PAUL CEGLIA CLAIMS HE OWNS 50% OF FACEBOOK, HAS NEW ATTORNEY'S AND OVERWHELMING EVIDENCE, WATCH OUT ZUCK

Remember Paul Ceglia? 

He's the fellow in upstate New York who sued Mark Zuckerberg last July, claiming that, way back in 2003, Zuckerberg had agreed to give him a 50% ownership in the project that became Facebook.

That claim seemed preposterous at the time, not least because Ceglia had waited 7 years to file it.

And there was also the fact that Ceglia was a convicted felon having been charged with criminal fraud in connection with a wood-pellet company he operated.. 

In the weeks following the filing of the lawsuit, Ceglia produced what Ceglia said was a copy of the contract he and Mark Zuckerberg had signed covering two projects on which the two were working together--a Ceglia project called "StreetFax" and a Zuckerberg project called "the face book." He also produced a canceled check for $1,000.  He also exlained why he waited 7 years to file the claim.

Paul Ceglia

The purported contract (we analyzed it here) gave Ceglia a 50% ownership in "the face book" project in exchange for funding its initial development, as well as an additional 1% ownership of the project per day for every day that the project remained uncompleted past a certain launch date.

When the lawsuit and the purported contract came to light, Facebook dismissed the whole thing as a fabrication.

Specifically, Facebook said the StreetFax part of the contract was real but that the rest had been doctored to include mention of "the face book."

And given the time that had passed, Ceglia's fraud conviction, and the lack of a payment trail for payments made to fund the development of "the face book" (as opposed to StreetFax), this indeed seemed the most logical explanation.

But now Paul Ceglia has refiled his lawsuit. With a much larger law firm. And a lot more evidence.

And the new evidence is startling.

THE EMAILS

Ceglia has produced more than a dozen of what he says are emails between him and Mark Zuckerberg from July 2003 to July 2004, the year in which Facebook was created.

In these purported emails, which we have included below, Zuckerberg and Ceglia discuss "the face book" project in detail:

• They discuss how Ceglia will fund the project. 
• They discuss how Ceglia has funded the project (proof of payment). 
• They discuss how Zuckerberg has met some upperclassmen--the Winklevosses, presumably-- who are pursuing a similar project, and how Zuckerberg is "stalling" them. 
• They discuss how Zuckerberg has failed to complete the "face book" project on time. 
• They discuss the launch of the face book, which Ceglia agrees looks great.

The emails then include Zuckerberg telling Ceglia that the Facebook site is not doing well. They include Zuckerberg telling Ceglia that the site has seen so little success that Zuckerberg is thinking of shutting it down. And, in the summer of 2004, they include Zuckerberg offering to send Ceglia his $2,000 of funding back--right at the time Zuckerberg had moved to California to continue to develop, incorporate, and raise money for Facebook.

Ceglia contends that most of what Zuckerberg told him after the launch of the site were lies. (Facebook, as we all now know, went gangbusters right from the beginning).  And Ceglia contends that, in the summer of 2004, Zuckerberg "misappropriated" the assets of their general partnership and conveyed them to the corporation that became Facebook, Inc.

Lastly, Ceglia contends that, in accordance with the original agreement, he was entitled to an equal share of Zuckerberg's ownership in the corporation.

FACEBOOK'S RESPONSE

We've talked to Facebook about the new evidence, which we'll run through in detail in the following pages. Facebook says the new emails, like the contract, are fake.  In a statement to us, Facebook lambasted Ceglia as a "scam artist" and a "convicted felon." 

We asked Facebook how it is certain the emails are fake.  (After all, how would Facebook know for sure?) 

Facebook would not elaborate except to say that it is "confident in [its] assessment."

Facebook almost certainly has a forensic analysis of Mark Zuckerberg's hard drives and email boxes from this period, because these drives would have been the same ones analyzed in the Winklevoss lawsuit. Perhaps the drives show different versions of the emails in question--or no emails at all.

But it's not clear that even a forensic analysis would contain records of emails that had been deleted at the time--and given the way his partnership with Ceglia appears to have ended, Mark Zuckerberg might well have deleted them.  In which case, Facebook's confidence about the emails being "fake" would have to be based solely on Mark Zuckerberg's recollection.

CEGLIA'S NEW LAW FIRM

Paul Ceglia's new law firm is a bit more powerful than the small-town upstate New York lawyer who was representing him last summer. The firm is DLA Piper, which is a major international law firm that primarily represents technology companies. 

We have spoken to DLA Piper about the new evidence and amended lawsuit.

DLA Piper took on Ceglia's case very recently, after performing "weeks" of due diligence to persuade itself that Ceglia's claims were valid.

As part of its due diligence process, DLA Piper says, it performed an electronic analysis of the contract Ceglia provided. The firm says this analysis made it confident the contract has not been doctored.

DLA Piper says the lawsuit is well within the statute of limitations in New York, which is 6 years from the breach of contract. DLA regards the "breach of contract" as Mark Zuckerberg's incorporating Facebook in July 2004 and conveying the assets of the Ceglia-Zuckerberg partnership into the new corporation without telling Ceglia. The lawsuit, meanwhile, was filed in early summer 2010.

THE BOTTOM LINE

And what do we think, having looked at this new batch of evidence?

We think that, if the emails and contract Ceglia produced are indeed fake, the fraud should be easy to expose (so easy, in fact, that we imagine DLA Piper's investigators would already have exposed it--which leads us to question whether the emails and contract really are fake). We also think that, if the emails are fake, Paul Ceglia will be going to jail for a long, long time--a consequence that we assume was not lost on him. It's one thing to allegedly defraud a few local customers by selling them wood pellets that you then don't deliver. It's another to try to defraud a major corporation out of hundreds of millions of dollars (or more).

Meanwhile, we think that if the Ceglia emails and contract are NOT demonstrably fake, Facebook will soon be paying Paul Ceglia several hundred million dollars--if not billions--in a settlement.

We think Paul Ceglia still has some major questions to answer, the most notable of which is why he waited so long to file his claim. (Last summer, Ceglia explained that he forgot about the contract, which is not particularly persuasive in light of the huge publicity Facebook and Mark Zuckerberg eventually received. Ceglia also said he only stumbled across the contract, ironically, when he was going through his files in connection with the fraud charges for his wood-pellet company).

Based on other emails, instant messages, and behavior of Mark Zuckerberg in the fall and winter of his sophomore year at Harvard, we also think that the duplicitous Zuckerberg behavior that Ceglia describes is plausible.

Lastly, we note that Ceglia's emails do not make Ceglia sound like a prince among men, either. So if Ceglia fabricated all of these emails, he was smart enough to add verisimilitude to his tale by making himself look like a bit of a jerk.

In short, to us at least, the emails don't read "fake."

COMMENTARY:  On July 10, 2010 I wrote a blog post about the film "The Social Network" which was going to be released in theaters on October 1, 2010.   I also poked some fun at all the individuals that were suing Mark Zuckerberg and Facebook.

• Cameron and Tyler Winklevoss - The original case ended in an out-of-court settlement of $65 million in 2008.  The Winklevoss twins reopened the case claiming that Facebook had misrepresented what the company was worth upon learning that Facebook was worth $41 billion in December 2010.  That case was dismissed on April 11, 2011 by the U.S. Court of Appeals for the 9th District.
• Edward Savarin - Mark's roommate at Harvard, who co-founded and financed the theFacebook.com (the original name of Facebook) sued Mark to be officially listed as co-founder of Facebook.  That lawsuit, was finally settled in January 2010, and supposedly included payment of an undisclosed amount of cash and a 0.5% stake in Facebook stock.
• Paul Ceglia - Filed a lawsuit against Mark Zuckerberg and Facebook on July 12, 2010 who claimed that he owned 85% of Facebook.  Gets new high-powered law firm to represent him.

How Ceglia's ownership claim of theFacebook.com (now Facebook) went from 85% to 50% is unknown.  I assume that it includes the late payment charges written into the agreement Zuck signed.

DLA Piper, Ceglia's  new attorney's, have conducted due diligence on the contract and email, and find them legitimate, otherwise they would not be taking on this case.

So far Zuck and Facebook have settled with two of the plaintiffs: the Winklevoss twins and Eduardo Savarin, but it is gonig to get very interesting if Ceglia wins his claim.  How do you award 50% of a company when the stock of that company is owned by multiple stockholders without diluting them. Business Insider prepared the following list of Facebook shareholders at the end of January 2011:

  

Facebook is now valued at $75 billion based on the sale of Facebook shares through private company stock broker SecondMarket on March 5, 2011.   As you can see from the above graphic, Zuck and Facebook staffers own 54% of Facebook shares.  If a judge were to award Ceglia a 50% interest in Facebook, then everybody's share holdings would drop by half, with Zuck and Facebook staffers owning only 12% and 15% respectively.   That's a drop of $20.250 billion.  The other shareholder's would be severely impacted.   Goldman Sachs has invested a total of $1.9 billion for 3.8% of Facebook.  Based on Facebook's new valuation, the Goldman Sachs shares are now worth $2.850 billion.  After dilution, Goldman's stock would be worth $1.425 billion.  That's a net loss of $475 million.  However, since it's Goldman Sachs, and I despise their CEO Lloyd Blankfein, I would not mind seeing that happen.  If I were a Facebook shareholder, I would quietly start selling my Facebook shares.

A lot of money is at stake, and I have a feeling that the other investor's are not gonig to take dilution lying down.  I anticipate an appeal, and if that fails, then the other shareholders will probably sue Zuck for withholding valuable information about Ceglia, and the affect that losing that lawsuit might have on their share holdings.  I actually look forward to this bloody series of lawsuits. It's fresh material for my blog.  However, if I were Ceglia, I would settle out-of-court for $20 billion and call it a day.   I'm rooting for you Ceglia.  #winning

Courtesy of an article dated Apri 14, 2011 appearing in SAI Business Insider, an article dated July 23, 2010 appearing in SAI Business Insider and an article dated January 12, 1011 appearing in SAI Business Insider

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