Facebook target of ConnectU appeal, original $US65 million settlement not enough

A group of judges is currently deciding on whether a $US65 million settlement payment made by Facebook to ConnectU founders Tyler and Cameron Winkelvoss in 2008 was actually misleading.

The original settlement was paid after the Winkelvoss twins alleged Facebook chief executive Mark Zuckerberg had actually promised to help them develop their own website, but then broke away from the agreement and started Facebook.

The original case was the subject of the Hollywood film, The Social Network.

However, the three-judge panel from the Ninth Circuit Court of Appeals seems timid about ruling in the Winkelvoss’ favour, with judge John Wallace pointing out the twins’ argument they were taken advantage of seems unlikely.

“The (ConnectU) founders are pretty smart people themselves, the twins also have a father from Wharton School who is very bright,” he said yesterday. “If you have all these people to advise you, isn’t it difficult to say this is one of those things where you were taken advantage of?”

These comments were backed up by further remarks from judge Alex Kozinski, who said upon reading the original settlement contact that, “it looks like it’s got a lot of just about everything you would want in a contract… It definitely says we have a binding agreement”.

The issue at hand is that although the Winkelvoss twins were awarded $US65 million back in 2008, they claim that amount is undervalued. About $US45 million of that award was in stock – which Facebook internally valued at $US9 per share.

But now the twins claim those shares are actually worth at least $US36, based on a previous investment from Microsoft which valued the company at $US15 billion. As a result, they say Facebook violated US securities law by not disclosing that information fully.

Their lawyer, Jerome Falk, has said outside the court the twins were wronged and they are entitled to the full amount they are owed.

“This is about money and matters of principle. They feel they were badly treated. They feel their idea was stolen and that in the settlement they did not get full disclosure as they were entitled to. . . .In America you measure things by money, and this is an awful lot of money.”

But Facebook lawyer Joshua Rosenkranz has said that the company was under no legal obligation to ever disclose the stock option information during negotiations.

“This case is about whether sophisticated parties surrounded by a platoon of world-class lawyers can cancel a deal that is binding,” he said. “No one was misled here… The ConnectU founders struck a deal that made them very rich and is making them richer by the day. No one made them sign it.”

This isn’t the first time the Winkelvoss twins have expressed disappointment with their original settlement. They actually accused the Quinn Emanuel lawyers who oversaw the original settlement of malpractice – but an arbitration panel ruled against that accusation.

If this appeal is lost, then the Winkelvoss twins will lose their cash and stock. But some analysts expect Zuckerberg to settle out of court – a lengthy and expensive decision could delay the company’s suspected plans for an IPO in 2012.