Fred Luddy

In May of 2013, San Diegan Frederic Luddy was being interviewed on video about the company he founded, ServiceNow. In response to a softball question, Luddy boasted, “Good artists copy and great artists steal, and I’ve been a thief all my life. I’m going to admit it right here, right on camera, live.”

Hmmm... There’s nothing like flipping the middle-finger salute at larger competitors. Indeed, BMC Software, a company cofounded by former San Diegan John Moores, gleefully picked up on Luddy’s quote. In September of last year, BMC filed a suit, claiming that ServiceNow has infringed on seven of BMC’s patents.

Luddy’s quote “explained his attitude toward the intellectual property rights of others,” declared the suit. “ServiceNow’s business is largely built upon its infringement of BMC’s patented technologies.”

BMC wasn’t the first to sue. In February of last year, Hewlett Packard filed suit against ServiceNow, claiming it infringed on eight of that company’s patents.

BMC, Hewlett Packard, and ServiceNow are all in the business of creating software to help companies manage information technology. BMC is probably the third-largest company in the business, and Hewlett-Packard the fifth largest. ServiceNow is well down the line but coming on fast in revenue, although it is still losing money.

There is a curious relationship among those three companies, marked by rancor and litigation. BMC was incorporated in 1980. The name BMC came from its three founders: Scott Boulette (the B), Moores (the M), and Dan Cloer (the C). In 1986, Boulette and Cloer sued Moores, claiming he had pressured them into signing away their partnership rights. The suit was settled confidentially. As BMC grew rapidly, it sued International Business Machines, which now is said to be the big enchilada in business-management software.

In the late 1980s, Moores took an interest in San Diego’s Peregrine Systems, another entrant in this area of software. Moores left BMC in 1991 after some internal squabbling and, with $400 million in his pocket, continued to buy Peregrine stock at 33 to 59 cents a share. He also bought a majority interest in the Padres. He was chairman of Peregrine from 1990 to 2000 and in 2002 and 2003. But it turned out that Peregrine was systematically cooking the books. The stock plunged to pennies a share, but Moores had dumped more than $600 million worth of stock, nearly all he controlled, before the fraud surfaced. Some executives went to prison, but Moores and other boardmembers got off with a wrist slap — a mere $55 million payment, with Moores shelling out roughly half of that, chump change for a person of his wealth.

Another company was in the Peregrine picture: BMC. In 2002, it was getting ready to buy Peregrine. Then the fraud was discovered. Peregrine went into bankruptcy, and BMC bought one company belonging to Peregrine. Eventually, Hewlett Packard bought much of the rest.

Frederic Luddy was chief technology officer of Peregrine from 1990 to 2003. Like Moores and virtually all the executives of Peregrine, he was dumping stock as the company cooked the books, although he was not charged with participating in the crimes. Luddy had to pay a $100,000 penalty for his role at the company.

In 2004, while Peregrine’s corpse was still warm, Luddy launched ServiceNow, which planned to butt heads with BMC, Hewlett-Packard, and other powerhouses such as International Business Machines and Microsoft. ServiceNow was initially based in San Diego.

Who was Luddy’s angel? Why, John Moores. JMI Equity, which Moores funded with his close associate Charles Noell, owned 54 percent of ServiceNow in its early years and 49 percent after it went public in mid-2012.

Charles Noell

ServiceNow executives are following the Peregrine script. The ServiceNow insiders’ mantra has been “sell early, sell big,” wrote Richard Pearson of investment news site Seeking Alpha in April of 2013. The title of his essay was “ServiceNow: Analysts Say Buy But Insiders Rush to Sell Big.” Pearson perceived the Peregrine pattern at ServiceNow: Luddy, Moores, and Noell “were big early sellers of their previous venture, Peregrine Systems” and were doing a rerun with ServiceNow stock. On the first day in which he was permitted to sell, Luddy jettisoned $12.4 million worth of ServiceNow stock. As time went on, Moores and Noell sold heavily and left the board of the company. They are not now listed among major holders of the stock. Top executives besides Luddy continue to bail out of ServiceNow stock.

Markus Aarnio of Seeking Alpha, also writing in early 2013, noted that insiders were selling but not buying — a pattern of “intensive insider selling.”

Similar to Peregrine in its heyday, ServiceNow is not profitable. It has a cumulative deficit of $314 million, but its revenue is soaring. Most analysts are paying little attention to the insider selling. The same was true of Peregrine — until it suddenly collapsed in fraud.

Forbes magazine in 2012 estimated that Luddy’s net worth was $400 million. At the time of the initial public offering in 2012, he had 13.4 million ServiceNow shares and has sold most of them. But the stock has more than tripled, so he should be worth more than $400 million now.

ServiceNow eventually moved its headquarters from San Diego to Santa Clara, but it is obvious Luddy spends much time here. In 2013, he bought a 4000-square-foot oceanfront home in Del Mar for $18.75 million.

Jack McGrory

SD Aviators logo

Along with former San Diego city manager Jack McGrory, Luddy owns the San Diego Aviators, a professional tennis team. He was chief executive officer of ServiceNow from 2004 to 2011, when he stepped down to become chief product officer.

Bank of America Merrill Lynch loves the stock. Its target price is $75. But with the stock selling in the 60-dollar range, investment analysis site Morningstar says it is worth only $43 and the company won’t be profitable until 2016.

I could not reach Luddy after several attempts. I asked the press relations person a slew of questions and gave her more than three weeks to answer. She came back with one prepared statement: “Fred Luddy is the founder and chief product officer at ServiceNow and is actively involved in day to day operations.” That’s all.

With those lawsuits hanging over this company and insiders dumping shares rapidly, I wouldn’t buy the stock.