
Court says Winklevoss twins must accept Facebook deal - jedwhite
http://www.reuters.com/article/2011/04/11/us-facebook-winklevoss-idUSTRE73A5DX20110411
======
grellas
If anyone still cares, this was the case that created such an uproar last May
when it was widely reported that Mark Zuckerberg had been accused of
committing "securities fraud," allegedly adding to his supposedly shady legal
woes (prior HN discussion here:
<http://news.ycombinator.com/item?id=1362379>).

In fact, the securities-fraud claim was merely some legal legerdemain by which
the Winklevoss brothers sought to set aside the $65 million settlement they
had struck with Facebook in their quest to obtain more. It is basically absurd
to say that a party settling a legal case must comply with the disclosure laws
for making a private placement in offering a stock component as part of a
settlement package in a mediation context.

The Ninth Circuit panel here obviously agreed, and the writing was on the wall
on this issue even after the oral argument held three months ago (see my
comment here: <http://news.ycombinator.com/item?id=2096370>).

The case is not necessarily dead, at least in theory, since the Winklevoss
brothers might petition to have it reconsidered _en banc_ by the full Ninth
Circuit and can file for a writ to the Supreme Court. At this stage, though,
such options are long-shot options at best.

I note one irony in passing. The ratio of the stock value to cash payment that
made up the original settlement was not coincidental. The $65 million value
consisted of 1.2 million Facebook shares originally valued at $45 million plus
$20 million in cash. Receipt of such stock is a taxable transaction and,
indeed, would constitute ordinary income to the Winklevoss brothers. Thus,
they were to have received $65 million in taxable income, including $20
million in cash to help cover the tax. But that was then. Having chosen to
fight the issue, they would not have realized any form of taxable income on
this deal until they actually _received_ the stock. As a result, when they now
receive the cash/stock package, they will realize an estimated $170 million in
taxable income (the cash plus FB stock worth $150 million), with only $20
million to help defray taxes. That stock will not be immediately marketable,
even on the secondary exchanges and will require FB's permission to be sold
there. The net result, unless I mis-analyze, is that the Winklevoss brothers
have by their choosing to fight managed to convert over $100 million in stock
value from what would have been a long-term capital gain into ordinary income,
will have to pay much higher taxes accordingly, and will (I would assume) be
faced with a serious logistical problem in the form of a short-term cash
squeeze in raising funds to cover the taxes. I am not a tax specialist and may
be wrong on this, but I don't think so.

FB dodged a bullet on this one. Had the settlement been set aside, the
liability overhang would very likely have messed up its IPO, among other
serious consequences. That was the gamble apparently made by the Winklevoss
brothers - that they would be able to exact a much larger settlement as a
result of their leverage obtained from having the issues re-opened. It
appears, though, that they gambled and lost and not without detriment to
themselves. For its part, FB now seems to be in the clear.

~~~
dhimes
_It is basically absurd to say that a party settling a legal case must comply
with the disclosure laws for making a private placement in offering a stock
component as part of a settlement package._

Why is it absurd? In particular, is it legal to lie about the value of the
stock in a negotiation? I'm genuinely curious.

~~~
grellas
Securities laws were obviously not intended for a mediation context. Innocent
investors buying stock from an issuer presumably trust that the issuer will be
truthful about the value of the stock and about the material facts that affect
that value. No such trust exists in an adversarial context where it is
presumed that, in negotiating deals, it is every man for himself. Moreover, if
securities laws applied in this context, then parties would need to do
Regulation D/blue sky compliance to ensure that they were not sued after-the-
fact. This is wholly impractical and would basically negate the ability of
parties to settle by offering stock or other forms of equity to one another.
In all the many years since the U.S. securities laws were enacted back in the
early 1930s, these laws have never been applied in the manner suggested by the
Winklevoss brothers. Since the issue is one of what Congress intended in
enacting those laws, the failure of anyone even to raise the issue for so long
a time is a good indicator that Congress never intended them to apply to this
context.

~~~
dhimes
_No such trust exists in an adversarial context where it is presumed that, in
negotiating deals, it is every man for himself._

This is what I was looking for. In these situations, misrepresenting the value
is not considered fraud. Thank you for the warning. I was unaware of this.

------
cabalamat
They should think themselves lucky to get $65 million for essentially nothing.
They are really no different from people who post on Craigslist that they have
a great new startup idea and just need someone to code it for them. The only
difference is that because they are rich and well-connected they were able to
unjustifiably extract money from Zuckerberg, who unlike them made something
people want.

~~~
phlux
I have no love for the twins, however I also cant agree with your statement.

There is a difference between posting on CL with an idea. and having an
idea/site and plan laid out - recruiting a developer who decides to work with
you who obviously would add value to the design/plan - and then him turning
around _after_ agreeing to work with you and implementing his own version of
it.

If, for example, he had read an ad on CL - which the ad alone ignited
something inside him and he went and implemented it on his own - then I could
agree. He was _recruited and agreed_ to work on the project _for/with_ them.

Then, he fucked them over in the negotiations as well.

Anyway this is looked at, Zuckerberg is a complete douchebag.

Successful? Yes. Within legal rights? Sure - but an amoral untrustworthy
douchebag none-the-less.

I am not saying the twins should receive [whatever it was they were seeking] -
but I am tired of people defending mark zuckerberg.

~~~
dasil003
Sure, Zuckerberg acted unprofessionally, and so they do probably deserve
something. But it's important to realize that they came out ahead by $65m.
There's not a chance in hell that if Zuckerberg had simply delivered what they
asked and then severed ties in an ethical manner that they would have created
a company worth anywhere near that.

~~~
phlux
I agree with this statement, its just the altruist in me wants to beat people
who act like zuck with a stick. The entrepreneur in me respects the company he
has built and the paranoid conspiracy theorist in me refuses to participate in
any facebook data harvesting site which commoditizes me and my personal
relationships for profit.

(This is why I make a distinction for Linked-in. Linked-in serves my
professional needs and I can financially/professionally benefit from it - but
my personal relationships are just that - personal. If I must have a suite of
digital tools to manage the personal relationships, then maybe there is
something wrong.)

Though, in conclusion, I agree too that the court system should be done with
the case when justice is served, not because its a tired story - or that the
twins are just as douchey as mark.

I am in no position to make a judgment on what is just, however.

~~~
juiceandjuice
The altruist in you wants to beat a man who donated $100 million dollars with
a stick?

~~~
SeanLuke
$100 million is rather less than 1% of Zuckerberg's wealth. Little old ladies
donate higher percentages than this.

Donations, particularly ones which smell an awful lot like quid pro quo, don't
count for much in my book unless they truly hurt. When Zuckerberg donates all
_but_ $100 million, I'll believe he's doing something other than buying his
way out of hell. And when he donates all but $5 million, ideally anonymously,
then I'll be impressed.

~~~
ryanwaggoner
_And when he donates all but $5 million, ideally anonymously, then I'll be
impressed._

Maybe he already has :)

~~~
SeanLuke
Cute, but we can verify that he has not: stock holdings.

------
imjk
"At some point, litigation must come to an end," Chief Judge Alex Kozinski
wrote. "That point has now been reached."

~~~
kenjackson
Doesn't litigation come to an end when justice has been served? I don't know
the details of the case, nor do I have a stake in this, but it seems odd to
limit damages if one party illegally withheld information.

This coupled with the recent Supreme Court ruling that prosecutors effectively
can't be held accountable for hiding evidence that would exonerate a defendent
-- seems to be saying that your best strategy in the legal system is to
illegally withhold information, because the legal system will eventually not
care, even if the actors in the case still do.

~~~
tedunangst
Litigation ending only when justice is served is an impossible standard. The
losing party (whichever side it is in that round) will obviously feel justice
has not been served and appeal endlessly. If the two sides agreed on what
constituted justice, there wouldn't be a court case.

~~~
jacques_chester
> If the two sides agreed on what constituted justice, there wouldn't be a
> court case.

And indeed this is the entire point of the common law: to provide independent
decisions, according to rules, in order to settle disputes without violence.

Endless appeals don't always work either -- you actually need a legal reason
to appeal beyond "I disliked the decision". You need something like "The judge
was wrong on points of law X, Y and Z" _and_ you need the appellate court to
agree that there _might_ be something to review.

Most appellate courts look pretty dimly on appealing for the sake of
appealing. Plus their time is limited, so they will tend to pick cases with
broader legal consequences that will impact more than the disputants.

------
yuhong
Personally I wonder why the IMs were not revealed until after the settlement.

------
timmyd
"Fool me once - shame on you. Fool me twice - shame on me."

~~~
KE4ZNR
Maybe it is just me being the lowly I.T. Geek I am but I do have a difficult
time feeling any sympathy for the "Wonder Twins". They were set for life
before pursuing this litigation and will still be set even with this ruling. I
guess since I was not lucky enough to be born in the "Silver Spoon" way of
living it makes my care threshold for them set very low :)

