Microsoft has denied allegations that it offered to guarantee an investment made into the SCO Group - the company at the heart of a legal dispute with IBM over open-source operating system Linux.

"Microsoft has no financial relationship with BayStar and never agreed to guarantee any of BayStar's $50 million investment in SCO," a spokesperson for Microsoft said yesterday. BayStar Capital led a $50 million investment in SCO in 2003 at a time when SCO was expanding its legal fight against IBM and other Linux users.

Last week, IBM filed court documents [pdf] that included a declaration from BayStar executive Larry Goldfarb that said Microsoft had promised to guarantee BayStar's investment. Goldfarb goes on to state that once BayStar made the investment, Microsoft stopped returning the company's phonecalls and the Microsoft executive who made the promise was likely fired.

Microsoft is using those statements to back up its position. "The BayStar declaration confirms that no guarantee was ever provided," the Microsoft spokesperson said.

Microsoft has been under the microscope for any indication that it may have helped support SCO's lawsuit against IBM as a way to stem the growth of Linux, which presents a competitive threat to Microsoft's business.

In its statement, Microsoft reiterated that it did make a licensing deal with SCO to support inter-operability between Microsoft Utilities and Unix-based applications. At the time, in 2003, speculation arose that Microsoft made the deal to help support SCO's legal activities, a motive Microsoft denied. Other companies, including Sun, also formed licensing agreements with SCO, possibly to avoid litigation.

If Microsoft did make such an offer to BayStar it would have been a very risky move, one industry analyst said. "Given the enormous scrutiny that Microsoft is under, I think it's extremely unlikely that they would have engaged in any kind of conspiracy because the potential upside simply isn't great enough and the potential downside is great," said Gary Barnett, an analyst with Ovum.

The dispute began in 2003 when SCO filed a lawsuit against IBM charging it with offering open-source software based on source code that SCO claimed to own. SCO then threatened to sue businesses that use Linux for patent infringement.

Earlier this year, a court dismissed almost 200 of SCO's claims, saying the company didn't provide enough details of the alleged patent infringements.