HP CEO Defended Sale of Options Prior to Board Leak Revelation

In a response dated December 21, 2006, to two incoming congressional committee chairpersons, Hewlett-Packard CEO Mark Hurd stated the sale of 100,000 stock options on August 25, just days prior to the public revelation of possible improprieties on the part of HP directors in investigating an information leak from its boardroom, was a well-planned trade that took place during a regularly scheduled "trading window."

Last December 12, incoming House Energy and Commerce Committee Chairman John Dingell (D - Michigan) and incoming House Subcommittee on Oversight and Investigations Chairman Bart Stupak (D - Michigan), sent Hurd a letter inquiring as to the curious timing of the stock sale. "A key issue in the Subcommittee's investigation," the letter read, "is how much Hewlett-Packard Co. management knew about the board-leak investigation, when they knew it, and what actions they took in response."

Hurd's response letter did not address those matters specifically, but instead focused on the timing of the options sale. Today, Reps. Dingell and Stupak attached a copy of Hurd's letter to a formal submission to the US Securities and Exchange Commission, in connection with its own investigation. A copy of the SEC submission was made public to reporters by Rep. Stupak's office this afternoon.

In Hurd's response, he says he consulted with HP's legal department prior to the August 25 sale, asking whether he could sell shares during a regularly scheduled window between August 18 and September 7. He quotes from the legal department's response, stating such a sale would be "consistent with HP policy and applicable statutes and regulations."

Hurd did not state specifically which HP lawyer he consulted. Ann Baskins, the company's general counsel, resigned last September, amid statements from the former HP chair, Patricia Dunn, that Baskins was involved in an elaborate scheme to determine the source of an information leak in the corporate boardroom by planting false information among suspects. When some of the false information was reported by CNET as rumor, investigators hired by HP sought personal information on a CNET reporter, probably illegally. Investigators sought private records on the reporter under false pretexts - initial reports state that they may have passed themselves off as agents of the US Dept. of Homeland Security, though details on the precise nature of the false pretext have become sketchy over time.

"I gather that the Committee's interest in the August Trade stems from the events that have transpired over the last few months," Hurd wrote Reps. Dingell and Stupak. "Let me assure you that the particular trade you have inquired about was totally unrelated to the interview I voluntarily gave as part of the so-called 'investigation of the leak investigation.' I began the process of exercising my stock options prior to anyone asking to interview me and the trade was completed before that interview occurred." Hurd went on to say that all the required steps necessary to complete the sale of those options just happened to fall on August 25.

"My August Trade was not a case of 'bullet-dodging,"' Hurd continued, referring to a phrase the representatives used in their letter. "That trade represented less than 5% of my vested and unvested HP stock and options and involved less than one-third of the options I could have exercised and sold at the time." What's more, Hurd pointed out, HP stock value rose, rather than falling, since August 25 despite the bad news.

Other HP officials also took advantage of the "August window," Hurd wrote. "While I do not know the details of those transactions," he commented, "I have no reason to believe they were anything other than right and proper."

Reps. Dingell and Stupak requested that the SEC inform them when its investigation of HP's options sale was closed, and then inform them as to whether securities laws were violated. If Hurd's story holds up, investigators may turn their attention from whether HP officials timed their options sale to fall prior to the impropriety revelations, to whether somehow the revelations may have been timed to fall after the "August window."