VALinux stock, a "legal scam" by David S. Lawyer, Dec. 2000 (posted to the website of my Linux Users Group) As some of you know, I bought some VA Linux stock in Dec. 1999 at the IPO price of $30/share and sold it for several times that amount. Thus by writing about this I'm in a sense biting the hand that fed me. Not only that but this windfall may have helped save my marriage. Yet I also feel strongly that people need to know some facts and opinions about it, since other stock IPOs (such as RedHat) are somewhat similar. I've been following the stock price on Yahoo and it's now under 8 (down from it's "insane" peak of over 300). Before buying it, I read over the prospectus (which was over 1 MB long downloaded over my old 14.4 modem). The prospectus indicated to me that the IPO was what amounted to a legal scam to make millionaires of the insiders and fleece the public. That is exactly what has happened and it ain't over yet. Why am I presenting it here? On Yahoo there is a discussion group for VA Linux and the posts are mostly short and misinformed. Right now there are a number of angry investors who are reduced to uttering vulgar epitaphs at VA Linux and sometimes at Linux in general. They seem like small investors and as far as I can see most of them are quite ignorant ones that never bothered to read over the almost 100 page Prospectus (single spaced on 8 1/2 x 11" paper). The Prospectus I'm looking at right now is a printed one dated 9 Dec. 1999 (the day the stock went public and sold to the public 4,400,000 shares at $30/share). On p. 7 it states in bold print: "We have a history of losses and expect to continue to incur net losses for the foreseeable future." On p. 22 under the boldface heading "Dilution" it shows that for $30 one only buys $3.45 worth of the company, with the remaining $26.55 going to the benefit of insiders who already own shares. It further implies that there will be additional dilution due to stock options. Then if you turn to p. 60 you see the heading "Stock Option Grants to Officers and Directors". The Chief Technical Officer has an option to purchase 2,376,000 shares at $0.02 per share. A Vice President has an option of purchase 2,919,000 shares at $0.02 per share. And so on. Eric S. Raymond can only get 150,000 shares at $0.043 per share. Did the insiders make money from their stock? Looking at the sales by insiders as reported to the SEC (Securities and Exchange Commission), one sees that they made multi-millions (and the public lost multi-millions). Thus the result of all this is to transfer wealth from the public to the insiders and others (including us). Why us? Because VA Linux has contributed to the free software community by sponsoring websites with info on Linux and has contributed to the development of free software for Linux. What was VA Linux stock really worth? It's main business is to sell servers with Linux pre-installed. It's not much of a monopoly like Microsoft and in a competitive environment their stock was perhaps worth about its book value of $3.45 (and not the $30 that fools like me paid for it nor the $300 that greater fools paid for it). I made money on the so called "greater fool theory". Where does it go from here? Since VA Linux has continued to incur huge losses (but gained in book value per share due to fictitious "good will" accounting), I'm not sure it's even worth $3.45 right now. So in a rational market (which it's not) VA Linux stock should go still lower. So long as it's over $0.02 per share, some insiders can still make money on it. I feel sorry for the investors who lost. Put yourself in their shoes. All of the recommendations or stockbrokers were to buy the stock. Only after it nearly collapsed did a couple of brokers rate it as "hold". What brokers recommended VA Linux? They include Chase H&Q (a subsidiary of Chase Manhattan), Lehman Bothers, Credit Suisse First Boston, and a number of others. See http://www.cnetinvestor.com/reports-single-company.asp?symbol=LNUX So we have an information Internet that mainly supplies misinformation in this case with unanimous recommendations to buy a grossly overpriced stock. If one searched hard enough, critical info on VA Linux was available from a detailed reading of on-line documents at the SEC. But for some reason these don't seems to be indexed by the major search engines. However one can use the SEC's own search engine to find these documents. So apparently a lot of people who bought VA Linux never found or studied this material. It's not all easy reading such as the implications of the term "amortization of deferred stock compensation" as an operating expense. I've studied railroad history and many investors were taken on railroad stock. The insiders like Stanford, Huntington, etc. made fortunes. Same old story but with a different twist. David Lawyer