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SCO Loses an Angel Investor

Officials at the SCO Group said Friday one of its primary investors is cashing out, converting 10,000 equity shares to common stock and selling the rest to fellow investor BayStar Capital.

In October 2003, BayStar and the Royal Bank of Canada (RBC) invested $50 million in SCO, a company facing daunting legal battles against some of the biggest software companies in the world -- IBM , Novell and Red Hat -- as well as some of its customers.

RBC told SCO officials Wednesday they planned to convert one-third of its 30,000 Series A-1 shares into 740,740 shares of common stock and sold the rest to BayStar, who now own 40,000 shares of the Series A-1 stock, worth $40 million. Each equity share is worth $1,000.

Chris Pepper, a spokesperson for RBC, refused to comment on anything beyond what was written in the SCO announcement.

"The timing and price of our purchase of RBC's holdings in SCO presented a strategic and financial opportunity for BayStar and its investors," a spokesperson for BayStar told internetnews.com.

Its a seeming contradiction for BayStar, which April 16 sent SCO a notice saying they wanted their $20 million investment returned to them, citing breach of contract on several items.

Unlike BayStar's request for money-back redemption, SCO officials said converting shares to common stock is acceptable under the terms of their contract for Series A-1 shareholders.

The investment firm has been tightlipped about the affair, other than the sections of the contract they said SCO violated. It's been felt by some in the tech community that BayStar is looking for a way to force a change of management at SCO. BayStar officials did not deny asking for the change, saying they're looking at all options.

"We certainly want a resolution that is in the best interests of all the shareholders in SCO, so we'll look at all options that can meet that criteria," the BayStar spokesperson said.

In a New York Times piece last month, Lawrence Goldfarb, a managing partner at BayStar said SCO's management "was traveling too much and spending too much when it should have been concentrating its efforts and resources on its legal strategy," according to the article. The BayStar partner also pointed to CEO Darl McBride's often outspoken verbal spats with the Linux community.

SCO spokesperson Blake Stowell told internetnews.com earlier this week they would be providing official comment on the BayStar's April actions but was not available at press time to comment on RBC's stock sale Wednesday.

The heart of the issue is SCO's allegations that IBM broke a contract and swiped code from its copyrighted Unix System V code to bolster the Linux kernel, the essential building block of an operating system. The Linux operating system is distributed by commercial vendors like Red Hat and Novel (which owns SUSE Linux) and used by millions of Linux enthusiasts. If SCO wins its case against IBM, it's possible every end user or company using a Linux-powered OS would have to pay them a licensing fee.