Investor outlines SCO-Microsoft link
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A former investor in the SCO Group has identified a Microsoft executive who, he said, worked to "backstop" a funding deal that ultimately helped SCO pursue its legal case against the Linux operating system.
The investor, BayStar Capital managing partner Lawrence Goldfarb, first called attention to Microsoft's involvement in BayStar's $50 million investment in the SCO Group more than two years ago.
The BayStar-arranged funding, which included $20 million from the venture fund and $30 million from the Royal Bank of Canada, was instrumental in SCO's expensive lawsuit against IBM, in which it alleges Big Blue moved proprietary Unix technology into open-source Linux against the terms of its Unix contract with SCO.
Now, in a sworn declaration described in an IBM court filing, Goldfarb said he discussed SCO funding arrangements with Richard Emerson, a Microsoft senior vice president. In 2000, Microsoft CEO Steve Ballmer named Emerson to lead the software giant's corporate development and strategy, putting him in charge of its mergers, acquisitions and partnerships.
"Mr. Emerson and I discussed a variety of investment structures wherein Microsoft would 'backstop', or guarantee in some way, BayStar's investment...Microsoft assured me that it would in some way guarantee BayStar's investment in SCO," Goldfarb said in the declaration.
The assertion indicates that at least one person at Microsoft apparently was working, at least indirectly, to support SCO's case against a mutual rival, the Linux operating system. SCO Chief Executive Darl McBride said the $50 million investment arranged by BayStar brought the company's legal "war chest" to $60 million.
A Microsoft representative didn't specifically deny the BayStar-Microsoft talks. However, the company said in a statement, "Microsoft has no financial relationship with BayStar and never agreed to guarantee any of BayStar's $50 million investment in SCO. The BayStar declaration confirms that no guarantee was ever provided."
Goldfarb's comments were disclosed over the weekend at the SCO-watcher legal Web site Groklaw.
Goldfarb's declaration indicates Microsoft was indeed willing to help SCO attack Linux, said Allonn Levy, litigation attorney with Hopkins & Carley, a San Jose, Calif.-based law firm.
The Goldfarb Declaration - Updated: MS Statement
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I now have the Larry Goldfarb Declaration, and now that I've had a chance to read it in full, what he says is actually a great deal more damaging, if established, than the part IBM highlighted in its Memorandum in Support of Its Motion for Summary Judgment on SCO's Interference Claims. According to the Declaration, Richard Emerson was not the only Microsoft employee Goldfarb was dealing with in connection with the BayStar investment in SCO. He mentions by name two others, from two other departments. He says, "I had discussions with Kenneth Lustig, Microsoft's managing director of intellectual property and Tivanka Ellawala, from Microsoft's corporate development department regarding the SCO deal." If true, that would seem to rule out Mr. Emerson being on some kind of rogue mission. You can see Mr. Lustig on this Directions on Microsoft chart of executives, showing him reporting to Marshall Phelps, who in turn is under Brad Smith, the Microsoft General Counsel and Secretary. Goldfarb recounts conversations with David Boies as well, and Goldfarb, then considering investing in SCO back in 2003, says Boies told him that he thought IBM was going to settle quickly. Obviously that didn't happen. Later, when Goldfarb asked to see the evidence against IBM, so his consultants could evaluate the strength of SCO's claims, he says that Boies said he'd provide it but he never did. Eventually Boies stopped taking Goldfarb's phone calls, the Declaration relates. I'm wondering now if Mr. Boies will end up a witness in this case, if IBM's motion is denied and SCO gets to proceed with its interference claims. I'd venture a guess that SCO wishes it had never accused IBM of interfering with SCO's business relationship with BayStar. But let's let Goldfarb tell his own story and I'll get the PDF up as soon as I can. This is just one of more than 500 exhibits that IBM has provided the court in support of its various motions for summary judgment. It's number 165. I'll have the exhibits list up as text shortly as well. Also, I thought you'd want to know that Ray Noorda died today, at 82, according to The Salt Lake Tribune. Frank Hayes at ComputerWorld has a more fitting tribute, with a link to the Canopy Group statement. Update: Todd Bishop at the Seattle Post Intelligencer has Microsoft's response. Here is their statement: Microsoft has no financial relationship with BayStar and never agreed to guarantee any of BayStar's $50 million investment in SCO. The BayStar declaration confirms that no guarantee was ever provided. Microsoft does have a deal with SCO that has been widely reported. We paid SCO for licensing rights to ensure IT interoperability for UNIX migration technology, currently in use in Microsoft Utilities for UNIX-based Applications. **********************************
SNELL & WILMER LLP CRAVATH, SWAINE & MOORE LLP Attorneys for Defendant/Counterclaim-Plaintiff
1. I, Lawrence R. Goldfarb, declare as follows: 1. This declaration is submitted in connection with the lawsuit entitled The SCO Group, Inc. v. International Business Machines Corporation, Civil No. 2:03CV-0294 DAK (D. Utah 2003). Unless stated otherwise, i make this declaration based upon personal knowledge. 2. I am one of the founders and managing members of BayStar Capital Management, LLC ("BayStar"). I have served as a managing member of BayStar since 1998. BayStar is the sole general partner of BayStar Capital II, L.P. (the "Fund"), an investment fund formed in 2001. 4. No one from IBM ever had any communications with me or, to my knowledge, anyone at BayStar relating to SCO. As I discuss below, BayStar terminated its relationship with SCO for multiple reasons. BayStar's decision to terminate its relationship with SCO had nothing whatsoever to do with any communications with or conduct of IBM. 5. In late 2003, the Fund and aligned investors invested a total of $50 million in SCO. I was one of the three managing members of BayStar who approved the investment, and I was intimately involved with all details of the transaction. 6. Sometime in 2003, I was approached by Richard Emerson (Microsoft's senior vice president for corporate development and stratedy) about investing in SCO, a company about which I knew little or nothing at the time. Mr. Emerson stated that Microsoft wished to promote SCO and its pending lawsuit about IBM and the Linux operating system. But Microsoft did not want to be seen as attacking IBM or Linux. For that reason, Microsoft wanted to further its interest through independent investors like BayStar. 7. I did some research on SCO, and had conversations with Mr. Emerson about it as well. In the course of my research about SCO, I became concerned that SCO might be merely a litigation company. As a result, Mr. Emerson and I discussed a variety of investment structures wherein Microsoft would "backstop," or guarantee in some way, BayStar's investment. In addition, I had discussions with Kenneth Lustig, Microsoft's managing director of intellectual property and Tivanka Ellawala, from Microsoft's corporate development department regarding the SCO deal. As part of these discussions, Microsoft assured me that it would in some way guarantee BayStar's investment in SCO. However, Microsoft would not agree to put anything in writing on this point. 8. The other managing members of BayStar and I met with Darl McBride of SCO and heard his pitch about SCO's business and SCO's lawsuit against IBM. We also discussed SCO's lawsuit with David Boies from SCO's outside law firm, Boies, Schiller & Flexner LLP. Mr. Boies informed me that he believed that IBM would settle the case fairly quickly. 9. As a result of Microsoft's and SCO's assurances, the other managing members of Bay Star and I voted unanimously to make the $50 million investment in SCO. the transaction was completed on October 16, 2003. 10. Not long after making the investment, I became very concerned about it. Among other things, it became clear to me that the BayStar investment was used primarily to pay David Boies' law firm. Beyond that, SCO's stock price declined, Microsoft stopped returning my phone calls and emails, and to the best of my knowledge, Mr. Emerson was fired from Microsoft. 11. I was also very concerned about SCO's high cash burn rate and whether its UNIX products were viable in the marketplace. 12. Thereafter, I had meetings with David Boies and asked him to provide me the evidence supporting SCO's case against IBM, so that my consultants could analyze the strength of the claims. Mr. Boies promised to provide the evidence but never did. Eventually Mr. Boies stopped returning my calls. 13. SECTION REDACTED. 14. Having received no satisfactory response from SCO, I determined that BayStar's obligations to its investors required the Fund to get out of this investment. I negotiated the terms of the deal to retire the investment on behalf of BayStar. SCO's outside law firm, negotiated the settlement on behalf of SCO, including the financial terms of the deal. 15. Ultimately, BayStar, on behalf of the Fund, agreed to sell its SCO Preferred Shares back to SCO for $13 million cash payments to BayStar and the issuance of shares of SCO common stock. 16. BayStar's decision to redeem its shares in SCO and retire its investment in SCO had nothing whatsoever to do with IBM or any representative of IBM. No one from IBM ever contacted me or anyhone else at BayStar about SCO, BayStar's investment in SCO, or anything else. Other than one investment that involved IBM years before BayStar's investment in SCO (and in connection with submitting this declaration), I have had no dealings with IBM or any of its representatives. 17. I declare under penalty of perjury that the foregoing is true and correct. Executed September 13, 2006.
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