Justice Department, fbi, House Panel to Examine 'Pretexting' Inquiry Tactics By jim carlton in San Francisco and john r. Emshwiller in Los Angeles September 12, 2006; Page A3

H-P's Leak Probe Comes Under Wider Scrutiny

Justice Department, FBI,
House Panel to Examine
'Pretexting' Inquiry Tactics

By JIM CARLTON in San Francisco and JOHN R. EMSHWILLER in Los Angeles
September 12, 2006; Page A3
The Justice Department has joined a probe of potentially illegal tactics by Hewlett-Packard Co. in investigating leaks by its board of directors.

A spokesman for the U.S. Attorney's Office for the Northern District of California yesterday confirmed that his office and the Federal Bureau of Investigation are probing the "processes employed" in the H-P leak investigation. Separately, a House committee said it is seeking information from H-P about the matter, including the identity of private investigators that H-P has said it used in the investigation, which involved accessing the private phone records of board members and nine journalists.

WHO'S WHO IN THE SCANDAL

 

See profiles of H-P Chairman Patricia Dunn, former director Thomas Perkins and other key players in the leak-probe controversy.

• Complete coverage 

The inquiries were disclosed ahead of the second phase of a closely watched H-P board meeting, which adjourned Sunday and resumed last evening. The directors were expected to discuss the investigation and its potential fallout, including questions about the role of Chairman Patricia Dunn and senior company executives in authorizing and conducting the probe.

The focus of the government inquiries is an H-P investigation that was requested by Ms. Dunn in 2005 and intensified in early 2006. That company probe involved a practice known as "pretexting," in which a person's private phone records are obtained by someone impersonating them.

The Palo Alto, Calif., computer and printer maker has disclosed that it hired a private-investigation firm to carry out the inquiry and the firm, still unidentified, hired a second firm that used pretexting to obtain phone records. Ms. Dunn has said she knew directors' phone records were being scrutinized, but didn't realize those records had been obtained improperly.

According to two people close to H-P, one reason for the board's adjournment Sunday was discussion about whether former director Thomas Perkins should be asked to rejoin the board. Mr. Perkins resigned last spring to protest the investigation of the leaks. Since then, the wealthy venture capitalist has suggested that directors remove Ms. Dunn as chairman and put him back on the board, according to these people familiar with the situation.

"He gets his prestige from sitting on corporate boards" and being an H-P board member was very important to him, one knowledgeable individual said. He was surprised when the board accepted his resignation, this person added.

However, Mr. Perkins's spokesman, Mark Corallo, said, "Tom Perkins will not return, even if asked, to the board of H-P. He remains steadfastly loyal to H-P and is motivated only by the company's best interests." As for Ms. Dunn, she has said she will resign if the board requests it. Both people close to H-P said the board has been cool to the idea of Mr. Perkins returning as an H-P director. It is unclear whether the board will ask Ms. Dunn to resign as chairman, director or both.

California Attorney General Bill Lockyer has said a crime was likely committed in the H-P probe, although his office has yet to determine who committed it. A spokesman for Mr. Lockyer's office yesterday said two potential felonies could be involved -- illegally accessing and using computer data and accessing personal-identification information and using it for illegal purposes, such as illegally accessing computer data.

Each of those crimes carries a maximum of three years in prison and a $10,000 fine. A person could be charged with multiple counts of the same crime, which presumably could happen because numerous individuals had their private records accessed.

The state agency could bring civil suits against individuals. The spokesman said there were various possible statutes under which to bring such actions. For instance, someone could be charged with unlawful business practices. Each violation of that statute carries a $2,500 fine.

FBI Deputy Director John Pistole told the Associated Press that the bureau opened its probe yesterday and was investigating two possible crimes: illegal computer intrusion and wiretapping. Under federal law, improperly obtaining personal phone records could be seen as a violation of the Federal Trade Commission Act, which attempts to protect consumer information. Regulations of the Federal Communications Commission require companies to keep customer information private.

But federal law may not be completely clear.

Late Friday, leaders of the House Judiciary Committee sent a letter to Senate Majority Leader Bill Frist urging him to move legislation stalled in the Senate that would make pretexting a federal crime. That legislation passed the House in April although a similar bill remains stalled there. In the letter, the lawmakers cited a letter by Larry Sonsini, H-P's outside attorney, reportedly suggesting that using pretexting services wasn't clearly illegal.

"If an attorney of Mr. Sonsini's caliber...believes that pretexting is not already a crime, then the time has come to clearly and unambiguously make such activity illegal," the lawmakers wrote.

On top of whatever federal statutes may have been broken, prosecutors could pile on conspiracy-related charges that could trigger a minimum of five years imprisonment, said Behnam Dayanim, a partner and privacy specialist in the Washington office of the international law firm Paul Hastings.

To put together a case, Mr. Dayanim added, investigators would have to first show records were accessed without proper authorization. Then, they would have to determine how much knowledge each of the parties had that a crime was taking place. H-P might argue that it wasn't aware of what activities were conducted by the private investigators.

The investigators could be asked to cooperate in showing the company was aware of the tactics, in exchange for lighter prosecution, he said. "This isn't a complex case," Mr. Dayanim said. "It will be a matter of proving what was done."

The Securities and Exchange Commission has asked H-P about a disclosure in May regarding Mr. Perkins's resignation. H-P didn't disclose a reason for the resignation, and has said it believes its disclosures about the matter were appropriate. Mr. Perkins has raised questions about that assertion, in view of the fact that he had disagreements with Ms. Dunn and resigned in connection with the investigation.

Mr. Perkins has disclosed that he asked federal prosecutors to look into the probe's tactics, and approached the FTC and FCC. The FCC on Thursday asked AT&T Inc., one of the phone carriers involved in the investigation, about possible improprieties linked to H-P's probe, a person familiar with the matter said.

Meanwhile, House Energy and Commerce Committee Chairman Rep. Joe Barton (R., Texas) and Rep. John Dingell (D., Mich.), the panel's senior Democrat, asked Ms. Dunn to identify firms or people hired to obtain directors' and journalists' phone records. "The committee is troubled by this information, particularly given that it involves H-P -- one of America's corporate icons -- using pretexting and data brokers to procure the personal telephone records of the members of its board of directors and of other individuals without their knowledge or consent," the letter said.

---- Peter Waldman, Amy Schatz and Joann S. Lublin contributed to this article.



Boardroom Fallout
Dunn Resigns as H-P Chairman
Amid Furor Over Phone Probes

CEO Hurd to Take Her Post;
California's Lockyer Warns
Insiders May Be Charged

Role of a Boston Investigator

By PETER WALDMAN and JOANN S. LUBLIN
September 13, 2006; Page A1

Hewlett-Packard Co. named Chief Executive Officer Mark Hurd to succeed its embattled chairman, but the computer maker faced a graver legal threat as California's attorney general said he has enough evidence to bring criminal charges against people at the company.

Mr. Hurd will succeed Patricia Dunn, H-P's nonexecutive chairman, in mid-January 2007. Her efforts to catch boardroom leakers last year led the Palo Alto, Calif., company to hire a contractor that scrutinized the private phone records of H-P's own directors and nine journalists.

H-P has said those records were improperly obtained by outside investigators through the use of "pretexting," or masquerading as the directors and journalists in order to request their records from phone companies. Mr. Hurd and Ms. Dunn apologized for the company snooping yesterday, though Ms. Dunn reiterated boardroom leaks had been a substantial problem for H-P.

In addition, H-P said George Keyworth, a former presidential science adviser and H-P's longest-serving director, resigned from the board. Mr. Keyworth was identified in Ms. Dunn's probe as a leaker of information to the press.

A spokesman for California Attorney General Bill Lockyer, confirming a remark made by Mr. Lockyer in an interview on the NewsHour with Jim Lehrer, said state investigators have "sufficient evidence to bring criminal charges against individuals inside Hewlett-Packard as well as outside the company." In the interview, Mr. Lockyer said: "People's identities were taken falsely, and it's a crime. People accessed computer records that have personal information. That's a crime."

CAST YOUR VOTE

 

Has H-P reacted appropriately since the pretexting controversy became public? Join a discussion.

Yesterday's resignations reflected a tense compromise worked out among some of H-P's disaffected board members, brokered by Mr. Hurd and H-P's outside attorney, Lawrence Sonsini. The compromise addressed the bitter infighting on H-P's board but it failed to deal with many of the questions that lie behind a host of investigations, including Mr. Lockyer's.

Among the welter of questions still unanswered: Besides Ms. Dunn, who knew within the company and the board that personal phone records were being scrutinized? Why didn't that practice raise alarm bells, even if it wasn't clear that the records were obtained via "pretexting"? Why didn't Mr. Hurd, who was given the results of the investigation two months before they were presented to the board in May, kill the probe before it blew up?

An H-P spokesman said Mr. Hurd focused only on the leaker when he first heard the results, not the methods used in the investigation. The CEO found out only in recent weeks that pretexting was involved and that journalists were targeted, and he worked with the board to turn the matter over to outside lawyers for investigation, the spokesman said.

People familiar with the matter said H-P has told them one of the outside investigators it used is Ronald R. DeLia of a small Boston firm called Security Outsourcing Solutions Inc. (See related article.) An H-P spokesman reiterated that the company isn't commenting on who did its investigative work.

The H-P board met by phone Sunday morning and the meeting ended inconclusively after about three hours. The directors couldn't figure out how to satisfy both Ms. Dunn and her two main adversaries -- Mr. Keyworth and Thomas Perkins, a venture capitalist and former H-P director.

Outside the boardroom on Sunday and Monday, negotiations continued among high-powered lawyers representing the principals. The board reconvened Monday night with Ms. Dunn apparently resistant to the notion of her stepping down.

To break the impasse, H-P agreed to issue two statements yesterday. In the first, H-P announced Ms. Dunn's resignation as chairman -- the main demand of the Keyworth-Perkins side. She will stay on as a director after the resignation takes effect in January. Ms. Dunn apologized for the methods used in the leak probe, saying they "went beyond what we understood." She defended the probe itself as an "important investigation that was required after the board sought to resolve the persistent disclosure of confidential information from within its ranks."

The second H-P statement, delayed several minutes yesterday morning as the lawyers haggled over final wording, announced Mr. Keyworth's resignation. It included explicit regrets from Mr. Hurd and Ms. Dunn for violating the privacy of Messrs. Keyworth and Perkins. The two are old friends, and Mr. Perkins resigned from H-P's board in May to protest the leak investigations.

The second statement also described Mr. Keyworth's role in leakinginformation, without H-P authorization, to a reporter with CNET News in January. The statement said H-P's board recognized that Mr. Keyworth was trying to "further H-P's interests." The statement added that Mr. Keyworth often had met with reporters at H-P's request. He was described as "an important member of the H-P family."

H-P announced no action yesterday against Ann Baskins, its general counsel. Her office handled the leak investigation with outside private investigators. She is married to a partner at Wilson Sonsini, the company's outside law firm.

A U.S. House of Representatives committee is seeking information from H-P about the leak investigation, including the identity of private investigators that H-P used.

A spokeswoman for the Federal Bureau of Investigation said yesterday an investigation started by the agency on Monday hasn't determined whether anyone in the case violated federal laws. LaRae Quy, a special agent in the FBI's office in San Francisco, said the investigation is focused on how the confidential information was obtained, not on H-P itself. The FBI normally doesn't discuss ongoing investigations but made an exception because there is "such a national interest," Ms. Quy said. H-P says it is fully cooperating with all the investigations.

FROM TODAY'S PAPER

 

• How Lawyer's Push Led Probe Into Public Eye

 
• Business: A Step Back for Corporate Reform
 

Investors didn't seem worried about the remaining questions: H-P's stock rose 1.5%, amid broad gains in the market, and reached a five-year high. Since arriving at H-P, Mr. Hurd has overseen a surge in profit as the computer maker has won market share from rival Dell Inc.

As H-P's board deliberated, it had to wade through a thicket of legal and personality issues. It hesitated to disclose much about the privacy intrusions because of the active investigations by federal and state authorities. Meanwhile, Mr. Perkins and Mr. Keyworth, who is a protégé of the late H-P co-founder David Packard, were adamant that Ms. Dunn step down for triggering the leak probe and acting on the information gained via the privacy violations, people familiar with the discussions said.

Ms. Dunn said she would step down if asked but argued that she was only doing her job as chairman in ferreting out boardroom media leaks that could move stock prices and cause legal problems for H-P.

She had a particularly bad relationship with Mr. Perkins, the former H-P director. He accused her of betraying him by presenting the leak investigation to H-P's board in May rather than dealing with it more privately among a subset of the board, say people familiar with the situation. Other knowledgeable people say Ms. Dunn was told by Mr. Hurd and H-P's lawyers that she needed to present the information to the full board. Mr. Perkins went on to challenge H-P for its use of pretexting and hire his own lawyer.

Mr. Keyworth's associates have argued that the only evidence H-P has produced of Mr. Keyworth's leaking was the CNET story in January, which these people say was complimentary to H-P and didn't include many inside details. They say Mr. Keyworth felt that his long career in business and government was tarnished when he was branded a habitual leaker. His phone records were among those improperly scrutinized by H-P's investigators.

People close to Ms. Dunn have said there were a total of 10 leaks from late 2004 through March 2006, with seven of them linked to Mr. Keyworth. H-P hasn't gone that far in its public disclosures. A company Securities and Exchange Commission filing last week described "multiple leaks of confidential" information and said they dated "to at least 2005." The filing singled out Mr. Keyworth as a leaker, but it didn't say how often the company believed he had leaked information. The only incident of leaking H-P cited yesterday was the CNET article this year.

An executive familiar with H-P says leaks were a chronic problem before Mr. Hurd was named CEO in March 2005 but ceased as a major issue after that except for the CNET case. That leak disturbed top levels of H-P's management, said company spokesman Robert Sherbin, and prompted Ms. Dunn to reopen a previous leak investigation that had been inconclusive.

Mr. Keyworth declined to comment. An associate said he is particularly satisfied that Ms. Dunn is likely to spend much of her remaining four months as chairman in legal proceedings and hearings explaining -- and apologizing for -- H-P's intrusions of privacy.

H-P said that after Mr. Hurd assumes the chairman's post, the lead independent director on the board will be Richard Hackborn, who worked at H-P for 33 years and was a senior executive before retiring in 1993.

The carefully worded statements H-P issued yesterday also included a conciliatory message from Mr. Perkins: "I believe in HP. I believe in Mark Hurd. I applaud Jay Keyworth for his courage in stepping down today and thank Patricia Dunn for her grace in letting HP move on. This too shall pass."

--Don Clark and Jim Carlton contributed to this article.

Outside Counsel Who Gave

Green Light to Methods
Guides Crisis Board Session

By PETER WALDMAN and JOANN S. LUBLIN
September 12, 2006; Page A3

(See Corrections & Amplifications item below.)

Larry Sonsini, Hewlett-Packard Co.'s outside attorney who suggested in a June email that the company's controversial leak investigation was "within legal limits," has been guiding the H-P directors' emergency meetings on the crisis, according to people familiar with the situation.

Mr. Sonsini essentially ran long stretches of H-P's board meeting Sunday, when the directors conferred by phone over how to handle the investigation imbroglio, said the people familiar with the matter. He did so because H-P's nonexecutive chairman, Patricia Dunn, who launched the leak probe last year, recused herself from participating in the board's discussions of the issue, these people said.

After an inconclusive, three-hour phone call Sunday night, the board was scheduled to continue its phone deliberations last evening.

Mr. Sonsini, a longtime adviser to many of Silicon Valley's most venerable companies, may prove a controversial choice to help H-P's board with this matter, said experts.

In an email to a former H-P director in June, Mr. Sonsini wrote that the use of "pretexting," or obtaining personal phone records through false pretenses, was legal. In addition, Mr. Sonsini and his law firm, Wilson, Sonsini, Goodrich & Rosati, could figure in the investigations by state and federal law-enforcement officials of H-P's leak probe. That is because, at various times, Mr. Sonsini was involved in H-P's efforts to ferret out who on its board was leaking confidential information to the press.

"It is extremely uncommon" for a company's outside attorney to lead a board meeting, said Jeffrey Sonnenfeld, a leadership expert and a senior associate dean at Yale University's School of Management. In the case of Mr. Sonsini, he said, "The outside counsel is part of what's needed to be discussed along with the outside chairman [Ms. Dunn.] He should have recused himself and it should have been an executive session of just the outside board members."

Among potential conflicts of interest, Mr. Sonnenfeld added, are those that may arise because of the civil and criminal investigations of the H-P leak probe. Also, one of Mr. Sonsini's law partners is married to H-P's general counsel, Ann Baskins, whose office handled the controversial leak investigation with outside private investigators.

Mr. Sonsini did not return phone calls for this article. In an interview last week, Mr. Sonsini said his email opinion in June upholding the probe's legality was based on assurances he had received from an H-P lawyer. Courtney Dorman, a spokeswoman for Wilson Sonsini, said the law firm was not involved in the part of the H-P leak probe that included pretexting. She said Mr. Sonsini's legal opinion on the matter was given before the firm was formally engaged by H-P to review the leak investigation.

Wilson Sonsini's review eventually concluded that pretexting, at the time of H-P's investigation, was "not generally unlawful," although the firm said it couldn't be certain that H-P's outside investigators "complied in all respects with applicable law," H-P said in a recent SEC filing.

H-P spokesman Robert Sherbin declined to comment on how the special board meetings are being run. He said in a prepared statement that H-P was not concerned about any conflicts of interest arising from the marriage of its general counsel, Ms. Baskins, with a partner at Wilson Sonsini. The statement said Ms. Baskins recuses herself from decisions about which work assignments go to Wilson Sonsini and from fee negotiations with the firm. Her husband, the statement said, does not work on H-P matters.

Write to Peter Waldman at [e-mail] and Joann S. Lublin at [e-mail]

Corrections & Amplifications:

Larry Sonsini, Hewlett-Packard Co.'s outside attorney, suggested in a June email that H-P's board-leak investigation was "within legal limits." As reported, his firm, Wilson Sonsini Goodrich & Rosati, said Mr. Sonsini sent that email before H-P engaged his firm to review the leak investigation. The headline in this article incorrectly reports that Mr. Sonsini gave a "green light" to "pretexting," or obtaining personal phone records through false pretenses.

Expanding Investigations

Increase the Heat on Dell

By CHRISTOPHER LAWTON
September 12, 2006; Page B1

The hole for Dell Inc. seems to keep getting deeper.

The computer maker said it would delay filing its fiscal second-quarter report because of a widening Securities and Exchange Commission investigation and its own probe into its financial accounting. Dell also said it has been subpoenaed by the U.S. attorney for the Southern District of New York over its financial reporting.

The news increases the spotlight on Dell's reporting methods and could spell more trouble for chief executive Kevin Rollins.

When Dell disclosed the SEC investigation in August, the Round Rock, Texas, company said it didn't think the investigation would materially affect its financials; now Dell isn't ruling out needing to restate prior results. The subpoenas from the U.S. attorney, which has requested documents related to Dell's financial reporting from 2002 to the present, hadn't previously been disclosed.

Dell was also forced to take two other embarrassing steps yesterday.

It suspended its share-buyback program until further notice. The company spent $7.2 billion to repurchase 204 million shares in fiscal year 2006, which ended in February. In addition, Dell canceled its financial-analysts' day for the second time this year; the meeting with Wall Street analysts was to have taken place in New York tomorrow.

Yesterday, Dell shares slid 2.1%, down 46 cents to $21.19 at 4 p.m. in Nasdaq Stock Market composite trading. Dell shares have declined by nearly 30% this year.

Analysts said the investigations, along with the company's plunging stock price, increase the pressure on Dell's management, in particular Mr. Rollins and chief financial officer Jim Schneider. Questions may also arise for Dell's independent auditing firm PricewaterhouseCoopers LLC.

"A big part of this is it further undermines management credibility, which is already very low," said Toni Sacconaghi, analyst with Sanford C. Bernstein & Co. "Certainly the finger is going to be pointed most squarely at Kevin Rollins and CFO Jim Schneider."

Founder Michael Dell, who remains Dell's chairman, said in a statement that the company was cooperating with the investigators.

"We will take any appropriate remedial or corrective actions to address any problems," he said in the statement. The company declined to make any further comment.

The intensifying investigations are the latest setbacks for Dell.

Over the past year, Dell -- the world's largest personal-computer maker measured by units shipped -- has seen its sales and profits slow and competition ramp up from rivals such as Hewlett-Packard Co. The company also announced a battery recall, involving millions of laptops, last month, because of a potential fire hazard.

Dell was already being investigated by the SEC for the timing with which it recorded its revenue. Yesterday, Dell said in a statement that the investigations indicated potential issues "relating to accruals, reserves and other balance sheet items." The company said it is working with its audit committee and independent auditors to determine whether it has to restate its prior results.

Companies use accruals and reserves when they sell services but deliver them at a later date. In Dell's case, the company typically sets aside funds from current operations to cover the cost of future warranty claims.

Dell said that in responding to the SEC in mid-August, it discovered information that "raises potential issues" related to the fiscal years before 2006. Dell management then recommended that its board audit committee investigate the matter, according to the statement.

"We have not yet reached any conclusion on materiality as to these issues," said Don Carty, a Dell director who is chairman of the audit committee, in the statement. "We are continuing to investigate the matter fully." The other members of Dell's audit committee are William H. Gray III, former president and chief executive of the United Negro College Fund, and Sam Nunn, a former Georgia senator who is now CEO of the Nuclear Threat Initiative.

While Dell declined to give any other details of its possible financial misstatements, accounting experts said the company could potentially have engaged in "cookie-jar reserves," which have also been seen at Xerox Corp. and Sunbeam Corp.

When using "cookie-jar reserves," a company is in effect creating a rainy day fund by setting up excess provisions on its balance sheet for future expenses that it doesn't truly expect to incur. It can then dip into the jar in leaner times to create the appearance of profit.

In a report in November, accounting expert Albert Meyer, then at research firm 2nd Opinion Research, wrote that he found one "cookie-jar reserve" that Dell created following its fiscal 2005 results. In that instance, Dell repatriated $4.1 billion in foreign earnings in its fiscal 2005.

The repatriation tax charge is 5.25%, meaning the tax provision Dell should have taken would have amounted to $215 million.

Instead, Mr. Meyer said in his report, the company accrued $280 million, resulting in a $65 million "cookie jar." Such a tactic could have added 5% to Dell's earnings-per-share growth rate in fiscal 2006, Mr. Meyer calculated.

"They overaccrued," Mr. Meyer -- now president of money-management firm Bastiat Capital in Plano, Texas -- said in an interview. In his report, he wrote that such a tactic "smells."

While most of the current attention at Dell is on Mr. Rollins, Mr. Dell, who founded Dell out of his University of Texas dorm room in 1984, isn't escaping notice either. In asking for documents going back to 2002, the U.S. attorney's office is scrutinizing a period when Mr. Dell was CEO of the firm. Mr. Rollins was appointed Dell CEO in 2004.

Shannon Cross, analyst with Cross Research, said the news would add "a layer of uncertainty" to the stock, making it harder for investors to buy into Dell.

"I think there are a number of changes that need to be made at Dell, and we need to get a good idea of what the strategy is on an ongoing basis," she said.

Board Members

At Bristol-Myers
Told to Fire CEO

Monitor Says Dolan Broke
Deferred-Prosecution Deal;
Directors Will Meet Today

By JOHN CARREYROU and BARBARA MARTINEZ
September 12, 2006; Page A1

Directors at Bristol-Myers Squibb Co. head into a board meeting today facing heavy pressure to fire Chief Executive Officer Peter R. Dolan and the drug maker's general counsel after a federal monitor overseeing the New York company urged their dismissal last night.

The board, which already was expected to discuss Mr. Dolan's fate at its meeting today after the latest in a long string of missteps, has little choice but to accept the monitor's recommendation. Bristol-Myers is operating under the terms of a deferred-prosecution agreement reached with the U.S. Attorney in New Jersey last year following a three-year investigation into a $2.5 billion scandal at the company involving "channel stuffing," or overloading wholesalers with inventory to meet quarterly sales targets. If the board refuses to fire Mr. Dolan, the company could face charges in connection with the probe.

The Bristol-Myers monitor, former federal Judge Frederick B. Lacey, recommended to a special session of the company's board late yesterday that it terminate Mr. Dolan and Bristol-Myers General Counsel Richard Willard, according to a person familiar with the matter. The meeting was attended by the U.S. Attorney for New Jersey, Christopher Christie, who appointed Mr. Lacey last year in the settlement agreement.

MORE ON PLAVIX

 

• Page One: How Bristol-Myers Fumbled Defense of Plavix

09/02/06
 
• Bristol-Myers Adjusts Its Earnings Forecast
09/02/06
 
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• Heard on the Street: Plavix Has CEO in Hot Seat
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Mr. Lacey made his recommendation after finding Bristol-Myers's actions in pursuing a pact to delay generic competition to the company's best-selling drug, the blockbuster blood-thinner Plavix, violated the terms of the deferred-prosecution agreement, the person said. It wasn't clear what specific actions Mr. Lacey was concerned about, but companies under such agreements are broadly expected to be on their best behavior. The Plavix deal unraveled after the Justice Department's antitrust unit opened a criminal probe into it and the Federal Bureau of Investigation raided Mr. Dolan's office in July.

A spokesman for Bristol-Myers declined to comment last night. Messrs. Dolan and Willard weren't available to comment, the spokesman said.

Mr. Dolan's removal would mark the third ouster of a chief executive of a big U.S. drug company in the past 16 months, underscoring the difficulties facing an industry reeling from an unprecedented number of patent expirations, increasing litigation costs and heightened competition from nimble generic-drug makers. Though still highly profitable, branded-drug makers also face financial pressure from pharmacy-benefit managers, who use their negotiating power and quick access to new generic pills to leverage lower drug prices.

Merck & Co., Whitehouse Station, N.J., last year pushed then-CEO Raymond Gilmartin into early retirement after withdrawing the painkiller Vioxx from the market in 2004. Pfizer Inc., the world's biggest drug maker, ousted Henry McKinnell in late July, replacing him with a former lawyer. As at Bristol-Myers, the stocks of both companies have been battered in the past two years.

Under the terms of its deferred-prosecution agreement, by which it avoided charges of conspiracy to commit securities fraud, Bristol-Myers was supposed to stay out of trouble for two years to avoid an indictment. The agreement, which gave Mr. Lacey unusually broad oversight powers, also forced Mr. Dolan to surrender his chairman title to a senior member of the Bristol-Myers board, James B. Robinson III.

Mr. Lacey, who was appointed to monitor the drug maker for two years through next April, has been attending all the company's board meetings and filing regular reports to Mr. Christie. As part of the agreement, he was given free reign to recommend changes at the company to keep it within bounds.

The board's only recourse if it disagrees with Mr. Lacey's recommendations is an appeal to Mr. Christie. Mr. Lacey briefed Mr. Christie and obtained his backing before speaking to the board about Mr. Dolan, said the person familiar with the situation.

Mr. Dolan's handling of Plavix already had put him on shaky ground with the board. After learning that the company's Plavix cash-cow was under threat from generic competition, he negotiated a deal that would have paid Canada's Apotex Inc. tens of millions of dollars to delay its introduction of a copycat drug. That pact, aimed at settling Apotex's legal challenge of the Plavix patent, unraveled in late July when the Department of Justice's antitrust division opened an investigation into it and state attorneys general rejected it.

In filings to the federal court in New York overseeing the patent litigation, Apotex has alleged that Bristol-Myers struck a verbal side agreement with it during the settlement negotiations that it then hid from regulators. A lawyer for Bristol-Myers has denied this to the court and has suggested that Apotex fabricated the allegation to torpedo the settlement.

In the meantime, Apotex used binding concessions it obtained during the negotiations to launch a knockoff version on Aug. 8, after the deal was rejected by regulators. The generic version quickly conquered 75% of the market, costing Bristol-Myers as much as $600 million in lost sales. The court overseeing the patent case ordered Apotex to stop selling the generic version on Aug. 31, but didn't force it to recall the product already in the distribution channel.

Bristol-Myers pursued the deal with Apotex even though U.S. regulators have been hostile to such agreements on the grounds that they hurt consumers by keeping lower cost versions of life-saving drugs off the market. The Federal Trade Commission has criticized similar deals and has fought one of them all the way to the U.S. Supreme Court.

The Bristol-Myers board already planned to discuss Mr. Dolan's future at its regularly scheduled meeting today, even before Mr. Lacey convened a special session yesterday. The board had become worried that the Plavix debacle, coming on top of a series of other controversies during Mr. Dolan's five-year tenure, had so angered shareholders that it was impairing his ability to lead the company effectively. Bristol-Myers shares have fallen nearly 60% since Mr. Dolan became CEO in May 2001.

Nine board members attended last night's special session, according to a person familiar with the matter. No one from management was there, though two lawyers, Mary Jo White and Kenneth Conboy, were on hand to advise the board. After Mr. Lacey briefed board members and issued his recommendation, Mr. Christie spoke to the board and signaled he supported Mr. Lacey's recommendation. The recommendation to fire the two executives "was made from a corporate-governance perspective in the handling of the patent issue over Plavix," the person familiar with the matter said, declining to provide further details.

If Mr. Dolan does go, the board is unlikely to name a permanent successor to Mr. Dolan immediately because it doesn't have a succession plan in place and no executive inside the company is thought to be experienced enough to be CEO, say people familiar with the board's thinking.

Instead, directors might name one of Mr. Dolan's lieutenants to lead the company on an interim basis while they search for a permanent successor. Among the executives the board could appoint to handle the transition are: Andrew Bonfield, the chief financial officer; research chief Elliott Sigal; Anthony Hooper, head of U.S. pharmaceuticals; and Lamberto Andreotti, head of world-wide pharmaceuticals.

Among the potential candidates to succeed Mr. Dolan is Karen Katen, Pfizer's former co-vice chairman and head of human health who lost out in a horse race to succeed Mr. McKinnell, say people familiar with the matter.