Former HP Exec’s Ethical Lapse Isn’t Securities Fraud

Form Hewlett-Packard CEO Mark Hurd’s alleged sexual harassment of a company contractor, lying to investigators, and doctoring of expense reports, may have been unethical but it was not securities fraud, a federal appeals court ruled Friday.

The 9th U.S. Circuit Court of Appeals upheld dismissal of a shareholder securities class action saying the suit filed to sufficiently allege that HP made material misrepresentations or misleading statements related to Hurd’s conduct.

The court was careful to note that it was not deciding when a high-ranking employee’s violation of a business’s ethical code may create a cause of action for violation of the Securities Exchange Act. It only held there was not one shown in this case.

In 2010, Hurd resigned from his post as CEO. During an investigation of alleged sexual harassment, HP discovered Hurd misrepresented his relationship with a former HP contractor, Jodie Fisher and doctored expense reports to prevent discovery about their relationship and lied to investigators, the court said.

According to the opinion, Fisher’s attorney Gloria Allred not only alleged Hurd sexually harassed Fisher, but that he also gave her confidential information about an impending merger.

The investigation found that Hurd had spent more time with Fisher at HP events than he told investigators and that he doctored expense reports saying he had dinner with his bodyguard when he had eaten alone with Fisher.

Immediately after Hurd’s resignation, HP stock dropped, resulting in a purported loss of $10 billion, the court said.  Shareholders sued.

Earlier HP Ethics Scandal

The HP ethics problems predated the Hurd issue. The court noted that in 2006, while Hurd was CEO, a major scandal erupted when a whistleblower told government agencies that HP had hired detectives to monitor phone records and email accounts of HP directors, employees and journalists to find the sources of leaks of company information.

Criminal charges were brought against HP’s then-chairwoman and general counsel. Although Hurd was CEO he was found free of wrongdoing. That bolstered his reputation for integrity.

“The complaint does not give rise to an actionable claim for securities fraud,” said visiting Judge Dana Christensen of Montana. “This is not to say that Hurd’s conduct was consistent with the general ethical values espoused within the SBC and related statements. Indeed, Hurd did not demonstrate the ‘uncompromising integrity’ asked of him by the SBC. However, there was no fraud,” Christensen wrote.

Case: Retail Wholesale v. Hewlett-Packard, No. 14-16433


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