

Appeals court doubts that Zuckerberg committed "securities fraud" - grellas
http://www.law.com/jsp/ca/PubArticleCA.jsp?id=1202477738186

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grellas
In my view, the last major legal cloud that hangs over Facebook is the appeal
by ConnectU and the Winklevoss brothers of a federal court decision upholding
a settlement between them and FB of their claims that Mr. Zuckerberg had
allegedly stolen their ideas to form the company. With that settlement in
place, those parties received what many considered a windfall ($20M cash and
1.2 shares of FB stock, originally valued at $45M and now estimated to be
worth $150M). Should it be set aside, however, the settlement value of such
claims today would be astronomical. Why? Because these claims (unlike those of
Mr. Ceglia, who filed a claim nearly seven years after the fact claiming an
"84% stake in Facebook") were timely brought and have overhung every round of
financing that FB has done from the beginning. In other words, existing FB
shareholders have at all times been aware, in making their investment, of the
risk that they could potentially lose everything should ConnectU prevail in
its claims to own the FB IP. That is a devastating outcome for FB
shareholders, of course, but the claimants here (unlike Mr. Ceglia) cannot be
accused of laches or foot-dragging in ways that make the timing of their
claims inequitable and therefore unenforceable. Thus, should they get this
settlement set aside, FB would be faced with _years_ of future litigation
during which a serious question mark would hang over the entire value of its
company. Hence, no IPO; hence, a far higher cost of any financing down the
road. The stakes are high in this case.

The ConnectU parties have sought to set the settlement aside on the grounds
that FB and Mr. Zuckerberg committed "securities fraud" in inducing them to
accept stock in the company whose value they allegedly overstated at the time
it was offered to them in settlement of their case (see this press account
which caused a frenzy at HN some 7 months ago,
[http://venturebeat.com/2010/05/19/facebook-connectu-
securiti...](http://venturebeat.com/2010/05/19/facebook-connectu-securities-
fraud/?utm_source=twitter&utm_medium=twitter-publisher-
author&utm_campaign=twitter) and my comment on it here,
<http://news.ycombinator.com/item?id=1362379>).

As I argued before, the securities-fraud claim was extremely artificial for
several reasons but mainly because it is wildly outrageous, by lawsuit
standards, that a party should be held to comply with such laws in a
confidential mediation context.

It now seems that the Ninth Circuit Court of Appeals is inclined to that view
as well. This news account is based only on the views publicly expressed by
the judges during the course of oral argument and anything is possible, of
course. But this doesn't appear to be going ConnectU's way at this point and,
barring a significant change of heart by the panel from that indicated by its
comments, FB would appear to have this one safely in hand.

