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BayStar, Bert Young, and marchFIRST
Monday, April 26 2004 @ 11:44 AM EDT

I told you I doubted that SCO was surprised by the BayStar letter, despite all the articles saying they were, quoting Blake Stowell saying they were stunned and in the dark as to why BayStar had sent them the letter. Now we have confirmation from BayStar:

"Meanwhile, BayStar's spokesperson said the company informed SCO of concerns both verbally and in writing on 'numerous occasions'. 'This is not something that has been communicated recently,' he said."

The article also quotes BayStar as saying, when asked if they would go to court, that they are looking at "all necessary and potential" options against SCO:

"'We are committed to taking all appropriate steps necessary for our investors,' the spokesperson said, adding this the first time, out of more than 100 investments, that BayStar has actually sought its money back."

Just as I was skeptical of SCO's story, I am skeptical of BayStar's also. I have been wondering if their decision might be an indication that they are not happy with the Bert Young appointment, in addition to other possible reasons. What started me thinking is some research into Mr. Young's previous employment history.

In the press release announcing Bert Young as the new CFO, SCO seemed a little vague about Mr. Young's prior work history, mentioning that he had worked at "several other companies", but not listing them all, which seemed unusual. The way they phrased it caught my attention:

"Young brings to SCO a seasoned background in executive-level management responsibilities from a variety of information technology companies including worldwide finance, operations, mergers and acquisitions expertise.

"Previous to SCO, Young was the Vice President and Chief Financial Officer for LANDesk Software, where he was accountable for all financial management and reporting to company stockholders. He has also served as CFO for several other companies including Talk2 Technology, Inc. and Whittman-Hart. He was also the CIO for Chicago-based Waste Management, Inc."

That naturally made us all curious to fill in the blanks. We have succeeded, I believe, in discovering why not all the companies were listed. This was a group effort -- I have been deluged with email.

First, to demonstrate that we are talking about the same Bert Young, here is a snip from Mr. Young's bio when he was CFO of LANDesk Software, Inc. [1] You'll note that his background includes a mention of his stint at Whittman-Hart, just as the SCO press release does, but this bio adds a significant detail that SCO failed to mention, that Whittman-Hart after a merger changed its name to marchFIRST:

"Most recently, Young was CFO for Talk2 Technology, Inc., two fast-growing technology start-up companies where Young was responsible for, among other things, turning venture capital into positive cash flow, managing steep growth curves and satisfying auditors. Prior to that, Young was CFO for Whittman-Hart, where he oversaw the $7 billion merger between Whitman-Hart and USWeb/CKS that led to the formation of marchFIRST, a company with over 9,000 employees in 70 offices in 14 different countries. Young directed the integration of the two companies' financial and accounting systems.

"Young has served as CIO for Chicago-based Waste Management, Inc., and spent three years in London as senior director of information systems for Waste Management International."

Perhaps it will be news to you there were some significant financial issues at marchFIRST, which went bankrupt, and which have resulted in lawsuits with Mr. Young named as one of the defendants, charged with corporate waste and breach of fiduciary duty, among other things. The lawsuits are ongoing. The most recent event was a hearing this month. eWeek mentioned marchFIRST's unfortunate bankruptcy:

"Prior to that, Young was CFO for Whittman-Hart, an application service provider, where he oversaw the $7 billion merger between Whitman-Hart and USWeb/CKS that led to the formation of MarchFirst, a company with more than 9,000 employees in 70 offices in 14 countries. Young directed the integration of the two companies' financial and accounting systems in 2000. After a high-flying start that saw MarchFirst's stock zoom to a high of $81.13, the company's stock plummeted in the dot-com crash and it filed for Chapter 11 bankruptcy on April 12, 2001. MarchFirst was unable to set itself right and never emerged from bankruptcy."

Not only did marchFIRST never set itself right, the trustee ended up suing Mr. Young, along with several other defendants, for corporate waste and breach of fiduciary duty. You can read the complaints and the answers:

  • Complaint, Andrew J. Maxwell, Chapter 7 Trustee for the bankruptcy estate of Debtors, vs. Robert F. Bernard, Robert Clarkson, Edward F. Szofer, Bert B. Young, Paul D. Carbery, Mark Kvamme, Joseph Marengi, W. Barry Moore, David Storch and John R. Torell, III, Case No. 01-24742, Adversary No. 02A00194, Chapter 7, United States Bankruptcy Court, Northern District of Illinois, Eastern Division, Filed Feb. 26, 2002
  • Answer, Filed March 31, 2002
  • Complaint to Avoid Fraudulent Transfer3 and for Declaratory Judgment, Andrew J. Maxwell, Chapter 7 Trustee for the bankruptcy estate of Debtors, v. Robert F. Bernard, Robert Clarkson, Edward F. Szofer and Bert B. Young, Complaint to Avoid Fraudulent Transfers and For Declaratory Judgment, Case No. 01-24742, Adversary No. 03A01412, Chapter 7, United States Bankruptcy Court, Northern District of Illinois, Eastern Division, Filed April 11, 2003
  • Answer, Filed June 12, 2003

The overview is presented in the Introduction section of the 2002 Complaint:

"Management also engaged in a variety of conduct designed to create the impression that marchFIRST was enjoying success in the marketplace when it was really in deep financial trouble. The misimpressions were fostered by inappropriate venture investments, improper income recognition (abuses of 'roundtripping'), overhiring, excessive real estate spending, and a variety of other corporate waste. . . . . This facade of success came at the cost of wasting untold millions of dollars by building an infrastructure for growth that did not exist at marchFIRST. Those abuses continued and accelerated while marchFIRST was in the vicinity of insolvency. Management and the Board of Directors of marchFIRST recklessly, intentionally and knowingly breached their duties to the company and its creditors."

At the heart of the 2003 Complaint to Avoid Fraudulent Transfers is the charge that marchFIRST and Young and another defendant signed mutual releases, attached to the Complaint as Exhibit A, which the Trustee alleges were entered into with an intent to "hinder, delay and defraud" the creditors and which the defendants raised as a defense in response to the first Complaint alleging breaches of their fiduciary duty. The complaint also mentions that the Agreement accelerated the vesting of Young's stock options and allowed the options to remain exercisable for 6 months following Young's leaving the company and that the Agreement was entered into at a time when marchFIRST was already insolvent:

"After the Insider Directors had caused marchFIRST's financial decline through their breaches of their fiduciary duties, they colluded to attempt to deprive marchFIRST of legal recourse against them. Upon leaving their employment with marchFIRST, Defendants Clarkson and Young entered into Separation Agreements with marchFIRST, in which marchFIRST purported to release both Clarkson and Young from causes of action arising out of their employment with marchFIRST....

"On information and belief, the Agreements with Young and Clarkson were made:

(a) with actual intent to hinder, delay or defraud its creditors; or
(b) without receiving a reasonably equivalent value in exchange for the Agreements at a time when:
(1) marchFIRST was insolvent, or became insolvent as a result of the Agreements; or
(2) marchFIRST was engaged or was about to engage in a business or a transaction for which its remaining assets were an unreasonably small capital in relation to such business or transaction; or
(3) marchFIRST intended to incur or believed that it would incur debts beyond its ability to pay as they came due."

The complaint alleges that Young and the two others defendants "breached their fiduciary duties of loyaty, which as officers and directors they owed to marchFIRST, by entering into the Young and Clarkson Agreements":

"33. The highly unfavorable terms of the Separation Agreement injured marchFIRST. marchFIRST gained only a release of claims, none of which actually existed, by Young and Clarkson, while in return provided them with vesting stock options, and release of liability for their numerous and egregious breaches of fiduciary duties. Such a transaction was not fair to marchFIRST, and could only have resulted from Insider Directors' bad faith.

"34. The Separation Agreements served only the personal needs of the Insider Directors, not those of marchFIRST."

There is a lot at stake here. According to paragraph 27 of the complaint, the agreements, if enforced, "would constitute a release of claims against Clarkson and Young worth at least tens of millions of dollars, in exchange for which marchFIRST rreceived from Clarkson and Young only a release of Clarkson and Young's claim against marchFIRST, which claims have no value."

marchFIRST was a high-flying dot com, that had many well-known companies as customers, such as Apple and Saks Fifth Avenue, and IBM, Novell (who reportedly lost millions), and Microsoft (who loaned them money) as partners. Many reports at the time of its demise viewed it as a victim of the bubble bursting. In fact, it made it into the Museum of E-Failure, as an example of that era's dot com busts. It seems to have been the VC guys, Francisco Partners, who pulled the plug, forcing management changes and then selling pieces of the company in an attempt to protect their investment. But after the Trustee filed his complaint, the news coverage began to change:

"The filing charges Bernard and the other company officials with 11 counts of breach of fiduciary duty.

"According to one charge, the company engaged in a financial practice known as 'roundtripping,' where MarchFirst invested in a start-up company only to have the firm hand the money back for MarchFirst's consulting services.

"The MarchFirst executives created a new company, named Bluevector Strategic Partners LLC, to use as a 'conduit whereby MarchFirst could use its own funds to improperly book revenue,' according to the filing.

"Bernard and other company officials authorized Bluevector to invest approximately $19.8 million from MarchFirst in 14 companies that used MarchFirst services.

"'In each and every instance, BVSP invested funds in customers of MarchFirst that simultaneously repaid the money back to MarchFirst for work MarchFirst was to perform for the customer in the future,' the filing alleged.

"The gambit, Maxwell concluded, gave investors and analysts a false impression of the company's financial health.

The 2002 Complaint talks about Bluevector and says not only was it a bad investment for marchFIRST, the existence of Bluevector wasn't mentioned in the company's SEC filing:

"Defendants Bernard, Young and Shelow, acting in their capacity as officers caused marchFIRST not to disclose to shareholders of the company in the company's Form 10-Q filed for the first quarter of 2000, the existence of Bluevector or marchFIRST's obligation to contribute approximately $87 million to Bluevector. "

The Complaint also alleges that the deal was over and done without prior Board approval. There were even in the media allegations of skimming, hiding assets, puffing the books. Employees of the company blogged and commented on the Internet, and the common thread was that they had nothing meaningful to do there, that they were "on the beach". The 2002 Complaint alleges that the company deliberately overhired to create a false impression of growth and profitability. Then it charges that just before filing for bankruptcy, the company "authorized raises and retention bonuses to management employees and to themselves." By the time this occurred, Young had left the company. However, the complaint does allege that he was involved in overinvesting in real estate to build a huge corporate headquarters to "maintain the illusion of marchFIRST's growth and success." And if you read page 38 - 46 and 48, it lists some other allegations regarding his actions, including allegations of dissemination of false and inaccurate information.

When the company went bankrupt, it was a Chapter 11, but then it was converted to a 7, when someone reportedly threatened to sue them if they kept selling off assets, an issue also mentioned in the Complaint:

"ANB reportedly threatened marchFIRST's officers and directors with personal liability if the company continued to sell off its assets. In addition, the company's CFO Michael Salvati resigned his position last week. MarchFIRST said these events led the company to convert to Chapter 7 and begin to liquidate the remaining assets."

Microsoft and Credit Suisse First Boston were the two largest creditors. Just before the company went down in flames, Credit Suisse made this announcement reported in, of course, Forbes:

"MarchFirst, the embattled Internet consulting firm, shot up 60% in heavy trading this afternoon after Credit Suisse First Boston reinstated its coverage of the stock with a 'buy' rating.

"Chicago-based MarchFirst (nasdaq: MRCH - news - people) was trading at $3 early this afternoon, after closing at $1.88 on Jan. 19. The stock has been a prominent victim of the dot-com collapse, falling precipitously from its 52-week high of $54.

"Today's vote of confidence from Credit Suisse First Boston analyst Mark Wolfenberger was the first bit of positive news the company has received in months. Just two weeks ago, the stock took another hit after the company announced a second round of layoffs. But Wolfenberger says that MarchFirst's turnaround plan appears to be on track, which means the stock is undervalued at its current bargain-basement price. He set a 6 to 12-month price target of $8."

Sound familiar?

The 2002 Complaint, paragraph 33 is of interest too, because it alleges that they company had a paragraph in its certificate of incorporation, the so-called "raincoat provision":

"As the surviving entity in the Merger, marchFIRST succeeded to the Whittman-Hart certificate of incorporation, which contains a provision adopted pursuant to Section 102(b)(7) of the Delaware General Corporation Law that modifies the standard of care members of the Board of Directors owed the company and its shareholders (sometimes called "raincoat provisions"). This amendment to the certificate of incorporation did not affect the duties owed by officers to the company and its shareholders; and did not affect the duties and responsibilities that both officers and directors owe to creditors of the company. As will be described in this Complaint, certain members of the marchFIRST Board of Directors and certain officers failed to meet the obligations they owed to marchFIRST and its creditors."

This Complaint, in paragraph 53, says there was a class action by shareholders filed against marchFIRST, in fact a number of them (9 at least), consolidated into Sutton, et a., v. Bernard, et al., No.00 C 6676, pending in the United States District Court for the Northern District of Illinois, asserting several claims including securities law fraud, which, upon investigation, I find has been stayed pending the bankruptcy action being finished. Then it picks up again. Here is what that case charges:

"According to a press release, The complaint alleges that Defendants made a series of materially false and misleading statements in: press releases, statements to stock analysts, and SEC filings. The misrepresentations concerned: the Company's second quarter 2000 financial results; its improving business momentum, its ability to meet analyst expectations for third quarter performance, and the quality of its accounts receivables. As a result, marchFIRST's stock price was artificially inflated throughout the Class Period."

Young was Chief Financial Officer and Treasurer of marchFIRST for part of 2000. Prior to the merger of Whittman-Hart and USWeb, Young was Chief Financial Officer of Whittman-Hart. According to the first Complaint, the 2002 one, Young and the other defendants were alleged to have wasted corporate assets:

"69. The Defendant officers misused marchFIRST's assets to create and perpetrate this facade of success in a number of different ways, including but not limited to the following:

A. Embarking on a massive program of overhiring consultants to create an appearance of demand for marchFIRST services when in fact there was no work for such consultants and employees, so that employees and consultants were put "on the bench," i.e. instructed not to come to work (or to come to the office but remain idle) while remaining on the marchFIRST payroll;

B. Spending tens of millions of dollars for the development of grandiose corporate headquarters in downtown Chicago;

C. Entering into unnecessary lease commitments that had to do with projecting an image of growth rather than company need, even after marchFIRST was confronting a severe liquidity crisis; and

D. Leasing and operating a corporate jet.

70. Defendants' waste of corporate asets was so egregious and irrational that the decisions could not have been -- and in fact were not -- based on any defensible assessment of what was in the best interest of marchFIRST. . . .

78. Not only did management engage in a massive hiring campaign to create the illusion of corporate growth, Bernard, Szofer, Clarkson and Young failed to take action in a timely fashion to reduce its idle workforce, even though marchFIRST was operating at a negative cash flow. For example, for the nine months ending September 30, 2000, net cash provided by and used in operating activities was negative $79.8 million. . . .

113. Defendants Bernard, Szofer, Clarkson, Young and Shelow, in their capacities as officers of marchFIRST, breached their fiduciary duty of due care by failing to put into place adequate internal controls. The lack of even the most rudimentary internal controls exacerbated the waste of corporate assets and severely limited marchFIRST's ability to collect for those projects its workforce did perform.

114. Moreover, Bernard and Young disclosed to the public inaccurate information about the status of integration. For example, in the second quarter of 2000, Bernard and Young disclosed that marchFIRST had made "great strides" in completing the Whittman-Hart/USWeb integration, and that such integration would be virtually complete by the end of the third quarter of 2000. At the October 24, 2000, analyst conference call, Bernard represented that marchFIRST completed its integration.

I hasten to add that Mr. Young has denied all the charges, as you can see in the answers to the complaints, and we'll have to wait and see how it all plays out. Being accused isn't the same as being found guilty. But it is also true to say that charges like this aren't something you see under every bush, although these days it is sadly not unheard of.

The point of all this is just this: Microsoft knows this story. They were there. Hearing that Bert Young has been named the CFO of SCO may not be a thrill to them. We know there is a relationship between BayStar and Microsoft of some kind, so what Microsoft knows, no doubt BayStar knows. It seems conceivable that BayStar is worried about its investment. The Complaint is seeking both actual and punitive damages. SCO did not mention Mr. Young's history at marchFIRST in its press release, or the lawsuits, and it will be interesting to see if this information makes it into their SEC filings.

UPDATE: BayStar is quoted today in this EnterpriseLinuxIT article, when asked about Bert Young's appointment:

"Although voicing resistance to BayStar's recommendations, SCO did announce on April 21st that it had hired a new chief financial officer, Bert Young. Young was previously CFO at LANDesk Software. [BayStar spokesperson Bob] McGrath declined to comment on that change, noting only that 'I think our issues, broadly, are still there.'"

And SCO has also answered BayStar's complaint that it talks too much publicly:

"The company also rejected claims by BayStar that its statements to the press regarding its intellectual property claims have been too frequent or too grand.

"'SCO is a publicly traded company and as such, we have an obligation to our shareholders to disclose material events that take place. As a company, we will continue to disclose information as it becomes available and this will frequently be reported on through the media,' the statement continued. 'This includes information concerning our Unix business, our litigation and the intellectual property issues that currently face Linux. We will continue to conduct our litigation through the courts with the strong legal team that we have in place, while also continuing to disclose material information to our shareholders.'"

How very apt. And true. They do have an obligation to disclose material information as it becomes available.

1. Up until this morning at around 12:30 AM, it was available in Google cache, but it has now disappeared. I do have a saved local copy. The original page no longer exists.

Update: If you search for that page on, you will find, after clicking on all the links that it was on the day this article was published, April 26, 2004, that the page was taken down. Here's how it looked that same year, on February 17th, two months' prior to this information being published. Here's some info on Waste Management International, including a judge calling the company out for "a culture of fraud and dishonesty".

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