Facebook CEO Mark Zuckerberg may have defeated the Winklevoss brothers in court, but he still has to face an upstate New York businessman who says he owns 50 percent of Facebook -- and that the founder of Facebook defrauded him.
Paul Ceglia filed a lawsuit against Zuckerberg and Facebook in July, charging that he had paid Zuckerberg for some web development work and invested $1,000 in the then-nascent Facebook in exchange for 50 percent of the business. Originally he claimed that under the terms of the contract, he now owns 84 percent of the company, which would be worth billions.He has since filed an amended complaint that reduces the amount to 50 percent.
Ceglia claims Zuckerberg deliberately concealed how well Facebook was doing, and that Zuckerberg committed fraud, saying he was thinking of abandoning the project altogether even as venture investors were interested. The plan, Ceglia says, was to convince him to take a payout of $2,000, relinquishing his claim to the business.
It started with a contract Ceglia gave in evidence in the suit. Dated April 28, 2003, it states that Ceglia is purchasing a 50 percent interest in Zuckerberg's software, programming language and business interests for $1,000. In addition, if the web development work is not completed by a certain date, Ceglia is entitled to an additional 1 percent of the company for each day that passes. Zuckerberg's attorneys maintain that the contract isn't genuine.
Ceglia himself has faced fraud charges. In October 2009 the state of New York charged him with one count of first degree scheme to defraud and 12 counts of fourth degree grand larceny. Customers of his wood pellets business had complained that they had paid for them but never received any.
Beyond that, Ceglia quotes a string of emails in the suit. Facebook says the emails are fakes, just like the contract.
The emails purport to show Zuckerberg accepting the terms of a deal in which he would do some Web development work for Ceglia -- including work on a social networking site that would become Facebook. Ceglia claims he paid Zuckerberg a total of $2,000. The first $1,000 was paid as part of the contract, the second was to continue development.
Ceglia was developing a site called Streetfax, a search engine for insurance adjusters. At one point in 2003 Zuckerberg asked Ceglia if he could adapt the source code from Streetfax to Facebook. Ceglia gave his approval, and then discussed with Zuckerberg ways to generate revenue from the social networking site.
Then in November 2003, Zuckerberg sent an urgent email to Ceglia, saying that two upperclassmen were also planning to launch a social networking site. He asked for an extra $1,000 to speed the work on his site and get it ready sooner. The upperclassmen he references are the Winklevoss brothers, who also sued Zuckerberg as they tried unsuccessfully to alter the settlement they signed with him. (The Winklevosses still got a $65 million payout).
On Jan. 1, 2004, Zuckerberg sent Ceglia an email that thanks Ceglia for the extra $1,000 and says that he needs more funding, and that, I think it is unnecessary at this point, with all of the extra work I have done for you, to hold me to the original completion date. I should not be penalized for delays that were out of my control, namely that there have been so many unspecified requests from the Streetfax project... delaying my start on our second project.
Ceglia responded by saying I guess I am somewhat torn as on one hand in your interest you want me to consider not enforcing my contract while also then making it clear that more money is owed to you for things that weren't a part of yours, does that make sense to you?
A few days later, on Jan. 5, 2004, Ceglia sent an email asking when the site, then called The Face Book, would be finished. I've been stalled long enough on this thing and if I don't see something soon (sic) I'll have no choice but to contact the school and perhaps your parents in Dobbs Ferry and let them know whats (sic) been going on.
On Feb. 2, 2004, Zuckerberg asked Ceglia to drop his ownership to 50-50. He was far enough past the deadline that Ceglia's ownership was in excess of 80 percent. Ceglia agreed. Just as long as we start making money from this thing. The next day, Zuckerberg sent an email saying the site - called thefacebook.com was up and running. Ceglia's attorneys say the timing was not coincidental.
Ceglia then suggested ways to draw more revenue, such as by advertising Harvard-themed coffee mugs and t-shirts. Zuckerberg then said he wasn't interested in making money. I just can not risk injuring my sites (sic) reputation by cheapening it with your idea of selling college junk... If I had the rest of the money I was owed by you for all that extra work I did I wouldn't even need to make money at all on this site. That is money I am entitled to and is rightfully mine.
By April, Zuckerberg wrote the following email: Paul, I have become too busy to deal with the site and no one wants to pay for it, so I am thinking of just taking the server down. My parents have a fund that I can tap into for my college expenses and I would just like to give you your two thousand dollars back and call it even on the rest of the money you owe me for the extra work. At this point I won't even really be able to work on the facebook until Summer.
Ceglia then told Zuckerberg, You stole code, not once, not twice but THREE TIMES! Do you have any idea the damage you've done??? Grow up, take a f---ing ethics class, choke yourself with that silver spoon of yours.
At that point thefacebook.com was a success at Harvard, and others were interested in investing. But Zuckerberg didn't tell Ceglia that. Ceglia's lawyers say that Zuckerberg's antics were an attempt to goad Ceglia into dissolving the business relationship by making it unpleasant.
On July 22, Zuckerberg wrote Ceglia that he was sorry about what he had done and offered to repay Ceglia the $2,000 he had been paid. Another summer is here and I still don't have any time to build our site, I understand that I promised I would, but other things have come up and I am out in California working during break. I just don't want the obligation of having to answer to you for not following through and I won't be able to.
But the suit says that at the same time Zuckerberg wrote the email, he was about to receive funding from investors and was meeting with several venture capital funds. A week later, Zuckerberg incorporated Facebook, Inc., in Delaware. Sean Parker, an entrepreneur, became Facebook's president, and received an investment that month from Peter Thiel, co-founder of PayPal.
Neither a Facebook spokesman nor Ceglia's attorneys returned a call for comment.