SCO - What have WE Forgotten?

Ed Almos asks: "When trying to examine the SCO affair with a cold analytical eye I can't help but be worried. Over the last twelve months the SCO stock price has climbed from just over a dollar to nearly eighteen dollars and at its peak it was well over twenty dollars. Hindsight is a wonderful thing and if I had invested my life savings in SCO stock last Christmas I would now be a multi-millionaire, examining which speedboat to buy instead of which bills to pay. Even a six month analysis of the stock price shows steady growth from about ten dollars to seventeen, a strange situation for a company which is supposed to be on its last legs. For years I had a friend who worked in the petroleum industry as a deep sea diver. Deep sea diving is one of the most dangerous jobs on the planet and when you looked at Matt's desk the first thing you saw was a wooden sign asking 'what have I forgotten?' When you are three hundred feet down the last thing you want is to find out you have forgotten an important tool, it's bad news all round. Matt lived to a ripe old age so I suspect that the sign worked. We all need to ask the same question about the SCO affair, what have we forgotten?"

"Over the last eight months I have read countless posts on Slashdot regarding SCO and most if not all of the posts view the scene with rose-tinted spectacles. Promises are made that SCO will be buried and that McBride will find himself in prison, yet they are still there and McBride is still in charge. The men and women who play the stock market on a regular basis are no fools and something unknown to Slashdot readers made the SCO stock price rise by 2.4%, on December 26th, over half a days trading. If someone buys a stock they expect the price to rise, so what have WE forgotten that could be good news for SCO investors? The principle of 'many eyes' has been used by the Open Source movement before. Thousands of people examine source code, submit patches, and ensure that we give the best software we can to the community at large. Bugs are announced and fixed within hours and all of us know that this methodology provides a better solution than that offered by closed source products. We now need to apply the same methodology to the SCO problem, all of us need to consider what we know about this sorry affair and how we can legally contribute to the downfall of the SCO Group.

SCO have been ordered to produce their evidence against IBM by midnight on January 11th, 2004. This gives us [five days] to make sure that when the IBM lawyer marches into court he has a spring in his step, knowing that he has every Linux user on the planet behind him. THEN we can talk about SCO being buried, but not before.

Thank you for your time and a Happy New Year."

Corrections

[overshoot]

SCO have been ordered to produce their evidence against IBM by midnight on January 11th, 2004.

Actually, they've been ordered to state their complaints against IBM; evidence comes later.

Also, their deadline isn't midnight the 11th: as with all such legal matters, it's COB (17:00 local) on the deadline or the first Court day (the 12th) following it. The Clerk of the Court's receipt of the response is the magic timestamp, and the Clerk isn't going to wait up to midnight on a Sunday in the hopes that soon Darl will be there.

Re:This is nothing new

[BoomerSooner]

Good advice. Here's some more. Diversification doesn't only mean a well diversified stock portfolio, it also means bonds, TBills, Mortgage/Real Estate, Tax Free Municipal Bonds, etc. There are a lot of investment opportunities, stocks are very volatile.

Re:We have forgotten

[Zathrus]

It's not a bloody pump and dump scheme.

Gods I'm tired of hearing this.

Corporate execs cannot just call their broker and say "buy!" or "sell!" when it comes to companies that they have insider knowledge on. You must file SEC forms months or years in advance, and there are time periods before routine announcements (10Q/10K) where you are prohibited from selling stock. Nobody has accused anyone at SCO of violating these rules. If you can, then go to the SEC.

As for Daryl, he has a mere fraction of his stock options. Go read the contract -- it's spelled out quite clearly in their 10Q/K statements. They didn't make a profit last quarter, so that resets the clock on the 100k (or 150k? I don't recall anymore) options that he would get for 4 profitable quarters. Oh, and even if he was awarded them -- guess what? He still can't sell them for 1-2 years under SEC and SCO regulations. The rest of his shares vest over a 4 year time frame.

If he wants to pump and dump then he's in an awfully bad position to do so -- he'll need to keep it going for 5-6 years in order to sell everything. Even though I expect the lawsuit to take 5+ years, the winds will be blowing for or against SCO well before the end. I still don't get why SCO took this course (other than the obvious cornered rat reason), but it isn't to pump and dump.

On the other hand, there are some very interesting money and stock manipulations happening with Canopy. If you want to look for someone doing questionable things, look there... not at SCO's execs themselves.

Re:We have forgotten

[Phaid]

Excuse me? You mean SCO exectutives aren't dumping SCO stock [sltrib.com]? It's not exactly an underreported story...

Re:This is nothing new

[FireBird615]

I think what the author was trying to say is "What do they [SCO Investors] know that we don't?". I agree that the case SCO is making is rediculous, and frankly, I think they'll lose. The question, though, is there something that they could/would/can pull in court, that would make them money? As we all know, just because everyone knows your wrong, doesn't mean the court will agree with you.

The investors are sheep?

[Anonymous Coward]

but they do smell blood. seriously, after all of the dot com fiascos, we have plenty of people with more money than brains running around the stock market. but if they can buy the right judges, Linux could be doomed.

Re:We have forgotten

[Anonymous Coward]

Sorry, but if you read the SCOX data, you will see that the insiders have already lined up option sales. Funny how these sales just happen to coincide with all this legal action and stock price foolery.

I mean, seriously, think about it. You acquire a company and begin to ponder a pump-n-dump. First, you put a bunch of litigious friends on the board. Then, you sell your friends stock at penny prices or award it as options. So, now you have your own company and a shat of options you can't excersise.

Now comes the fun part. You set up sales for all your stocks. Most of them won't go through for 1-2 years. This means you have 1-2 years to pump the price up. You claim ownership of the 'IP' that the Internet runs off of (Unix). With the stakes that high, people are going to buy into your stock.

Next, move your fight into the court of public opinion. Don't bother being careful or worrying about making statements that may hurt you later in court. All that matters is that the first sales you lined up go through at $20/share.

I mean, sure, Daryl might not be getting all his options excersised, but that's probably just because of his position and his contract. Look at the rest of the insiders. Some of them don't even have stock left at this point.

Actually, maybe I just made your whole point about Canopy and this being their game....

Check out the Numbers

[SkySurfSnow]

Livecharts SCOX Values [lycos.com] Check out the detailed quote and add a volume study. Insiders own about 45% Institutions about 31% That only leaves 24% laying around to trade. Volume is really low. Looking at the time and sales for the past few weeks there have been almost no large block trades. With so little trading volume it's probably relatively easy to keep the price up. We'll see what happens with the institutionals after the 11th of Jan.

Re:We have forgotten

[Fnkmaster]

Well, it's not a traditional pump-n-dump, and you are right, the execs of a company can never just dump their holdings whole hog without raising lots of attention. But there are execs with tradable holdings and, damned straight, they are bleeding off shares - not rapidly enough to cause alarm, but they are doing it nonetheless. The CFO is selling off 5000-10000 shares a month [yahoo.com]. Senior Vice President Reginald Braughton has dumped at least 5,000 shares per month during 2003, totalling perhaps 40% of his holdings [yahoo.com]. Controller Michael Olson has dumped at least 50 thousand shares, about 50-60% of his holdings, during 2003 [yahoo.com].

Sure, Darl may not be getting a lot of options, but it's pretty clear that the secondary execs are trying to get as much out as possible. Can't say I blame them, they've made a lot in the last year or two, it would be foolish to leave it there when the entire share price is based on unrealistically optimistic expectations about lawsuit outcomes. Of course, this only comes out to a half million here, a half million there.

I'm sure that the big money manipulations are going on with Canopy et. al.

Re:We have forgotten

[MuParadigm]

"Nobody has accused anyone at SCO of violating these rules."

Well, actually they have. I'm sure the SEC has plenty of complaints/accusations on record at this point, because I keep reading on Groklaw and the Yahoo SCOX bulletin boards that people have called the SEC to complain.

While there are many problems to choose from in making a complaint, probably the most convincing, and the one that goes to the heart of your assertion is that, while claiming that the executives cashing out options (Reginald Broughton, etc.) had no insider knowledge before filing their SEC sales forms, the truth is that David Boies was contacted before January, 2003, and that SCO was in contact with Boies in regard to intellectual issues before then. Darl McBride has even said in interviews that they first approached IBM in November/December 2002 with respect to intellectual property issues.

So the excuse of filing stock sale forms before any insider knowledge was available is disingenuous, at the very least.

Further, a minor correction on your description of Darl's stock arrangement. Darl would have rec'd 600,000 stock options on performance of 4 straight profitable quarters. But we have no way of knowing whether that was based on Pro Forma or GAAP measurements, and SCO announced a Pro Forma profit of 44 cents per share for the quarter, as well as the GAAP loss.

Finally, Darl has 150,000 options coming to him on March 1, as a result of achieving 1 profitable quarter. Those options are available to him either immediately or in the next quarter (Sorry, I forget which). The point being that Darl will not have to wait a full year to cash out if he chooses. He only needs to keep the stock price up for another 3-6 months.

Re:SCO

[Fnkmaster]

Clearly you have no idea how shorting a stock works if you think it's that simple. Making money on the collapse of a bubble is all about timing. You have to know when things are going to go to shit. If you short SCO right now, you may very well lose your ass. It all depends on when the news bubbles over and reaches the mass media that the SCO case is going to collapse, and how high the stock is going to go before it happens. You can't just short a stock and ride it indefinitely, no matter how out of the money your short is until it comes back into the money.

Re:did you even read the article

[HyperbolicParabaloid]

>> IBM is far larger and more powerful than both SCO and Microsoft put together

Actually according to todays Wall Street Journal, Microsoft's market capitalization is $296,802 million, IBM's is $157,504 million, and SCO Group's is $235 million, so, infact Microsoft is quite a bit larger than IBM and SCO combined.
But the fact remains that IBM could probably have bought SCO if they wanted to.

Re:We have forgotten

[Smallpond]

Edgar [sec.gov] form 4 reports insider trades. Why are people still investing? The insiders are cashing in stock options like crazy.

Re:did you even read the article

[SwellJoe]

IBM is far larger and more powerful than both SCO and Microsoft put together.

Um...No. Market cap disagrees with you on the odd assertion that IBM is bigger than Microsoft. (Market penetration is more subjective and difficult to pin down, but I think Windows is in far more places than IBM products. Number of employees might put IBM in the same league as Microsoft, but I can't find those numbers quickly...)

Anyway, the market caps:

MSFT = 305.45B
IBM = 159.86B

In plain english, Microsoft is nearly twice the size of IBM, according to the stock market. And if money equals power, as seems as good an indicator of power as any, Microsoft wields significantly more power than IBM.

Good thing it's not Microsoft we're talking about...But then again, it would have to be a company with little to lose to take such a bold risk on an attack so flimsy and immoral.

It's going to go up until it crashes

[iabervon]

The most important thing about the stock market is that you can sell your shares at any time, for the going rate. This means that it isn't necessary for a company to have any real value at all (in terms of paying dividends) to have a stock that will make you money. SCO has demonstrated that they can impress the market. Even if everybody agrees that SCO will be out of business in 3 years, it's a good bet that SCOX will go up at some point before then.

SCO's chances in court are unrelated to the value of SCOX. SCOX is a good deal at $10 today if it can be sold for $11 some time next week. SCO's PR only matters to the value of SCOX because it matters to the people who might buy SCOX from you later.

Re:SCO

[SmilingBoy]

These are the same dimbulbs who gave us the tulip mania a century ago ($3000.00 for one bulb?!?)

It was actually in the early 17th century, and if I remember correctly, the price for the most expensive bulbs was (in today's money) easily a million dollars (per bulb!).

Stock market dynamics & the legal system

[BritGeek]

Speaking as someone who works in the Financial Services space (and has done for a couple of decades), a couple of points are worth mentioning:

1. The stock market is notorious for both over-valuing, as well as undervaluing, especially towards the start of an investment cycle. It does seem as though the "run up" phase of SCO's price is about over - the market has now valued the stock on the assumption that SCO will win. For those of us (me included) who believe that SCO's case is baseless, this is now an excellent time to short the stock. As soon as SCO starts losing aspects of their case, their stock price will plummet through the floorboards.

2. IANAL, *but* I think many of us have forgotten quite how slowly - but inexorably - the legal wheels grind. None of us should be particularly surprised that not much, legally speaking, has happened yet. This series of cases (remember there are multiple cases involved), could literally take years before the dust has all settled...

Re:SCO

[twiddlingbits]

The stock ,market as a whole has been proven to be random, there IS no pattern or predicatabilty. Some things move certain stocks, but not for a predictable amount or for a predicatable period of time. Picking good stocks is as much a matter of luck as it is skill. You see the funds and managers that were on top on the bottom a few years later even though they are still doing all the right things. Thats what drives a lot of "logical thinking" types crazy about the stock market..it is NOT logical. SCO stock should be almost worthless if things were sane, but it's close to $20. Never underestimate the stupidity of investors, because if enough of them are stupid enough to buy the price WILL rise even if the company is a really a dog. Then when the price starts going up the ones who were thought they were smart and stayed out are now overcome by greed and they jump in too. That is what is keeping SCO's price way above reasonable levels.

Risk-Neutral Probability

[TheWizardOfCheese]

Regardless of the details, there is a fundamental flaw in your method: you have assumed that the fair price of something is the same as the expected discounted future value. (You didn't mention the "discounted" part, but let's say that ommission was an approximation.) In essence, you have assumed that you can set a fair value by integrating over all possible future prices. This won't work unless you substitute the "risk-neutral" density function for the "real" probability density in your integration. The bottom line is that excess risk always requires excess expected value in the price.

Here is an example. Let's say that you know, with absolute certainty (God told you) that SCO has a 20% chance of bankrupting within a year. Let's say that you can earn 2% lending money to the federal government ("risk-free") for a year. The risk-free future value of $100 is therefore $102, and to break even you would have to charge SCO $102/0.8 = $127.5 1 year from now for $100 today. SCO would find that it is unable to borrow money on these terms - it would have to pay an interest rate significantly in excess of 27.5% to borrow money. Lenders demand to be paid for taking on the risk of default - the "market price of risk." That is the reason that companies like SCO issue equity, not debt.

The default probability that you back out of a market price for debt is therefore always higher than what the market thinks is the real default probability.

Re:Fools?

[EricTheGreen]

The only real winnners, it's been proven over and over, are the ones who buy stocks of companies that provide real value and hold on to them long term.


(sigh--kiss my karma goodbye, but...)

Absolutely wrong. You obviously don't deal with arbitrage specialists, short-sellers, contrarians, professional bears and the like. They seem to do pretty well financially.

The fascination with the market as a wealth-generating device arises from, among many many other factors, the ability to make money ("win") using a variety of different techniques. Consistently successful investors rely on a mix of investment strategies, some involving buy-n-hold of a variety of different classes of securities, other strategies involving more volatile involvement.

Your statement has a high degree of "warm fuzziness", but is not supported by the whole of investment behavior.

Re:IBM is bigger than Microsoft

[tomhudson]

Actually, it doesn't mean anything of the sort. You seem to forget that, after the stock is sold, any increase in its' value doesn't revert to the seller, but to the buyer.

In other words, if I were to form a company and sell you a share for a buck, if the share goes up to $10.00, I don't get the other $9.00.

That's one reason why market cap means nothing. If the company owns ALL the shares, it means nothing because it isn't being traded (hence no market capitalization - it's private) . If, on the other hand, it owns none of the shares, market capitalization again has no bearing on how much money the company currently has in the bank. IBMs revenue stream is almost 3x that of Microsoft. So, who has more cash flow, more employees, and better karma? IBM is, by any measure, several times Microsofts' size, as I pointed out.

Re:This is nothing new

[Casualposter]

Apparently the person asking slashdot should be asking Groklaw.

Really, for a very good analysis of why the SCO lawsuit is very very unlikely to succeed, and a lot of pretty good analysis on how the stock price got to be so high, check out groklaw.

Learn about shorting before you get all panicky

[Belzecue2]

"If someone buys a stock they expect the price to rise"

No. You have completely overlooked 'short selling', which is what is happening with SCOX. Go look [nasdaq.com] at the short stats on SCO. See how the amount of shorting has risen from 33K in May to 2 million in Dec? Gosh, that's a lot of investors who want SCO to tank, dontcha think?

What YOU'VE Forgotten

[Anonymous Coward]

Over the last twelve months the SCO stock price has climbed from just over a dollar to nearly eighteen dollars and at its peak it was well over twenty dollars. We all need to ask the same question about the SCO affair, what have we forgotten?

What you've forgotten is that SCO IPO'd 4 years ago at close to a hundred bucks. After the bubble burst it went to $1. So even if it HAS gone up 20x in the past year, it's stock is still 1/5 of what people thought it was worth a few years back.