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Novell’s Stock Options Scandal Just Weeks Before Deal with Microsoft

Posted in America, Finance, Fraud, GNU/Linux, IBM, Microsoft, Novell, SCO, SLES/SLED at 5:05 am by Dr. Roy Schestowitz

A couple of days ago we wrote about alleged fraud at Novell. Having been taken to task, we hereby provide a more detailed analysis. It is difficult to find full articles because it dates back to early days of Novell SUSE, but we do our best nonetheless.

Here are some more details (than the last time) about Novell’s settlement in the class action lawsuit over securities fraud. Novell was never cleared and according to this article, “In its stipulation to the settlement, Novell said it had agreed to end the case in order to avoid further “protracted and expensive” litigation.” There is a little more information here and here.

A three-judge federal appellate panel on Tuesday ordered a drastically trimmed version of a long-running shareholders’ securities fraud lawsuit against Novell back to a Salt Lake City courtroom. In their unanimous decision, Judges Carlos F. Lucero,

Other bits of text such as this, this and this seem to suggest that proof was not sufficient.

In the securities fraud context, a plaintiff is held to a strict standard of pleading. Id. at 1124. Traditionally, plaintiffs alleging securities fraud had to meet the heightened pleading requirement of Rule 9(b)….


Grossman alleged violations of §§ 10(b) and 20(a) of the Securities Exchange Act and common law fraud arising out of a seven percent decline in the price of Novell stock after the company announced disappointing earnings for the third quarter of its 1994 fiscal year. The District Court granted Novell’s motion to dismiss, ruling that Plaintiff had failed to allege a materially misleading statement or omission, that Novell had disclosed the risks of the merger, and that Plaintiff had not pled fraud with sufficient particularity.

At the time, it was not known that that Novell would report accounting errors a few years later. We’ll come to this in a moment.

Some time later, the following article from Law.com showed up. LaSala quit Novell several months ago, but the following story is interesting.

Last month, Novell gave LaSala a $350,000 bonus for “exceptional contributions” to the business — even as the company remained in the middle of an internal investigation into backdating that was launched in August.

Novell CEO Jack Messman and Chief Financial Officer Joseph Tibbetts Jr. both stepped down in June. The company said the departures had nothing to do with Novell’s ongoing backdating investigation. In 2002, Messman was the sole member of the company’s stock option grant committee for nonemployees, according to an SEC filing, a structure found at other companies under the backdating cloud, like Brocade Communications.


Journalist Pamela Jones, editor of Groklaw, a blog that closely follows open-source intellectual property disputes, mused that LaSala’s bonus was likely “related to the recent Microsoft deal.”

“Novell views the Microsoft partnership as a plus,” Jones wrote in an e-mail. “They may well feel that whoever worked on the deal deserves recognition. I don’t know if Mr. LaSala was involved, but it seems likely that the general counsel would be.”


Last fall The Recorder reported that Novell board members, including Sonsini, granted themselves stock options at dates other than the company’s annual meeting in 1997, 1999 and 2001. The 1999 grant came near a 17-month low in Novell’s stock price. The out-of-cycle grants practice deviated from shareholder-approved guidelines, but the board cited a 1991 stock plan for the authority to make the grants.

A Wilson Sonsini spokeswoman said at the time that Sonsini never exercised his 1999 grant.

The text speaks about Sonsini, which CNN wrote about in the context of scandals just after the deal with Microsoft.

Because Sonsini was on Brocade’s audit committee one year, he has also been named as a defendant in private class-action suits. Sonsini was on the board of Novell (Charts) too, which has initiated a voluntary audit of its options practices. Like all Novell directors, Sonsini received options himself. He never exercised his, according to a firm spokesperson, and they expired three months after he left the board in 2002. Sonsini declines to discuss either Novell or Brocade.

There is no ‘smoking gun’ here, but the vicinity to those scandals does not fare well.

One thing that was covered before is Novell's financial struggles just before the deal with Microsoft and throughout negotiations with them. Here is an article about it. Mind the date.

Novell Dogged by Delisting, Default Issues


Novell is not alone in the stock options scandal that has put more than 60 other public companies under scrutiny by the Securities and Exchange Commission in recent months.

Both of the issues at hand, however, have further hurt the company’s lagging stock price and likely shaken clients of the second largest Linux vendor, Yankee Group Senior Analyst Laura DiDio told LinuxInsider.

“Anytime you get a delisting notice from Nasdaq it’s a big red flag,” she said. “It’s worrisome. It’s got to be worrisome to the customers, and that’s the big thing.”

So says a Microsoft shill (also ally of SCO), who works at the Microsoft-Yankee Group [1, 2]. We already know the routine [1, 2].

Sadly, also quoted is The Gartner Group, which is equally biased [1, 2, 3]. The entire article seems composed of these unreliable perspectives, which seems irresponsible for the writer, Jay Lyman, who now works in the 451 Group. It’s careless to just quote people that are close to Microsoft and even paid by Microsoft. At the time, Novell was also competing against Microsoft.

From around the same time, the following article can also be pulled. Novell was checking for backdating and therefore it seemed to have concealed its records.

Novell was only able to post preliminary fiscal third-quarter results Tuesday because it’s hired outside legal counsel to review its past stock option practices for indications of backdating, so the results it put out, it said, don’t reflect any adjustments that may have to be made.

More of the same from USA Today:

At high-tech firm Novell, for instance, a dozen current and former directors approved and backdated an unknown number of grants from 1997 to 2003 to inflate stock profits for officers and directors, according to a shareholders’ lawsuit.

Former Novell CEO and chairman Jack Messman left the firm last summer, and Novell has hired a law firm to investigate its backdating practices. The company says it may restate its financial statements and faces possible delisting from the Nasdaq Stock Market.

Here also:

Novell’s move comes as the SEC continues to widen its probe into potentially fraudulent stock options practices occurring now or in the past at U.S. companies and related to the backdating of options. By timing the granting of options to a low point in a company’s stock, an options recipient could buy shares cheaply and then resell them for a greater profit once the vendor’s share price rose.

Finally, we have covered this one before. It’s about stock option errors at Novell, lasting for about 10 years. Matt Aslett covered this also. it came after the settlement.

To conclude, what may have happened here is that Novell cooked its books in order stay on its feet. At the same time, it explored a deal with Microsoft that would inject hundreds of millions of dollars into the company. Maybe this was desperately needed.

Novell changed a lot since itsdeal with Microsoft. They were more careful the following year and watch how, according to The Wall Street Journal, Novell shifted its report from 2006 (before the Microsoft cash infusion) and published it in 2007 after selling some Microsoft SUSE coupons.

Bruce Lowry, a company spokesman, declined to say what the letters concerned, except that they were accounting-focused. Dana Russell, chief financial officer, said in a statement that the earnings release was postponed in “an abundance of caution” and “we look forward to completing our dialogue with the SEC.”

Novell delayed filing the 2006 annual report until May 2007 because of an internal investigation of whether its employees received backdated stock options.

One has to wonder what it is that Bruce Lowry saw, which made his escape Novell.

Just one week before the Microsoft deal, the following article shows up: Novell Board Gets Hit With Third Derivative Suit About Backdating

Reader trmanco has found the article after some discussions in the IRC channel. Sonsini is mentioned again.

The complaint focuses on options Novell board members gave themselves in October 1999, which came in addition to their regularly scheduled options. The “strike price” of the grants was a 17-month low. Filed by San Diego’s Lerach Coughlin Stoia Geller Rudman & Robbins, the suit also accuses the current top managers and board of directors and former CEO and chief financial officer of fraudulent accounting from 1999 to 2006.

The alleged backdating “has wreaked hundreds of millions of dollars of damages on Novell,” according to the suit.


A Wilson Sonsini spokeswoman noted Sonsini never exercised his October 1999 grant.

Again: this was published just one week before announcing the cash infusion from Microsoft. Was it a sellout of desperation, which came about because Novell was’nt buoyed by an acquisition of S.u.S.E., despite financial help from IBM?

TAKING STOCK Big news from Novell. The business-software company announced that it will acquire German Linux developer SuSE Linux AG for $210 million in cash. That’s not all — Novell added that IBM plans to invest $50 million in its stock, a big thumbs up from Big Blue. NOVL stock shot up more than 21 percent to $7.33, while IBM lost 54 cents to $89.14.

More on the events from the following year (including SCO) can be found here.

Novell is no angel and we wish to show this. Going further into the past, you can find Novell bribes.

The new chief of technology at the state Department of Children & Families resigned late Tuesday after agency officials learned he had been faulted by officials at a previous job in Ohio for accepting gifts from a technology company that had won a $1.9 million contract.

John R. Hurd was also criticized in a separate investigation by the Ohio Inspector General’s Office for appearing in several advertisements for the company, Novell, and allowing the company to run endorsements by him on its website.

Here is a similar story, which does not necessarily involve Novell. It’s the Salt Lake Olympics (winter games) scandal.

Reeling from a still-unfolding scandal involving charges that Utah won the right to host the Games by showering cash, gifts and other financial favors on International Olympic Committee (IOC) members and their families, this prosperous and booming city nestled against the Wasatch Mountains is undergoing a kind of civic and psychic crisis. “Utahans are very ashamed of what they are seeing…”

Some more details about it here:

In the early to mid-1990s, Utah by almost every economic indicator was on an express elevator. In the peak year of 1994, employment grew by 6.2 percent. Hundreds of high-tech firms led by giants such as Novell, WordPerfect and Iomega sprouted and grew along the Wasatch Front from Ogden to Provo, attracting a flood of migrants from other states. Two years ago, Nation’s Business magazine honored the Salt Lake City-Provo area as the No. 1 large metropolitan area to start and build a business.

So, what can be said about Novell? Is it really trustworthy? Does it seem like a company which in a good shape?

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