Executives from Microsoft introduced The SCO Group to an investment fund which provided the Unix supplier with a $50m investment last October.
The executives suggested BayStar Capital should look into SCO as an investment opportunity, said Bob McGrath, a BayStar spokesman.
SCO claimed the Linux operating system contains code which violates its intellectual property rights, and it has launched lawsuits against IBM and Novell in connection with those claims.
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A 2003 Unix licensing deal between SCO and Microsoft earned SCO $16.6m last year, according to US Securities and Exchange Commission filings.
Microsoft's role in the BayStar financing first came to light last week when open-source advocate Eric Raymond published an e-mail written by Mike Anderer, a consultant with SCO contractor S2 Strategic Consulting, which appeared to suggest that Microsoft had funnelled as much as $86m into the company.
"Microsoft also indicated there was a lot more money out there and they would clearly rather use BayStar 'like' entities to help us get signifigantly [sic] more money if we want to grow further or do acquisitions," the e-mail said.
SCO confirmed the authenticity of the 12 October 2003 e-mail, but dismissed its contents.
"We believe the e-mail was simply a misunderstanding of the facts by an outside consultant who was working on a specific, unrelated project to the BayStar transaction. He was told at the time of his misunderstanding," a SCO spokesman said.
While Raymond did not find it surprising that Microsoft had not made a direct investment in BayStar, he speculated that the SCO investment probably involved "an unspoken quid pro quo that would be difficult to verify", on the part of Microsoft.
So far Microsoft's investment tip has not proved to be a good one. BayStar purchased stock in SCO for $16.93. SCO's stock is trading at $9.66, BayStar's initial $50m investment is worth $28.5m.
Robert McMillan and Joris Evers write for IDG News Service