Conflict? Oracle Hires Bullish Analyst

Analyst who covered the software company brought on as senior executive. Elsewhere: MCI to pay investors $500 million to settle civil fraud charges, Fastow pleads not guilty, and Martha Stewart has a real bad day.


It seems some CEOs need more than a good finance chief by their side.

In a surprising twist, Oracle hired Charles Phillips, a Morgan Stanley research analyst who had advised investors on the company. Phillips will serve as an executive vice president at the software maker.

Arguably, the most startling aspect of the appointment is its timing, coming just a month after Wall Street firms paid $1.4 billion to settle a dispute over conflicts of interest between analysts and the companies they cover.

Phillips will be in charge of corporate strategy and business development at Oracle, and will report directly to CEO Larry Ellison. He will be one of three executives, including Ellison, in Oracle’s office of the chief executive, and will also serve as a member of the executive-management committee, which includes CFO Jeffrey Henley.

As reported (“Take This Job and Split It”), some CFOs have started to focus more of their energy lately on compliance and less on corporate strategy. That switch is due mostly to onerous certification and reporting requirements brought on by the passage of the Sarbanes-Oxley Act.

But Henley insists that the newly created position is supplemental in nature. “There’s really no change here,” he says. “It’s really not taking away from me.”

If anything, Henley says, Phillips’s role will be supplemental, getting involved with M&A activity, and bringing insight “into how to evolve the company.” In the high-tech sector, it’s “difficult for a CFO to set strategy,” he adds. “CFOs can help in evaluating ideas and offering financial models and things like that.”

Ellison is also bullish on Phillips: “Chuck’s market perspective and strong relationships with CEOs, CFOs and CIOs across industries will be of enormous benefit to Oracle and our customers,” he said in a prepared statement.

Phillips, who has covered the enterprise software industry since 1986, has called Oracle one of the “most well-positioned software companies in the world,” according to a Reuters report. The newswire further notes that Phillips’s bullishness on Oracle persisted even when the company’s share price was falling and Ellison was under attack from investors for cashing out some of his Oracle options.

Phillips did cut his rating on Oracle to “neutral” in March 2001 after the technology bubble burst, Reuters adds. But a month later he raised the rating back to “outperform,” or “buy.”

Analysts are expected to keep a professional distance from the companies they cover, but Phillips has been known to straddle that line. Reportedly he hosted Oracle executives for dinners at his home in Manhattan. When he recently arranged a similar meeting for some investors in Siebel Systems Inc., he sparked a second Securities and Exchange Commission probe into Siebel’s disclosure practices.

Reportedly Siebel CFO Ken Goldman spoke at the gathering, and the next day the company’s stock price jumped 8 percent in usually heavy trading. Siebel management has said that it’s cooperating fully with the SEC inquiry and has not concluded that any violations occurred.

Laura Nash, a senior research fellow at Harvard Business School, says Phillips will have to watch his step because shareholders are wary of further conflicts of interest.

“If he’s doing marketing for Oracle, it’s perfectly legitimate for him to talk to other CEOs and CFOs,” said Nash in a CBS Marketwatch article. “What’s not legitimate is if he tries to use past relationships to influence analysts.”

MCI Agrees to $500 Million Settlement

MCI (formerly WorldCom) has agreed to pay investors $500 million to settle civil fraud charges over the company’s $11 billion accounting scandal, lawyers for the company and the federal government announced on Monday.

Attorneys for the two sides presented the proposed settlement to U.S. District Judge Jed Rakoff in Manhattan, according to an Associated Press report. Rakoff said he would consider the deal, but would not rule before June 11 because he needs to learn “much more of the defendant’s seemingly massive fraud.” Rakoff also wants to know who would be affected by the settlement and what internal controls MCI has put in place since the scandal broke.

The actual fine is $1.5 billion, but that figure would be reduced to an agreed-upon $500 million through bankruptcy proceedings. SEC lawyer Peter Bresnan described the fine as the largest the SEC has ever imposed in connection with a financial fraud, according to the newswire’s story. Xerox paid the SEC $10 million to settle accounting charges, while in June 2001 Arthur Andersen LLC paid $7 million over its audit of Waste Management.

MCI, which recently changed its name from WorldCom in an attempt to distance itself from the accounting scandal, expects to emerge from bankruptcy as early as September. The company is accused of falsifying balance sheets to hide expenses and inflate earnings.

In November the SEC and MCI (then WorldCom) reached a partial settlement in which the company agreed to a permanent injunction barring it from future violations of securities laws. MCI executives reportedly agreed to submit to ethics training.

Separately, the Justice Department has been conducting a criminal investigation into MCI and has already charged several former executives, including the telco’s ex-controller, David Myers, who pleaded guilty, and its former CFO, Scott Sullivan, who denied any wrongdoing and is free on $10 million bail.

Prosecutors allege that the two former executives directed employees to conceal more than $3.8 billion in expenses in financial reports, causing earnings at the telco to be overstated by $5 billion.

Fastow Pleads Not Guilty to New Criminal Charges

This should sound familiar by now: former Enron chief financial officer Andrew Fastow reportedly pleaded not guilty on Monday to a wider range of criminal charges. This according to a Reuters report of the brief arraignment at Houston federal court.

Fastow’s lawyers, who appeared in court for him, apparently also asked for more time to review thousands of boxes of evidence turned over by the Justice Department and other agencies.

As reported earlier this month, Fastow initially pleaded guilty when he was charged with fraud, insider trading, and falsification of accounting records earlier this month. The 109-count indictment replaced an earlier 78-count October indictment, to which Fastow already pleaded not guilty. Former Enron treasurer Ben Glisan and former Enron Corp. finance executive Dan Boyle were added to the new indictment.

The case, Reuters says, may not go to trial until 2004. U.S. District Judge Kenneth Hoyt scheduled the next hearing in the matter for July 28.

Chiron to Buy PowderJect

Chiron Corp. said Monday it will buy PowderJect Pharmaceuticals PLC for about $878 million, increasing the San Francisco Bay—area biotechnology company’s share in part to enter the growing market for U.S. flu vaccines.

With the deal, Chiron gains access to Fluvirin, one of only two injectable flu vaccines approved in the United States. While not confirmed by the company, the bid Monday reportedly was above an earlier offer amount of about $802 million.

James Sulat, Chiron’s CFO, says the deal needed to be not only a strategic fit but also a financial fit, creating shareholder value. To ensure that, he used a net present value model, modeling out for 10 years, “using discount rates, which is equivalent to our weighted average cost of capital.”

He added that since the deal was all in cash—and Chiron has strong cash flow and will be left with about $500 million in reserves—there was very little concern financially.

Since PowderJect doesn’t have many overlapping operations, and the companies have headquarters outside London, Sulat notes that he expects the integration to be a smooth one. With respect to financial-system integration, he says, “I don’t think it’s something that we’re going to force the pace on immediately because we were quite pleased with the back-office functions that we found at PowderJect.” Nevertheless, Chiron uses SAP, so he notes that the company will invest 6 to 12 months to “convert them over.”

Sulat also notes that the Sarbanes-Oxley Act requires a level of documentation on internal controls and other measures that “will have to be increased at PowderJect.” Chiron, he says, is working on its documentation and identifying opportunities for improvement. “Unfortunately, there’s a high degree of uncertainty for what the requirements will be,” adds Sulat, referring to Section 404 of the act.

Short Take

We’re guessing Martha Stewart does not like Mondays—or at least not yesterday’s version.

Why? Well, at night, a truly unflattering bio-pic about Stewart ran on one of the major television networks (NBC, specifically). And during the day, a U.S. federal court judge reportedly refused to dismiss a shareholder lawsuit against Stewart and her company Martha Stewart Living OmniMedia. A pretrial hearing for the case is set for November. The lawsuit charges that Stewart and other company insiders sold shares of the company before the public became aware of federal authorities’ investigations into Martha Stewart, according to the Reuters article.

The SEC and Justice Department have been looking into Stewart’s sale of nearly 4,000 shares of ImClone Systems in December 2001, just before ImClone’s stock fell on disappointing news about a cancer drug. Meanwhile, Newsweek reported on Monday that the U.S. Attorney in Manhattan is “still strongly considering indicting” Stewart for insider trading and obstruction of justice in the ImClone case.

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