Tuesday, July 20, 2010

What do Mark Zuckerberg and "The Producers" have in common?

I now direct your attention to the curious case of Paul Ceglia, who filed suit on June 30th in New York state Supreme Court against Mark Zuckerberg and Facebook, asking to be awarded 84% of Facebook. Ceglia submitted a copy of an agreement that he claimed he entered into in 2003 that required Zuckerberg to create a website for Ceglia's company. Tied together with that project was an agreement for Zuckerberg to sell Ceglia a 50% interest in "The Face Book". Ceglia paid Zuckerberg $1,000. In addition, a clause in the contract required Zuckerberg to give up an additional 1% ownership for every day after January 1, 2004 that "The Face Book" didn't go live. The website, at thefacebook.com, finally went live on February 4, 2004, and Ceglia claims that due to the delay, he's owed an additional 34% of the company. The entire lawsuit, including the contract, is viewable at Scribd.

Ceglia has his own problems; he's under investigation in New York state for fraud relating to his wood pellets business. Ceglia waited more than six years to file his lawsuit, and it was filed in a New York state court, not U.S. Federal court. The contract itself is a mess (I'm not an attorney, but I've read a few business contracts in my day, and this one could be an example of "Ten things not to do in a contract.")  The easy conclusion would be that Ceglia had faked the contract, faked Zuckerberg's signature, or otherwise engaged in some kind of fraud. However, that's not what appears to have happened.

Neither Facebook nor Zuckerberg's attorney have come out and said that the contract is a fake. When asked directly by the U.S. Federal Court judge who's taken over the case if Zuckerberg actually signed the contract, his lawyer said "Whether he signed this piece of paper, we’re unsure at this moment." That's a pretty startling statement by defense counsel. If Zuckerberg didn't enter into the contract, his statement to his counsel would be a straightforward "No", and that's what his attorney would have told the judge. However, it appears that Zuckerberg and Facebook are hoping that Ceglia can't produce an original copy of the contract. If not, and all that Ceglia can provide is a facsimile, it makes the case for the authenticity of the contract much weaker. In essence, what Zuckerberg's lawyer said is that they don't know if he signed that particular piece of paper, not that he signed a contract in general. In fact, Zuckerberg's attorney has admitted that Zuckerberg entered into a contract with Ceglia to build a separate website for him.

Facebook and Zuckerberg's counsel are also arguing that the statute of limitations has already run out on any claim that Ceglia could make. In addition, given the enormous amount of publicity that Facebook has had over the years, and the publicity that sales of equity holdings in Facebook have had, Ceglia had an obligation to take action to protect his interests and mitigate losses of other investors.

There's a good chance that Facebook and Zuckerberg will prevail on their arguments, even if Zuckerberg did enter into the contract...but if did he enter into the contract, why? Facebook has already had to pay a $65 million settlement to the Winklevoss brothers, who originally contracted with Zuckerberg to create the website that eventually became Facebook. If Paul Ceglia's contract is shown to be authentic, even if it can't be enforced, Zuckerberg sold him 50% of Facebook for $1,000. Why was Zuckerberg apparently selling Facebook to everyone he could find? It sounds like the plot from "The Producers"; perhaps he thought that "The Face Book" would fail, and he'd keep everyone's money, or perhaps he desperately needed the money for some reason.

In any event, would you like to have this man running your $20 billion dollar valuation business?
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