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BayStar exec says Microsoft 'guaranteed' SCO investment

By Nancy Gohring, IDG News Service
October 09, 2006 08:31 AM ET

IDG News Service - The long-running contract dispute between The SCO Group and IBM  took another twist last week when IBM filed court documents that suggest Microsoft agreed to back up BayStar Capital's 2003 investment in SCO, which alleges IBM contributed Unix functionality to Linux in violation of its Unix contracts.

Executives from BayStar, an investment company, have said previously that Microsoft introduced BayStar to SCO. In a declaration filed last week with the U.S. District Court for the District of Utah, a BayStar executive said Microsoft's involvement went further than that.

Microsoft's senior vice president of corporate development and strategy promised that Microsoft would "guarantee" BayStar's part in a $50 million investment in SCO, according to the declaration from BayStar managing member Larry Goldfarb.

After BayStar made the investment, however, Microsoft stopped returning the company's phone calls and the Microsoft executive who made the promise, named in the filing only as Mr. Emerson, was likely fired, according to Goldfarb. In 2004, the SCO Group denied that Microsoft was involved in raising venture capital funding for the company after a memo connecting Baystar and Microsoft became public.

BayStar ultimately sold its investment back to SCO at a loss. The investment company blamed SCO's high cash burn rate and the questionable viability of its products for its decision to sell, Goldfarb said.

Microsoft did not immediately respond to a request for comment Monday. In a report in the online edition of the Wall Street Journal, a Microsoft spokesman said it never made any such guarantee to BayStar.

Microsoft has been scrutinized for any sign of involvement in BayStar's investment. Such a move would suggest that Microsoft helped support SCO's lawsuit against IBM as a way to hamper the growth of Linux, which presented a threat to Microsoft's own business.

If Microsoft did make such an offer to BayStar it would have been a very risky move, one industry analyst said.

"Given the enormous scrutiny that Microsoft is under, I think it's extremely unlikely that they would have engaged in any kind of conspiracy because the potential upside simply isn't great enough and the potential downside is great," said Gary Barnett, an analyst with Ovum.

The battle between IBM and SCO started in 2003 when SCO charged IBM with offering open source software based on source code that SCO claimed to own. The company then threatened to sue businesses using Linux for patent infringement. In July of this year a judge dismissed nearly 200 SCO claims, saying the company didn't offer enough detail of the alleged patent infringements.

A PDF of last week's filing is posted on the Groklaw Web site.

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