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Cement & Concrete Workers District Council Pension Fund v. Hewlett Packard Co.

United States District Court, N.D. California

August 9, 2013

CEMENT & CONCRETE WORKERS DISTRICT COUNCIL PENSION FUND, et al., Plaintiffs,
v.
HEWLETT PACKARD COMPANY, et al., Defendants

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For Cement & Concrete Workers District Council Pension Fund, Plaintiff: Ira M. Press, LEAD ATTORNEY, Kirby McInerney LLP, New York, NY; Lionel Z. Glancy, Robert Vincent Prongay, LEAD ATTORNEYS, Glancy Binkow & Goldberg LLP, Los Angeles, CA; Sarah G. Lopez, LEAD ATTORNEY, PRO HAC VICE, New York, NY.

For Retail Wholesale & Department Store Union Local 338 Retirement Fund, Plaintiff: Ira M. Press, LEAD ATTORNEY, Mark Allen Strauss, Sarah G. Lopez, Kirby McInerney LLP, New York, NY; Robert Vincent Prongay, Lionel Z. Glancy, LEAD ATTORNEYS, Glancy Binkow & Goldberg LLP, Los Angeles, CA.

For Hewlett Packard Company, Defendant: Diane Leslie Webb, LEAD ATTORNEY, Andrew Michael Purdy, Joseph Edward Floren, Kimberly Alexander Kane, Morgan, Lewis & Bockius LLP, San Francisco, CA; Karen A. Pieslak Pohlmann, Marc J. Sonnenfeld, LEAD ATTORNEY, PRO HAC VICE, Morgan Lewis and Bockius LLP, Philadelphia, PA.

For Mark Hurd, Defendant: Lawrence David Lewis, LEAD ATTORNEY, Dwight Ludden Armstrong, Keith Paul Bishop, Allen Matkins Leck Gamble Mallory & Natsis LLP, Irvine, CA; Amy Wintersheimer Findley, Allen Matkins Leck Gamble Mallory & Natsis LLP, San Diego, CA.

OPINION

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ORDER GRANTING MOTIONS TO DISMISS

JON S. TIGAR, United States District Judge.

In this securities fraud suit, Defendants Hewlett Packard Co. and its former CEO, Mark Hurd, move to dismiss for failure to state a claim pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4. Because the First Amended Complaint fails to satisfy the materiality and falsity requirements for a securities fraud claim, the Court will grant the motions with leave to amend.

I. FACTUAL ALLEGATIONS

Lead Plaintiff Cement & Concrete Workers District Council Pension Fund's operative First Amended Complaint, ECF No. 33 (" FAC" ), filed on behalf of a class of purchasers of Defendant Hewlett Packard Co.'s stock who purchased between November 13, 2007, and August 6, 2010, and held the shares as of August 6, 2010, alleges that HP and its former Chairman, President, and CEO Mark Hurd committed securities fraud in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (15 U.S.C. § § 78j(b), 78t(a)), and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission (17 C.F.R. 240.10b-5).

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A. The 2006 Scandal

The FAC alleges that HP was embroiled in an ethics scandal in 2006 arising out of information leaks that implicated several HP executives and members of its board of directors. FAC ¶ 3-4. HP's then-Chairman and General Counsel were both prosecuted for their role in the scandal. Id. ¶ 22. Defendant Mark Hurd had become CEO in 2005 and was not implicated; instead, " he emerged with his reputation for integrity not only intact, but made all the stronger for it." Id. ¶ 22. HP's shares " remained buoyant" during the scandal because of the concurrent increase in the profitability of its main business and increased market share. Id. ¶ 23. At that time, Wall Street generally approved of CEO Hurd's efforts " to reshape the management team, improve morale and cut costs," as well as his implementation of strategies that resulted in HP's increase in market share. Id. However, when Hurd was implicated on September 21, 2010, as a potential target in the 2006 scandal, HP's stock price dropped 5.19 percent. Id. ¶ 24. The Complaint alleges that Hurd's reputation for integrity was a material factor in HP's success following the scandal. Id. 23-25. Hurd testified before Congress, issued press releases, briefed investors, and sent public letters to HP employees in an effort to restore public trust. Id. ¶ 23-28.

B. Hurd's Departure

HP retained Jodie Fisher as an independent consultant in the fall of 2007 to help host executive events and introduce Hurd to important HP customers at hotel receptions around the world. Id. ¶ 34. Fisher's contract was terminated in November 2009. Id. On June 29, 2010, Fisher's attorney sent HP a letter containing allegations that Hurd had sexually harassed Fisher and that her contract was terminated because she refused his sexual advances. Id. ¶ 36. The letter also alleged that in March 2008, Hurd disclosed to Fisher HP's plans to acquire Electronic Data Systems (" EDS" ) at a time that the information was confidential. Id. HP's Board of Directors immediately initiated an internal investigation into the allegations. Its results were presented to the board on July 28, 2010. Id. ¶ 38. The investigation revealed that Hurd had filed inaccurate expense reports, and that there were factual inaccuracies in the account Hurd initially gave to directors regarding the allegations. Id. Hurd initially claimed not to know Fisher well and to be ignorant of her pornographic career. An investigation revealed, however, both that Hurd was aware her prior career and that, as he eventually admitted, he and Fisher had a " very close personal relationship." Id.

The investigation did not reveal evidence supporting Fisher's allegations concerning sexual harassment or insider trading with respect to the EDS acquisition; however, the investigators did not interview Fisher or her attorney. Id. ¶ 39. On July 29, 2010, the board agreed to disclose Fisher's allegations to the public as well as part of the investigation's results, " having concluded that Hurd had irreparably comprised [sic] the board's trust by misleading directors." Id. ¶ 40. HP announced Hurd's resignation on August 6, 2010. The press release included a statement from Hurd in which he stated: " I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP and which have guided me throughout my career . . . ." Id. ¶ 42. At that time, HP's general counsel revealed some of the investigation's findings, including that Hurd hired Fisher without disclosing their personal relationship to the Board, that there were numerous instances in

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which Fisher received compensation or expense reimbursement where there was not a legitimate business purpose, and that Hurd submitted numerous inaccurate expense reports that were intended to or had the effect of concealing his relationship with Fisher. Id. ¶ 44.

Wall Street and the press reacted strongly to Hurd's departure. One Wall Street Journal Article stated: " 'The scandal brought to a surprising end the tenure of a CEO who has placed great emphasis on upgrading H-P's ethics standards. Mr. Hurd had pledged to make the company's code of business conduct stronger following a 2006 boardroom investigation that triggered the departure of then-HP chairwoman Patricia Dunn.'" Id. ¶ 46. HP's share price fell 8.2% on the first trading day after the announcement, and one week later had dropped 12.6%. The day of the announcement, HP's stock was trading at approximately $46. As of the filing of the First Amended Complaint, it traded at approximately $14, a 69% decline. Id. ¶ 48. An April 27, 2011 article concluded: " 'it seems safe to say that Hurd's departure from HP has cost the company's shareholders at least $10 billion and probably a lot more.'" Id. (quoting Blodget, Henry, businessinsider.com (April 27, 2011)).

C. Alleged Securities Fraud

The FAC alleges that HP and Hurd made false and misleading statements when they (1) issued and updated HP's Standards of Business Conduct Brochure (SBC) in 2006, May 2008, and June 2010, and (2) approved and issued SEC Forms 10-K and 10-Q throughout the class period that contained a " Risk Factors" section stating the risk of losing key personnel.

The FAC does not contain any detailed allegations regarding the 2006 SBC. Plaintiff alleges that in May 2008, Hurd and HP amended the SBC to restore confidence following the 2006 scandal. In the 2008 SBC, Hurd issued an opening statement in which he expressed his commitment " to build trust in everything we do by living our values and conducting business consistent with the high ethical standards embodied within our SBC." Id. ¶ 52. The 2008 and 2010 SBCs outlined a number of ethical rules that Plaintiff alleges Hurd violated through his relationship with Fisher. Id. ¶ 53. Some of the ethical guidelines are specific; others, more general and aspirational. For example, the SBC provides both that " We are open, honest, and direct in all our dealings," and that " We maintain accurate business records . . . that accurately reflect the truth of the underlying transaction or event." Id. It is clear from the allegations of the FAC that the SBC is directed primarily at HP's employees, though the FAC alleges that the intended audience of the 2008 and 2010 SBC amendments also included Wall Street and HP's shareholders and potential investors.

As to the SBCs, Plaintiff alleges: " These statements were misleading because in light of Hurd's endorsement of these tenets, there was an implication that Hurd was in fact in compliance with them. In truth, Hurd was knowingly violating each of these tenets in his dealings related to Fisher, by (a) inappropriately using his position as CEO to attempt to pursue a romantic relationship with Fisher, (b) submitting expense reports that did not accurately reflect their meetings, and (c) knowingly allowing Fischer to receive compensation and/or expense reimbursement where there was not a legitimate business purpose." Id. ¶ 56.

Plaintiff also alleges that the following passage, included in the " Risk Factors" section of HP's class period Form 10-Ks and the " Factors that Could Affect Results"

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section of HP's class period Form 10-Qs, which was added to each form following the 2006 scandal, was false and misleading:

In order to be successful, we must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and IT support positions. Hiring and retaining qualified executives, engineers, skilled solutions providers in the IT support business and qualified sales representatives are critical to our future, and competition for experienced employees in the IT industry can be intense. The failure to hire ...

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