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Originally published September 13, 2006 at 12:00 AM | Page modified September 13, 2006 at 9:29 AM

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HP's Dunn is demoted over role in probe of leaks

Hewlett-Packard Chairwoman Patricia Dunn took the fall Tuesday after admitting she authorized an investigation that relied on "inappropriate...

The Associated Press

SAN JOSE, Calif. — Hewlett-Packard Chairwoman Patricia Dunn took the fall Tuesday after admitting she authorized an investigation that relied on "inappropriate techniques" to uncover who was leaking boardroom secrets to the media.

CEO Mark Hurd, who has the respect of Wall Street and is untainted by the investigation at the Palo Alto-based computer and printer maker, will take over in January, vowing that the probe's methods "have no place in HP." HP's stock rose to a 52-week high.

Director George Keyworth II, who acknowledged sharing company information with reporters, resigned from the board Tuesday, effective immediately, after refusing to do so in May.

It was the culmination of a scandal that has rocked Silicon Valley's biggest and oldest technology company, led to investigations by state and federal authorities, and raised questions about one of the most powerful women in corporate America.

Having already concluded that HP's probe broke some California laws, state Attorney General Bill Lockyer indicated for the first time that company insiders are likely to face some criminal charges.

"We currently have sufficient evidence to indict people both within Hewlett-Packard as well as contractors on the outside," Lockyer said late Tuesday on PBS' "NewsHour with Jim Lehrer."

Dunn, who initiated the probe in which private investigators impersonated HP directors and journalists to access their personal phone logs, will remain on the board after giving up the top job Jan. 18. Hurd will add chairman to his existing positions of chief executive and president, the company announced Tuesday.

The fact that Dunn will remain on the board may indicate that she has strong support among fellow board members. Investors reacted to the announcement by pushing the price of HP stock up 56 cents to $36.92, a 52-week high.

Industry analysts say Hurd's track record as CEO and straight-shooting style make him the logical pick to replace Dunn. "This is a very elegant solution to a tricky situation," said technology-industry analyst Cindy Shaw, a former HP employee.

Hurd has won praise from Wall Street for a cost-cutting campaign that will have cut some 15,000 jobs by the end of this quarter.

"It makes perfect sense to give [Hurd] the chairmanship," Kay said. "He has the character, personality and chops to do it. I can't think of anyone else you would want to run the company at this point."

But some analysts said Dunn's demotion sent a message to investors that HP was ready to move on, while others said she should have been removed completely.

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"She needed to go — she had become a liability to the company whether she liked it or not," said Morningstar analyst Mark Lanyon. "But just removing her from the chairperson role and keeping her on the board is a half-measure at best and probably not appropriate.

"There are still legal matters that could come down on the company, and the issue is still festering with her there."

The pressure on Dunn to step down rose sharply when Congress and federal investigators joined the probe of the scandal involving HP's board of directors.

Hurd said in a statement he was "taking action to ensure that inappropriate investigative techniques will not be employed again. They have no place in HP," he said.

The company declined to provide details about the future safeguards.

Dunn was angry about media leaks of confidential board discussions and commissioned an unnamed outside firm to identify their source. The investigators used Social Security numbers and other personal information to get phone companies to turn over detailed logs of home phone calls of reporters and company directors.

Keyworth said Tuesday that he was often asked to be HP's liaison to the press, and that he thought he was acting in the company's best interest when he spoke to News.com.

The attempt to oust him last spring riled another board member, longtime Silicon Valley venture capitalist Tom Perkins, 74, who resigned and stormed out of the May 18 meeting.

His attorney later revealed that Perkins' home phone calls had also been compromised. At least nine journalists, including reporters for The Wall Street Journal, BusinessWeek, The New York Times and News.com, also had their personal calls monitored.

Perkins, Keyworth and Dunn were all in a conciliatory mood Tuesday, saying HP's focus should now be on moving forward with Hurd at the helm.

"I believe in HP. I believe in Mark Hurd," said Perkins, adding through a spokesman that he would not return to the HP board if asked. "This too shall pass."

Material from the San Jose Mercury News was used in this report.

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