Inside look at a billionaire's budget / Larry Ellison's spending worries his accountant

Amercia's Cup class racing returned to the U.S and the Bay Area as the cup winning Swiss team ALINGHI took on Bay Area's , ORACLE BMW racing team. Larry Ellison is at the helm (in photo) of the Oracle racing team , against his friend and rival, Ernesto Bertarelli, skipper of the Alinghi. Oracle won the first race of a pair racing today. 09/11/03 FREDERIC LARSON / The Chronicle less Amercia's Cup class racing returned to the U.S and the Bay Area as the cup winning Swiss team ALINGHI took on Bay Area's , ORACLE BMW racing team. Larry Ellison is at the helm (in photo) of the Oracle racing ... more Photo: FREDERIC LARSON Photo: FREDERIC LARSON Image 1 of / 5 Caption Close Inside look at a billionaire's budget / Larry Ellison's spending worries his accountant 1 / 5 Back to Gallery

Even billionaires need to budget.

That's the message delivered to Oracle Corp. founder Larry Ellison, one of the world's richest men, by his personal financial adviser in a series of e-mails obtained by The Chronicle.

In the e-mails, which stem from a recent shareholder lawsuit against the technology titan, Ellison's accountant, Philip Simon, warns the billionaire about his habitual runaway spending. Like a concerned parent, Simon chides Ellison for overextending himself on a new yacht, on his America's Cup team and on his new houses in Woodside and Malibu.

"I'm worried, Larry ..." Simon wrote to Ellison in a 2002 e-mail. "I think it's imperative that we start to budget and plan."

According to documents unsealed by a judge in the shareholder lawsuit, Ellison habitually pushes his credit limit of more than a billion dollars to its maximum to finance his yachts and homes. And that's not even counting some $20 million a year he burns through in miscellaneous lifestyle expenses.

Of course, there's no question that Ellison, 62, is good for the loans. Forbes' famous list of wealthy people says the maverick entrepreneur is the nation's fifth richest individual, worth $17 billion, mostly in Oracle stock. Still, Ellison's spending and his reluctance to part with Oracle shares have caused his financial adviser fits of anxiety, the documents show.

Simon expressed concern that Ellison would follow in the footsteps of wealthy entrepreneurs who ran into hard times in their personal or business finances, people like Carl's Jr. founder Carl Karcher and Computer Associates founder Charles Wang.

Simon went so far as to write, "I don't want you to end up like ... Bernie Ebbers, and the countless others." Ebbers, the former WorldCom CEO, famously borrowed heavily against his own stock holdings, ultimately resigning in disgrace before being charged with and convicted of securities fraud. Ebbers is serving 25 years in federal prison.

The lawsuit that revealed these communications was a shareholder action that accused Ellison of acting on insider information when he sold more than 29 million Oracles shares in January 2001, just weeks before Oracle issued a disappointing earnings statement and the stock plummeted.

Ellison generated nearly $900 million with that sale, making his 2001 income more than any other executive had ever taken in during a single year, the Washington, D.C., think tank Institute for Policy Studies disclosed.

The suit was settled in November in San Mateo Superior Court -- Ellison agreed to donate $100 million to charity and pay $22 million to lawyers out of his own pocket -- but the settlement is being appealed by a shareholder.

In court depositions, Ellison argued that he had sold the shares not because he thought Oracle's stock would soon decline in price but because Simon had been pressuring him to unload some of his vast company holdings. For instance, in a 2000 e-mail, Simon urged Ellison to "take some money off the table" because the adviser said he had grown increasingly concerned.

Simon did not return an e-mail from The Chronicle regarding this story. An Oracle spokesman offered no comment.

The personal e-mails and other documents originally were filed under seal as confidential, but San Mateo County Superior Court Judge John Schwartz unsealed them in November.

A holding pattern

So how could someone with $17 billion cause his accountant to worry about running low on cash? Ellison, who identifies strongly with the company he founded in 1977, has been famously unwilling to sell Oracle shares over the years.

Instead of selling them, he has financed his lavish lifestyle -- the 23-acre Japanese-style estate in Woodside, the yachts, the airplanes, the Armani suits -- by borrowing against his stock.

"I know this e-mail may/will depress you," Simon wrote in a 2002 note about diversification. "However, I believe it's my job to address issues you'd prefer not to confront. You told me years ago that it's OK to raise the 'diversification issue' with you quarterly. ... Well, I'm doing so. View this as a call to arms."

This wasn't the first time Simon had sounded the alarm. In 2001, Ellison's spending was on an upswing, and his debt level was increasing rapidly, Simon said in a 2004 deposition.

Simon tried to explain to Ellison the seriousness of his debt, saying, "We have a freight train going down a track, hitting a debt wall," he said in the deposition.

Ellison apparently didn't view his way of operating as risky. Court documents quote him as pointing out that his net worth was always at least 10 times his debt.

But financial experts agree that borrowing against stock holdings isn't generally accepted as a good way to operate.

"If you were to look in the textbook for how a financial plan should work, this would be in chapter one under, 'Never do this,' " said Cynthia Harrington, a former money manager who now writes about finance for journals and magazines.

The danger is that if Oracle's stock value drops steeply, the banks could call in their loans, forcing Ellison to sell masses of stock at bargain-basement prices to cover them.

Ellison has already found himself facing a situation like that. In 1990, Oracle ran into hard times, and its stock fell to $5 a share, causing big cash flow problems, recalls Nicola Miner, the daughter of Oracle co-founder Bob Miner, in the biography, "The Difference Between God and Larry Ellison," by Mike Wilson. (The famous subtitle to the book is: "God doesn't think he's Larry Ellison.")

At that time, Ellison managed to avoid having to sell his Oracle shares cheaply by selling nearly $3 million worth of shares he owned in another company, Cadence Design Systems, and by arranging a line of credit with securities firm Morgan Stanley.

Then again, Ellison owns so much stock that the value would have to decline pretty severely before banks would ever consider calling in his loans, Harrington said.

Simon's comparison to WorldCom founder Ebbers is apt, though certainly not in a criminal sense. Ebbers, too, financed lavish spending by borrowing against his WorldCom shares. When they declined in price and his loans were called in, he turned to borrowing heavily from the company itself, and when he resigned in 2002, shortly before Simon wrote the e-mail mentioning him, he owed WorldCom $408 million.

Ellison, by contrast, has not borrowed from Oracle but from a number of banks.

As risky as it can be, Santa Clara University finance Professor Meir Statman said it is not uncommon for senior executives to borrow against their stock to avoid parting with it.

Statman studies behavioral finance, which examines how people often make financial moves based on emotional perceptions instead of rationally following the path that maximizes income.

"It is really a sense of, 'I know this company better than others do,' and, second, 'The entire world is not appreciating my company as it should be appreciated,' " Statman said.

Indeed, even when Simon persuaded Ellison to sell shares of Oracle in 2001, Ellison set a price floor of $30, below which he felt the stock would be undervalued.

Oracle shares fell to $16.88 in March of that year after Oracle warned that its third-quarter profit would not meet market expectations.

Big risk, bigger spending

Oracle and other tech companies were headed for further declines. This is something Simon, if not Ellison, saw coming. As the stock market ran to a fever pitch in 2000, Ellison's undiversified portfolio increasingly worried Simon.

"Query -- have you seen the reviews on Robert Shiller's new book 'Irrational Exuberance?' " Simon wrote in a March 29, 2000, e-mail urging Ellison to start a sales program that would divest him of 0.5 percent of his Oracle stock each quarter.

As usual, that didn't result in a big change in Ellison's behavior. The CEO finally did start a regular diversification program, but not until 2004. In his most recent sale through this plan, Ellison sold more than a quarter of a billion dollars worth of stock earlier this month.

Getting back to the scary days of 2000, when the tech stock market was imploding, a list of Ellison's debts as of July 13, 2000, showed that he owed $1.022 billion to five banks: JP Morgan, Bankers Trust, CMB, Merrill Lynch and UBS. At that time, those loans came from credit lines that had a combined limit of $1.35 billion, putting Ellison a mere $328 million from maxing out.

By 2001, when Ellison made the stock sales that triggered the lawsuit, that debt was up to $1.22 billion.

At the bottom of a document that detailed Ellison's 2000 debt load, Simon had scrawled a rough accounting of Ellison's lavish spending, according to deposition testimony:

"1) Life Style -- annual $20m

2) Interest Accrual -- annual $75m

3) Villa in Japan -- $25m

4) New Yacht -- $194m -- over 3 yrs

5) America's Cup -- $80m -- over 3 yrs

6) UAD -- 12m over 3 yrs."

It's not clear what UAD refers to. Since this rough budget, Ellison has reportedly spent $200 million building a Japanese-style estate in Woodside, which includes a reproduction of a 17th-century Kyoto teahouse. He has also bought multiple properties in Malibu -- $180 million worth, by one report.

Where does it all go?

Ellison's charitable giving also caught his accountant's eye.

Although Ellison's generosity to charity does not rival that of richest American Bill Gates, Ellison's giving seemed to give Simon ulcers, as well. In the 2002 e-mail, Simon frets that the Ellison Medical Foundation's leaders believed Ellison would support increasing its budget to $100 million a year from $35 million annually.

"$100 million is a lot of money ..." Simon wrote. "There's nothing wrong with keeping the (foundation) budget at $35M/year ... or even reducing it in a sensible manner."

And when Oracle executive Safra Catz mentioned in a 2000 e-mail that Ellison might want to donate $1 billion worth of expiring stock options to charity, Simon seemed shaken.

"I had no idea that Larry was even considering donating $1.0bn to charity. Such a large amount."

When asked in a deposition about considering a $1 billion gift, Ellison said he vaguely remembered discussing this with Catz, but nothing came of it.

The documents obtained by The Chronicle certainly show that Ellison did not break any laws, but some experts say they are a symptom of an economy with larger and larger gaps between haves and have-nots.

Sarah Anderson, director of the global economy project at the Institute for Policy Studies, said the details of Ellison's spending shows "how different these peoples' realities are. You have to wonder how much they can connect with the people who work for them and the people they're serving with their business."

Early warning

Larry Ellison's financial adviser, Philip Simon, encouraged the Oracle founder to sell his company's shares when the stock market got soft in March of 2000. Simon wrote March 29, 2000:

"Dear Larry. ... "

"I'm getting increasingly concerned about stock market valuations (query -- have you seen the reviews on Robert Shiller's new book "Irrational Exuberance?") -- and believe this would be a good time to take some money off the table. ... I'd just like to start cashing out."

High anxiety

In an e-mail to Ellison dated May 3, 2002, Simon expresses grave concerns about the Oracle founder's spending.

"I'm worried, Larry. ... I know you view me as a pessimist. Maybe you're right, though I would disagree. Nonetheless, I think it's imperative that we start to budget and plan. New purchases should be kept to a minimum. We need to establish and execute on a diversification game plan, to eliminate (yes, eliminate) all debt and build up a significant, conservatively structured, liquid investment portfolio. If this means sacrificing 30% of your current holdings in Oracle, so be it. With stock options and Oracle's share repurchases, your ownership percentage has been increasing somewhat over the last year or two."

"I do not want you to end up like Carl Karcher, Wang, Bernie Ebbers, and the countless others. Yes, Oracle's a different company; no debt, real cash earnings, clean accounting. But, when the pendulum swings the other way, it can overshoot. PE multiples are driven by market (or should I say, mob) psychology. There's no science or logic in the short or medium term. "

"I know you don't like to discuss this. I know this e-mail may/will depress you. However, I believe it's my job to address issues you'd prefer not to confront. You told me years ago that it's OK to raise the 'diversification issue' with you quarterly. Well, I'm doing so. View this as a call to arms."