October 10, 2004
GRETCHEN MORGENSON
Lies and the Lying C.E.O.'s Who Tell Them

To the casual observer, Oracle v. PeopleSoft, the case unfolding in Delaware Chancery Court, is just the latest round in an ugly and long takeover fight between two software giants. Ho-hum.

But sometimes a small detail in such a case can speak volumes about the times we live in. And that is precisely what happened last week, when testimony turned to the issue of corporate lies, the executives who tell them and the companies that help to paper them over.

Oracle, you may recall, made a hostile bid for PeopleSoft 14 months ago and has received scorched-earth opposition since. The judge hearing the case will decide whether PeopleSoft's directors exercised their fiduciary duty to shareholders in turning down the bid from Oracle.

Our story begins on Oct. 1, the Friday before the trial began, when PeopleSoft abruptly fired Craig A. Conway, its chief executive. In court, a few days later, Steven D. Goldby, chief executive of Symyx Technologies and a PeopleSoft director, testified that one of the reasons Mr. Conway got the boot was that he made a misstatement to analysts at a meeting on Sept. 4, 2003.

The analysts' meeting was PeopleSoft's first and, as is typical, was transmitted over the Internet. Mr. Conway's misstatement came after an analyst asked if the Oracle bid had disrupted PeopleSoft's business.

The questioner wanted to know if customers were holding off buying PeopleSoft software out of fear that the goods would become obsolete if Oracle eventually won the battle. (Both companies sell so-called enterprise software that helps corporations handle things like finance and manufacturing.)

Playing down the bid's effects, Mr. Conway said: "I think people have lost interest in it. The last remaining customers whose business decisions were being delayed have actually completed their sales and completed their orders." In other words, not a disruptive factor, in Mr. Conway's view.

In reports issued after the meeting, many analysts parroted Mr. Conway's comments. A bullish report by Banc of America Securities said the Oracle bid seemed to be less and less relevant to PeopleSoft each day. A Wachovia Securities analyst said, "Officials mentioned that the disruption from the Oracle bid had decreased in the last few weeks." First Albany's report, raising PeopleSoft to a buy from neutral, said Oracle's bid "is no longer a disruptive factor."

NEVER mind that back on Planet Earth, Oracle's bid was indeed creating problems for PeopleSoft. As Mr. Goldby testified in court last week, PeopleSoft's board knew immediately that Mr. Conway had erred in his comments. "We were aware that they were not wholly true," he said.

So what did the company do to correct the misstatement? It filed a corrected version of the meeting transcript with the Securities and Exchange Commission. The correction, however, was part of a document identified as being related to the takeover offer and almost certain to be seen by no one.

In fact, the only clue a curious investor might have that PeopleSoft was correcting anything was this sentence at the top of the transcript, which does not appear until the last half of the document: "Certain statements in this transcript have been corrected to reflect the intended meaning of the speaker." The filing identified neither the speaker nor the statement that was being corrected.

Gone, however, was Mr. Conway's statement about PeopleSoft's customers completing their sales. Instead he is quoted as saying: "Oracle's tactics have created concern among many users, and that's a problem for us. Fortunately we've been able to overcome much of it and we expect that we will continue to be able to do so." Words he never said at the meeting, but that the company said he meant to.

Cute, maybe, if you're a lawyer. But if you're an investor? Dishonest and wrong.

Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels in New York, said PeopleSoft's correction of the misstatement might not be adequate disclosure under securities law. "If there is something out there, which if not corrected would be materially misleading, then the company has a duty to correct it," Mr. Lowenfels said. "And the company has a duty to correct it in a manner that would result in the same degree of dissemination as the original misstatement."

Did the company go to all the analysts at the meeting and advise them of Mr. Conway's error? A spokeswoman said it did not and declined to comment further on the matter. She said that neither Mr. Goldby nor Mr. Conway was available for comment.

A footnote: the month after his misstatement, Mr. Conway sold just more than 200,000 shares of PeopleSoft. The sales generated almost $4.3 million.

Interestingly, the board did not feel that Mr. Conway's lie was a firing offense at the time that he said it. "I did not consider those statements to represent material dishonesty under Mr. Conway's employment contract and I reached that conclusion on the advice of counsel," Mr. Goldby testified.

While Mr. Conway acknowledged in a pretrial deposition that his statement to the analysts had been "absolutely not true" and "promotional," at the trial last Wednesday he backtracked, testifying that he had simply been unclear, not false.

The pity of all this is that PeopleSoft was doing well in its business for the most part, despite the disruption from the Oracle bid.

To be sure, PeopleSoft's reaction to Mr. Conway's deception could be an anomaly. Then again, maybe not. The only reason it came to light was owing to the court case.

So this is where we are now in corporate America. Even in the post- Enron era, some executives still think nothing of misleading investors, analysts and their customers. And when they get caught dissembling, their companies respond in a way that may provide legal protection but also allows the lie to live.

How in the world does corporate America expect to regain investors' trust when it makes boneheaded moves like this?