August 22, 2006
Ladies and Gentlemen,
I am sending this complaint to the Securities Exchange Commission (enforcement@sec.gov) to describe the illegal actions being taken by Jim Allchin, Paul Allen, Steve Ballmer, BayStar Capital LP, Baystar Capital II, L.P., BayStar Capital Management, LLC, Boies Schiller & Flexner, The Canopy Group, Brent Christensen, Steven Derby, Bill Gates, Lawrence Goldfarb, Jeff Hunsaker, Steven M. Lamar, Darl McBride, Microsoft Corporation, Morgan Keegan, Darcy Mott, Thomas Raimondi, Royal Bank of Canada, S2 Strategic Consulting, Blake Stowell, The SCO Group, Inc., Vulcan Capital, Ralph Yarro, and Bert Young. These entities have committed numerous crimes centered around the recent activities of The SCO Group, Inc.
Ishtiaque Omar has written a thesis which thoroughly explains the background and origins of the current fight between Microsoft and SCO on one side versus IBM and the Open Source community on the other. You can read the thesis, "The Penguin in Peril: SCO's Legal Threat to Linux" here. http://firstmonday.org/issues/issue10_1/omar/#o1
My specific complaints are:
1. SCO is grossly exaggerating the value of its intellectual property by
claiming ownership of operating systems actually owned by other people.
This exaggerated claim is a fraud on the investing public.
Among my experiences in investing I learned to understand the Vancouver
Exchange gold mine fraud which seem to always be with us. Typically a
Vancouver Exchange gold mine promoter finds some gold, which is easy to do,
but of course the gold deposit is too small or too dilute to be profitably
mined. Then the promoter forms a penny stock company which owns the gold
claim and begins hyping the stock. There is actually some gold in the
company's mining claim but the promotion propaganda exaggerates the claim
into the greatest strike since the Comstock lode. If the promoter succeeds
in creating a stock price bubble then he sells as much stock as he can until
the bubble bursts leaving the current crop of gullible investors with heavy
losses. I am sure that the investigators at the SEC are thoroughly familar
with Vancouver Exchange gold mine stock frauds.
Now comes SCO with a new twist on the Vancouver Exchange gold mine fraud.
SCO has a contested claim to ownership to an obsolete computer operating
system called System V which has a microscopic share of the market for
operating systems. SCO has hyped this asset into a claim of ownership of
several other UNIX style operating systems sold by competing companies. The
SCO propaganda has created a stock price bubble in SCOX stock and the SCO
insiders are methodically selling SCOX stock at inflated prices.
This fraud is illegal under the Securities Act of 1934. Rule 10b-5 states:
"It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the mails
or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not
misleading, or
c. To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security."
http://www.law.uc.edu/CCL/34ActRls/rule10b-5.html
A. SCO sells a computer operating system called System V which is sometimes
referred to by the brand name of UnixWare.
http://www.caldera.com/products/unixware713/
Unix System V and its derivatives, including UnixWare, have a small and
shrinking share of the operating system market. That share has been
steadily shrinking for several years because System V is gradually
becoming obsolete.
http://www.computerworld.com/news/2000/story/0,11280,41643,00.html
B. Linux is a operating system written by Linus Torvalds and thousands of
volunteers who donate their creativity for free.
http://www.linux.org/
C. "Project Monterey" is a code name for a joint project between IBM and
"The Santa Cruz Operation" of Santa Cruz, California to create an
operating system based on System V code which works on large IBM
computers. Then later IBM started a second project team with the
same goals as Monterey except the second project was based on Linux.
To my personal knowledge IBM has at least a 40 year history of competing
development projects. IBM has often developed both software and hardware
products by setting up two development projects unbeknownst to each other
and giving both project teams the same assignment. Then IBM chooses to
market the project with better product results and gives the axe to the
among the members of the losing project team. Here is an explanation of
why IBM chose to start supporting Linux.
http://www.groklaw.net/article.php?story=20050117091704111
The reason that IBM gave for cancelling the Monterey project was that
The Santa Cruz Operation (SCO) sold their interest in the Unix System V
code and the Monterey project to Caldera Systems. The Monterey project
contract gives IBM the right to cancel the project in the event of such
a sale by The Santa Cruz Operation.
"IBM shall have the right to terminate this Agreement immediately upon
the occurrence of a Change of Control of SCO which IBM in its sole
discretion determines will substantially and adversely impact the
overall purpose of the cooperation set forth by this Agreement and
applicable Project Supplements or will create a significant risk or
material and adverse exposure of IBM's confidential and/or technical
proprietary information (which is subject to, and to the extent of,
confidentiality restrictions) ("Information")."
http://www.sec.gov/Archives/edgar/data/851560/0000891618-99-000561.txt
The Santa Cruz Operation sold the Monterey project agreement to Caldera
Systems in August, 2000.
"Caldera Systems Inc., a Linux distributor will acquire the Server
Software Division and the Professional Services Division of The Santa
Cruz Operation (SCO) Inc., a Unix provider."
http://www.entmag.com/news/article.asp?EditorialsID=678
Caldera Systems Inc. changed their name to The SCO Group (SCO). This
similarity in names can sometimes be confusing when discussing the
history of the Monterey project. Since IBM terminated the Monterey
project based on the change in control from The Santa Cruz Operation
(old SCO) to Caldera Systems (new SCO) the distinction between the two
very similar names is important.
http://news.zdnet.co.uk/software/developer/0,39020387,2121346,00.htm
Great was (new) SCO's consternation when Monterey was axed in favor of
IBM's Linux project. SCO decided to sue IBM but had no legally
compelling case. SCO decided on a nuisance lawsuit against IBM for
contributing operating system code allegedly owned by SCO to the Linux
operating system.
http://news.com.com/2100-1016-991464.html
D. SCO knew before they filed suit against IBM that their claim was
fraudulent.
SCO hired an outside consultant named Bob Swartz who spent several months
comparing the computer code in Linux against several versions of the Unix
operating system originally developed by AT&T. Michael Davidson of
Caldera Internation (Caldera later changed their name to SCO) worked with
Bob Swartz and received Bob Swartz' report. On August 13, 2002 Michael
Davidson sent an email to Reg Broughton, who forwarded it to Darl McBride
with a cover note. Here is Reg Broughton's email to Darl McBride.
http://www.groklaw.net/pdf/IBM-459-22.pdf
The reasons for the study and the results are summerized by Michael
Davidson in his email thusly:
"The project was a result of SCO's executive management refusing to
believe that it was possible for Linux and much of the GNU software to
have come into existance without *someone* *somewhere* having copied
pieces of proprietary UNIX source code to which SCO owned the
copyright. The hope was that we would find a "smoking gun" somwhere in
code that was being used by Red Hat and/or the other Linux companies
that would give us some leverage. (There was, at one stage, the idea
that we would sell licenses to corporate customers who were using
Linux as a kind of "insurance policy" in case it turned out that they
were using code which infringed our copyright)."
"At the end, we had found absolutely *nothing*. ie no evidence of any
copyright infringement whatsoever."
E. SCO v IBM
IBM has contributed code to the Linux operating system. SCO claimed that
the contributed code was written and owned by SCO. This claim was widely
and repeatedly publicized.
http://www.mozillaquest.com/Linux03/ScoSource-20-CodeReview_Story01.html
quoting MozillaQuest:
"Simply take a look at this excerpt from the letter Darl McBride and
SCO-Caldera sent out to at least 1,500 companies, including Fortune 500
and Forbes 1000 top companies. It is that letter that precipitated the
German Linux community's successful legal counterattack against
SCO-Caldera. That letter, dated 12 May 2003, states in part:
Linux is, in material part, an unauthorized derivative of UNIX . . . We
have evidence that portions of UNIX System V software code have been
copied into Linux . . . legal liability that may arise from the Linux
development process may also rest with the end user . . . We intend to
aggressively protect and enforce these rights . . . we are prepared to
take all actions necessary to stop the ongoing violation of our
intellectual property or other rights."
SCO told the investing public that SCO would reap huge profits from the
damages that IBM would have to pay for illegal distribution of SCO code.
http://webreprints.djreprints.com/875991416323.html#top
1) In the SCO v IBM court hearings SCO lawyers have dropped their claim
that System V code was contributed to Linux after SCO was unable to
produce any evidence supporting that claim. SCO now claims that the
code in question was written by IBM but belongs to SCO anyway.
http://www.groklaw.net/article.php?story=2003121122033016
http://www.theage.com.au/articles/2004/02/09/1076175080452.html
This is in spite of clear legal precedents, most notably USL v BSDi,
which clearly state that the code written by SCO belongs to SCO and
the code written by IBM belongs to IBM.
http://www.groklaw.net/article.php?story=20031128153414688
2) The code that IBM has contributed to Linux is publically available to
anyone. IBM has demanded that SCO identify which lines of that code
are the stolen code. SCO has never answered that question. On
December 5, 2003 Judge Brooke Wells ordered SCO to answer that
question in great detail within 30 days.
http://www.groklaw.net/article.php?story=2003121122033016
On March 3, 2004 Judge Brooke Wells found that SCO had not complied
with the December 5 order and issued the order again with a 45 day
deadline.
http://www.groklaw.net/article.php?story=20040303195948664
Even when ordered to do so in a court case that SCO must win in order
to survive as a company, SCO cannot provide specific evidence that IBM
gave any SCO intellectual property to Linux.
3) IBM explains the importance of the absence of evidence to Judge
Kimball this way.
http://www.groklaw.net/article.php?story=20040521183116140
IBM has asked the court for a series of partial summary judgements to
resolve some of the disputed points in the case. One partial summary
judgement that IBM asked for was for the judge to rule that SCO's
claim that IBM infringed SCO's copyrights by contributing SCO code to
Linux was false. On February 9, 2005 Judge Kimball ruled that IBM's
motions for partial summary judgements are premature. In his ruling
Judge Kimball made the following statement about SCO's lack of
evidence.
"Viewed against the backdrop of SCO's plethora of public statements
concerning IBM's and others' infringement of SCO's purported
copyrights to the UNIX software, it is astonishing that SCO has not
offered any competent evidence to create a disputed fact regarding
whether IBM has infringed SCO's alleged copyrights through IBM's
Linux activities."
http://www.groklaw.net/article.php?story=20050209203941896
http://news.com.com/Judge+slams+SCOs+lack+of+evidence+against+IBM/2100-7344_3-5570265.html
If the SEC has any doubt that the whole SCO claim to owning Linux
intellectual property rights is a complete fraud this statement by
Judge Kimball should remove that doubt.
4) After the deadline for submitting claims has long passed SCO tried to
introduce the unsubstantiated claims again as part of some expert
witness testimony. IBM moved to strike SCO's claims. On June 28,
2006 Magistrate Judge Brooke C. Wells issued a court order in SCO v
IBM which states that SCO has willfully disobeyed several court orders
to produce specific evidence against IBM. In that court order Judge
Wells makes the following statements.
On page 2:
"As outlined in greater detail below, the court finds that SCO has
failed in part to meet the level of specificity required by this
court's orders and the order entered by Judge Kimball. It is also
apparent that SCO in some instances failed to meet the level of
specificity it required of IBM. Further, this failure was willful
under case law and prejudicial to IBM. Therefore, the court GRANTS
IBM's Motion to Limit SCO's Claims Relating to Allegedly Misused
Material in Part."
On page 32:
There appears to be a mistake where the court mentions SCO when she
obviously means IBM. I have placed this correction in parenthesis.
"Based on the foregoing, the court finds that SCO has had ample
opportunity to articulate, identify and substantiate its claims
against SCO (IBM). The court further finds that such failure was
intentional and therefore willful based on SCO's disregard of the
court's orders and failure to seek clarification. In the view of
the court it is almost like SCO sought to hide its case until the
ninth inning in hopes of gaining an unfair advantage despite being
repeatedly told to put "all evidence . . . on the table."
"Accordingly, the court finds that SCO willfully failed to comply
with the court's orders."
On page 33:
"The court finds SCO's arguments unpersuasive. SCO's arguments are
akin to SCO telling IBM sorry we are not going to tell you what
you did because you already know."
On page 36:
"Accordingly, based on the delays that would arise form SCO's lack
of specificity, and the burdens that this places on IBM at such a
late stage in this litigation, the court finds that IBM is
prejudiced by the lack of specificity in SCO's disclosures."
These repeated charges without any evidence and in violation of a
judge's specific orders to stop making such claims is further proof
that SCO v IBM is a deliberate criminal attack on IBM and Linux.
http://www.groklaw.net/pdf/IBM-718.pdf
F. SCO claims ownership of Linux. SCO's claims are partially based on their
claimed ownership of the IBM code contributed to Linux.
SCO also claims that 65 Linux programs were copied from SCO's version of
Unix.
http://lwn.net/Articles/64052/
Linus Torvalds has documentary proof that he wrote the code claimed by
SCO.
http://www.ussg.iu.edu/hypermail/linux/kernel/0312.2/1241.html
When IBM proved to be steadfast in fighting the lawsuit and refused to
negotiate a settlement SCO attacked IBM customers in an attempt to put
pressure on IBM to settle on terms favorable to SCO. SCO is demanding
that corporations which use Linux pay SCO a licensing fee to use Linux.
SCO sent a letter to 1500 corporations claiming ownership of Linux and
threatening to bill for Linux. These threats have never been carried
through because SCO would be indicted for mail fraud, billing for
something that they do not own.
http://lwn.net/Articles/43085/
http://www.cxotoday.com/cxo/jsp/index.jsp?file=template0.jsp&storyid=472§ion=News&subsection=Business&subsection_code=1
http://www.groklaw.net/staticpages/index.php?page=20030929022014462
http://www.informationweek.com/story/showArticle.jhtml?articleID=17100017
http://www.forbes.com/forbes/2003/1124/096_print.html
In SCO v Novell Novell's counterclaims include the charge that SCO
fraudently tried to sell Linux licenses.
"45. A significant aspect of SCO's rebranding efforts and new business
strategy was its adoption of a scheme to extract "licenses" from the
UNIX and Linux communities based on claims to own intellectual
property specifically reserved to Novell, i.e., the UNIX Copyrights.
SCO proceeded on its own in this scheme after Novell rebuffed SCO's
overtures to participate."
"38. In late 2002, SCO repeatedly contacted Novell in connection with
SCO's soon-to-be- announced SCOsource campaign. SCO requested copies
of certain documentation concerning rights to UNIX, including the
agreement between Novell and Santa Cruz. SCO also expressed its
interest in a campaign to assert UNIX infringement claims against
users of Linux. SCO asked Novell to assist SCO in a Linux licensing
program, under which SCO contemplated extracting a license fee from
Linux end users to use the UNIX intellectual property purportedly
contained in Linux. Novell refused to participate."
'46. On January 22, 2003, SCO publicly announced its licensing scheme
as part of its "SCOsource" program. In connection with this
announcement, SCO's CEO, Darl McBride, commented that "SCO owns much
of the core UNIX intellectual property, and has full rights to license
this technology and enforce the associated patents and copyrights."'
'47. Under the SCOsource licensing program, SCO seeks to enter into
license agreements with UNIX vendors and offers Intellectual Property
Licenses to Linux end users ("Intellectual Property Licenses"). The
purported purpose of these licenses is to allow UNIX vendors to use
SCO's UNIX intellectual property and to permit Linux end users to
"properly compensate us for our UNIX intellectual property as
currently found in Linux." One term of SCO's Intellectual Property
Licenses for Linux is that licensees "will be held harmless against
past and future copyright violations based on their use of SCO's
intellectual property . . . in Linux distributions . . . ."'
"48. As part of its SCOsource initiative, SCO filed a lawsuit against
IBM on March 7, 2003, asserting, among other things, UNIX Copyrights
that SCO does not own. SCO has alleged that it owns the UNIX
Copyrights and that IBM's contributions to Linux and use of Linux
infringe these copyrights."
"52. As part of the SCOsource program, in May 2003, SCO sent letters
to 1,500 of the world's largest corporations threatening suit based on
its alleged ownership of the UNIX Copyrights ("End User Letters"). On
May 12, 2003, SCO sent one of these letters to IBM, and sent another
letter to Novell. On information and belief, all of the End User
Letters were nearly identical in content to the IBM and Novell
letters."
'53. In the End User Letters, SCO made the false and misleading
statement that "SCO holds the rights to the UNIX operating system
software originally licensed by AT&T to approximately 6,000 companies
and institutions worldwide (the 'UNIX Licenses')."'
'54. In the End User Letters, SCO also made the unsupported assertion
that "We [SCO] have evidence that portions of UNIX System V software
code have been copied into Linux and that additional other portions of
UNIX System V software code have been modified and copied into Linux,
seemingly for the purposes of obfuscating their original source."'
"55. After setting forth these alleged facts in the End User Letters,
SCO erroneously concluded that "Linux infringes on our UNIX
intellectual property and other rights." According to SCO, end users
of Linux were liable for this alleged infringement whether-or not they
participated in any contribution of UNIX System V software code into
Linux.'
"56. As set forth in detail above, besides sending the End User
Letters, SCO has made numerous public statements that it owns the UNIX
Copyrights and that end users of Linux are liable for infringement of
those copyrights. For instance, contrary to the express terms of the
APA, SCO has stated on its website that "only SCO is in a position to
license the use of this infringing intellectual property." The Court
itself has noted SCO's "barrage of public statements about pursuing
alleged infringers of its alleged intellectual property." The SCO
Group Inc. v. Int'l Bus. Machs., Case No. 2:03CV294 DAK, Memorandum
Decision and Order at 5 (Feb. 9, 2004)."
"38. In late 2002, SCO repeatedly contacted Novell in connection with
SCO's soon-to-be- announced SCOsource campaign. SCO requested copies
of certain documentation concerning rights to UNIX, including the
agreement between Novell and Santa Cruz. SCO also expressed its
interest in a campaign to assert UNIX infringement claims against
users of Linux. SCO asked Novell to assist SCO in a Linux licensing
program, under which SCO contemplated extracting a license fee from
Linux end users to use the UNIX intellectual property purportedly
contained in Linux. Novell refused to participate. "
http://www.groklaw.net/article.php?story=20050915183241951
SCO is asking operating systems resellers to sell an "Intellectual
Property License for Linux". SCO expects the threat of lawsuits to
create new revenue for both the resellers and SCO.
http://www.vnunet.com/News/1152257
http://www.caldera.com/scosource/
Here is where you can order your SCO IP License license for US$699.
http://shop.sco.com/caldera/cart.jsp?action=add&collection=Scosource&sku=LA520-0001-CC1&additem_LA520-0001-CC1_0_Quantity=1&additem_LA520-0001-CC1_0_ShipTo=Me&additem_LA520-0001-CC1_0_BillTo=Me
The investing public has been repeatedly told that SCO owns Linux and is
about to bill 1500 major corporations huge amounts of money in Linux
licensing fees.
G. Two German courts ruled that SCO's claims to own Linux was a criminal
offence in Germany and SCO must stop making such claims in Germany.
Subsequently, SCO was fined 10,000 euros for continuing to make false
claims in Germany that SCO owns Linux.
On May 28, 2003 the Bremen, Germany Regional Court ruled in favor of
Univention GmbH and issued a preliminary injunction against SCO-Caldera.
"The order prohibits SCO-Caldera from circulating:
'the idea that the Linux Operating System illegitimately acquired and
contains the Intellectual Property of SCO UNIX and/or that the end
users of LINUX can be made liable for patent/copyright infringements
against SCO's intellectual Properties.'"
http://www.mozillaquest.com/Linux03/ScoSource-19-Injunction_Story01.html
The injunction was based on the fact that SCO had no proof of any of its
intellectual property claims. The injunction gave Univention the right
to ask for a permanent injunction if SCO did not provide such proof
within 30 days.
On June 5, 2003 the Munich, Germany District Court ruled in favor of
Tarent GmbH and issued a permanent injunction against SCO-Caldera which
is very similar to the Bremen injunction.
http://www.tarent.de/html/tarent-vs-sco/030612_Questions-and-Answers.html
On September 2, 2003 SCO Group was fined 10,000 Euros (about US$11,000)
by the Munich court for violating the June 5 injunction.
http://www.computerworld.com/softwaretopics/os/linux/story/0,10801,84564,00.html
On February 18, 2004 Univention GmbH and SCO Group GmbH agreed to an out
of court settlement of the Bremen case. In this agreement:
"1) SCO Group GmbH (German branch of SCO) has agreed not to allege any
more that Linux contains SCO's unlawfully acquired intellectual
property.
2) The settlement also forbids SCO from claiming that if end users
are running Linux they might be liable for breaches of SCO's
intellectual property.
3) Also they cannot say that Linux is an unauthorized derivative of
Unix.
4) Finally SCO Group GmbH is prohibited to threaten to sue Linux users
unless they bought SCO Linux or Caldera Linux."
http://www.groklaw.net/article.php?story=20040301025634926&mode=print
Here is the agreement in German.
http://www.computerwoche.de/index.cfm?pageid=254&artid=58483&main_id=58483&category=8&currpage=1&kw=
Here is an English synopsis of the agreement.
http://www.groklaw.net/article.php?story=20040301025634926
So in Germany the courts have ruled that SCO's claims against Linux are
completely unsubstantiated. And in spite of the German court orders SCO
is still fraudently claiming in Germany that SCO will make "millions or
up to billions of profit" by selling licenses for intellectual property
that SCO does not own.
http://www.groklaw.net/article.php?story=20040413122355148
On August 19, 2003 SCO announced:
"LINDON, Utah, Aug 19, 2003 -- The SCO Group, Inc. (Nasdaq: SCOX), the
owner of the UNIX® operating system, today announced the appointment of
Gregory Blepp as vice president of SCOsource. Blepp will report to
Chris Sontag, the senior vice president and general manager of
SCOsource, the division of SCO tasked with protecting and licensing the
company's UNIX intellectual property."
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=116432
SCO never filed notice of this appointment with the SEC.
On August 16, 2004 Chris Preimesberger conducted an interview with Blake
Stowell of SCO in which Blake Stowell said that Gregory Blepp was no
longer a SCO employee. Chris Preimesberger asked:
"What ever happened to that SCO sales guy in Germany, Gregory Blepp,
who said he was carrying 'millions of lines' of the disputed
Linux code in his own briefcase last April?" I asked. "That was an
interesting story. He kind of fell off the map; I haven't heard about
him lately."
'Stowell laughed. "Oh, he no longer works for us," he said. "But I
think he might be doing some consulting. Anyway, do you know how many
pages 'millions of lines of code' would be? A lot bigger than his
briefcase, that's for sure. That should have been somebody's first
clue."'
http://www.newsforge.com/article.pl?sid=04/08/16/0658202
SCO never reported to the the SEC that Gregory Blepp has been terminated
as a SCO officer.
In an interview with Pamela Jones published on August 19, 2004 Gregory
Blepp denied that he had ever been a SCO employee:
"I am only consulting with SCO since day one for a couple of reasons. I
know it was taken up differently in many places, as some other facts,
especially by Heise in Germany, but they did not as you, contact me
directly (and I offered) so I did not bother any more correcting all
the time."
And later in the interview:
"PJ: One thing since we last spoke: I checked the press release
announcing your hiring by SCO as VP. They didn't say you were a
consultant. They indicated you were staff. Even now, the statement by
Stowell indicates you were staff but now are consulting. Can you
clarify? I understood that you were a consultant throughout."
"BLEPP: Yep, the announcement did say this. Being in Germany, we needed
to make sure that I can talk at that time, facing the TRO's and at
least try to inform the respective people about what SCO's position is.
So, being employed in Germany was no option. I was always consulting
SCO."
http://www.groklaw.net/article.php?story=20040819062642232
So the way that I interpret the situation is that the German courts
decreed a permanent injunction against SCO forbidding SCO to claim
ownership of Linux. SCO tried to evade the court order by hiring Gregory
Blepp as a consultant, rather than as an employee, to spread false
information. SCO issued a press release announcing that Blepp was a vice
president of SCOsource, which both SCO and Blepp now deny. However, SCO
did not notify the SEC that Gregory Blepp was appointed as an officer of
the company. Also Gregory Blepp never received any stock options, which
every other officer of SCO has received. Therefore I think that the
announcement that Gregory Blepp was appointed vice president of SCOsource
was a lie designed to add credence to the illegal propaganda Gregory
Blepp spread in Germany to bolster the SCO stock scam.
H. Red Hat is a company whose main product is distributing Linux operating
systems. Red Hat sued SCO in the United States to contest SCO's claims
to own Linux.
http://news.com.com/2100-7252-5059547.html?tag=nl
I. Embedded Linux is a small version of Linux used in such things as mobile
phones and handheld computers.
http://www.linuxdevices.com/articles/AT9952405558.html
SCO claims ownership of Embedded Linux and demands a $32 fee for each
embedded device using Linux even though SCO has absolutely no logical or
legal basis for such a claim. SCO's claim to Linux is that IBM donated
SCO code to Linux. The code that IBM has contributed to Linux allows Linux
to work well on extremely large computers. Such code is inappropriate for
embedded devices and it is impossible for embedded devices to run the IBM
code.
http://www.eet.com/sys/news/OEG20030806S0025
Once again the general investing public has been told that SCO will reap
huge amounts of money by selling an operating system, embedded Linux,
that SCO does not own.
J. BSD is an operating system that was developed at the University of
California, Berkeley using government grants handed out to develop the
Internet. AT&T sued the University of California claiming that AT&T
owned the BSD operating system. Early in the trial (USL v BSDi) the
court ruled that the code written by AT&T was owned by AT&T and the code
written by University of California was owned by the University of
California. The story is complicated because both operating systems have
changed ownership. BSD is currently owned by Berkeley Software
Development and System V ownership is currently disputed between Novell
and SCO.
There is a 1994 agreement between (now) BSD and (now) Novell deliniating
what code is owned by each. Also the agreement states that Novell or its
successor, SCO, (if in fact SCO is Novell's successor as SCO claims and
Novell denies) can never again sue over the BSD code.
http://www.groklaw.net/article.php?story=20031128153414688
On November 28, 2004 this agreement was made public by a request under
California's Public Records Law. Here is a copy of the 1994 USL-Regents
of UCal Settlement Agreement.
http://www.groklaw.net/article.php?story=20041126130302760
Ray Noorda knew the contents of the agrement and is quoted in the agreed
upon press release as saying:
"Ray Noorda, Chairman of Novell, Inc., which recently acquired USL,
called the settlement an "excellent example of what can be
accomplished by cooperation between the business and academic
communities." Mr. Noorda stated that "the settlement permits the
University to accomplish its goals but preserves USL's legitimate
interest in protecting its intellectual property." David Hodges,"
The Noorda Family Trust is the majority shareholder in Canopy and Canopy
is the controlling shareholder in SCO.
Darl McBride keeps claiming he knows what's in various sealed documents
from the case. Also SCO claims that they have no copy of the agreement.
This conflict is easily resolved by the fact that Ray Noorda told the
officers of SCO verbally what the contents of the agreement are. Then
SCO proceeded to lie about the contents knowing that they would be
protected by the secrecy clause in the agreement. Such lies are fraud on
the investing public.
SCO claims ownership of BSD even though Novell's predecessor in
interest thoroughly lost any and all claims to BSD in 1994 so that
Novell can not possibly have sold BSD to SCO. SCO has threatened to
reopen the BSD suit even though to do so is forbidden by the agreement
settling the case. This creates the false impression among public
investors that SCO owns BSD.
http://www.newsforge.com/business/03/11/18/1742216.shtml
K. SCO claims ownership of all UNIX operating systems.
http://radio.weblogs.com/0120124/2003/09/06.html
Eric Raymond gives a comprehensive explanation of why SCO's claims to own
all of UNIX are false.
http://www.opensource.org/sco-vs-ibm.html#id2790728
In fact SCO owns only a disputed claim to System V. Claiming ownership
of all the other UNIX operating systems is a gross exaggeration of SCO
assets and is a fraud against the investing public.
L. Novell is the company from which SCO obtained a contract to sell System
V. Novell strongly disputes the exaggerated size of the intellectual
property claimed by SCO. Novell's position is that SCO has the right
to sell System V but SCO does not own System V.
http://www.wired.com/news/technology/0,1282,59013,00.html
http://www.infoworld.com/article/03/12/22/HNnovellSCO_1.html
http://www.theage.com.au/articles/2004/01/08/1073437391747.html
In the MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF NOVELL, INC.
MONDAY, SEPTEMBER 18, 1995 the minutes contain the following explanation
that the agreement with SCO did not include certain assets which are now
claimed by SCO.
"Novell will retain all of its patents, copyrights and trademarks
(except for the trademarks UNIX and UnixWare), a royalty-free,
perpetual, worldwide license back to UNIX and UnixWare for internal
use and resale in bundled products, Tuxedo and other miscellaneous,
unrelated technology."
http://www.groklaw.net/article.php?story=20041129162537548
Here is the agreement between Novell and SCO which is dated September
19, 1995.
http://www.groklaw.net/article.php?story=2003111023050367
Here is the correspondence between Novell and SCO.
http://www.novell.com/licensing/indemnity/legal.html
In the list of assets excluded from the sale are:
"Schedule 1.1(b) Excluded Assets (Page 2 of 2)
V. Intellectual Property:
A. All copyrights and trademarks, except for the trademarks UNIX
and UnixWare.
B. All Patents"
In April 1996, after the agreement between Novell and SCO, Novell
negotiated an amendment to the software license with IBM. This
amendment to the contract has been entered as exhibit 13 in SCO v IBM.
The fact that the contract is between Novell and IBM versus between SCO
and IBM is consistent with Novell's stance that SCO only bought
marketing rights to System V. If SCO had bought the copyright to System
V then SCO would have nogotiated the amended contract directly with IBM
without any Novell participation at all. And the amended contract
clearly states that the copyright belongs to Novell.
"Notwithstanding the above, the irrevocable nature of the above rights
will in no way be construed to limit Novell's rights to enjoin or
otherwise prohibit IBM from violating any and all of Novell's rights
under this Amendment, the Related Agreements, or under general patent,
copyright, or trademark law."
http://www.groklaw.net/article.php?story=20041023052655609
This viewpoint is supported by the testimony of the man who negotiated
the contract for Novell, Michael J. DeFazio.
http://www.groklaw.net/article.php?story=20041022220159488
SCO is suing Novell in an attempt to obtain clear title to System V.
http://www.iht.com/articles/125939.html
In SCO v Novell Novell's counterclaims include the charge that SCO
fraudently claims ownership of UNIX.
"40. Notwithstanding Novell's rejections, SCO embarked on an aggressive
campaign in which it falsely asserted ownership over these same
copyrights via public statements, a series of letters to Linux end
users, several lawsuits against Linux distributors and end users,
and a licensing program purporting to offer SCO's Intellectual Property
Licenses for Linux."
"41 SCO's misleading and wrongful public assertions of ownership
include the following:"
'a. On March 7, 2003, SCO stated in a press release, "In 1995, SCO
purchased the rights and ownership of UNIX and UnixWare that had been
originally owned by AT&T. This included source code, source
documentation, software development contracts, licenses and other
intellectual property that pertained to UNIX-related business. . . .
'SCO is in the enviable position of owning the UNIX
operating system,' said Darl McBride, president and CEO, SCO."'
'b. On May 14, 2003, SCO stated in a press release, "[SCO], the owner
of the UNIX operating system, today warned that Linux is an
unauthorized derivative of UNIX and that legal liability for the use
of Linux may extend to commercial users."'
"c. On June 6, 2003, SCO stated in a press release, "[SCO], the owner
of the UNIX© operating system, today confirmed its previously stated
ownership of UNIX copyrights. As SCO has consistently maintained, all
rights to the UNIX and Unix-Ware technology, including the
copyrights, were transferred to SCO as part of the Asset Purchase
Agreement between Novell and SCO dated September 19, 1995. Any
question of whether the UNIX copyrights were transferred to SCO under
the Asset Purchase Agreement was clarified in Amendment No. 2 to the
Asset Purchase Agreement dated October 16, 1996."
'"This amendment simply confirms SCO's long stated position that it
owns all copyrights associated with the UNIX and UnixWare
businesses,' said Chris Sontag, senior vice president and general
manager, SCOsource intellectual property division, SCO. . . . 'SCO is
the owner of the UNIX operating system, as well as all of the UNIX
contracts, claims and copyrights necessary to conduct that business,'
said Sontag. 'None of the litigation we are currently involved with
asserts claims based on copyrights. Because others have called into
question SCO's ownership of the UNIX and UnixWare copyrights, we are
satisfied that we have now proven without a doubt that SCO owns those
copyrights. "'
"d. During at least June and July, 2003, SCO wrongfully registered
copyrights in UNIX and UnixWare releases owned by Novell. These
registrations related to UNIX System V release 3.0, UNIX System V
release 3.1, UNIX System V release 3.2, UNIX System V release
3.21386, UNIX System V release 4.0, UNIX System V release 4.1, UNIX
System V release 4.lES, UNIX System V release 4.2, UNIX System V
release 4.2MP, and UnixWare 7.1.3."
'e. On January 13, 2004, SCO stated, "[SCO] today reiterated its
ownership of UNIX intellectual property, source code, claims and
copyrights and has made all of the documents surrounding the
companies' ownership of UNIX and UnixWare available for public
viewing at www.sco.com/novell."'
'f. On January 28, 2004, in its Form 10-K filed with the United
States Securities and Exchange Commission, SCO stated, "We own
the UNIX operating system and are a provider of UNIX-based products
and services. . . . We acquired our rights to the UNIX source code
and derivative works and other intellectual property rights when we
purchased substantially all of the assets and operations of the
server and professional services groups of The Santa Cruz Operation,
Inc., in May 2001. The Santa Cruz Operation (now known as Tarantella,
Inc.) had previously acquired such UNIX source code and other
intellectual property rights from Novell in September 1995, which
were initially developed by AT&T Bell Labs. Through this process, we
acquired all UNIX source code, source code license agreements with
thousands of UNIX vendors, all UNIX copyrights, all claims for
violation of the above mentioned UNIX licenses and copyrights and
other claims, and the control over UNIX derivative works . . .."'
"Interviewer: Well, Novell would say that you actually don't own
those copyrights fully. McBride: Yeah, well, the Novell thing, they,
they came out and made a claim that held up for about four days and
then we put that one to bed. If you go talk to Novell today, I'll
guarantee you what they'll say, which is they don't have a claim on
those copyrights."
"43. Novell has not acquiesced to SCO's claims, as recited in SCO's own
Amended Complaint. (Amended Complaint ¶ 19(d)-(e).) To the contrary,
Novell was vigorously contesting those claims in private correspondence
with SCO at the very same time SCO was publicly claiming otherwise. For
example:"
"a. On May 12, 2003, SCO's CEO Darl McBride sent Novell a letter
asserting that it owned the UNIX copyrights and that Linux end users
were infringing those copyrights."
"b. On May 28, 2003, Novell's CEO, Jack Messman, responded by letter,
asserting in no uncertain terms that "SCO is not the owner of the
UNIX copyrights."
'c. After SCO registered its claim to the UNIX copyrights with the
U.S. Copyright Office, Novell's General Counsel, Joseph LaSala wrote
to SCO, again disputing its claim to ownership of the copyrights. In
his August 4, 2003, letter, LaSala stated, "We dispute SCO's claim to
ownership of these copyrights."'
"44. In September and October 2003, Novell attempted to protect its
rightful ownership of the UNIX Copyrights, and to correct SCO's
erroneous registrations claiming ownership, by filing its own
copyright registrations."
"95. SCO made its public statements claiming ownership of the UNIX
Copyrights, and improperly registered its claim to UNIX Copyrights,
with knowledge that title to these copyrights remains with Novell."
"96. SCO made such statements maliciously, in bad faith, and with
intentional disregard for the truth."
http://www.groklaw.net/article.php?story=20050915183241951
SCO is deceiving the investing public by falsely claiming to have
purchased System V in its entirety from Novell.
M. BSD has a valid claim to partial ownership of System V. BSD allows
anyone to use BSD code as long as the source code displays the BSD
copyright notice. In the law case explained in section G, AT&T barred
BSD from using AT&T code but BSD said that AT&T was welcome to use BSD
code, provided that it was copyrighted as BSD code. SCO accidently
showed that some of System V code actually belongs to BSD when SCO held a
public viewing of some code that they claimed was SCO code illegally
added into Linux. The BSD code would also be legal in System V if SCO
included the BSD copyright notice in the code. SCO did not include the
BSD copyright notice in the example of BSD code that they claimed was SCO
code illegally incorporated into Linux.
http://www.perens.com/SCO/SCOSlideShow.html
Therefore System V contains some BSD code but the amount of BSD code in
System V is not public knowledge. SCO says that there are millions of
lines of SCO code in Linux. If in fact there are millions of lines of
BSD code in both Linux and System V then a very significant portion of
System V is actually owned by BSD.
http://josiah.ritchietribe.net/blog/index.php?p=469&c=1
There is a 1994 agreement between (now) BSD and (now) Novell deliniating
what code is owned by each. Also the agreement states that Novell or its
successor, SCO, (if in fact SCO is Novell's successor as SCO claims and
Novell denies) can never again sue over the BSD code.
http://www.groklaw.net/article.php?story=20031128153414688
On November 28, 2004 this agreement was made public by a request under
California's Public Records Law. Here is an explanation of what portions
of System V are owned by BSD.
"4. BSD Derived Materials are computer files or documents which the
University contends are derived from the BSD Releases which are
contained in the UNIX System or are otherwise distributed by USL. A
list of the BSD Derived Materials is attached as Exhibit C."
"f. USL agrees that it shall affix the University Copyright Notice and
the University Acknowledgment to the files listed in Exhibit C in the
following manner:"
"(v) In any future release of the UNIX System issued following the
issuance of UNIXWARE 2.0, USL shall include the University Copyright
Notice and the University Acknowledgment in all of the files listed in
Exhibit C, other than the .mk files (the "Files"). In all events, USL
shall include the University Copyright Notice and the University
Acknowledgment in all such Files in any copies of UNIXWARE 2.0
distributed after January 31, 1995. If any such File contains a
copyright notice reflecting publication by the University at some date
earlier than the dates appearing in the University Copyright Notice,
USL shall not delete the reference to such earlier date(s) of
publication, but shall include those dates in addition to the later
dates reflected in the University Copyright Notice."
EXHIBIT C Then contains a 17 page list listing the files which are
owned by BSD and to which SCO is required to attach BSD copyrights.
Here is a copy of the 1994 USL-Regents of UCal Settlement Agreement.
http://www.groklaw.net/article.php?story=20041126130302760
Ransom Love is a former CEO of the company now called SCO. When
discussing the possibility of releasing SCO code as Open Source software
Ransom Love said, "Some code, however, can't be open sourced because
other companies own it."
http://www.practical-tech.com/infrastructure/i08042000.htm
Other individuals and organizations with known copyrights to portions of
System V code include:
Computer Associates International, Inc.
Edison Design Group, Inc.
Eric P. Allman
Hewlett-Packard Company
Hitachi, Ltd.
Intel Corporation
International Business Machines Corporation
Massachusetts Institute of Technology
Microsoft Corporation
The Regents of the University of California
Sun Microsystems, Inc.
The Open Group (formerly OSF)
Compaq Computer Corporation
Digital Equipment Corporation
http://www.groklaw.net/article.php?story=2004061708050599
By not providing information as to how much of System V is owned by
BSD and the other copyright holders SCO is misleading the general
investing public about the value of the System V asset. By claiming
ownership of BSD code SCO is committing fraud.
N. One of the results of SCO attacking the validity of the GPL was that
SCO's Linux customers refused to buy Linux from SCO. SCO's customers
began returning SCO's Linux products. SCO's Linux business was hard hit
and was discontinued as a result. Erik Hughes, Director of Product
Management, for SCO filed a declaration in SCO v IBM which says in part:
"9. SCO copied, advertised and distributed the Linux kernel and other
related Linux software for years before 2003."
"10. Prior to suspending sales of Linux-related products in May, 2003,
SCO had a promising Linux business with long standing customers and
pre-existing binding sales and service contracts. The Linux product
line, including the operating system, services, support, professional
services, education, and layered applications had accounted for 5-10%
of SCO's revenues."
"7. In accordance to its obligations to current customers from May
14, 2003, until May 31, 2003, SCO sold 83 units of SCO Linux Server
4.0, for gross revenue of %9,209. During this same period, 79 units
were returned, which resulted in a loss of $7,360, so net sales for
this period were 4 units and net revenue was $1,849."
"6. As indicated in SCO press release attached as Exhibit C, August 5,
2003, was the first date on which SCO offered its SCO Intellectual
Property License for sale."
"4. From August 5, 2003, until May 31, 2004, (the date of the last
sale), SCO sold 45 units of SCO Linux Server 4.0, for gross revenue of
$5,294. During this same period, 70 units were returned, which resulted
in a loss of $6,473, so net sales for this period were -25 units and
net revenue was -$1,179."
http://www.groklaw.net/pdf/IBM-353-B.pdf
O. SCO has sent letters to about 6000 SCO customers stating that SCO owns
Linux and that the terms of the contract between SCO and each customer
forbids the customer from using Linux unless the customer pays SCO for
Linux. SCO demanded that each customer certify that they had not
inserted any SCO code into Linux..
http://www.groklaw.net/article.php?story=20040106112439165
This letter has received wide publicity and creates the false impression
among investors that SCO will receive money for Linux from the existing
SCO customers.
P. When SCO sued IBM, SCO hired a prominent law firm, Boies, Schiller, and
Flexner to handle the case. SCO initially told the general investing
public that Boies, Schiller, and Flexner was working on a contingency
basis. This created the false impression among the general investing
public that Boies, Schiller, and Flexner was so confident of SCO's
chances of winning the IBM case that they would accept the case on
a contingency fee basis.
http://zdnet.com.com/2100-1104-1010981.html
"SCO's legal costs are being paid under a contingency arrangement,
McBride said. In such cases, lawyers typically are paid not by the
hour, but with a percentage of whatever money they can win for their
clients in the case."
In fact Boies, Schiller, and Flexner is being paid a retainer fee and is
billing SCO at hourly rates, as well as a 20% contingency fee on windfall
profits from equity sales.
http://www.sec.gov/Archives/edgar/data/1102542/000110465903028046/a03-6084_1ex99d1.htm
Q. The ELF standard is a description of a format used to store executable
programs on a computer disk. The ELF standard is widely used in UNIX
operating systems, including System V and Linux among others. SCO claims
ownership of the UNIX Executable and Linking Format (ELF) standard.
"SCO's two latest filings with the Utah district court hearing its $5
billion suit against IBM claim that SCO's Unix Executable and Linking
Format (ELF) codes are in Linux illegally."
"The charge was made by SCO VP of engineering Sandeep Gupta in a
declaration that is currently under seal, but is quoted, albeit
tersely, in the new filings."
The ELF standard was created by a committee of companies called Tool
Interface Standard Committee (TISC). One of the companies on the TISC
was named SCO. That SCO corporation is not the same corporation as the
corporation currently using the SCO name. The TISC committee issued non
exclusive licenses to use the standard to all comers to the point that
the ELF standard is essentially in the public domain. So while the
current SCO has the right to use the ELF standard, and does use the ELF
standard, the current SCO has absolutely no ownership claim to the ELF
standard.
http://www.linuxworld.com/story/45588.htm
SCO's claim that they own the ELF standard is an example of SCO claiming
ownership of something it does not own.
R. Eric Levenez has created a chart showing the history of the various UNIX
operating systems and the relationships between them.
http://www.levenez.com/unix/
The SCO group made two small modifications to Eric Levenez's chart.
These modifications are intended to bolster SCO's claim of owning Linux.
SCO posted the modified chart, still attributed as the original by Eric
Levenez, on the SCO web site. The forged chart added the claims that
UNIX SVR4 code was copied into Minix and that Minix code was copied into
Linux. Neither claim is true.
The forgery was noticed and publicized on the Groklaw web site.
http://www.groklaw.net/article.php?story=20040620053051348
SCO immediately tried to destroy the evidence by removing the forged
chart from the SCO web site. However a copy of the forged chart is still
available here.
http://web.archive.org/web/20030605133708/www.sco.com/scosource/unixtree/unixhistory01.html
SCO is guilty of both forgery and obstruction of justice in trying to
destroy the evidence.
S. On August 8, 2004 SCO released a story saying that SCO had found a
"smoking gun" to be used against IBM in the SCO v IBM lawsuit. Please
note that Santa Cruz Operation is a different company than the company
now called SCO.
"McBride says that as part of the Monterey deal, Santa Cruz Operation
gave IBM the right to use a version of Unix called System V Release 4
(SVR4)--but only on Intel-based microprocessors, and only if IBM stuck
to the partnership."
"McBride says IBM ignored that restriction and used SVR4 to build a
version of AIX--AIX 5L, released in 2001--that runs on IBM's
proprietary PowerPC microprocessor. (SCO claims that until then, AIX
had been based on Unix System V Release 3, an earlier version of
Unix.)"
http://www.forbes.com/business/2004/08/04/cz_dl_0804sco.html
This story is completely false. In August, 2000 IBM announced that AIX
5L would run on both Intel's Itanium chip and IBM's PowerPC
microprocessor.
http://www.eetimes.com/printableArticle.jhtml?doc_id=19168&_requestid=188585
There are bits and pieces of other articles in the 1999 - 2001 time frame
which show that the original SCO, the company that signed the Monterey
agreement with IBM, knew and approved of IBM using AIX on the PowerPC.
http://www.theinquirer.net/?article=17742
SCO floated this false rumor in an attempt to hype their stock price by
claiming much greater chance of success in the IBM lawsuit than is likely
otherwise. There is a difference between presenting this evidence in
court and presenting it to Forbes.
T. SCO publicly claimed to have hired a team of mathematicians from MIT who
found that System V code had been copied into Linux. This claim was
widely reported.
"SCO was able to uncover the alleged violations by hiring three teams
of experts, including a group from the MIT math department, to analyze
the Linux and Unix source code for similarities. "All three found
several instances where our Unix source code had been found in
Linux," said a SCO spokesman."
http://www.computerworld.com/governmenttopics/government/legalissues/story/0,10801,81973,00.html
This story is completely false. SCO never hired a team of MIT
mathematicians. Here the story is debunked by a MIT newspaper, "The
Tech".
http://www-tech.mit.edu/V123/N33/33sco.33n.html
U. C++ is a widely used programming language. C++ was created by Bjarne
Stroustrup.
http://www.research.att.com/~bs/homepage.html
SCO claims ownership of the C++ programming language and that people are
paying SCO to license C++. Statements to this effect were made by Darl
McBride and Blake Stowell of SCO and widely publicized.
"Blake Stowell: C++ is one of the properties that SCO owns today and we
frequently are approached by customers who wish to license C++ from us
and we do charge for that. Those arrangements are done on a
case-by-case basis with each customer and are not disclosed publicly.
C++ licensing is currently part of SCO's SCOsource licensing program."
http://www.mozillaquest.com/Linux03/ScoSource-02_Story03.html
In fact the C++ programming language is a standard published by ANSI
committee X3J16.
http://www.cplusplus.com/info/history.html
"No one owns the C++ language and the language is royalty-free."
http://en.wikipedia.org/wiki/C_Plus_Plus
SCO has the right to use the C++ programming language but SCO does not
own C++. The SCO statements claiming ownership of C++ are lies. I doubt
that anyone is foolish enough to pay royalties on C++ to SCO so the SCO
statements about collecting royalties for C++ are probably lies. The
purpose of these lies is to illegally promote the value of SCOX.
V. In 1994 Novell transferred the UNIX trademark to the Open Group.
"In 1994 Novell (who had acquired the UNIX systems business of
AT&T/USL) decided to get out of that business. Rather than sell the
business as a single entity, Novell transferred the rights to the
UNIX trademark and the specification (that subsequently became the
Single UNIX Specification) to The Open Group (at the time X/Open
Company). Simultaneously, it sold the UNIX source code and the
product implementation (UNIXWARE) to SCO. The Open Group also owns
the trademark UNIXWARE, transferred to them from SCO more recently.
As the owner of the UNIX trademark, The Open Group has separated the
UNIX trademark from any actual code stream itself, thus allowing
multiple implementations. Since the introduction of the Single UNIX
Specification, there has been a single, open, consensus specification
that defines the requirements for a conformant UNIX system."
http://www.opengroup.org/comm/press/who-owns-unix.htm
The UNIX trademark is owned by the Open Group. The Open Group has set
up guidelines for allowing companies to use the UNIX trademark. These
guidelines include:
"* It must not be used as a generic term.
* It must not be used in connection with products, unless the product
is licensed to use the mark.
* There are detailed guidelines referring to the visual presentation,
form and manner of use.
* In editorial or articles, but not advertising the trade marks may be
used without prior permission - provided that the rules in our
Trademark Usage Guide are followed."
http://www.unix.org/trademark.html
While SCO has the right to use the UNIX trademark under certain
conditions SCO does not have exclusive rights to use the UNIX trademark.
The Open Group has publicly stated that SCO's use of the UNIX trademark
is incorrect.
"Regarding SCO's positioning on UNIX, The Open Group would like to make
it clear that SCO holds the rights ONLY to the operating system source
code (originally licensed by AT&T) and related intellectual property
and DOES NOT OWN the UNIX trademark itself or the definition (the
Single UNIX Specification) of what the UNIX system is.
Reference to the SCO web site shows that they own certain intellectual
property and that they correctly attribute the trademark to The Open
Group. SCO has never owned "UNIX". SCO is licensed to use the
registered trademark UNIX "on and in connection" with their products
that have been certified by The Open Group, as are all other
licensees.
These are the ONLY circumstances in which a licensee may use the
trademark UNIX on and in connection with its products.
Statements that SCO "owns the UNIX operating system" or has "licensed
UNIX to XYZ", are clearly inaccurate and misleading."
http://www.opengroup.org/comm/press/unix-backgrounder.htm
Indeed, SCO has flagrently violated the Open Group's term of usage for
the UNIX trademark. SCO has widely publicized the notions that SCO "owns
the UNIX operating system" and/or has "licensed UNIX to XYZ". A Google
search turns up thousands of examples of SCO mischaracterizing its rights
to use the UNIX trademark. One example that I give is a SCO quarterly
report filed with the SEC in which SCO repeatedly refers to UNIX as their
product without qualifying that the UNIX name is shared by several other
companies' products.
http://www.sec.gov/Archives/edgar/data/1102542/000110465904027598/a04-10532_110q.htm
Another example is this press release in which SCO states that it owns
UNIX. The press release notes that UNIX is a registered trademark but it
does not note that the UNIX trademark belongs to the Open Group, not SCO.
"LINDON, Utah, Jun 15, 2004 /PRNewswire-FirstCall via COMTEX/ -- The
SCO Group, Inc. ("SCO") (Nasdaq: SCOX), the owner of the UNIX(R)
operating system and a leading provider of UNIX-based solutions, today
announced a broad array of new and enhanced UNIX products as well as
new channel support and training programs."
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=137086
Thus SCO has misled the investing public by repeatedly stating that they
own UNIX when in fact they have a dubious claim to System V which is one
of several operating systems which conform to the UNIX specifications.
W. SCO has misled investors about SCO's revenues.
1) On March 1, 2004 SCO announced that EV1Servers.Net had bought a
SCOsource license. Blake Stowell, SCO Director of Public Relations,
said that SCO had received more than $1 million for the SCOsource
license.
'Blake Stowell, SCO's director of public relations, said that
EV1Servers.Net had made the deal because its "CEO felt that there
was uncertainty about Linux's legal standing and they made a
business decision to avoid any possible doubts about their use of
Linux for both themselves and their customers."'
'Stowell added, "They didn't pay full retail price on each server,
but the deal was still worth seven figures all together for SCO."'
http://www.eweek.com/article2/0,1759,1541140,00.asp
2) On March 3, 2004 Robert Marsh, CEO of EV1Servers.net, denied that EV1
had paid that large an amount for the SCOsource license.
"I would discount ANY reports or quotes of a 7 figure cash payment
as has been reported."
"We did agree to a one time payment, however we did not agree to pay
a 7 figure cash payment as reported in the media."
"__________________"
"Robert Marsh"
"Head Surfer Ev1servers.net"
http://forum.ev1servers.net/showthread.php?s=ec6c44446e8b2650e51ec132337d3bf4&postid=261665#post261665
3) On June 10, 2004 SCO held their 2nd Quarter Earnings Conference Call.
During this conference call SCO made several evasive statements about
the amount and accounting for the EV1 SCOsource license. Eventually
Darl McBride stated that the EV1 SCOsource revenue was less than
$250,000 and at least $100,000.
"McBride: We had a few deals on the SCOsource side, Maureen. You
know with last quarter we had announced a major deal with EV1. That
is not part of the revenue stream that we're reporting in second
quarter. That revenue will start to be accounted for in the quarter
that we're currently in."
"Cornett: Just what's the magnitude going to be? I mean is the
quarter million still right for the July quarter?"
"Young: That'd be a little high."
"McBride: From them, that would be high. It's going to be spread out
over multiple quarters, but it will be in the six figures."
http://www.groklaw.net/article.php?story=20040615030206675
So from March 1, 2004 to June 10, 2004 SCO misled the investing public
by stating that revenue from the EV1 SCOsource license was at least
four times as high as it actually was.
X. SCO has engaged in fraudulent accounting.
Section 1350 of the Sarbanes-Oxley Act of 2002 says:
"Sec. 1350. Failure of corporate officers to certify financial reports"
"(a) CERTIFICATION OF PERIODIC FINANCIAL REPORTS- Each periodic report
containing financial statements filed by an issuer with the Securities
Exchange Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall be
accompanied by a written statement by the chief executive officer and
chief financial officer (or equivalent thereof) of the issuer."
"(b) CONTENT- The statement required under subsection (a) shall certify
that the periodic report containing the financial statements fully
complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act pf 1934 (15 U.S.C. 78m or 78o(d)) and that
information contained in the periodic report fairly presents, in all
material respects, the financial condition and results of operations of
the issuer."
"(c) CRIMINAL PENALTIES- Whoever--"
"(1) certifies any statement as set forth in subsections (a) and (b)
of this section knowing that the periodic report accompanying the
statement does not comport with all the requirements set forth in this
section shall be fined not more than $1,000,000 or imprisoned not more
than 10 years, or both; or"
"(2) willfully certifies any statement as set forth in subsections (a)
and (b) of this section knowing that the periodic report accompanying
the statement does not comport with all the requirements set forth in
this section shall be fined not more than $5,000,000, or imprisoned not
more than 20 years, or both."
http://thomas.loc.gov/cgi-bin/query/F?c107:1:./temp/~c1077MINQe:e197484:
On September 1, 1998 Novell and the first of two companies to be called
SCO entered into a sales agreement which gave old SCO the right to market
the Unix System V operating system and its derivatives. In this
agreement SCO agreed to pay 95% of the revenue from existing customers to
Novell. SCO also agreed that if the contract of an existing customer
were renegotiated then Novell was still entitled to 95% of the revenue
from that customer.
http://www.groklaw.net/article.php?story=20040229023446199
Old SCO later transfered their rights in the Novell-SCO contract to
Caldera.
http://contracts.corporate.findlaw.com/agreements/sco/caldera.mer.2000.08.01.html
In August 2002 Caldera changed its name to The SCO Group (SCO). This
corporation now called SCO is the successor company to the company called
SCO which signed the agreement with Novell.
http://news.zdnet.co.uk/software/developer/0,39020387,2121346,00.htm
1) Under the terms of the Novell - SCO agreement SCO must pay Novell
about 3 million dollars per quarter for the original contract between
Sun and Novell. This was explained in the transcript of the "SCO 4Q &
Year-End Financial Conference Call" on December 22 2004.
"Eisenberg: Right, I know you mentioned this once before, but I'm
now looking at the balance sheets. Funny. There were two press
releases -- one didn't have the balance sheet but the other did. I
found it. The restricted cached 8 million is earmarked for legal
expenses."
"Young: 5 million of that is."
"Eisenberg: Uh-huh. What about the other 3?"
"Young: The other 3 is a royalty agreement that we collect on behalf
of Novell and then send to them. So it's basically just a
pass-through here in the company. We have that every quarter."
http://www.groklaw.net/article.php?story=20041222011158357
SCO is accounting for pass through royalty payments to Novell by
recording them as legal expenses. This is a serious misrepresentation
of what the money is spent on. SCO has repeatedly claimed that
their ongoing software business is cash flow positive. By recording
these expenses payable to Novell as legal expenses SCO is making
fraudulent claims of the viability of their ongoing software business.
On April 1, 2005 SCO filed their 10-K for 2004. In that 10-K there is
a statement confirming that SCO owes Novell money and that such money
had been previously been accounted as restricted cash for legal
expenses.
"Restricted Cash and Payable to Novell, Inc."
"Pursuant to the 1995 Asset Purchase Agreement and the Company’s
acquisition of assets and operations of The Santa Cruz Operation,
the Company acts as an administrative agent in the collection of
payments from a limited number of pre-existing Novell, Inc.
(“Novell”) customers who continue to deploy SVRx technology. Under
the agency agreement, the Company collects payments from such
customers and receives 5 percent as an administrative fee. The
Company records the 5 percent administrative fee as revenue in its
consolidated statements of operations. The accompanying
consolidated balance sheets as of October 31, 2004 and 2003 reflect
amounts collected related to this agency agreement but not yet
remitted to Novell of $3,283,000 and $2,025,000, respectively, as
restricted cash and payable to Novell. The Company’s obligation to
act as an administrative agent for Novell is unrelated to the
Company’s SCOsource initiatives related to its intellectual property
rights or the Company’s lawsuit against Novell for slander of title
alleging Novell’s bad faith effort to interfere with the Company’s
copyrights in its UNIX source code and derivative works and its
UnixWare product. . . . ."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
2) In February 2003 Sun Microsystems renegotiated their contract with
SCO. Scott McNealy is Chairman and CEO of Sun Microsystems. In a
Newsforge interview he was asked a question by Jem Matzan.
"McNealy responded by saying that the process of open sourcing
Solaris actually started five years ago. 'There were hundreds of
encumbrances to open sourcing Solaris. Some of them we had to buy
out, others we had to eliminate. We had to pay SCO more money so we
could open the code -- I couldn't say anything about that at the
time, but now I can tell you that we paid them that license fee to
expand our rights to the code,' he said, referring to the February
2003 multi-million-dollar purchase of expanded Unix SVR4 license
rights from the SCO Group."
http://www.newsforge.com/article.pl?sid=04/11/18/1540233
SCO owed Novell 95% of the multimillion dollar fee paid by Sun to SCO
for Sun's expanded Unix SVR4 license rights in the February 2003
agreement. This money has not appeared on the SCO books either as
payable to Novell or as a disputed payable.
Before the December 22, 2004 SCO 4Q & Year-End Financial Conference
Call I looked at the SCO financial report in a SCO press release. The
fourth quarter balance sheet showed a multimillion dollar liability to
Novell which was more than 72 days old. That item had not appeared on
any previous SCO quarterly statement. After the teleconference when I
went looking for that balance sheet I could not find it. I found a
different balance sheet which did not contain any mention of overdue
payables to Novell.
I am not the only person who remembers two balance sheets. One of the
people asking questions at the teleconference was Tom Eisenberg with
Open Road Partners. Tom Eisenberg asked a series of questions that
showed he was confused about the balance sheet and was trying to
figure it out. His comments included this statement:
"Eisenberg: Right, I know you mentioned this once before, but I'm
now looking at the balance sheets. Funny. There were two press
releases -- one didn't have the balance sheet but the other did. I
found it. The restricted cached 8 million is earmarked for legal
expenses."
http://www.groklaw.net/article.php?story=20041222011158357
My recollection differs from Tom Eisenberg in that I remember that
both press releases had balance sheets but that the two balance sheets
differed. The financial statements as they appeared in the second
press release can be found in a FORM 8-K files by SCO on January 26,
2005.
http://www.sec.gov/Archives/edgar/data/1102542/000110465905002648/a05-2253_1ex99d1.htm
There has been a series of letters exchanged between Novell and SCO.
These letters reveal a pattern of SCO withholding payments due Novell
and Novell demanding both payments and audits, the right for Novell to
conduct such audits being a part of the contract between Novell and
SCO.
http://www.groklaw.net/article.php?story=20040115161155820
Novell has filed a reply in SCO v Novell. On page 27, section 63 of
Novell's pleadings Novell states:
"Section 1.2(b) of the APA gives Novell broad audit rights relating
to the administration of the SVRX licensing program. It reads in
part:
[Novell] shall be entitled to conduct periodic audits of [SCO]
concerning all royalties and payments due to [Novell] hereunder or
under the SVRX Licenses, provided that [Novell] shall conduct such
audits after reasonable notice to [SCO] and during normal business
hours and shall not be entitled to more than two (2)such audits
per year."
On page 30, section 73 of Novell's pleadings Novell states:
"Despite Novell's repeated requests, SCO has never provided copies
of the Sun and Microsoft licenses, or amendments, or copies of SCO's
Intellectual Property Licenses for Linux or other agreements
connected with attempts by SCO to enter into new or amended SVRX
licenses. SCO also never provided any explanation why SCO was not
obligated under the APA to seek Novell's consent to amend or
otherwise enter into new SVRX agrements. As a result, Novell has
been unable to verify SCO's compliance with the APA, as Novell is
entitled under the APA."
On page 30, section 75 of Novell's pleadings Novell states:
"SCO has failed to remit to Novell all royalties owen under 1.2(b)
and 4.16(a) of the APA."
On page 31, section 78 of Novell's pleadings Novell states:
"SCO has not remitted any royalties from its new SVRX Licenses with
Sun or Microsoft."
http://www.groklaw.net/pdf/Novell-78.pdf
"In fiscal 2003, SCO Group reported $25.8 million in new Unix
license fees from Sun and Microsoft, according to its financial
statements. Novell says 95% of that should be paid to Novell. That
would come to $24.5 million that SCO owes Novell."
"But SCO currently has only about $11 million. So Novell is asking
for SCO's assets to be attached and its cash put in a trust fund
until the legal issues are resolved, in order to protect the money
Novell says it's owed. If the judge in this case (who's also the
judge in SCO v IBM), grants those preliminaries, SCO will have no
money at all to continue in business -- much less to sue IBM, Novell
or Linux users."
http://www.computerworld.com/blogs/node/688
I consider these facts to be evidence that SCO has misrepresented
large payments by Microsoft and Sun Microsystems as income in the SCO
books without recording the corresponding liability to Novell. SCO
must file their yearly statement with the SEC by January 31, 2005 and
this report must be certified by an outside auditor, KPMG. Is this
why SCO made a belated effort to correct their books in the first
December 22, 2004 press release and then pulled the corrections
between the press release and the teleconference? I suggest that the
SEC audit the SCO books to determine whether or not the royalty fees
due to Novell have been accounted for correctly.
3) Novell's counterclaims include the charge that SCO has fraudulently
failed to pay money owed to Novell. SCO concealed this fraud from the
investing public by engaging in fraudulent accounting.
"63. Section 1.2(b) of the APA gives Novell broad audit rights
relating to the administration of the SVRX licensing program.
It reads in pertinent part:"
"[Novell] shall be entitled to conduct periodic audits of [SCO]
concerning all royalties and payments due to [Novell] hereunder or
under the SVRX Licenses, provided that [Novell] shall conduct such
audits after reasonable notice to [SCO] and during normal business
hours and shall not be entitled to more than two (2) such audits per
year."
"64. Further, section 1.2(f) of the APA obligates SCO to provide
Novell monthly reports detailing the SVRX royalties that SCO
received."
"65. On July 11, 2003 Novell notified SCO that it intended to
conduct an audit beginning on August 18, 2003 covering the period
beginning January 1, 1998 through June 30."
"66. By reply correspondence dated July 17, 2003, SCO accepted
Novell's right to an audit. Novell's audit began during the week of
August 25, 2003."
"67. As part of Novell's aforementioned audit rights, on November
21, 2003, Novell sought information and documentation relating to:"
"a. Any amendments and modifications to SVRX licenses, and in
particular the amendments to the Sun and Microsoft SVRX licenses.
Novell specifically requested (1) "copies of the Sun and Microsoft
amendments to verify SCO's compliance" with the APA and (2) "a
detailed explanation of SCO's position" if SCO contends that
either of the two exceptions to the prohibition on unilateral
amendments by SCO were applicable."
"b. Any buy-out of SVRX licenses, and in particular any
information concerning any buy-out of Sun's and Microsoft's
royalty obligations under their SVRX licenses. Novell specifically
requested that SCO identify any potential buy-out transactions so
that Novell could verify SCO's compliance with the APA."
"c. Any new SVRX licenses, and in particular SCO's Intellectual
Property Licenses for Linux. Novell specifically requested (1)
"copies of all SCO Intellectual Property Licenses for Linux, and
any other agreements connected with attempts by SCO to enter into
new SVRX Licenses, so Novell can verify SCO's compliance" with the
APA and (2) "a detailed explanation of SCO's position" if SCO
contends that the exception to the prohibition on new SVRX
licenses by SCO was applicable."
"d. Any SVRX to UnixWare Conversions. Novell specifically
requested that SCO (I) identify and provide documentation for any
allegedly valid conversions and (2) "explain in detail" how the
alleged conversion complies with the APA and (3) provide "a
detailed explanation of SCO's position" if SCO contends that any
exception to the prohibition on conversion by SCO was applicable."
"68. Novell renewed its November 21, 2003 demand on December 29,
2003 and again on February 4, 2004."
"69. On February 5, 2004, SCO conveyed its refusal to provide at
least the information identified in subparagraphs a, b and c of
Paragraph 67, above."
"70. On March 1, 2004, Novell again contacted SCO for the above
categories of information: "In order to complete our audit, we
need the Sun, Microsoft and any other Intellectual Property
Licenses for Linux. Stated more categorically, we need all
agreements in which SCO purported to grant rights with respect to
Unix System V." Novell noted that SCO's Intellectual Property
Licenses for Linux appeared to be SVRX Licenses since they
purported to grant rights relating to UNIX System V or Unix-Ware."
"71. Novell again sent a letter to SCO on April 2, 2004 urging a
response."
"72. On November 17, 2004, Novell contacted SCO yet again:
We have communicated with SCO several times about our concerns
with SCO's handling of UNIX licenses, including the license with
Sun. In these communications, we have noted that our audit rights
under the Asset Purchase Agreement require SCO to provide Novell
with copies of any UNIX agreements (including amendments) SCO has
reached with Sun. We have sent you letters twice on this issue (in
March and April 2004), and have not received an adequate response.
. . . Accordingly, we must once again insist that you provide us
with copies of any agreements with Sun (including amendments) that
relate to UNIX. We would appreciate a response by Friday,
December 3, 2004."
"73. Despite Novell's repeated requests, SCO has never provided
copies of the Sun and Microsoft licenses, or amendments, or copies
of SCO's Intellectual Property Licenses for Linux or other
agreements connected with attempts by SCO to enter into new or
amended SVRX licenses. SCO also never provided any explanation why
SCO was not obligated under the APA to seek Novell's consent to
amend or otherwise enter into new SVRX agreements. As a result,
Novell has been unable to verify SCO's compliance with the APA, as
Novell is entitled under the APA."
'74. Sections 1.2(b) and 4.16(a) of the APA obligate SCO to remit
100% of "all royalties, fees and other amounts due under all SVRX
Licenses" to Novell. "SVRX Licenses" are in turn defined to
include "[a]ll contracts relating to" the various UNIX System
releases and auxiliary products enumerated at Schedule 1.1(a)(VI)
and Attachment A to Amendment No. 1. Under the APA, Novell has
"all right, title and interest to the SVRX Royalties, less the 5%
fee for administering the collection thereof."'
"75. SCO has failed to remit to Novell all royalties owed under §§
1.2(b) and 4.16(a) of the APA."
"76. As SCO admitted in its February 5, 2004 letter to Novell, SCO
has entered into "new" agreements with Sun and Microsoft."
"77. On information and belief, these new agreements are
"contracts relating to" the various UNIX System releases and
auxiliary products enumerated at Schedule 1.1 (a)(VI) and
Attachment A to Amendment No. 1. The new agreements are therefore
SVRX Licenses under the APA."
"78. SCO has not remitted any royalties from its new SVRX Licenses
with Sun or Microsoft."
http://www.groklaw.net/article.php?story=20050915183241951
4) SCO has deliberately falsified their accounting for SCOsource
revenues.
a) On March 1, 2004 SCO announced that EV1Servers.Net had bought a
SCOsource license. SCO said that they had received more than $1
million for the SCOsource license.
'Blake Stowell, SCO's director of public relations, said that
EV1Servers.Net had made the deal because its "CEO felt that there
was uncertainty about Linux's legal standing and they made a
business decision to avoid any possible doubts about their use of
Linux for both themselves and their customers."'
'Stowell added, "They didn't pay full retail price on each
server, but the deal was still worth seven figures all together
for SCO."'
http://www.eweek.com/article2/0,1759,1541140,00.asp
b) On March 3, 2004 Robert Marsh, CEO of EV1Servers.net, denied that
EV1 had paid that large an amount for the SCOsource license.
"I would discount ANY reports or quotes of a 7 figure cash
payment as has been reported."
"We did agree to a one time payment, however we did not agree to
pay a 7 figure cash payment as reported in the media."
"__________________"
"Robert Marsh"
"Head Surfer Ev1servers.net"
http://forum.ev1servers.net/showthread.php?s=ec6c44446e8b2650e51ec132337d3bf4&postid=261665#post261665
c) On June 10, 2004 SCO held their 2nd Quarter Earnings Conference
Call. During this conference call SCO made several evasive
statements about the amount and accounting for the EV1 SCOsource
license. Eventually Darl McBride stated that the EV1 SCOsource
revenue was less than $250,000 and at least $100,000.
"McBride: We had a few deals on the SCOsource side, Maureen. You
know with last quarter we had announced a major deal with EV1.
That is not part of the revenue stream that we're reporting in
second quarter. That revenue will start to be accounted for in
the quarter that we're currently in."
"Cornett: Just what's the magnitude going to be? I mean is the
quarter million still right for the July quarter?"
"Young: That'd be a little high."
"McBride: From them, that would be high. It's going to be spread
out over multiple quarters, but it will be in the six figures."
http://www.groklaw.net/article.php?story=20040615030206675
In the same conference call SCO stated that revenue for SCOsource
was $11,000 the in 2nd quarter of 2004 and did not provide any
customer names. The customers are probably Questar Corp. and
Leggett & Platt Inc.
http://www.computerworld.com/softwaretopics/os/linux/story/0,10801,90791,00.html
"McMillan: Yeah, hi there. Just a question about SCOsource
revenue for Q2, can you tell me what that was?"
"McBride: [pause] Well, it's not ... go ahead Bert."
"Young: Yeah, I mean, it's Bert. It was just a couple of small
licensing deals, people that, you know, signed up for our
SCOsource agreement."
"McMillan: So you're not saying what the ... so was it zero?"
"Young: No, it's eleven thousand dollars."
http://www.groklaw.net/article.php?story=20040615030206675
d) On August 31, 2004 SCO held their 3d Quarter Earnings Conference
Call.
The SCOsource revenue from EV1 was not mentioned specifically but
was lumped into a total SCOsource revenue of $678,000. Since EV1
SCOsource revenue was less than $250,000 then SCO is claiming
SCOsource revenue of more than $438,000 from an unnamed customer
in the 3d quarter of 2004.
"Revenue from our SCOsource division relating to compliance
licenses was $678,000 for the 3rd quarter, and $709,000
year-to-date. This revenue was primarily from two sources,
including a transaction that was completed in a prior quarter,
and a newly signed license agreement in the third quarter. Due
to confidentiality reasons we are not disclosing specific terms
of either of these license agreements."
http://www.groklaw.net/article.php?story=20040902040655144
e) On December 21, 2004 SCO held their 4th Quarter Earnings Conference
Call. In the 4th quarter of 2004 SCO claimed SCOsource revenue of
$120,000 from and unnamed source.
"The remaining revenue for the 4th quarter was derived from
$120,000 in SCOsource licensing, which represents significant
year-over-year decrease, given the 4th quarter of 2003 was an
exceptional quarter in which the company closed two large
licenses."
http://www.groklaw.net/article.php?story=20041222011158357
I consider these facts to be evidence that SCO has deliberately
falsified their accounting for SCOsource revenues.
5) On January 31, 2005 SCO filed a FORM 12b-25 with the SEC which stated
that SCO could not file a FORM 10-K on time and requested a 15 day
extension.
http://www.sec.gov/Archives/edgar/data/1102542/000104746905001904/a2150650znt10-k.htm
Part III of the FORM 12b-25 contained an explanation by SCO of why the
10-K could not be filed on time:
"PART III — NARRATIVE"
"State below in reasonable detail why forms 10-K, 20-F, 11-K, 10-Q,
N-SAR, N-CSR, or the transition report or portion thereof, could not
be filed within the prescribed time period."
"The SCO Group, Inc. (the "Company") hereby requests an extension of
time to file its Annual Report on Form 10-K for the period ended
October 31, 2004. The Company was unable to file its Form 10-K by
January 31, 2005 without unreasonable effort or expense because the
Company needs more time to adequately compile and analyze supporting
documentation and provide such documentation to its auditor.
Consequently, the Company's auditor was unable to complete the audit
of the Company's financial statements within the necessary period of
time. The Company currently anticipates that the Form 10-K will be
filed by no later than the fifteenth calendar day following the date
on which the Form 10-K was due."
"The SCO Group, Inc. (the "Company") hereby requests an extension of
time to file its Annual Report on Form 10-K for the period ended
October 31, 2004. The Company was unable to file its Form 10-K by
January 31, 2005 without unreasonable effort or expense because the
Company needs more time to adequately compile and analyze supporting
documentation and provide such documentation to its auditor.
Consequently, the Company's auditor was unable to complete the audit
of the Company's financial statements within the necessary period of
time. The Company currently anticipates that the Form 10-K will be
filed by no later than the fifteenth calendar day following the date
on which the Form 10-K was due."
http://www.sec.gov/Archives/edgar/data/1102542/000104746905001904/a2150650znt10-k.htm
Exhibit A is a letter from KPMG agreeing that the reasons given in
PART III of the FORM 12b-25 were why KPMG has been unable to complete
their audit and report on SCO's financial statements for the year
ended October 31, 2004. I wish to emphasis that KPMG only agreed to
PART III of the FORM 12b-25.
"January 28, 2005"
"The SCO Group, Inc.
355 South 520 West
Lindon, Utah 84042"
"Ladies and Gentlemen:"
"Pursuant to Rule 12b-25 of the General Rules and Regulations under
the Securities and Exchange Act of 1934, we inform you that we have
been furnished a copy of the Form 12b-25 to be filed by The SCO
Group, Inc. (the "Company") on or about January 31, 2005, which
contains notification of the registrant's inability to file its Form
10-K by January 31, 2005. We have read the Company's statements
contained in Part III therein and we agree with the stated reason as
to why we have been unable to complete our audit and report on the
Company's financial statements for the year ended October 31, 2004,
to be included in its Form 10-K."
"Very truly yours,"
"/s/ KPMG LLP"
PART IV — OTHER INFORMATION of the FORM 12B-25 SCO contains some
questions to be answered by SCO. One of these questions is:
"(3) Is it anticipated that any significant change in results of
operations from the corresponding period for the last fiscal year
will be reflected by the earnings statements to be included in the
subject report or portion thereof?"
SCO has answered both "yes" and "no" to this question. NOTE THAT KPMG
HAS NOT AGREED TO THIS ANSWER. Both the "yes" and the "no" reference
a footnote which seems to shed more light on the nature of the
problem. The footnote says:
"The Company is examining certain matters related to the issuance of
shares of common stock issued under the Company's 2000 Employee
Stock Purchase Plan and potentially its other equity compensation
plans. More time is needed to compile and analyze all relevant
data."
NOTE THAT KPMG HAS NOT AGREED TO THIS FOOTNOTE.
The SCO 2003 10-K states that Arthur Andersen used to be the SCO
external auditors until Arthur Andersen folded. Then KPMG became the
SCO external auditors. KPMG refuses to express any opinion or any
form of assurance on events before November 1, 2001. So KPMG cannot
express any opinion on whatever problems SCO might be having with
their 2000 Employee Stock Purchase Plan.
"As discussed above, the consolidated financial statements of The
SCO Group, Inc. and subsidiaries for the year ended October 31, 2001
were audited by other auditors who have ceased operations. . . .
However, we were not engaged to audit, review, or apply any
procedures to the fiscal year 2001 consolidated financial statements
of The SCO Group, Inc. and subsidiaries other than with respect to
such adjustments and disclosures and, accordingly, we do not express
an opinion or any form of assurance on the fiscal year 2001
consolidated financial statements taken as a whole."
"/s/ KPMG LLP"
http://www.sec.gov/Archives/edgar/data/1102542/000104746904002142/a2127332z10-k.htm
Regardless of whether or not the ambiguous answer and tangential
footnote by SCO in PART IV are true they are not the reasons why KPMG
has been unable to complete its audit. The statements by SCO in PART
IV are a fraud meant to mislead investors about the true nature of the
accounting problems at SCO.
6) SCO failed to file a FORM 10-K for 2004.
SCO has failed to file a FORM 10-K for the 2004 fiscal year. The FORM
10-K was due by January 31, 2005. On January 31, 2005 SCO filed a
FORM 12b-25 notifying the SEC that the 10-K would file filed late.
The FORM 12b-25 gave two reasons for the late filing. One of the two
reasons was fraudulent. SCO promised that the 10-K would be filed no
later than February 15, 2005. That deadline has passed and SCO still
has not filed a 10-K.
http://www.sec.gov/Archives/edgar/data/1102542/000104746905001904/a2150650znt10-k.htm
I suggest that the SEC conduct a formal investigation into why KPMG
refuses to certify SCO's accounts.
7) SCO's financial statements for the quarters ending January 31, 2004,
April 30, 2004 and July 31, 2004 are incorrect.
On March 3, 2005 SCO filed an 8-K with the SEC. This 8-K said in
part:
"On February 28, 2005, on management’s recommendation, the Audit
Committee of the Board of Directors of The SCO Group, Inc. (the
“Company”) concluded, and KPMG LLP, the Company’s independent
auditors agreed, that, due to certain accounting errors, the
Company’s financial statements for the quarters ending January 31,
2004, April 30, 2004 and July 31, 2004 should no longer be relied
upon and should be restated."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905009368/a05-4200_28k.htm
The 8-K then included some more explanations of SCO's accounting
problems. Such explanations were not certified by KPMG. A press
release with further explanations, again not certified by KPMG, was
attached.
http://www.sec.gov/Archives/edgar/data/1102542/000110465905009368/a05-4200_2ex99d1.htm
All of the accounting problems listed in the press release could be
solved to both parties' satisfaction in a half hour meeting between
SCO and KPMG. Whatever problem(s) is causing the deadlock between SCO
and KPMG is not listed in the press release. The best description
that I could find of what SCO's elaborations mean is this:
"Those assiduous corporate officers -- singlemindedly and doggedly
badgering the auditors into seeing the necessity for restating
results: no matter how long it took. What a team. What ethics.
What ... self-serving bilgewater."
http://www.groklaw.net/article.php?story=20050303161820784
8) On April 1, 2005 SCO filed their 10-K for 2004 very late. In that
10-K SCO stated that the S-3 registration statement was invalid
because the 10-K was filed late. I suggest that the 10-K has cause
and effect backwards; the 10-K was filed late because SCO (and
BayStar) lied about the SEC approving the S-3 registration for the
SCOX common stock exchanged for the Series A-1 Preferred Stock and the
auditors, KPMG, refused to certify actions taken under the unapproved
SCO/BayStar registration statement.
"We previously had an effective registration statement on Form S-3
relating to the sale or distribution by BayStar as a selling
stockholder of the 2,105,263 shares of common stock issued to
BayStar in connection with our repurchase completed in July 2004 of
all Series A-1 shares previously held by BayStar. When we failed to
file this Form 10-K in a timely fashion, we became ineligible to use
Form S-3, our registration statement ceased to be effective and
BayStar’s ability to resell shares pursuant to that registration
statement terminated. We are currently in the process of preparing
a new registration statement for the resale of BayStar’s shares on
Form S-1. Upon that registration statement being declared effective
by the SEC, BayStar will again be able to resell its shares."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064 _110k.htm
One of the actions taken under the invalid contract was that the
outstanding dividends owed by SCO on the Series A-1 redeemable
convertible preferred stock were canceled. As part of the accounting
corrections forced by KPMG $7,123,000 in dividends on the Series A-1
preferred stock were moved to liabilities.
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064 _110k.htm
9) SCO failed to file a 10-Q for the first quarter of 2005,
"On March 18, 2005, the Company received a notice from the staff of
The Nasdaq Stock Market regarding the Company's failure to comply
with Nasdaq's requirement to file its Form 10-Q for the quarterly
period ended January 31, 2005 in a timely fashion, as required under
Marketplace Rule 4310(c)(14)."
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=158467
10) KPMG has resigned as SCO's external auditors.
"June 3, 2005"
"Securities and Exchange Commission
Washington, D.C. 20549"
"Ladies and Gentlemen:"
"We were previously principal accountants for The SCO Group,
Inc. and, under the date of February 18, 2005, except as to note 16,
which is as of March 11, 2005, we reported on the consolidated
financial statements of The SCO Group, Inc. as of and for the years
ended October 31, 2004 and 2003. On May 27, 2005, we notified the
SCO Group, Inc. that we would resign upon completion of the
Statement of Auditing Standards (SAS) No. 100 review of The SCO
Group, Inc.'s condensed consolidated financial statements as of
April 30, 2005 and for the related three-month and six-month periods
ended April 30, 2005. The SAS No. 100 review was completed June 2,
2005. We have read The SCO Group, Inc's statements included under
Item 4.01 of its Form 8-K dated June 3, 2005, and we agree with such
statements, except that we are not in a position to agree or
disagree with The SCO Group, Inc's statements that: 1) Tanner LC was
engaged as the independent registered public accounting firm and the
Audit Committee recommended or approved their appointment and 2)
whether or not The SCO Group, Inc. consulted with Tanner LC
regarding any of the matters set forth in Item 304(a)(2)(i) and (ii)
of Regulation S-K."
"Very truly yours,"
"/s/ KPMG LLP"
http://www.sec.gov/Archives/edgar/data/1102542/000104746905016438/a2159203z424b3.htm#toc_ka2085_1
An external auditor can make no public statements about their clients.
Anything that KPMG says about SCO has to be published by SCO. I have
read through all of the statements published by SCO about what KPMG
has told SCO in KPMG's audit reports. According to SCO, KPMG has
approved everything done by SCO with one exception. The exception is
that KPMG found a weakness in SCO's internal controls related to the
accounting for capital stock and stock option transactions.
"KPMG reported in a letter to the Company's Audit Committee dated
May 17, 2005 that during its audit of the Company's financial
statements for the fiscal year ended October 31, 2004, it noted a
material weakness in internal controls related to the accounting
for capital stock and stock option transactions."
http://www.sec.gov/Archives/edgar/data/1102542/000104746905016438/a2159203z424b3.htm
11) When KPMG refused to certify SCO's 10-Q all of the reasons for why
they did so were published by SCO. While KPMG possibly raised the
objections published by SCO, I think SCO lied about THE reason why
KPMG refused to certify SCO's books. KPMG had discovered that the SEC
never did approve the BayStar repurchase agreement.
While SCO has stated that KPMG objected to SCO's internal controls
related to the accounting for capital stock and stock option
transactions, SCO never did explain what KPMG's objection was to the
repurchase agreement. When SCO finally admitted that the repurchase
agreement was invalid they gave a bafflegab explanation of why it was
invalid. KPMG finally certified the books. But the evidence
indicates that KPMG wound up their work at a convenient point and then
resigned because KPMG was horrified that SCO was and still is lying
about what the KPMG audit reports said about the repurchase agreement.
Here are the responsibilities laid down by the Sarbanes-Oxley act for
Darl McBride (CEO) and Bert Young (CFO).
"SOX Section 302 - Corporate Responsibility for Financial Reports
a) CEO and CFO must review all financial reports.
b) Financial report does not contain any misrepresentations.
c) Information in the financial report is "fairly presented".
d) CEO and CFO are responsible for the internal accounting controls.
e) CEO and CFO must report any deficiencies in internal accounting
controls, or any fraud involving the management of the audit
committee.
f) CEO and CFO must indicate any material changes in internal
accounting controls."
http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
The penalties for violating the Sarbanes-Oxley reporting
responsibilities include the following.
"Besides lawsuits and negative publicity, a corporate officer who
does not comply or submits an inaccurate certification is subject to
a fine up to $1 million and ten years in prison, even if done
mistakenly. If a wrong certification was submitted purposely, the
fine can be up to $5 million and twenty years in prison."
http://www.sarbanes-oxley-101.com/sarbanes-oxley-faq.htm
I think that the SEC should obtain a search warrant to find all of the
audit reports which KPMG has submitted to SCO. The SEC should compare
the KPMG audit reports with the information that Darl McBride and Bert
Young have filed with the SCO and their public statements through
press releases and the quarterly earning conference calls.
Darl McBride and Bert Young are violating their Sarbanes-Oxley
reporting responsibilities and should be indicted for doing so.
I also suggest that the SEC freeze all payments to Darl McBride,
Ralph Yarro, and Bert Young under the authority given to the SEC to
do so by the Sarbanes Oxley Act.
http://www.webcpa.com/article.cfm?articleid=15839
Y. SCO fraudulently claimed that Computer Associates bought a SCOsource
license.
Robert Bench, SCO Chief Financial Officer, said that Computer Associates
had purchased a SCOsource license.
"Software giant Computer Associates International Inc. has signed up
for The SCO Group Inc.'s Intellectual Property License for Linux, SCO
Chief Financial Officer Bob Bench confirmed yesterday."
http://www.computerworld.com/softwaretopics/os/linux/story/0,10801,90791,00.html
Sam Greenblatt, Computer Associates Senior Vice Ppresident, said that SCO
had misconstrued the terms of the agreement settling a breach of contract
dispute between Canopy and Computer Associates. Canopy insisted that a
SCOsource license be included in the settlement even though no money was
paid by Computer Associates to SCO and SCO was not party to the
agreement.
"The settlement that gave CA the Linux rights took place in August, CA
spokeswoman Michelle Healy said. In that settlement, CA agreed to pay
$40 million to Canopy and Center 7, a company in which Canopy holds a
majority ownership, according to a SCO filing with the Securities and
Exchange Commission. Center 7 sued CA in April 2001, alleging a breach
of contract of a software license agreement, CA said in a filing with
the SEC."
"CA disagrees with SCO's tactics, which are intended to intimidate and
threaten customers. CA's license for Linux technology is part of a
larger settlement with the Canopy Group. It has nothing to do with
SCO's strategy of intimidation,"
http://news.zdnet.com/2100-3513_22-5170310.html
Z. The SCOX stock price rose spectactularly after SCO began claiming
exaggerated worth for their intellectual property beginning about
February 25, 2003. The bubble reached a high on October 17, 2003 and
eventually faded away about May 20, 2004
http://bigcharts.com/custom/washingtontimes-com/interactivechart.asp?sid=&o_symb=scox&symb=scox&x=0&y=0&time=9&uf=7168&compidx=aaaaa%3A0
http://lwn.net/Articles/75129/
AA. SCO insiders have registered the following SCO stock sales with the Securities
Exchange Commission during the period of March 6, 2003 through April 7, 2004.
SCO insider sales from March 6, 2003 through April 7, 2004
-------------------------------------------------------------
Date Name Shares Amount
04/08/2003 Robert Bench 4,100 $11,890.00
03/10/2003 Robert Bench 7,000 $21,420.00
04/08/2003 Robert Bench 4,100 $11,890.00
06/03/2003 Opinder Bawa 15,000 $90,000.00
06/04/2003 Opinder Bawa 7,916 $52,245.60
06/06/2003 Jeff Hunsaker 5,000 $44,500.00
06/09/2003 Robert Bench 3,000 $27,788.00
06/11/2003 Michael Olson 6,000 $51,820.00
06/20/2003 Reginald Broughton 5,000 $55,446.00
06/25/2003 Reginald Broughton 5,000 $50,000.00
07/08/2003 Robert Bench 7,000 $77,213.00
07/09/2003 Jeff Hunsaker 5,000 $59,000.60
07/11/2003 Michael Olson 8,000 $84,208.00
07/14/2003 Sean Wilson 6,000 $65,045.00
07/15/2003 Sean Wilson 6,000 $64,240.00
07/22/2003 Reginald Broughton 20,000 $242,893.00
07/23/2003 Jeff Hunsaker 5,000 $66,694.00
07/30/2003 Reginald Broughton 5,000 $64,001.00
08/05/2003 Reginald Broughton 5,000 $62,819.00
08/08/2003 Robert Bench 7,000 $76,300.00
08/11/2003 Michael Olson 5,000 $46,270.00
08/13/2003 Jeff Hunsaker 5,000 $50,000.00
08/19/2003 Reginald Broughton 5,000 $52,028.00
08/25/2003 Jeff Hunsaker 5,000 $71,400.00
08/26/2003 Reginald Broughton 5,000 $73,700.00
09/02/2003 Reginald Broughton 5,000 $73,555.45
09/09/2003 Reginald Broughton 5,000 $90,262.00
09/11/2003 Michael Olson 7,000 $122,850.00
09/14/2003 Reginald Broughton 2,450 $49,000.00
09/15/2003 Reginald Broughton 2,550 $51,199.00
10/08/2003 Robert Bench 6,800 $112,880.00
10/13/2003 Michael Olson 10,000 $141,486.50
12/29/2003 Duff Thompson 10,000 $174,860.00
01/07/2004 Thomas Raimondi 11,841 $210,189.59
01/26/2004 Larry Gasparro 5,259 $81,076.06
02/04/2004 Thomas Raimondi 11,841 $170,510.40
03/03/2004 Thomas Raimondi 11,841 $143,276.10
04/07/2004 Thomas Raimondi 11,481 $128,736.45
04/07/2004 Jeff F. Hunsaker 5,976 $66,733.84
------- -------------
Totals 268,255 $3,149,426.59
http://ir.sco.com/edgar.cfm
2. SCO has illegally manipulated its insider stock option plan and its
employee stock option plan..
A. In order to balance the conflicting interests of the inside and outside
shareholders in a corporation it is customary when granting stock options
based on stock market prices to use the average closing price for some
time period previous to the date that the option was issued. The usual
averaging period is 30 days.
But SCO has used an entirely different method of setting the exercise
price for the stock options issued to SCO insiders from March 6, 2003
through August 10, 2004. SCO has been back dating the date that stock
options are granted and then using the closing price on the transaction
date as the exercise price for the stock option. In fairness to the
outside shareholders the stock options should have been granted at the 30
day average closing price on the issue date. This fraud has resulted in
33 of the 34 stock options issued since March 6, 2003 being issued at
exercise prices very advantageous to the SCO insiders and very
disadvantageous to SCO outside shareholders.
The SCO stock option reports filed with the SEC can be found here.
http://ir.sco.com/edgar.cfm
The daily stock prices for SCOX can be found here.
http://finance.yahoo.com/q/hp?s=SCOX
The following list shows each stock option issued, the issue date, the
back dated transaction date, the 30 day closing price average on the
issue date, the closing price on the transaction date, and the exercise
price of the option. I then calculate the insider advantage amount by
subtracting the exercise price from the 30 day average and multiplying by
the number of shares.
================================================================================
Insiders Stock Options Exercise Advantage
Prices
-------------------------
Date Name Shares 30 Day Close Exercise
issued 03/27/2003 $2.36 $2.27
03/18/2003 Robert Bench 100,000 $2.07 $2.07
unfair insider advantage: $29,000
issued 03/27/2003 $2.36 $2.27
03/18/2003 Reginald Broughton 50,000 $2.07 $2.07
unfair insider advantage: $14,500
issued 03/27/2003 $2.36 $2.27
03/18/2003 Michael Olson 50,000 $2.07 $2.07
unfair insider advantage: $14,500
issued 03/27/2003 $2.36 $2.27
03/18/2003 Darl McBride 200,000 $2.07 $2.07
unfair insider advantage: $58,000
issued 06/09/2003 $6.03 $9.05
03/18/2003 Jeff Hunsaker 100,000 $2.07 $2.07
unfair insider advantage: $396,000
issued 07/08/2003 $10.60 $11.01
06/26/2003 Fred Skousen 45,000 $10.25 $10.25
unfair insider advantage: $15,750
issued 07/24/2003 $10.56 $14.84
05/16/2003 Ralph Yarro 10,000 $4.75 $4.75
unfair insider advantage: $58,100
issued 07/24/2003 $10.56 $14.84
05/16/2003 Duff Thompson 10,000 $4.75 $4.75
unfair insider advantage: $58,100
issued 07/24/2003 $10.56 $14.84
05/16/2003 Darcy Mott 10,000 $4.75 $4.75
unfair insider advantage: $58,100
issued 07/24/2003 $10.56 $14.84
05/16/2003 Steven Cakebread 10,000 $4.75 $4.75
unfair insider advantage: $58,100
issued 07/24/2003 $10.56 $14.84
05/16/2003 Edward Iacobucci 10,000 $4.75 $4.75
unfair insider advantage: $58,100
issued 07/24/2003 $10.56 $14.84
06/02/2003 Thomas Raimondi 10,000 $6.13 $6.13
unfair insider advantage: $44,300
issued 09/12/2003 $13.61 $17.99
09/11/2003 Ryan Tibbits 30,000 $17.99 $8.71
unfair insider advantage: $147,000
issued 09/12/2003 $13.61 $17.99
09/11/2003 Ryan Tibbits 35,000 $17.99 $17.99
insider disadvantage: $153,300-
issued 11/03/2003 $16.87 $16.90
11/03/2003 Daniel Campbell 45,000 $15.99 $15.99
unfair insider advantage: $39,600
issued 12/12/2003 $15.59 $15.99
06/02/2003 Thomas Raimondi 15,000 $6.13 $6.13
unfair insider advantage: $141,900
issued 12/12/2003 $15.59 $15.99
05/16/2003 Steven Cakebread 15,000 $4.75 $4.75
unfair insider advantage: $162,600
issued 12/12/2003 $15.59 $15.99
05/16/2003 Darcy Mott 15,000 $4.75 $4.75
unfair insider advantage: $162,600
issued 12/12/2003 $15.59 $15.99
05/16/2003 Ralph Yarro 15,000 $4.75 $4.75
unfair insider advantage: $162,600
issued 12/12/2003 $15.59 $15.99
05/16/2003 Duff Thompson 15,000 $4.75 $4.75
unfair insider advantage: $162,600
issued 12/12/2003 $15.59 $15.99
05/16/2003 Edward Iacobucci 15,000 $4.75 $4.75
unfair insider advantage: $162,600
issued 12/15/2003 $15.85 $16.02
06/13/2003 Christopher Sontag 5,739 $11.21 $0.001
unfair insider advantage: $85,252
issued 01/30/2004 $16.37 $14.85
05/16/2003 Ralph Yarro 15,000 $4.75 $4.75
unfair insider advantage: $174,300
issued 02/03/2004 $16.07 $14.40
05/16/2003 Darcy Mott 15,000 $4.75 $4.75
unfair insider advantage: $169,800
issued 04/22/2004 $9.02 $6.08
04/20/2004 Thomas Raimondi 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Edward Iacobucci 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Daniel Campbell 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Darcy Mott 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Ralph Yarro 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Fred Skousen 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Duff Thompson 15,000 $7.18 $7.18
unfair insider advantage: $27,600
issued 04/22/2004 $9.02 $6.08
04/20/2004 Bert Young 150,000 $7.18 $7.18
unfair insider advantage: $276,000
issued 05/28/2004 $5.48 $5.19
05/25/2004 Ryan Tibbits 10,000 $5.05 $5.05
unfair insider advantage: $4,300
issued 08/10/2004 $4.59 $4.30
07/27/2004 Ryan Tibbits 100,000 $4.05 $4.05
unfair insider advantage: $54,000
----------------------------------------
total unfair insider advantage: $2,807,602
================================================================================
B. SCO has illegally issued common stock and stock options through their
employee stock purchase program to a value of $528,000. SCO has been
forced to admit their illegal transactions in their 2004 10-K in order to
get KPMG to certify the 10-K.
"We have issued shares and granted options under our 1998 Stock Option
Plan, 1999 Omnibus Stock Option Plan, the ESPP, 2002 Omnibus Stock
Incentive Plan, and 2004 Omnibus Stock Incentive Plan (collectively,
the “Equity Compensation Plans”) without complying with registration or
qualification requirements under federal securities laws and the
securities laws of certain states. As a result, certain plan
participants have a right to rescind their purchases of shares under
the Equity Compensation Plans or recover damages if they no longer own
the shares or hold unexercised options, subject to applicable statutes
of limitations. Additionally, regulatory authorities may require us to
pay fines or impose other sanctions on us. Although we are evaluating
the possible actions we may take in response to these securities law
compliance issues, we may, subject to obtaining required regulatory
approvals, make a rescission offer to certain plan participants that
hold unexercised options (in California, Georgia and possibly other
states) or shares acquired under the Equity Compensation Plans or that
otherwise are entitled to recover damages from us in respect of such
shares they have sold."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
"According to SCO sources, these amounts are not stock options. They
are attributable to shares that were purchased through the employee
stock purchase program."
http://quote.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=SCOXE:US&sid=asTNiDLbE1A0
The value of stock and options issued illegally amount to $528,000.
"If our potential rescission offer is made and accepted by plan
participants holding shares acquired under the Equity Compensation
Plans or otherwise entitled to recover damages from us in respect of
such shares they have sold, or such plan participants otherwise make
rescission claims against us, we could be required to make aggregate
payments to these plan participants of up to $528,000 in the aggregate,
excluding interest and other possible fees, based upon shares
outstanding under the Equity Compensation Plans as of October 31,
2004."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
C. SCO has offered to buy back the stock illegally issued to their
employees.
"We are offering to repurchase 137,219 shares of common stock
purchased pursuant to our 2000 Employee Stock Purchase Plan, or ESPP,
during the six-month periods ended November 30, 2004 and May 31, 2005
from our current and former employees who are residents of California,
Connecticut, Illinois, New Jersey, Texas, Utah or Washington."
"We are also offering to repurchase 175,587 shares of common stock
purchased pursuant to the ESPP during the six-month periods ended May
31, 2003, November 30, 2003 and May 31, 2004 from our current and
certain former employees who were, at the time of issuance, residents
of California and Utah and are now residents of Arizona, California or
Utah."
"In addition, we are offering to rescind the offer of securities to
employees residing in California who enrolled in the ESPP for the
offering period that began June 1, 2005 because we have not completed
the qualification of the offer and sale of such shares with the
Securities Regulation Division of the California Department of
Corporations."
"The repurchase price for the shares of our common stock subject to
the rescission offer ranges from $0.65 to $5.21 per share and is equal
to the price paid by those persons who purchased these shares,
excluding interest."
"We may continue to have potential liability even after this rescission
offer is made."
"Additionally, regulatory authorities may require us to pay fines or
they may impose other sanctions upon us, and we may face other claims
by plan participants other than rescission claims"
http://www.sec.gov/Archives/edgar/data/1102542/000110465905034806/a05-13532_1s1.htm
3. There is management instability at SCO.
A. Steven Cakebread, Chairman of the SCO Board of Directors Audit Committee,
resigned.
'Resigned effective Dec. 22 -- the day of SCO's fourth-quarter earnings
release -- in an announcement released on Dec. 23. Reason for
resignation given as "personal time constraints."'
http://twiki.iwethey.org/twiki/bin/view/Main/SteveCakebread
B. Thomas Raimondi has abruptly resigned from the Board of Directors of The
SCO Group.
http://www.sec.gov/Archives/edgar/data/1102542/000110465904037384/a04-14111_18k.htm
Thomas Raimondi was a member of the audit committee.
"The members of the Audit Committee are Messrs. Campbell (Committee
Chair), Raimondi, Thompson and Skousen."
http://ir.sco.com/EdgarDetail.cfm?CIK=1102542&FID=1047469-04-5973&SID=04-00
C. SCO failed to file a FORM 10-K on time for the 2004 fiscal year. The
FORM 10-K was due to be filed by January 31, 2005. On January 31, 2005
SCO filed a FORM 12b-25 notifying the SEC that the 10-K would be filed
late. SCO promised that the 10-K would be filed no later than February
15, 2005. That deadline passed and SCO still had not filed a 10-K.
http://www.sec.gov/Archives/edgar/data/1102542/000104746905001904/a2150650znt10-k.htm
On April 1, 2005 SCO filed a revised 10-Q for 1st quarter 2005, a revised
10-Q for 2nd quarter 2005, a revised 10-Q for 3d quarter 2005, and the
overdue 10-K for 2004.
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014783/a05-6056_110qa.htm
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014785/a05-6056_210qa.htm
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014786/a05-6056_310qa.htm
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
Section 304 of the Sarbanes-Oxley Act of 2002 forces a company's CEO and
CFO to pay back all bonuses and stock options to the company if the books
have to be restated because of illegal accounting.
"Additional Compensation Prior to Noncompliance With Commission
Financial Reporting Requirements. If an issuer is required to prepare
an accounting restatement due to the material noncompliance of the
issuer, as a result of misconduct, with any financial reporting
requirement under the securities laws, the chief executive officer and
chief financial officer of the issuer shall reimburse the issuer
for--"
"1. any bonus or other incentive-based or equity-based compensation
received by that person from the issuer during the 12-month period
following the first public issuance or filing with the Commission
(whichever first occurs) of the financial document embodying such
financial reporting requirement; and"
"2. any profits realized from the sale of securities of the issuer
during that 12-month period."
http://www.law.uc.edu/CCL/SOact/sec304.html
As described elsewhere in this complaint SCO deliberately lied in
stating that the SEC had approved the BayStar PIPE investment repurchase
agreement. As a result the auditors, KPMG, refused to certify the books
and SCO had to restate three quarterly results and the 2005 annual
statement.
"The bonus of $35,000 earned by Mr. McBride in fiscal year 2004 was
paid during fiscal year 2005."
Darl McBride, CEO, must reimburse SCO for $35,000 in bonuses.
"The bonus of $30,000 earned by Mr. Young in fiscal year 2004 was paid
during fiscal year 2005."
Burt Young, CFO, must reimburse SCO for $30,000 in bonuses.
Burt Young, CFO, must relinquish stock options for 150,000 shares of SCOX
received on April 22, 2004.
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
D. On March 11, 2005 a settlement agreement was reached between Yarro et al
and Kreidel et al. In this agreement Canopy transfered ownership of all
SCO stock owned by Canopy to Ralph Yarro. Ralph Yarro is now the
principle stockholder of SCO and controls SCO. Ralph Yarro remains
Chairman of the Board of SCO and Darcy Mott remains Director.
http://www.sltrib.com/business/ci_2605421
'Yarro is now the biggest shareholder of SCO common stock, with 5.4
million shares or 31% of the company's 17.5 million available shares.
"We expect he'll continue to own those shares and we expect he'll
continue in his role as chairman," Stowell said. "He's taking a
long-term view of the value of the shares."'
http://www.cbronline.com/article_news.asp?guid=19128C75-4E9B-496C-B205-871C351FBBCE
Here is the SEC FORM 4.
"1. Reporting Person disposed of these shares in connection with a
settlement agreement reached with a former executive of Reporting
Person. The shares were transferred to the former executive pursuant to
the terms of a Stock Purchase Agreement for consideration other than
cash."
http://www.sec.gov/Archives/edgar/data/1102542/000092275805000002/xslF345X02/primary_doc.xml
E. On May 24, 2005 Fred Skousen told SCO that he would not stand for
reelection for the SCO Board od Directors.
http://www.sec.gov/Archives/edgar/data/1102542/000110465905025655/a05-10013_18k.htm
Fred Skousen was a member of the audit committee.
"The members of the Audit Committee are Messrs. Campbell (Committee
Chair), Raimondi, Thompson and Skousen."
http://ir.sco.com/EdgarDetail.cfm?CIK=1102542&FID=1047469-04-5973&SID=04-00
F. On May 27, 2005 KPMG resigned as SCO's external auditors.
"June 3, 2005"
"Securities and Exchange Commission
Washington, D.C. 20549"
"Ladies and Gentlemen:"
"We were previously principal accountants for The SCO Group, Inc.
and, under the date of February 18, 2005, except as to note 16, which
is as of March 11, 2005, we reported on the consolidated financial
statements of The SCO Group, Inc. as of and for the years ended
October 31, 2004 and 2003. On May 27, 2005, we notified the SCO Group,
Inc. that we would resign upon completion of the Statement of Auditing
Standards (SAS) No. 100 review of The SCO Group, Inc.'s condensed
consolidated financial statements as of April 30, 2005 and for the
related three-month and six-month periods ended April 30, 2005. The
SAS No. 100 review was completed June 2, 2005. We have read The SCO
Group, Inc's statements included under Item 4.01 of its Form 8-K dated
June 3, 2005, and we agree with such statements, except that we are not
in a position to agree or disagree with The SCO Group, Inc's statements
that: 1) Tanner LC was engaged as the independent registered public
accounting firm and the Audit Committee recommended or approved their
appointment and 2) whether or not The SCO Group, Inc. consulted with
Tanner LC regarding any of the matters set forth in Item 304(a)(2)(i)
and (ii) of Regulation S-K."
"Very truly yours,"
"/s/ KPMG LLP"
http://www.sec.gov/Archives/edgar/data/1102542/000104746905016438/a2159203z424b3.htm#toc_ka2085_1
http://www.cbronline.com/article_news.asp?guid=41A8AED9-E79B-4BE3-B56C-0BC680A57AB9
4. Microsoft has invested in SCO equity above the 10% reporting threshold without
revealing their true identity.
A. SCO's strategy of suing their own customers and potential customers for
using Linux or for ignoring SCO's demands that the customers attest that
they are not using Linux is economic suicide. Existing customers now
face the prospect of being sued in an attempt to force the customer to
acknowlege that SCO owns Linux. Potential customers face the prospect
that signing a contract to buy SCO products dramatically increases the
customer's chances of being sued by SCO.
Such a strategy makes economic sense only if SCO has a way to make money
from it. There is strong evidence that Microsoft has committed to paying
SCO large amounts of money for SCO to attack Linux users in an attempt to
force Linux out of the operating system marketplace. Such payments in
order to lessen competition violates section 18 of Title 15 U.S.C.
http://assembler.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00000018----000-.html
Microsoft has purchased a license to use SCO technology for 16.6 million
dollars. Microsoft has absolutely no need to buy SCO technology
licenses and the reasons Microsoft has given publicly are simply
disinformation.
http://news.com.com/2100-1016_3-1007528.html
http://www.practical-tech.com/business/b05212003.htm
http://news.com.com/Fact+and+fiction+in+the+Microsoft-SCO+relationship/2100-7344_3-5450515.html?part=rss&tag=5450515&sub
So Microsoft has openly and seemingly legally given SCO money for reasons
that Microsoft is unwilling to publicly reveal.
B. Microsoft is willing to finance an expensive lawsuit campaign by SCO to
bludgeon customers who use Linux.
Mike Anderer is one of the participants in the Microsoft money
laundering scheme. Here is his explanation of the purpose of
Microsoft's support of SCO.
"In a world where there are $500 million dollar patent infringement
lawsuits imposed on OS companies (although this is not completely
settled yet), how would somebody like Red Hat compete when 6 months
ago they only had $80-$90 million in cash? At that point they could
not even afford to settle a fraction of a single judgment without
devastating their shareholders. I suspect Microsoft may have 50 or
more of these lawsuits in the queue. All of them are not asking for
hundreds of millions, but most would be large enough to ruin anything
but the largest companies. Red Hat did recently raise several
hundred million which certainly gives them more staying power.
Ultimately, I do not think any company except a few of the largest
companies can offer any reasonable insulation to their customers from
these types of judgments. You would need a market cap of more than a
couple billion to just survive in the OSspace."
http://trends.newsforge.com/trends/04/03/12/1731252.shtml
C. SCO has sent letters to about 6000 SCO customers stating that SCO owns
Linux and that the terms of the contract between SCO and each customer
forbids the customer from using Linux unless the customer pays SCO for
Linux. SCO demanded that each customer certify that they had not
inserted any SCO code into Linux. SCO then sued one of their customers,
DaimlerChrysler, because DaimlerChrysler did not reply to the letter.
SCO attempted to expand the suit to claim that DaimlerChrysler's use of
Linux violated their contract with SCO.
http://www.groklaw.net/article.php?story=20040303182714835
On July 21, 2004 Judge Rae Lee Chabot of Oakland County Circuit Court in
Michigan threw out all of SCO's claims against DaimlerChrysler except
the claim that Chrysler was slow in replying.
"The judge threw out all of SCO's claims except the question of
whether the auto manufacturer should have responded to SCO's
request within 30 days, and whether SCO suffered any damages
from the delay. DaimlerChrysler didn't respond until after SCO
had filed its lawsuit."
"It is unclear what SCO's next move will be or whether that
remaining issue will go to trial."
'"I think the judge just sort of saw through what SCO was doing,
particularly its public comments around copyright violations,
and I think she took the prudent course here," said Dion Cornett,
an analyst at Chicago-based Decatur Jones Equity Partners LLC.
"SCO hasn't provided any evidence out there to convince IT
managers that Linux violates its intellectual property rights."'
http://www.computerworld.com/governmenttopics/government/legalissues/story/0,10801,94664,00.html
On December 21, 2004 Judge Chabot dismissed the last remaining issue,
whether or not DaimlerChrysler replied to SCO's letter in a timely
fashion.
"PRESENT: Hon. Rae Lee Chabot, Circuit Court Judge"
"Upon the stipulation of the parties hereto, through their respective
counsel, and the Court being fully advised in the premises;"
"IT IS HEREBY ORDERED that Plaintiff The SCO Group, Inc.'s claim for
breach of contract for Defendant DaimlerChrysler Corporation's
alleged failure to respond to the request for certification in a
timely manner is DISMISSED without prejudice."
"IT IS FURTHER ORDERED that, in the event Plaintiff The SCO Group, Inc.
refiles its claim for breach of contract for Defendant DaimlerChrysler
Corporation's alleged failure to respond to the request for
certification in a timely manner, Plaintiff shall pay Defendant's costs
and reasonable attorneys' fees incurred in the instant action in
defending against that claim only, from and after the entry of this
Court's August 9, 2004 Order Granting in Part and Denying in Part
Defendant DaimlerChrysler Corporation's Motion for Summary
Disposition, as a condition precedent to pursuing any such refiled
action. The amount of Defendant's costs and reasonable attorneys' fees
shall be determined by the Court in the refiled action as soon as
practicable after refiling, and Plaintiff shall pay such costs and
reasonable attorneys' fees, as are determined by the Court, within 15
days following the Court's decision, as a condition to pursuing the
refiled action. Defendant shall not be required to answer or otherwise
respond to the complaint in the refiled action until Plaintiff pays the
costs and reasonable attorneys' fees described above."
"THIS ORDER DISPOSES OF THE LAST PENDING CLAIM AND CLOSES THIS CASE."
"----[signature]___
Hon. Rae Lee Chabot
Circuit Court Judge"
SCO customers take SCO's threats seriously. Medscheme has recently
stopped using SCO software partially because of the legal threat posed by
signing contracts with SCO.
http://www.idgnews.net/intl/international.nsf/0/00256AF50054FFC100256ED3006C6B98?OpenDocument
On January 21, 2005 The Michigan Court of Appeals dismissed SCO's appeal
of their loss in the DaimlerChrysler case. The Michigan Court of Appeals
did not hold a hearing on the matter. They said that SCO could not
appeal a stipulated settlement of the case. You can read the court order
here.
http://courtofappeals.mijud.net/resources/asp/viewdocket.asp?casenumber=260036
click on number 6
This article in the Salt Lake Tribune explains SCO v DaimlerChrysler.
http://www.sltrib.com/business/ci_2535182
Thus SCO v DaimlerChrysler has proven to be a complete rout for SCO. SCO
had intended for this case to be an example mugging for the companies SCO
selected as extortion racket victims.
D. SCO has also repeatedly threatened to sue Linux users who are not SCO
customers.
http://www.cxotoday.com/cxo/jsp/index.jsp?file=template0.jsp&storyid=472§ion=News&subsection=Business&subsection_code=1
SCO has sued AutoZone for using Linux as a way of pressuring IBM and as
an example victim in the SCO extortion racket.
http://news.com.com/2100-1014-5168921.html
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=129978
Coincidently, the Nevada court where SCO filed the AutoZone lawsuit uses
Linux and has infringed upon SCO's intellectual property rights to
the exact same extent that AutoZone has or has not infringed on SCO's
intellectual property rights.
http://www.linuxpipeline.com/trends/18201947
SCO markets Linux licenses as a way to avoid lawsuits.
http://www.thescogroup.com/scosource/linuxlicense.html
http://www.nwfusion.com/news/2003/0721sco.html
http://news.com.com/2100-7344-5176308.html
E. The SCO attempt to sell Linux licenses has all of the earmarks of an
extortion racket. Darl McBride, President of SCO, explains it this way.
"We're going to force people down a path,"McBride says. "They can
choose licensing or litigation. If someone says they want to see a
court ruling before they pay, we'll say, ‘Fine, you're the lucky
winner. We'll take you first.'
http://www.forbes.com/forbes/2003/1124/096.html
From a marketing viewpoint such an extortion campaign is economic
suicide. No Linux user will pay SCO a Linux licensing fee based on SCO's
extremely flimsy claims to owning Linux. This strategy of trying to
extort money from Linux users by threatening to launch expensive lawsuits
does not make any economic sense from SCO's viewpoint unless SCO has been
promised large amounts of money by Microsoft for harassing companies that
use or sell Linux in line with the Microsoft strategy that Mike Anderer
announced.
When SCO was organizing its protection racket they asked Novell to
participate. Novell refused. Novell explains this in their pleadings
in SCO v Novell. On page 19, section 38 of Novell's pleadings Novell
states:
"In late 2002, SCO repeatedly contacted Novell inconnection with
soon-to-be-announced SCOsource campaign. SCO requested copies of
certain documentation concerning rights to UNIX, including the
agreement between Novell and Santa Cruz. SCO also expressed its
interest in a campaign to assert UNIX infringment claims against
users of Linux. SCO asked Novell to assist SCO in a Linux licensing
program, under which SCO contemplated extracting a license fee from
Linux end users to use the UNIX intellectual property purportedly
contained in Linux. Novell refused to participate."
http://www.groklaw.net/pdf/Novell-78.pdf
So I conclude that Microsoft has secretly and illegally invested money in
SCO equity. No sophisticated investor would seriously consider buying
equity in SCO's lawsuit campaign against Linux because the SCO lawsuit
strategy is a guarenteed loss to SCO and its investors. Therefore any
sophisticated investor would only be interested in investing in SCO if
Microsoft compensated the investor for doing so. Any efforts by
Microsoft and the nominal investors to hide the fact that money invested
in SCO originated from Microsoft is illegal money laundering.
F. BayStar and The Royal Bank of Canada invested in a private placement
of SCO convertible preferred shares which amounts to 17.5% of SCO
equity.
http://www.forbes.com/markets/newswire/2003/10/16/rtr1112634.html
http://marketwatch-cnet.com.com/2110-7344_3-5093997.html
http://biz.yahoo.com/e/031017/scox8-k.html
This is the contract between SCO and Royal Bank and BayStar.
http://contracts.onecle.com/sco/baystar.reg.2003.10.16.shtml
G. Royal Bank has stated that it purchased the equity position in SCO
as a hedge against client positions. In fact Royal Bank purchased the SCO
equity as a front for Microsoft or Microsoft's agents..
'An RBC spokesman was reluctant to comment, saying the SEC filing was
about how SCO operates its business. He said that RBC's "investment in
SCO is passive, made to hedge an economic exposure resulting from
client transactions."'
http://www.globetechnology.com/servlet/story/RTGAM.20031209.gtscodec9/BNStory/Technology/
In order for a hedge to work both sides of the hedge must be owned
by the same investor. The article in the Globe and Mail quotes the
Royal Bank as saying that Royal Bank made the SCO investment to
hedge a client's position. If the client owns one side of the hedge and
Royal Bank owns the offsetting position of the hedge then neither the
client nor Royal Bank is hedged against anything. In order for the
client to be hedged the client must own the SCO equity position. If the
SCO equity position was purchased in Royal Bank's name but is
beneficially owned by Royal Bank's client then the client, and perhaps
Royal Bank, has broken the United States securities law that requires
any purchaser of a significant equity position to publicly announce
their equity purchase and their reasons for the purchase. The purchaser
must also file a form with the United States Securities Exchange
Commission.
Such transaction by Royal Bank also violates Canada's Proceeds of Crime
Act.
"The Proceeds of Crime (Money Laundering) and Terrorist Financing Act
(PCMLTFA), sets out a regulation making authority for carrying out the
purposes and provisions of the Act, including the implementation of
the record-keeping and client identification requirements and the
requirements to report suspicious and prescribed transactions, as well
as the cross-border movement of large amounts of currency and monetary
instruments. All of the regulations are now in force"
http://canadagazette.gc.ca/partII/2003/20030325-x/html/sor102-e.html
H. I suspect that the money laundry trail that leads from Microsoft to
Royal Bank passes through McGill University in Montreal, Quebec, Canada.
"Vulcan Inc. Paul G. Allen, co-founder of Microsoft" is listed as an
"angel", i.e. someone who has given McGill University a lot of money, by
McGill.
http://www.mcgill.ca/ott/links/
The same McGill web site also lists Royal Bank Business Plans as a
business plans site and Royal Bank Capital Corporation as a venture
capital site.
I sent a letter to McGill on April 10, 2004 asking the following two
questions.
1) During 2003 what investments did McGill University make, other than
short term money, where the investments were greater than one million
dollars?
2) During 2003 what non-government grants, endowments, or other gifts
did McGill University receive where the gifts were greater than one
million dollars?
McGill chose to ignore my letter. Therefore I recommend that the SEC
work with the Autorite des marches financiers du Quebec and the RCMP to
ask McGill the following three questions.
1) Did Paul Allen, Vulcan Capital, or anybody else donate $30,000,000
to McGill University's endowment, trust or other invested funds
during the 2003 calendar year?
2) Has McGill University invested $30,000,000 in SCO through Royal Bank?
3) Has McGill University sold SCOX short?
You can contact the RCMP Commercial Crime Branch here.
https://www.recol.ca/login.aspx
I. Section 16(a) of the Securities Exchange Act of 1934, as amended by the
Sarbanes-Oxley Act of 2002, states:
'Section 16(a)(2)(C) (15 U.S.C. 78p(a)(2)(C)), as amended by the Act.
Section 30(h) of the Investment Company Act of 1940 (15 U.S.C.
80a-29(h)) provides that "Every person who is directly or indirectly
the beneficial owner of more than 10 per centum of any class of
outstanding securities (other than short-term paper) of which a
registered closed-end company is the issuer or who is an officer,
director, member of an advisory board, investment adviser, or
affiliated person of an investment adviser of such a company shall in
respect of his transactions in any securities of such company (other
than short-term paper) be subject to the same duties and liabilities
as those imposed by section 16 of the Securities Exchange Act of 1934
upon certain beneficial owners, directors, and officers in respect of
their transactions in certain equity securities." Accordingly, the
Act's amendments also accelerate the deadline for change of beneficial
ownership reports required pursuant to Section 30(h).'
http://www.sec.gov/rules/final/34-46421.htm
On October 16, 2003 Royal Bank purchased 30,000 shares of SCO Series A
Convertible Preferred Stock. Royal Bank's purchase represented 60% of
the outstanding SCO Series A Convertible Preferred Stock. FORMs 13 and
3 were never filed. Neither the direct or indirect owners were ever
reported. Royal Bank has stated publicly that the SCO Series A
Convertible Preferred Stock was purchased to hedge a client's position.
So the client is the indirect owner.
http://www.sec.gov/Archives/edgar/data/1102542/000110465903023055/a03-4160_1ex10d1.htm
J. BayStar is also a front for a secret Microsoft investment in SCO.
Here is a leaked email from Michael Anderer of S2 Strategic Consulting
to SCO which states that Microsoft provided the entire $50,000,000 which
BayStar and Royal Bank invested in SCO:
http://www.opensource.org/halloween/halloween10.html
"Responding to the clamor, SCO said the e-mail was authentic"
http://msnbc.msn.com/id/5182427/
Here is the contract between S2 Strategic Consulting and SCO.
http://contracts.onecle.com/sco/s2.svc.2003.07.01.shtml
SCO paid S2 Strategic Consulting Services by giving them a warrant to
purchase 25,000 shares of SCO stock at a price of $8.50 per share.
Therefore S2 Strategic Consulting Services did something useful for SCO.
http://contracts.onecle.com/sco/s2.warrant.2003.07.01.shtml
This article explains that Paul Allen, the second largest Microsoft
shareholder, is also a large investor in BayStar:
http://www.wired.com/news/business/0,1367,62544,00.html?tw=wn_tophead_2
Paul Allen is also a senior strategy advisor to Microsoft.
http://www.microsoft.com/presspass/press/2000/Sept00/AllenHackbornPR.asp
http://www.thocp.net/biographies/allen_paul.htm
Paul Allen makes most of his investments through Vulcan Capital:
http://capital.vulcan.com/
Since 1995 Vulcan Ventures has invested in 18 BayStar PIPE deals and
Microsoft has invested in 8.
www.baystarcapital.com/public/pdf/BayStar%20White%20Paper%20October%202002.pdf
"Lawrence Goldfarb, managing partner of BayStar, says that senior
executives at the software giant had telephoned him about two months
before the investment."
http://www.businessweek.com/technology/content/mar2004/tc20040311_8915_tc119.htm
http://www.wired.com/wired/archive/12.07/linux.html?pg=4
'"Microsoft obviously has an interest in this, and their interest is
obviously in keeping their operating system on top," says Larry
Goldfarb, managing partner of BayStar.'
'Without naming names, Goldfarb explained that BayStar received a call
from a "senior" Microsoft employee, but not Chairman Bill Gates or
Chief Executive Steve Ballmer. "When they started telling me what it
was, I wasn't shocked (that) this was something they'd like to see
prevail."'
http://news.com.com/Fact+and+fiction+in+the+Microsoft-SCO+relationship/2100-7344_3-5450515.html?part=rss&tag=5450515&sub
After BayStar invested in SCO, BayStar began exerting extreme pressure
on SCO to abandon SCO's business of selling System V operating systems and
concentrate on attacking Linux in the courts:
http://www.nytimes.com/2004/04/22/technology/22sco.html?ex=1083211200&en=11aa704a6aaf373f&ei=5062&partner=GOOGLE
SCO does not want to give up selling System V or make the other changes
demanded by BayStar.
http://www.sltrib.com/2004/Apr/04252004/business/160190.asp
BayStar's business plan for SCO is exactly what Microsoft, Paul Allen,
and Vulcan Corp want SCO to do. It is in Microsoft's best interest for
SCO to stop selling System V which is a competing operating system to
Microsoft's Windows operating system. It is in Microsoft's best
interest to intimidate software customers to not use Linux. However
such a plan is disasterous for SCO's very viability as a business. This
pressure from BayStar indicates that BayStar is primarily interested in
SCO advancing Microsoft's interests even at the expense of SCO's, and
presumably BayStar's, best interests. Therefore I conclude that
Microsoft has illegal hidden control of the BayStar investment in SCO
and illegally laundered the money used to invest in SCO.
K. Section 16(a) of the Securities Exchange Act of 1934, as amended by the
Sarbanes-Oxley Act of 2002, states:
'Section 16(a)(2)(C) (15 U.S.C. 78p(a)(2)(C)), as amended by the Act.
Section 30(h) of the Investment Company Act of 1940 (15 U.S.C.
80a-29(h)) provides that "Every person who is directly or indirectly
the beneficial owner of more than 10 per centum of any class of
outstanding securities (other than short-term paper) of which a
registered closed-end company is the issuer or who is an officer,
director, member of an advisory board, investment adviser, or
affiliated person of an investment adviser of such a company shall in
respect of his transactions in any securities of such company (other
than short-term paper) be subject to the same duties and liabilities
as those imposed by section 16 of the Securities Exchange Act of 1934
upon certain beneficial owners, directors, and officers in respect of
their transactions in certain equity securities." Accordingly, the
Act's amendments also accelerate the deadline for change of beneficial
ownership reports required pursuant to Section 30(h).'
http://www.sec.gov/rules/final/34-46421.htm
On October 16, 2003 BayStar purchased 20,000 shares of SCO Series A
Convertible Preferred Stock. BayStar's purchase represented 40% of the
outstanding SCO Series A Convertible Preferred Stock. FORMs 13 and
3 were never filed. Neither the direct or indirect owners were ever
reported. BayStar formed Baystar Capital II, L.P. to purchase
the SCO Series A Convertible Preferred Stock. The direct owner is
Baystar Capital II, L.P. and the indirect owner(s) is the partner(s) who
invested in Baystar Capital II, L.P.
http://www.sec.gov/Archives/edgar/data/1102542/000110465903023055/a03-4160_1ex10d1.htm
5. BayStar, Boies, Schiller, and Flexner, Microsoft, Royal Bank, SCO
management, and Vulcan Capital are engaged in insider dealing to the
detriment of the outside SCO shareholders.
A. SCO entered into an agreement with the law firm Boies, Schiller, and
Flexner where Boies will receive 20% of the value of any new equity
issued by SCO.
http://www.sec.gov/Archives/edgar/data/1102542/000110465903028046/a03-6084_1ex99d1.htm
http://www.groklaw.net/article.php?story=20031209210141826
B. Under the terms of that agreement SCO paid Boies, Schiller, and Flexner
$10 million consisting of $1 million in cash and nominally $9 million in
SCO stock as being 20% of the private equity placement to BayStar and
Royal Bank.
http://www.crn.com/sections/BreakingNews/dailyarchives.asp?ArticleID=46124
C. BayStar and Royal Bank have objected to the terms of the agreement
between SCO and Boies, Schiller, and Flexner. The four parties have
negotiated a new agreement dividing up the results of future SCO
equity sales among BayStar, Boies, Schiller, and Flexner, Royal Bank,
and SCO.
http://www.globetechnology.com/servlet/story/RTGAM.20031209.gtscodec9/BNStory/Technology/
http://www.sec.gov/Archives/edgar/data/1102542/000110465903028046/a03-6084_18k.htm
D. If, as Royal Bank stated in the Globe and Mail, the Royal Bank
investment is passive then why is Royal Bank so actively trying
to manage SCO equity sales strategy? It is against U.S. law for a bank
to manage a corporation.
E. This negotiation and resulting agreement is illegal insider dealing.
Whether SCO equity growth results from SCO successfully stealing other
people's operating systems, being a Microsoft mercenary, or from a pump
and dump stock scam the resulting profit will be distributed according
to an insider deal among BayStar, Boies, Schiller, and Flexner, Royal
Bank, and SCO management to the detriment of the outside shareholders.
F. Since BayStar and/or Royal Bank are fronts for Microsoft and/or Vulcan
Capital who actually owns a 17.5% interest in SCO then Microsoft and/or
Vulcan Capital is also guilty of insider dealing.
G. On April 16, 2004 the deal among BayStar, Boies Schiller & Flexner,
Royal Bank, and SCO began to unravel. All parties involved were
extremely vague as to what the problem was.
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/04-16-2004/0002153221&EDATE=
On May 7, 2004 Royal Bank announced that it had sold 20,000 of its SCO
Series A-1 preferred stock to BayStar. Royal Bank converted its
remaining 10,000 Series A-1 preferred shares into SCO common stock at a
conversion price of $13.50 per common share. This leaves Royal Bank
owning 740,740 shares of SCO common stock which amounts to 4.8% of the
outstanding SCO common stock. Thus Royal Bank ownership in SCO drops
below the 5% threshold for reporting the name of real owner of the
position, although this action does not relieve Royal Bank of its
responsibility to report who beneficially owned the equity position before
May 7.
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=134782
H. In May, 2004 Royal Bank decided to have a management shakeup. The
stimulus for the shakeup seems to have been the SCO PIPE scandal. Once
the shakeup got rolling other reasons came into play including losses in
the Royal Bank's American subsidiaries and the rainbow sticker campaign
fiasco.
"Royal Bank began studying changes in May, although the U.S. problems
were ``absolutely not'' the impetus for them, said spokesman David
Moorcroft. Nixon, 47, presented the ideas to the bank's board of
directors for approval this afternoon."
http://quote.bloomberg.com/apps/news?pid=10000082&sid=atXLBQWfatK8&refer=canada
http://quote.bloomberg.com/apps/news?pid=10000082&sid=aDMurnJqrHUM&refer=canada
http://money.canoe.ca/News/Sectors/BanksFinance/Royal_Bank/2004/09/22/639511-cp.html
"The changes ``mask the real issue here, and that is that Royal has got
itself between a rock and a hard place in the U.S.,'' said Alex Zivic,
a financial services analyst at CI Fund Management Inc.'s Signature
Group of Funds, which manages the equivalent of about $10.9 billion,
including Royal Bank."
"Royal Bank spokesman David Moorcroft said the changes were not a
result of the U.S. problems, although the reorganization will help
that business."
http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1095891010639&call_pageid=968350072197&col=969048863851
1) Heads rolled at Royal Bank headquarters.
a. Three officers, Peter Currie, Suzanne Labarge, and Jim Rager,
retired.
"Chief Risk Officer Suzanne Labarge retired along with Jim Rager,
the Vice-Chairman of the RBC Banking consumer unit, and Chief
Financial Officer Peter Currie, the bank said in a statement."
http://quote.bloomberg.com/apps/news?pid=10000082&sid=atXLBQWfatK8&refer=canada
b. The head of Canadian wealth management, Doce Tomic, resigned.
"The head of Canadian wealth management for RBC Financial Group has
resigned. Doce Tomic quit last week"
http://money.canoe.ca/News/Sectors/BanksFinance/Royal_Bank/2004/09/22/639511-cp.html
c. Charlotte Otto has resigned as a Royal Bank director.
http://www.canada.com/businesscentre/story.html?id=95cc2628-735d-4c91-bf0c-b0a00e68f3d3
2) Royal Bank recruited a new second in command.
"the new Number 2 executive at the Royal Bank has not been recruited
to confront the bank's difficulties in its recent U.S.
expansion. Stymiest, it appears, will instead be the Royal's
defacto chief ethics officer, given that her responsibilities are to
include governance, compliance, regulation and accounting
standards."
'Stymiest touted Canada as a gateway to the United States for any
offshore company that "isn't quite ready for Sarbanes-Oxley, U.S.
GAAP and corporate justice, Mississippi style."'
"Translation: Listing your firm on the TSE enables you to thumb your
nose at the Sarbanes-Oxley governance reforms of 2002, implemented
in reaction to the scandals at Enron Corp., WorldCom Inc. and other
former blue-chip U.S. firms; to fly below the radar of GAAP
(generally accepted accounting principles); and rest easy that
Canadian courts are reliably more business-friendly than their U.S.
counterparts."
http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1096495811500&call_pageid=968350072197&col=969048863851&tacodalogin=no
3) RBC Dain Rauscher is an American brokerage firm which is a subsidiary
of Royal Bank.
http://www.rbcdain.com/DRP_1.0/Public_Site/Home/DRP_1.0VStaticHome/1,37986,,00.html
a. The Chief Operating Officer, Lisa Ferris, will be leaving.
"As part of the restructuring, Lisa Ferris, chief operating officer,
will be leaving the firm."
http://www.mysan.de/international/article13160.html
b. Charley Gross, President of Retail Brokerage, resigned.
"RBC Dain Rauscher is continuing with management restructuring
since Toronto-based Royal Bank of Canada bought Dain Rauscher in
2000. The Minneapolis securities brokerage said Charley Gross,
president of its private client group or retail brokerage, will
resign Oct. 31."
http://www.twincities.com/mld/twincities/business/9873650.htm?1c
c. RBC Dain Rauscher was fined for violating certain trading rules and
failing to maintain proper records.
"RBC Dain Rauscher and three other brokerage firms were fined by
the New York Stock Exchange for allegedly violating certain
trading rules and failing to maintain proper records, regulators
announced Wednesday."
"In its agreement, RBC Dain Rauscher in Minneapolis did not admit
wrongdoing but agreed to pay $80,000, according to NYSE documents
released Wednesday. The settlement was technically agreed to
several weeks ago but announced this week after an NYSE panel
hearing."
"NYSE officials said Dain Rauscher did not properly fund an
account that specifically dealt with outside brokers
for whom it performed clearinghouse functions. Dain also was
cited for not properly supervising trades, keeping accurate
records and setting up separate "facilitating" accounts for
proprietary orders."
http://www.startribune.com/stories/535/5079730.html
d. RBC Dain Rauscher was fined for defrauding a customer.
"U.S. securities regulator NASD fined three financial firms for
buying municipal securities from customers at prices that were
below fair market value"
"RBC Dain Rauscher Inc. in Minneapolis, Minnesota, was fined
$10,000 and ordered to pay about $8,715 plus interest
in restitution to a public customer, NASD said. RBC Dain Rauscher
is a subsidiary of Royal Bank of Canada"
http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=6818625
"The customer asked his broker, RBC Dain Rauscher, to sell them.
The dealer bought them for 85.25. The bonds sold later that day
for prices ranging from 85.25 to 102.679. This seems to be the
only time the bonds, $50,000 in par value out of $200,000
originally issued in this maturity, ever traded in the secondary
market."
"The NASD had RBC Dain Rauscher send the customer a check for
$8,714.50."
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_mysak&sid=a8HCp3S2TfzA
e. RBC Dain Rausher failed to tell clients that the client's broker
had committed securities violations.
"American Express Financial Advisors, RBC Dain Rauscher and Wells
Fargo Investments were among 29 investment firms fined Tuesday by
securities regulators for not adequately informing customers of
disciplinary actions taken against their brokers."
http://www.startribune.com/stories/535/5112618.html
"The NASD . . . fined RBC Dain Rauscher Inc. $150,000 for 140
late disclosures."
http://www.twincities.com/mld/pioneerpress/10307247.htm?1c
f. RBC Dain Rauscher failed to report U.S. campaign contributions made
by their paid political lobbyists. Such reports must be made
by any municipal bond underwriter to the Municipal Securities
Rulemaking Board, which requires such filings.
"RBC Dain Rauscher, the top U.S. underwriter of municipal bonds
with an issue size of $10 million or less, didn't report a
$10,000 contribution to the Pennsylvania Republican State
Committee from Harrisburg, Pennsylvania-based lobbyist Greenlee
Partners LLC."
"RBC Dain Rauscher also didn't report $12,000 in contributions
to Georgia Governor Sonny Purdue, a Republican, and to the state
Democratic and Republican parties, from Atlanta-based consultant
Joe Tanner & Associates."
"In addition to Greenlee Partners' $10,000 contribution to the
Pennsylvania Republican party, RBC also didn't report $4,450 in
contributions made by two of its New Jersey-based consultants to
state and local Democratic Party funds and a $500 contribution
to Republican New York Governor George Pataki from David Poleto,
a partner at New York City-based lobbyist Park Strategies LLC."
"Stanley Rapp, senior partner at Greenlee Partners, referred all
questions to RBC Dain Rauscher."
http://quote.bloomberg.com/apps/news?pid=10000006&sid=a95LpahDAFWY&refer=home
"The Municipal Securities Rulemaking Board is seeking to ban the
use of consultants by underwriters seeking bond business. Score
one for the good guys."
"At a stroke, the board, the self-regulatory organization that
oversees the $2 trillion municipal market, will be forcing
underwriters to sever ties with the entire unsavory community of
lobbyists, and their aroma of pay to play."
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_mysak&sid=aX3wUgfzsSXY
g. NASD fined RBC Dain Rauscher for taking money payments to push
certain mutual funds to their customers.
"prominent regional broker RBC Dain Rauscher of Minneapolis and
Wells Fargo Investments are among those paying more than $34
billion in civil fines to settle with regulators for taking money
payments to push certain mutual funds to their customers."
"The companies have agreed to pay the civil fines in settlements
with the National Association of Securities Dealers, the
brokerage industry's self-policing organization. The NASD alleged
that the brokerages received payments from mutual fund companies
in exchange for preferential treatment for the funds, creating a
conflict of interest."
"RBC Dain Rauscher Inc., Minneapolis, $1.7 million."
http://www.journalstar.com/articles/2005/06/08/business/doc42a7646696ba3806216247.txt
h. Brian Peters has reigned as CEO of RBC Dain Rauscher.
"The chief executive of brokerage firm RBC Dain Rauscher is
leaving the company, according to an internal memo."
http://www.miami.com/mld/miamiherald/business/national/12593648.htm
i. RBC Dain Rauscher has been fined and order to pay restitution for
violations related to trading in corporate high-yield bonds.
"RBC Dain Rauscher Corp. has been fined $1 million for
violations related to trading in corporate high-yield bonds."
"The National Association of Securities Dealers cited
Minneapolis-based Dain Rauscher and three other firms for
charging excessive markups or downmarks in bond trades, as well
as for supervision violations."
"In addition to paying the fine, Dain Rauscher will make more
than $158,000 in restitution payments."
"According to the NASD, Dain Rauscher charged markups ranging
from 5.5 percent to 8 percent on six pairs of trades in 2004.
The NASD also found books and records violations."
http://twincities.bizjournals.com/twincities/stories/2005/10/31/daily7.html
4) RBC Centura is an American bank which is a subsidiary of Royal Bank.
http://www.rbccentura.com/
a. Ken Landis, CEO of RBC Centura has retired, effective immediately.
http://www.canada.com/businesscentre/story.html?id=d507b50a-7871-43ef-9684-a692993fd7fd
Here is a brief biography of Ken Landis.
http://www.rbccentura.com/about/whoweare/team.html
b. RBC Centura has had layoffs.
"RBC Centura Banks Inc. has eliminated about 150 jobs in its
restructuring to improve profitability, said RBC Centura spokeswoman
Kristen Doherty."
http://www.rockymounttelegram.com/news/content/news/stories/2004/12/14/121404rmtCentura.html;COXnetJSessionID=BDURlu5ncdizxQ1Mn1Wm7AOHwb3Ilp9MAZGn6ORS2qEDOflr0bMg!1494295711?urac=n&urvf=11033366576090.2907441168735623
5) RBC Mortgage is an American mortgage company which is a subsidiary of
Royal Bank.
http://company.monster.com/rbcmort/
a. Royal Bank will close its Chicago mortgage office, laying off an
unspecified number of people.
http://quote.bloomberg.com/apps/news?pid=10000082&sid=aAhIbbaoJPl0&refer=canada
b. RBC Mortgage has split off as a separate company from RBC Centura.
'"RBC Mortgage does not report in to (RBC Centura) any longer,"
Custer said. "I do not have the responsibility for RBC Mortgage
and the bank's national business. We are not as actively engaged
in (RBC Mortgage) as we were some time ago. It has not performed
like we would have liked it, but we have a lot of good things
going on to correct that performance, but it would not be
appropriate for me to comment on it."'
http://www.rockymounttelegram.com/news/newsfd/auto/feed/news/2004/11/06/1099795215.18121.1891.8147.html;COXnetJSessionID=Ba8fxxL1Wyl5i72O7JGkiUvEfTMPecQCytTFEGrO5ZjdOgS78hSh!404316644?urac=n&urvf=11006434871960.4468884962790389
6) Liberty Life Insurance is an American insurance company which is a
subsidiary of Royal Bank.
http://www.libertycorp.com/
a. Harold Huffstetler, the head of the Royal Bank's U.S. insurance
subsidiary, Liberty Life Insurance, resigned.
http://quote.bloomberg.com/apps/news?pid=10000082&sid=a38ISDT.bW0c&refer=canada
b. RBC Insurance sold its data center to IBM.
"International Business Machines Corp. on Tuesday said it agreed
to buy Liberty Insurance Services Corp. from RBC Insurance for an
undisclosed sum."
http://www.forbes.com/business/energy/feeds/ap/2004/11/23/ap1672540.html
7) RBC Dominion Securities Inc. is a Canadian brokerage firm owned by
Royal Bank.
http://www.rbcinvestments.com/ds/
a. RBC Dominion Securities has been convicted of illegal market
timing transactions in mutual funds.
"The brokerage arms of three of Canada's big banks have reached
settlement agreements with the trade group that polices the
industry for allegedly failing to detect and prevent "potentially
harmful" market timing activities in mutual funds."
"The Investment Dealers Association of Canada yesterday levelled
the same allegation against RBC Dominion Securities Inc., TD
Waterhouse (Canada) Inc. and BMO Nesbitt Burns Inc."
"All three firms have reached a settlement with staff at the IDA,
thereby avoiding regulatory hearings."
"The settlement agreements, including proposed fines, will be
presented to an IDA panel for approval at back-to-back hearings on
Dec. 16."
http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20041207/RFUNDS07/TPBusiness/Canadian
"IDA penalizes RBC Dominion Securities Inc. $16,975,302.08"
"RBC Dominion Securities Inc. acknowledged that from January 1,
2002 to December 31, 2003, it engaged in potentially harmful
practices by executing market timing trades for select clients.
The market timing activities of one of the clients were primarily
conducted by means of written special arrangements with seven
fund companies, while the market timing activities of the other
client engaged in market timing were conducted in the absence of
a special arrangement. During this time period, RBC Dominion
Securities Inc. executed in excess of 4,160 trades involving 56
funds within 11 fund companies on behalf of the two sophisticated
offshore retail clients engaged in market timing."
"RBC Dominion Securities Inc. is fined $8,462,651.04, with costs
to the Association of $50,000. It is also required to disgorge
Gross Market Timing Revenues of $8,462,651.04."
http://www.newswire.ca/en/releases/archive/December2004/16/c6382.html
Mutual fund shareholders have filed a class action suit against RBC
Dominion over market timing crimes committed by RBC Dominion.
http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20041222/RTICKSUIT22/TPBusiness/Canadian
b. A RBC Dominion Securities broker has been banned from the brokerage
industry for life.
"The Investment Dealers Association of Canada has fined a former
broker of RBC Dominion Securities $300,000 and banned him from
the brokerage industry after investigating his stock trading
practices."
http://www.canada.com/national/nationalpost/financialpost/story.html?id=71a09c35-8dde-457b-b9ff-69d6819819a3
http://www.ida.ca/whatsnew_en.asp
click on bulletin 3371
c. The RBC Dominion Securities Head Trader, Andrew Foote, has quit.
"CIBC yesterday raided Royal Bank of Canada's RBC Capital
Markets, hiring Andrew Foote as a replacement for the head trader
who left for Genuity."
http://www.bloomberg.com/apps/news?pid=10000082&sid=a8b.ikdv4f2g&refer=canada
d. A RBC Dominion Securities director, Sanjiy Samant, has quit.
"Sanjiy Samant, formerly a director at RBC Dominion and a onetime
lawyer, will join Genuity today."
http://www.theglobeandmail.com/servlet/story/RTGAM.20050103.wgenui0103/BNStory/Business/
e. A RBC Dominion Securities analyst, Joe Hamilton, has quit.
"Yesterday also saw RBC Dominion Securities, the investment
banking unit of Royal Bank of Canada, lose gold analyst Joe
Hamilton to Genuity."
http://www.theglobeandmail.com/servlet/story/RTGAM.20041218.wxcibc1218/BNStory/Business/
f. A RBC Dominion Securities compliance officer, Nick Katerinakis,
has quit.
"Then this past October, after four years at RBC, he was lured
back to CIBC . . ."
http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20050124/PFPROF24/TPBusiness/General
g. Market Regulation Services has accused RBC Dominion of engaging in
wash trades of Royal Bank stock and Bank of Montreal stock.
"The allegations were posted on Monday by Market Regulation
Services, the agency that polices trading on the Toronto Stock
Exchange."
"RBC Dominion Securities and four of its traders are accused of
what is called "wash trading" in shares of the brokerage firm's
parent, Royal Bank of Canada, and in those of rival Bank of
Montreal."
http://www.cbc.ca/story/business/national/2005/05/30/rbc-wash-trading050530.html
Royal Bank and the traders involved negotiated a settlement with
Market Regulation Services.
"An ill-conceived attempt to correct a trading error has cost
four senior employees of RBC Dominion Securities a total of
$312,000 in a settlement of a "wash-trading" case."
"In addition, the securities unit of the Royal Bank - while
admitting no corporate breach of regulations and receiving no
sanction - agreed to make restitution of $231,500 to cover the
estimated losses of other market participants."
"Ian Macdonald, managing director of Canadian equity derivatives,
was fined $90,000 and assessed $35,000 in costs."
"David Singh, director of Canadian equity derivatives, and Edward
Boyd, vice-president of Canadian equity derivatives, were each
fined $60,000 and must pay $20,000 each in costs."
"Peter Dennis, senior equity and derivatives trader, was fined
$20,000 plus $7,000 in costs."
http://www.canada.com/businesscentre/story.html?id=8e7dff24-8b61-4daf-9ded-90649ad97455
h. A former RBC Dominion Securities managing director, Andrew Rankin,
was convicted in Toronto of 10 counts of giving illegal stock tips
to a friend.
"The Ontario Securities Commission alleged that Rankin illegally
gave information to longtime friend Daniel Duic about pending
mergers and acquisitions before it was publicly known."
http://www.cbc.ca/story/business/national/2005/07/15/rankin-05-715.html
"Several RBC executives testified and the judge said he was
skeptical about their evidence that confidential information was
tightly controlled at Dominion Securities."
'"I dismiss, without reservation, that material information was
not free flowing among M&A staff at DS," said Judge Khawly.'
http://www.canada.com/ottawa/ottawacitizen/news/business/story.html?id=651ca29a-8e3b-484c-9cb7-27c9e2407936
"Andrew Rankin, a former managing director in RBC Dominion
Securities' M&A unit, was sentenced to six months in jail on
Thursday, after previously being convicted on 10 counts of
illegally giving stock tips to a childhood friend."
http://news.hereisthecity.com/news/business_news/4850.cntns
i. RBC Dominion has been successfully sued by a former client for
conflict of interest.
" In a B.C. Supreme Court decision, Wendy Osborne, 50, was
awarded a favourable ruling in her lawsuit against her former
broker, Brian Alexander Harper, and RBC Dominion Securities Inc."
"In his decision, Justice J.S. Sigurdson described how Osborne,
with Harper as her trusted broker, made three investments
beginning in 1988 in something called Victoria Securities
Depository Inc. in the Victoria Securities Trust. She also
invested in something called Canadian Shipping Containers."
"According to Osborne's testimony, Harper told her they were
going to ship Corona beer. Meanwhile, Harper was president and
sole director of Victoria Securities Depository Inc. So, as a
broker, taking investments from a client for the company put him
in a conflict of interest."
"All three investments failed and now have no value."
http://www.edmontonsun.com/Business/News/2005/08/24/1185863-sun.html
j. The Investment Dealers Association of Canada (IDA) fined RBC
Dominion for misrepresenting who was the branch manager at the RBC
Dominion branch office in Penticton, British Columbia.
"On April 26, 2005, the Hearing Panel considered, reviewed and
accepted a settlement agreement negotiated between RBC DS and
staff of the IDA. Pursuant to the settlement agreement, RBC DS
admitted to contravening Association By-law 29.1 in that it
sought and obtained the IDA's approval to have an individual
designated as the branch manager of its Penticton, British
Columbia branch office for a period of approximately 46 months,
when in fact it did not intend for him to perform, nor did he
actually perform, any of the responsibilities that a branch
manager is required to perform. The responsibilities were
actually performed by the branch manager of RBC DS's
Kelowna branch office, who was not normally present at the
Penticton branch office. The infraction took place between
November 28, 1997 and September 24, 2001. RBC DS was assessed a
$130,000 fine and must pay $5,000 in costs."
http://www.newswire.ca/en/releases/archive/September2005/09/c7943.html
8) RBC Capital Markets is a subsidiary of Royal Bank.
http://www.rbccm.com/
a. The NASD has fined RBC Capital Markets $2 million and will have to
make $108,000 in restitution for inflated trading charges in the
bond market.
"Two of Royal Bank of Canada's U.S. subsidiaries have been
ordered to pay nearly $3.3-million (U.S.) in penalties and
restitution by a New York regulator, which claims they were
charging excessive fees for junk bond trading."
"New York-based RBC Capital Markets Corp. was fined $2-million,
and will have to pay $108,000 in restitution."
http://www.theglobeandmail.com/servlet/story/RTGAM.20051031.wrbcbond1031/BNStory/Business/
b. The New York Stock Exchange has fined RBC Capital Markets $80,000
for mishandling proxies.
"The New York Stock Exchange has fined Royal Bank of Canada
$80,000 U.S. to settle allegations that it mishandled proxies"
http://www.canada.com/ottawacitizen/news/business/story.html?id=9bda74a6-eeb3-4fb6-befa-e17a925bf060
9) Royal Bank is a defendant in the Enron money laundering scandal.
a. Unlike the other exposed Canadian banks, Royal Bank has not set
aside reserves to cover legal losses caused by the Enron scandal.
"The bank also has yet to set aside reserves to cover legal costs
from its association to the financial meltdown at U.S. energy
trader Enron."
http://www.metronews.ca/reuters_national.asp?id=47407
b. The University of California has filed an Enron shareholdrs
lawsuit against Royal Bank.
"As the lead plaintiff in the Enron Corp. shareholders lawsuit,
the University of California filed today (Jan. 9) complaints in
the U.S. District Court for the Southern District Court of Texas
in Houston, adding Royal Bank of Canada"
"The new complaints lay out a detailed scheme of fraud pursuant
to Section 10(b) of the Securities Exchange Act of 1934 naming
the Royal Bank of Canada as well as Houston-based Andrews & Kurth
and New York-based Milbank, Tweed, Hadley & McCloy as major
players in a series of fraudulent transactions that ultimately
cost Enron investors many billions of dollars," said James E.
Holst, University of California general counsel."
"As alleged in the complaint, the Royal Bank of Canada, much like
Citigroup, J.P. Morgan Chase and other financial institutions
previously named in the class action suit, structured and
participated in transactions that enabled Enron Corp. to inflate
its financial results by overstating its income and
underreporting its debt."
http://www.ucop.edu/news/archives/2004/jan09.htm
c. Royal Bank has settled with Rabobank over Royal Bank's actions in
the Enron scandal.
"In 2002, Rabobank filed a complaint in a New York court,
accusing RBC of collaborating with Enron -- a dispute which was
settled in February, 2004."
http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20050408/IBENRON08/TPBusiness/International
d. Royal Bank has settled with the Enron trustees.
"Royal Bank of Canada will pay $25 million in cash to collapsed
energy trader Enron Corp. to settle a lawsuit filed on behalf of
the estate of the company, Enron said on Thursday."
"Royal Bank, Canada's largest, will also pay an additional $24
million related to a bankruptcy settlement."
http://ca.today.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2005-07-28T125443Z_01_WEN6242_RTRIDST_0_BUSINESS-FINANCIAL-ROYALBANKOFCANADA-ENRON-COL.XML
10) Three Royal Bank currency traders have been suspended for running the
stops on the New Zealand dollar.
"RBC recently completed an internal probe of trading activities
that sought to drive down the value of the New Zealand dollar.
People familiar with the situation say three staff members have
been suspended."
http://sg.biz.yahoo.com/050308/15/3r3y1.html
11) Royal Bank has banned PIN messages by brokerage employees who deal
directly with clients.
"On Wednesday, the bank revoked PIN rights for any employees at its
brokerage arm who deal directly with clients. Most of those affected
work in sales, research and trading, said RBC spokeswoman Beja
Rodeck, adding that the new policy was driven by regulatory
requirements for overseeing electronic communications."
http://www.theglobeandmail.com/servlet/story/RTGAM.20050310.wrbcc0310/BNStory/Business/
"The RBC decision might be considered a responsible strategy if it
were more consistent. Instead, the bank has said it will continue to
allow PIN messaging for crisis management staff, who will also
presumably be equipped with old phones that plug into the wall in
case another blackout hits Ontario. It’s not clear whether this
would include the most senior members of the organization, such as
the CEO, but you only have to look at recent history to see that
issues of fraud and information mismanagement started at top."
http://www.itbusiness.ca/index.asp?theaction=61&lid=1&sid=58359&adBanner=ItOpinions
12) Fitch Ratings has palaced Royal Bank on credit watch.
"Fitch Ratings has placed the long-term and individual ratings of
Royal Bank of Canada ('AA' and 'A/B', respectively) and the
long-term, short-term, and individual ratings of RBC Centura Banks,
Inc. ('AA-', 'F1+', and 'B', respectively) and its subsidiaries on
Rating Watch Negative."
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20040914005681&newsLang=en
One of the reasons given for the negative rating watch is the recent
Royal Bank management shakeup.
I. Since both BayStar and Royal Bank both owned over 10% of the SCO Series
A-1 preferred stock then both direct and indirect owners of the
preferred stock are reportable persons.
"Section 16(a) also requires reporting persons to report changes in
such ownership, or the purchase or sale of a security-based swap
agreement involving such equity security."
http://www.sec.gov/rules/final/34-46421.htm
Both BayStar and Royal Bank failed to report this transaction to the SEC
and both have consistently failed to name the indirect owners of the SCO
Series A-1 preferred stock. In this case BayStar failed to file the
required FORM 4 and Royal Bank failed to file the required FORM 5.
J. By buying 20,000 shares of SCO Series A-1 preferred stock from Royal
Bank, Baystar moves from owning 40% of the Series A-1 preferred stock to
owning 100% of the Series A-1 preferred stock. According to the illegal
insider deal described in section 3.F.
"SCO is prohibited from completing any settlement, acquisition
of SCO or investment in SCO, unless the holders of two-thirds of the
preferred shares give written approval."
"Previously, when RBC held 60 percent of the preferred shares, and
BayStar had 40 percent, neither party had more than two-thirds. Now,
BayStar holds all the preferred shares."
http://news.zdnet.co.uk/software/linuxunix/0,39020390,39154226,00.htm
K. SCO cannot exist without more capital infusions. Thus Microsoft has
arrived at the position of illegal hidden control of SCO by having
acquired veto power over new investment in SCO. Such hidden control was
obtained by illegal money laundering and illegal insider dealing.
Microsoft intends to use their control of SCO to illegally destroy System
V as a competitor to Microsoft software and to run a protection racket
designed to drive Linux from the software market where it has begun
successfully competing with Microsoft products. I suggest that
the SEC work with the Justice Department to investigate Microsoft's
violations of the anti-trust law with Microsoft's attempts to force SCO
to quit selling System V and to drive Linux from the software market.
http://www.usdoj.gov/atr/contact/newcase.htm
Microsoft's purchase of SCO stock in order to lessen competition violates
section 18 of Title 15 U.S.C.
http://assembler.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00000018----000-.html
L. Microsoft may have illegally invested in SCO through an investment
in Vintela.
"Vintela began as a project within Santa Cruz Operations before it was
acquired by Caldera Systems (Caldera later changed its name to SCO
Group). Vintela spun out of SCO Group as an independent company and
began shipping its authentication services in April 2003."
http://informationweek.com/story/showArticle.jhtml?articleID=47205136
Here is a timeline of the Microsoft-Vintela relationship.
http://www.vintela.com/company/corp_timeline.php
On November 15, 2004 Microsoft invested less than $10 million in Vintela.
"Nonetheless, Vintela is an unlikely Microsoft partner."
"Vintela is a spinoff of Caldera, the company that sued Microsoft for
antitrust violations and settled for an undisclosed amount in 2000.
Vintela also has deep roots in the Unix/Java worlds. "
http://www.microsoft-watch.com/article2/0,1995,1727799,00.asp
SCO received $500,000 from Vintela on December 9, 2004.
"The company also will record a $500,000 gain from a deal originally
brokered in April 2003 with a company called Center 7, where SCO gave
the company its half of the copyright applications, trademarks, patents
and contracts related to a joint venture, originally formed in
November 2002, called Volution Technologies. In exchange, SCO received
a $500,000 promissory note due in April 2005. The software was later
passed to a company called Vintela, and SCO arranged a deal with the
new owners to forgo any interest payments for an immediate payment on
the note, which was made Dec. 9."
http://www.internetnews.com/ent-news/article.php/3450791
"On December 9, 2004, the Company received the $500,000 payment from
Vintela and will record the transaction during the three months ending
January 31, 2005."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
Therefore I suggest that the SEC investigate whether the Microsoft
investment in Vintela is a circuitous route for Microsoft to invest more
money in the SCO attack on Linux. Such an investment violates section 18
of Title 15 U.S.C.
http://assembler.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00000018----000-.html
6. There have been a series of illegal stock transactions centered around the
SCO Series A-1 Convertible Preferred stock issue and selling the SCO common
stock short.
The prices for SCOX used in the following explanation can be obtained here.
http://finance.yahoo.com/q/hp?s=SCOX
A. American law requires the purchasers of a PIPE deal to invest in the
company issuing the PIPE and not just act as a conduit to distribute the
shares to the public.
"Each of the purchasers must intend to acquire for investment at the
time the securities are purchased. Whether or not investment intent was
present will be determined from all the circumstances surrounding the
acquisition. Such circumstances would include the financial capability
of the purchaser to hold the securities for the long term and whether
the purchaser signed a letter of investment intent. The amount of time
the securities have been held (the holding period) is one of the
factors in a hindsight determination that an investment intent existed
at the time of purchase. A two-year holding period is deemed to be the
bare minimum."
http://www.seclaw.com/docs/pplace.htm
However BayStar Capital LP, Baystar Capital II's partners, Royal Bank,
and Royal Bank's beneficiary client got around the investment intent
provision by selling SCOX short before they formally signed the
PIPE agreement.
http://msnbc.msn.com/id/5182427/
http://www.globetechnology.com/servlet/story/RTGAM.20031209.gtscodec9/BNStory/Technology/
In doing so, BayStar Capital LP, Baystar Capital II's partners, Royal
Bank, and Royal Bank's beneficiary client became guilty of trading on
insider information. The law allows SCO to disclose non-public
information to investors sophisticated enough to qualify as PIPE
investors. By selling SCOX short between the time that BayStar Capital
LP, Baystar Capital II's partners, Royal Bank, and Royal Bank's
beneficiary client received the non-public information from SCO
and the time that the PIPE deal was signed and became public
knowledge BayStar Capital LP, Baystar Capital II's partners, Royal Bank,
and Royal Bank's beneficiary client are guilty of trading on inside
information.
Such crimes are well known to the SEC.
"Sources familiar with the SEC investigation say regulators are looking
for situations in which a hedge fund that is simply considering
investing in a PIPE deal misuses non-public information and places
short bets on the stock."
http://biz.yahoo.com/ts/040521/10161684_3.html
B. Naked short selling is illegal in the United States.
Well over a century ago there was a bidding war where the Great Northern
RR and the Northern Pacific RR competed to buy controlling interest in
the Rock Island RR. The price of the Rock Island shares was bid to
astronomical levels. Then the short sellers piled in. They sold short
many times the total number of shares in the Rock Island RR and the two
RRs bought every offered share of Rock Island.
Eventually Great Northern and Northern Pacific had all of the share
certificates for Rock Island in hand and they had bought a huge number of
shares in Rock Island for which the shares had not been delivered (and
indeed were undeliverable because they did not exist). So Great Northern
and Northern Pacific made peace. Then they asked the shorts to deliver
stock certificates which the shorts could not do even though they were
legally required to do so. Great Northern and Northern Pacific made a
lot of money on their settlement with the shorts. This situation is
called a "short squeeze".
As a result of this episode the United States passed a law which requires
short sellers to borrow the shares that they sell short. Thus the short
position in a stock theoretically cannot exceed the total of number of
shares in the company. In practice the maximum number of shares that can
be sold short is limited to the number of shares that brokers have
available to loan to short sellers and this number is usually
considerably less than the total number of shares in a company. It is
important to note that even though a short seller is required to borrow
shares to sell short it is very rare that a short seller has to actually
deliver the stock certificate that he borrowed and in fact the stock
certificate usually continues to reside with the broker who loaned
it.
Once the SCO scam bubble began in earnest in May, 2003 many stock market
professionals recognized the bubble for what it is and sold SCOX short.
Since then it has been very hard to find shares of SCOX to borrow to sell
short.
A holder of SCO Series A-1 Convertible Preferred stock has the right to
convert the preferred into SCO common stock. But the Series A-1
Convertible Preferred stock does not meet the SEC definition of
borrowable stock so it cannot be used to simply short SCO common shares
against the box in America.
C. Naked short selling is de facto legal in Canada.
The Canadian national government does not regulate the securities
industry. Instead, regulating the securities industry is the
responsibility of the individual provinces. The securities laws of the
various provinces are quite varied and in a few cases exceedingly lax.
In some provinces naked short selling is legal, mostly because it is not
even mentioned in the provincial laws one way or the other.
Canadian brokerage firms are sometimes faced with a customer order that
is illegal in their province but is legal in other provinces. The broker
can make the order legal by routing it through a branch office in a
province where it is legal. As an example, during the oil crisis Mobil
found a huge oil deposit off the Newfoundland shore. Suddenly
Newfoundlanders were clamoring to buy call options on Mobil stock.
Unfortunately New York Stock Exchange stock options were not legal in
Newfoundland. So Newfoundland stock brokers routed their Mobil call
option orders through their New Brunswick or Nova Scotia branch offices.
By doing so the broker was not violating Canadian or United States law.
In a similar vein, if a Canadian broker gets an order to sell a naked
short position on an United States exchange and that is illegal in his
province then he can simply route the order through a branch office in a
province where it is legal. Thus the order is de facto legal in Canada.
By passing through an American exchange a naked short violates United
States law. If an American resident places a naked short order with a
Canadian broker in order to circumvent the United States naked short law
then the American is guilty of both violating the naked short law and
also the much more severe Anti Money Laundering Act of 2001.
http://www.gabankers.com/issuesfederal.patriot.summary.htm
I suggest that the SEC work with the Canadian authorities to investigate
whether Mike Anderer, BayStar, Boies Schiller & Flexner, McGill, Royal
Bank, or S2 have sold SCOX as a naked short in Canada.
D. Naked short selling is illegal in Germany but the law is easily evaded.
There are two ways to sell American stock in Germany. It can be sold as
a naked short on a German exchange. It can also be sold over the
counter in Germany to a German broker subject to the two day delivery
law. The German broker then sells the stock that he bought 5 minutes
ago on an American exchange for a slightly higher price. In practice
what the German broker does is sell the shares on the American
exchange then buy the shares from his customer at a slightly lower
price and back time-stamp the buy. The sale by the German broker is
not a short sale because he is selling stock that he owns.
The second type of transaction is an arbitrage sale between the
German over the counter market and the American exchange. An arbitrage
transaction leaves less of a public record than an exchange sale which is
an advantage to American naked short sellers who are trying to launder
the transaction to hide it from the SEC.
So, what is a frustrated short seller to do when he cannot borrow shares
to short? One possibility is to sell short in Germany. German law
does not require borrowing shares. Instead, German law requires that
the seller be able to deliver the shares within two days. So the
short seller lies and says that he can deliver within two days. In
the unlikely event that he has to deliver he buys the shares back and
eventually delivers very late.
A holder of SCO Series A-1 Convertible Preferred stock has the right to
convert the preferred into SCO common stock. But the Series A-1
Convertible Preferred stock does not meet the SEC definition of
borrowable stock so it cannot be used to short SCO common shares in
America. It can be used in Germany to fullfill the two day delivery
requirement. This is a half truth. The owner of SCO Series A-1
Convertible Preferred stock can deliver share certificates, just not
within two days. After waiting for SEC approval and then doing the
paperwork to convert the preferred stock to common stock, four months
is a more reasonable expectation.
I suggest that the SEC work with the German Bundesaufsichtsamt für den
Wertpapierhandel to investigate whether Mike Anderer, BayStar, Boies
Schiller & Flexner, McGill, Royal Bank, or S2 have sold SCOX in Germany.
If any of these have done so then they have violated the following
laws.
1) They have violated the German requirement that they be able to deliver
the stock within 2 days.
2) They have violated the United States law forbidding naked short sales.
3) They have violated the United States money laundering law by routing
the sale through Germany in an attempt to hide the transaction
from the SEC.
4) The German broker has violated United States law by reporting his
short sale on an American exchange as a long sale.
5) The German broker has violated German law by back time-stamping his
purchase transaction.
http://www.thestreet.com/_tscana/stocks/brokerages/10164442.html
http://www.newsobserver.com/business/story/1301471p-7423499c.html
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=136874
http://www.investors.com/breakingnews.asp?journalid=21575009&brk=1
Here are the German securities laws in English.
http://www.iuscomp.org/gla/statutes/WpHG.htm
E. On October 16, 2003 BayStar bought 32,000 shares of SCO Series A-1
Convertible Preferred stock from SCO at $625 per share for a total
investment of $20,000,000.
"the Series A-1 Convertible Preferred is convertible into SCO’s common
stock at a variable price based upon the market price of SCO’s common
stock, subject to a floor price for conversion of $13.50 per share.
There is no ceiling on the conversion price."
http://www.edgar-online.com/bin/edgardoc/finSys_main.asp?dcn=0001104659-04-002999&nad=
BayStar has stated that it shorted SCOX.
'"We're a pure financial animal," Goldfarb said of the venture capital
firm. The terms of the investment deal were attractive, he said, with
BayStar purchasing $20 million worth of preferred shares that paid an
ongoing dividend. The firm mitigates its risk by shorting the common
stock of the company it is investing in.'
http://msnbc.msn.com/id/5182427/
BayStar would establish a hedge position against 32,000 shares of
SCO Series A-1 Convertible Preferred stock by selling 1,481,481
shares of SCOX short at a price higher than $13.50. During the time
period of September 16, 2003 through October 15, 2003 the price of SCOX
ranged from $13.57 to $21.57 thus giving BayStar the opportunity to lock
in a hedge profit between $103,703 and $11,955,551. It is worth noting
that the volume of SCOX on October 15, 2003 was 2,506,900 shares, by far
a volume record for SCOX since March 6, 2003.
It is also worth noting that both BayStar and Royal Bank were shorting a
total amount of SCOX equal to 17% of the total amount of SCOX issued in
a very crowded short situation. In is extremely unlikely that BayStar
could borrow enough SCOX stock to meet the SEC short selling
requirements. Therefore I suggest that the SEC work with the German and
Canadian authorities to investigate whether BayStar sold SCOX as a naked
short violating both the United States naked short law and the United
States money laundering law.
F. On February 26, 2003 Boies Schiller & Flexner law firm was retained by
SCO. As part of the agreement:
"The Client agrees to pay a twenty percent (20%) contingency fee in
cash proceeds immediately upon the occurrence of recovery in litigation
or settlement, including any sale of stock or assets, and the
contingency payments shall be made as set forth according to Schedule
B."
http://www.sec.gov/Archives/edgar/data/1102542/000110465903028046/a03-6084_1ex99d1.htm
On October 16, 2003 SCO entered into an agreement selling SCO Series A-1
Convertible Preferred stock to BayStar and Royal Bank for a total of
$50,000,000. This is the contract between SCO and Royal Bank and
BayStar.
http://contracts.onecle.com/sco/baystar.reg.2003.10.16.shtml
Boies Schiller & Flexner was entitled to $10,000,000 in immediate cash as
their contingency fee on the issue of Series A-1 Convertible Preferred
stock. Instead, on November 18, 2003, Boies Schiller & Flexner received
$1,000,000 in immediate cash and 400,000 shares of SCO common stock
valued at $7,956,000.
"We have agreed to pay to Boies, Schiller & Flexner LLP and other
firms representing us in the protection of our intellectual property
rights $1 million and register the issuance, pursuant to an effective
registration statement, to Boies, Schiller & Flexner by March 1, 2004
of 400,000 shares of our common stock. Subject to the registration
statement covering such shares being declared effective by the
Securities and Exchange Commission, we would issue such shares under
our current equity incentive plans. As a result of the issuance of this
consideration to Boies, Schiller & Flexner LLP and other firms, SCO
anticipates recording an additional charge to earnings of approximately
$8,956,000 in its fourth quarter that ended October 31, 2003. This
$8,956,000 charge to earnings is comprised of non-cash expense of
$7,956,000 related to the issuance of the 400,000 shares of common
stock and $1,000,000 in cash expense. We also have agreed with
Boies, Schiller & Flexner LLP and the other law firms to expand the
scope of their representation to include representing us in the
Red Hat litigation, defending us in IBM's counterclaim against
us and representing us in other matters relating to the protection of
our intellectual property."
http://www.sec.gov/Archives/edgar/data/1102542/000104746903037685/a2123014zs-3.htm
Boies Schiller & Flexner traded an agreement for $10,000,000 in immediate
cash for $1,000,000 in immediate cash and 400,000 shares of highly
volitile stock at the then current value of $7,956,000 with sale of that
stock being postponed for as long as three and a half months. For the
stock deal to be equal in value to the cash deal Boies Schiller & Flexner
would have to sell the stock at $22.50. The highest SCOX price since
Boies Schiller & Flexner was retained was $22.29 on October 17,
2003. The highest SCOX price since Boies Schiller & Flexner received the
rights to the 400,000 shares was $19.62 on December 19, 2003. On
March 1, 2004 SCOX closed at $12.27. I suggest that the SEC
investigate the possibility that Boies Schiller & Flexner, faced
with the prospect of a speculative loss in a situation where they
obviously did not want to speculate, shorted 400,000 shares of
SCOX in order to create a hedge which guarenteed a fixed fee.
SCO is in the situation where the outcome of the various lawsuits is of
overwhelming importance to SCO's future prospects. Obviously Boies
Schiller & Flexner has insider knowledge of SCO's prospects in the
lawsuits. Either speculating in SCOX or creating a hedge in SCOX is
illegal insider dealing by Boies Schiller & Flexner.
On October 31, 2004, The SCO Group, Inc. signed a renegotiated engagement
agreement with Boies, Schiller & Flexner, a copy of which is attached to
a FORM 8-K as Exhibit 99.1 filed with the SEC.
http://www.sec.gov/Archives/edgar/data/1102542/000110465904033567/a04-12714_18k.htm
One of the clauses in the agreement states that SCO will pay Boies
$7,956,000 which is the valuation placed on the SCO common stock received
by Boies on November 18, 2003.
"(c) Immediately upon the execution of this engagement letter,
$7,956,000 of which amount $7,160,400 and $795,600 will be allocated to
BSF and Berger Singerman, respectively."
Another clause in the agreement nullifies the 400,000 shares received by
Boies and this clause is worded in such a way as to falsely imply that
the transfer of the shares from SCO to Boies never took place.
"Furthermore, the Three Original Firms expressly waive any right to
receive the 400,000 shares of SCO common stock referred to in the
letter agreement between SCO and BSF dated November 17, 2003."
http://www.sec.gov/Archives/edgar/data/1102542/000110465904033567/a04-12714_1ex99d1.htm
This agreement means that SCO bought back 400,000 SCOX from Boies for
$7,160,400. SCOX closed at $3.55 on November 18, 2004 which means that
the 400,000 shares of SCOX had a market value of $1,420,000. This
insider transaction in SCO common stock was never reported to the SEC on
a FORM 4.
I suggest that the SEC work with the appropriate American Bar
Association representatives to determine if either a Boies Schiller &
Flexner speculative position or hedged position in SCOX violates legal
ethics. You need to file the same complaint with both bar associations.
John A. Boggs
The Florida Bar
650 Apalachee Parkway
Tallahassee, FL 32399-2300
850/561-5775
FAX: 850/561-5665
Website: www.flabar.org
Mark S. Ochs
Chief Attorney
Third Judicial Department
Committee on Professional Standards
40 Steuben Street, Suite 502
Albany, NY 12207-2109
518/474-8816
FAX: 518/474-0389
G. On October 16, 2003 Royal Bank bought 48,000 shares of SCO Series A-1
Convertible Preferred stock from SCO at $625 per share for a total
investment of $30,000,000.
"the Series A-1 Convertible Preferred is convertible into SCO’s common
stock at a variable price based upon the market price of SCO’s common
stock, subject to a floor price for conversion of $13.50 per share.
There is no ceiling on the conversion price."
http://www.edgar-online.com/bin/edgardoc/finSys_main.asp?dcn=0001104659-04-002999&nad=
Royal Bank has stated that it purchased the equity position in SCO
as a hedge against a client's position.
quoted from the Globe and Mail:
'An RBC spokesman was reluctant to comment, saying the SEC filing was
about how SCO operates its business. He said that RBC's "investment in
SCO is passive, made to hedge an economic exposure resulting from
client transactions."'
http://www.globetechnology.com/servlet/story/RTGAM.20031209.gtscodec9/BNStory/Technology/
In order for a hedge to work both sides of the hedge must be owned
by the same investor, i.e. Royal Bank's client. Thus Royal Bank is
stating that the client was already short SCOX when Royal Bank bought
48,000 shares of SCO Series A-1 Convertible Preferred stock for their
client. The client would establish a hedge position by selling
2,222,222 shares of SCOX short at a price higher than $13.50. During
the time period of September 16, 2003 through October 15, 2003 the
price of SCOX ranged from $13.57 to $21.57 thus giving the client the
opportunity to lock in a hedge profit between $155,555 and $17,933,331.
It is worth noting that the volume of SCOX on October 15, 2003 was
2,506,900 shares, by far a volume record for SCOX since March 6, 2003.
It is also worth noting that both BayStar and Royal Bank were shorting a
total amount of SCOX equal to 17% of the total amount of SCOX issued in
a very crowded short situation. In is extremely unlikely that Royal
Bank could borrow enough SCOX stock to meet the SEC short selling
requirements. Therefore I suggest that the SEC work with the German and
Canadian authorities to investigate whether BayStar sold SCOX as a naked
short violating both the United States naked short law and the United
States money laundering law.
H. On August 4, 2003 SCO signed a contract with Mike Anderer of S2
Strategic Consulting for S2 to help find additional funding for
SCO. Here is the contract.
http://contracts.onecle.com/sco/s2.svc.2003.07.01.shtml
There is a widely publicized leaked email that shows the nature of the
work done by Mike Anderer under the contract. From the contents of the
email and from subsequent events it is obvious that Mike Anderer had
insider knowledge about SCO's long range strategic planning based on his
actions in helping to set up the SCO Series A-1 Preferred stock
deal.
http://www.opensource.org/halloween/halloween10.html
On July 1, 2003 Mike Anderer and S2 were paid with a warrant for 25,000
shares of SCO common stock at an exercise price of $8.50 per share. The
warrant contains this statement.
"The Stock issuable upon exercise of the Holder's rights contained
herein will be acquired for investment and not with a view to
the sale or distribution of any part thereof, and the holder has
no present intention of selling or engaging in any public distribution
of the same except pursuant to a registration or exemption."
Mike Anderer was faced with having to hold a warrant in highly volitile
SCO common stock for an indefinite period until he could legally sell the
common stock. On July 1, 2003 the warrant had a value of $29,750. On
October 17, 2003 the warrant hit a peak value of $344,750. Since April
19, 2004 the warrant has been worthless. It is quite possible that Mike
Anderer could not exercise the warrant and sell the 25,000 shares at the
point in time when he wanted to do so. I suggest that the SEC
investigate the possibility that Mike Anderer sold SCOX in Canada
or Germany as a way to cash in the value of the warrant at a time
of his choosing thus violating the United States naked short law and the
United States money laundering law.
http://contracts.onecle.com/sco/s2.warrant.2003.07.01.shtml
I. The brokers who entered naked short sales have also violated the law.
"With respect to short sales, Rule 203(b) prohibits a brokerdealer
from accepting a short sale in an equity security from another person,
or effecting a short sale in an equity security for its own account,
unless the broker-dealer (1) has borrowed the security, or entered
into a bona fide arrangement to borrow the security, or (2) has
reasonable grounds to believe that the security can be borrowed so
that it can be delivered on the date delivery is due. The
broker-dealer must document compliance with this requirement.
Reasonable grounds to believe that the security can be borrowed may be
established by reliance on easy-to-borrow lists, as long as the list
is less than 24- hours old and securities on the list are readily
available so that it is unlikely that failures to deliver will occur.
However, if there are repeated failures to deliver securities included
on an easy-to-borrow list, reliance on the list would not constitute
reasonable grounds. Moreover, the absence of a security on a
hard-to-borrow list will not constitute reasonable grounds to believe
that the security can be borrowed by the delivery date."
http://www.mondaq.com/i_article.asp_Q_articleid_E_29999
K. BayStar has dissolved amid a dispute between the founders.
1) Steven M. Lamar, one of the BayStar founders quit BayStar and became
president of SLS International, a company that BayStar has invested
in heavily.
"SLS International (OTC Bulletin Board: SITI - News) announced
today that it has appointed Steven M. Lamar as President and
Michael Maples as Chief Operating Officer and Chief Financial
Officer. Mr. Lamar was formerly a Managing Partner at BayStar
Capital Management, LLC"
"Mr. Lamar has spent over 15 years in the financial services
industry. Previously, he was a co-founder and Managing Partner
of BayStar Capital Management, LLC,"
http://biz.yahoo.com/prnews/050617/nyf024.html?.v=11
2) The remaining BayStar founder, Larry Goldfarb is liquidating BayStar.
"BayStar Capital, a San Francisco-based hedge fund, is liquidating
amid management disagreements, a spokesman for the firm said on
Thursday."
"BayStar founder Larry Goldfarb is planning to launch another
venture called BayStar Ventures LLC, which will seek $300 million
to $500 million to practice the same strategy, the firm said."
http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?duid=mtfh58414_2005-07-07_17-11-39_n07316383_newsml
3) Steve Derby has resigned.
"BayStar Capital Management LLC announced that its managing
partners have reached an agreement effective August 2 whereby Bay
East (the management entity for Steve Derby) will resign its
operating role at BayStar Capital. Bay East (Steve Derby) will
stay on until February 2006 in a limited capacity."
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/08-10-2005/0004086232&EDATE=
4) Larry Goldfarb and Steven Lamar are on opposite sides of a lawsuit.
There is a lawsuit in New York over a defunct company called
Clickradio. Originally both Larry Goldfarb and Steven Lamar were
defendents in the lawsuit. Then Steven Lamar switched to the
opposite side.
"Goldfarb apparently disappeared before negotiating the deal for
Vibe, leaving Jones empty-handed. Jones has asked at least one
Goldfarb associate if the financier has a drug problem, according
to an affidavit in the case from Goldfarb's former partner,
Steven Lamar."
"Lamar was originally a defendant in the suit, but is now helping
Syncom."
http://www.nypost.com/business/64023.htm
5) Larry Goldfarb has been publicly accused of bilking a stripper of
$50,000
"One of those allegations comes from a ex-New York City stripper,
who accused Goldfarb in 2001 of bilking her of $25,000 - money she
spent on European excursions and rent for a San Francisco-based
houseboat."
"The stripper also claims Goldfarb convinced her to buy $25,000
worth of stock in a start-up called Sorceron, by promising she
would make "10 times her investment." But she claimed she never
received cash or stock when she asked for it."
http://www.nypost.com/business/62511.htm
6) Larry Goldfarb has been publicly accused of cheating the Marciano
brothers.
'He also settled a case brought against him by Guess founders
Paul, Georges and Armand Marciano. In 1992, the Marcianos paid
Goldfarb $275,000 a year to manage their family's money. A month
later, they fired him, claiming he didn't work enough, made
unauthorized business trips and "conducted an inordinate amount
of personal business from his office."'
http://www.nypost.com/business/62511.htm
7. BayStar Capital LP, Boies Schiller & Flexner, Royal Bank of Canada, and The
SCO Group, Inc have entered into an illegal agreement as a result of
renegotiating the recent issue of SCO's Series A-1 convertible preferred
shares.
A. On October 16, 2003 BayStar and The Royal Bank of Canada invested in a
private placement of SCO convertible preferred shares which amounts to
17.5% of SCO equity.
http://contracts.onecle.com/sco/baystar.reg.2003.10.16.shtml
B. On February 5, 2004 SCO registered a Series A-1 Convertible Preferred
stock issue with the SEC.
http://www.edgar-online.com/bin/edgardoc/finSys_main.asp?dcn=0001104659-04-002999&nad=
C. I sent a letter to McGill University on April 10, 2004 asking the
following two questions.
1) During 2003 what investments did McGill University make, other
than short term money, where the investments were greater than one
million dollars?
2) During 2003 what non-government grants, endowments, or other gifts
did McGill University receive where the gifts were greater than one
million dollars?
D. On April 16, 2004 the deal among BayStar, Boies Schiller & Flexner, Royal
Bank, and SCO began to unravel. All parties involved were extremely
vague as to what the problem was although it seemed to have something to
do with SCO violating the secrecy clauses in the contract. This was one
or two days after McGill received my letter.
On April 16, 2004 BayStar asked for their money back because SCO had
breached the agreement among BayStar, Boies Schiller & Flexner, Royal
Bank, and SCO. The issue seemed to be that SCO had not abided by the
secrecy clauses in the contract.
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/04-16-2004/0002153221&EDATE=
On April 22, 2004 BayStar gave a different reason for the deal falling
apart:
"BayStar Capital of Larkspur, Calif., a private hedge fund which
invested $20 million in the SCO Group last October and then called
the loan back last week, told NewsForge Thursday that it doesn't
believe SCO's senior management is experienced enough in IT
litigation to fully reap the financial benefits from the
company's intellectual property."
"BayStar spokesman Bob McGrath told NewsForge Thursday evening that
BayStar asked in an April 15 letter to have its stock redeemed
because "we wanted to get SCO's attention on the management problems
we see," McGrath said.
'"We have been pursuing this for some months with them (SCO Group),
both verbally and in writing," McGrath said. "We're acting on behalf of
our shareholders, as always, because they are entitled to a reasonable
return on their investment. We think at this point, to create the
value we need, that SCO Group will need to make some changes in
senior management."'
http://business.newsforge.com/business/04/04/23/0947205.shtml
E. On May 5, 2004 Royal Bank pulled out of the SCO Series A-1 Convertible
Preferred deal by converting some preferred into common stock and by
selling some preferred to BayStar.
http://ir.sco.com/EdgarDetail.cfm?CompanyID=CALD&CIK=1102542&FID=1047469-04-16421&SID=04-00
F. I cite the following reference as to the legality of making changes to
the terms of a private offering after the private offering is registered
with the SEC.
"Once the issuer files its registration statement, no further
renegotiation of any terms of the private offering is permitted."
http://www.faegre.com/articles/article_1128.aspx
Such changes violate rule 152 of the Securities Act of 1933.
On June 1, 2004 SCO announced that:
"it has entered into an agreement with BayStar Capital II LP to
repurchase and retire all 40,000 shares of Series A-1 Convertible
Preferred Stock currently held by BayStar. The shares of Series
A-1, which have a face value of $40 million, will be retired
through a payment of $13 million in cash and the issuance of
2,105,263 shares of the Company's common stock, payable and
issuable upon closing which will occur upon the effectiveness
of a shelf registration statement for the resale of the common stock by
BayStar."
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=136299
This agreement is illegal, not withstanding the deferred closure, because
it is a renegotiation of the Series A-1 Convertible Preferred Shares
private offering after SCO has filed its registration statement. The
deal compounds its illegality by including clauses that if the SEC
has not approved the registration by certain dates then futher
negotiation will take place to change the terms of the agreement
during the registration period.
"(b) Termination . If the Closing has not occurred by July 31, 2004,
without any breach of this Agreement by either party hereto, the
Company and BayStar shall negotiate in good faith appropriate
amendments or other arrangements in regards to this Agreement
and the matters contemplated hereby, including potentially an
extension of the Termination Date (as defined in the following
sentence). If the Closing has not occurred by September 1, 2004 (the “
Termination Date ”), without any breach of this Agreement by either
party hereto, and notwithstanding such negotiations the Company
and BayStar do not reach binding agreement on such amendments
or arrangements or otherwise agree to extend the Termination
Date, then this Agreement shall terminate and cease to be effective in
its entirety, without any liability by either party to the other solely
as a result of such termination."
http://ir.sco.com/EdgarDetail.cfm?CompanyID=CALD&CIK=1102542&FID=1104659-04-15992&SID=04-00
G. On July 23, 2004 SCO announced:
"The SCO Group, Inc. (Nasdaq: SCOX) announced today that the SEC has
declared effective, as of July 21, 2004, SCO's registration statement
relating to the resale of shares of common stock issuable to BayStar
Capital II, L.P. This fulfills the only condition to closing the
repurchase transaction under the stock repurchase agreement between
SCO and BayStar dated May 31, 2004, which was previously announced
on June 1, 2004. Accordingly, SCO has informed BayStar that it
considers the repurchase transaction to be closed as of July 21,
2004."
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=140068
BayStar immediately denied that the deal was closed and announced a
lawsuit will be launched against SCO:
'According to Justin Meese, BayStar spokesperson, the arranged
settlement had not closed due to an "unresolved dispute between the
parties," despite a prior announcement by The SCO Group to the
contrary.'
'Further, Meese said that the Larkspur, Calif.-based private equity
firm "intends to file an action requesting a declaratory judgment
with respect to its rights under the Stock Repurchase Agreement.
Until a final determination is made by the court, BayStar maintains
its position as a Series A-1 Preferred stockholder of SCO."'
According to SCO the dispute arises because:
'"BayStar has notified SCO that it is BayStar's position that the
repurchase transaction has not closed," because BayStar believed SCO
had mislead it on how much money could be made from SCO's IP
(intellectual property) licensing division, SCOsource, according to
Blake Stowell, Lindon, Utah-based SCO's communications director.'
http://www.eweek.com/article2/0,1759,1627364,00.asp
BayStar has not commented recently on the cause of the dispute.
Previously BayStar complained about SCO not keeping as quiet as the
contract required, wanted SCO to quit selling System V to concentrate
on the lawsuits, and wanted SCO to make changes in their senior
management. It is possible that the BayStar threat to sue SCO is an
opening ploy in an effort to again illegally renegotiate the deal, such
renegotiation would violate rule 152 of the Securities Act of 1932.
In any case, BayStar should file a statement with the SEC stating why
they think that SCO has violated the terms of the various agreements and
why BayStar's actions are not simply a renegotiation of a deal as
approved by the SEC.
H. On August 25, 2004 both BayStar and SCO confirmed that the revised deal
had been closed.
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=142124
http://www.sltrib.com/business/ci_2399461
I could not understand why the SEC would approve a blatently illegal
registration statement. Then I found a message on the Yahoo SCOX forum
which claimed that the SCO/BayStar stock registration had never become
effective.
http://finance.messages.yahoo.com/bbs?.mm=FN&action=m&board=1600684464&tid=cald&sid=1600684464&mid=197222&thr=191511&cur=191511&dir=d
On April 1, 2005 SCO filed their 10-K for 2004 very late. In that 10-K
SCO stated that the S-3 registration statement was invalid because the
10-K was filed late. I suggest that the 10-K has cause and effect
backwards; the 10-K was filed late because the S-3 registration was
invalid. In other words, SCO (and BayStar) lied about the SEC approving
the registration statement and the auditors, KPMG, refused to certify
actions taken under the unapproved SCO/BayStar registration statement.
"We previously had an effective registration statement on Form S-3
relating to the sale or distribution by BayStar as a selling
stockholder of the 2,105,263 shares of common stock issued to BayStar
in connection with our repurchase completed in July 2004 of all Series
A-1 shares previously held by BayStar. When we failed to file this Form
10-K in a timely fashion, we became ineligible to use Form S-3, our
registration statement ceased to be effective and BayStar’s ability to
resell shares pursuant to that registration statement terminated. We
are currently in the process of preparing a new registration statement
for the resale of BayStar’s shares on Form S-1. Upon that registration
statement being declared effective by the SEC, BayStar will again be
able to resell its shares. We will not receive any proceeds from the
sales of the shares covered by such registration statement. The shares
that may be sold or distributed pursuant to such registration
statement, upon being declared effective by the SEC, will represent
approximately 8 percent of our issued and outstanding common stock. The
sale of the block of stock to be covered by such registration
statement, or even the possibility of its sale, may adversely affect
the trading market for our common stock and reduce the price available
in that market."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905014787/a05-6064_110k.htm
I suggest the SEC investigate both the SCO/BayStar statements about the
SEC approval of the registration statement and the reasons given in the
10-K about why the registration statement is invalid.
I. On May 18, 2005 SCO filed a FORM S-1 form with the SEC. This FORM S-1
starts over on the process of obtaining approval for the FORM S-3 filed
by SCO on June 22, 2004. That FORM S-3 was never approved by the SEC.
SCO declared it effective anyway on July 22, 2004 and issued 2,105,263
shares of common stock to BayStar. BayStar has sold at least 634,610
shares illegally. SCO describes the purpose of the FORM S-1 this way:
"We previously had an effective registration statement on Form S-3
relating to the sale or distribution by BayStar as a selling
stockholder of the 2,105,263 shares of common stock issued to BayStar
in connection with our repurchase completed in July 2004 of all Series
A-1 shares previously held by BayStar. When we failed to file our Form
10-K in a timely fashion, we became ineligible to use Form S-3, our
registration statement ceased to be effective and BayStar's ability to
resell shares pursuant to that registration statement terminated. This
prospectus is part of this registration statement on Form S-1, which is
a post-effective amendment to the previous Form S-3, to register the
resale of BayStar's shares. Upon this registration statement being
declared effective by the SEC, BayStar will again be able to resell its
shares."
"This Registration Statement on Form S-1 constitutes Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-116732). The Registrant is filing this
Post-Effective Amendment for the purpose of meeting the requirements
of Section 10(a)(3) of the Securities Act of 1933. Pursuant to Rule
401(b) under the Securities Act, the Registrant is filing this
post-effective amendment on Form S-1, as it is currently ineligible to
file a registration statement on Form S-3."
http://www.sec.gov/Archives/edgar/data/1102542/000104746905015179/a2158258zposam.htm
This statement is fraudulent because Registration No. 333-116732 was
never approved and therefore never effective. This S-1 seems to ignore
the fact that at least 634,610 shares of the 2,105,263 issued under the
S-3 agreement that was never approved by the SEC have already been sold
illegally.
"The selling stockholder and any of its pledgees, assignees,
transferees, donees and successors-in-interest may, from time to time,
sell any or all of its shares on any stock exchange, market or trading
facility on which our common stock is traded or in private
transactions. The selling stockholder will act independently in making
decisions with respect to the timing, manner and size of each sale of
the shares covered in this prospectus. The selling stockholders may
use any one or more of the following methods when selling shares:"
http://www.sec.gov/Archives/edgar/data/1102542/000104746905015179/a2158258zposam.htm#ds1951_selling_stockholder
J. On August 25, 2004 SCO announced that BayStar Capital received 2,105,263
shares of SCO common stock. This represents 12% of the 17,484,473
outstanding SCO common shares and brought BayStar's total holdings of
SCOX to 2,208,645 shares.
http://www.sec.gov/Archives/edgar/data/1102542/000104746904027281/a2142711zex-99_1.htm
Under Section 16(a) of the Securities Exchange Act of 1934, as amended by
the Sarbanes-Oxley Act of 2002, every person who directly or indirectly
holds more than 10% of SCOX must report their name and other information
to the SEC. BayStar reported the name of the direct holder of the SCO
common stock as Baystar Capital II, L.P. but failed to report the name(s)
of the partner(s) in Baystar Capital II, L.P. who indirectly control the
SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604002679/form13-g.txt
K. Beginning September 1, 2004 BayStar Capital II LP has filed a series
of forms with the SEC reporting the sale of SCO common stock. Since
BayStar Capital II LP owns more than 10% of SCOX, BayStar is required by
law to report both the direct and indirect owners of the SCOX shares.
The forms that BayStar Capital II LP have filed correctly report the
direct owner as BayStar Capital II LP. The forms also report names as
the indirect owners of the SCOX shares and then in the footnotes deny
that the people reported are actually the indirect owners of SCOX. These
reports are a fraudulent attempt to hide the indirect owners of the
reportable position in SCOX. The forms also contain a footnote which
says:
"Intentional misstatements or omissions of facts constitute Federal
Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a)."
Here is 18 U.S.C. 1001 which deals with fraud and false statements.
http://assembler.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00001001----000-.html
15 U.S.C. 78ff(a) gives the penalties for fraud and false statements.
Such penalties were amended in 2002:
"Section 32(a) of the Securities Exchange Act of 1934 (15 U.S.C.
78ff(a)) is amended--
(1) by striking $1,000,000, or imprisoned not more than 10 years' and
inserting $5,000,000, or imprisoned not more than 20 years'; and
(2) by striking $2,500,000' and inserting $25,000,000'."
http://www.manupatra.com/downloads/corporate%20fraud%20accountability%20act%202002.htm
So that Section 32(a) of the Securities Exchange Act of 1934 now reads:
"Any person who willfully violates any provision of this title (other
than section 30A), or any rule or regulation thereunder the violation
of which is made unlawful or the observance of which is required under
the terms of this title, or any person who willfully and knowingly
makes, or causes to be made, any statement in any application, report,
or document required to be filed under this title or any rule or
regulation thereunder or any undertaking contained in a registration
statement as provided in subsection (d) of section 15, or by any
self-regulatory organization in connection with an application for
membership or participation therein or to become associated with a
member thereof, which statement was false or misleading with respect to
any material fact, shall upon conviction be fined not more than
$5,000,000, or imprisoned not more than 20 years, or both, except that
when such person is a person other than a natural person, a fine not
exceeding $25,000,000 may be imposed; but no person shall be subject to
imprisonment under this section for the violation of any rule or
regulation if he proves that he had no knowledge of such rule or
regulation."
http://www.law.uc.edu/CCL/34Act/sec32.html
Note that the penalty is per infraction and there are several
infractions listed below. Also note that the FORM 4 contains a notice of
the rule that applies so that the person filing the FORM 4 cannot plead
that he had no knowledge of such rule or regulation.
1) On September 1, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 5,000 shares of SCO common stock.
After the sale BayStar still holds 2,203,645 SCOX which is more than
10% of the issued shares of SCOX. BayStar Capital II LP is reported
as the direct owner of the shares but the indirect owner of the SCOX
is not reported. BayStar Capital II LP is legally required to report
its partners by name as indirect owners of the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604002699/xslF345X02/p400804_ex.xml
2) On September 22, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 16,000 shares of SCO common
stock. After the sale BayStar still holds 2,187,645 SCOX which
is more than 10% of the issued shares of SCOX. BayStar Capital
II LP is reported as the direct owner of the shares but the
indirect owner of the SCOX is not reported. BayStar Capital II
LP is legally required to report its partners by name as indirect
owners of the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604002867/xslF345X02/p401123_ex.xml
3) On September 24, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 9,000 shares of SCO common stock.
After the sale BayStar still holds 2,178,645 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228804000001/xslF345X02/baystarform4_ex.xml
4) On September 27, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 11,000 shares of SCO common stock.
After the sale BayStar still holds 2,167,645 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000001/xslF345X02/baystarform4_ex.xml
5) On September 28, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 13,960 shares of SCO common stock.
After the sale BayStar still holds 2,153,685 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000002/xslF345X02/baystarform4_ex.xml
6) On September 30, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 8,422 shares of SCO common stock.
After the sale BayStar still holds 2,145,263 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000003/xslF345X02/baystarform4_ex.xml
7) On October 5, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 18,027 shares of SCO common stock.
After the sale BayStar still holds 2,127,236 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000004/xslF345X02/baystarform4_ex.xml
8) On October 7, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 11,973 shares of SCO common stock.
After the sale BayStar still holds 2,115,263 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000005/xslF345X02/baystarform4_ex.xml
9) On October 8, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 10,000 shares of SCO common stock.
After the sale BayStar still holds 2,105,263 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000006/xslF345X02/baystarform4_ex.xml
NOTE: The amount of SCOX held by BayStar (2,105,263) at this date
(October 8, 2004) corresponds exactly to the number of shares that
BayStar received on August 25, 2004 as per the June 1, 2004 agreement
between SCO and BayStar. Since the SEC never approved the repurchase
agreement between SCO and BayStar any SCOX sales by BayStar after this
date are illegal.
10) On October 12, 2004 BayStar Capital II LP filed two FORM 4s with the
SEC which state that BayStar sold 19,100 shares of SCO common stock
in total. After the sales BayStar still holds 2,086,163 SCOX which is
more than 10% of the issued shares of SCOX. BayStar Capital II LP is
reported as the direct owner of the shares but the indirect owner of
the SCOX is not reported. BayStar Capital II LP is legally required
to report its partners by name as indirect owners of the SCO common
stock.
BayStar sells 9,100 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000007/xslF345X02/baystarform4_ex.xml
BayStar sells 10,000 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000008/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
11) On October 14, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 17,716 shares of SCO common stock.
After the sale BayStar still holds 2,068,447 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000009/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
12) On October 15, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 8,000 shares of SCO common stock.
After the sale BayStar still holds 2,060,447 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000010/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
13) On October 29, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 22,794 shares of SCO common stock.
After the sale BayStar still holds 2,037,653 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000011/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
14) On November 4, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 39,653 shares of SCO common stock.
After the sale BayStar still holds 1,998,000 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003236/xslF345X02/p402020_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
15) On November 5, 2004 BayStar Capital II LP filed three FORM 4s with the
SEC which state that BayStar sold 46,347 shares of SCO common stock
in total. After the sales BayStar still holds 1,951,653 SCOX which is
more than 10% of the issued shares of SCOX. BayStar Capital II LP is
reported as the direct owner of the shares but the indirect owner of
the SCOX is not reported. BayStar Capital II LP is legally required
to report its partners by name as indirect owners of the SCO common
stock.
BayStar sells 16,347 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003273/xslF345X02/p402106a_ex.xml
BayStar sells 8,000 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003274/xslF345X02/p402106b_ex.xml
BayStar sells 22,000 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003277/xslF345X02/p402107_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
16) On November 9, 2004 BayStar Capital II LP filed two FORM 4s with the
SEC which state that BayStar sold 24,000 shares of SCO common stock.
After the sale BayStar still holds 1,927,653 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
BayStar sells 5,000 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003338/xslF345X02/p402203b_ex.xml
BayStar sells 19,000 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003339/xslF345X02/p402203_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
17) On November 10, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 18,000 shares of SCO common stock.
After the sale BayStar still holds 1,907,653 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000095011604003348/xslF345X02/p402202_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
18) On November 16, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 17,500 shares of SCO common stock.
After the sale BayStar still holds 1,890,153 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000012/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
19) On November 18, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 10,000 shares of SCO common stock.
After the sale BayStar still holds 1,880,153 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000013/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
20) On November 24, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 7,500 shares of SCO common stock.
After the sale BayStar still holds 1,872,653 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000018/xslF345X02/baystarform4a_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
21) On November 26, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 12,000 shares of SCO common stock.
After the sale BayStar still holds 1,860,653 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000019/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
22) On December 2, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 14,100 shares of SCO common stock.
After the sale BayStar still holds 1,846,553 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000020/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
23) On December 3, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 15,000 shares of SCO common stock.
After the sale BayStar still holds 1,831,553 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000021/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
24) On December 6, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 20,000 shares of SCO common stock.
After the sale BayStar still holds 1,811,553 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000022/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
25) On December 8, 2004 BayStar Capital II LP filed a FORM 4 with the
SEC which states that BayStar sold 17,500 shares of SCO common stock.
After the sale BayStar still holds 1,794,053 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000024/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
26) On December 9, 2004 BayStar Capital II LP filed a FORM 4A with the
SEC which state that BayStar sold 31,500 shares of SCO common stock.
After the sale BayStar still holds 1,762,553 SCOX which is more
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000025/xslF345X02/baystarform4a_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
27) On December 9, 2004 BayStar Capital II LP filed two FORM 4s with the
SEC which state that BayStar sold 16,100 shares of SCO common stock.
After the sale BayStar still holds 1,746,453 SCOX which is less
than 10% of the issued shares of SCOX. BayStar Capital II LP
is reported as the direct owner of the shares but the indirect
owner of the SCOX is not reported. BayStar Capital II LP is legally
required to report its partners by name as indirect owners of
the SCO common stock.
BayStar sells 10,000 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000026/xslF345X02/baystarform4_ex.xml
BayStar sells 6,100 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000130228704000027/xslF345X02/baystarform4_ex.xml
Since the SEC never approved the repurchase agreement between SCO and
BayStar this SCOX sale by BayStar was illegal.
NOTE: On this date (December 9, 2004) BayStar Capital II LP has dropped
below the 10% reporting threshold. Between 10% and 5% BayStar Capital II
LP is required to report the direct owners of SCOX but not the indirect
owners.
28) On December 31, 2004 BayStar Capital II owned 1,470,653 SCOX.
http://www.sec.gov/Archives/edgar/data/1102542/000095011605000618/sch13ga.txt
Therefore between October 8, 2004 and December 31, 2004 BayStar sold
634,610 SCOX illegally.
L. Since the repurchase agreement is illegal and since BayStar has stated
several times that SCO violated the terms of the original agreement I
suggest that the SEC thoroughly investigate the entire deal. Pending an
SEC investigation the following items should be ordered into escrow
under section 1103 of the Sarbanes-Oxley Act before the items can be
dispursed beyond the SEC's reach:
1) All SCO Series A-1 Convertible Preferred stock held by BayStar or
Baystar Capital II's partners
2) All money obtained by BayStar or BayStar Capital II's partners since
March 6, 2003 by selling SCO common stock short
3) All SCO common stock held by BayStar or Baystar Capital II's
partners
4) All money obtained by BayStar, BayStar Capital II, or BayStar Capital
II's partners by selling SCO common stock.
5) All SCO comman stock issued to Boies Schiller & Flexner as their
commission on the original agreement
6) All money paid to Boies Schiller & Flexner as their commission on
the original agreement
7) All money obtained by Boies Schiller & Flexner since March 6, 2003
by selling SCO common stock short
8) All SCO common stock held by Royal Bank or their beneficiary client
which was obtained through the original agreement
9) All money obtained by Royal Bank or their beneficiary client which
was obtained by selling SCO stock obtained through the original
agreement
10) All money obtained by Royal Bank or their beneficiary client since
March 6, 2003 by selling SCO common stock short
11) The warrant for 25,000 SCOX held by S2
12) All shares of SCOX held by S2 as a result of exercising the warrant
13) All money obtained by S2 since March 6, 2003 by selling SCO
common stock short
14) All money obtained by SCO by selling Series A-1 Convertible
Preferred Shares.
http://www.law.uc.edu/CCL/SOact/sec1103.html
8. Morgan Keegan participated in both the PIPE deal and in the purchase of
software licences by Microsoft and Sun Microsystems. Morgan Keegan's
actions show that the PIPE deal and the software license deals are
interrelated parts of financing SCO's protection racket scheme. Certain
actions by Morgan Keegan show that Morgan Keegan knew that SCO was mounting
an illegal protection racket and Morgan Keegan willingly participated in the
crime.
A. Morgan Keegan had a contract to help SCO obtain equity financing.
"This letter confirms the engagement of Morgan Keegan & Company, Inc.
("Morgan Keegan") to act as exclusive financial advisor to Caldera
International, Inc. ("Caldera" or the "Company") to assist the Company
in its analysis, consideration and, if appropriate, execution of
various financial and strategic alternatives available to it, and such
other matters to which you and we may agree during the course of our
engagement. Such financial alternatives and other matters may include
assisting the Company in securing additional equity and/or debt
capital; and assisting the Company in its analysis and consideration of
the financial aspects of certain potential strategic transactions,
including, but not limited to, mergers, acquisitions, spin-offs, joint
ventures, minority investments, negotiated purchases, or other similar
transactions (individually, the "Transaction" and collectively, the
"Transactions")."
http://www.sec.gov/Archives/edgar/data/1102542/000104746904002142/a2127332zex-10_8.htm
B. The Morgan Keegan contract with SCO was amended to allow Morgan Keegan to
act as an agent in the sale of SCOsource licenses to Microsoft and Sun
Microsystems. Interestingly the SCOsource licenses were treated as
equity financing instead of contracts as far as Morgan Keegan was
concerned. It is likely Microsoft and Sun Microsystems were insistent
that their investment in SCO's protection racket NOT be called an
investment.
"SCO and Morgan Keegan agree that, in the event Sun Microsystems and/or
Microsoft enters into a substantial SCOsource licensing arrangement
with SCO during the term of the engagement, that such an event would
fall under provision 1(b) of our Engagement Letter. As such, the
aggregate amounts paid under the license agreements would be subject to
the Contingent Placement Fee, calculated as six (6) percent for a
license with Sun and one (1) percent for a license with Microsoft."
http://www.sec.gov/Archives/edgar/data/1102542/000104746904002142/a2127332zex-10_9.htm
The question of the status of the money Microsoft and Sun Microsystems
gave to SCO is a real conundrum to the parties involved. If Microsoft
and Sun Microsystems bought SCOsource licences then SCO owes 95% of that
money to Novell. Adding Morgan Keegan's fees mean that SCO netted 4% of
Microsoft's payment and -1% of Sun Microsystems payment, hardly a
profitable arrangement for SCO. If, on the other hand, the money was
intended to finance SCO's various lawsuits then Microsoft, Morgan Keegan,
SCO, and Sun Microsystems are guilty of conspiracy to create a protection
racket. In SCO v Novell, SCO's replies to Novell's counter claims
include a statement denying that the money SCO received from Microsoft
and Sun Microsystems was payment for SCOsource licenses.
"50. Admits that SCO, through its SCOsource division, entered into
agreements related to UNIX and Unixware with Sun Microsystems, Inc.,
and Microsoft Corporation (in that order) and that the Microsoft
agreement covered UNIX compatibility products; but denies each and
every other allegation of ¶50, including the allegation that the Sun
and Microsoft agreements were part of the SCOsource licensing program."
http://www.groklaw.net/article.php?story=20050915183241951
C. The Morgan Keegan contract was again amended. This time the contract
allows for the possibility of a second investment bank participating
in the SCO equity financing. It does not appear that a second investment
bank actually participated.
"In the event SCO decides to engage a second investment bank to assist
with a financing event, then the Contingent Placement Fees payable to
Morgan Keegan provided in Section 1(b) shall be reduced by 67% of the
otherwise applicable fee (i.e., 2% for equity financings, 1.0% for
mezzanine financing and 0.33% for debt financing)."
http://www.sec.gov/Archives/edgar/data/1102542/000104746904002142/a2127332zex-10_10.htm
D. Morgan Keegan received $2,000,000 for setting up the PIPE deal.
"In connection with this private investment, SCO will pay its
investment banker, Morgan Keegan & Company, Inc., a fee equal to 4
percent of the gross proceeds."
http://www.sec.gov/Archives/edgar/data/1102542/000110465903023055/a03-4160_18k.htm
E. Morgan Keegan participated in the SCO extortion racket by threatening
Sony Pictures. This means that Morgan Keegan understood this scheme
to be an extortion racket and that Microsoft, Sun Microsoft, and the
PIPE investors are participating in an extortion racket.
'By contrast, the assault on Hollywood has started on a softer note.
SCO claims it has had brief conversations with executives at Fox,
Universal and Sony Pictures. Patrick Scholes, an investment banker at
Morgan Keegan & Co. who advises SCO, says that on Oct. 9 he spoke by
phone with Mitch Singer, a senior vice president at Sony Pictures,
broaching the fact that Hollywood companies use a lot of Linux.
Scholes says Singer understood the implication. "He said, Okay, I can
read between the lines,'" Scholes recalls.'
http://web.archive.org/web/20040209122701/http://www.forbes.com/forbes/2003/1124/096.html
F. Morgan Keegan received a warrant for 200,000 shares of SCO.
"Morgan Keegan & Co., an investment banking firm that in August
received a warrant for 1.6 percent of SCO, or 200,000 shares. SCO
retained the firm to explore and possibly execute plans including
finding financing or selling SCO to another company, according to SCO's
filing for the quarter ended 31 January."
"Under the agreement, Morgan Keegan would get between 1 percent and 6
percent of money raised. If SCO is acquired or acquires others, Morgan
Keegan would receive the greater of US$250,000 or 2 percent of the
transaction price, according to the filing."
http://www.zdnet.com.au/news/business/0,39023166,20273310,00.htm
http://www.sec.gov/Archives/edgar/data/1102542/000104746904002142/a2127332zex-10_11.htm
9. Boies Schiller & Flexner are conspirators in the SCO protection racket.
A. Boies Schiller & Flexner's contribution to the crime is an attempt to
intimidate potential victims with barratry.
Organized crime often employs lawyers. It is accepted morality in
America that a lawyer's reputation is not tarnished by the reputation
of his clients. For example a criminal gang might be running a
protection racket. The gang leader sends out enforcers to meet the
selected victims. The enforcers threaten the victims with potential
harm unless they pay protection. Often it is necessary for the enforcers
to make an example of a potential victim who resists, both to scare that
victim and to scare others who might be inclined to resist. When the
gang members run afoul of the law, usually as a result of some action by
the enforcers, the gang hires lawyers to defend themselves in court. The
lawyers have committed no crimes and the lawyer's reputations are not
besmirched by the reputation of their clients.
The SCO gang is running a protection racket where they are trying to
intimidate victims into paying protection money in the form of buying
licenses for software that SCO does not own. In the SCO version of the
protection racket the enforcers are not thugs. They are lawyers. The
lawyers that SCO has hired do not protect the criminals after the crimes
are committed. The lawyers commit the crimes. SCO has sued Auto Zone,
DaimlerChrysler, and IBM as example enforcement actions against potential
extortion victims partially to force the selected victims to pay up and
partially to intimidate other potential victims. These lawsuits are not
based on any evidence that the victim has actually done something that is
an actionable offence. Instead the lawsuits are intended to harass and
intimidate the victim into settling as the cheaper alternative.
Therefore Boies Schiller & Flexner are not reputable lawyers representing
a disreputable client. Boies Schiller & Flexner are on the same moral
plane as mob enforcers. From a legal standpoint, Boies Schiller &
Flexner are guilty of barratry. Here is the definition of barratry.
"n. creating legal business by stirring up disputes and quarrels,
generally for the benefit of the lawyer who sees fees in the matter.
Barratry is illegal in all states and subject to criminal punishment
and/or discipline by the state bar, but there must be a showing that
the resulting lawsuit was totally groundless. There is a lot of
border-line barratry in which attorneys, in the name of being tough or
protecting the client, fail to seek avenues for settlement of disputes
or will not tell the client he/she has no legitimate claim."
http://dictionary.law.com/default2.asp?selected=40&bold=%7C%7C%7C%7C
B. The California Supreme Court has ruled that a lawyer can be prosecuted
for a criminal threat made on behalf of a client.
'In writing last week's decision for the court, Justice Carlos R.
Moreno stated, "A threat that constitutes criminal extortion is not
cleansed of its illegality merely because it is laundered by
transmission through the offices of an attorney."'
http://www.foxnews.com/story/0,2933,206615,00.html
It follows from the California Supreme Court ruling that Boies, Schiller,
and Flexner can be prosecuted for the illegal barratry that they have
committed against IBM on behalf of their client, SCO.
C. Boies Schiller & Flexner has a history of illegal and unethical actions.
'Boies has had his share of over-the-top bravura--an impulse that has
repeatedly landed him in scalding water. He and his clients have been
sanctioned at least three times. "It's fairly unusual," says Paul
Carrington, a professor at Duke University Law School and author of
current rules on sanctions in federal courts. "I don't think lawyers
get sanctioned very often. People get very angry first."'
http://www.badfaithinsurance.org/reference/General/0206a.htm
D. Boies Schiller & Flexner has referred clients to do business with
companies owned by relatives of David Boies without disclosing the
relationship.
"In the past few years, Boies Schiller has guided clients to at least
three companies without disclosing family stakes in the firms,
generating millions of dollars in income and potential returns for
his children. The Journal in August disclosed the children's ties to
two of the companies, document-management firm Amici and copying firm
Echelon. William F. Duker, Mr. Boies's friend, a former associate who
served prison time for overbilling the federal government for legal
services, held stakes in both Amici and LSAG."
http://online.wsj.com/public/article/SB112898399461664870-vhYLPPI_N38qjmPw64O0IzEtP_k_20061011.html?mod=tff_main_tff_top
"David Boies' firm resigned as Adelphia special counsel after it was
learned that Boies' family members owned a company that owned, through
another company, a document management company Adelphia had hired on
the Boies' firm's recommendation. Lest you think document management is
small potatoes, Adelphia has paid $5-$10 million for its services."
http://busmovie.typepad.com/ideoblog/2005/08/boies_and_adelp.html
E. John Deep has accused David Boies of illegally selling Amici corporation
even though controlling interest in Amici is owned by John Deep.
"In a separate case involving Amici, Cohoes resident John Deep, founder
of the file-sharing network Aimster, is fighting in U.S. Bankruptcy
Court in Albany to block the sale to Xerox, claiming he developed
much of the technology and still owned a controlling interest in the
Albany company."
"In a tangled web of bankruptcy filings and lawsuits, Deep alleges
his former attorney, David Boies, and members of his firm, Boies
Schiller and Flexner LLP, stole parts of his companies and
technologies while they represented him against movie and recording
industry claims that his now-defunct software facilitates piracy."
http://timesunion.com/AspStories/story.asp?storyID=502397&category=BUSINESS&newsdate=7/25/2006
F. David Boies was sanctioned for attacking the integrity of a judge.
'In one 1998 case Boies tried to get New York Supreme Court Judge
Edward Greenfield removed from a lawsuit--three years after his client,
New York landlord Sheldon Solow, had settled the underlying complaint.
Boies cited flimsy allegations of corruption dug up by Solow's
investigators involving the judge's clerk, which raised at least "the
appearance of impropriety" by the jurist. But in a testy courtroom
exchange Greenfield accused the litigator of ignoring "basic law that
everyone knows after the first year of law school." Still another
judge fined Boies and his client $46,000 for filing the "barely
sensible" motion. "It was startlingly unusual," says Greenfield of the
incident, which occurred as he was retiring at the mandatory age of 76.
"I'd never seen anything like it in 35 years on the bench." Solow
appealed the sanctions and lost. Even today Boies maintains "we had a
bad judge" who should have recused himself even if there were no
evidence of corruption. Attacking a judge, he says, is "always the last
resort."'
http://www.badfaithinsurance.org/reference/General/0206a.htm
G. Boies Schiller was ordered to pay double costs for bringing a frivolous
lawsuit.
"Boies was fined again in 2003. This was after filing a federal
Racketeer Influenced & Corrupt Organizations suit against a doctor who
had sold an East Hampton, N.Y. waterfront mansion to Hard Rock Cafe
founder Peter Morton. Solow, who owns a house nearby, had already lost
a state-court suit seeking to overturn the sale. "Boies was brought in
to have more artillery," says Morton's lawyer, Errol Margolin. The
Second Circuit Court of Appeals called the suit "frivolous," however,
and ordered Boies, Schiller and another firm to pay double costs."
http://www.badfaithinsurance.org/reference/General/0206a.htm
H. Boies, Schiller was fined for failing to respond to discovery requests.
"In a high-profile price-fixing case against the Click modeling agency
last year, New York defense attorney Aaron Richard Golub convinced a
federal judge to fine Boies, Schiller $30,000 for failing to respond to
discovery requests--even though the court insisted it do so. "No
attorney can expect an exemption" from court rules "simply because that
attorney chooses to take on more work than he or she can handle," said
U.S. District Judge Henry Pitman in a May 2004 opinion. "We nailed
them left and right," Golub says. Boies explains that despite the
sanctions, all the modeling agencies, including Click, settled for
undisclosed amounts."
http://www.badfaithinsurance.org/reference/General/0206a.htm
I. A lawyer who worked for Boies, Schiller was suspended for paying a
witness.
"Boies narrowly escaped sanctions in a Florida lawsuit over the estate
of celebrity jeweler Harry Winston. He and partner Robert Silver agreed
to pay a former Winston employee a bonus of up to $1 million for help
with the case. The Florida Supreme Court called it paying a witness
and suspended for 90 days the license of a Florida lawyer who worked
with Boies. Boies and Silver, who are licensed to practice in New York,
were exonerated last year by the New York State Bar Association."
http://www.badfaithinsurance.org/reference/General/0206a.htm
J. David Boies has provided large amounts of free legal services to a client
with whom he has a personal relationship. The unethical acts committed
by Boies, Schiller & Flexner has resulted in Amy Habie, the CFO of Boies,
Schiller & Flexner, being sentenced to 90 days in jail.
"The case that led to the charges started out in 1996 as a breach of
contract action between Amy Habie, owner of Nical of Palm Beach Inc.,
and Scott and Carol Lewis of Scott Lewis Gardening & Trimming. It
degenerated into a bitter, seven-year war with multiple contempt of
court orders and sanctions against Nical."
"The Boies, Schiller & Flexner firm... has acknowledged providing years
of free legal services to Habie and paying other lawyers more than
$400,000 in fees and costs to fuel the litigation."
"...Testimony and court filings in the past year disclosed that Boies
had made Habie chief financial officer of the far-flung law firm, with
a salary of $120,000 a year. Lewis alleged in court and in documents
that Boies was willing to provide unlimited legal and financial help
because of a personal relationship with Habie..."
http://talkleft.com/new_archives/003188.html
"Amy Habie, the chief financial officer of Boies, Schiller & Flexner
and the owner of a gardening company in Palm Beach, Fla., was found
guilty of civil contempt of court in Palm Beach County, and ordered to
pay a $500,000 fine to the defendants in the case, according to a
judgment filed in a Florida courtroom yesterday."
"Ms. Habie was also sentenced to 90 days in the Palm Beach County
jail."
http://www.nytimes.com/2006/06/03/business/03law.html
The judge has also filed criminal contempt of court changes against Amy
Habie in the same case.
"Habie also faces a criminal trial on the same charges. Judge Smith
appointed West Palm Beach attorney Robert Gershman of Gershman &
Goldstein as special prosecutor in the criminal case."
"After a Palm Beach County Circuit judge found her in civil contempt,
the chief financial officer of Boies Schiller & Flexner could face a
year in jail if found guilty on criminal contempt charges arising
from a long-running dispute between two landscaping companies."
http://www.law.com/jsp/article.jsp?id=1149510922205
10. The SCO Group has illegally manipulated the price of their common stock. I
am asking the Securities and Exchange Commission to examine every trade made
in SCO stock during the time period of March 23 through April 7 to see if
SCO was manipulating the SCO stock price, making wash trades, and marking
the close. If such illegal trades were made then both SCO and the broker
who made the trades for SCO have broken the law.
A. On March 10, 2004 SCO filed a report with the SEC stating that SCO
intended to repurchase SCO common stock.
http://ir.sco.com/EdgarDetail.cfm?CompanyID=CALD&CIK=1102542&FID=1047469-04-7411&SID=04-00
SCO also issued a press release announcing the SCO stock repurchase
plan.
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=130784
SCO investing in their own, presumably undervalued, stock is legal.
Stock market price manipulation is illegal. I think that during the time
period of March 23 through April 7, 2004 SCO illegally manipulated its
stock price in an attempt to create higher prices for their stock.
SCO reported to the SEC, "During the quarter ended April 30, 2004, we
purchased 290,000 shares of our common stock in open market purchases
for a total cost of $2,414,000."
http://www.sec.gov/Archives/edgar/data/1102542/000104746904020342/a2138509z10-q.htm
The average price that SCO paid for SCOX stock was $8.32 a share.
http://www.sec.gov/Archives/edgar/data/1102542/000104746904020342/a2138509z10-q.htm
During the period from March 23 through April 7, 2004 the SCOX low was
$7.57 and the high was $11.48. The average closing price was $9.11.
http://finance.yahoo.com/q/hp?s=SCOX
B. Between March 23 and April 7 Time and Sales shows there were frequent
sequences of 100 share lots bought at about 10 minute intervals on
constant upticks. It is unlikely that random small investor purchases
would occur with such regularity. A large investor would not buy in
such a large number of small lots because commission costs would
balloon.
Even more suspiciously, Time and Sales shows several final daily
purchases on the Pacific Exchange where the final transaction was a 100
share lot purchased on a large uptick. Such transactions are called
"marking the close" and marking the close is illegal. I cite as a
precedent the OPINION OF THE COMMISSION in the matter of Richard D. Chema
in which the Commission stated:
"In addition to his wash trades, Broumas engaged in the
practice of "marking the close" by purchasing small amounts of
JML on the AMEX and the Midwest Stock Exchange at or near the
close of trading. [4] Between January 18, 1989 and June 25,
1990, he made 69 purchases of JML during the final 10 minutes of
the trading day. Of those purchases, 54 were the last trade of
the day and 47 were executed on an uptick. [5] On several
occasions, Broumas' trades raised the closing price of JML stock
by 1/8. Broumas' purchases at the close of trading were
beneficial to him in more than one respect. Brokerage firms use
the closing price of a security in determining whether they will
extend margin on the security, whether a customer's account meets
margin requirements, and the customer's equity in his margin
account. Moreover, the closing price of a security is quoted in
the following day's newspapers. Broumas admitted to one of his
registered representatives that he was trying to create interest
in JML, observing that "if nobody [bought] it on a certain day,
it [wouldn't] show up in the [newspaper] listing." [6]"
http://www.sec.gov/litigation/opinions/3440719.txt
On and before March 23 there was a huge short interest in SCO stock. In
addition to the advantages to SCO for marking the close given in the
case I just cited, marking the close helped SCO to squeeze the shorts by
increasing the shorts margin requirements. The intentional attempt by
SCO to squeeze the shorts is illegal.
Another advantage to SCO of marking the close is that the closing price
of SCO stock sets the conversion price of SCO Series A-1 Convertible
Preferred Stock under the agreement between SCO and BayStar and Royal
Bank.
http://www.edgar-online.com/bin/edgardoc/finSys_main.asp?dcn=0001104659-04-002999&nad=
So it is illegal for SCO to engage in marking the close for SCO stock.
C. SCO stock is not widely followed by stock market analysts because of its
small market volume. One person who has followed SCO for some time is
Dion Cornett, a Decatur Jones analyst, who since January has been
recommending that investors short SCO stock. Dion Cornett has a target
price of $2 per share for SCO stock.
http://biz.yahoo.com/ibd/040402/tech_1.html
If SCO were investing in their own stock because it was grossly
undervalued then SCO should purchase their stock at prices well below $2
a share. The fact that SCO is purchasing their stock in the $8.50 to
$9.50 range indicates an attempt at stock price manipulation rather than
investment. This is not a closed end mutual fund buying back their own
common stock that is trading at well under net asset value. This is a
pump and dump stock scam trying to raise the price of its stock to
prolong the bubble.
http://bigcharts.com/custom/washingtontimes-com/interactivechart.asp?sid=&o_symb=scox&symb=scox&x=0&y=0&time=9&uf=7168&compidx=aaaaa%3A0
D. SCO has made wash trades. Such trades are illegal under the Securities
Exchange Act of 1934, Section 9, a, 1, which states:
"To effect, alone or with one or more other persons, a series of
transactions in any security registered on a national securities
exchange or in connection with any security-based swap agreement (as
defined in section 206B of the Gramm-Leach-Bliley Act) with respect
to such security creating actual or apparent active trading in such
security, or raising or depressing the price of such security, for
the purpose of inducing the purchase or sale of such security by
others."
http://www.law.uc.edu/CCL/34Act/sec9.html
SCO is in poor financial shape:
http://ir.sco.com/ReleaseDetail.cfm?ReleaseID=129977
Which creates a problem for SCO as to how to pay for all of the stock
that it might have to buy to raise the stock price. One way that SCO
can prolong the time that it can support its stock price is by engaging
in "wash trades". Wash trades are where SCO acts simultaneously as the
buyer and seller thus creating the appearance of a 100 share trade on an
uptick at at no cost to SCO other than the commission cost. One way
that the SEC can check for SCO wash trades on the NASDAQ is to check to
see if SCO made any trades where SCO told their broker to execute the
trade with a particular NASDAQ dealer. Such a stipulation to a broker is
a red flag for a wash trade or other illegal trade. SCO is thinly
traded enough that a series of 100 share wash trades on continuous
upticks could raise the price of SCO stock.
On April 7 a SCO insider, Thomas Raimondi, sold 11,481 shares of SCO for
$128,736.45.
http://ir.sco.com/EdgarDetail.cfm?CompanyID=CALD&CIK=1102542&FID=1102542-04-12&SID=04-00
On April 7 a SCO insider, Jeff Hunsaker, sold 264,155 shares of SCO for
$3,137,536.59.
http://ir.sco.com/EdgarDetail.cfm?CompanyID=CALD&CIK=1102542&FID=1102542-04-14&SID=04-00
These two trades are illegal wash sales. SCO cannot be buying up its
stock at the same time that SCO insiders are selling SCO stock.
E. SCO may have illegally supported the SCO stock price.
http://bigcharts.com/custom/washingtontimes-com/interactivechart.asp?sid=&o_symb=scox&symb=scox&x=0&y=0&time=8&uf=7168&compidx=aaaaa%3A0
Looking at the SCOX stock chart shown above it appears that about April
20 SCOX was likely due for a rally back up to the $8 support/resistance
level driven by short covering. There are 8 SEC Statement of Changes
of Beneficial Ownership filings dated 04/22/2004. I suggest that the
SEC investigate whether SCO bought stock on April 21 and/or April 22,
2004 to trigger the expected short covering rally. If SCO did so then
SCO was engaged in illegal stock price manipulation in an effort to
support the SCO stock price above the exercise price of the 8 newly
issued insider stock options.
11. Canopy, the Canopy officers, and the Canopy directors are criminally liable
for SCO's criminal acts.
A. Canopy sold a SCOsource license for SCO by including such license as a
term in the agreement settling a contract dispute between Canopy and
Computer Associates.
"The settlement that gave CA the Linux rights took place in August, CA
spokeswoman Michelle Healy said. In that settlement, CA agreed to pay
$40 million to Canopy and Center 7, a company in which Canopy
holds a majority ownership, according to a SCO filing with the
Securities and Exchange Commission. Center 7 sued CA in April 2001,
alleging a breach of contract of a software license agreement, CA said
in a filing with the SEC."
"CA disagrees with SCO's tactics, which are intended to intimidate and
threaten customers. CA's license for Linux technology is part of a
larger settlement with the Canopy Group. It has nothing to do with
SCO's strategy of intimidation,"
http://news.zdnet.com/2100-3513_22-5170310.html
B. A resolution was passed at an emergency general meeting of the The Canopy
Group Board of Directors on December 17, 2004. This resolution fired
Brent Christensen, Darcy Mott, and Ralph Yarro from all positions within
Canopy. It also states:
"RESOLVED FURTHER, that the Company shall take all available action to
remove Mr. Yarro from all positions he holds as an employee, officer,
director, or consultant of any of the entities in which the Company
holds an interest (the "Portfolio Companies");"
"RESOLVED FURTHER, that the Company shall take all available action to
remove Mr. Christensen from all positions he holds as an employee,
officer, director, or consultant of any of the Portfolio Companies;"
"RESOLVED FURTHER, that the Company shall take all available action to
remove Mr. Mott from all positions he holds as an employee, officer,
director, or consultant of any of the Portfolio Companies;"
http://scofacts.org/yarro-2005-01-31-affidavit_E.pdf
The resolution was posted by SCO on their web site which indicates that
the resolutions about removing Brent Christensen, Darcy Mott, and Ralph
Yarro from all positions within Canopy portfolio companies applies to
SCO. Obviously, if Canopy can remove members of the board of directors
of SCO at will then Canopy controls SCO tightly enough that Canopy, the
Canopy officers, and the directors of Canopy are criminally liable for
any criminal acts by SCO.
C. Ralph Yarro has filed a lawsuit against the people who ousted him. This
complaint is accompanied by several affidavites from former Canopy
employees. Here is the Joyce Wiley affidavit.
http://www.groklaw.net/article.php?story=20050210085656462
In Joyce Wiley's affidavit she made a statement about Canopy's directors
& officers insurance policy. This statement is direct evidence that
Canopy's subsidiaries' directors and officers are included in the same
D&O insurance policy as Canopy or that Canopy buys and/or approves the
D&O insurance for its subsidaries.
"Mr. Mustard's hostility and management style is also illustrated by
his conduct in response to an inquiry by an insurance broker. The
insurance broker for Canopy's Directors & Officers Policy ("D&O
Policy") contacted me and asked me about the purported changes in
management so that he could determine whether the changes in management
affected the insurance policy coverage. Consistent with instructions
provided by Mr. Mustard that all Canopy employees should refer any
questions about Canopy's management to him, I told the insurance broker
he should speak with Mr. Mustard about the matter. I also left a
message with Mr. Mustard's assistant that the insurance broker would
like to speak with Mr. Mustard. Mr. Mustard later came down to my
office and repeatedly questioned me, in a stern and accusing manner, as
to how the insurance broker would attribute a change in management to a
change in control. Mr. Mustard acted as if he suspected that I had told
the insurance broker more than just what was reported in the newspapers
regarding the change in management. Mr. Mustard kept hammering me with
the statement that he needed to understand why the broker would think
that a change in management might mean a change in control. I offered a
few likely explanations that Mr. Mustard refused to accept. Mr. Mustard
told me he would not return the broker's call and that it was
unnecessary to do so because there had not been a change in control of
the company. The broker was persistent with emails and phone calls, and
finally a few days later, Mr. Mustard spoke to the insurance broker and
told him that Canopy's D&O Policy should still be effective because,
although there may have been a change in Canopy's management, there had
not been a change in control of Canopy. Mr. Mustard's statement to the
insurance broker gave me concern about Canopy's D&O coverage, as well
as Canopy portfolio companies' D&O coverage under the same policy."
http://www.groklaw.net/article.php?story=20050210085656462
If Canopy controls SCO closely enough that Canopy controls SCO's D&O
insurance purchases (indeed they are on the same policy) then Canopy has
enough control over SCO's actions that Canopy, the Canopy officers, and
the directors of Canopy are criminally liable for SCO's criminal acts.
D. At the heart of the dispute between the two factions is a strong
disagreement over the equity plan adopted by Canopy in 2000.
"On or about November 7, 2000, Canopy's Board of Directors, consisting
of Mr. and Mrs. Noorda and myself, unanimously adopted The Canopy
Group, Inc. 2000 Stock Option Plan, by which certain persons, such as
eligible employees, could acquire equity in Canopy by obtaining and
exercising stock options in Canopy, at prices consistent with Canopy's
value at the time each employee joined Canopy. Under this equity plan,
I was granted an option to purchase 10,000 shares of Class A Voting
Common Stock and 9.990 million shares of Class B Non-Voting Common
Stock at $5 per share, a price consistent with Canopy's value at the
time he joined Canopy. A copy of this equity plan is attached hereto
as Exhibit C."
http://www.groklaw.net/pdf/YarroMottChristensen2.pdf
The dispute between the two factions trying to control Canopy also
encompasses SCO. SCO has also started examining the disputed 2000 equity
plan and SCO thought that doing so was important enough to notify the
SEC.
"The Company is examining certain matters related to the issuance of
shares of common stock issued under the Company's 2000 Employee Stock
Purchase Plan and potentially its other equity compensation plans.
More time is needed to compile and analyze all relevant data."
http://www.sec.gov/Archives/edgar/data/1102542/000104746905001904/a2150650znt10-k.htm
The fact that the dispute about the 2000 equity plan also includes SCO is
proof that Canopy controls SCO to a degree that Canopy, the Canopy
officers, and the directors of Canopy are criminally liable for the
criminal acts committed by SCO.
E. Darla Newbold has filed an affidavit in support of Yarro et al v
Kreidel et al. She testified that Brandon Tidwell, a Ballard Spahr
attorney, has said that Darcy Mott and Ralph Yarro will be removed from
the board of directors of all Canopy portfolio companies.
"After the takeover of Canopy by Mr. Mustard, I tried to perform my
work duties and assist with the transition. Mr. Mustard rarely spoke
with me. In fact, he appeared suspicious of and hostile to me and other
of the Canopy employees. Mr. Mustard instructed me to assist Brandon
Tidwell, a Ballard Spahr attorney. I assisted Mr. Tidwell in reviewing
the corporate records. I explained the corporate books to him and
advised him of matters currently of concern with the Canopy portfolio
companies. He stated that Mr. Yarro and Mr. Mott were going to be
removed from the Board of Directors of all Canopy portfolio companies
through consent resolutions whenever possible, and otherwise when
necessary, through shareholders meetings."
http://www.groklaw.net/article.php?story=20050213201137855#c275915
Obviously, if Canopy can remove members of the board of directors of a
portfolio company at will then Canopy controls that company tightly
enough that Canopy, the Canopy officers, and the directors of Canopy are
criminally liable for any criminal acts by that portfolio company.
F. Canopy was doing SCO's clerical accounting work.
On March 11, 2005 Canopy and Ralph Yarrow reached an agreement whereby
Canopy would divest itself of its SCO subsidiary.
"March 11, 2005, Lindon, Utah: Ralph Yarro, Darcy Mott and Brent
Christensen, and Mrs. and Mrs. Raymond Noorda, The Noorda Family Trust,
the Canopy Group, Inc., Canopy’s CEO, William Mustard, Terry Peterson
and Val Noorda Kreidel announced today that they have reached an
agreement to amicably settle all claims in the pending litigations
amongst the parties. Under the agreement, Messrs. Yarro, Mott and
Christensen will receive an undisclosed amount of money, and Mr. Yarro
will receive Canopy’s shares of SCO stock. Messrs. Yarro, Mott and
Christensen have resigned from all positions they held with Canopy and
Canopy’s portfolio companies, and they will cease to hold any interest
in Canopy. The other terms of the agreement are confidential."
http://www.groklaw.net/article.php?story=2005031202422897
On the same day that the agreement was reached SCO advertised job
openings for three permanent and one temporary clerical staff in the SCO
accounting department. The positions advertised are General Ledger
Clerk, Accounts Receivable Clerk, Accounts Payable Clerk, and Payroll
Specialist.
http://www.sco.com/company/jobs/
The fact that SCO suddenly needed accounting clerks on the day that
Canopy divested SCO indicates that Canopy was doing the clerical work for
SCO's accounting department. This is evidence that Canopy exerted enough
control over SCO that Canopy, the Canopy directors and the Canopy
officers are criminally liable for the criminal actions of SCO.
12. There has been a management shakeup at Canopy, the parent company of SCO.
Canopy owns 5,492,834 shares of SCOX which is 31% and makes Canopy the
controlling shareholder in SCO.
http://www.webweek.com/
http://ir.sco.com/EdgarDetail.cfm?CIK=1102542&FID=1047469-04-5973&SID=04-00
Canopy is owned by Ray Noorda.
http://www.nwfusion.com/anniversary/legends/legends.html#ray
Advancing age forced Ray Noorda to cease taking an active part in the
management of Canopy. Ray Noorda turned control of Canopy over to the
Noorda Family Trust.
http://www.nft.com/
Here is a business biography of Ray Noorda.
http://www.thechannelinsider.com/article2/0,1759,1758104,00.asp
A. Three top executives at the Canopy Group have been fired.
Ralph Yarro is CEO of Canopy, Chairman of the Board of SCO, one of the
trustees of the Noorda family trust, and a member of the board of
directors of most of the Canopy subsidiary companies.
http://twiki.iwethey.org/twiki/bin/view/Main/RalphYarro?rev=1.13
Darcy Mott is Vice President, Treasurer and Chief Financial Officer of
The Canopy Group.
http://www.forbes.com/finance/mktguideapps/personinfo/FromPersonIdPersonTearsheet.jhtml?passedPersonId=297331
Brent Christensen is Vice President-Legal and Corporate Counsel of
Canopy.
http://www.webtopia.com/aboutus/brentc.htm
Ralph Yarro, Darcy Mott, and Brent Christensen have been fired from
Canopy by the Noorda Family Trust.
"In an apparent corporate coup, longtime Canopy Group chief executive
Ralph Yarro and his chief financial officer, Darcy Mott, have been
ousted from their positions with the technology incubator."
http://www.sltrib.com/ci_2492852
"Canopy CEO Ralph Yarro, CFO Darcy Mott and chief counsel Brent
Christenson were reportedly barred from returning to Canopy's offices."
http://www.linuxbusinessweek.com/story/47589.htm
"Yarro is generally held to be the "mastermind" behind the SCO suit
against IBM. Rumor yesterday was that Yarro had been escorted from the
Canopy building. My surmise is that this is connected with action by
the Noorda family against Yarro, who was managing Noorda's funds.
Noorda suffers from advanced senility, but from his pre-illness
actions, such as his role in resolving the ATT-BSD suit, he never would
have approved of the SCO suit."
"Although Yarro has been fired, he personally made millions or even
tens of millions during the period when he was able to kite SCO's
stock."
http://technocrat.net/article.pl?sid=04/12/21/1948203&mode=thread
William Mustard has replaced Ralph Yarro as CEO of Canopy.
http://www.sltrib.com/ci_2492852
http://www.smooth-engine.com/company/04_03_bio_mustard.html
B. Robert Penrose, Canopy's Director of Information Systems and Technology,
committed suicide.
"Robert L. Penrose, Canopy's director of information systems and
technology, died of a self-inflicted gunshot wound at his Taylorsville
home late Dec. 23, according to a Salt Lake County sheriff's report."
"Ex-employees: Hostile management style may have led to a colleague's
suicide, according to court documents"
http://www.sltrib.com/business/ci_2556061
"Several former Canopy employees including Barbara Jackson, Allan
Smart, Joyce Wiley, Frankie Gibson and Darla Newbold, in affidavits,
described Penrose as being "very distraught" and in tears after a
closed-door meeting with Mustard on Dec. 22, and following a staff
meeting that day in which all Canopy employees, in the presence of
attorneys from the law firm of Ballard Spahr and several security
guards, were "bullied" into signing a non-disclosure agreement."
http://www.harktheherald.com/modules.php?op=modload&name=News&file=article&sid=47321&mode=thread&order=0&thold=0
C. Five Canopy employees out of the eight remaining employees have quit
Canopy since December 22, 2004. The employees who have quit are Frankie
Gibson (Administrative Assistant), Barbara Jackson (Executive Assistant),
Darla Newbold (Legal Assistant), Allan Smart (Director of Business
Development), and Joyce Wiley (Controller).
http://www.sltrib.com/business/ci_2556061
D. Two different factions within The Canopy Group are accusing the other of
having committed fraud and other crimes.
"A bitter struggle for control of The Canopy Group has erupted in
dueling allegations of greed, deceit and manipulation of its aged and
purportedly failing founder, Utah technology legend Ray Noorda."
http://www.sltrib.com/ci_2543579
Both factions are accusing the other of taking advantage of Ray Noorda's
mental condition for illegal purposes. I suggest that the SEC
investigate both claims of illegal actions, that the Noordas illegally
seized control of Canopy, and that the three fired executives stole from
Canopy. Also Ray Noorda probably needs some help.
Both factions are accusing the other of taking advantage of Ray Noorda's
mental condition for illegal purposes. I suggest that the SEC
investigate both claims of illegal actions, that the Noordas illegally
seized control of Canopy, and that the three fired executives stole from
Canopy. Also Ray Noorda probably needs some help.
E. The three executives fired by Canopy, Brent Christensen, Darcy Mott, and
Ralph Yarro are suing Canopy because they say that their ouster was
illegal. You can find the Yarro et al v. Kreidel et al complaint here.
http://www.groklaw.net/article.php?story=20050213085738714
"Yarro is joined by ex-chief financial officer Darcy Mott and former
corporate counsel Brent Christensen."
"The three are suing for at least $100 million, alleging they were
illegally ousted in December . . ."
http://www.sltrib.com/ci_2543579
This complaint is accompanied by several affidavites from former Canopy
employees. Here is the Brent Christensen affidavit.
http://www.groklaw.net/article.php?story=20050212194721510
Here is the Joyce Wiley affidavit.
http://www.groklaw.net/article.php?story=20050210085656462
"Yarro had worked with Noorda since 1995 at Canopy and Noorda made it
clear he did not want his children involved in the venture capital firm
. . ."
'A Canopy board meeting on 17 December voted to sack the three men.
Yarro told the Tribune that: "based on our long and close
association, as well as the long-standing mutual trust and respect
between us and Mr. Noorda over many years, we do not believe that the
actions taken on Dec. 17 reflect the mind and will of Ray Noorda."'
http://www.theregister.co.uk/2005/01/31/canopy_sued/
Here is Ralph Yarro's description of Ray Noorda's participation in the
Canopy board of directors meeting.
"The upshot was a "purported" board meeting that Yarro was summoned to
on December 17. He was told he would meet with the Noordas but instead
was met by lawyers from the firm that had been asking for the
confidential information about Canopy."
"The Noordas participated in the meeting by speakerphone. Mrs Noorda,
"apparently reading from a script," moved to distribute more shares to
herself and her husband, terminate Yarro, Mott and Christensen for
cause and elect Mustard president and CEO."
'Then, Yarro says, "after more than one request for a 'second,' long
pauses after each request, and, upon information and belief after
being directed as to what to say and being unable to independently
comprehend the import of what was occurring, Mr Noorda seconded the
motion."'
"Yarro claims the vote wasn't "informed or competent" and so is "void
ab initio."'
http://www.linuxbusinessweek.com/story/48070.htm
"In addition to monetary damages, Yarro's suit seeks a court
declaration that the board meeting and its results are invalid, and
that Yarro, Mott and Christensen regain their positions; removal of
the Noordas from the three-member board; and appointment of a neutral
overseer for Canopy until litigation is resolved."
http://management.itmanagersjournal.com/management/05/01/30/0834245.shtml
F. Canopy and the Noorda family trust have countersued Brent Christensen,
Darcy Mott, and Ralph Yarro, for stealing $20 million from Canopy.
'Meantime, Canopy has countersued, along with Ray Noorda and wife,
Lewena, as officers of the Noorda Family Trust, Canopy's founding and
primary investor. They accuse Yarro, Mott and Christensen of
siphoning off at least $20 million via "a series of self-dealing and
wasteful transactions."'
http://www.sltrib.com/ci_2543579
Here is the complaint by The Canopy Group, Inc., and Raymond
J. Noorda and Lewena Noorda, in their capacity as trustees of The Noorda
Family Trust against Ralph J. Yarro III, Darcy G. Mott and Brent D.
Christensen.
http://www.groklaw.net/article.php?story=2005020318075063
Here is Pamela Jones' explanation of what the lawsuit is about.
"What the Noordas and Canopy are accusing them of doing is, in plain
English, gaining their trust and confidence and then taking advantage
of it, writing up self-dealing corporate equity plans and shareholder
agreements and bonus plans, and then handing themselves more than the
plans and agreements even allowed. They are accused of taking
advantage of some decent folks who got old and had a lot of money. It
was a honey pot that no one was watching closely, except for the three
defendants, who are accused of dipping into it over and over and over."
http://www.groklaw.net/article.php?story=20050203130721913
G. The Canopy Group has filed a lawsuit to remove Ralph Yarro as a director
of Canopy.
http://www.groklaw.net/pdf/CanopyMotDisYarroDir.pdf
In the MEMORANDUM IN SUPPORT OF MOTION TO REMOVE RALPH J. YARRO III AS
DIRECTOR Canopy says.
"By this Motion, Canopy and the Noordas seek Yarro's removal from
Canopy's Board of Directors for fraudulent and dishonest conduct and
gross abuse of authority and discretion. Through a series of self
dealing and wasteful transactions, Yarro, aided and abetted by
defendents Darcy G. Mott and Brent D. Christensen, wrongfully
enriched himself and others at the expense of Canopy and the Noorda
Family Trust, its majority shareholder. Although the precise amount of
damages suffered by virtue of Yarro's conduct is not known, the
evidence will show that at least $20 million has been misappropriated.
The evidence will also show Yarro improperly acquired an option an
option pursuant to which he may allegedly acquire forty percent of the
company's non-voting shares."
http://www.groklaw.net/pdf/CanopyMemSupMotDisYar.pdf
H. The fight for control of Canopy will probably affect some of the
partially owned Canopy subsidiaries which have acquired equity funding
from Canopy in the past.
"In the Canopy portfolio"
"Linux Networx: Bluffdale, supercomputer design and manufacture.
Recently ended Canopy funding relationship."
"SCO Group: Lindon, Unix software and applications provider best known
for litigation alleging Linux illegally incorporates Unix code."
"Altiris: Lindon, computer network management services."
"Center7: Lindon, tools and services for managing computer sites and
central data centers."
"Power Innovations: Lindon, hardware and services for regulation and
generation of electricity."
"MyFamily.com: Provo, online genealogy research company."
"FatPipe Networks: Salt Lake City, high-speed Internet equipment and
technology."
http://www.sltrib.com/business/ci_2547606
Darla Newbold has filed an affidavit in support of Yarro et al v
Kreidel et al. She testified that Brandon Tidwell, a Ballard Spahr
attorney, has said that Darcy Mott and Ralph Yarro will be removed from
the board of directors of all Canopy portfolio companies.
"After the takeover of Canopy by Mr. Mustard, I tried to perform my
work duties and assist with the transition. Mr. Mustard rarely spoke
with me. In fact, he appeared suspicious of and hostile to me and other
of the Canopy employees. Mr. Mustard instructed me to assist Brandon
Tidwell, a Ballard Spahr attorney. I assisted Mr. Tidwell in reviewing
the corporate records. I explained the corporate books to him and
advised him of matters currently of concern with the Canopy portfolio
companies. He stated that Mr. Yarro and Mr. Mott were going to be
removed from the Board of Directors of all Canopy portfolio companies
through consent resolutions whenever possible, and otherwise when
necessary, through shareholders meetings."
http://www.groklaw.net/article.php?story=20050213201137855#c275915
I. Trolltech, has asked Canopy and SCO to divest their shares in Trolltech
Trolltech is a Norwegian company which produces software called Qt, which
is a is a complete C++ application framework built around a widely used
set of C++ classes.
http://www.trolltech.com/
The Canopy Group owns 5.7% of Trolltech and SCO owns 1.6%. Ralph Yarro
sits on the Trolltech board of directors.
http://www.trolltech.com/newsroom/investors.html
Trolltech, has asked Canopy to divest their shares.
"We have asked Canopy to divest since SCO turned against Linux.
Unfortunately under US and Norwegian law you cannot force someone to
sell something. We have sold all our investments in Canopy companies a
long time ago. We do not like the fact that Canopy and SCO owns shares
in Trolltech. The irony is that they became shareholders because the
old Canopy/Caldera wanted us to continue to create good Linux software.
Canopy/SCO owns a very small share of Trolltech and has no control or
influence whatsoever on the strategy and operations of Trolltech.
Trolltech is controlled by it's employees. Eirik Chambe-Eng (President,
Trolltech) -----"
http://it.slashdot.org/it/05/02/07/147223.shtml?tid=156&tid=201&tid=8
In the April 13, 2005 conference call SCO announced that it had sold
their TrollTech shares.
"Young said that the company had recently sold its holdings in
TrollTech, a software development company, for over $800,000."
http://www.eweek.com/article2/0,1759,1785640,00.asp
"During the second quarter of fiscal year 2005, the Company received
notice from Troll Tech that a third party investor was interested in
acquiring the Company’s shares of Troll Tech. On March 14, 2005, the
Company received proceeds of $779,100 for the Troll Tech shares."
http://www.sec.gov/Archives/edgar/data/1102542/000110465905016503/a05-6736_110q.htm
On May 23, 2005 Trolltech announced that a new financing agreement had
eliminated Canopy Group as owners of Trolltech shares.
"The completion of this investment round precipitates the departure of
Borland, Canopy Group and SCO Group from Trolltech's ownership
structure. Trolltech's shares are currently owned by employees, the
Trolltech Foundation and investors with the following distribution:
Employees 51.84%, Index Ventures 24.82%, Teknoinvest 9.70%, Northzone
Ventures 4.83%, Trolltech Foundation 4.5%*, Orkla ASA 3.79%, Previous
Employees 0.48%, Others, 0.04%."
http://www.trolltech.com/developer/affiliations.html
J. On March 11, 2005 a settlement was reached in the various Canopy
lawsuits. The portion of the settlement that was made public had four
major points.
1) Brent Christensen, Darcy Mott, and Ralph Yarro resigned from all
positions that they held with Canopy and Canopy's subsidiaries
(except SCO which has ceased to be a Canopy subsidiary).
2) Brent Christensen, Darcy Mott, and Ralph Yarro no longer own any
Canopy stock or Canopy stock options.
3) Canopy transfered ownership of all SCO stock owned by Canopy to Ralph
Yarro. Ralph Yarro is now the principle stockholder of SCO and
controls SCO. Ralph Yarro remains Chairman of the Board of SCO and
Darcy Mott remains Director.
4) Brent Christensen, Darcy Mott, and Ralph Yarro received undisclosed
amounts of money from Canopy.
http://www.groklaw.net/article.php?story=2005031202422897
Canopy's divesture of SCO does not remove Canopy's liability for SCO's
criminal acts committed before the divesture.
Here is the SEC FORM 4.
"1. Reporting Person disposed of these shares in connection with a
settlement agreement reached with a former executive of Reporting
Person. The shares were transferred to the former executive pursuant to
the terms of a Stock Purchase Agreement for consideration other than
cash."
http://www.sec.gov/Archives/edgar/data/1102542/000092275805000002/xslF345X02/primary_doc.xml
K. On March 17, 2005 Val Kreidel died. Val Kreidel was the daughter of Ray
and Tye Noorda. She had lead the fight to oust Ralph Yarrow from
control of Canopy.
"Val Marie Kreidel, 49, of Huntington Beach, a financial analyst, died
March 17, 2005, of causes yet to be determined. Visitation: 5-8 p.m.
Tuesday, with services at noon Wednesday, Westminster Memorial Park."
"Husband, Bob; son, Chris; daughters, Lauren, Kenzie, Taylor, Raye;
mother, Tye Noorda; father, Ray Noorda; brothers, Alan, Andy, John and
Brent Noorda."
http://www.ocregister.com/ocr/2005/03/21/sections/local/obituaries/article_451011.php
"Orange County Coroner Watch Commander Cullen Ellingburgh, has told me
that his office has Kreidel's body, that her death occurred on
Thursday, March 17, and that it was an apparent suicide.
http://finance.messages.yahoo.com/bbs?action=m&board=1600684464&tid=cald&sid=1600684464&mid=248075
http://sltrib.com/business/ci_2617160
13. Microsoft and SCO are obstructing justice.
Destroying evidence in a criminal case is illegal under section 1001(a) of
Title 18 U.S.C. which states:
"(a) Except as otherwise provided in this section, whoever, in any matter
within the jurisdiction of the executive, legislative, or judicial branch
of the Government of the United States, knowingly and willfully—
(1) falsifies, conceals, or covers up by any trick, scheme, or device
a material fact;
(2) makes any materially false, fictitious, or fraudulent statement or
representation; or
(3) makes or uses any false writing or document knowing the same to
contain any materially false, fictitious, or fraudulent statement or
entry; shall be fined under this title or imprisoned not more than 5
years, or both."
http://assembler.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00001001----000-.html
"Recent court decisions have put attorneys and companies on notice by
posing hefty fines against businesses and public institutions that don't
properly handle -- or hand over -- electronic records."
http://www.montereyherald.com/mld/montereyherald/business/10385104.htm
On November 15, 2004 a more stringent law on corporate record keeping came
into effect in the United States. Now a company can be criminally liable for
destroying records even if those records are not needed in a court case.
"The most common area of focus is the archiving of all communications and
the creation of transparent and auditable systems for recording
transactions, dealings and any kind of business correspondence."
http://news.com.com/Sarbanes-Oxley+cheat+sheet/2030-7349_3-5465172.html?tag=nl
Now, in possibly the first application of the new law a company named Rambus
has lost a court case because they destroyed evidence.
"Judge Robert E Payne dismissed Rambus's patent infringement claims, a
decision welcomed by Infineon."
"Infineon had accused Rambus of destroying key documents ahead of the
trial, and the judge agreed with them."
'In a statement the German firm said: "Infineon is pleased that the Court
has found that Rambus's egregious conduct, including shredding key
documents, failing to produce evidence, and testifying falsely under oath,
constituted unclean hands and spoliation and was so improper as to warrant
the dismissal of all of Rambus's remaining patent claims in this case. We
are gratified that the Court determined that Rambus's litigation misconduct
should not be rewarded."'
http://www.theregister.co.uk/2005/03/02/rambus_infineon/
A. Burst.com is a company which creates and sells computer software which
processes and plays audio and video files.
http://www.burst.com/new/home.htm
Burst.com has filed a civil lawsuit against Microsoft.
"Chairman & CEO Richard Lang today announced that Burst.com has filed a
lawsuit accusing software giant Microsoft Corporation of violations of
the Patent Act, Sherman Act Sections 1 & 2, California Cartwright Act
(anti-trust), California Business & Professions Code Section 17200
(unfair acts or practices), the California Trade Secrets Act and for
breach of contract."
http://www.burst.com/new/newsevents/pressrelease001.htm
In the subsequent lawsuit Microsoft's policy of deliberately not
retaining old emails became an issue.
http://news.zdnet.com/2100-3513_22-5218193.html
http://seattlepi.nwsource.com/business/138857_msftburst10.html
In October, 2004 Judge Frederick Motz unsealed some court documents
discussing the issue of Microsoft's email retention policy.
"This week, the news from recently unsealed court documents is that
Microsoft may have deliberately lied not only to Burst, but also to
the other anti-trust litigants right up to and including the U.S.
Department of Justice."
"You will find the two relevant unsealed documents in their entirety in
this week's list of links. I'm going to characterize them here, but
please read the documents for yourself. One thing to keep in mind
here is that documents are unsealed when the judge decides that it is
more important for the public to know what is in them than to not
know, so Judge Motz, too, thinks this is worth your time."
http://www.pbs.org/cringely/pulpit/pulpit20041007.html
Judge Frederick Motz has unsealed a document called, "BURST'S REPLY TO
COMPEL MICROSOFT TO PRODUCE DOCUMENTS RELATING TO ITS DOCUMENT
PRESERVATION POLICY". This document describes Microsoft's policies
toward retaining email.
On page 28 the document describes the email retention policy adopted by
Microsoft in a previous case, the Federal anti-trust suit:
"Microsoft's document policies here were clearly crafted with its
ongoing litigation in mind. Senior Microsoft employees felt free to
destroy documents relevant to ongoing investigations and litigations
because it would assist the company in "staying ahead" of the DOJ.
Microsoft adopted very short retention periods for e-mail (actually
non-existent ones) because it had been embarressed so badly by the
lawyers representing the government in the trial before Judge Jackson.
Its executives urged employees to destroy e-mails as soon as possible
and directed them not to store them on servers were (sic) they could be
preserved."
Between the anti-trust suit and the Burst.com case Microsoft seems to
have formalized a policy of deliberately not retaining incriminating
e-mails.
On page 11:
"These specific illustrations of document destruction underscore a
larger underlying problem. Unless a specific employee received a
specific retention notice on the right subjects at the right time,
Microsoft's underlying retention policies pushed documents toward
deletion. Given Microsoft's own policies, it became critical for
Microsoft to identify potentially relevant documents promptly, and
ensure that documents were preserved. And this it did not do."
http://www.pbs.org/cringely/links/burstbrief_1.pdf
A second document, "BURST'S SUPPLEMENTAL REPLY TO COMPEL MICROSOFT TO
PRODUCE DOCUMENTS RELATING TO ITS DOCUMENT PRESERVATION POLICY" relates
to the fact that Microsoft abrupty refused to produce any further
information about its document preservation policy.
http://www.pbs.org/cringely/links/burstbrief_2.pdf
Microsoft's email retention policies ensure that no emails relevent to
any criminal prosecutions exist for more than 30 days. They also insure
that when a court issues an order for Microsoft to retain relevant emails
that order is not passed on to the proper Microsoft employees.
"Burst claims Microsoft avoids damning documents being discovered when
a record retention rule is in place. The short version of this Burst
argument is that Microsoft deliberately identifies the wrong people
so that retained records are useless, and records that probably
should have been retained are destroyed."
http://www.pbs.org/cringely/pulpit/pulpit20041007.html
A fuller description of Microsoft's email retention system can be found
here.
http://www.theregister.co.uk/2004/10/11/ms_legal_mail_autodestruct/
"In September 2003, however, the first hearing in the case was cut short
when Burst's lawyers pointed out something peculiar about the Microsoft
email records they had been shown during the discovery stage: there were
no messages from the 35-week period during which the two companies were
in discussions. Asked about the missing messages, Microsoft's attorneys
explained they'd been deleted. Unfortunately for Microsoft, Burst's legal
team remembered testimony from a hearing in the Sun Microsystems versus
Microsoft antitrust case in which Microsoft representatives said all
internal company email was backed up twice: once at Microsoft
headquarters and again at an off-site location. The judge in the Burst
case ordered Microsoft to produce the missing emails, but a year later
the company seems to be still working on recovering the mail."
http://www.infoconomy.com/pages/strategy-column/group101698.adp
The Microsoft email retention policy amounts to systematic violation of
the obstruction of justice law. Whatever crimes the SEC or DoJ charge
against Microsoft or Microsoft employees, there should be corresponding
within Microsoft, Steve Ballmer and Bill Gates and against the
executive who implemented the email destruction policy, Jim Allchin.
'Burst.com's motion accuses Microsoft of not allowing employees to
archive e-mail and accuses James Allchin, group vice president of
Microsoft's Platforms Group, of ordering employees in January 2000 to
destroy e-mail after 30 days. "This is not something you get to
decide," Allchin wrote to employees, according to the Burst.com motion.
"Do not archive your mail. Do not be foolish. 30 days."'
http://www.pcworld.com/news/article/0,aid,118635,00.asp
On March 11, 2005 the case was been settled with Microsoft agreeing to
pay Burst.com $60 million.
http://www.reuters.com/newsArticle.jhtml?type=internetNews&storyID=7882670
B. When the SEC and DoJ file anti-trust charges against Microsoft for
attempting to destroy Linux and System V the government should also
consider filing criminal obstruction of justice charges in all of the
civil suits Microsoft has been a party to since their systematic
destruction of incriminating emails began. In the Burst.com lawsuit the
Burst.com lawyers have already prepared most of the legal argument needed
to indict Jim Allchin, Steve Ballmer and Bill Gates.
"Court documents unsealed this week reveal U.S. District Judge
Frederick Motz, in Baltimore, has ordered Microsoft Chairman Bill Gates
and Jim Allchin, Microsoft's top Windows executive, to be questioned
under oath in the antitrust case brought by Burst.com."
http://www.linuxinsider.com/story/news/38239.html
"Now, court documents claim, Burst.com has evidence that Microsoft
followed a policy of deliberately destroying e-mail that could be used
as evidence against it. Legal documents made public on Wednesday
include evidence of a 1995 "do-not-save-e-mail directive," and a
"30-Day E-Mail Destruction Rule" promulgated by Jim Allchin, group vice
president of Platforms."
http://www.internetnews.com/ent-news/article.php/3437251
"Burst.com Inc. asked a U.S. judge to penalize Microsoft Corp. for
destroying e-mails it says the world's largest software company should
have preserved as evidence in antitrust suits. The material should have
been available for jurors who will decide whether Microsoft stole
Burst's patented technology for broadcasting sound and video at high
speeds over the Internet, Burst said in court papers. The jury should
be permitted to infer that Microsoft destroyed the e-mails because the
documents would hurt the company's defense, the court papers say."
http://seattlepi.nwsource.com/business/199918_tbrf17.html
http://www.burst.com/new/newsevents/chairltr112004.htm
'In February Burst's lawyers served a motion to have Microsoft
compelled "to produce Jim Allchin email directing Microsoft executives
to destroy all 'business-related' emails."'
http://www.theregister.co.uk/2004/05/24/allchin_destroy_email_claim/
"When Burst's lawyers put the messages in order by date and time, they
claim to have noticed a peculiar phenomenon. There were literally no
messages from approximately one week before until about a month after
all seven meetings between the two companies. This meant that either
Microsoft completely suspended its corporate e-mail culture for an
aggregate period of 35 weeks, or there were messages that had been sent
and received at Microsoft, but not divulged to Burst."
"Presented with this charge in court, Microsoft's attorneys
acknowledged that the message gaps existed. The messages had been
erased by the half-dozen Microsoft employees involved,"
http://www.pbs.org/cringely/pulpit/pulpit20030828.html
This is Microsoft's public rebuttal to the charges of destroying
evidence.
http://www.interesting-people.org/archives/interesting-people/200309/msg00116.html
This is Robert Cringely's rebuttal of Microsoft's rebuttal.
http://www.interesting-people.org/archives/interesting-people/200309/msg00123.html
C. An online news story has been removed.
On March 18, 2004 I filed a complaint with the SEC which included a
section on the Mike Anderer email know as "Halloween X". In this
complaint I made the statement:
"SCO has stated that the leaked email is genuine."
and I cited the following web site as my source for that information.
http://www.eweek.com/article2/0,1759,1542904,00.asp
After I reported this link to the SEC the web page was removed. The
link to that web page was redirected to the eweek magazine's front page.
The SEC should investigate whether the removal is an attempt to obstruct
justice.
D. SCO has obstructed justice by altering and then removing a web page.
Previously in this complaint to the SEC I reported that SCO falsely
claimed to own UNIX. I gave as an example this press release by SCO.
http://ir.sco.com/Re%20leaseDetail.cfm?ReleaseID=137086
On February 17, 2005 a member of the Groklaw forum reported that the
press release now stated that UNIX is a registered trademark of the Open
Group.
http://www.groklaw.net/comment.php?mode=display&sid=20050217102444119&title=Changed+document%3F&type=article&order=&hideanonymous=0&pid=278145#c278328
On March 2, 2005 I found that the web page no longer existed.
"HTTP/1.0 404 Object Not Found"
http://ir.sco.com/Re%20leaseDetail.cfm?ReleaseID=137086
E. SCO has obstructed justice by hiding and/or destroying a web page in
an archive.
Previously in this complaint I stated that SCO had forged an online
document in Eric Levenez's name and then destroyed the document. I
referenced an archived copy of the forgery. On February 17, 2005 an
anonymous poster on the Groklaw forum noted that the archived copy of the
forged chart was no longer available.
http://www.groklaw.net/comment.php?mode=display&sid=20050217102444119&title=SCO%27s+Unix+timeline+graph+non+accessible&type=article&order=&hideanonymous=0&pid=278145#c278243
On March 4, 2005 I get an error message when I try to access the web
page.
http://web.archive.org/web/20030605133708/www.sco.com/scosource/unixtree/unixhistory01.html
"We're sorry, access to
http://www.sco.com/scosource/unixtree/unixhistory01.html has been
blocked by the site owner via robots.txt."
F. SCO has obstructed justice by hiding and/or destroying emails between
the President of SCO, Darl McBride and Microsoft.
On December 20, 2005 there was a motion hearing in SCO v IBM. You can
find a transcript of the 2005-12-20 hearing on two motions in SCO v IBM
on the following web page:
http://www.groklaw.net/pdf/IBM-2005-12-20-Transcript.pdf
This motion hearing was centered on discovery problems. In discussing
the various problems with discovery one of the IBM lawyers, Todd
Shaughnessy, makes the following statement on pages 52 and 53 of the
transcript concerning discovery requests made of Darl McBride, President
of SCO:
"We had some doubts and reservations about whether SCO had produced all
of the documents from Mr McBride's files. We took them at their word,
and we took Mr. McBride's deposition."
"During Mr. McBrides deposition, we find that are potentially dozens of
emails between Mr. McBride and Microsoft which have not been produced
despite having been specifically requested. So after his deposition,
we write a letter to counsel and we say, we want those documents."
On pages 57 and 58 of the transcript there is this conversation between
Magistrate Brook Wells, presiding, and one of the SCO lawyers, Ted
Normand:
"THE COURT: But do you dispute what was stated during Mr. McBride's
deposition that there were identified a number of e-mails that referred
to Linux but didn't exist in his file?"
"MR NORMAND: I don't dispute that."
On page 60 of the transcript there is this conversation between
Magistrate Brook Wells, presiding, and one of the SCO lawyers, Ted
Normand. In this statement IBM is the "they" whom THE COURT refers to:
"THE COURT: -- it's been stated once again that the reasonable search
has been conducted, and they produced what is there. There's also
indication that you have undertaken a reasonable search that may have
come up a little short in some respects that wasn't discovered until
Mr. McBride was deposed."
Based on this court transcript I urge the SEC to obtain search warrants
to search both SCO and Microsoft for emails as evidence that the two
companies joined in a conspiracy to attack Linux with barratry.
G. In the case of z4 v. Microsoft U.S. District Judge Leonard Davis has
found that Microsoft was guilty of litigation misconduct.
"The court then went through a laundry list of examples of Microsoft's
litigation misconduct that formed the basis for the finding of an
exceptional case as well as a partial basis for the enhanced
willfulness damages."
"The Moncau email. It wasn't until the Sunday one-day before trial that
z4 was finally a able to depose Microsoft's witness Moncau, and during
that deposition Moncau revealed information about an important email
that had been sent to two other Microsoft witnesses discussing critical
information regarding operation of Microsoft's product. That email had
never been produced even though Moncau testified that he had provided
all his documents to Microsoft's counsel over one year before the
deposition."
"Nevertheless, the email had never been produced by Microsoft during
discovery despite the fact that it was between three Microsoft
employees referenced in the email, all of whom allegedly gave all of
their relevant documents to Microsoft's counsel for production. Making
matters even worse, Defendants admit they were aware of the Moncau
email several hours before Moncau's deposition, but still withheld it
from z4 until z4 found out about it during questioning during the
deposition. This raises a serious question as to whether the email
would have ever seen the light of day, had z4 not uncovered it during
Moncau's deposition the day before trial."
"At trial, the Court indicated to the Jury that Microsoft had
improperly withheld the communication."
"The Hughes Database. Microsoft attempted to use a summary chart at
trial based on an underlying database. In his deposition, however,
Hughes, the chart's creator, testified that the database did not
exist. One week after the deposition, Microsoft did, in fact, produce
the data stored in file on a CD labeled “Source Code,” but z4 never
found the database and, even after z4 asked, Microsoft never corrected
Hughes original testimony or informed z4 of the database."
"It also turned out that the summary was an inaccurate representation
of the database and that Microsoft had not accurately disclosed the
method used to create the summary chart."
"The Court determined that Microsoft had attempted to mislead z4, the
Court, and the jury and excluded Hughes from testifying with regard to
the database and his summary chart."
"Voluminous Exhibit Tactic. Microsoft marked over 3,000 exhibits for
trial, but only admitted 107 of these."
"The Court concludes that Defendants attempted to bury the relevant 107
exhibits admitted at trial in its voluminous 3,449 marked exhibits in
the hope that they could conceal their trial evidence in a massive pile
of decoys. This type of trial tactic is not only unfair to z4, but
creates unnecessary work on the Court staff and is confusing and
potentially misleading to the jury."
"Etc."
"Finally, the Court is greatly disturbed by the repeated instances
where Defendants actions go beyond what can be dismissed as a mere
appearance of impropriety and collectively appear to represent a
pattern which is of disappointment to the Court and a disservice to
legitimate advocacy. The repeated examples, some of which are not even
mentioned here, of what can be described as nothing less than
misleading on the part of Defendants, justify a conclusion that
Defendants committed litigation misconduct. This conduct, coupled
with the fact that Microsoft was found to have willfully infringed the
patents-in-suit results in this case being deemed exceptional.
Accordingly, the Court awards z4 reasonable attorneys' fees and
expenses, excluding expenses related to expert witnesses."
http://www.patentlyo.com/patent/2006/08/z4_v_microsoft_.html
'The defendants marked 3,449 exhibits, but only admitted 107 of them at
trial. "The Court concludes that Defendants attempted to bury the
relevant 107 exhibits ... in a massive pile of decoys," Davis wrote.'
'He cited several examples in which the defendants failed to fully and
promptly disclose evidence, calling one instance "an intentional
attempt by Defendants to mislead z4 and this Court."'
'In sum, Davis wrote that the court was "greatly disturbed by the
repeated instances where Defendants actions go beyond what can be
dismissed as a mere appearance of impropriety and collectively appear
to represent a pattern which is of disappointment to the Court and a
disservice to legitimate advocacy."
http://seattletimes.nwsource.com/html/businesstechnology/2003216032_msftpatent22.html
14. Paul Allen, Microsoft, and BayStar have illegally invested in Burst.com
based on insider knowledge.
"Illegal insider trading refers generally to buying or selling a security,
in breach of a fiduciary duty or other relationship of trust and
confidence, while in possession of material, nonpublic information about
the security. Insider trading violations may also include "tipping" such
information, securities trading by the person "tipped," and securities
trading by those who misappropriate such information."
http://www.sec.gov/answers/insider.htm
A. Burst.com is a company which creates and sells computer software which
processes and plays audio and video files.
http://www.burst.com/new/home.htm
Burst.com filed a civil lawsuit against Microsoft. Soon Burst.com v
Microsoft became the entire business prospects for Burst.com.
"Chairman & CEO Richard Lang today announced that Burst.com has filed a
lawsuit accusing software giant Microsoft Corporation of violations of
the Patent Act, Sherman Act Sections 1 & 2, California Cartwright Act
(anti-trust), California Business & Professions Code Section 17200
(unfair acts or practices), the California Trade Secrets Act and for
breach of contract."
http://www.burst.com/new/newsevents/pressrelease001.htm
B. On March 11, 2005 the case was been settled with Microsoft agreeing to
pay Burst.com $60 million.
http://news.yahoo.com/news?tmpl=story&u=/nm/20050316/wr_nm/tech_microsoft_burst_dc
C. Paul Allen, the second largest Microsoft shareholder, and Microsoft are
large investors in BayStar:
http://www.wired.com/news/business/0,1367,62544,00.html?tw=wn_tophead_2
Paul Allen makes most of his investments through Vulcan Capital:
http://capital.vulcan.com/
Since 1995 Vulcan Ventures has invested in 18 BayStar PIPE deals and
Microsoft has invested in 8.
http://www.baystarcapital.com/public/pdf/BayStar%20White%20Paper%20October%202002.pdf
D. Here are the BayStar portfolio pages listing Burst.com as an investment.
http://www.baystarcapital.com/public/portfolio_public_left.html
http://www.baystarcapital.com/public/portfolio_hw_sw_left.html
E. Therefore Microsoft and Paul Allen invested in Burst.com through BayStar
using insider knowledge that that Burst.com's lawsuit against Microsoft
would be settled in Burst.com's favor.
------------------------------------ Jim Allchin: Group Vice President of Platforms Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 U.S.A. ------------------------------------ Paul Allen: Chairman of the Board of Directors Vulcan Capital 505 Fifth Avenue South Suite 900 Seattle, Washington 98104 U.S.A. ------------------------------------ Mike Anderer: Mike Anderer, CTO Realm Systems 9350 South 150 East, 9th Floor Sandy, Utah 84107 U.S.A. ------------------------------------ Steve Ballmer: Chief Executive Officer Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 U.S.A. ------------------------------------ BayStar: BayStar Capital LP 50 California Street San Francisco, California 94111 U.S.A. ------------------------------------ Baystar Capital II, L.P. Baystar Capital II, L.P. 53 Forest Avenue, 2nd Floor Old Greenwich, CT 06870 U.S.A. ------------------------------------ BayStar Capital Management: BayStar Capital Management, LLC 80 East Sir Francis Drake Boulevard, Suite 2B Larkspur, California 94939 U.S.A. ------------------------------------ Boies, Schiller, and Flexner: Boies Schiller & Flexner 570 Lexington Avenue New York, New York 10022 U.S.A. Boies Schiller & Flexner LLP 100 SE 2nd St Miami, Florida 33131 U.S.A. ------------------------------------ Canopy: The Canopy Group, Inc. 333 South 520 West, Suite 300 Lindon, Utah 84042 ------------------------------------ Brent Christensen: Vice President-Legal and Corporate Counsel The Canopy Group, Inc. 333 South 520 West, Suite 300 Lindon, Utah 84042 ------------------------------------ Steven Derby: General Partner of Bay East, L.P. 53 Forest Avenue, 2nd floor Old Greenwich, Connecticutt 06870 U.S.A. ------------------------------------ Bill Gates: Chairman and Chief Software Architect Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 U.S.A. ------------------------------------ Lawrence Goldfarb: Managing Member of the General Partner BayStar Capital Management, LLC 80 East Sir Francis Drake Boulevard, Suite 2 Larkspur, California 94939 U.S.A. ------------------------------------ Jeff F Hunsaker: Senior Vice President and General Manager, UNIX Division 355 S 520 W, Suite 100 Lindon, Utah 84042 U.S.A. ------------------------------------ Steven M. Lamar: President, SLS International 3119 South Scenic Avenue Suite A Springfield, Missouri 65807 U.S.A. ------------------------------------ Microsoft: Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 U.S.A ------------------------------------ Darcy Mott: Vice President, Treasurer and Chief Financial Officer The Canopy Group, Inc. 333 South 520 West, Suite 300 Lindon, Utah 84042 ------------------------------------ Thomas P. Raimondi jr: member of the SCO Board of Directors 1801 S. Federal Highway, Suite 100 Delrae Beach, Florida 33483 U.S.A. ------------------------------------ Royal Bank: Royal Bank of Canada 200 Bay Street Toronto, Ontario M5J 2J5 Canada ------------------------------------ S2: S2 Strategic Consulting 56 East Broadway Salt Lake City, Utah 84111 U.S.A. (last known address) ------------------------------------ SCO: The SCO Group, Inc. 355 South 520 West Lindon, Utah 84042 U.S.A. ------------------------------------ Blake Stowell: Director of Public Relations The SCO Group, Inc. 355 South 520 West Lindon, Utah 84042 U.S.A. ------------------------------------ Vulcan Capital: Vulcan Capital 505 Fifth Avenue South Suite 900 Seattle, Washington 98104 U.S.A. ------------------------------------ Ralph Yarro: Chief Executive Officer The Canopy Group, Inc. 333 South 520 West, Suite 300 Lindon, Utah 84042 ------------------------------------ Bert Young: Chief Financial Officer The SCO Group, Inc. 355 South 520 West Lindon, Utah 84042 U.S.A. ------------------------------------ Sincerely, Steve Stites 2933 Marshall Street Falls Church, Virginia 22042 U.S.A.