7 ms·

Zuckerberg accused of securities fraud

201 points by bjonathan 16y ago

WillyF 16y ago
When I first read the headline, I assumed the story was going to be something like Zuckerberg looks at Facebook user's private messages and makes trades based on the private information in those messages. Obviously that's not the case, but it wouldn't have surprised me with the way he treated user data, especially early on in Facebook's history.
- philwelch 16y ago
  What good do you think it accomplishes to post this comment? Of course people assume terrible things about Zuckerberg now that Facebook has passed into the backlash stage of the hype cycle, but having a vivid imagination about the crimes someone hasn't actually committed is a reflection on you, not on him.
  - WillyF 16y ago
    The point of my comment is that unethical behavior, even when you're early 20s, will cause people to assume the worst with you. Facebook's current privacy policies and attitudes are alarming enough, but they're far more alarming when taken into context with Mark Zuckerberg's alleged past behavior. Most people don't read full articles. They look at the headlines and make assumptions. Mark's put himself in a position where the assumptions that people make are going to be negative, and that's going to hurt his business, even if it's unfair.
    - philwelch 16y ago
      It's important to recognize that once you've reached the backlash stage of the hype cycle, the negative rumors and assumptions of bad faith will begin. It's not important to participate in that process personally, and it's rather below the level of discourse I'm interested in seeing on Hacker News.
deleted 16y ago
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byrneseyeview 16y ago
This looks weak. They knew what they were getting. They agreed to take it. And now they've changed their minds. The secondary value of that stock is higher than the value at the time of the Microsoft deal (http://www.sharespost.com/companies/facebook http://www.sharespost.com/companies/facebook), so they're basically suing because Zuckerberg accidentally gave them a bargain. If FB can buy back that stock at the original valuation, they'll get a good deal.
- Ixiaus 16y ago
  I agree, the stance appears weak - I'm not a lawyer nor am I fully aware of the whole thing but it just sounds like a timed temper tantrum to take advantage of Facebook's negative press about privacy settings &c.
- alttab 16y ago
  The point is they based the stock off the valuation of preferred stock, but then they actually "received" common stock. It takes a while to get the ball rolling to accuse Facebook that they got a raw deal. Here, Facebook tried to pull over a "well at least its stock" deal even though they agreed to $65million. I wouldn't feel bad for ConnectU as $35million is still fantastic, but wouldn't you go back to court if another 35 was on the table? You'd be an idiot not too. All that said, this is perfectly in-line with Zucker's character as its been painted as of late.
  - pwhelan 16y ago
    I don't feel that bad, considering it seems like Zuckers has been an unethical solipsist since the start. These 3 perhaps had more than just money taken from them by Zuckers "jackassery".
  - pier0 16y ago
    They're also claiming that the initial agreement was fraudulently induced.
frisco 16y ago
"An actual indictment on securities fraud would make it impossible for Zuckerberg to remain Facebook’s CEO if it were to go public." How likely is that, really? Regardless of whatever anyone thinks of Zuckerberg, that's ridiculous.
- neurotech1 16y ago
  This statement is ambiguous anyway. This is a civil suit and not criminal case. Secondly, from my understanding, only the SEC via a federal court can "ban" someone from being a director in a public company.
mkramlich 16y ago
This is one of those stories where I cannot feel sympathy for either side.
- tiffani 16y ago
  I feel sorry for the ConnectU guys only because it looks like they'd rather spend time suing than building something else. Sure, it sucks to get ripped off, but it sucks worse to drag out that kind of response to having that happen.
  - jerf 16y ago
    What realistic chance do they have of building anything that would make up the difference of around $30 million? "Shrug it off and go build something else, it's not worth the hassle" is for when you miss two weeks of consulting fees on a terrible customer before you cut them off, not $30 million.
    - philwelch 16y ago
      About as much chance as they'd have of building anything worth $65 million in the first place, which doesn't seem like much. These guys are just the stereotypical "startup idea people" who think "we just need to hire a programmer to implement our vision". I know Mark Zuckerberg is the villain now, but let's be fair. Just because Facebook's default privacy settings aren't private enough for our tastes doesn't mean Zuckerberg is a psychopath or that everyone who has a grudge against him is the hero.
      - jerf 16y ago
        I have no idea nor any opinion about the merits of their case. I am pointing out the otherwise useful idea of "just shrug it off and build something else" is good advice only in a certain domain, and this is not in that domain. It is dangerous to take advice out of the domain it is appropriate for (a broadly applicable statement), and useful to point out when it is occurring. Frankly, I don't care how any lawsuit goes. My personal recommendation would be to take the settlement and cash out while Facebook stock is still worth something. I'm not terribly sanguine about the 1-2 year prospect of the stock. (Not because Facebook will be gone by then, but because the current value of the stock includes a promise of growth that I think will be obviously not going to happen by then.)
jrockway 16y ago
Zuckerberg slept with my girlfriend! Do you see what I did there? Anyone on the Internet can accuse anyone of anything. And you can do the same in a court document -- when you sue someone, you don't say "I think the person I am suing is a fine and upstanding citizen." You come up with anything that sounds bad and could possibly be true, just in case you're right or the judge buys it. This is a non-story. Facebook is shady, but there is probably no securities fraud involved.
- deleted 16y ago
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- adelevie 16y ago
  I'm sure the settlement was well-documented... much more documented than any supposed rendezvous with your girlfriend.
ct4ul4u 16y ago
I believe this will hinge on the details of how Facebook represented the value of the securities to ConnectU. Representations of the value of a security are legally perilous. If Facebook's lawyers at the time were good, I imagine Zuckerberg will get a pass. If they missed the dots on a few "i"s or the crosses on a few "t"s, then Zuckerberg could be in for a long ugly ride. I am not a lawyer, but I worked in the securities industry in a regulatory supervisory capacity (series 24, plus a mess of others). Good general advice: Any time you feel the urge to tell somebody what your stock is worth, avoid the urge unless your legal department is involved.
strlen 16y ago
I have a very neutral opinion about Facebook and no strong attachment. While I respect their ability to solve some really interesting scalability challenges, I don't work there: I ignored them early on thinking they're "just another PHP website", their recruiters did reach out to me recently but I've already started a new position. I am not a heavy user of the site: I don't message other users, don't use any applications and update my status from Twitter. Essentially, I don't have a bias for or against Facebook. On the other hand, I find the Winklevoss brothers revolting: "Oh hey, here's this nerd who can our build vision for us and make us rich! Let's hire and pay him pittance! Oh no, he executed on our unique idea himself?!". As for most other developers, when approached by "business guys" my typical reaction is to polite say no. Zuckerberg did a much smarter: took their (simple and intrinsically worthless) idea and built a product and a business on it himself. It's sad that the courts gave the brothers any money (rather than treating the lawsuit as frivolous). Nonetheless, I still hope this will be a sign to "business guy" jocks that this model won't work: it's a lot easier for a nerd to learn business than it is for you to learn programming. Want to build software? Pick up the K&R book, instead of trolling the CS lab.
- _delirium 16y ago
  I dunno, it depends on the circumstances I suppose. If you accept a hired job from someone and then take the idea private instead of doing it for the person who hired you, that seems like it legitimately should be illegal. Like if an Intel manager comes up with an idea and asks an engineer to work up a prototype, surely it'd be illegal for the engineer to quit and work up that same prototype for a new chip-design startup instead?
  - philwelch 16y ago
    Something tells me that microprocessor specifications (at the level that an Intel engineer would be dealing with) are actually valuable intellectual property, not just some sort of vague idea about a unified online Harvard facebook that Zuckerberg changed several times as Facebook developed.
    - 16y ago
grellas 16y ago
A few observations: 1. What is at stake: The original lawsuits filed in Massachusetts in 2004 claimed a theft of IP by Mr. Zuckerberg in starting what is today Facebook. Ergo, there is a massive amount at stake financially if the original case is re-opened and made subject to litigation. Among other things, the ConnectU founders could make a claim on FB's profits almost in perpetuity, could obtain injunctive relief by which they could effectively shut FB down via court order, and could cause the FB founders to be exposed to endless problems with FB's own investors for what would undoubtedly be breaches of reps and warranties made by FB and its founders in the Series A through D & following investment documents (for example, Microsoft might potentially seek to rescind its $240 million investment and demand its money back). Thus, a re-opening of the original case would be a horrific event for FB and its founders. The problem here is this and not any supposed indictment for securities fraud. Of course, with such risks involved, the ConnectU founders have a great motivation to push every angle possible to get the case re-opened because any amount that would be paid to settle the case today would easily dwarf the original settlement amount. 2. Where this is at: The article makes it seem like some dramatic event occurred by which FB and its founders have suddenly been hit with some claim for securities fraud. This is far from accurate. Back in 2005, Facebook responded to the original Massachusetts suit by filing a legal action in California, evidently trying to gain a procedural advantage against both ConnectU and its founders. The ConnectU founders got themselves dismissed from that case on grounds of lack of personal jurisdiction, leaving only their entity in the case. The parties later conducted a private mediation and settled the case over a two-day period. The ConnectU founders did appear in the mediation and got their promised payday. The settlement was documented in the form of a 2-page term sheet and basically involved the grant of a large chunk of FB's common stock to the ConnectU founders. After the mediation was done, the parties attempted to take the 2-pager and put it in the form of definitive documentation and that is where things broke down. Initially, FB apparently tried to accommodate the ConnectU side by preparing complex documentation that would have made the acquisition of ConnectU by FB a tax-free merger (this obviously would have benefited the ConnectU founders, who otherwise would have been taxed on the value of the stock they received as of the date of receipt, leaving them with a multi-million dollar tax hit and no way to liquidate their FB stock to pay for it). When disputes arose about the detailed terms, FB filed a motion with the court to enforce the settlement. In doing so, it asked the court to enforce the terms it had put form in the complex documentation and not as set forth in the 2-pager. The court, on hearing the motion, ordered that the settlement agreement be enforced but did so based on the terms set forth in the 2-pager. The ConnectU parties were then forced to deliver the ConnectU stock to Facebook, which (given that it then controlled the company) promptly fired the attorneys who had been representing ConnectU and its founders. This left the founders scrambling to appeal and to do so under circumstances where the only party with standing to appeal (ConnectU) was controlled by FB as an adverse party. This led to a logistical nightmare, from a litigation perspective, but it eventually got sorted out when the court let the ConnectU founders "intervene" and make their case on appeal. The brief filed before the Ninth Circuit Court of Appeals (discussed in this article) is the opening shot on an appeal seeking to overturn the lower court's order enforcing the settlement. 3. The legal claims on appeal: When it opposed enforcement of the settlement in the lower court, ConnectU raised the legal theory that FB had violated federal securities laws when it allegedly agreed to grant stock to the ConnectU founders in exchange for a release of their claims. The lower court disagreed in electing to enforce the settlement and that is why the issue is being raised on appeal. The other ground of appeal is that the 2-pager that the lower court said constituted an enforceable settlement agreement did not amount to a binding contract because it lacked material terms. Hence, given that the parties were unable to agree on the detailed terms, ConnectU asserts that, at best, the parties only had a "letter of intent" outline of what an agreement would look like, subject to reaching final agreement following the mediation itself. Since no final terms were reached, ConnectU argued to the lower court, and argues now on appeal, that there is no binding agreement and that the Massachusetts litigation by which it seeks the horrific remedies described above should be allowed to proceed (i.e., that FB give back the ConnectU stock, that the original lawyers for ConnectU be brought back into the case, and that the litigation on the merits of the alleged trade secret theft by Mr. Zuckerberg be allowed to proceed to trial). 4. The merits of those claims: This appeal is a testament to what high-priced (and quite excellent) lawyers can do to stir things up when large amounts of money are at stake. I have been involved in countless mediations over the course of a 30-year-plus career and can strongly attest that no one in his right mind (or otherwise) even begins to think that federal securities laws should be taken into account when settling a case by which stock is transferred from one party to another as part of the settlement. Such a mediation usually takes place over a day or two (as it did here) and is conducted under confidential circumstances - that is, there are court rules that affirmatively state that nothing said or done in that process shall be admissible as evidence for any reason in a later proceeding. Who, in that context, would be concerned about making sure that whatever was said by one party or the other constituted truthful representations about the value of what was being transferred to settle the case. Indeed, if anything, parties will try to wildly puff up the value of what is being offered in order to maximize the value of their deal (no one wants to leave "money on the table"). What is more, the other party knows that this is happening. That is the nature of litigation, where you frequently have blowhard lawyers shooting off about this or that with little regard to truth. When a fight is settled in this way, and stock is transferred, the party getting the stock is not making a business investment by which the transferring party needs to figure out if he is, e.g., an accredited investor or, e.g., if he has had full and complete access to the company's books and records. If anyone would even suggest such things in a mediation, he would be laughed out of the room. But, when you have expensive lawyers straining for every possible ground to maximize their client's leverage in a case where huge amounts of money are at stake, you get an approach where no stone is left unturned to gain maximum advantage. Hence, this argument in this appeal. 5. The alleged "fraud" is likely bogus here as well. The theory is that FB did a press release shortly before the settlement touting Microsoft's $240 million investment and suggesting that, based on that investment, FB had a market cap of $15 billion. The claim is that the ConnectU founders relied on that valuation in determining what the value of the common stock was that they received. Later, supposedly, they discovered that FB had in fact done a 409A valuation of the common stock and that such valuation had placed an approximately $8/sh price on the common stock (in contrast to the $35/sh price placed on the preferred at the time of the Microsoft investment). Thus, the ConnectU founders were supposedly defrauded by having been misled about the value of the FB stock they were receiving to settle their claims (that is, as alleged, they thought they were getting stock worth $35/sh when it was in fact worth no more than $8/sh and, presumably, they would not have settled their claims for this supposedly lower amount had they known the true facts about the 409A appraisal, which facts were not disclosed to them at the time of the mediation). That might sound plausible to someone who knows nothing about startups but it is in fact an absurd argument to anyone who knows even the basics of startup financing. Every startup deal-maker knows that startups value preferred stock at 4 to 5 times higher (it used to be more like 10 times higher) than the common stock. This is vital for keeping employee incentives reasonably priced. Anyone who has been through even a single financing with a startup will know this. Therefore, what are the odds that the ConnectU founders, knowing that the $35/sh price was based on a press release discussing Microsoft's preferred stock investment, did not immediately know and understand that a startup of this type would be putting a significantly lower price on the common stock at the same time. Thus, the argument strikes me as entirely artificial. It is a lawyer argument, very likely concocted after the fact. Because of this, too, in my judgment, I believe the argument will be rejected on appeal, just as it was by the lower court. If courts were to hold that no stock could be transferred in a settlement effected through mediation unless the parties stopped to comply with federal securities laws, the result would be utter chaos whenever a party sought to transfer equity as part of resolving a dispute. This is wholly inappropriate to a settlement context because you take a situation where a party is trying its best to "put one over" on the other party (that is how litigation is played) and transform it into a situation where a party can be sued for statements made about value or company circumstances, etc. Rule 10b-5, for example, allows a defrauded investor to sue not only the issuer but also all controlling persons and also all aiders and abetters. Will we now get lawsuits against litigation lawyers who are trying to get the best results for their clients by structuring a settlement with a stock component? Will we now have to create a record of negotiations rather than conduct settlements in a confidential context where parties can feel free to discuss the merits of their case openly without fear of repercussions? When you consider this claim in context, it is actually frivolous, at least when considered as a general rule for whether such laws should apply to a settlement context. 6. Having said all that, I have been involved a number of times with settlements where the deal falls apart before it is fully documented, and courts are generally highly reluctant to enforce a settlement agreement if they are not absolutely convinced that the deal as struck is truly a binding agreement. It is impossible to evaluate this without being able to see the 2-pager itself (which is not in this record). Based on that experience, though (and every litigator will attest to this), it could well be that the ConnectU side has good grounds to get the settlement set aside, and I assume that explains the tremendous effort that has gone into this. Even if they don't ultimately succeed, this puts enormous pressure on FB and Mr. Zuckerberg to settle up at a much higher amount than that of the original settlement, even while the appeal is pending. The lawyers representing FB are undoubtedly sitting their client down and reviewing the parade of horribles in great detail, if nothing else just because they want to cover themselves from liability. 7. I don't know any of the participants here but, from what I have read in news reports, the founders on each side of this do seem to deserve each other - but I can't say that about innocent investors and others who stand to lose and lose big if this goes awry. This is just the sort of royal mess that winds up on law school and bar exams to test the limits of a candidate's knowledge when something gets super-complex with myriad twists and turns. Not a happy situation for anyone really.
mattmaroon 16y ago
On the one hand, it's tempting to dismiss all of the negative vibes about Zuckerberg as just haters latching onto a runaway success. On the other hand, I don't remember anything like they about the Google guys, or Yahoo. (I remember it about the MySpace guys, and it turned out to be mostly true.)
- rms 16y ago
  The Google guys seem nice. Zuckerberg does not give off a "nice" vibe. He's much more like Bill Gates than LarrySergeySchmidt. He is in the game to win and doesn't pretend to have a benign mission.
mcslee 16y ago
I'm consistently surprised by how supportive or neutral a position the tech community (or Silicon Valley tech media) takes towards the Winklevoss brothers when they provide an avenue to attack Facebook or Zuckerberg. These guys seem to be the antithesis of what Silicon Valley claims to be all about. They wield the benefits of a privileged American elite background masterfully, having top-brand lawyers work on their behalf whilst they attend top academic institutions and train for the Olympics. It's a far cry from Silicon Valley's purported do-it-yourself, boostrap-iterate-and-execute meritocracy. (This is not an ad hominem attack, just an account of apparently differing values/ideals.) Yet, here folks are, on Hacker News, dispassionately contemplating whether they deserve $30 million or $60 million. Most folks working 80+ hour weeks on innovative startups, no matter how talented or even lucky they are, will never earn that kind of money. If this were not connected to Facebook/Zuckerberg, I suspect that any discussion community like this would be absolutely overflowing with vitriol towards these characters.
raganwald 16y ago
To those who say that the execution matters more than the idea, I ask why copy someone else's idea? If it's all in the execution, execute well on an idea you think up yourself.
- ericd 16y ago
  Most ideas, brilliantly executed, could never be 10% as big as FB. It's most definitely not all in the execution, except where execution includes "Be ready to change your idea to a better one".
  - DaniFong 16y ago
    But the original idea for Facebook wasn't 10% as big as Facebook. 'Execution' includes turning your good idea into a great one.
- loewenskind 16y ago
  Why do you only value invention? Why not innovation (taking something you've seen and making it better)? Personally I'm very good at the second and not very good at the first. Do I deserve to be poor or always slaving away for little pay for people who are good at inventing?

201 points by bjonathan 16y ago

When I first read the headline, I assumed the story was going to be something like Zuckerberg looks at Facebook user's private messages and makes trades based on the private information in those messages. Obviously that's not the case, but it wouldn't have surprised me with the way he treated user data, especially early on in Facebook's history.

philwelch 16y ago
What good do you think it accomplishes to post this comment? Of course people assume terrible things about Zuckerberg now that Facebook has passed into the backlash stage of the hype cycle, but having a vivid imagination about the crimes someone hasn't actually committed is a reflection on you, not on him.
- WillyF 16y ago
  The point of my comment is that unethical behavior, even when you're early 20s, will cause people to assume the worst with you. Facebook's current privacy policies and attitudes are alarming enough, but they're far more alarming when taken into context with Mark Zuckerberg's alleged past behavior. Most people don't read full articles. They look at the headlines and make assumptions. Mark's put himself in a position where the assumptions that people make are going to be negative, and that's going to hurt his business, even if it's unfair.
  - philwelch 16y ago
    It's important to recognize that once you've reached the backlash stage of the hype cycle, the negative rumors and assumptions of bad faith will begin. It's not important to participate in that process personally, and it's rather below the level of discourse I'm interested in seeing on Hacker News.

deleted 16y ago

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byrneseyeview 16y ago

This looks weak. They knew what they were getting. They agreed to take it. And now they've changed their minds. The secondary value of that stock is higher than the value at the time of the Microsoft deal (http://www.sharespost.com/companies/facebook http://www.sharespost.com/companies/facebook), so they're basically suing because Zuckerberg accidentally gave them a bargain. If FB can buy back that stock at the original valuation, they'll get a good deal.

Ixiaus 16y ago
I agree, the stance appears weak - I'm not a lawyer nor am I fully aware of the whole thing but it just sounds like a timed temper tantrum to take advantage of Facebook's negative press about privacy settings &c.
alttab 16y ago
The point is they based the stock off the valuation of preferred stock, but then they actually "received" common stock. It takes a while to get the ball rolling to accuse Facebook that they got a raw deal. Here, Facebook tried to pull over a "well at least its stock" deal even though they agreed to $65million. I wouldn't feel bad for ConnectU as $35million is still fantastic, but wouldn't you go back to court if another 35 was on the table? You'd be an idiot not too. All that said, this is perfectly in-line with Zucker's character as its been painted as of late.
- pwhelan 16y ago
  I don't feel that bad, considering it seems like Zuckers has been an unethical solipsist since the start. These 3 perhaps had more than just money taken from them by Zuckers "jackassery".
- pier0 16y ago
  They're also claiming that the initial agreement was fraudulently induced.

frisco 16y ago

"An actual indictment on securities fraud would make it impossible for Zuckerberg to remain Facebook’s CEO if it were to go public." How likely is that, really? Regardless of whatever anyone thinks of Zuckerberg, that's ridiculous.

neurotech1 16y ago
This statement is ambiguous anyway. This is a civil suit and not criminal case. Secondly, from my understanding, only the SEC via a federal court can "ban" someone from being a director in a public company.

mkramlich 16y ago

This is one of those stories where I cannot feel sympathy for either side.

tiffani 16y ago
I feel sorry for the ConnectU guys only because it looks like they'd rather spend time suing than building something else. Sure, it sucks to get ripped off, but it sucks worse to drag out that kind of response to having that happen.
- jerf 16y ago
  What realistic chance do they have of building anything that would make up the difference of around $30 million? "Shrug it off and go build something else, it's not worth the hassle" is for when you miss two weeks of consulting fees on a terrible customer before you cut them off, not $30 million.
  - philwelch 16y ago
    About as much chance as they'd have of building anything worth $65 million in the first place, which doesn't seem like much. These guys are just the stereotypical "startup idea people" who think "we just need to hire a programmer to implement our vision". I know Mark Zuckerberg is the villain now, but let's be fair. Just because Facebook's default privacy settings aren't private enough for our tastes doesn't mean Zuckerberg is a psychopath or that everyone who has a grudge against him is the hero.
    - jerf 16y ago
      I have no idea nor any opinion about the merits of their case. I am pointing out the otherwise useful idea of "just shrug it off and build something else" is good advice only in a certain domain, and this is not in that domain. It is dangerous to take advice out of the domain it is appropriate for (a broadly applicable statement), and useful to point out when it is occurring. Frankly, I don't care how any lawsuit goes. My personal recommendation would be to take the settlement and cash out while Facebook stock is still worth something. I'm not terribly sanguine about the 1-2 year prospect of the stock. (Not because Facebook will be gone by then, but because the current value of the stock includes a promise of growth that I think will be obviously not going to happen by then.)

jrockway 16y ago

Zuckerberg slept with my girlfriend! Do you see what I did there? Anyone on the Internet can accuse anyone of anything. And you can do the same in a court document -- when you sue someone, you don't say "I think the person I am suing is a fine and upstanding citizen." You come up with anything that sounds bad and could possibly be true, just in case you're right or the judge buys it. This is a non-story. Facebook is shady, but there is probably no securities fraud involved.

deleted 16y ago
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adelevie 16y ago
I'm sure the settlement was well-documented... much more documented than any supposed rendezvous with your girlfriend.

ct4ul4u 16y ago

I believe this will hinge on the details of how Facebook represented the value of the securities to ConnectU. Representations of the value of a security are legally perilous. If Facebook's lawyers at the time were good, I imagine Zuckerberg will get a pass. If they missed the dots on a few "i"s or the crosses on a few "t"s, then Zuckerberg could be in for a long ugly ride. I am not a lawyer, but I worked in the securities industry in a regulatory supervisory capacity (series 24, plus a mess of others). Good general advice: Any time you feel the urge to tell somebody what your stock is worth, avoid the urge unless your legal department is involved.

strlen 16y ago

I have a very neutral opinion about Facebook and no strong attachment. While I respect their ability to solve some really interesting scalability challenges, I don't work there: I ignored them early on thinking they're "just another PHP website", their recruiters did reach out to me recently but I've already started a new position. I am not a heavy user of the site: I don't message other users, don't use any applications and update my status from Twitter. Essentially, I don't have a bias for or against Facebook. On the other hand, I find the Winklevoss brothers revolting: "Oh hey, here's this nerd who can our build vision for us and make us rich! Let's hire and pay him pittance! Oh no, he executed on our unique idea himself?!". As for most other developers, when approached by "business guys" my typical reaction is to polite say no. Zuckerberg did a much smarter: took their (simple and intrinsically worthless) idea and built a product and a business on it himself. It's sad that the courts gave the brothers any money (rather than treating the lawsuit as frivolous). Nonetheless, I still hope this will be a sign to "business guy" jocks that this model won't work: it's a lot easier for a nerd to learn business than it is for you to learn programming. Want to build software? Pick up the K&R book, instead of trolling the CS lab.

_delirium 16y ago
I dunno, it depends on the circumstances I suppose. If you accept a hired job from someone and then take the idea private instead of doing it for the person who hired you, that seems like it legitimately should be illegal. Like if an Intel manager comes up with an idea and asks an engineer to work up a prototype, surely it'd be illegal for the engineer to quit and work up that same prototype for a new chip-design startup instead?
- philwelch 16y ago
  Something tells me that microprocessor specifications (at the level that an Intel engineer would be dealing with) are actually valuable intellectual property, not just some sort of vague idea about a unified online Harvard facebook that Zuckerberg changed several times as Facebook developed.
  - 16y ago

grellas 16y ago

A few observations: 1. What is at stake: The original lawsuits filed in Massachusetts in 2004 claimed a theft of IP by Mr. Zuckerberg in starting what is today Facebook. Ergo, there is a massive amount at stake financially if the original case is re-opened and made subject to litigation. Among other things, the ConnectU founders could make a claim on FB's profits almost in perpetuity, could obtain injunctive relief by which they could effectively shut FB down via court order, and could cause the FB founders to be exposed to endless problems with FB's own investors for what would undoubtedly be breaches of reps and warranties made by FB and its founders in the Series A through D & following investment documents (for example, Microsoft might potentially seek to rescind its $240 million investment and demand its money back). Thus, a re-opening of the original case would be a horrific event for FB and its founders. The problem here is this and not any supposed indictment for securities fraud. Of course, with such risks involved, the ConnectU founders have a great motivation to push every angle possible to get the case re-opened because any amount that would be paid to settle the case today would easily dwarf the original settlement amount. 2. Where this is at: The article makes it seem like some dramatic event occurred by which FB and its founders have suddenly been hit with some claim for securities fraud. This is far from accurate. Back in 2005, Facebook responded to the original Massachusetts suit by filing a legal action in California, evidently trying to gain a procedural advantage against both ConnectU and its founders. The ConnectU founders got themselves dismissed from that case on grounds of lack of personal jurisdiction, leaving only their entity in the case. The parties later conducted a private mediation and settled the case over a two-day period. The ConnectU founders did appear in the mediation and got their promised payday. The settlement was documented in the form of a 2-page term sheet and basically involved the grant of a large chunk of FB's common stock to the ConnectU founders. After the mediation was done, the parties attempted to take the 2-pager and put it in the form of definitive documentation and that is where things broke down. Initially, FB apparently tried to accommodate the ConnectU side by preparing complex documentation that would have made the acquisition of ConnectU by FB a tax-free merger (this obviously would have benefited the ConnectU founders, who otherwise would have been taxed on the value of the stock they received as of the date of receipt, leaving them with a multi-million dollar tax hit and no way to liquidate their FB stock to pay for it). When disputes arose about the detailed terms, FB filed a motion with the court to enforce the settlement. In doing so, it asked the court to enforce the terms it had put form in the complex documentation and not as set forth in the 2-pager. The court, on hearing the motion, ordered that the settlement agreement be enforced but did so based on the terms set forth in the 2-pager. The ConnectU parties were then forced to deliver the ConnectU stock to Facebook, which (given that it then controlled the company) promptly fired the attorneys who had been representing ConnectU and its founders. This left the founders scrambling to appeal and to do so under circumstances where the only party with standing to appeal (ConnectU) was controlled by FB as an adverse party. This led to a logistical nightmare, from a litigation perspective, but it eventually got sorted out when the court let the ConnectU founders "intervene" and make their case on appeal. The brief filed before the Ninth Circuit Court of Appeals (discussed in this article) is the opening shot on an appeal seeking to overturn the lower court's order enforcing the settlement. 3. The legal claims on appeal: When it opposed enforcement of the settlement in the lower court, ConnectU raised the legal theory that FB had violated federal securities laws when it allegedly agreed to grant stock to the ConnectU founders in exchange for a release of their claims. The lower court disagreed in electing to enforce the settlement and that is why the issue is being raised on appeal. The other ground of appeal is that the 2-pager that the lower court said constituted an enforceable settlement agreement did not amount to a binding contract because it lacked material terms. Hence, given that the parties were unable to agree on the detailed terms, ConnectU asserts that, at best, the parties only had a "letter of intent" outline of what an agreement would look like, subject to reaching final agreement following the mediation itself. Since no final terms were reached, ConnectU argued to the lower court, and argues now on appeal, that there is no binding agreement and that the Massachusetts litigation by which it seeks the horrific remedies described above should be allowed to proceed (i.e., that FB give back the ConnectU stock, that the original lawyers for ConnectU be brought back into the case, and that the litigation on the merits of the alleged trade secret theft by Mr. Zuckerberg be allowed to proceed to trial). 4. The merits of those claims: This appeal is a testament to what high-priced (and quite excellent) lawyers can do to stir things up when large amounts of money are at stake. I have been involved in countless mediations over the course of a 30-year-plus career and can strongly attest that no one in his right mind (or otherwise) even begins to think that federal securities laws should be taken into account when settling a case by which stock is transferred from one party to another as part of the settlement. Such a mediation usually takes place over a day or two (as it did here) and is conducted under confidential circumstances - that is, there are court rules that affirmatively state that nothing said or done in that process shall be admissible as evidence for any reason in a later proceeding. Who, in that context, would be concerned about making sure that whatever was said by one party or the other constituted truthful representations about the value of what was being transferred to settle the case. Indeed, if anything, parties will try to wildly puff up the value of what is being offered in order to maximize the value of their deal (no one wants to leave "money on the table"). What is more, the other party knows that this is happening. That is the nature of litigation, where you frequently have blowhard lawyers shooting off about this or that with little regard to truth. When a fight is settled in this way, and stock is transferred, the party getting the stock is not making a business investment by which the transferring party needs to figure out if he is, e.g., an accredited investor or, e.g., if he has had full and complete access to the company's books and records. If anyone would even suggest such things in a mediation, he would be laughed out of the room. But, when you have expensive lawyers straining for every possible ground to maximize their client's leverage in a case where huge amounts of money are at stake, you get an approach where no stone is left unturned to gain maximum advantage. Hence, this argument in this appeal. 5. The alleged "fraud" is likely bogus here as well. The theory is that FB did a press release shortly before the settlement touting Microsoft's $240 million investment and suggesting that, based on that investment, FB had a market cap of $15 billion. The claim is that the ConnectU founders relied on that valuation in determining what the value of the common stock was that they received. Later, supposedly, they discovered that FB had in fact done a 409A valuation of the common stock and that such valuation had placed an approximately $8/sh price on the common stock (in contrast to the $35/sh price placed on the preferred at the time of the Microsoft investment). Thus, the ConnectU founders were supposedly defrauded by having been misled about the value of the FB stock they were receiving to settle their claims (that is, as alleged, they thought they were getting stock worth $35/sh when it was in fact worth no more than $8/sh and, presumably, they would not have settled their claims for this supposedly lower amount had they known the true facts about the 409A appraisal, which facts were not disclosed to them at the time of the mediation). That might sound plausible to someone who knows nothing about startups but it is in fact an absurd argument to anyone who knows even the basics of startup financing. Every startup deal-maker knows that startups value preferred stock at 4 to 5 times higher (it used to be more like 10 times higher) than the common stock. This is vital for keeping employee incentives reasonably priced. Anyone who has been through even a single financing with a startup will know this. Therefore, what are the odds that the ConnectU founders, knowing that the $35/sh price was based on a press release discussing Microsoft's preferred stock investment, did not immediately know and understand that a startup of this type would be putting a significantly lower price on the common stock at the same time. Thus, the argument strikes me as entirely artificial. It is a lawyer argument, very likely concocted after the fact. Because of this, too, in my judgment, I believe the argument will be rejected on appeal, just as it was by the lower court. If courts were to hold that no stock could be transferred in a settlement effected through mediation unless the parties stopped to comply with federal securities laws, the result would be utter chaos whenever a party sought to transfer equity as part of resolving a dispute. This is wholly inappropriate to a settlement context because you take a situation where a party is trying its best to "put one over" on the other party (that is how litigation is played) and transform it into a situation where a party can be sued for statements made about value or company circumstances, etc. Rule 10b-5, for example, allows a defrauded investor to sue not only the issuer but also all controlling persons and also all aiders and abetters. Will we now get lawsuits against litigation lawyers who are trying to get the best results for their clients by structuring a settlement with a stock component? Will we now have to create a record of negotiations rather than conduct settlements in a confidential context where parties can feel free to discuss the merits of their case openly without fear of repercussions? When you consider this claim in context, it is actually frivolous, at least when considered as a general rule for whether such laws should apply to a settlement context. 6. Having said all that, I have been involved a number of times with settlements where the deal falls apart before it is fully documented, and courts are generally highly reluctant to enforce a settlement agreement if they are not absolutely convinced that the deal as struck is truly a binding agreement. It is impossible to evaluate this without being able to see the 2-pager itself (which is not in this record). Based on that experience, though (and every litigator will attest to this), it could well be that the ConnectU side has good grounds to get the settlement set aside, and I assume that explains the tremendous effort that has gone into this. Even if they don't ultimately succeed, this puts enormous pressure on FB and Mr. Zuckerberg to settle up at a much higher amount than that of the original settlement, even while the appeal is pending. The lawyers representing FB are undoubtedly sitting their client down and reviewing the parade of horribles in great detail, if nothing else just because they want to cover themselves from liability. 7. I don't know any of the participants here but, from what I have read in news reports, the founders on each side of this do seem to deserve each other - but I can't say that about innocent investors and others who stand to lose and lose big if this goes awry. This is just the sort of royal mess that winds up on law school and bar exams to test the limits of a candidate's knowledge when something gets super-complex with myriad twists and turns. Not a happy situation for anyone really.

mattmaroon 16y ago

On the one hand, it's tempting to dismiss all of the negative vibes about Zuckerberg as just haters latching onto a runaway success. On the other hand, I don't remember anything like they about the Google guys, or Yahoo. (I remember it about the MySpace guys, and it turned out to be mostly true.)

rms 16y ago
The Google guys seem nice. Zuckerberg does not give off a "nice" vibe. He's much more like Bill Gates than LarrySergeySchmidt. He is in the game to win and doesn't pretend to have a benign mission.

mcslee 16y ago

I'm consistently surprised by how supportive or neutral a position the tech community (or Silicon Valley tech media) takes towards the Winklevoss brothers when they provide an avenue to attack Facebook or Zuckerberg. These guys seem to be the antithesis of what Silicon Valley claims to be all about. They wield the benefits of a privileged American elite background masterfully, having top-brand lawyers work on their behalf whilst they attend top academic institutions and train for the Olympics. It's a far cry from Silicon Valley's purported do-it-yourself, boostrap-iterate-and-execute meritocracy. (This is not an ad hominem attack, just an account of apparently differing values/ideals.) Yet, here folks are, on Hacker News, dispassionately contemplating whether they deserve $30 million or $60 million. Most folks working 80+ hour weeks on innovative startups, no matter how talented or even lucky they are, will never earn that kind of money. If this were not connected to Facebook/Zuckerberg, I suspect that any discussion community like this would be absolutely overflowing with vitriol towards these characters.

raganwald 16y ago

To those who say that the execution matters more than the idea, I ask why copy someone else's idea? If it's all in the execution, execute well on an idea you think up yourself.

ericd 16y ago
Most ideas, brilliantly executed, could never be 10% as big as FB. It's most definitely not all in the execution, except where execution includes "Be ready to change your idea to a better one".
- DaniFong 16y ago
  But the original idea for Facebook wasn't 10% as big as Facebook. 'Execution' includes turning your good idea into a great one.
loewenskind 16y ago
Why do you only value invention? Why not innovation (taking something you've seen and making it better)? Personally I'm very good at the second and not very good at the first. Do I deserve to be poor or always slaving away for little pay for people who are good at inventing?