The SCO scam

When I was a kid the big bad computer company on the block was IBM. They were the 800lb gorilla of the computer hardware and software market and had been implicated in all kinds of predatory and unfair business tactics worthy of the title of Evil-Doer #1 in the computer industry. Everybody loved to hate IBM. Later on the upstart Microsoft earned its title as the big bad computer company everyone loved to hate. Arguably they still have that title inspite of shrugging off the anti-trust charges leveled against them with few real tangible effects to your average consumer.

However right now it appears the heir apparent is the Santa Cruz Operation aka SCO. While not big, SCO has certainly been labeled as bad, and the free software community has them pegged as Evil Doer #1 right now. That's for daring to implicate Linux with copyright infringement, and embarking on a campaign of terror against all Linux users threatening them with law suits if they don't by a license from SCO. The ensuing $3 billion suit against IBM for allegedly introducing SCOs copyrighted code into the Linux kernal was clearly a pathetic money grab exercise, but inevitable. After all when you're the evil doer you're working for the evil empire and you've got to stoop to every cheap low down trick available, even if it is coloured sparks flying from your wizzened fingers.

Hence I wasn't very suprise when I read an article in Software Development magazine called "State of the Scam". In it the author points out that SCO's actions have all the characteristics of a pump and dump scam. I witnessed one of these before just after entering the dot com world, when Geoworks decided that a patent it owned covered the WAP protocol and browsers used to browse WML content. They then proceeded to send threatening letters to almost every web based company out there telling them they needed to buy a license for $20,000 and up to even serve WML content from their web sites. Although their claims were unfounded, and later challenged by other companies, they managed to extract large payments from some of the key mobile players of the time. For most it was simply not worth the effort to go to court over a few million dollars. The result was that the also-ran Geoworks who was once dwindling to penny-stock status on the stock market suddenly transformed over night into a company worth hundreds of millions with a stock price of over $50. Ultimately Geoworks' claims were shown to be groundless and they now trade at a fraction of a dollar.

So, as the article on SCO points out, it is not without interest that SCO has gone from a company with a stock price of $1 in February 2003, to $17 as of writing, and as high as $22.29. During that time the legal company representing SCO received $1 million in cash and 400,000 shares of SCO stock. During the time since the stock reached its low point SCO has issued an additional 300,000 shares at a par value of $0.001. In addition several SCO officers have sold large quantities of stock at market prices while receiving additional options to buy shares at $0.001.

Ironically SCO claims the insider trades were only made to "cover the tax costs of stock grants made to them". Hence one can deduce that the stock grants made were pretty damned lucrative. If you have to raise $500k and up to pay your taxes then clearly you've just been given a couple of million dollars or more pay off in no-risk restricted stock, presumably to ensure "loyalty". Such payments are typically required when you make a Section 83b Election to avoid being taxed on the full value of options as income when your restrictions expire. Instead you run away with your stock paying only the much lower capital gains tax, or even lower long term capital gains tax when you sell it.

In the mean time SCO made another payoff when they used their new stock issues to buy a company called Vultus which was funded by Novell Founder Ray Noorda's Canopy Group. The Canopy Group coincidentally funded a company Caldera which had also previously merged with SCO. By further coincidence Vultus was also based in the same building as SCO. No doubt this transaction was quite wonderfully beneficial to all concerned at Vultus and Canopy Group.

So behind the barrage of their fire and brimstone warnings against the Linux community, a bunch of SCO executives and investors are quiety making out like bandits. My prediction is that the SCO suit will quietly "go away" after IBM lawyers and the Linux community demonstrate their claims are largely frivilous. Then just after further stock dumping by SCO executives, their stock price will plunge back into the penny stock range, and SCO as a company will dwindle back into obscurity and infamy.