Ellison Settlement Invites Cynicism

Opinion: If there is a question of insider trading, prosecutors should take up the case rather than standing by and allowing a charitable contribution to suffice.

There are so many different things wrong with Larry Ellisons being able to make a $100 million charitable donation to settle allegations of insider trading, its hard to know where to start. The case is a textbook illustration of why no one in Silicon Valley or the larger tech world takes government regulation very seriously.

First of all, Ellison isnt doing battle with federal authorities—the folks who normally take on allegations like this. He is not accused of a crime; he is instead being sued by shareholders of Oracle, the company he founded, which he still runs and in which holds roughly 24 percent of the stock.

The lawsuit, according to the New York Times, alleges that Ellison sold Oracle shares to make a profit, knowing before the news was made public that Oracles sales would not meet expectations in 2001.

Now, you can debate what Larry knew and when it knew it. But anyone thinking in early 2001 that tech shares were headed down wasnt exactly betting against the odds. Larry Ellison isnt a dummy, and he also likes being rich.

Ellisons offer to have Oracle make $100 million in charitable donations comes on the heels of a similar settlement by executives at eBay who, like Ellison, admitted no wrong-doing with their settlements.

eBay CEO Meg Whitman and others who received allocations of "hot" public offerings from their banks, agreed to make millions in charitable donations to settle a lawsuit by eBay shareholders.

These are noble offers, to be sure. But given the sums involved and the wealth of the individuals being sued, theyre hardly penalties.

Why? Because enforcing insider trading laws and other white collar crime is supposed to be about social embarrassment, not fines. The embarrassment, not the financial loss, is the deterrent. Folks accused of insider trading and stock manipulation often earn millions of dollars in salary and fees, so the only real weapon the government has is a threat: Break the law—even in a quiet way—and you go to jail. People who try and hoodwink the governments agents get treated roughly, too.

This is the reasoning that led to Martha Stewarts indictment on an obstruction of justice charge. Its the same thinking—a bit more drawn out—that led to Silicon Valley banker Frank Quattrones trial and conviction on those same charges.

But heres an important difference: Quattrone and Stewart were tried in New York. Ellison is in California.

The Securities and Exchange Commission was a sardonic joke during the Internet bubble. The Washington bureaucrats were—correctly—seen as unable to keep up with the fast pace of "Internet time." Their actions came too late to do any harm. Or any good.

You might think the U.S. Attorney for the Northern District of California would have turned his office into the West Coast equivalent of New York Citys Southern District, which considers itself Wall Streets top cop and operates the best financial crime division in the country.

But thats not the case, and there is no such group in California. Its unlikely that Californias attorney general—a Democrat who was mulling a gubernatorial race that might have capitalized on political contributions from Silicon Valley—would model his behavior on New York Attorney General (and potential presidential contender) Eliot Spitzer.

So its left to private lawyers—the firm handling the Ellison case will pocket $22 million, according to the Times—to do the policing. This creates contempt for government along with quiet admiration for Ellisons deal-making skill. Thats not exactly a penalty, either.

/zimages/4/28571.gifSome observers are skeptical about Oracles CRM buying binge. Click here to read more.

Throughout the Quattrone trial, bankers and tech CEOs in Silicon Valley would ask why the once-high flying banker was on trial. It wasnt just that Quattrones friends and peers couldnt see why he was charged with obstruction over a few words in e-mail; its that they didnt see what crime Quattrone had committed in creating his "Friends of Frank" network. The "Friends of Frank" network offered shares in hot public offerings to bank clients—a once-common practice among many banks.

Looking at the Oracle and eBay decisions, it gets harder to argue with Quattrones defenders. The real the issue here is that if the law is to have any power, it needs to be consistently enforced. Letting private shareholder action substitute for actual law enforcement is ineffective and cynical. Its a mixed signal that breeds confusion and contempt for the law.

Which is why folks in Silicon Valley—and tech generally—should be demanding better law enforcement: For their own protection. The law, applied arbitrarily, can do more harm than good. Thats whats really wrong with the Ellison case.

eWEEK.com technology and politics columnist Chris Nolan spent years chronicling the excesses of the dot-com era with incisive analysis leavened with a dash of humor. Before that, she covered politics and technology in D.C. You can read her musings on politics and technology every day in her Politics from Left to Right Weblog. She can be reached at mailbox@chrisnolan.com.

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