Whistleblower Lawsuit Next on Oracle’s Docket

After recently losing major lawsuits to Google (NASDAQ: GOOGL) and Hewlett-Packard (NYSE: HPE), Oracle Corp. (NYSE: ORCL) still must deal with the fallout from a whistleblower lawsuit filed last month in U.S. District Court for the Northern District of California. Over the past month, the case has spawned a separate securities class action and an ERISA class action.

The whistleblower complaint alleges that Oracle last year fired Svetlana Blackburn, a senior finance manager, after she resisted preparing unlawful accounting entries and warned her supervisor that she would inform authorities. The complaint claims Oracle violated the whistleblower protection provisions of the Sarbanes-Oxley Act, the Dodd-Frank Act, and the California Labor Code. Blackburn is seeking compensatory damages for lost earnings and benefits, special damages for emotional distress, and punitive damages.

To prevail, Blackburn doesn’t have to prove that Oracle violated securities laws as long as she reasonably believed that a violation would occur. Instead, she must prove that her termination resulted at least partly from telling her supervisor that she planned to report the allegedly unlawful activity. If she succeeds, Oracle can avoid liability only by proving that it would have fired Blackburn regardless of her plans to blow the whistle.

In a prepared statement to Business Insider, an Oracle spokesperson said Blackburn was fired for poor performance after working at the company less than a year. The statement also said Oracle is confident in its accounting and plans to countersue Blackburn for malicious prosecution.

Proving Liability

In wrongful termination cases, either side may retain a forensic accountant or economist to perform a statistical analysis of the employer’s termination history. The analysis often begins by considering whether the plaintiff’s termination was part of a large-scale layoff or annual stack ranking. Then it defines populations of employees who have been compared with each other and have equal probabilities of termination. Next, the study examines the evaluation process and identifies factors that influence the probability of termination. When a subjective measure such as performance is a factor, it must be compared to objectively quantifiable measures to determine its validity.

Blackburn’s complaint says that she received a positive performance review two months before she was fired. A statistical analysis could determine the probability of termination for employees in Blackburn’s population who received a positive rating–and whether the probability increased over time after the rating was assigned. Ultimately, if a study found that Blackburn had a low probability of termination, the results would indicate that factors outside the evaluation process, such as her whistleblowing activity, contributed to her firing.

Whistleblower Damages

If a jury found Oracle liable, Blackburn could recover back pay, prejudgment interest, and lost future earnings and benefits based on the assumption that she would have continued working at Oracle until retirement. Either side could retain a forensic accountant to calculate the damages. The accountant would consider, among other factors, Blackburn’s earnings history, average earnings in her profession, and expected inflation rates to project the earnings she would have accrued until retirement. The projected earnings would be reduced by mitigating earnings from alternative employment and by a discount rate to express future cash flows at present value.

Damages awards in whistleblower cases can be handsome. In 2014, a California jury awarded Catherine Zulfer, a former accounting executive at Playboy Enterprises, Inc., $6 million after finding Playboy had violated the Sarbanes-Oxley Act’s whistleblower protections. The company allegedly terminated Zulfer after she resisted orders to accrue $1 million in executive bonuses without approval from Playboy’s board of directors.

Securities Claims

Media outlets first reported Blackburn’s lawsuit on June 1 after U.S. stock markets had closed. The following day, Oracle’s stock price fell $1.60, or 3.97%, to close at $38.66. In a securities class action filed on behalf of shareholders on June 2, law firm Pomerantz LLP alleged that Oracle made materially false and misleading statements by omitting that it used “improper accounting practices to inflate the Company’s cloud computing revenues by millions of dollars” and that it “had terminated a Senior Finance Manager for raising the Company’s improper accounting practices to the attention of her supervisors.”

On June 24, the law firm Stull, Stull & Brody filed a separate class action on behalf of participants in Oracle’s 401(k) Savings and Investment Plan, claiming violations of the Employee Retirement Income Security Act of 1974 (ERISA), which requires the plan fiduciaries–Oracle, its 401(k) committee, and committee members–to protect the participants’ interests. The complaint alleges that the “Defendants permitted the Plan to continue to offer Oracle Stock as an investment option to Participants even after the Defendants knew or should have known that Oracle Stock was artificially inflated.” In explaining the inflated stock price, the complaint refers to Blackburn’s whistleblower allegations.

Forensic Analysis

A securities fraud case based on allegations of improper accounting and a disclosure event may require two types of analysis by a forensic accountant. To analyze the accounting allegations, the accountant may review Oracle’s workpapers, source documents, and entries to determine whether its accounting for cloud computing revenue complies with Generally Accepted Accounting Principles (GAAP)–particularly ASC 985–605 as it pertains to revenue recognition for hosted software. In addition, the accountant may review Oracle’s internal controls to evaluate compliance with Section 404 of the Sarbanes-Oxley Act.

To analyze the disclosure event, the forensic accountant would perform an event study to isolate the effects of news about Blackburn’s whistleblower lawsuit on Oracle’s stock price. An event study typically applies regression analysis to a time series of stock returns. The goal is to identify the effects of disclosures that are specific to a stock’s issuer and separate from general market forces. For example, if all stocks rose on June 2 because of positive economic news, but Oracle’s stock fell on news of the whistleblower lawsuit, an event study would seek to measure the amount of Oracle’s decline caused by the lawsuit after accounting for the effect of the economic news.

Such analysis hasn’t begun yet in the securities cases pending against Oracle. Nor has statistical analysis of terminations begun in the whistleblower case. All of the cases will have to survive motions to dismiss and discovery battles before experts can work their magic.