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Methinks He Doth Protest Too Much
Friday, August 15 2003 @ 07:54 AM EDT

Or else he doth need to get his story straight.

Bloomberg News has an article, appearing in The Salt Lake Tribune, reporting that Darl McBride says that SCO's CFO submitted a sales plan in January "months before legal action was contemplated", presumably as proof that there is no connection between the stock sales and the lawsuit:

"Chief Financial Officer Robert Bench began the selling by SCO insiders, four days after SCO filed the suit against IBM. Bench is selling to help pay a $150,000 tax bill, McBride said. Under the Sarbanes-Oxley law, companies are no longer able to loan executives money to pay taxes or other expenses.

"Bench submitted a sale plan in January, months before any legal action against IBM was contemplated, McBride said. His agreement called for the sales to begin on March 8. He planned to sell 5,000 shares a month for the next 12 months, according to the plan."

Now, I'm no stock expert, but as for SCO not "contemplating" any legal action in January, here are some news stories from January of 2003 that I believe indicate that they were contemplating legal action in that month. All emphasis added by me.

It was on January 10 that the story first broke, in an article entitled, "SCO Threatens to Press IP Claims on Linux", by Maureen O'Gara:

"Informed sources, who would only talk on the guarantee of anonymity, say SCO has been proposing to charge users $96 per CPU for a so-called one-time System 5 for Linux software license to protect their systems from SCO-enforced patent issues if they ante up as soon as demand is made. . . .

"Sources say the scheme, which pretty much sounds like a protection racket - we won't sue if you pay -- isn't engraved in stone but an undated weeks-old draft SCO press release that details the plan and was read to us has been quietly making the rounds. At press time, we got word that a major player, believed to be IBM, thought it had dissuaded SCO from going through with the idea.

"A usually reliable source swears a SCO executive told him that SCO has hired the redoubtable David Boies, who prosecuted the Microsoft antitrust case for the Justice Department, to press infringement claims not against users but against the other Linux distributions."

If IBM, or whoever it was, was having discussions with them at that time, they are in a position presumably to testify as to the content of those discussions and as to the truthfulness of McBride's assertion that they were not contemplating legal action until "months" after January.

EWeek mentioned the January date too, in a story published later:

"The company in January hired high-profile attorney David Boies and his law firm to investigate whether Windows, Mac OS X, Linux and versions of BSD infringed on the Unix intellectual property it owned."

They hired an attorney regarding infringement of IP, but they were not contemplating litigation at all? Here is another:

"Rumors escaping the Lindon, Utah-based company as early as mid-January had suggested the company may be gearing up to sue one or more of its competing Linux distributors, such as Red Hat, in the near future. The speculation intensified when SCOsource, the intellectual property-licensing wing of the company, was announced during LinuxWorld in late January. In part, that announcement acknowledge the retaining of star attorney David Boies by SCOsource for research and protection of SCO's patents,' providing many observers of an ominous feeling about what SCO was up to."

Stephen Shankland, in an article entitled "SCO fees may hit some Linux users", wrote this on January 14:

"The company, which is seeking untapped revenue from customers who migrated from SCO Unix to Linux but are still using SCO Unix software components, plans to detail its efforts in the coming weeks or months. SCO Chief Executive Darl McBride created an organization last fall 'to formalize the licensing of our intellectual property,' according to a company presentation seen by and according to sources close to SCO.

"'SCO is concerned about violations of our software license copyrights. SCO pays royalties on software, and we're asking companies/customers to do the same,' according to the October presentation. . . .

"Chris Sontag, hired in October as senior vice president of SCO's Operating Systems division, leads the intellectual property organization, sources said. Earlier in his career, Sontag led marketing and product development for Novell, a once-powerful operating system seller with ties to SCO. . . .

"'Our Unix IP is a significant asset. And for several months, we have been holding internal discussions, exploring a wide range of possible strategies concerning this asset,' the company said in a statement Monday. SCO hasn't decided how exactly to collect more Unix revenue, the company added. . . ."

Here's their press release back in January, on the 22nd:

"The SCO(R) Group (SCO) (Nasdaq: SCOX), a leading provider of Linux and UNIX business software solutions, today announced that it has created a new business division to manage the licensing of its UNIX intellectual property. . . .

"Appointment of Boies, Schiller and Flexner

"As part of SCO's plans to protect its intellectual property, the company has retained David Boies of the law firm Boies, Schiller and Flexner for research and protection of SCO's patents, copyrights and other intellectual property."

On January 30, reported an interview with a SCO spokesman:

"Rumors have been circulating for a few weeks: SCO, it is said, has hired a fancy law firm and will be pursuing intellectual property claims against Linux users and distributors. . . .

"What will SCO do if it finds something? As might be expected, the company is not willing to say much: 'If we found unlicensed use of our intellectual property in a product like Linux, any action we would take would have to be based on the scope, source and impact of the violation. We do not feel we can rule out any particular response without impairing our fiduciary responsibility to our stockholders to protect their property. Certainly our first choice in helping to resolve this issue would not to be heavy handed in our response.'"

On January 23, 2003, Internet News had a "Are Linux Users Infringing on SCO's Property?":

"'Anybody that does not have intellectual property issues related to SCO can sleep well at night, but for anyone violating our IP we are going to be more aggressive enforcing our rights than we have in the past,' Chris Sontag, SCO senior vice president for operating systems, told . . . .

"Still, the move had been hinted at earlier, prompting some observers of the Linux scene to wonder whether SCO wasn't simply fishing for financial settlements from companies looking to avoid a lawsuit. . . .

"SCO's chief executive, McBride, has played it somewhat coy, acknowledging that Boies was hired (Boies is known for taking on Microsoft on behalf of the Justice Department in its antitrust case, and for defending Napster) but telling the media only that he was 'not prepared to answer' what course of action the company was going to be taking."

Not answering is not the same as not contemplating. In March, Peter Galli wrote in eWeek that discussions had been going on with SCO and IBM since early December. But in January they still were not "contemplating" legal action? I don't think that word means what he thinks it means. Here's what McBride said back then:

"McBride said the bottom line was that SCO owned the source code to Unix and the right to that operating system. IBM had taken AIX and made it available to the Linux community in an unlawful way.

"'IBM has been happily giving part of the AIX code away to the Linux community, but the problem is that they don't own the AIX code,' he said. 'And so it's a huge problem for us. We have been talking to IBM in this regard since early December and have reached an impasse. This was thus the only way forward for us.' . . .

"While McBride said SCO expects much of the $10 million in licensing revenue to be raised amicably, it was willing to litigate in order to enforce its IP and other rights."

When they announced the establishement of SCOsource, they said this, on January 22:

"'The most substantial intellectual property in UNIX comes from SCO,' said Chris Sontag, Senior Vice President for Operating Systems and SCOsource, The SCO Group. 'While Linux is an Open Source product, it shares philosophy, architecture and APIs with UNIX. Starting today, SCO's libraries will be available to third-party application developers, OS vendors, hardware providers, services vendors, and end-users. SCO will help customers legitimately combine Linux and UNIX technology to run thousands of UNIX applications. SCOsource plans to create other new licensing programs to make our rich inventory of UNIX System technology available to the market.'

"As part of SCO's plans to protect its intellectual property, the company has retained David Boies of the law firm Boies, Schiller and Flexner for research and protection of SCO's patents, copyrights and other intellectual property."

Now, it's possible that Bloomberg News misquoted McBride, and he didn't say that Bench filed his plan in January "months before" they "contemplated" legal action. In that case, it brings us right back to the question of the timing of all this. But if the quotation is accurate, the assertion doesn't appear to match the facts. I believe there is a word for that. The real question in my own mind is one nobody seems to be asking, namely why did SCO decide to change its policy and pay in stock when it did? SCO's comments on all this can be read here but it leaves questions in my mind still.

Today's 3rd-Quarter Financials

Speaking of changes, there was a change of procedure in today's teleconference. When SCO announced its first-quarter results on Feb. 26, it publicly invited anyone to listen in live by simply calling in. The number was listed on their web site. When it announced its second-quarter earnings, the procedure was the same. But today, in contrast, if you wished to participate, you first had to provide an email address. There was no number listed publicly. Alternatively, you could listen to a webcast, if you had certain proprietary software. Whatever could have made them make this change if they are so upbeat about their finances? Whatever the motive, the result has to be the capability to select the audience, I would think, and screen out naysayers. I don't know if SCO used that capability, because I didn't attend, but I am simply recording that they changed their procedure.

[ Update: SCO's press release regarding insider transactions:

The SCO Group Comments on Insider Transactions

LINDON, Utah, Aug 14, 2003 -- The SCO Group, Inc. (Nasdaq: SCOX) encourages its directors and executive officers to sell the stock held by them through plans designed to qualify for the protections provided by Rule 10b5-1 under the Securities Exchange Act of 1934.

The 10b5-1 plans provide for future sales of stock, at predetermined times and in amounts and under conditions specified in the plans, without subsequent instructions from the participants. These plans have been adopted by the following individuals: Robert Bench, CFO; Jeff Hunsaker, Sr. VP Marketing; Reg Broughton, Sr. VP International Sales; and Michael Olson, VP Finance/Controller. These plans have been implemented primarily for the purpose of providing liquidity to the participants to meet sizable personal tax liabilities resulting from the vesting of restricted stock awards.

During the three months ended July 31, 2003, individuals selling under approved 10b5-1 plans sold 88,000 shares of the Company's common stock. Two other executive officers sold 29,616 shares during the same three-month period in Company approved open trading windows. For the upcoming three-month period to end on October 31, 2003, the above-referenced executive officers may sell up to 141,000 shares of the Company's common stock under current 10b5-1 plans if the conditions of the various plans are met. No other directors or executive officers have implemented a 10b5-1 trading plan to sell shares of the Company's stock during the next three months.

Our directors and executive officers beneficially hold approximately 6,005,000 shares and options to acquire an additional 2,016,000 shares.

End update.]

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