IBM Subpoenas SCO Investors, Analysts

Forbes Magazine ^ | 11/11/2003 | Daniel Lyons

[justlurking]

IBM Subpoenas SCO Investors, Analysts
Daniel Lyons, 11.11.03, 2:53 PM ET

NEW YORK - The legal battle between SCO Group and IBM is widening, as IBM has sent subpoenas to investors and analysts who have supported SCO.

On Oct. 30, IBM (nyse: IBM -

news - people ) issued subpoenas to Baystar Capital, Deutsche Bank (nyse: DB -

news - people ), Renaissance Ventures and Yankee Group, companies that have either invested in SCO (nasdaq: SCOX -

news - people ) or published reports suggesting that SCO's claims against IBM could be legitimate.

"I view this as an attempt to bully and intimidate analysts--to try to cow them into silence," says Christopher Sontag, executive vice president at SCO, in Lindon, Utah.

In a lawsuit filed in March, SCO claims IBM put derivative code from Unix System V--an operating system for which SCO holds copyrights--into Linux, the free operating system developed collaboratively by programmers around the world.

SCO aims to collect $3 billion in damages from IBM and wants Linux customers to pay licensing fees to SCO.

IBM will not say why it issued the subpoenas. But a company spokesman says IBM is frustrated by SCO's reluctance to produce proof of its allegations. "It is time for SCO to produce something meaningful. They have been dragging their feet and it is not clear there is any incentive for SCO to try this in court," he says.

IBM has filed two motions to compel discovery, the most recent one on Nov. 6.

Sontag says SCO has provided 1 million pages of documents to IBM and that IBM in return has provided only 100,000 pages to SCO. "The foot-dragging is on the part of IBM," he says.

One legal expert says the subpoenas may be IBM's way to get at information that SCO will not provide. "If you're having trouble compelling discovery, you go to outside sources," says Brian Ferguson, an attorney at McDermott, Will & Emery, a Washington, D.C., law firm.

Ferguson, who is on the advisory board of a Linux enthusiast magazine and has published an article declaring SCO's case a long shot, points out that in its counter-claim IBM alleges SCO has unjustly enriched itself through the lawsuit.

Investors and analysts have participated, perhaps unwittingly, in that enrichment, Ferguson says. SCO shares, which traded at less than $1 before the suit was filed, now change hands at nearly $16 per share. Some insiders have sold shares.

"IBM needs to get answers from analysts about why they wrote positive reports and from Baystar about why they invested," Ferguson says.

The subpoenas, issued by Cravath, Swaine & Moore, IBM's law firm, present a broad request for all documents related to SCO and the Canopy Group, a Utah investment company that is SCO's biggest shareholder. One subpoena provided to Forbes requests all material related to communication with SCO or Canopy and any agreements that outsiders may have made with SCO or Canopy.

Baystar, Deutsche Bank and Yankee Group acknowledged receipt of the subpoenas but declined to comment on them. Baystar in October invested $50 million in SCO. Deutsche Bank analyst Brian Skiba in October issued a "buy" recommendation on SCO stock and said the stock could more than double in value. Yankee Group analyst Laura DiDio has advised corporate customers who use Linux that they should take SCO's claims seriously.

"We expected IBM to conduct a fishing expedition at some point," says Herbert Jackson, managing director of Renaissance Ventures, a small investment company in Richmond, Va., that first bought SCO shares 18 months ago, before SCO filed its lawsuit, and it has bought more since the suit was filed. In April of this year Renaissance published a research report stating that the SCO lawsuit was "well founded."

Jackson, who also has invested alongside Canopy in other companies, says he has complied with the IBM subpoena, sending a 15-inch stack of paperwork to IBM's lawyers.

Meanwhile, Linux enthusiast Web sites and blogs are buzzing with theories. One is that SCO knows its case is groundless and has been using the lawsuit to perpetrate a massive "pump and dump" securities fraud, and now IBM is talking to Baystar and Renaissance to find out what they were told. (SCO says the "pump and dump" theories are nonsense and that Sontag, along with Darl McBride, CEO, have not sold a single share. Some executives have sold shares but only small amounts and mostly "to cover tax consequences on restricted stock," Sontag says.)

Another theory is that IBM hopes to uncover secret connections between SCO and Microsoft (nasdaq: MSFT -

news - people ). This theory holds that Microsoft is funneling money into SCO via "fronts" like Baystar to keep SCO's litigation alive and cast a shadow over Linux. Baystar has said Microsoft has nothing to do with its SCO investment. Sontag says Microsoft has nothing to do with SCO's lawsuit.

[dighton]

...

[Salo]

Pinging interested parties

[D-fendr]

I wonder if IBM is also looking to make SCO's lawsuit - they are making money on it whether or not they have a case - not so profitable any more.

If that happens, SCO disappears.

[Nick Danger]

I can see why IBM would do this. Deutsche Bank Securities, for example, issued a glowing report suggesting that SCO stock could be at $45 next year.

Given that this company has no business that is profitable, Deutsche Bank was told something to make them think that. IBM has a lawsuit pending against SCO alleging, among other things, that SCO has been making false statements about IBM that amount to trade libel. Well, what statements did SCO make to Deutsche Bank about IBM? Or to Renaissance? Or to Laura Didio?

I suspect Mr. Lyons will be getting a subpoena as well. He is clearly "in the loop" with the SCO insiders. He's getting the same earful.

[battousai]

Go get em Big Blue, this blatant shake down by SCO is along the lines of the revEREnd jacksons slavery reparations, only with even less merit.

[Bush2000]

SCO has been making false statements about IBM that amount to trade libel...

Funny, there seem to be quite a few libelous statements being made on FR...

[Nick Danger]

there seem to be quite a few libelous statements being made on FR...

You betcha. Clinton is a scumbucket, and his old lady is a deceitful, treacherous bitch.

[Liberal Classic]

Funny, there seem to be quite a few libelous statements being made on FR...

``SCO executives perform un-natural acts with poodles'' is libelous because it is false. It I were to make this statement publically it would definately be defamatory because I would know it to be false, I would be saying it with reckless disregard for them and the truth and with malicious intent.

``SCO executives, who have a history of litigating for profit, are filing frivoloud lawsuts and making misleading statements to the business press in an attempt to orchestrate a buyout or artifically inflate the price of their stock'' is not libelous. For one, it is not a falsehood or at least has it has not yet been proved to be a falsehood. Secondly, it is not in reckless disregard the truth, because dishonest business practices are a very serious matter and should be pursued vigorously. Nor is it malicially intended, because I have nothing personally against the executive managers of SCO except that they be a good corporate neighbor. Furthermore, I have nothing to gain from making such a statement nor do I have any kind of privilaged relationship to SCO.

Though it has not yet been proved, I believe that is exactly what they're doing.

Sue a clue.

[Liberal Classic]

Can't be libelous if it's true. :)