Wednesday, December 13, 2006

House Subcommittee Asks About H-P CEO's Stock Sales

While the Hewlett-Packard pretexting imbroglio has faded from view, a House Subcommittee decided to pepper company CEO Mark Hurd with an inquiry about his exercise of options on 100,000 shares of stock and immediate sale on the day he was interviewed in August 2006 as part of the company's internal investigation.  The Subcommittee letter is signed by Representatives John Dingell, the incoming chair of the Energy and Commerce Committee, and Bart Stupak, the likely new chair of the Oversight and Investigations Subcommittee that has already been looking at the pretexting.  Hurd sold the shares on August 26, 2006, the same day H-P's then-outside counsel, Wilson Sonsini, interviewed him about his role in the investigation of boardroom leaks that included the pretexting that caused such a public relations disaster. 

The Congressmen asked whether Hurd's sale was a species of "bullet dodging" in which a corporate insider sells shares ahead of the disclosure of negative news that will cause the stock price to go down.  In addition, they asked Hurd whether any other executives sold at this time.  It's not a hard question to answer on your own by looking at the company's public records.  A quick check of H-P's Form 4s (which report stock sales by executives and directors) shows one example (here) in which board member Lucille Salhany sold over 18,500 shares on August 24.  Ms. Salhany is a member of the audit committee and was likely aware of the Wilson Sonsini investigation, although that's a guess based on her committee membership.  The timing of the trade does not mean the person sold shares because of the internal investigation, and there are many reasons for these transaction. 

Hurd's Form 4 (here) shows that he received the options on April 1, 2006, at an exercise price of $21.73, and he sold the shares for about $35.40, for a profit of approximately $1.35 million (not counting brokerage costs, which are usually fairly low).  While the sale may look bad, it may be that Hurd did not exactly dodge a bullet, but instead took a bit of one.  The announcement of the pretexting that was part of the leak investigation triggered a firestorm of criticism, but had little if any effect on the stock price in the short term.  Moreover, since late September, when the Subcommittee held a hearing on the pretexting at which Hurd testified, the price has gone up almost $2 per share.  Hurd sold a few months too early, and if he'd waited until now he would have reaped another $450,000 based on the December 13 closing price of $39.83.  Hurd still has options on another 600,000 shares, so no tears need be shed over his sale.  While the timing looks suspicious, I doubt there's anything there for the Representatives to get too worked up about. (ph)

Download hurd_house_subcommittee_letter_dec_12_2006.pdf

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