[ale] Red Hat sues SCO

[John Marasco]

> I disagree.  The best way to make companies (and execs) pay for fraud,
> illegal stock manipulation, etc., is with criminal and civil action
> against them.  Assuming they have any assets and the case is strong,
> there is a high probability of success and they are publicly punished.
>
SCO has 37.9 mil in assets and 24.3 mil in liabilities.  That leaves 13 
mil of which about 10 is cash.  SCO cash flow sheet shows them loosing 
about $15 mil per year in 01 and 02.  The cash flow statement is covered 
in red.  At the conclusion of any lawsuit (+12 months) will there be any 
assets left?  Don't forget that the little capital SCO has will be 
drained by their lawyers.  I do not believe they will save anything just 
so Red Hat can get a payout.

A quick check of Enron, WorldCom, etc... officers shows that very few 
are in jail.  I couldn't actually find a single sentence from the 
debacles but certainly there were indictments and plea bargains.  It's 
not easy to make the criminal cases outlined here and there are bigger 
fish for the government to fry.  As of right now there are no 
initiatives to bring criminal proceedings against anyone at SCO.

Despite my earlier words, we really do not need a "best" solution.  This 
need not be an either/or situation...criminal, civil and market based 
methods are all viable and do not compromise each other.  To the 
contrary, if SCO stock tanked you would see more people interested in 
criminal and civil proceedings.

> The stock market right now is far too volatile and the investment
> cash far too high for shorting the stock to be valuable.  Further, it
> would not put to rest the issue of whether SCO can harm Linux users.
>
If SCO stock is driven into the tank I believe that would effectively 
put to rest the issue of whether SCO can harm Linux users.  I think it 
would take away financial incentive for others as well and thus reduce 
risk moving forward.  As for the level of investment, SCO has a market 
cap of ~170 mil.  Red Hat estimated 7.5 mil Linux users in 1998.  So 
that would mean $20/user to short every outstanding share of SCO stock.  
Of course, practically you only need to short a percentage of the shares 
held publicly by non-SCO officers to create a run on the stock.  20-40 
mil or so would probably be enough.  $100 by 4% of Linux users would 
cover this value without subjecting individuals to high levels of risk.  
Volatility is a good thing when you are discussing shorting a stock at a 
52 week high.  With a beta of 5.0 SCO stock is bound to fall below it's 
current level even without massive short selling.  Buying MSFT or AOL 
2-3 years ago was a lot less intelligent than shorting SCOX today.  Of 
course I think buying SCOX today at $12.50 is insanely stupid (41 times 
tangible book and 100 times cash flow), but these things have nothing to 
do with Linux.  Investors are too skittish today to maintain the ratios 
SCOX supports today.  A few articles about how Linux users are shorting 
SCO stock would pull the rug out from under this thing very quickly.

> I think that you are missing the point that SCO appears to be slandering
> Red Hat and Linux and Red Hat is -- quite rightly -- seeking a legal 
> remedy.
> I've already had a question from one of my large clients asking if they
> are at risk from a suit from SCO using Linux.
>  

I'm sorry; I don't believe I miss the point.  I simply suggest a 
different angle to address the injustice.  One that every Linux user can 
participate in.  Why is encouraging people to give lawyers money 
responsible but encouraging people to short stock not responsible?  
Shorting stock (if done intelligently) runs the possibility of a 
return.  Is there any hope of a return even if the lawyers win the 
case?  There is little that you or I can do to participate in a 
lawsuit.  Open source is about nothing if not personal risk (our time 
spent), responsibility (our decision to create) and reward.  News of a 
massive short selling initiative would have a definitive impact and 
would prove a point about the Linux community.  In addition there is the 
possibility to actually turn this situation to some advantage rather 
than simply hoping to return to the status quo.  All this assumes that 
we actually do know more about the situation than the "average" investor 
or market analyst.  My initial response was somewhat tongue in cheek.  I 
want to make clear that shorting is inherently risking with little 
downside risk (stock price can rise indefinitely) and limited upside 
gain (a stock price can only go to zero).  I DON'T RECOMMEND THAT ANYONE 
RUN OUT AND SHORT STOCK even if I am arguing that it makes sense to do 
so.  This is a decision that people should make themselves.  If they do 
then limit losses (buy to cover if the stock goes past some acceptable 
value) and DON'T RISK MORE THAN YOU CAN AFFORD TO LOOSE.  NEVER INVEST 
IN AN INVESTMENT UNLESS YOU UNDERSTAND THE RISKS.  Please forgive the 
caps, I think the points are important given the arguments I'm making.

Short selling would immediately hit those you argue are doing wrong 
right where you argue they will feel it most.  It does so without 
resorting to massive legal fees and relying on some circuit judge to 
rule on obscure copyright and/or intellectual property issues.  20-40 
mil would not buy a better legal case but it would allow the legal case 
to continue longer.  Longer is not in the best interests of Linux as 
Microsoft is using this case to show that Linux users have no one 
supporting Linux IP.  Investors are not going to rally around SCO if the 
stock is tanking.  Investors aren't really rallying around the stock now 
and those that are rallying are doing so because of the promise of a 
quick $1 billion return.  It's more like a lottery situation than a 
valuation situation.  No educated investor would make a long-term 
investment in the current SCO management team (look at their cash flow 
and balance sheets).  But, again the Linux community can have it both 
ways (legal and market based).

I'm a little surprised that individuals who feel confident enough (that 
SCO's claims are without merit) to go on public record are even against 
the ****idea** (not the actual act which is rather risky) of putting 
money behind the claim.  Stock history shows that prices do eventually 
respond in instances of genuine fraud.  By the nature of the market, 
fraud is always a short term strategy and there is not enough momentum 
here to keep this house of cards up for long.  How many more "licenses" 
do you think Microsoft can get away with buying?

I apologize for my passion it's just the longer I think about this idea 
the less "stupid" it sounds, assuming we all *really* believe SCO's 
claims are without merit.

FYI -
Short sales don't "expire".  You can wait as long as you like before 
"buying to cover".  You may get called on your short if you run out of 
margin, but that isn't the same as when options expire.

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