SEC Investigating SCO?

Udo Schmitz writes "As Groklaw reports, the SCO Group stated in a SEC filing from yesterday: 'In addition, regulators or others in the Linux market and some foreign regulators have initiated or in the future may initiate legal actions against us, all of which may negatively impact our operations and future operating performance.' Does this mean the SEC finally started to pull some stops? SCOs and Canopys financial dealings (Vultus acquisition anyone?) long ago lead to speculations in the Linux community about the legality of their business practices, or the whole lawsuit just being a stock scam."

Comments

And the world wept

[Darkmoor]

I mean, seriously, at this point, who (other than investors) is going to be the least bit sympathetic?

Re:And the world wept

[J Barnes]

In all cases of law, society should aspire not to sympathy in the legal system, but to impartiality. Slight, but substantial difference.

More info

[Udo Schmitz]

There is another link I should've added to the submission: This site assembles some very interesting information from the Yahoo SCOX Financial Board.

Standard CYA

[cmcguffin]

It is standard operating procedure to include in SEC filings discussion of any factors that will or reasonably may negatively impact business.

This CYA language is meant to prevent both SEC probing and shareholder lawsuits should something go wrong. This language is often copied verbatim in later filings, so it often is written to be as broad as possible.

Mere inclusion of such language does not mean that these factors have happened or will happen, only that the company thinks there is some non-zero chance of it happening.

Not surprisingly, SCO's language is pretty mushy here, but the wording, "have initiated or in the future may initiate" makes me believe that they're simply being prudent.

Of course, the fact that they feel the need to mention regulator investigation says a great deal about the company, regardless.

Giggling

[kristopher]

You know I didn't think anything would make me giggle like a little girl. I was wrong.

My favorite quote from the article:

[AnObfuscator]

"Our stock price could decline further because of the activities of short sellers. Our stock has attracted the interest of short sellers. We believe the activities of short sellers have in the past and could in the future further reduce the price of our stock or inhibit increases in our stock price. " ha ha ha. Next on the Nature channel: How the activities of vultures and buzzards inhibit and reduce the activities an otherwise perfectly healthy wildebeest.

Re:I hear quite abit about SCO

[thparker]

except they have not been able to pony up any rock hard evidence

I'd suggest that they really haven't even shown any flaccid, squishy evidence.

They got in over their heads

[Anonymous Coward]

Canopy sued Microsoft and made a bundle without actually having to go to court. SCO was a Canopy company and both had Ralph Yarro as part of the organization.

It was reasonable to assume that if they sued IBM over its use of UNIX, that IBM would also cave in and give them a bundle of cash. Given what the lawyers have cost so far, it would have been cheaper. Oops, IBM didn't cave.

There are very serious issues involved in the SCO vs. IBM case which could have made many businesses worry about adopting Linux. IBM had bet the farm on Linux. IBM had no choice to fight.

Not only did SCO not have a leg to stand on but it seriously looked like they were perpetrating a fraud. Their only chance to stay out of jail is to make it look like they really believed their claims about IBM. SCO, therefore, had no choice but to fight to the bitter end.

What have we gotten out of this whole mess? Linux is unencumbered by anybody's copyrights. All doubt has been removed. The extra publicity may actually have promoted the uptake of Linux. We have gotten a wonderful legal education on Groklaw. We have been activated. A lot of people realize the importance of the next big fight (patents) and have started writing their congresscritters.

So, thank you SCO. Good luck staying out of jail.

Bogus

[Anonymous Coward]

You're right about profitability but completely wrong about share price. Shares are initially issued to raise capital. After that it's a secondary market and they fight among themselves for how much the shares are worth. Profit not share price should be the determining factor for the corporation.

It used to be that the two were related, profit divided as dividends was the the primary motivation for determining share price - or the potential to control the company via the votes accrued. Now that it's all speculative - stockholders have hijacked the original purpose of the corporation which was a *business* to make money. This has led to SCO, HP, Nortel, Time Warner/AOL etc where short term decisions to help the stock price have resulted in long term harm to the corporation's viability and profitability.

I'm not saying that this is wrong either - but it really isn't very good for the economy overall when otherwise productive businesses are gutted to be made more appealing to the sucker buyer. The worst excesses (SCO, ENRON) should probably be punished. But there's not much that can be done about it as long as there are fools that want to get in on the sinking ship...

Re:This doesn't mean anything

[DeathB]

They also have more amusing risk factors than that one. (All text from SCO's current 10k)

• We do not have a history of profitable operations.
• We may not prevail in our SCO Litigation, which may adversely affect our business.
• Our failure to timely file this Form 10-K, and our quarterly report on Form 10-Q for the quarter ended January 31, 2005 (as previously defined, the "Form 10-Q"), could result in the delisting of our common stock on The Nasdaq SmallCap Market.
• Our Engagement Agreement with the Law Firms will require us to spend a significant amount of cash during fiscal year 2005 and could harm our liquidity position.
• Our future SCOsource licensing revenue is uncertain.
• We may lose the support of industry partners leading to an accelerated decline in our UNIX products and services revenue.
• Our claims relating to our UNIX intellectual property may subject us to additional legal proceedings.
• Fluctuations in our operating results or the failure of our operating results to meet the expectations of public market analysts and investors may negatively impact our stock price.
• We operate in a highly competitive market and face significant competition from a variety of current and potential sources; many of our current and potential competitors have greater financial and technical resources than we do; thus, we may fail to compete effectively.
• If the market for UNIX continues to contract, our business will be harmed.
• We rely on our indirect sales channel for distribution of our products, and any disruption of our channel at any level could adversely affect the sales of our products.
• Our Engagement Agreement with the Law Firms representing us to enforce our intellectual property rights may reduce our ability to raise additional financing.
• Our foreign-based operations and sales create special problems, including the imposition of governmental controls and taxes and fluctuations in currency exchange rates that could hurt our results.
• If we are unable to retain key personnel in an intensely competitive environment, our operations could be adversely affected.
• We have issued shares and options under our Equity Compensation Plans that were not exempt from registration or qualification under federal and state securities laws, and, as a result, we may incur liability to repurchase such shares and options and may face additional potential claims under federal and state securities laws.
• Our stock price is volatile.
• There are risks associated with the potential exercise of our outstanding options.
• The resale of common shares by BayStar may have an adverse impact on the market value of our stock and the existing holders of our common stock.
• Our stock price could decline further because of the activities of short sellers.
• The right of our board of directors to authorize additional shares of preferred stock could adversely impact the rights of holders of our common stock.
• Our Stockholder Rights Plan could make it more difficult for a hostile bid for the Company or a change of control transaction to succeed at current market prices for our stock.

FYI, the full text of the risk that Groklaw is quoting from:

Our claims relating to our UNIX intellectual property may subject us to additional legal proceedings.

In August 2003, Red Hat brought a lawsuit against us asserting that the Linux operating system does not infringe on our UNIX intellectual property rights and seeking a declaratory judgment for non-infringement of copyrights and no misappropriation of trade secrets. In addition, Red Hat claims we have engaged in false advertising in violation of the Lanham Act, decept

Re:I hear quite abit about SCO

[snorklewacker]

Set anal probes to stun:

This is the second time I heard them called "Santa Clara Operations". It's "The Santa Cruz Operation". They were a joint venture with Microsoft to write a port of Unix System V to the 8086 and 8088. They called this port Xenix. Microsoft was supposed to pay SCO licensing for Xenix, but since they never used it, they figured they didn't have to pay SCO. SCO demanded rights to Xenix back, and got it.

For a while, SCO Unix sort of held its own on cost. The damn thing didn't even come with TCP/IP (you had to buy it from Excelan or another vendor) but once you got it up, you could run backoffice apps like order printing on the cheap, and it was reliable enough as long as you had a competent admin. They later grew into a bloated corporate entity with an increasingly shoddy product, but they had a moment in the sun. Later, the same company went on to produce products like Reflection (a rather good terminal emulator package, later sold off to WRQ and becoming Reflection X), and Tarantella, which was like VNC well before VNC. Tarantella was the most successful SCO product ever, and eventually SCO changed its name to match the product.

Tarantella sold off the name SCO to Caldera, a company whose history I know less of, except that they appear to be the working retirement package for Novell executives. Since Novell was going nowhere with their shiny new trophy -- the Unix name -- they sold it off to Caldera. Additionally, they bought the SCO name from Tarantella, who appeared more than happy to be rid of it. They started a not-terribly-well-received commercial Linux distribution, but also poured quite a lot of resources into free software development including KDE and various network utilities.

All was pretty happy for a while until a major shareholder, The Canopy Group then led by Ralph Yarro III, decided that this Linux thing wasn't really all that hot after all, and decided to kick Ransom Love out and replace him with Darl McBride -- another former Novell exec. McBride apparently agreed with Yarro that the demise of Project Monterey, a joint venture with IBM that scuttled SCO's prospects (that is, Caldera SCO, not Tarantella SCO) when it went away, meant that IBM had to pay, and pay hard, and that since they went with Linux, Linux had to pay too.

The rest you can read on Groklaw. I have to get back to work :) Just remember, the company bearing the name SCO is Caldera, a former puppet of the Canopy group, now running on McBride's and Yarro's egos alone. The original SCO is now soon to be a division of Sun, though it's not as if anyone even working there is from "the old SCO" either.

The Wheels of Justice Turn Slow

[Greyfox]

We've been speculating that the whole thing was a pump'n'dump since day 1. I personally found it a little too coincidental that a couple of days before the lawsuit was announced, a lot of people in high places at SCO were issued a heaping helping of SCO stock options for pennies on the dollar. Issuing options is a perfectly normal business operation, of course, but I personally thought the timing was a little too good.

Anyway, I don't foresee a serious SEC investigation until the lawsuit is settled. It would be a waste of resources to start an investigation when all that really needs to be done is to sift through the broken remants of a case. If a judge dismisses the case because SCO never had any more evidence than "It looks like UNIX so they must have copied it!" then I expect the SEC would crawl up SCO's ass with a microsope at that point.

Unless something has changed, I doubt it

[anomaly]

Some time last year I got fed up with the irritation that is SCO. I got interested to see if the SEC was digging into what seems to be false claims on their part. It seems that the SEC does not offer any information publicly about ongoing investigations.

Since I didn't know what, if anything, was happening, I reported them to the SEC. I was shocked to get a call the NEXT DAY from a man who identifdied himself as an attorney with the SEC. We spoke for about 45 minutes. At the conclusion of the conversation, he indicated that he thought he understood my issues with them - their apparent lies, their seeming stock manipulation, etc but doubted that he could proceed without more specific information about how they knowingly lied to the public.

If sufficient evidence was produced, he seemed interested in protecting the public from abusive corporate officers. He was not satisfied with what I offered him.

Unless someone has subsequently provided more and better evidence than what I knew about as an interested observer, it is doubtful that the SEC proceeded.

I was displeased that I was unable to move them to action.

Regards,
Anomaly