Monday, April 18, 2011

Winkelvoss Twins Appeal Ruling Closing Down Their Facebook Suit

Winkelvoss Twins Appeal Ruling Closing Down Their Facebook Suit: "

The Winkelvoss twins, who claim they were defrauded by Facebook when the company settled their lawsuit over Zuckerberg stealing their idea for Facebook, appealed Monday a decision telling them to be happy with the $65 million payout they negotiated.

The twins, former Olympic rowers who hire their Harvard classmate Mark Zuckerberg in 2003 to help with their social networking site, were told a week ago by the 9th U.S. Circuit Court of Appeals to drop their attempt to undo a 2007 settlement.

That settlement, created in mediation, gave the twins $20 million in cash and $45 million in stock.

But the twins say that Facebook committed securities fraud by not providing relevant information about the stock price, and the twins say they deserve 5 million shares, not the 1.2 million they agreed to.

Now the twins are asking for a full panel of judges from the Ninth Circuit to revisit the ruling, arguing that the three-judge panel that snarkily dismissed their case ignored federal precedent about fraudulent settlements. That ruling said that the two had very good counsel and that they should be happy with what they got since Facebook’s valuation keeps going up — reaching $80 billion at the most recent calculation.

In mediation, the parties agreed the twins would get $45 million in Facebook shares, in exchange for their failed social networking site UConnect. The settlement calculated that the twins would get 1,253,326 shares of stock valued at $35 each, based on the fact that Microsoft had recently invested in the company at a $15 billion.

But the twins say that Facebook used an outside auditor to determine the value of shares for setting the price of stock options for employees. That valuation was $8.88, the suit claims, and that information was not revealed in the mediation hearing. (It’s typical for companies to try to get a low valuation for stock options to make them more enticing to new recruits and reducing the number that have to be given out by the company.)

If that lower valuation had been used, the twins would have gotten more than five million shares of Facebook stock. That, the twins say, is fraud that should allow them to re-open their 2004 lawsuit.

The twins’ lawyers had sharp words for the appellate court, which fairly rudely told the two to be happy with what they got and stop seeking to restart the lawsuit.

“The opinion’s implication that Appellants should take the now more-valuable stock and stop complaining about Facebook’s blatant violation of Rule 10b-5 inappropriately minimizes federal securities laws that command honest dealing and full disclosure in the sale or exchange of securities,” the appeal said. “Whether Appellants would be better off financially keeping the proceeds of the settlement rather than rescinding and proceeding with their lawsuit against Facebook is a personal judgment for them — not an appellate court — to make.”

If the Ninth Circuit declines to accept the case for a rehearing by a full panel of judges, the twins would then have the option of appealing to the Supreme Court.

Photo: The Winkelvoss twins studying in Oxford in 2010. Credit: Rory Cellan


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