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Leaked Memo Revives SCO-Microsoft Connection Furor

In the open-source community, the rumor that just won’t die claims that Microsof Corp. is funding The SCO Groups legal actions against Linux. On Thursday, those allegations rose again with reports of a memo that links Microsoft with a financial backer of SCO.

The rumors center around a $50 million investment in SCO by the Larkspur, Calif.-based BayStar Capital investment fund last October. At the time, online reports suggested that BayStar, which invests money from a variety of companies, had taken money from Microsoft for the SCO funding. However, in an interview last fall with eWEEK, BayStar officials denied that Microsoft was an investor in this transaction.

The latest twist surfaced Wednesday on the Web with a document that brings into question Microsofts claim that it had nothing to do with the BayStar Capital funding of SCO—and, by association, of SCOs lawsuits against Linux vendors and users.

The new memo was published to the Web on late Wednesday by open-source advocate Eric Raymond. The memo was picked up by the Slashdot Web site on Thursday morning.

Blake Stowell, SCOs director of communications, acknowledged that the leaked memo is real.

But, Stowell claimed, pundits had mischaracterized the memos context. “We believe the e-mail was simply a misunderstanding of the facts by an outside consultant who was working on a specific unrelated project to the BayStar transaction and he was told at the time of his misunderstanding. Contrary to the speculation of Eric Raymond, Microsoft did not orchestrate or participate in the BayStar transaction.”

Responding to the allegations, a Microsoft spokesman said: “The allegations in the posting are not accurate. Microsoft has purchased a license to SCOs intellectual property, to ensure interoperability and legal indemnification for our customers. The details of this agreement have been widely reported and this is the only financial relationship Microsoft has with SCO. In addition, Microsoft has no direct or indirect financial relationship with BayStar.”

The alleged memo, to which Raymond referred as the “Halloween X” memo, is dated October 12, 2003 and penned by Mike Anderer, whom Raymond identifies as a consultant with a company called S2 Strategic Consulting, which has ties to SCO.

S2 had been hired, according to the contract to help “with the formulation and implementation of various options for Intellectual property management.” In essence, S2 was to help SCO make money from its IP.

Four days after the alleged memo was distributed, on October 16, 2003, SCO received the $50 million cash infusion from BayStar Capital and other funders.

A number of industry watchers at that time questioned whether Microsoft had any involvement in the $50 million BayStar financing deal. Some pundits noted that by providing SCO with funding, Microsoft and/or other parties would be helping to fuel SCOs lawsuits against Linux vendors and customers, thereby benefiting Windows. Microsoft and BayStar officials both denied that Microsoft was involved in the funding deal in any way.

he Halloween X memo appears to link Microsoft to BayStar.

“I realize the last negotiations are not as much fun, but Microsoft will have brough(sic) in $86 million for us including BayStar,” said S2 Consultings Anderer in the memo.

“Microsoft also indicated there was a lot more money out there and they would clearly rather use BayStar like entities to help us get signifigantly(sic) more money if we want to grow further or do acquisitions,” Anders continued in the alleged internal memo.

Meanwhile, Microsoft is known to have made at least two lump sump payments to SCO in order to license Unix. Microsoft executives said in May that the company wanted to be on the right side of intellectual-property law. (Microsoft makes available a number of Unix utilities in the form of its Services for Unix product.) One of these payments was for $8 million, according to Securities and Exchange documents; the amount of the other is not known.

Raymond has published a number of alleged internal memos from a variety of companies, including several from inside Microsoft. Raymond referred to all of the leaked memos he posted to the Web as the “Halloween memos,” since he published the first of them on November 1, 1998, the day after Halloween.

Microsoft has verified the accuracy of several of the early Halloween documents that outlined the companys strategy to compete with Linux.

BayStar Capital spokesman Bob McGrath said “we have no way of knowing where it (the memo) comes from or anything about it.” He added that BayStar is standing by its statement from last fall that “Microsoft was not a participant in BayStars fund” that went to backing SCO.

A version of this story first appeared in eWEEK.

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