Ronna Abramson

Return to Article

SCO Group Hit by Double Whammy

Ronna Abramson

Updated from 2:21 p.m. EST.

Shares of SCO GroupSCOX, the company challenging the popular Linux movement, fell sharply Monday after the company lost a court motion Friday and postponed its earnings report.

After trading as low as $15.10 intraday Monday, SCO shares closed down $1.32, or 8%, at $15.27.

Two events from Friday were feeding the selloff. First, SCO lost a motion asking IBMIBM for source code. The court also ruled SCO must provide the code relevant to the case to IBM within the next 30 days.

In its suit, Lindon, Utah-based SCO has charged that IBM breached a contract with SCO by misappropriating SCO's Unix code in IBM's Linux business.

"We are pleased that the court has indicated that it will compel SCO to finally back up its claims instead of relying on marketplace FUD, or fear, uncertainty and doubt," IBM spokesman Mike Darcy said in a prepared statement Monday.

The legal setback may prove temporary for SCO, however. SCO spokesman Blake Stowell said the company will have the opportunity to argue again in Jan. 23 that IBM also should produce source code.

The judge's order compelling SCO to produce its code was "absolutely not a surprise to us at all," Stowell said. "We were sure at some point we would need to be more specific, and this was that point."

Secondly, SCO on Friday postponed its fourth-quarter earnings report, initially scheduled for Monday, in order to work through the accounting treatment of its recent private placement convertible stock issue. SCO sold a $50 million convertible note last month to fund its Linux campaign and to help pay lawyer David Boies, who has a history of litigating high-profile cases against MicrosoftMSFT and George W. Bush, and against the recording industry on behalf of Napster.

In a press release Friday, SCO said it was performing a valuation of the conversion feature associated with the issue, which will not affect revenue or cash. SCO reiterated its prior guidance for fourth-quarter revenue ranging from $22 million to $25 million.

Although such delays can raise red flags, one buy-side source, who asked that his name not be used, said he believed the reason was legitimate. "I don't think there's any funny business going on," he said.

The source, who holds SCO shares, suggested a "market effect" was also pushing the stock down, with investors taking profits in small-cap tech names that have enjoyed a strong run this year. SCO shares have soared in the past 12 months, trading as high as $22.29 in mid-October vs. a low under $1.50 a year ago, while drawing a whopping 21.6% short interest as of Nov. 10.

But on some level, SCO has turned its stock into a lottery ticket on the outcome of its controversial suit against IBM. On Monday, investors were rethinking the worth of those tickets.