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In Wake of Autonomy Scandal, HP's Lawyers Wonder What's Next
By the time Hewlett-Packard Co.'s $8.8 billion write down of Autonomy was announced late last month, a number of the in-house lawyers who worked on the ill-fated deal denounced by pundits as HP's worst ever were already gone.
The share price tumbled with the news. And one claim in the resulting litigation is that HP is likely to go bankrupt within the next two years.
But the company's in-house lawyers already had plenty of reasons to head for the exits. In the past six years, employees have weathered debacles including the fallout from the pretexting scandal, former CEO Mark Hurd's departure after allegations of sexual harassment and former CEO Leo Apotheker's brief and rocky tenure.
Those highly public pratfalls have left the legal department that new general counsel John Schultz inherited in April tired and frustrated, according to interviews with a dozen former HP lawyers, several of whom were still with the company at the time of the Autonomy deal. Battered by scandal after scandal, some lawyers who remain at the company are afraid to hope for better.
"When you have various crises occurring in succession, any general counsel would be concerned about the morale in the department," said Daniel Cooperman, currently of counsel at Bingham McCutchen, who has served as general counsel at Apple Inc. and Oracle Corp.
The work is taxing, and the rewards are in question. HP's stock options, a key component of compensation packages in Silicon Valley, are dwindling in value. And bonuses in the legal department are notably smaller this year, a source at HP said. One former HP lawyer said she and her colleagues felt they were working harder than ever to right the ship for less and less pay. And the ranks of those colleagues have been very much in flux. The legal department saw several rounds of layoffs during GC Michael Holston's tenure, and some lawyers have taken advantage of voluntary early retirement offers extended by CEO Meg Whitman this May.
"What's getting lost in all the bad press is that you've got a lot of people that are working their asses off to try to make HP successful," a source at the company said. "It hurts our morale, and it hurts our ability to focus on what we're trying to do."
Schultz, who joined HP in 2008, may face the tallest orders of all. After overseeing the internal investigation of the Autonomy debacle, including a forensic review by PricewaterhouseCoopers, Schultz must now deal with the wave of litigation that the allegations have triggered at least seven shareholder lawsuits so far in the Northern District of California.
Many in Silicon Valley thought the $11 billion HP paid for the British data-mining software maker was far too much when the deal was announced in August 2011.
Schultz, who declined to be interviewed, may also face scrutiny about the legal department's handling of the deal. Accountants shoulder the primary responsibility for detecting cooked books during due diligence, M&A experts say. But legal and accounting due diligence sometimes overlap and concerns raised about Autonomy's books before the negotiations began should have influenced the lawyers' approach, said Eric Talley, a corporate law professor at UC-Berkeley School of Law.
"This may cast some doubt on the performance of HP's in-house legal department and outside counsel," he said. "Autonomy wasn't the type of company that people would be stunned to see this from."
HP lawyers are discussing the due diligence they conducted during the acquisition to determine whether they could have detected any improprieties at Autonomy before the whistleblower came forward, a source at HP said. But at least two key players are no longer around for the conversation. Former deputy general counsel Paul Porrini, who led HP's in-house legal team for the deal, left in July to become general counsel of YuMe, a video advertising company. Former associate general counsel Edward Rockwell, who stepped down in March to take the top legal job at data solutions company DataDirect Networks Inc., worked with Porrini on the deal.
Porrini appointed Sergio Letelier, who is based in Geneva, to serve as lead on the offer documentation team, a source at the company said. Associate general counsel David Ritenour also worked on the deal, Recorder sibling publication The Am Law Daily reported last August. Gibson, Dunn & Crutcher was HP's lead outside counsel for the deal.
Although dozens of internal and external lawyers work on deals of this magnitude, the general counsel is ultimately responsible for due diligence, said Robert Stefanski, a Reed Smith partner who served as general counsel of TIBCO Software Inc. Charles Charnas, a longtime HP lawyer who was acting GC before leaving in 2008, is confident that Holston, who declined to be interviewed, would have brought any concerns to the board. "That was his job, and he was determined to do it correctly," Charnas said. With the internal discussions leading up to the Autonomy deal largely a mystery, Talley noted that lawyers may have unearthed concerns that were disregarded by the board. Several former HP lawyers said the legal department's advice was respected but not always heeded during acquisitions.
"Sometimes these deals take on a huge momentum of their own," said Ian Hardcastle, a former patent lawyer at HP. "It's very hard to stop the train."
Earlier this month at HP's headquarters in Palo Alto, the lights were low in Building 20, which houses the executive suite and the legal department, among others. A downsized Christmas tree was on display in the temporary lobby the permanent one has been under construction for more than a year. A pair of security guards chatted about how a number of local companies are choosing Apple for their tech needs, furnishing their employees with "thousands of iPhones, iPads."
On the same floor as the legal department, the HP Archives contain some of the company's earliest and most pivotal products: audio oscillators, wrist instruments, scientific calculators, personal computers. To rally the legal department, Schultz needs to remind them of this history, Cooperman said.
"The quality of the department and its role in shaping HP are things that need to be emphasized so lawyers really feel that pride," he said. "And the general counsel also needs to display vision and a sense of where the company is going."
CHANGING OF THE GUARD
If there is anyone who understands what Schultz is up against, it may be Charnas, who served as acting general counsel after Ann Baskins resigned over the legal department's use of pretexting to spy on journalists and members of its board in an attempt to determine where leaks about the company where coming from. The furor created an avalanche of work for the legal department, Charnas said, including advising executives about the unfamiliar challenges they faced and managing regulatory filings to document leadership changes. And they were facing questions from outside the department.
"I think everyone became much more skeptical of the lawyers," said Brad Haymond, a patent attorney who worked for HP in Oregon until 2007.
Lisa LaForge, a corporate counsel who left HP in 2010, said she and her colleagues were shocked to see such a scandal rocking the company that some knew as the "boy scout of Silicon Valley."
"The company had such a long and straightforward history of doing so well," Charnas said. "It was a bit of a challenge to get the lawyers working up to speed."
Six years later, the department is no longer a stranger to such challenges. Charnas left HP after being passed over for the permanent general counsel position for Holston, a former prosecutor and Morgan, Lewis & Bockius partner who represented the company in the pretexting scandal. Charnas read the selection of a litigator for the top spot as a harbinger of future legal battles to come.
"That led me to believe that the company thought it was in fairly deep trouble," he said.
Over the years, changes of the guard have altered the makeup of HP's legal department especially in the wake of scandals. Charged with helping the company move forward after pretexting, Holston shook up the legal department. A champion of Hurd's push to cut costs, Holston submitted attorneys to more rigorous performance reviews and implemented layoffs trading long-term lawyers for junior attorneys, some say. But others note that Holston leveraged his close relationship with Hurd to elevate the legal department. Whereas some of his predecessors had answered to the chief financial officer, Holston reported directly to Hurd.
Their bond grew more complicated when Holston was tasked with investigating Hurd's behavior after an HP contractor alleged Hurd had sexually harassed her. When Hurd resigned, Holston denounced his behavior as reflecting a "profound lack of judgment," though the company did not find evidence of sexual harassment.
"I think the writing was pretty much on the wall for him after that," a former HP lawyer said. "He was standing there like a federal prosecutor who had gotten his man."
Holston left shortly after Whitman was named CEO last fall. But Whitman reassured in-house lawyers that she was pleased with their performance and wanted the department to stay the course, a source at HP said. To that end, she may have found the right man in Schultz, who worked with Holston at Drinker Biddle & Reath; Morgan Lewis; and, finally, HP. Schultz, who served as HP's deputy general counsel for litigation investigations and global functions before assuming the top spot in May, earned a law degree at the University of Pennsylvania.
STAYING ON BOARD
In 24 years as general counsel, Jack Brigham said he shepherded HP through "plenty of crises." But the GCs who followed him when he retired in 2000 faced very different challenges, particularly with regard to dealing with the board, he noted.
"Our board was a very solid board," he said. "Ann Baskins and Mike Holston had some issues with their boards that I didn't have to deal with."
Since the passage of the Sarbanes-Oxley Act in 2002, corporate governance has been a much bigger task for most general counsel, Cooperman said. As the interface between the company and the board, the general counsel helps members make the most informed decisions, he noted.
"The board cannot do its job unless the general counsel plays a very active role in ensuring that they get the information that they need," Cooperman said.
The task is more difficult with a dysfunctional board, UC-Berkeley's Talley noted. HP's board has been blamed for many of the company's woes in recent years. Analysts are calling on HP to overhaul its board and some are going as far as to say that the company needs to be broken up.
"When you are teaching courses on corporate governance, it's hard not to use HP as a cautionary tale," Talley said.
But Schultz could be a big part of the solution, Talley noted. A general counsel cannot change board members' temperaments, but he can remind them of their legal responsibilities to shareholders, Talley said. That message can do much to smooth over disagreements and spark discussion, he added.
Outside the boardroom, Schultz may have to address turnover in the legal department. Legal recruiter PJ Harari said that after public struggles, companies risk losing both rank-and-file lawyers and top deputies. HP has not yet named a replacement for Porrini, the deputy general counsel who left in July, leaving the corporate and securities wing of the legal department without a leader, a source at HP said.
Rank-and-file attorneys who jump ship can be hard to replace, said Harari, who is co-global leader of the in-house practice group for Major, Lindsey & Africa. But a high-profile opening at a troubled company can intrigue seasoned lawyers who are looking for a challenge. And a candidate's interest may be piqued if they are offered more money and influence perks that companies in crisis often dangle to sweeten the deal, Harari said.
"You can attract some very high-level talent if you are experiencing setbacks," Harari said. "We find that there are people who gravitate toward those turn-around situations."
Acquisitions can also trigger departures from in-house legal departments, Harari said. And HP has been highly acquisitive over the past decade. Adjunct law professor Guy Kelley, a longtime HP lawyer who left in 2008, hopes the Autonomy deal undermines the strategy of "buying innovation." Brigham thinks the process of integrating company after company made in-house lawyers' jobs harder, too.
"The 'HP way' was watered down a bit as they acquired companies," Brigham said. "As the management style changed, the issues that came up for the legal department changed."
Lawyers who remain at HP are working hard to move past the Autonomy debacle, a source at HP said. But Hardcastle, the former IP lawyer, thinks their performance is somewhat beside the point. HP needs better business decisions, not better legal advice, he said.
"Certainly, you have an avenue to prevent your client from acting illegally," he said. "But if they're going to do something that's legal but stupid, you might not get all that far."