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Ellison agrees to settle insider trading suit

Oracle's CEO agrees to pay $100 million to charity to resolve a lawsuit charging that he engaged in insider trading in 2001.

4 min read
Larry 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, 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 Ellison.

The lawsuit charged that 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 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. 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 Ellison's net worth to be $13.7 billion. According to a recent filing, 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 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 Ellison and 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 settle?
Why Ellison (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, 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 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 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 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," Talley said.