Alison Frankel

If Paul Ceglia — the onetime wood pellet salesman from upstate New York who hired Mark Zuckerberg as a computer programmer before Zuckerberg founded Facebook — thought he’d wring a quick settlement out of his claim to own a piece of Facebook by virtue of a two-page contract Zuckerberg signed in 2003, boy did he think wrong. Facebook’s long-awaited motion to dismiss, finally filed Monday in federal court in Buffalo, asserts that Ceglia was out for an easy score based on a doctored version of the 2003 contract. But it’s not easy to put one over on Zuckerberg or his lawyers at Gibson, Dunn & Crutcher. Facebook’s 74-page dismissal motion is a virtual compendium of the tiny mistakes (alleged) frausters can make and the ways determined defendants can find them out.

I should say upfront that Ceglia’s lawyers at Boland Legal and Milberg dispute Facebook’s assertion that Ceglia is a con man. Milberg is a recent addition to Ceglia’s ever-changing legal roster, but Team Ceglia has intimated that if anyone has manipulated the evidence in this case, it’s Zuckerberg, a legendary computer whiz. Here’s the official comment from Ceglia’s lawyers on Monday’s motion to dismiss:

We have made a preliminary review of Facebook’s motion, which attempts to have this matter ended before Facebook has to provide any discovery and before going to a jury. The Federal Rules of Evidence say a jury should weigh the evidence in this case, including experts’ declarations in Mr. Ceglia’s favor about the authenticity of his contract with Mr. Zuckerberg. Mr. Ceglia deserves his day in court, where the jury will resolve this dispute over the ownership of Facebook.

Point taken. For now Ceglia is merely an accused fraudster, at least when it comes to the Facebook case. His lawyers haven’t filed a point-by-point response to the Facebook dismissal motion. Nevertheless, here are some Ceglia-inspired rules for how not to go after the billionaire founder of a social media giant.

Rule 1: Don’t leave a version of the contract between you and the billionaire on your parents’ computer unless that version matches what you’ve presented to the court. According to Facebook, it found the original version of the 2003 contract between Ceglia and Zuckerberg — which makes no reference to the yet-unfounded company Facebook — on a computer belonging to Ceglia’s parents. Gibson, Dunn has referred to that document as a smoking gun that proves Ceglia forged the contract he has cited in the litigation. Corollary to Rule 1: Don’t leave seven additional drafts of your allegedly doctored contract — as well as a “hex editor” program that permits digital manipulation of raw data — vulnerable to discovery by the sorts of forensic experts a billionaire tech defendant can be reliably expected to hire. Yep, Gibson, Dunn asserts Ceglia did that, too.

Rule 2: Don’t send a Facebook-free version of the 2003 contract in an email to a lawyer at Sidley Austin, which will store the email on its server and later produce it to Facebook. After Zuckerberg stopped working for Ceglia, he and Ceglia squabbled over about $10,000 that Ceglia supposedly owed Zuckerberg. In 2004, when Zuckerberg was demanding his full payment, Ceglia exchanged emails with a then-Sidley lawyer named James Kole, asking for help. According to Facebook’s motion to dismiss, one of those 2004 emails attached the same version of the 2003 contract that Facebook’s forensic experts discovered on Ceglia’s parents’ computer. Facebook also asserts that its forensic experts discovered evidence that Ceglia scanned the contract found on the Sidley server to his computer minutes before he sent it to Kole.

Rule 3: If you’re going to “bake” your contract to make it look older than it is, don’t forget to age the whole document. Facebook claims in its motion to dismiss that Ceglia exposed the purported contract granting him rights to half of Zuckerberg’s Facebook stake to intense light to make it appear as though it dated back to 2003, but forgot to fade the parts of the pages hidden by the clips used to hang them. This is just one of the forensic flaws that Facebook claims to have found in Ceglia’s version of his contract with Zuckerberg.

Rule 4: Remember daylight saving. All of us have some embarrassing story about forgetting to spring forward or fall back in accordance with daylight saving, but if Facebook is right, Ceglia’s alleged slip-up is much worse than embarrassing. Ceglia had alleged that in a series of emails, he counseled Zuckerberg on how to get Facebook off the ground. DLA Piper cited those purported emails in an amended complaint by Ceglia in 2010. It later turned out that Ceglia no longer had any record of sending or receiving the supposed emails — nor, for that matter, was there any evidence of those particular emails on Harvard’s server, despite the presence of dozens of other emails between Zuckerberg and Ceglia. Ceglia had an explanation: He said he hadn’t saved the emails per se, but had cut and pasted the text of the messages into Word files that dated back to 2003 and 2004. But according to Facebook’s motion to dismiss, Ceglia only made it appear as though he created the Word files years ago by resetting the system clock on the computer he used. Facebook argued that he made a crucial mistake in backdating the Word documents: The date on the purported emails shows them to have been sent between October 2003 and April 2004 under Eastern Daylight Time. In fact, Eastern Standard Time was in effect, and, according to Facebook, Ceglia’s Word files would have shown the right time if he hadn’t manipulated the system clock.

Rule 5: Always check your facts. One of the purported email exchanges between Ceglia and Zuckerberg took place on the momentous day of Feb. 4, 2004, the birthday of Facebook (then called Thefacebook.com). Ceglia claimed that Zuckerberg sent him an email at 8:27 in the morning announcing that the website was up, and he sent Zuckerberg a return message at 10:30 a.m. saying the site looked great. The problem: Zuckerberg launched the Thefacebook.com on Harvard’s server on the afternoon of Feb. 4 — not in the morning — and Ceglia couldn’t have seen it because he didn’t have access to Harvard’s server.

Rule 6: Don’t let on that you’re out for a quick settlement. Facebook’s dismissal motion asserts that only days after the suit was originally filed in state court in Buffalo, Ceglia’s lawyer told Facebook’s then-counsel from Orrick, Herrington & Sutcliffe that the two should immediately meet to discuss a settlement. Later in 2010, after Zuckerberg and Facebook made it clear they had no interest in settling, Ceglia and his then-lawyers sent to “multiple top-tier law firms” what amounts a pitch for them to take the case. The objective? “Paul is seeking a law firm to represent him in a) immediate settlement negotiations and b) the lawsuit going forward.” At the time, and, indeed, at no time, have there ever been settlement negotiations between Ceglia and Facebook.

According to a previous Gibson, Dunn filing in the case, Kasowitz Benson Torres & Friedman reviewed the Ceglia pitch and refused to take the case. On the Case has previously reported that a partner at Quinn Emanuel Urquhart & Sullivan also corresponded by email with Ceglia in late 2010, although we don’t know what’s in those emails. (We may someday; they’re under review by the judge in Ceglia’s case.) Obviously, Quinn Emanuel never agreed to represent Ceglia. DLA Piper, on the other hand, apparently signed on to the case in response to Ceglia’s pitch and filed Ceglia’s amended complaint before withdrawing last summer.

I’ve previously posed the question of whether DLA could face a Rule 11 sanctions motion from Facebook, and got mixed responses from the legal experts I consulted, some of whom credited DLA Piper for resigning when questions arose about Ceglia’s credibility. I nevertheless said in that post that I’d be surprised if Facebook didn’t eventually bring a sanctions motion. Based on Monday’s motion to dismiss, I’ll be even more surprised. (A DLA spokesperson declined to comment.)

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Buried on page 93 of Facebook’s Securities and Exchange Commission registration for its $5 billion initial public offering is a very interesting disclosure.

“The Enforcement Division of the Securities and Exchange Commission has been conducting an inquiry into secondary transactions involving the sale of private company securities as well as the number of our stockholders of record,” the disclosure said. “In connection with this inquiry, we have received both formal and informal requests for information from the staff of the SEC and we have been fully cooperating with the staff. We have provided all information requested and there are no requests for documents or information that remain outstanding. We believe that we have been in compliance with the provisions of the federal securities laws relating to these matters.”

The fact of that paragraph alone is news. The New York Times reported in Dec. 2010 that the SEC was looking into the red-hot secondary market for trading in the privately-held shares of Facebook, Zynga, LinkedIn, Twitter, and some other Internet darlings. The leading market-maker for such trading, SecondMarket, confirmed last January that it had received a voluntary request for information from the SEC (which has never confirmed the investigation). But Facebook is the first company to offer any hard facts about what the agency is probing.

The key disclosure is Facebook’s mention of “the number of our stockholders of record.” Federal securities laws restrict the number of shareholders in privately-held companies to 500. To distribute shares more widely, a corporation must register as a public company, which, of course, entails a whole bunch of regulatory complications. The 500-shareholder limit, however, was enacted in the 1960s, before the explosive growth in secondary-market trading of private shares. You can see why companies like Facebook would be worried about inadvertently crossing the line; Facebook can control the number of people to whom it issues stock directly, but not necessarily the number of investors who buy the private shares.

One solution to that problem is selling shares to a group of aggregated investors. According to Adam Pritchard of the University of Michigan Law School, an investment fund with a portfolio of stock, for instance, would count as one shareholder in the SEC’s eyes. So might a special-purpose vehicle devised specifically to buy shares of one private company on behalf of a group of investors. (An SPV, according to Pritchard, has more leeway with non-accredited investors than an investment fund.) When Goldman Sachs planned to invest $1.5 billion in Facebook last January, it was to be through a special-purpose vehicle that would have allowed Goldman clients to participate. (Dealbook’s Deal Prof had a great column explaining the SPV and the 500-shareholder threshold for private companies.)

But if Facebook was aware that Goldman or any other investor was using a special-purpose vehicle to get around the limited-holding rule, it could be in trouble with the SEC, according to Pritchard. “The question would be whether Facebook has been involved with creating or encouraging the vehicles,” he said. If the SEC determined that it was, Pritchard said, it could potentially be subject to an enforcement action for violating the Exchange Act — which could cause a delay in the IPO.

Pritchard is quick to note that it’s extremely unlikely Facebook is in line for an enforcement action, since it disclosed no hint of an SEC target letter in its IPO filing. Instead, the professor said, Facebook’s lawyers at Fenwick & West and Simpson Thacher & Bartlett were probably just being careful in choosing to disclose the existence of the SEC investigation. (Interestingly, neither LinkedIn nor Zynga mentioned anything about the SEC’s secondary market investigation in their IPO registration filings.)

Stanford Law School professor (and securities-law maven) Joseph Grundfest agreed that Facebook’s disclosure indicates the company is not an SEC target. In fact, Grundfest told me his understanding is that the SEC isn’t looking at private-stock issuers, but is trying to understand how the secondary market operates. The agency is focused on buyers, sellers, and intermediaries, he said. “There’s not even a whiff of suspicion that issuers have violated the law,” Grundfest said. “[Facebook's] disclosure is exactly right.”

I called Facebook counsel Gordon Davidson of Fenwick and William Hinman Jr. of Simpson but didn’t hear back from either of them.

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On Thursday, the Buffalo federal court judge overseeing Paul Ceglia’s claim to own half of Facebook — by virtue of a 2003 contract he claims CEO Mark Zuckerberg signed as a Harvard undergraduate — is expected to enter an order directing Ceglia to return from Ireland to produce crucial undisclosed computer evidence, and to answer Facebook’s withering questions about the authenticity of the contract and his own failures to comply with previous court directives.

For Facebook’s lawyers at Gibson, Dunn & Crutcher, this order, which follows a three-hour hearing Wednesday, is the latest success in a string of rulings that express the judge’s concern with the evidence offered by Ceglia, an upstate New York wood-pellet salesman who decamped to Ireland in the face of Facebook’s relentless attacks. Facebook’s lead lawyer, Orin Snyder of Gibson, said that when Ceglia finally produces the evidence ordered Thursday, his purported two-page contract with Zuckerberg will be indisputably exposed as a fraud.

But Ceglia’s latest lawyer — who joined the case about two weeks ago, after four other firms resigned over the last year — told me in a long interview Wednesday evening that he and Ceglia have turned the tables on Facebook and Gibson Dunn. In the face of sanctions motions by Facebook, California solo Dean Boland filed retorts accusing Facebook and Gibson Dunn of tampering with the original contract between Ceglia and Zuckerberg, who did some coding work for Ceglia before founding Facebook, and with Zuckerberg’s Harvard email account. Facebook and Gibson have argued, very persuasively, that the Harvard email records prove Ceglia fabricated a series of emails between him and Zuckerberg to bolster his false account of their contract.

But Boland insisted to me that Ceglia’s experts have verified the authenticity of the two-page contract that purportedly gives his client rights to half of Zuckerberg’s billion-dollar company. In fact, he said, the sworn testimony of those experts is why he was willing to take on a representation that so many other lawyers — including DLA Piper and former New York State Attorney General Dennis Vacco – have walked away from.

“I’d be an idiot as a lawyer and tactician and strategist if that didn’t concern me,” he said. “Like any other lawyer, before I took on this case I did due diligence. I was confident I was relying on someone who is telling the truth. And I relied on two experts who know the documents, and who are telling me it is authentic. … If I’m suspicious I ask questions. If I don’t get answers, I’m out of here.”

Boland said he was persuaded by Ceglia’s experts’ findings on the aligned staple holes on the two-page contract, which, according to him, prove the two pages were stapled together. (Facebook has argued that Ceglia created a false first page and attached it to a signed second page that made no mention of Facebook.) He also said Ceglia’s experts concluded the ink on the two pages of the document match, and the toner cartridge is relatively rare. “If my client created the [allegedly fabricated first page] he had to be holding onto a printer and cartridge from 2005,” Boland said. (He offers a full explanation of the Ceglia expert testimony, complete with videos, at his blog.) “There is no evidence the contract is anything but authentic,” Boland asserted. “[Facebook counsel] Mr. Snyder hasn’t offered a single fact that it’s not authentic. As the judge said Wednesday, that silence is deafening.”

I’ve always considered the evidence from Zuckerberg’s Harvard email account to cast the biggest shadow on Ceglia’s story. Ceglia had offered a series of purported emails between him and Zuckerberg, in which he and the then-Harvard undergraduate discuss the launch of Facebook. But when Gibson Dunn retrieved Zuckerberg’s emails from Harvard’s server, none of the purported Ceglia emails appeared — even though dozens of other emails between Ceglia and Zuckerberg, in which Zuckerberg hounded Ceglia for money he earned as a coder, did show up. Gibson Dunn’s forensic analysts eventually determined that the emails Ceglia quoted in court filings don’t appear as e-mails on any of the computers he has turned over to the defense, but show up only in a Word file in which Ceglia claims to have cut and pasted the emails.

“I agree — if my client is lying about those emails, it’s pretty devastating,” Boland told me Wednesday. “Why would you have to make up the emails if you have the contract?” But in one of the sanctions motions Boland filed Tuesday, he asserted that Zuckerberg’s own forensic analysts conceded that emails listed on the Harvard account in 2010 had disappeared by the time the Harvard records were turned over to Ceglia. Moreover, he said, Zuckerberg has previously admitted, in a deposition in another Facebook case, to backdating a document. “No one can read this and say this is a person who is honest,” Boland said.

Boland told me Ceglia is happy to return from Ireland to produce additional evidence and answer Facebook’s questions. “Everything they wanted, my client is not shying away from,” he said. “He’s got a contract. He’s got a case.”

That’s one view of where things stand. Thursday morning I got an alternate reality from Snyder. He first addressed Boland’s assertion that Zuckerberg somehow deleted emails from the Harvard server. Snyder supplied me with a sworn declaration from the forensic expert Boland cited as the basis of the claim of email tampering. The expert, Bryan Rose, explained that the initial automated review of the Zuckerberg Harvard records suggested 17 emails appeared in the earlier account but not the later version. But when the forensic team rechecked the records by hand, all 17 were accounted for. Minor formatting discrepancies, Rose said, were responsible for the preliminary failure to match the emails.

“There are no missing emails from the Harvard account,” Snyder said. “That baseless claim has been entirely refuted by forensic evidence.”

Snyder also said Ceglia’s purported document experts cannot explain why Facebook found an original version of Ceglia’s contract with Zuckerberg on Ceglia’s computers — and that version does not refer to Facebook, but to Streetfax, the Ceglia Internet project on which he employed Zuckerberg. Ceglia has alleged that Facebook planted that contract on his computer — but Snyder said the Streetfax contract has also turned up on the computer of a Sidley Austin lawyer to whom Ceglia sent it in 2004. (Here’s a memo explaining that.)

“We now know why Ceglia resisted turning over the computers to us,” Snyder said. “They contain the authentic contract, which has nothing to do with Facebook. That exposes this entire case to be a fraud.”

Snyder said that once Ceglia returns from Ireland to face Gibson Dunn’s questions, the case will be over. “Their most recent arguments are delusional,” he said. “These are the desperate acts of a plaintiff who has been exposed as a fraud and whose case is collapsing around him.”

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Note to disgruntled employees: you can’t be fired for complaining about your job on Facebook. That’s the upshot of the first ruling to address employees’ use of social media by a National Labor Relations Board judge. Last week, in a case called Hispanics United of Buffalo, administrative law judge Arthur Amchan said HUB violated the National Labor Relations Act when it fired five employees who commiserated about their jobs on Facebook. Judge Amchan’s ruling endorsed the NLRB’s stance that employees are protected from retribution for job-related postings. “Discussions about the workplace are protected whether they occur at the watercooler or the virtual watercooler,” said Laura Lawless Robertson of Greenberg Traurig, who sent out an alert about the NLRB administrative law judge’s ruling Friday.

The HUB Facebook posts came in response to an October 2010 Facebook warning from one HUB employee that a co-worker was complaining about people in the housing division. “[She] feels that we don’t help our clients enough at HUB,” the warning said. “I [have] about had it! My fellow coworkers how do u feel?”

At least seven HUB employees posted responses, some of which were pretty angry. “Tell her to come do [my] fucking job,” one post said in part. “This is just dum.”

The posts appeared on a Saturday. The following Tuesday, according to Judge Amchan’s ruling, five employees were called before their supervisor, who informed them that their co-worker felt so threatened by the Facebook posts that she had suffered a heart attack. The five employees were fired for bullying and harassment.

Judge Amchan, however, concluded that the Facebook posts constitute protected speech under the NLRA. “Employees have a protected right to discuss matters affecting their employment amongst themselves,” he wrote. “Explicit or implicit criticism by a co-worker of the manner in which they are performing their jobs is a subject about which employee discussion is protected.” The judge also found that the posts were not harassing or threatening, and that the record didn’t establish any link between the Facebook comments and the health of the supposedly bullied HUB co-worker. He ordered HUB to re-instate all five of the fired employees. (HUB counsel Rafael Gomez of Lotempio and Brown didn’t return my call; the docket indicates that HUB intends to ask the full NLRB to review the administrative law judge’s ruling.)

Unless it’s overturned, said Robertson of Greenberg Traurig, Judge Amchan’s ruling offers broad protection to employees. “We know the NLRB has been concerned about the contours of employees using social media because of the uptick of complaints issued by the board,” she said. But because previous cases in which the board said employees were wrongly fired for social media posts have settled, Judge Amchan’s ruling is the first decision to offer guidance to employers. “The decision says you have to be pretty cautious,” Robertson said. “A post only needs to discuss terms of employment to be protected.”

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It’s been more than 15 years since e-mail began to enliven (or blight, depending on your perspective) the discovery process. By now — despite some notable fiascos (see, for instance, here and here) — we’ve got well-established case law to guide lawyers and their clients in e-mail production. Too bad that’s yesterday’s means of communication. Today it’s all about Twitter, Facebook, and Google+, whatever that is. So to celebrate establishing a Twitter account for On the Case (@AlisonFrankel), I figured I’d look at the e-discovery frontier of social media.

The news isn’t very good. What little consideration the courts have given to social media discovery has been in the context of postings by individuals, not corporations. And all signals indicate that social media data is broadly discoverable. As Gibson, Dunn & Crutcher explains in its just-published e-discovery report, courts continue to find that when you post to Facebook, Twitter, or their equivalents, you give up the expectation of privacy, even if you’ve sent private messages or set up restrictions on who can see your profile. Judges are increasingly likely to order litigants to provide access to their social media accounts and to preserve their posts. In May, for instance, a Pennsylvania state court judge ruled that a personal injury plaintiff had to turn over even his private Facebook posts to the defense.

It’s no giant leap from that kind of ruling to a looming problem for businesses. As corporations venture into social media to promote their brands and reach out to clients and customers, they have to be prepared to face the same discovery demands. In late July, a Symantec flash poll of 1,225 information tech executives reported that “social media incidents” — such as employees posting confidential corporate information – cost businesses an average of $4.3 million, of which more than $650,000 was attributed to litigation costs. That’s just the beginning, though, according to Symantec, which says corporations face increasing risk of scrutiny for their social media posts. E-discovery of such posts is a certainty, according to Symantec. (Caveat emptor: Symantec has an ulterior motive for predicting social media e-discovery doom. On Monday the company introduced a new version of its e-mail archiving software that includes social media archiving as well.)

But Symantec isn’t alone. The tech consulting firm Gartner has said that by 2013, “half of all companies” will have faced e-discovery demands for material from social media sites. Social media e-discovery precedent is “a patchwork,” Gartner says, and there’s no reason to expect “clear guidance from courts or regulators in the near future.” Gartner analyst Debra Logan (who didn’t respond to my request for an interview) warned, “In e-discovery, there is no difference between social media and electronic or even paper artifacts. The phrase to remember is ‘if it exists, it is discoverable.’” (In a prescient post in January, Sheppard Mullin’s e-discovery blog wrote about Citigroup’s pioneering program to archive Twitter data as it moves to Twitter-based customer service.)

So what does the prospect of untold reams of social media discovery material mean for lawyers? The same kind of information-overload headaches lawyers faced at the dawn of e-mail discovery, according to Ian Wilson, the CEO of the e-discovery software company Servient. (Wilson is also a lawyer.) Wilson posits a nightmare scenario of lawyers being forced to plough through spools of Twitter posts — not just official corporate postings, but, in all likelihood, posts by corporate employees who may not even realize their material is discoverable — to find Tweets that are potentially related to litigation. (Wilson said Servient can ease the pain with software to help lawyers screen out irrelevant posts.)

“There’s a new mass of information, and we have to figure out what to do with it,” Wilson told me. “It’s even more burdensome that e-mail.”

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