## Facts

- Hewlett-Packard Company (HP), a Delaware issuer, operated through indirect wholly owned subsidiaries, including HP Russia, HP Poland, and HP Mexico.
- From approximately 2003 to 2010, employees, agents, and intermediaries at those subsidiaries made improper payments and provided things of value to foreign government officials to obtain or retain public-sector business.
- In Russia, funds were routed through agents and shell companies in connection with a contract involving the Office of the Prosecutor General of the Russian Federation.
- In Poland, HP Poland provided cash and gifts to a government official associated with the national police to obtain and maintain contracts.
- In Mexico, HP Mexico paid more than $1 million in inflated commissions to a consultant tied to officials at a state-owned enterprise (Pemex), and funds were routed in a manner that facilitated payment to an official.
- The subsidiaries concealed the nature of the payments by recording them as legitimate expenses (e.g., consulting/services, commissions, or travel), causing false entries that rolled into HP’s consolidated books and records.
- The SEC found HP earned approximately $29 million in profits attributable to the improper conduct.
- The SEC instituted a cease-and-desist proceeding under Exchange Act § 21C; HP settled by consenting without admitting or denying the findings (except jurisdiction).

## Issues

1. Whether HP violated Exchange Act § 13(b)(2)(A) by failing to make and keep books, records, and accounts that accurately and fairly reflected transactions and dispositions of assets.
2. Whether HP violated Exchange Act § 13(b)(2)(B) by failing to devise and maintain internal accounting controls sufficient to provide reasonable assurances that transactions were authorized and properly recorded.
3. Whether improper payments made by foreign subsidiaries, when mischaracterized in subsidiary accounts that are consolidated into the issuer’s financial records, can support parent-level liability for accounting and controls violations.

## Decision

- The SEC found HP violated Exchange Act § 13(b)(2)(A) (books and records) and § 13(b)(2)(B) (internal accounting controls).
- The SEC ordered HP to cease and desist from committing or causing violations of those provisions.
- The SEC ordered disgorgement of approximately $29 million plus prejudgment interest, totaling roughly $31.5 million.
- The SEC required compliance-related undertakings, including enhancements to anti-corruption/internal-controls measures and periodic reporting to the SEC for three years regarding remediation and any credible evidence of additional questionable payments.

## Legal Principles

- An issuer violates Exchange Act § 13(b)(2)(A) when transactions are inaccurately recorded, including when improper payments are booked as legitimate business expenses such as consulting fees, commissions, or travel.
- An issuer violates Exchange Act § 13(b)(2)(B) when internal accounting controls do not provide reasonable assurance that transactions are executed with authorization and recorded to permit accurate reporting, including where third-party relationships and payment processes permit improper payments.
- Parent-level liability for accounting and controls provisions may rest on false subsidiary entries that flow into the parent issuer’s consolidated books and records.
- Use of agents, consultants, and shell entities without effective vetting, monitoring, and controls can evidence internal-controls deficiencies when those relationships facilitate improper payments.
- Disgorgement and interest may be imposed to deprive an issuer of profits obtained through business linked to improper payments, even where the misconduct occurred at foreign subsidiaries.

## Conclusion

The SEC concluded that improper payments made through HP’s foreign subsidiaries were concealed through false accounting entries and weak controls, resulting in violations of the Exchange Act’s books-and-records and internal-controls provisions; HP was ordered to cease and desist, disgorge profits with interest, and implement compliance reporting undertakings.


In re Hewlett-Packard Co., Exchange Act Release No. 71916 (Apr. 9, 2014)