[FoRK] Fw: Analysis: Microsoft, SCO have a lot more explaining to do

Joseph S. Barrera III joe at barrera.org
Mon Mar 8 20:13:02 PST 2004

The story behind the story. The whole thing makes me sick to my stomach.
Really the only new bits here are of the SEC's possible interest...

- Joe


Whether or not Microsoft is secretly bankrolling the SCO Group for more 
than $100 million to attack Linux and the general open source community 
through questionable intellectual property lawsuits, NewsForge has 
learned that U.S. federal regulators may have begun investigating the 
relationship between the two companies -- and may also be looking 
closely at a number of other people and companies connected to them 
through stock or other business transactions.

Although the Securities and Exchange Commission (SEC) never officially 
makes public when it investigates an organization, an SEC staff member 
told NewsForge that complaints and tips about suspected under-the-table 
funding, stock-kiting, illegal insider trading, and money-laundering 
involving Microsoft or Microsoft-connected individuals to the 
financially struggling SCO Group have been coming into the agency with 
regularity since last August. The SEC "does not take such complaints 
lightly," the source said.

Most of the complaints have been registered by telephone and by using 
the SEC's Web site. "We've gotten a lot of them," the SEC source said. 
An SEC investigation would look into alleged backtracking and charting 
fund transfers, suspicious timing of certain stock transactions, 
possible instances of stock-kiting and insider trading, and other 
potentially serious infractions.

Other individuals may be far ahead of the SEC in this investigation. 
Several open source advocates have been conducting their own, private 
investigations of SCO's financial dealings for many months.

If and when this all gets into court and becomes public record one day, 
the following allegations may be among those included in the litigation:

    * That Microsoft used Lindon, Utah-based SCO Group as a puppet to 
create havoc in the courts against the open source software movement, 
which is the most serious current challenge to the Redmond, Wash., 
company's longtime stranglehold on the personal computer software industry;
    * That Microsoft apparently paid for influence among key software 
industry analysts;
    * That insider trading was common among heavily invested people and 
    * That conflicts of interest occurred, in particular one involving a 
stockbroker/analyst who appeared on a cable television show and gave a 
positive recommendation to SCO stock while he owned a substantial number 
of SCO shares and stood to profit personally from an increase in their 
    * That money was laundered involving two international banks and 
several key outside business people with close ties to both Microsoft 
and SCO Group.

And this might not be the half of it. A story like this has numerous 
threads; much more information is bound to come out as time goes by.

In case you haven't seen the IT news the past few days, here's a little 

This story began last summer, intensified last October when SCO received 
a $50 million investment from BayStar Capital, a venture capital firm in 
California, and moved into the fever-pitch realm with the release last 
Wednesday of "Halloween X," the latest in a series of documents 
published on OpenSource.org by Open Source Initiative founder Eric S. 
Raymond about Microsoft's campaign against Linux.

"Halloween X" includes an October 12, 2003, email memo reputedly leaked 
from an internal SCO Group source to Raymond that outlines in detail the 
Microsoft-SCO Group financial deal and speculates about other future 
deals. Prior to the $50 million infusion of cash from the BayStar 
transaction, SCO Group was in a cash crisis, despite the fact that its 
stock price had been slowly climbing for months. Its primary market, 
Unix products and services, has been down for several months, and 
without additional income, the company might well have been teetering on 
the verge of bankruptcy.

The email memo from SCO Group consultant Mike Anderer (CEO of S2 Group) 
to SCO executive Chris Sontag says, in part, "Microsoft will have 
brought in $86 million for us including Baystar," and that the "next 
deal we should be able to get from $16-20 (million)" for SCO's bank 
accounts. SCO Group is currently suing IBM for $5 billion, contending 
that Big Blue has illegally copied Unix code fragments into its Linux 
products. SCO Group also is suing Novell, DaimlerChrysler, and AutoZone 
in separate actions and says it intends to file more lawsuits in the 
future against companies that it believes violate its intellectual 
property licenses. SCO, in turn, is being sued by Red Hat, who calls 
SCO's claims of copyright infringement "unfair and deceptive actions."

SCO's response

The response from both SCO Group and Microsoft has been very 
interesting, to say the least. Neither one has debunked the email's 
information outright. The key words used in the responses are 
"misunderstanding" (SCO) and "not accurate" (Microsoft) -- about the 
softest terms you can use in a denial.

SCO Group did not question the authenticity of the leaked e-mail, saying 
instead that the message is a "misunderstanding."

"We believe the e-mail was simply a misunderstanding of the facts by an 
outside consultant who was working on a specific unrelated project to 
the BayStar transaction, and he was told at the time of his 
misunderstanding," said SCO spokesman Blake Stowell. "Contrary to the 
speculation of Eric Raymond, Microsoft did not orchestrate or 
participate in the BayStar transaction."

This "misunderstanding" would have been on the part of a consultant who 
had worked with SCO for four months (and had worked with SCO staff 
members previously), and who used specific names, numbers, and dates in 
the memo. Not only that, in this contract between S2 and SCO filed in 
January 2004, S2 "... agrees to indemnify, defend and hold SCO harmless 
from and against any and all losses, liabilities, damages, claims, 
demand, suits, actions and/or judgments, and all costs and expenses, 
including attorneys' fees, based upon, or arising out of damage to 
property or injury (including death) to any person or persons caused by 
any act or omission of IC [the "Independent Contractor," i.e. S2 - Ed] 
or any of IC's agents, employees, contractors or representatives or 
sustained in connection with the performance of Services hereunder or 
based upon or arising from the failure by IC to carry out its 
obligations hereunder or from any unauthorized disclosure of all or part 
of the Confidential Information by IC or any of IC's agents, employees, 
contractors or representatives."

Microsoft's response

Waggener Edstrom's Mark Martin, a spokesman for Microsoft, said: "The 
allegations in the posting are not accurate. Microsoft has purchased a 
license to SCO's intellectual property, to ensure interoperability and 
legal indemnification for our customers. The details of this agreement 
have been widely reported and this is the only financial relationship 
Microsoft has with SCO. In addition, Microsoft has no direct or indirect 
financial relationship with BayStar."

Microsoft did not have to have a relationship with BayStar. According to 
the allegations, other people, connected to Microsoft, SCO, and the two 
international banks mentioned above, apparently took care of that fund 

Microsoft and SCO Group have a lot more explaining to do. SCO cannot 
just admit that "Halloween X" is legitimate, then simply write it off as 
a misunderstanding.

NewsForge and others are beginning to follow the money right now. We'll 
let you know what we find as we connect the dots.

   1. "SEC's Web site" - http://www.sec.gov/complaint.shtml
   2. "BayStar Capital" - http://www.baystarcapital.com/public/
   3. "Halloween X," - http://www.opensource.org/halloween/halloween10.html
   4. "OpenSource.org" - http://www.opensource.org/
   5. "this contract between S2 and SCO filed in January 2004" - 

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printed from NewsForge, Analysis: Microsoft, SCO have a lot more 
explaining to do on 2004-03-09 04:07:03

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