiously craft a creative resolution."

The case is separate from the felony criminal charges that have been brought against five individuals.

HP has said that as part of its effort to unmask the individual who made unauthorized media disclosures, its investigators used false pretenses, or pretexting, to obtain the phone records of more than a dozen people. These targets included journalists, board members and employees. Investigators also followed a board member and two journalists, and the company sent a bogus tip with an electronic "tracer" to a News.com reporter.

In the wake of the scandal, Congress held hearings, and the FBI and U.S. Attorney's Office launched investigations. HP also faces a formal inquiry from the U.S. Securities and Exchange Commission, as well as shareholder lawsuits.

No civil charges
News.com reported last week that the Office of the Attorney General was considering bringing civil action against HP. But the PC maker said that as part of the deal, the state will not pursue civil charges against the company, or against its current or former officers or directors. (It's not uncommon for prosecutors to file a settlement at the same time as a civil complaint.)

"We are pleased to settle this matter with the Attorney General and are committed to ensuring that HP regains its standing as a global leader in corporate ethics and responsibility," said Mark Hurd, HP chairman and chief executive.

Lockyer's office said the Santa Clara County Superior Court has approved the settlement, which was filed Thursday, along with the civil complaint.

That complaint alleges that HP violated several sections of California's penal code, including one that prohibits "willfully and knowingly" accessing computerized telephone account information without permission. It also cites an identity theft statute that prohibits obtaining someone's personally identifying information and then using that information for an unlawful purpose.

HP did not admit liability as part of its settlement.

Among the other stipulations, HP agreed that for five years, it will:

• Maintain employment of a chief ethics and compliance officer. HP named Jon Hoak to that position in October.
• Expand the role of the company's chief privacy officer to review HP's investigation practices.
• Expand the company's employee and vendor codes to ensure that they address ethical standards regarding investigations.
• Retain an expert in the field of investigations to assist the company's chief ethics officer with regard to investigations.

Of the settlement money, $13.5 million will go into the new fund, while $650,000 will go to statutory damages, and $350,000 will reimburse the Attorney General's Office for the costs of its investigation.

A lawyer for two reporters whose phone records were accessed said HP has yet to provide a full accounting of what transpired.

"My clients are all gratified that the AG's office has gotten HP to take even further responsibility and to pay a small sum of money to the general public to make up for its improper acts," said Terry Gross, whose firm, Gross & Belsky, represents The New York Times and its reporter John Markoff, as well as BusinessWeek reporter Ben Elgin. "But my clients still are looking for HP to provide us fuller information as to the extent of their invasions of privacy."

Gross said that, in a meeting six weeks ago, HP was not able to provide answers to many questions surrounding the investigation. "They promised they would look into these matters and provide us with additional information," Gross said. "We have not received any additional information. We hope they will do a more thorough job of investigating and provide this information to the reporters whose journalistic activities have been threatened."

HP said it has designated new board member, G. Kennedy Thompson, the CEO of Wachovia, as the independent director with responsibility for reviewing and reporting on HP's compliance with legal and ethical requirements related to investigations.

"HP has traditionally been a leader in the area of business ethics, and I look forward to working with the management team to help ensure that the company operates with the highest standards of integrity," Thompson said in a statement.

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