Posted on 10/09/2006 1:05:09 PM PDT by antiRepublicrat
In the ongoing saga of SCO v. IBM, one peripheral question has been the extent of Microsoft's financial support for SCO. Groklaw has dug up an interesting bit of data in the case, namely that Microsoft supposedly promised venture capital firm BayStar that they would guarantee their multimillion-dollar investment in SCO.
Buried in IBM's recent motion for summary judgment against SCO is a Declaration from BayStar general partner Larry Goldfarb. Near the beginning of the long-running legal soap opera, BayStar invested $50 million in SCO. In exchange for their investment, BayStar received 20,000 shares of preferred stock in SCO.
In his declaration, Goldfarb testifies that former Microsoft senior VP for corporate development and strategy Richard Emerson discussed "a variety of investment structures wherein Microsoft would 'backstop,' or guarantee in some way, BayStar's investment." Goldfarb then said that after BayStar committed the $50 million to SCO's cause, Microsoft "stopped returning my phone calls and e-mails, and to the best of my knowledge, Mr. Emerson was fired from Microsoft."
As SCO's case began showing more holes than a slice of Swiss cheese, BayStar began to regret that hefty investment. In April 2004, BayStar asked SCO to redeem its preferred stock for cash, accusing SCO of breaking the terms of the investment agreement. A few days later, BayStar pressed its case by calling for a change in management at SCO, saying that the company's management team was spending too much time and money dissing Linux instead of concentrating on its increasingly costly battle against IBM.
Things got messier with the two companies finally agreeing in June 2004 that SCO would repurchase $40 million of BayStar's stock for $13 million. However, before that deal was finalized BayStar went on the offensive again, accusing SCO of misleading it about the potential for revenues from its SCOsource UNIX licensing program. For the first two quarters of 2004, revenues totalled $30,000, instead of the millions SCO had told BayStar it expected. SCO and BayStar finally worked out a mutually acceptable agreement, and the divorce became final later that year.
Questions have been raised about the extent of Microsoft's involvement not only with BayStar, but with SCO itself. Microsoft stood to gain in the event of a SCO victory, as Linux would become a much-less-attractive option for companies looking to wean themselves from UNIX or even Microsoft's own commercial offerings. In March 2004, an e-mail surfaced that indicated Microsoft had played a part in hooking BayStar up with SCO. At the time, both BayStar and Microsoft denied that the Redmond, WA-based software giant had any financial involvement in the deal, although it did purchase a UNIX license from SCO in 2003, ultimately spending $16.6 million on licensing fees.
In the big picture of SCO's disastrous legal strategy, the extent of Microsoft's involvement—if any—will ultimately be little more than a footnote in an obituary. SCO's case has proven to be so weak that it is difficult to envision any amount of investment by Microsoft, BayStar, or any other capital firm that would have us saying positive things about SCO and its prospects for survival.
"Microsoft assured me that it would in some way guarantee BayStar's investment in SCO."
SCO got $50 million to fund its lawsuit after that. Looks like the open source community's rumors that this lawsuit was being indirectly helped by Microsoft weren't so tin-foil hat.
yawn. into the "the better you are the more they hate you" file with this.
Wait a second. I don't doubt that this may have happened but BayStar isn't just going to jump into this deal without some written assurances right? There seems to be no mention of any real deal being made, right?
Very good point. You don't spend $50 million without getting it in writing. At least that's what contracts for idiots say. Looks like they must be more dumb than idiots OR they are lying.
Microsoft is famous for using their name and the "process" to give people the illusion that Microsoft is going to make things happen for them. Most especially technology companies that Microsoft pilfers via the mechanism of "Due Diligence." Where MS says they are attempting to find it the company's technology is "real." If its not protected well enough, MS simply implements their own and says ... sue us! Many have tried and few have succeeded. But, during the period of inspection or communication Microsoft is getting their way.
Such is probably the case with BayStar where just the Name of Microsoft and sweet promises were enough for BayStar to risk $50 Million on the opportunity to be owed a favor by Microsoft.
Whoa! With all due respect, that is just not true. I have been in the industry for quite some time and I know that many companies are "leery" about doing business with Microsoft. Microsoft has a long track record of eventually turning on those who partner with it.
That is why I cannot believe that BayStar said "Microsoft would make it worth our while" yet have nothing to back it up with. At least, nothing they are willing to come out and admit to in public.
At the time, SCO was suing IBM for 3 Billion dollars and the press was giving credence to this howler. And Microsoft comes to you saying we know this case is a lock, but we can't get our hands on it.. would you do this for us? 50 Million buys you perhaps $500 Million in a couple of years in a negotiated settlement???
It easy to see how these folks could be duped.
Oh I see why BayStar wanted to do it. A negotiated settlement would have raked in some dough for them. I guess the question how did MSFT exactly "sweeten the pot". Just saying they will make some guarantees seems a little odd unless they are used to doing business this way.
There is supposed to be an email out there somewhere. I guess I gotta go look for it.
Oh I understand the why MSFT wants SCO to win this and I have no doubt MSFT has been doing something. I am just curious why BayStar outed MSFT on this?
By the way there is a follow up post here about who at MSFT Goldfarb talked to. http://www.groklaw.net/article.php?story=20061009152706664
I'm guessing sworn testimony under penalty of perjury.
I just read the whole thing -- WOW! He even talked to SCO's law firm, which stated that they believed IBM would settle quickly, giving a good return.
"We also discussed SCO's lawsuit with David Boies from SCO's outside law firm, Boies, Schiller & Flexner LLP. Mr. Boies informed me that he believed that IBM would settle the case fairly quickly."This bolsters another thing the OSS folks have been saying, that SCO didn't really have anything to back up the scrutiny of full discovery and a trial, and was instead hoping for a quick settlement to get them off IBM's back at a time IBM was promoting Linux.
Investor outlines SCO-Microsoft link
******************AN EXCERPT ***********************
A former investor in the SCO Group has identified a Microsoft executive who, he said, worked to "backstop" a funding deal that ultimately helped SCO pursue its legal case against the Linux operating system.
The investor, BayStar Capital managing partner Lawrence Goldfarb, first called attention to Microsoft's involvement in BayStar's $50 million investment in the SCO Group more than two years ago.
The BayStar-arranged funding, which included $20 million from the venture fund and $30 million from the Royal Bank of Canada, was instrumental in SCO's expensive lawsuit against IBM, in which it alleges Big Blue moved proprietary Unix technology into open-source Linux against the terms of its Unix contract with SCO.
Now, in a sworn declaration described in an IBM court filing, Goldfarb said he discussed SCO funding arrangements with Richard Emerson, a Microsoft senior vice president. In 2000, Microsoft CEO Steve Ballmer named Emerson to lead the software giant's corporate development and strategy, putting him in charge of its mergers, acquisitions and partnerships.
"Mr. Emerson and I discussed a variety of investment structures wherein Microsoft would 'backstop', or guarantee in some way, BayStar's investment...Microsoft assured me that it would in some way guarantee BayStar's investment in SCO," Goldfarb said in the declaration.
The assertion indicates that at least one person at Microsoft apparently was working, at least indirectly, to support SCO's case against a mutual rival, the Linux operating system. SCO Chief Executive Darl McBride said the $50 million investment arranged by BayStar brought the company's legal "war chest" to $60 million.
A Microsoft representative didn't specifically deny the BayStar-Microsoft talks. However, the company said in a statement, "Microsoft has no financial relationship with BayStar and never agreed to guarantee any of BayStar's $50 million investment in SCO. The BayStar declaration confirms that no guarantee was ever provided."
Goldfarb's comments were disclosed over the weekend at the SCO-watcher legal Web site Groklaw.
Goldfarb's declaration indicates Microsoft was indeed willing to help SCO attack Linux, said Allonn Levy, litigation attorney with Hopkins & Carley, a San Jose, Calif.-based law firm.
The Goldfarb Declaration - Updated: MS Statement
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I now have the Larry Goldfarb Declaration, and now that I've had a chance to read it in full, what he says is actually a great deal more damaging, if established, than the part IBM highlighted in its Memorandum in Support of Its Motion for Summary Judgment on SCO's Interference Claims. According to the Declaration, Richard Emerson was not the only Microsoft employee Goldfarb was dealing with in connection with the BayStar investment in SCO. He mentions by name two others, from two other departments. He says, "I had discussions with Kenneth Lustig, Microsoft's managing director of intellectual property and Tivanka Ellawala, from Microsoft's corporate development department regarding the SCO deal." If true, that would seem to rule out Mr. Emerson being on some kind of rogue mission. You can see Mr. Lustig on this Directions on Microsoft chart of executives, showing him reporting to Marshall Phelps, who in turn is under Brad Smith, the Microsoft General Counsel and Secretary. Goldfarb recounts conversations with David Boies as well, and Goldfarb, then considering investing in SCO back in 2003, says Boies told him that he thought IBM was going to settle quickly. Obviously that didn't happen. Later, when Goldfarb asked to see the evidence against IBM, so his consultants could evaluate the strength of SCO's claims, he says that Boies said he'd provide it but he never did. Eventually Boies stopped taking Goldfarb's phone calls, the Declaration relates. I'm wondering now if Mr. Boies will end up a witness in this case, if IBM's motion is denied and SCO gets to proceed with its interference claims. I'd venture a guess that SCO wishes it had never accused IBM of interfering with SCO's business relationship with BayStar. But let's let Goldfarb tell his own story and I'll get the PDF up as soon as I can. This is just one of more than 500 exhibits that IBM has provided the court in support of its various motions for summary judgment. It's number 165. I'll have the exhibits list up as text shortly as well. Also, I thought you'd want to know that Ray Noorda died today, at 82, according to The Salt Lake Tribune. Frank Hayes at ComputerWorld has a more fitting tribute, with a link to the Canopy Group statement. Update: Todd Bishop at the Seattle Post Intelligencer has Microsoft's response. Here is their statement: Microsoft has no financial relationship with BayStar and never agreed to guarantee any of BayStar's $50 million investment in SCO. The BayStar declaration confirms that no guarantee was ever provided. Microsoft does have a deal with SCO that has been widely reported. We paid SCO for licensing rights to ensure IT interoperability for UNIX migration technology, currently in use in Microsoft Utilities for UNIX-based Applications. **********************************
SNELL & WILMER LLP CRAVATH, SWAINE & MOORE LLP Attorneys for Defendant/Counterclaim-Plaintiff
1. I, Lawrence R. Goldfarb, declare as follows: 1. This declaration is submitted in connection with the lawsuit entitled The SCO Group, Inc. v. International Business Machines Corporation, Civil No. 2:03CV-0294 DAK (D. Utah 2003). Unless stated otherwise, i make this declaration based upon personal knowledge. 2. I am one of the founders and managing members of BayStar Capital Management, LLC ("BayStar"). I have served as a managing member of BayStar since 1998. BayStar is the sole general partner of BayStar Capital II, L.P. (the "Fund"), an investment fund formed in 2001. 4. No one from IBM ever had any communications with me or, to my knowledge, anyone at BayStar relating to SCO. As I discuss below, BayStar terminated its relationship with SCO for multiple reasons. BayStar's decision to terminate its relationship with SCO had nothing whatsoever to do with any communications with or conduct of IBM. 5. In late 2003, the Fund and aligned investors invested a total of $50 million in SCO. I was one of the three managing members of BayStar who approved the investment, and I was intimately involved with all details of the transaction. 6. Sometime in 2003, I was approached by Richard Emerson (Microsoft's senior vice president for corporate development and stratedy) about investing in SCO, a company about which I knew little or nothing at the time. Mr. Emerson stated that Microsoft wished to promote SCO and its pending lawsuit about IBM and the Linux operating system. But Microsoft did not want to be seen as attacking IBM or Linux. For that reason, Microsoft wanted to further its interest through independent investors like BayStar. 7. I did some research on SCO, and had conversations with Mr. Emerson about it as well. In the course of my research about SCO, I became concerned that SCO might be merely a litigation company. As a result, Mr. Emerson and I discussed a variety of investment structures wherein Microsoft would "backstop," or guarantee in some way, BayStar's investment. In addition, I had discussions with Kenneth Lustig, Microsoft's managing director of intellectual property and Tivanka Ellawala, from Microsoft's corporate development department regarding the SCO deal. As part of these discussions, Microsoft assured me that it would in some way guarantee BayStar's investment in SCO. However, Microsoft would not agree to put anything in writing on this point. 8. The other managing members of BayStar and I met with Darl McBride of SCO and heard his pitch about SCO's business and SCO's lawsuit against IBM. We also discussed SCO's lawsuit with David Boies from SCO's outside law firm, Boies, Schiller & Flexner LLP. Mr. Boies informed me that he believed that IBM would settle the case fairly quickly. 9. As a result of Microsoft's and SCO's assurances, the other managing members of Bay Star and I voted unanimously to make the $50 million investment in SCO. the transaction was completed on October 16, 2003. 10. Not long after making the investment, I became very concerned about it. Among other things, it became clear to me that the BayStar investment was used primarily to pay David Boies' law firm. Beyond that, SCO's stock price declined, Microsoft stopped returning my phone calls and emails, and to the best of my knowledge, Mr. Emerson was fired from Microsoft. 11. I was also very concerned about SCO's high cash burn rate and whether its UNIX products were viable in the marketplace. 12. Thereafter, I had meetings with David Boies and asked him to provide me the evidence supporting SCO's case against IBM, so that my consultants could analyze the strength of the claims. Mr. Boies promised to provide the evidence but never did. Eventually Mr. Boies stopped returning my calls. 13. SECTION REDACTED. 14. Having received no satisfactory response from SCO, I determined that BayStar's obligations to its investors required the Fund to get out of this investment. I negotiated the terms of the deal to retire the investment on behalf of BayStar. SCO's outside law firm, negotiated the settlement on behalf of SCO, including the financial terms of the deal. 15. Ultimately, BayStar, on behalf of the Fund, agreed to sell its SCO Preferred Shares back to SCO for $13 million cash payments to BayStar and the issuance of shares of SCO common stock. 16. BayStar's decision to redeem its shares in SCO and retire its investment in SCO had nothing whatsoever to do with IBM or any representative of IBM. No one from IBM ever contacted me or anyhone else at BayStar about SCO, BayStar's investment in SCO, or anything else. Other than one investment that involved IBM years before BayStar's investment in SCO (and in connection with submitting this declaration), I have had no dealings with IBM or any of its representatives. 17. I declare under penalty of perjury that the foregoing is true and correct. Executed September 13, 2006.
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Let's see, one is a damage-control PR statement, and the other is sworn testimony from the head of a company that has no stake in the matter anymore (I think they've sold their SCO by now). Which to believe...
Which to believe? Well if you believe the head of a company you'd have to admit he's also an idiot for not getting it in writing; tehrefore, how on earth did he become a head of a company able to spend $50 mil on a crappy investment?
Something isn't adding up.
It's a long story.
Boies, the firm representing SCO, and which will get a huge chunk if they win, was hoping for a huge settlement with IBM. SCO was suing at the beginning of IBM's big Linux strategy, and Boies/McBride thought that the suit could cause enough FUD in the market for IBM to either settle or buy SCO. That would have reaped huge rewards for Boies and any investors.
But SCO was running low on cash. Microsoft goes to Baystar and suggests they invest some money in this company called SCO, and Microsoft's interest is in an attack against IBM and Linux. But Microsoft can't be seen as attacking (thus no paper trail). Baystar expresses reservations, and Microsoft offers to guarantee the investment, but again can't leave a paper trail for obvious reasons.
Baystar listens to McBride, and Boies, who says they're expecting IBM to settle soon for huge sums of money. Basically, Boies and McBride were saying, "Come, play the legal lottery with us, you have great odds."
I believe this prospect of a quick and very large payout is what got Baystar very close to investing, but Microsoft's offer of a guarantee softened their worries enough for them to actually invest.
So you're saying Baystar CEO is an idiot then?
No, he just got greedy, and believed Microsoft (which many before him have).
Wow, you'll defend anyone that attacks M$. You can't even admit that this guy made an idiot mistake.
You know the saying..."fool me once, shame on you. Fool me twice shame on me."
(or as Bush said it). "Fool me once, Shame on you. Fool me twice...well you can't fool me again."
To become CEO I'd expect he's been around the block a few times, so this wasn't his first mistake. Bottomline he's in idiot or a liar.
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