- Oracle was sued and lost to the US government on multiple occasions for fraud.
- We cover what Oracle did and the implications of these lawsuits.
Oracle lost multiple lawsuits to the US government. We will cover the details of the lawsuits and provide our provide analysis.
See our references for this article and related articles at this link.
Oracle’s First US Government Lawsuit
The Lawsuit Quotes
“The Justice Department said on Thursday it sued Oracle Corp, alleging it defrauded the federal government on a software contract in effect from 1998 to 2006 that involved hundreds of millions of dollars in sales.
The lawsuit alleged Oracle misrepresented its true commercial sales practices, ultimately leading to government customers receiving deals inferior to those Oracle gave its commercial customers, the department said.” – Reuters
It is rare for the US Government to use the term “defrauded” in a lawsuit. Fraud is a criminal accusation. And the amount of the (at the time) accused fraud is in the hundreds of millions.
“Under the contract, the General Services Administration (GSA) used Oracle’s disclosures about its commercial sales practices to negotiate minimum discounts for government agencies that bought Oracle’s software.
The contract required Oracle to update GSA when commercial discounts improved and extend the same improved discounts to government customers.
The lawsuit was initially filed in federal court in Virginia by Paul Frascella, Oracle’s senior director of contract services, the department said, adding it then decided to intervene in the case and to file a complaint under the False Claims Act.” – Reuters
If the government’s contract states that Oracle was required to disclose prices paid by commercial companies and they didn’t then, they would lose that case. Oracle’s primary strategy would have to be to have the case dismissed.
Oracle’s Motion to Dismiss
Oracle made a motion to dismiss, not based upon the claims being untrue, but based upon the claims being old, as covered in the following quotation.
“In a strongly worded motion filed in late September, Oracle argued the government’s allegations should be dismissed partly on grounds they are too old and exceed the statute of limitations.
Its “most obvious problem is timeliness,” the motion adds. “One of its primary allegations is that Oracle made false disclosures relating to discounting practices to the General Services Administration … during 1997 contract negotiations. But this allegation ignores a 1998 pre-award audit of Oracle’s discounting practices, which was distributed to a host of responsible Government officials.”
So does lack of action mean that the continuation of the fraud was right and that it was legal? Oracle was still out of conformance with the GSA until 2006.
Also, what was the nature of the pre-award audit as to Oracle’s discounting practices?
What if this document was not sufficiently illuminating for the government to understand. Oracle was aware of the discounting practices for the entire time. The GSA requires those discounts to be passed on to the government, without the government spending resources to obtain this information from Oracle. All Oracle has to do to find this out is to read the GSA, which they did, as they signed it.
Therefore the claim that some document was sent to the US Government would not remove Oracle from the responsibility to operate under the rules of the GSA.
“Rather than taking action then, the Government sat on its hands, and in the subsequent thirteen years, witnesses have died, memories have faded and documents have disappeared — the very reasons that statutes of limitations exist,” the motion states. A Nov. 2 ruling by Judge Leonie M. Brinkema partly granted Oracle’s motion, dismissing “any claims based upon the 1997 disclosures; (2) any claims alleging common law fraud occurring before May 29, 2004; and (3) any claims alleging False Claims Act violations, breach of contract, or quasi-contract violations occurring before May 29, 2001.
A Nov. 2 ruling by Judge Leonie M. Brinkema partly granted Oracle’s motion, dismissing “any claims based upon the 1997 disclosures; (2) any claims alleging common law fraud occurring before May 29, 2004; and (3) any claims alleging False Claims Act violations, breach of contract, or quasi-contract violations occurring before May 29, 2001.” – CIO
The Settlement of Case #1
Oracle eventually paid roughly $200 million to settle this case.
“Oracle Corp. agreed to pay $199.5 million, plus interest, to settle charges that it defrauded the U.S. government on a software contract that involved more than $1 billion in sales, the Justice Department said Thursday. “
The damage amount is curious. It seems like a price of a can of soup as if part of the negotiation between the Oracle attorneys and the DOJ was to keep the settlement below $200 million. A second question we have is if the fraud was roughly $200 million, why was no one at Oracle brought up on criminal charges. Shoplifting clothes in the US is a misdemeanor. How does the $200 million fraud not qualify for criminal indictments? If the $200 million only covers the amount overpaid by the government, this means that in effect, Oracle was not punished, and they have little incentive not to continue the practice. That is, Oracle can book the revenues where they are not caught, and pay out settlements where they are caught. This means it is a winning strategy to continue the practice.
Oracle’s Second US Government Lawsuit for Fraud (and Kickbacks)
The Lawsuit Quotes
The original offender was Sun Microsystems, which was purchased by Oracle.
“This settlement resolves allegations under the False Claims Act (FCA) and Anti-Kickback Act that Sun knowingly paid kickbacks to systems integrator companies in return for recommendations that federal agencies purchase Sun’s products. Sun executed agreements with consulting companies that provided for the payment of fees each time the companies influenced a government agency to purchase a Sun product. These kickback allegations are part of a larger, ongoing investigation of government technology vendors that has resulted in settlements to date with six other companies.” – Justice.gov
For a while now, Brightwork Research & Analysis concluded that many of the decisions made in the IT arena don’t make any sense, and the only thing that would make them make sense is if the decision-making entities are selling out the interests of their clients for personal benefit. This shows evidence of kickbacks. Our view is that for the decision making to be as bad as it is, this practice must be more prevalent than generally known.
How Common are Kickbacks?
We found another case of kickbacks, this time against HP.
“Hewlett-Packard will pay the U.S. government US$55 million to settle allegations that it defrauded the U.S. General Service Administration and other agencies by paying kickbacks to systems integrators in exchange for recommendations that agencies purchase HP products, the U.S. Department of Justice announced Monday.” – CIO
Yes, this is not a similar claim; this is the exact same claim as was brought against Sun/Oracle. But again, where are the claims brought against the SIs?
Well, the following quote explains.
“The lawsuit centered on alleged improper payments and illegal rebates made by HP, Sun Microsystems and Accenture, but the lawsuit named dozens of IT companies allegedly involved in giving or receiving kickbacks.
The HP settlement is the second-largest of five settlements resulting from the lawsuit. In May, EMC agreed to pay the U.S. government $87.5 million to settle similar charges.
HP had announced a potential settlement in early August. The company denies any illegal activity. “We believe it is in the best interest of our stakeholders to resolve the matter and move beyond this issue,” an HP spokeswoman said.”
And now EMC was doing the same thing. This is quite a lot of companies engaging in kickbacks with SIs. Is it still the argument of SIs that they always look out for their client’s interests?
This statement from HP is quite untrue. If HP had the ability to win the case against the government, it would have had a responsibility to fight the case.
And now we get to the settlements paid by other companies, including consulting firms.
“The DOJ has settled similar kickback allegations with IBM for $2.9 million, Computer Sciences for $1.4 million and PWC for $2.3 million. The same allegations were a part of the $87.5 million settlement with EMC. The EMC settlement also settled defective pricing claims found through an audit by the GSA.” – CIO
But why where the settlements paid by the receives of the kickbacks (IBM, CSC, and PwC) so low? They amount to a combined settlement of less than $7 million. IBM, CSC, and PwC are giant firms. They will barely notice such fines.
The Settlement of Case #2
Another interesting feature is that the dollar amount of the payment by Oracle is so low.
“Oracle America Inc. has agreed to pay the United States $46 million to settle claims that Sun Microsystems Inc., a corporation that merged with Oracle in 2010, submitted false claims and caused others to submit false claims to the General Services Administration (GSA) and other federal agencies, the Justice Department announced today.” – Justice.gov
Kickbacks are illegal, so why is the settlement so low?
Sun was caught paying kickbacks to SIs. If the SIs were known, why wasn’t the SIs brought into the lawsuit and also made to pay fines? Taking kickbacks is as illegal as paying kickbacks.
“The settlement also resolves claims under the FCA that Sun’s 1997 and 1999 GSA Schedule contracts were defectively priced because Sun provided incomplete and inaccurate information to GSA contracting officers during contract negotiations, as well as claims that the incomplete and inaccurate information resulted in defective pricing of Sun’s contract with the U.S. Postal Service and GSA Schedule contracts held by two resellers of Sun products.” – Justice.gov
This means this settlement was for more than kickbacks paid to SIs.
This means that Sun was accused of defrauding the Postal Service and the GSA. Again, if we cut the settlement in half (one for each offense), we end up with $23 million per offense. These appear to be very small penalties per offense.
What incentive does (now Oracle) have not to continue to engage in these behaviors in the future and write off any settlements as a cost of doing business? In fact, don’t they have a responsibility to shareholders to continue to defraud the government?
And once again, there were no criminal charges we could find brought that resulted from this case.
At the time Sun entered into its contracts with GSA to sell information technology products and services to federal agencies, applicable regulations and contract provisions required Sun to fully and accurately disclose to GSA how it conducted business in the commercial marketplace so that GSA could use that information to negotiate a fair price for government customers using the GSA contracts to purchase Sun products and services. The defective pricing information that Sun disclosed to GSA was subsequently relied on by the Postal Service in negotiating a contract with Sun, as well as by GSA in negotiating contracts with two resellers of Sun products.”
Long story short, Sun was charging the US government more than it was charging commercial customers.
The discounts given to commercial customers were hidden.
“The complaint against Oracle was originally filed by an Oracle employee, who alleged that large discounts offered to other customers were hidden from government agencies. Paul Frascella — who no longer works for Oracle — accused his employer of a “scheme…to defraud the United States government by failing to disclose deep discounts offered to commercial customers” – The Register
One commenter on The Register offered the following explanation of the GSA MAS or the General Services Administration Multiple Award Schedules.
“The GSA MAS schedule exists precisely to allow government departments to buy products and services from a “catalog” of pre-approved items WITHOUT having to go through tedious, expensive, time-consuming negotiations each time nor for every government purchasing department to need to employ experienced negotiators. Vendors can choose to participate in it if they promise that the government will get the same price as the “most favored” customer — and generally speaking, vendors fall over themselves to get included. Most-favored Customer pricing is a contractual obligation freely entered into by the vendor when they choose to participate in the GSA MAS. If a company doesn’t have the internal controls in place to ensure that it complies with the legal obligations that it opted in to, it shouldn’t sign up for GSA MAS. Simple as that.”
This is essentially the same claim made by the DOJ in the first fraud case. And there it is against Sun Microsystems, which had different management from Oracle. This brings up the question, how common is it for IT firms to hide the discounts that commercial companies receive from the US Government. And the US Government should ask itself the question if the only penalty they are prepared to issue to firms that do this, what is the incentive to stop doing this?
The Commonality of Kickbacks and Fraud Against the US Government by Software and Hardware Vendors
Software companies and consulting companies routinely rip off the US government. The VA is currently implementing a Cerner health record system that we have predicted will fail, and was only selected because of campaign donations. The point is that the bar is set incredibly low. US taxpayers are expected to pay billions to IT consulting and vendors every year that will lead to very little.
The US government is supposed to be transparent. Yet these implementations are kept private. If the government published what was going on with these projects, which they certainly could, they could bring oversight. Not only that it would give researchers like us access to information so that it would serve a research purpose as well.
Currently, the only oversight is congressional and senate committees, where the politicians show how little they know about IT. The US government lacks the domain expertise to manage either IT vendors or consulting firms.
This means to get sued for fraud (multiple times) by the government is, in a way, an amazing accomplishment.
Oracle Fraud Detection?
What is ironic is that Oracle has a fraud detection offering.
Perhaps the first place that Oracle should run its fraud detection software is on their own internal operations, which keep them from being repeatedly sued by the US government for fraud.
There is a curious quotation from the Oracle PDF on fraud detection.
“New account fraud also continues to gain momentum as criminals buy stolen information and use it to set up a new account. This type of fraud can go undetected for longer periods of time as thevictims are often unaware asthey are not seeing any abnormalities on their statements.”
However, Oracle’s position was that the fraud that was undetected in Oracle pricing to the US government should have been a reason to dismiss the charges against Oracle. Oracle’s position on fraud seems inconsistent.
And their PDF goes on to say..
“Oracle Financial Services Enterprise Fraud Management is changing the game with a powerful integrated solution that enablesan enterprise-wide approach to fraud management combined with real-time decision support—powered by machine learning—that equipsfirms to stop even the most creative fraudsters in their tracks.”
It appears that Oracle did not pay damages, but only paid back the amount they defrauded the US government. It looks like they paid 20% on the total amount of software sold, which as anyone knows who negotiations with Oracle, is just a modest discount.
If the DOJ applied the same rules to citizens that they apply to corporations, after being caught for theft, the individual could provide a settlement by only returning the item to the store. If that rule were applied, theft from stores would be rampant. I would make multiple weekly trips to Best Buy because they have a lot of stuff; it would make sense to try to steal.