Dave Welch (@OraVBCA), CTO & Chief Evangelist

Firefighter’s Retirement System of St. Louis sued Oracle executives and Oracle’s board on May 8, 2017 over allegations of conflicted and self-serving actions, in causing Oracle Corporation to pay an inflated price for NetSuite. The lawsuit’s allegations include that the inflated price inappropriately enriched Larry Ellison, his family members, trusts for the family members’ benefit, and related entities who together were the majority shareholders of NetSuite. The lawsuit also alleges that two NetSuite executives were complicit.

Why It Matters

Any wins for the plaintiff in the Firemen’s Retirement System lawsuit could be useful to Oracle audit customers, as the Securities Class complaint and City of Providence lawsuit (both venued in the Northern District of California) include both the Oracle/NetSuite transaction and allegations of inappropriate Oracle sales and audit tactics.

This August 19, 2019 Reuters’ article provides a nice overview of the Firemen’s Retirement System lawsuit.

Court Documents

Some of the motions and documents related to the suit for the Delaware Court of Chancery are included here for your convenience:

• May 8, 2017: Shareholder Derivative complaint
• June 5, 2019: (A sample motion of the defendants asserting everything is legit): Defendants Lawrence J. Ellison and Safra A. Catz’s response to the special litigation committee’s motion to extend stay and lead plaintiff’s response to special litigation committee’s motion to extend stay for the limited purpose of addressing certain factual assertions
• June 7, 2019: (A sample reply motion of the plaintiff saying what the defendants assert is bogus): Lead plaintiff’s motion to strike “Defendants Lawrence J. Ellison and Safra A. Catz’s response to the special litigation committee’s motion to extend stay and lead plaintiff’s response to special litigation committee’s motion to extend stay for the limited purpose of addressing certain factual assertions”
• July 18, 2019: Lead Plaintiff’s (Firemen’s Retirement System of St. Louis) Motion to Lift the Stay for the Limited Purpose of Filing Motion for Leave to File Verified Amended Derivative Complaint
• July 29, 2019: Amended Complaint
• August 15, 2019: Special Litigation Committee’s letter to the court

Reading Guide

I provide the following guide for a 10-15 minute read of the Firemen’s Retirement System lawsuit:

Amended Complaint – paragraphs to read:

• 1-17: Nature of the action
• 27: Defendant Leon Panetta bio
• 34: Defendant (and NetSuite Co-Founder) Evan Goldberg bio
• 35: Defendant (and NetSuite CEO) Zachary Nelson bio
• 43: Oracle stockholder’s dissatisfaction with Ellison’s compensation package
• 51-64: Ellison-controlled NetSuite begins suffering from competition by Oracle, and Ellison decides that Oracle should acquire NetSuite rather than cannibalize It (caution—language in paragraph 52)
• 153: Plaintiff’s prayer for relief

A Chronology

Two months before the Firemen’s Retirement System’s May 8, 2017 lawsuit, the Southeastern Pennsylvania Transportation Authority filed a separate complaint in the Delaware court challenging the Oracle/NetSuite transaction.

May 8, 2017: Firemen’s Retirement System of St. Louis filed its lawsuit.

September 7, 2017, the court designated Firemen’s Retirement System as the lead plaintiff.

Over time, there were various motions by the defendants to dismiss the complaint.

March 9, 2018: the court denied (in part) the defendants’ motion to dismiss.

March 26, 2018: the Firemen’s Retirement System moved to drop various Oracle board members from the lawsuit. “The (March 9, 2018) Opinion presented Lead Plaintiff with a tactical choice, either (a) pursue litigation options against all Defendants or (b) proceed directly to discovery on the claim against Larry Ellison and Safra Catz by stipulating to the voluntary dismissal without prejudice of the Former Defendant Directors. Lead Plaintiff elected the latter option (Lead Plaintiff Firemen’s Retirement System of St. Louis’ Motion to Lift the Stay for the Limited Purpose of Filing Motion for Leave to File Verified Amended Derivative Complaint, Paragraph 4).”

May 4, 2018: Oracle’s board appointed Leon Panetta as a single-man Special Litigation Committee (SLC). Subsequently, two other board members were appointed to the SLC. As a result, defendants Ellison and Catz got a series of stays from the court, ostensibly to allow the SLC to operate.

July 29, 2019: the Firemen’s Retirement System filed an amended complaint reinstating all the Oracle board members previously dropped from the suit. It did so because of alleged inadequate information sharing with the plaintiff on the part of the SLC, a statute of limitations rapidly approaching, and the desire to add aiding and abetting claims against senior NetSuite officers Evan Goldberg and Zachary Nelson.

August 15, 2019: Oracle’s Special Litigation Committee tendered an astounding letter to the court. The letter stated that the SLC had failed in its attempt to negotiate a settlement with defendant Oracle executives Ellison and Catz. Therefore, the SLC recommended that the Firemen’s Retirement System action be allowed to proceed with the Firemen’s Retirement System continuing in its role as primary plaintiff. In its memo to the court, the SLC included its opinion that a settlement between Ellison, Catz, the plaintiffs, and nominal defendant Oracle would still be in the best interests of the parties. This memo is all the more astounding as “two of the prominent people with prominent roles in the (SLC members’) selection, are inevitably the two defendants in this case (Oral argument on the SLC’s motion to extend stay and rulings of the court – June 7, 2019 11:00 AM: Pages 22:23-24 – 23:1).”

Observations

thelayoff.com quotes a Business Insider’s August 22, 2019 article as saying that we now have a scenario where Oracle board member Leon Panetta is recommending to the court that an action be allowed to proceed in which Panetta himself is a defendant (Business Insider article available through subscription only). The Firemen’s Retirement System action alleges Panetta was substantially enriched by Oracle’s acquisition of NetSuite. Should the suit succeed, Panetta (with Ellison, Catz, and other Oracle board members) could be subject to compensatory damages and punitive damages.

Both the Providence and Fireman’s Retirement System filings allege something that appears to be universally understood: the Oracle board serves at Larry Ellison’s pleasure. But now suddenly we’re dealing with an unprecedented scenario where it appears a subset of the board is turning on Ellison. Is this a coordinated play on the part of the defendants that could somehow redound to their benefit? Or are the three SLC board members the first rats to abandon the sinking ship — the once airtight Oracle board?

There are numerous court-granted redactions of information in the Firemen’s Retirement System filings and motions. I see no such redactions in the Securities Class Complaint or the Providence lawsuit.

It can be difficult to find public-facing reference to Oracle discounts due to NDA restrictions. Wikibon asserted various general discount levels in its 2013 post (I am not endorsing the accuracy of the asserted numbers by my reference to the post). The Paris Court of Appeals filing also disclosed that Oracle customer AFPA had received an Oracle Financials offer at an 85.79 % discount. The Firemen’s Retirement System amended complaint discloses that Oracle provided NetSuite a 75.4% discount on Oracle’s Active Data Guard (amended complaint—paragraph 100). Bear in mind that NetSuite “had never turned a profit on a GAAP basis in any year during its 18-year history (amended complaint—paragraph 117).” Therefore Oracle must have understood it was giving the 75.4% discount to an entity to which it might be obligated to continue to shell out cash to for an extended period of time. Bearing in mind the direction of money flow in your transactions with Oracle, compare NetSuite’s Active Data Guard discount to whatever discounts you may have negotiated with Oracle.

The Firemen’s Retirement System of St. Louis lawsuit, Securities Class Complaint, and the City of Providence lawsuit were filed by public entities. These suits in progress appear to have substantially elevated prominence and staying power compared to three previous lawsuits filed over alleged stock price manipulation:

• Former senior Oracle finance manager/accountant and whistleblower Svetlana Blackburn filed lawsuit June 1, 2016 against Oracle for wrongful termination due to having complained about allegedly improper Oracle cloud revenue accounting.
• A class action alleging Oracle’s stock price manipulation through misstating cloud revenue was filed June 2, 2016. That class action appears to have been entirely dependent on the Blackburn action.
• Another class action followed on June 24, 2016.

Both class action plaintiffs voluntarily dismissed their class actions out of court. Oracle settled out of court with Blackburn February 8, 2017.

In contrast to the 2016 lawsuits, the Firemen’s Retirement System is suing for billions of dollars in damages.

Summary

Awareness of these outstanding legal actions could positively impact Oracle customers’ resolve to stand on their contractual rights.