I am sending this complaint to the Securities Exchange Commission (enforcement@sec.gov) to describe the illegal actions being taken by BayStar Capital LP, Boies Schiller & Flexner, Microsoft Corporation, Royal Bank of Canada, and The SCO Group, Inc. These entities have committed numerous crimes centered around the recent activities of The SCO Group, Inc.
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.
A. SCO sells a computer operating system called System V which SCO sells
under the brand name of UnixWare.
http://www.caldera.com/products/unixware713/
UnixWare has a small share of the operating system market. That share
is has been steadily shrinking for several years because UnixWare 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 an army of
volunteers who donate their creativity for free.
http://www.linux.org/
SCO sued IBM for contributing operating system code allegedly owned by
SCO to the Linux operating system.
http://news.com.com/2100-1016-991464.html
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
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 AT&T v BSD,
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
So, the SCO claims to ownership of IBM operating system were deliberately
exaggerated even by the standards of SCO's current legal position and
were completely false by the standards of IBM's consistent legal
position. So far, the court has consistently upheld IBM's position.
C. 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
SCO claims ownership of Linux and 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
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
However 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.
D. A German court 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.
http://mozillaquest.com/Linux03/ScoSource-19-Injunction_Story01.html
http://www.groklaw.net/article.php?story=20040301025634926
E. 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
F. 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.
G. BSD is an operating system that was developed at the University of
California, Berkely 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 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 Berkely Software Development and
System V ownership is currently disputed between Novell and SCO.
There is a court sanctioned 1994 agreement between (now) BSD and Novell
deliniating what code is owned by each. Also the agreement states
that Novell or SCO can never again sue over the BSD code.
http://www.groklaw.net/article.php?story=20031128153414688
SCO claims ownership of BSD even though Novell 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
H. SCO claims ownership of all Unix operating systems.
http://radio.weblogs.com/0120124/2003/09/06.html
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.
I. Novell is the company from which SCO obtained ownership of 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
Here is the agreement between Novell and SCO
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"
SCO is suing Novell in an attempt to obtain clear title to Unix.
http://www.iht.com/articles/125939.html
SCO is deceiving the investing public by falsely claiming to have
purchased Unix in its entirety from Novell.
J. 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 code turned out to be BSD code that was legally
added into both System V and 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
By not providing information as to how much of System V is owned by BSD
SCO is misleading the general investing public about the value of the
System V asset.
K. 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.
L. 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
M. The SCOX stock price has risen spectactularly since SCO began claiming
exaggerated worth of their intellectual property.
http://bigcharts.com/custom/washingtontimes-com/interactivechart.asp?sid=&o_symb=djia&symb=scox&x=0&y=0&time=8&uf=0&compidx=aaaaa%3A0
N. SCO insiders have registered the following SCO stock sales with the Security
Exchange Commission during the period of March 6, 2003 through March 3, 2004.
SCO insider sales from March 6, 2003 through March 3, 2004
-------------------------------------------------------------
Date Name Shares Amount
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
------- -------------
Totals 246,698 $2,942,066.30
http://ir.sco.com/edgar.cfm
2. Microsoft has invested in SCO equity above the reporting threshold without
revealing their true identity.
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 customers 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.
Microsoft has legally purchased a license to use SCO technology for
somewhere between 10 million and 30 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
So Microsoft has openly and legally given SCO money for reasons that
Microsoft is unwilling to publicly reveal.
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 OS space."
http://trends.newsforge.com/trends/04/03/12/1731252.shtml
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.
http://www.groklaw.net/article.php?story=20040303182714835
Such lawsuits against SCO's existing customers are a strong incentive for
SCO's customers to stop doing business with SCO. This strategy of trying to
extort money from existing customers 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 Linux in line with the Microsoft strategy that Mike
Anderer announced.
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 markets Linux licenses as a way to avoid lawsuits.
http://www.thescogroup.com/scosource/linuxlicense.html
http://www.nwfusion.com/news/2003/0721sco.html
The SCO attempt to sell Linux licenses has all of the earmarks of an
extortion racket. 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 Linux in line with the Microsoft strategy that Mike
Anderer announced.
Microsoft has also 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 to hide the
fact that money invested in SCO originated from Microsoft is illegal money
laundering.
A. 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
B. The 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..
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 the 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 the Royal Bank's name but is
actually owned by the RoyalBank client then the client, and perhaps the
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 Security Exchange
Commission.
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."'
In any case, the Royal Bank statement is nonsense meant to hide who
really owns the SCO equity position.
C. 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
SCO has stated that the leaked email is genuine:
http://www.eweek.com/article2/0,1759,1542904,00.asp
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 warrent 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
"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
3. BayStar, Boies, Schiller, and Flexner, Microsoft, Royal Bank, and SCO
management 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 three parties have
negotiated an agreement dividing up the results of future SCO
equity sales among the three groups of investors.
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 the 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. If BayStar and/or Royal Bank are trustees for Microsoft who actually
owns a 17.5% interest in SCO then Microsoft is also guilty of insider dealing.
------------------------------------ BayStar: BayStar Capital LP 50 California Street San Francisco, California 94111 U.S.A. ------------------------------------ Boies, Schiller, and Flexner: Boies Schiller & Flexner 570 Lexington Avenue New York, New York 10022 U.S.A. ------------------------------------ Microsoft Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 USA ------------------------------------ Royal Bank: Royal Bank of Canada 200 Bay Street Toronto, Ontario M5J 2J5 Canada ------------------------------------ SCO: 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.