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In re Oracle Corp. Derivative Litigation11/24/2004
Date Submitted: September 3, 2004
Date Revised: December 2, 2004
This derivative action involves a claim that two of the top officers at Oracle Corporation breached their fiduciary duty of loyalty to the company by selling stock in the company at a time when they possessed material, adverse, nonpublic information about the company. The plaintiffs thus raise a claim under the venerable case of Brophy v. Cities Service Co. Defendant Lawrence J. Ellison is Oracle's largest stockholder and was its Chairman of the Board and Chief Executive Officer at the time of the events relevant to this case. Defendant Jeffrey O. Henley was Oracle's Chief Financial Officer and director at the time of the complaint.
Ellison and Henley are alleged to have sold large amounts of Oracle stock in January 2001 - albeit amounts that were only a small percentage of their total Oracle holdings - while in possession of information that, according to the plaintiffs, suggested that Oracle would be unlikely to meet its publicly-announced revenue and earnings projections for that quarter, which was to end on February 28, 2001. Those projections - the "Market Estimates" - had indicated that Oracle would increase its FY 2001 third quarter "3Q 01" license revenues "about 25%" over the comparable quarter in the previous year, "3Q 00," and would earn 12 cents per share. As it turned out, Oracle fell far short of those projections, delivering license revenue growth of only 5% and earnings of only 10 cents per share - results that moved Oracle's stock price sharply downward. According to the plaintiffs, Ellison and Henley both possessed material financial information before their January 2001 trades that should have led them to recognize that Oracle would not meet the Market Estimates. Having sold shares at prices materially in excess of Oracle's market price after Oracle disclosed that it would not meet the Market Estimates, Ellison and Henley allegedly reaped ill-gotten gains that the plaintiffs say should be returned to Oracle.
The case is now before the court on a summary judgment motion. After a review of the massive record, I conclude that Ellison and Henley are entitled to summary judgment. In keeping with prior Delaware precedent, I conclude that Ellison and Henley can only be held liable if they acted with scienter, by trading, in whole or in part, because they possessed adverse, nonpublic information that made it likely that Oracle would fall materially short of the Market Estimates. Contrary to the plaintiffs, I conclude that no rational trier of fact could find that: 1) Ellison or Henley possessed material, nonpublic financial information as of the time of their trades; or 2) Ellison or Henley acted with scienter, by consummating trades in part because they believed, on the basis of the nonpublic information they had received, that Oracle would materially fall short of the Market Estimates. As a result, I find that even if Brophy v. Cities Service Co. remains good law, this case should be dismissed.
The grounds for this decision are fully set forth in the later pages of this opinion but can be summarized as follows:
* The conservative bias of Oracle's financial projection system, which resulted in estimates of earnings and license revenue growth that were more likely to be low than high. There is no evidence to cast doubt on the integrity of Oracle's estimation process. Within this process, the estimates of Oracle executive Jennifer Minton were historically the most accurate and given the most weight;
* Oracle's best estimates of its 3Q 01 results at the time of Henley's and Ellison's trades, which continued to predict that the company would ei
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