In an opinion issued Friday, Delaware Chancery Court Vice Chancellor Leo Strine found that the special litigation committee had "failed to demonstrate that no material factual question exists regarding its independence."
The committee was set up in February 2002 to determine whether Oracle should settle insider-trading suits brought by investors. The lawsuits were filed after Ellison and three other board members sold stocks in 2001, just weeks before the company reported earnings that did not match expectations.
The other board members who sold stocks are Jeffrey Henley, Oracle's chief financial officer; Donald Lucas, a Stanford University alumnus who has directed millions of dollars of contributions toward the school; and Michael Boskin, a Stanford professor. Ellison is a large contributor to Stanford through a personal foundation as well as indirectly through Oracle, according to the court opinion.
The crux of the problem with the committee, according to Strine's opinion, is that the several financial and personal ties between its members and those under investigation were left undisclosed. For example, two members of the committee joined the Oracle board in October 2002, more than half a year after the stock sales in question took place. Those same board members, Hector Garcia-Molina and Joseph Grundfest, are also professors at Stanford.
The Delaware Chancery Court became involved because of a Delaware derivative action taken by some plaintiffs. In addition to prompting a federal class-action suit, the Oracle stock sales spurred shareholders to file several derivative action lawsuits in California and Delaware. Derivative action is filed by a shareholder against directors or management for a failure to protect the interest of the shareholder.
Oracle said Monday the special litigation committee has conducted an "exhaustive inquiry and found no merit to the plaintiffs' allegation," Jim Finn, a company spokesman, said in a statement. "We anticipate the SLC (special litigation committee) will seek leave to appeal this recent decision."
Boskin and Lucas could not be reached for comment.
While not impugning the credibility and integrity of the professors, Strine said that the facts raise a reasonable doubt about the impartiality of the committee.
"It is no easy task to decide whether to accuse a fellow director of insider trading," wrote Strine. "For Oracle to compound that difficulty by requiring (special litigation committee) members to consider accusing a fellow professor and two large benefactors of their university" with a violation of criminal law was unnecessary and inconsistent with the concept of independence, he wrote.
The Wall Street Journal first reported this story.