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Airing a Board's Dirty Laundry
The fallout from Hewlett-Packard's ('HP') controversial boardroom leak investigation has led to a variety of actions ' including an investigation by the California Attorney General's office and Congressional hearings on the practice of 'pretexting' ' a tactic employed by Hewlett-Packard to gain the confidential phone records of board members. Despite the considerable press attention devoted to the incident, it is an otherwise under-the-radar action by the SEC that could have the greatest long-term impact on corporate governance and compliance.
On May 23, 2007, the SEC issued a cease-and-desist order (the 'SEC Order') stemming from HP's failure to report the reason for Thomas Perkins' resignation from the board in Item 5.02(a) of its Form 8-K filing (Form 8-K is used by public companies to report significant events to their shareholders as they happen, rather than doing so only on a quarterly basis in Form 10-Q). In the current case, Perkins' resignation was an event that triggered the obligation for HP to file an 8-K, and it did so in a timely manner. The SEC's action, however, focuses on what was not included in the filing.
The SEC's enforcement action is notable in two key respects: 1) It was brought even though HP relied on the advice of counsel in not reporting the reasons for Perkins' resignation; and 2) It was brought under cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ('Exchange Act'), which lacks a 'public interest' standard that is normally needed for an SEC sanction. The impact these aspects of the enforcement will have on corporate governance and compliance bears close attention in the future.
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