Judge Beth Labson Freeman held an October 17, 2019 hearing over the City of Sunrise Florida Firefighters Pension Fund class action lawsuit v.2. There wasn’t a lot about Judge Beth Labson Freeman’s December 17, 2019 order to dismiss that I found encouraging for Oracle’s audit defense clients, other than leave for the plaintiff to amend the case. The plaintiff did amend, increasing the length of the filing from 107 to 164 pages. There wasn’t a lot about Pam Fulmer/Tactical Law Group’s observations about the court’s September 24, 2020 hearing on the amended complaint that I found encouraging, either.
As a layman (non-attorney), I’m impressed and relieved with the analysis in the judge’s March 22, 2021 order. No one could accuse her of coddling Oracle. By quoting examples in the order favoring the plaintiff, I don’t mean to imply that any of her findings in favor of the defendant’s motion to dismiss are weak. See Pam Fulmer/Tactical Law Group’s legal analysis of the March 22, 2021 order.
Judge Freeman was apparently impressed enough with the 11 Confidential Witnesses’ allegations that she provided convenient cliff notes. See heading A. Confidential Witnesses on page 4.
A sampling of things that caught my eye on first read of the order:
Before addressing Defendants’ argument, the Court acknowledges at top that Plaintiff has dedicated significant investigative resources in the operative complaint. These efforts are not in vain. As explained below, Plaintiff has adequately pled a narrow omission-based theory of fraud. Although some of the surviving statements pose a close call, the Court opts to allow them to proceed and be reviewed with the benefit of a more developed record.
The CW (Confidential Witnesses) accounts detailed in the SAC (Second Amended Class Action Complaint) provide the requisite additional facts to establish that the revenue generated through the Sales Practices constituted a material portion of Oracle’s cloud revenue at the time each alleged misstatement was made.
… the Court ultimately found that Plaintiff failed to establish the materiality of Oracle’s Sales Practices. Id. The SAC has overcome this hurdle. Plaintiff has provided additional allegations from the CWs along with new allegations from industry members that establish the materiality of revenue generated through Sales Practices.
The Court, again, emphasizes that Oracle does not have a stand-alone duty to disclose its sales practices. However, as with Defendants’ statements about drivers of cloud growth, once Defendants made statements about the reasons underpinning cloud growth deceleration, investors would have been interested to know that the dwindling efficacy of Oracle’s sales practices had a material impact on this decline. See LendingClub, 254 F. Supp. 3d at 1118. At this stage, the allegations relating to cloud growth deceleration are adequate to state an omission-based claim under Section 10.
Plaintiff has successfully pled a narrow omission theory of securities fraud. This theory centers on Defendants’ statements about Oracle’s cloud growth deceleration and the drivers of cloud growth. Statements at FAC ¶¶ 363, 367, 390, 404, 416, 418, 422, 424, 433, 434, 443, 446, and 453 support this theory. The Court emphasizes that this theory is not based on a stand-alone duty to disclose allegedly coercive sales tactics; rather, Oracle’s affirmative representations about cloud growth deceleration and drivers of cloud growth “affirmatively create[d] an impression of a state of affairs that differs in a material way from the one that actually exist[ed].” Brody, 280 F.3d at 1006. This is particularly true during a Class Period where the nascent cloud market exploded and Oracle competitors enjoyed robust growth. With the exception of this theory and associated statements, the Court DISMISSES the SAC.
The Court has reviewed all of Plaintiff’s allegations separately and holistically to determine whether Plaintiff has alleged sufficient facts to support scienter. Tellabs, 551 U.S. at 323. The allegations within the SAC give rise to a strong inference of scienter with regard to Hurd, Catz, Ellison, Bond, and Oracle.
When questioned why Oracle’s cloud sales rates skyrocketed at first and later slowed, Defendants affirmatively and falsely attributed Oracle’s success and subsequent slowed sales rates to false reasons, masking the material impact of engineered sales on cloud growth.
The Court finds the overall fraud theory alleged in the SAC plausible, cogent and compelling. Unlike in Nguyen, Plaintiff does not allege that Defendants engaged in a fraud scheme to cover up the inevitable reveal of a critical problem. Instead, Plaintiff alleges that Defendants attempted to buy themselves time to improve their flagging cloud products by deploying coercive sales practices and obfuscating that these practices were material drivers of cloud product growth and deceleration. Indeed, under this theory, it would not be implausible that Oracle would simultaneously decide to repurchase $12 billion in shares while it launched its struggling cloud services. Corporate optimism about the eventual success of the cloud products makes this at least as plausible as Plaintiff’s spin. Plausibility is not a death knell for Plaintiff.
In sum, the CW allegations raise a strong inference that Hurd and Catz were, at a minimum, deliberately reckless in their statements about the drivers of cloud growth and cloud growth deceleration.
Plaintiff’s allegations give rise to a strong inference that Ellison was deliberately reckless as to his statements about drivers of cloud growth and cloud growth deceleration. This inference is cogent and equally as compelling as the competing inference that Ellison, Oracle’s Chief Technology Officer and Chairman of the Company’s Board of Directors, made the December 2017 and March 2018 comments without any meaningful knowledge about the material nature of the sales practices to Oracle’s cloud growth. See Zucco, 552 F.3d at 1007. Plaintiff alleges that based on a letter from a group of industry participants, Ellison was aware of public concerns that Oracle would rely on coercive auditing practices to rocket its cloud product growth as early as January 2015. SAC ¶¶ 51-58. Further supporting an inference that Ellison had significant knowledge about Oracle’s cloud program and associated sales practices, Plaintiff alleges that Ellison “spent the large majority of their time on investor calls discussing the cloud.”
The Court now considers the allegations holistically. See In re VeriFone, 704 F.3d at 702– 03; Zucco Partners, 552 F.3d at 992. As the Court detailed above, multiple kinds of evidence individually support a finding of, at the very least, deliberate recklessness as to Hurd, Catz, Ellison, and Bond. Tellabs, 551 U.S. at 323. A holistic review of the evidence confirms this conclusion. Although not every kind of evidence individually supports a finding of scienter, Plaintiff’s factual and CW allegations against Hurd, Catz, Ellison, and Bond are highly compelling. And while the core operations doctrine rarely succeeds, here it adds modestly to support the evidence supplied by the CWs given the centrality of engineered sales to Oracle’s bottom line and allegations of Hurd, Catz, Ellison, and Bond’s roles in the company and involvement in cloud sales. When viewed holistically, even Plaintiff’s compensation structure and stock sales allegations have some teeth to them. In sum, the inference that Hurd, Catz, Ellison, and Bond were deliberately reckless as to the truth of their public statements is “at least as compelling as any opposing inference.”
The Court DENIES Defendants’ motion to dismiss for failure to state a claim under section 10(b) or Rule 10b-5 with respect to the claims against Hurd, Catz, Ellison, Bond, and Oracle and GRANTS the motion WITH PREJUDICE with respect to the claims against Kurian and Miranda.
“[T]o prevail on their claims for violations of § 20(a) and § 20A, plaintiffs must first allege a violation of § 10(b) or Rule 10b 5.” Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1033 n.15 (9th Cir. 2002). Defendants’ only ground to dismiss Plaintiff’s claims under § 20(a) and § 20A is that the SAC fails to plead a predicate violation under Section 10(b). Mot. at 25. Accordingly, the Court DENIES Defendants’ motion to dismiss Plaintiff’s Section 20(a) against Hurd, Catz, Ellison, and Bond and Section 20A claims against Hurd and Catz.
As a result of this motion, the Court is only allowing a narrow omissions theory limited to Defendants’ stated reasons for cloud revenue growth and explanations for the subsequent slowing of that growth in light of alleged contrary factual circumstances known to them at the time. Whether this is enough to support Plaintiff’s claims will be determined on a more developed record. The Court DENIES the motion to dismiss with respect to the claims against Hurd, Catz, Ellison, Bond, and Oracle. The Court GRANTS the motion to dismiss WITH PREJUDICE with respect to the claims against Kurian and Miranda. Defendants shall file their answer within thirty days of this Order.
(End of quotes from the order.)
Bottom line: the alleged ring leaders are still in the hot seat.
I would hope this lawsuit will have more hearings in Judge Freeman’s courtroom. But I doubt it. I would think Oracle has a substantial incentive to settle out of court at this point rather than have further attention focused on these audit-related issues with the stenographer taking all discovery and argument down for the eternal public record. Further complicating any attempt by Oracle to settle out of court: the City of Providence Rhode Island class action lawsuit based largely on the City of Sunrise Firefighters’ lawsuit, and the Firefighters Retirement System of St. Louis lawsuit that was filed in 2017 and is yet to be resolved.