March 8, 2004

Analysis: Microsoft, SCO have a lot more explaining to do

Author: Chris Preimesberger

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 companies;
  • 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 value.
  • 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 background:

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 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 transfer.

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.


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