While Oracle awaits a judge's decision on whether it can continue in its quest to acquire PeopleSoft, the company faced a setback in an unrelated case. An appeals court on Wednesday ruled that a three-year-old shareholder lawsuit charging Oracle and several of its top executives with misleading investors about Oracle's performance may proceed, overturning a lower court's dismissal.
Led by investor Local 144 of the Nursing Home Pension Fund, the March 2001 complaint charges Oracle executives with covering up a sales slump caused by an economic slowdown and alleges defects with its 11i E-Business Suite of applications. After a series of dismissals and refilings of amended complaints, a San Francisco federal court dismissed the complaint in March 2003, deciding that the plaintiffs' allegations did not show "a strong inference" that Oracle's executives intentionally made statements they knew to be false.
The U.S. Court of Appeals for the Ninth Circuit ruled Wednesday that the complaint did contain evidence of deliberate falsehoods, and should be allowed to proceed.
On March 1, 2001, Oracle warned that its quarterly financial results would be worse than expected, with applications sales growing significantly less than it had predicted and database sales flat at best. The company's share price promptly tumbled.
In light of the March warning, the plaintiffs challenge the veracity of statements over the preceding few months by top company executives, including Chief Executive Officer Larry Ellison, that sales were strong and that Oracle was feeling no ill effects from the slowing economy. The complaint also challenges Ellison's sale of nearly US$900 million in Oracle stock in late January 2001, barely a month before the company's warning and subsequent share-price plunge.
Wednesday's opinion, written by Judge Warren Ferguson, states that Ellison's stock sale was "suspicious" and that the company's officers probably did know that sales were slowing even as they publicly said otherwise.
"It is reasonable to believe that Oracle had known, prior to its March 1 report, that it would not reach its projected earnings, particularly since Ellison acknowledged that 'I was involved in an awful lot of these deals,'" Ferguson wrote in the opinion.
The court's decision also gave weight to a claim of accounting impropriety that the lower court dismissed.
The plaintiffs charge that Oracle recorded customers' inadvertent overpayments as revenue, a practice that added US$230 million to the company's bottom line, according to one of the plaintiffs' witnesses. Ferguson said that the documents presented to support the claim "appear to establish improper revenue adjustment."
Ferguson concluded that the complaint establishes sufficient grounds for continuing the case against Oracle, Ellison, Oracle Chairman Jeffrey Henley and Executive Vice President Edward Sanderson. The case will now return to the U.S. District Court for the Northern District of California in San Francisco.
An Oracle spokeswoman said the company regards the complaint's allegations as "wholly unsupported by the evidence," and is confident it will prevail when litigation in the case concludes.