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Morgan Lewis Beats HP Securities Suit over Hurd Conduct, Am Law Daily

August 12, 2013

Reprinted with permission from the 8/12/13 edition of The Litigation Daily ©2013 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

In 2008, Hewlett-Packard Co. issued a new code of ethics for its employees. Two years later, the HP CEO who approved the ethics code, Mark Hurd, resigned amid allegations that he falsified expense reports in order to cover up a romantic relationship. The irony wasn't lost on plaintiffs lawyers at Kirby McInerney and Glancy Binkow & Goldberg, who argued in a 2012 complaint that HP committed securities fraud by touting its high ethical standards to investors without affirmatively disclosing Hurd's transgressions.

Those claims fell flat on Friday, when U.S. District Judge Jon Tigar in San Francisco issued a 20-page decision dismissing the case without prejudice. Siding with HP's defense lawyers at Morgan, Lewis & Bockius, Tigar concluded that HP's public statements about its ethics, including the code of ethics itself, were neither false nor materially misleading.

HP named Hurd its CEO in 2005. A year later, he also took over as chairman. He replaced Patricia Dunn, who resigned under the weight of HP's 2006 spying scandal. During his four-year tenure, Hurd tried to rebuild the company's reputation through new compliance programs. In 2008 and again in 2010, HP circulated a code of ethics to employees that required them to promise to be "open, honest, and direct" and to "maintain accurate business records."

According to the plaintiffs, Hurd couldn't be bothered to obey his own rules. In the fall of 2007, the company hired a marketing consultant named Jodie Fisher. A former soft-core porn actress, Fisher had just participated in a reality TV dating series on NBC called Age of Love, in which "cougars" like her competed for the affection of a younger man. Fisher's job at HP was an unusual one. As CNNMoney reported, she attended Hurd's meet-and-greets with HP clients and helped him brush aside smaller customers so that he could focus on the big spenders.

In 2010, Fisher hired famed lawyer Gloria Allred and accused Hurd of sexual harassment. He resigned later that year. The harassment claims were never substantiated, but an internal investigation performed by Covington & Burling turned up evidence that Hurd used company resources to wine and dine Fisher and then tried to hide the relationship from HP's board.

Hurd's departure sparked several shareholder derivative actions. After a Morgan Lewis team led by Marc Sonnenfeld defeated those cases (see here, and with the statute of limitations about to expire, Kirby and Glancy tried their luck with the securities fraud case.

Their complaint, brought on behalf of everyone who bought HP stock between November 2007 and August 2010, alleged that HP made false and misleading statements by issuing an ethics code that Hurd was busy flaunting. According to the plaintiffs, the code was intended to be read not only by employees, but also by the investing public. "[I]n light of Hurd's endorsement of these tenets, there was an implication that Hurd was in fact in compliance with them," the complaint alleged.

The complaint also focused on the following statement, which HP put in regulatory filings: "The loss of executives or key employees could have a significant impact on our operations." According to Kirby and Glancy, that passage "created a duty to disclose" Hurd's misconduct.

Tigar rejected both arguments in Friday's decision. The statements in HP's code amounted to "inactionable puffery," he ruled. "Adoption of the Plaintiff's argument here would...render every code of ethics materially misleading whenever an executive commits an ethical violation following a scandal," the judge concluded.

HP lead counsel Marc Sonnenfeld of Morgan Lewis declined to comment. We didn't immediately hear back from plaintiffs counsel Ira Press of Kirby McInerney.