SCO Investor Changing the Deal

Kurt Wall writes "According to this story, recent SCO investor Royal Bank of Canada appears to be changing its tune. RBC, along with BayStar Capital, invested $50 million in SCO, but now has changed the deal to give it veto power over the payment of the 20% contingency fees SCO's IP lawyers will get. As to the wisdom of the investment itself, an RBC spokesman would only say that the 'investment in SCO is passive, made to hedge an economic exposure resulting from client transactions.' Such as the SCO case collapsing, perhaps?"

Comments

Hmm.. maybe from the recent court's judgment.

[junkymailbox]

Looks like the banks realize their "investment in SCO is passive, made to hedge an economic exposure resulting from client transactions." "The court gave SCO 30 days to provide IBM with information and source code to prove its allegations. SCO, the ruling stated, must give IBM "all source code and other material in Linux ... to which [SCO] has rights; and the nature of plaintiff's rights." Take a dump or get off the pot!

Hedge what exactly?

[Ed Avis]

'investment in SCO is passive, made to hedge an economic exposure resulting from client transactions.'

So RBC does business with Red Hat, and needs to hedge against them going bust when SCO wins? Or they are hedging short positions they already had in SCO because of selling call options or the like to clients?

It would make some sense if they said 'we have lots of Linux boxes, and we want to get cash if SCO wins to cover the licence fees'...

Pro Sco Slant?

[toadf00t]

Is it just me or does this article seem to have a Pro-Sco slant towards it?

SCO has admitted that its action is designed to shore up sagging sales by wringing revenue out of its rights to Unix, an older operating system from which Linux was derived.

Derived is used rather loosely here. To a casual looker, it might sound like SCO is in the right.

IBM scored a surprise legal victory in that court case when a judge ruled on Friday in favour of IBM in SCO's trade-secret violation lawsuit against the computing giant.

Whoa! :-) (emphasis on surprise)

SCO had been pressuring the courts to force IBM to reveal its Unix and Linux source code so SCO could prove that IBM was using stolen code. But the judge ruled that SCO would have to present its own Unix source code first and identify which software code had been stolen.

That does'nt make sense considering just about anyone can look at Linux source.

Good story. Financial community isn't seeing it.

[Animats]

That's one of the better stories about SCO to appear in the financial press this week. They totally ignore SCO's hype and concentrate on real transactions.

Bloomberg hasn't picked this up yet. Bloomberg is slipping. Yahoo Finance doesn't have it yet either.

This is an unusual investment for a bank. It's a pure speculative play. Their management is probably kicking themselves for buying in at the top.

Groklaw has a good story ..

[leerpm]

going on here.

One user states:

I've always thought there was something fishy about RBC's rold in this. I can tell you such speculative investments are way out of character for a Canadian bank. Even if the money comes from the New York office of their brokerage/investment bank arm. When the deal was first announced, RBC refused comment saying they never comment on client affairs. That cryptic response caused some questions as the relationship with SCO didn't look like a bank/client relationship. An SEC filing in November indicated that the $30 million was RBC's money and did not belong to anyone else. It also indicated that RBC did not intend to sell its shares and had no prior arrangement to sell them.

Now another cryptic statement. I've felt (with no evidence) that RBC was indeed up to something. But what? My best guess is that they have used their own money, and are not holding the shares for anyone else. And that they have an agreement with a third party about the disposition of any profit or loss from the deal. The logical arrangement would be that RBC puts up the money and gets to keep any profits. But the third party would compensate them for any loss. Thus the investment is clean, and the third party gets to funnel cash to SCO without disclosing their involvement.

For the record, I have no idea who such a third party might be. I don't think it would be Microsoft. They have lots of money marching in the front door. Why would they need to sneak money in the back? But that doesn't leave any other likely suspects. Its possible that one of the other big propriatory software companies, like Adobe, could be behind it. We may never know.

this is making sense...

[fermion]

Investment in SCO is passive, made to hedge an economic exposure resulting from client transactions
This seems to be making sense. The investment companies are playing both sides against the middle. If SCO wins, the consequences will be likely be lower earnings for companies that must pay the licensing fees. OTOH, the investment bankers who have invested with SCO will be able to offset those losses by their earnings from SCO. If SCO loses, they lose their investment, but it is not that much money.

As far as the lawyer veto, I think this is just another hedge in case SCO loses. The bankers want to keep the money instead of paying for currently promised obligation. In any event, they will probably just go court and claim that the lawyer fees are excessive. No one likes lawyers, and even in the case where a lawyer funds a litigation, such as the tobacco case with the states, the courts seem willing to put aside contractual obligations to the detriment of the lawyers.

recently famous for Enron involvement, too

[Anonymous Coward]

did anybody else notice the other reason RBC has
been in the news

http://www.cfo.com/article/1,5309,11460,00.html? f= features

lately? To quote:

"Goldin said that Bank of America and Royal Bank
of Canada knew of fraud in Enron-related
transactions. . ."

Charming profile they're developing of late.

The insiders are!

[Russ Nelson]

The insiders *are* selling their shares. Darl isn't ... because he's already sold them. However, he's got another 600K options coming due soon. If ... he ... can ... just ... keep the stock up, he'll have "earned" a few million more for himself. And in any case he can always vote himself a 2M bonus for having attracted so much new investment.
-russ

Boise Representation

[Camel Pilot]

I am surpised that the main stream press did not make more of the fact that David Boise et al did not appear in court last week. You would think the law firm would at least have a representive present. Oh I would love to be a fly on wall back at SCO central right now.

If I was a SCO sucker^h^h^h^h^h investor this would be a very troubling sign. In fact, Boise's presence is the only thing that really gave the lawsuit credibility - regardless of the fact that he lost the last two highly publized lawsuits.

The short percentage on this stock is huge and that can help keep the stock price, up strangely enough. As the stock drops people complete the short transaction, which is "buying back" the shares that they sold earlier.

Darl's Brother....

[Tmack]

Was evidently the lawyer that represented SCO last friday.

David Boies and his fellow Boies, Schiller & Flexner LLP lawyer Mark Heise are SCO's attorneys in this case, but the software company was represented in a court skirmish last week in Utah between SCO and IBM Corp. byDarl McBride's brother Kevin. Kevin McBride, according to West Legal Directory, has a private practice in nearby Park City, Utah, where he specializes in litigation and appeals, not corporate-contract or intellectual-property law.

Makes things even more fishy. Looks like the McBride family is going to make out nicely either way, SCO wins Darl gets a big payout, Kevin gets a cut of attorney fees, SCO looses and Kevin still gets a cut from the contingency plan.

Also to reference Linux as being a derivitave of the "older operating system" Unix is wrong on a couple points. First has already been pointed out, Linux is designed to work like Unix but was not in any way derived directly from its source, which is actually what SCO is trying to claim in the first place. Also, the article fails to mention that the "older operating system" Unix is what SCO's primary buisness was based on originally.

Tm

Who d'yall think might be the big "client"?

[pjkundert]

So, there is/are some large investor(s) that suddenly excersised huge financial instruments, exposing the RBOC to USD$50M in potential losses, should SCOX increase in value?

This is the only rationalle that I can think of, for a big bank to buy SCOX; banks are typically not big risk takers.

I wonder if there is any way to discover who bought "Call" options on SCOX from the Royal Bank? Perhaps some investor whose name starts with M? Maybe it didn't take a rocket scientist corporate finance guy to figure out how to force an "independent" third party to buy a big chunk of SCOX, if you don't want to do it personally...

Re:They aren't altering the deal.

[Brandybuck]

NO change to the deal with the lawyers. Just don't push the red button (and give away a fifth of the store) without asking the owners first.

Which brings up an interesting question in my mind. If the deal with the lawyers was made by the executives and not the board, is this deal even legal? Was the right to give away a "fifth of the store" even theirs?

If I were an investor in SCO, and this prior deal wasn't disclosed to me, or made subsequent to my investment without my knowledge, I would immediately be on the phone to the SEC.