A German asset manager with approximately €359 billion under management is suing Oracle in US courts for allegedly inflating cloud revenues, saying the company resorted to “systematically coercing and bribing” its existing customers into cloud migrations.
The 164-page complaint, filed on Monday February 17 with the federal District Court in California, is the third bid by Union Asset Management Holding AG and other complainants to have judge Beth Labson Freeman hear the case.
Early attempts in August 2018 and March 2019 fell at the first hurdle, with the judge finding initial evidence insufficient, and granting Oracle’s motion to dismiss; albeit leaving the door open for the plaintiffs to return with more evidence.
The filing names Oracle founder Larry Ellison, late CEO Mark Hurd’s estate, CEO Safra Catz, and former Oracle cloud boss Thomas Kurian as defendants.
It also claims that each was “highly motivated to misleadingly inflate Oracle’s cloud revenues through the use of engineered deals (and artificially inflate its stock price) by virtue of the Company’s compensation plan”.
As a result they “deceived investors as to the true source, nature and quality of Oracle’s all-important cloud revenue stream” it alleges.
Oracle says the suit – which relies substantially on press and analyst reports – “has no merit and Oracle will vigorously defend against these claims.”
Oracle Sued: Audit, Bargain, Close
After belatedly realising that it was getting left behind by companies selling SaaS and IaaS from the cloud, the complaint alleges that it was under pressure to demonstrate cloud growth to shareholders and set about strong-arming customers.
(Oracle continues to play cloud-catch-up with rivals Amazon, Microsoft and Google; all of which have substantially outperformed it on stock markets in recent years.)
A single passage of allegations in the complaint sums it up: “Oracle employed a strategy called ‘Audit, Bargain, Close,’ or ‘ABC,’ to coerce cloud sales during the Class Period. Oracle would install its on-premises software in the clients’ ecosystem with a variety of preferences automatically enabled that, unbeknownst to the customer, caused the customer to arguably—and unknowingly—exceed the limits of its license.
It adds: “After the customer fell into this trap, Oracle would audit the on-premises customer for violations of its on-premises software license. When it found violations, Oracle would threaten to impose extremely large penalties. Oracle would then offer to reduce or eliminate those penalties if the customer agreed to accept a short-term cloud subscription that the customer neither desired nor intended to use.”
Kurian: “The Core Product UI is Awful”
It quotes a 2017 email from Thomas Kurian, now in charge of rival Google Cloud Platform, lamenting the interface for Oracle Human Capital Management Cloud: “I want to make sure that the entire HCM dev organization understands what a disgrace your UI [user interface] is and stop living in denial on that.”
Kurian is cited as adding: “I continue to get extraordinary pressure from our two CEOs [the late Mark Hurd and Safra Catz] and LJE [Larry Ellison] himself that the UI is not tenable… the core product UI [user interface] is awful.
“Until you all collectively accept the mess you have made and the need to move quickly we are talking past one another.”
With cloud performance stalling, Oracle in June 2018 opted to stop breaking out cloud-specific segments in its financial reporting, instead bundling IaaS, PaaS and SaaS into one reporting line which it calls ‘cloud services and licence support’.
Union Asset Management Holding AG is being represented by Bernstein Litowitz Berger and Grossman LLP. It seeks “relief for itself and all other similarly situated Oracle investors” for violations of Sections 10(b) and 20(a) of the Exchange Act.
The asset manager’s lawyers also claim that Oracle should have disclosed its “ABC” approach under strict ASC 605-25 revenue recognition rules that require a company to disclose the nature of material ‘multiple-element arrangements’, which provide guidance on the separability of deliverables included in an arrangement.
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