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05.29.10

Pequot Capital, Microsoft, and SCO

Posted in Courtroom, GNU/Linux, Microsoft, SCO at 9:20 am by Dr. Roy Schestowitz

“On the same day that CA blasted SCO, Open Source evangelist Eric Raymond revealed a leaked email from SCO’s strategic consultant Mike Anderer to their management. The email details how, surprise surprise, Microsoft has arranged virtually all of SCO’s financing, hiding behind intermediaries like Baystar Capital.”

Bruce Perens

Summary: How Pequot Capital made money through a former Microsoft employee it hired (David Zilkha) and helped fund SCO litigation against Linux shortly later

IT IS hard to tell whether we stepped in a scandal or not, but putting the evidence out there is almost certainly worthwhile. Last night we wrote about Pequot's inside trading that involved Microsoft shares. This was not the first time that we wrote about the Pequot fiasco [1, 2, 3].

Having done some research, we found the claim that months after the SCO lawsuit had been filed ‘”Integral Capital Management” and “Pequot Ventures / Pequot Capital Management” have been buying huge chunks of SCO stock. There’s a pretty short version of those degrees-of-separation chains leading back to MSFT if you’re a conspiracy theorist.’

Could Microsoft be investing in unsubstantiated claims and bogus allegations not just through Baystar Capital? Could there be more parties involved? Right now we have an everlasting frivolous lawsuit and SCO never seems to run out of money, not even this week. It wants a new trial which it can fund with rather mysterious funding that we wrote about before.

I know some of you wondered if SCO had given up and faced reality and wasn’t going to file. Hah! Nevah happen. The full title of the document is “SCO’s Reply Memorandum in Support of Its Renewed Motion for Judgment as a Matter of Law or, in the Alternative, for a New Trial”.

Looking plainly at the surface, there is nothing which connected Pequot Capital to Microsoft back in 2003. Groklaw however points out “Pequot’s mention in the SCO saga” when showing the following list from SCO:

VSpring Capital (SCO)
Vector Capital (SCO)
IDG Ventures (Broadmark)
Group Atlantic Partners, LLC (Broadmark)
Paladin Capital Group (Broadmark)
Pequot Capital (Broadmark)
Technology Crossover Ventures (Broadmark)
Ram Capital Resources, LLC (Impact Capital)
Crestview Capital Fund (Impact Capital)

Here is a new report about how Pequot Capital profited from Microsoft (just as Acacia did earlier this month):

The U.S. Securities and Exchange Commission in January resumed a probe into whether Samberg’s funds illegally profited in 2001 by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. That was about a year after the agency told Samberg and Morgan Stanley Chief Executive Officer John Mack they wouldn’t be accused of wrongdoing related to insider trading.

Here is the most revealing new article so far. It turns out that there are Microsoft roots, misconduct, and other abnormalities inside Pequot Capital. The key person moved from Microsoft to Pequot Capital not so long before the SCO case, just as Microsoft staff moved from Microsoft to Acacia only weeks before Acacia sued Linux (Red Hat and Novell).

Fried, Frank, Harris, Shriver & Jacobson and Wachtell, Lipton, Rosen & Katz played key roles brokering a $28 million settlement that resolves a long-simmering allegation that Pequot Capital Management, the Westport-based hedge fund, committed insider trading in Microsoft securities in 2001, according to SEC officials.

The SEC filed suit against Pequot and its chairman, Arthur Samberg, today and announced at the same time that Pequot and Samberg agreed to pay $28 million combined in disgorged profits and penalties to settle the case. (They did not admit or deny guilt.) Federal investigators had been looking into the allegations since at least 2005 but closed early investigations after failing to find enough evidence to bring a case, according to our prior reporting. But then something happened that didn’t help Pequot: The employee at the center of the case got divorced, and e-mails implicating the employee, David Zilkha, in the insider trading scheme came to light in filings. Zilkha joined Pequot in 2001 after working for Microsoft, and he used his contacts at Microsoft to tip Pequot to the fact that Microsoft was about to release a better-than-expected earnings report in the spring of 2001. Pequot then made $14 million on trades of Microsoft securities, according to the SEC’s complaint.

Separately, in another context, Groklaw has stated: “Perhaps Microsoft could adopt a new slogan: Don’t Look Evil.” (“If you can’t make it good, at least make it look good,” Bill Gates famously said.)

This statement from Groklaw was said in reference to this meeting. Groklaw also points out another new case of inside trading:

Feds Charge Two In Insider-Trading Plot Involving Disney

Wowza. Folks out at Disney’s HQ in Burbank, Calif., are probably doing a bit of glassy-eyed headshaking on Wednesday, in wake of a criminal complaint filed a few hours ago.

The complaint, filed by federal prosecutors in Manhattan, has alleged that a former administrative assistant to Disney’s head of communications and her boyfriend tried to sell advance access to the company’s second-quarter earnings reports. Click here for the WSJ story; here for the criminal complaint.

Wanna know who else got caught inside trading (but never charged)? Robbie Bach, the Microsoft president who has just fled the company.

“Like any dictatorship, when things start to get tough Microsoft is going to discover that it has lots of allies, but very few friends.”

Dan Gillmor, San Jose Mercury

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