The Hewlett-Packard spying scandal has produced its firstshareholder suit, which was filed two months ago by notedplaintiffs' attorney William Lerach.

But the question remains whether the action should beinterpreted as stemming from a unique and headline-friendly set ofcircumstances, or whether it is a product of a new atmosphere ofboardroom turmoil, which should, in turn, have directors andofficers liability insurers concerned about a new spate ofclaims.

The Lerach suit was filed in California Superior Court, SantaClara County, in September, asserting that the Silicon Valleyelectronics pioneer breached its fiduciary duty through illegalspying and the use of false “pretexts” to obtain directors' phonerecords in order to discover the source of leaks to reports aboutconfidential board business.

Separately, in October, California Attorney General Bill Lockyerfiled felony charges against former Hewlett-Packard ChairwomanPatricia C. Dunn and four other defendants, alleging they committedcriminal offenses related to the use of false pretenses to accessindividuals' phone records during the company's probe of boardroomleaks to the media.

Unlike the options timing scandal, which insurance executivesfeared could result in a rash of directors and officers suits, ifit turns out other companies were engaged in spying practicessimilar to HP, the HP shareholders lawsuit does not appear to bethe tip of any iceberg.

Peter Taffae, managing director for Los Angeles-basedExecutivePerils, sees the HP case as “unique.”

“It is a perfect storm. The stock is growing, the scandalbreaks, the stock takes a hit and the market cap drops,” Mr. Taffaesaid. “Whenever there is a scandal, Lerach and his buddies areexcited.”

Former HP Board Chairman Patricia Dunn and General Counsel AnnBaskins, who have already resigned, the suit alleges, should beforced to pay damages for their role in the scandal.

The suit is a so-called derivative action, which shareholdersfile on behalf of the corporation for damages incurred by theinjurious actions of the parties named.

Mr. Taffae said what makes derivative lawsuits particularlydangerous to insurers is that there is no deductible, and for theparties at fault, there is the potential to be forced to pay out oftheir own pockets if the Worldcom and Enron suits are anyguide.

The reason there is no retention, “with very few exceptions ofcertain states,” is that no corporation is permitted to indemnifyfor a derivative suit.

“The average derivative can be $25 million,” he said.

The scandal first became public in September, when news outletsreported Director Thomas Perkins' claims that he was pressured tosay his resignation was for personal reasons rather than to protestthe leak investigation.

According to the Lerach complaint, Boston-based contractorRonald DeLia used pretext to access board members' phone records tofind out who was leaking information to reporters.

Mr. Perkins and board member George Keyworth were among thetargets of the leak probe in addition to nine journalists they wereallegedly in contact with.

“As a result of the defendant's wrongful acts, HP is exposed tosubstantial criminal liability by Board members' illegal conductand millions of dollars in potential criminal and legal penalties,as well as the enormous expenses of dealing with the crisis,” thesuit alleges.

The suit tells of rivalries within the board, consisting forpeople loyal to Mr. Perkins, a longtime Silicon Valley pioneer, andthose loyal to then Chairman Dunn, which are at the heart of thescandal.

HP investigators typically used the last four digits ofdirectors' Social Security numbers to obtain phone records from thephone company, the suit claims.

While the HP case may be something of a “fluke,” Mr. Taffaeasserted, what is interesting is the fact that the general counseland the outside law firm got caught “red-handed.”

“Not only is HP a Fortune 500 company, but its law firm, WilsonSonsini, has some very deep pockets,” Mr. Taffae said.

What students of such suits will be watching in the HP case isthe dual role of Ann Baskins as both an officer of the company andits general counsel, he said.

“The directors and officers policy does not provide professionalliability [coverage]. It does not cover legal malpractice andsuch,” he said.

Thus, the HP carrier could use this dual role to deny coverage.“This capacity has always been an issue,” Mr. Taffae said.

The issue has arisen most often in leveraged buyout instances,when officers buy the company from shareholders and therefore havea grave conflict, since they are supposed to represent theirinterests, he said.

“Only time will tell what is going to happen,” Mr. Taffae said.“But I think this is something that every general counsel is goingto watch.”

And outside counsel will also more than likely take aninterest.

The Lerach suit alleges that since Attorney Larry Sonsini wasactively involved in the leak investigation that was at the heartof the scandal, the law firm's advice to the company not to pursuelegal action or full investigation would seem suspect.

While pretexting and director-on-director spying may presentunique circumstances, boardroom turmoil in general looks to a readysource of directors and officers suits in the coming years, saidone expert.

Kevin LaCroix, an insurance broker for Oakbridge Insurance inBeachwood, Ohio, who is also author of the D&O Diary blog,citied recent chief executive ousters at Bristol Meyers Squibb andPfizer, saying that such dismissals “involve not only the potentialfor board turmoil, distraction and adverse publicity, butincreasingly also present the possibility of D&Olitigation.”

The recent boardroom upheaval at the San Jose-basedsemi-conductor manufacturer Atmel illustrates the perils of the newera, according to Mr. LaCroix.

Five independent board members succeeded in firing ChiefExecutive George Perlogos, as well as three other executives onAug. 5 for alleged misuse of corporate travel funds. Mr. Perlogosimmediately filed suit asserting the firing would have adevastating impact on shareholder value.

Sarbanes-Oxley reforms have led to increased presence andactivism of independent directors who are less likely beholden tocompany management, as evidenced by the Atmel board, according toMr. LaCroix.

In addition, regulatory and investigative pressures have takentheir toll, leading to the removal of the chief executive officersof both Bristol Meyers Squibb and American International Group inrecent years.

“This atmosphere not only presents a challenge for corporateboards, but also represents an environment where allegations ofwrongdoing can more easily arise,” Mr. LaCroix said.

A recent ruling in the U.S. Court of Appeals, Second Circuit mayalso help stoke future independent director fires under management.The court ruled in favor of a process allowing shareholders to wagedirector election contests when they are unhappy with slates ofdirectors that corporations put up.

Almost as if on cue, three major public pension funds that aremajor HP investors in New York, Connecticut and North Carolina,filed a proposal seeking access to the Hewlett-Packard proxy.

“This is just one more element under the larger category ofshareholder independence that we are seeing today,” Mr. LaCroixsaid.

Art caption: The first shareholder derivative lawsuit filed inthe wake of the HP spying scandal alleges that former HP BoardChairwoman Patricia Dunn should be forced to pay damages for herrole.

Recent CEO ousters not only highlight the potential for boardturmoil, but increasingly also present the possibility of D&Olitigation.

Kevin LaCroix, Oakbridge Insurance

“It is a perfect storm. The stock is growing, the scandalbreaks, the stock takes a hit and the market cap drops. Wheneverthere is a scandal, [William] Lerach and his buddies areexcited.”

Peter Taffae, Executive Perils