Investor outlines SCO-Microsoft link

Microsoft exec discussed ways to "guarantee" $50 million investment in SCO by BayStar Capital, a firm partner says.

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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.

"Although the declaration does not indicate any actual money was paid by Microsoft, it does suggest that the software behemoth was operating behind the scenes, employing its extensive industry contacts in an apparent effort to help SCO finance its lawsuits," Levy said. "Certainly, Microsoft has an obvious interest in promoting the lawsuits, since the lawsuits are seen as an effort to undermine the legitimacy of the Linux operating system."

After BayStar made the investment, Goldfarb said, "Microsoft stopped returning my phone calls and e-mails, and to the best of my knowledge, Mr. Emerson was fired from Microsoft."

Emerson couldn't immediately be located for comment. Microsoft confirmed he no longer works for the company but wouldn't give details of the circumstances of his departure.

BayStar's relationship with SCO has floundered. The investor wanted SCO to focus totally on litigation, while SCO insisted on continuing its Unix business. By mid-2004, the two companies had parted ways.

In his declaration, Goldfarb said that BayStar had sold its stake back to SCO because SCO's stock price was falling and because the company was rapidly spending its cash pile. He also indicated that Microsoft had cooled on its earlier offer of support.

SCO's case hasn't just hit IBM. The Lindon, Utah-based company also sued Linux user AutoZone, Unix licensee DaimlerChrysler, and is tangling with Novell, which claims that it never sold its Unix copyrights to SCO.

Graeme Wearden of ZDNet UK contributed to this report from London.