Oracle's Chief in Agreement to Settle Insider Trading Lawsuit

["Miklos A. Vasarhelyi" <miklosv@andromeda.rutgers.edu>]

September 12, 2005

Oracle's Chief in Agreement to Settle Insider Trading Lawsuit

By JONATHAN D. GLATER

Lawrence J. Ellison, chief executive of

Oracle, has reached a tentative agreement under which he would pay
$100 million to charity to resolve a lawsuit charging that he engaged in
insider trading in 2001, a lawyer involved in the case said.

The unusual settlement, which requires the approval of Oracle's board and
could still break down, would be one of the largest payments made to
resolve a shareholder suit of this kind, known as a derivative lawsuit.
Typically in derivative lawsuits, damages are paid directly to the
company. Under the terms of the settlement, Mr. Ellison would designate
the charity and the payments, to be made over five years, would be paid
in the name of Oracle. It is unclear whether the payments would be
tax-deductible by Mr. Ellison.

The lawsuit charged that Mr. Ellison, known for his brash and combative
pronouncements, sold almost $900 million of shares ahead of news that
Oracle would not meet its expected earnings target. The same amount of
stock, after the announcement, was worth slightly more than half as much.

According to the court docket for the case, which was filed in Superior
Court in San Mateo, Calif., a hearing on the settlement - which requires
court approval - is scheduled for Sept. 26. Under the terms of the
agreement, the lawyers who brought the case for shareholders would
receive about $22.5 million, separate from the $100 million payment.

"The plaintiffs believe this is a very innovative settlement
providing a positive benefit to Oracle," said Joseph J. Tabacco Jr.
of Berman DeValerio Pease Tabacco Burt & Pucillo, one of the lawyers
representing shareholders in the suit. "It resolves a lawsuit that
has been pending for almost five years."

A spokeswoman for Oracle declined to comment. Alan N. Salpeter, a lawyer
at Mayer Brown Rowe & Maw who has represented Mr. Ellison, also
declined to comment.

The settlement is a surprising turn in the litigation that followed an
announcement by Oracle on March 1, 2001, that the company's results for
the third quarter of 2001 would not meet market estimates. The day after
the announcement, Oracle's shares closed at $16.88, down from $21.38 at
the close of trading the day before. Mr. Ellison had sold nearly $900
million in Oracle stock in the last two weeks of January of that year for
an average price of $30.76 a share, according to court documents.

In 2004, Forbes magazine estimated Mr. Ellison's net worth to be $13.7
billion. According to a recent filing, Mr. Ellison owns about 1.2 billion
shares of Oracle, or about 24 percent of the company's outstanding
stock.

Shareholders sued in Chancery Court in Delaware, where Oracle is
incorporated, charging that Mr. Ellison and another executive, Jeffrey O.
Henley, who was then Oracle's chief financial officer, sold shares
knowing of the downward revision in expected earnings and before the news
was made public. (In derivative lawsuits, shareholders sue on behalf of a
company; the right to sue is derived from the corporation.)

Vice Chancellor Leo E. Strine Jr., who oversaw that lawsuit, decided in
November 2004 that "no rational trier of fact" could find that
Mr. Ellison and Mr. Henley possessed nonpublic information at the time of
the stock sales and traded on that knowledge. The decision was upheld on
appeal by the Delaware Supreme Court earlier this year. 

Why Mr. Ellison (Mr. Henley was later dropped from the California case)
decided to settle a very similar derivative lawsuit in California for
such a large amount, after successfully defending himself in Delaware, is
a question with different possible answers. But the fact that the payment
is going to charity, rather than the company itself, suggests that both
sides compromised.

"I've never heard of anything, structured from the beginning as a
settlement this large, going to a charity," said Michael A. Perino,
a law professor at St. John's University School of Law. Typically, Mr.
Perino said, a derivative action results in a payment to the company.
"The difference between a derivative suit and a securities class
action is that a derivative suit is brought under state law on behalf of
the corporation itself for an injury that the corporation has
suffered," he said. 

In April, three

eBay executives agreed to pay $3.4 million to settle a derivative
lawsuit, with half of those proceeds going to charity. 

Oracle still faces a shareholder lawsuit in federal court in San
Francisco. That suit was dismissed by the trial court judge but was
essentially reinstated by an appellate court. Resolving the derivative
lawsuit against Mr. Ellison frees Oracle to battle that case without
worry that one set of proceedings could be used against the company in
the other.

Another reason a settlement might have been attractive is uncertainty for
both sides about the law governing derivative lawsuits in California,
said Eric L. Talley, a law professor at the University of Southern
California. In the Delaware case, Judge Strine found that shareholders
could not establish that Mr. Ellison both possessed inside information
and traded because of what he knew. It is not clear that the shareholders
would have to meet as difficult a test to make a case under California
law.

For the plaintiffs, California law also holds the possibility of higher
damages. A California statute provides that anyone who engages in insider
trading may be liable "for damages in an amount up to three times
the difference between the price at which the security was purchased or
sold and the market value which the security would have had at the time
of the purchase or sale if the information known to the defendant had
been publicly" available at the time of sale.

In other words, for example, damages could be based on the assumption
that the closing price of $16.88 on March 2 was what the price would have
been when Mr. Ellison sold 29 million of his shares for an average price
of $30.76. Trebling the difference between $30.76 and $16.88 on 29
million shares amounts to slightly more than $400 million.

"I don't know if I'd take a chance on that," Mr. Talley
said.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Director RARC / CARLAB
Rutgers University
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
(973) 353 5002
(201) 454 4377 (cell)
http://raw.rutgers.edu/mik los