UPDATE:To include mention of a report that Facebook valued itself at $3.75 billion.
SAN JOSE, Calif.--What is Facebook really worth?
One of the burning questions in the technology business during the past year also played a major role in the dispute between social networks ConnectU and Facebook, according to documents obtained by CNET News.com.
Some interesting details about Facebook's valuation were revealed in partially redacted court records released Wednesday by federal district judge James Ware. The documents were a transcript of a June 23 hearing in the case, which Ware had closed to the public. The judge released the redacted transcripts after CNET Networks, parent company of News.com, objected to the closing and launched an effort to have relevant documents unsealed.
Facebook founder Mark Zuckerberg
(Credit: Facebook)ConnectU, founded by brother Cameron and Tyler Winklevoss and Divya Narendra, filed suit against Facebook founder Mark Zuckerberg in 2004 and accused him of stealing their business plan. The two sides reached a settlement, but ConnectU's side tried to pull out of the deal after alleging that Facebook fraudulently misrepresented the value of its stock. Ware disagreed and last week ordered that the settlement be enforced. That means Facebook is nearing the end of the ConnectU case.
But what the transcripts show was just how much Microsoft inadvertently influenced the proceedings.
Last fall, Microsoft paid $240 million to acquire a 1.6 percent share of Facebook. The day that news of the deal broke, headlines screamed that Facebook was worth $15 billion based on Microsoft's investment.
Analysts said all along that the money Microsoft paid was more a reflection of the company's need to strengthen ties to Facebook than what Microsoft thought the company was really worth. Judging from the transcripts, the Microsoft money may have gotten ConnectU's founders seeing dollar signs. But it shouldn't have, according to statements made during the June 23 hearing by Facebook attorney Neel Chatterjee.
The value of Facebook shares
As part of the settlement, Facebook agreed to give ConnectU's four principals--Narendra, the brothers Winklevoss, and their father, Howard Winklevoss, who had invested in ConnectU--an undisclosed amount of cash and Facebook stock. In exchange, ConnectU's principals agreed to give Facebook all the stock they held in ConnectU. The settlement was essentially an acquisition.
In a statement to the court, a small portion of which was redacted, it's obvious that Chatterjee wanted to make clear that Microsoft's investment in Facebook had little in common with ConnectU's deal. The transcript indicates that ConnectU received common stock while Microsoft received preferred stock.
"ConnectU didn't get that and they knew they weren't getting that," Chatterjee said. "What Microsoft got out of the deal...are fundamentally different than what ConnectU is getting, or the principals of ConnectU, which was subject to the fair-market valuation."
Chatterjee pointed out that Facebook provided ConnectU with fair-market valuations it obtained when it considered using stock for other partnerships. But he also noted that if ConnectU wanted to know what Facebook was worth it could have obtained its own "independent appraisal," which it did not do before agreeing the the settlement.
Getting an accurate Facebook valuation was not why ConnectU had sought to challenge the settlement, said the company's attorney, David Barrett. ConnectU argued that the settlement was unenforceable for several reasons, the first being that Facebook withheld vital information.
"The point is that (Facebook's) duty is to disclose all material information," Barrett said, noting that Facebook is a privately held company but comes under security laws when selling shares. "If they decide to engage in a private trade of their stock, they do have to disclose material information."
Specifically, Barrett said that Facebook's board of directors obtained an evaluation of their company's worth following the Microsoft sale but before the settlement was reached. ConnectU claimed that Facebook never handed over that valuation. The transcript of the hearing didn't reveal the amount of Facebook's valuation.
But on Thursday, The New York Times' Brad Stone reported that in a transcript from a June 13 case management conference, that figure was revealed: "one-quarter of its apparent value based on Facebook's public press releases." That would put the price of Facebook at $3.75 billion.
As Stone points out that valuing private companies is not exact and we'd have to wait until someone actually plunks down real money for Facebook in an acquisition or in a public offering of the company's stock.
In any case, Chatterjee, Facebook's attorney, told the court he suspected that the reason ConnectU's founders had changed their mind about the settlement was because of a dispute with the company's former law firm, Quinn Emanuel. The reality of legal fees "was affecting the economics in some way they don't like," Chatterjee said.
Lawyers from Quinn Emanuel have filed a lien against ConnectU's settlement money, and appeared before Ware on Wednesday to request that he not release any of the company's funds until they got paid.
CNET News.com's Caroline McCarthy contributed to this report.
SAN JOSE, Calif.--The public will be allowed a peek at some of what was said last week during a settlement hearing in the long-running legal dispute between ConnectU and Facebook.
James Ware, a U.S. district court judge, barred reporters and the public from attending the June 23 hearing in San Jose, Calif. He also put many of the documents in the case under seal. CNET Networks filed an objection to Ware's decision last week.
On Wednesday, Ware said he would release a redacted copy of the transcript from the June 23 hearing and allow a magistrate judge to decide on whether some of the other sealed documents should be released. What was redacted is still unclear, according to CNET lawyers who were at Wednesday's hearing.
Facebook has agreed to pay ConnectU's founders cash and stock as part of the terms of the settlement, but the exact amounts have not been released.
The case began in 2004, when ConnectU's founders alleged in a lawsuit that the idea for Facebook was originally theirs, and accused Facebook founder Mark Zuckerberg of ripping off their business plan and their code while they all attended Harvard.
Zuckerberg denied the allegations. The case dragged on until the two sides reached a settlement earlier this year that called for Facebook to pay cash and stock to ConnectU's founders. ConnectU later tried to back out after it said it had obtained important new information.
Some of that information was unearthed by a computer forensics expert hired by ConnectU who located instant-message logs belonging to Zuckerberg.
But Ware decided there was no reason to throw out the settlement. The purpose of Wednesday's hearing was to figure out how the settlement would be paid and take care of other legal loose ends.
Prior to the judge's decision about releasing some of the sealed documents, Facebook's lawyers objected, arguing that some of the information included Facebook's source code, proprietary trade secrets, financial information, and communications between Facebook employees and their family and friends.
Roger Myers, the attorney representing CNET, told the court that before documents should be sealed in this kind of legal proceeding, the parties had to prove that they would suffer a "competitive harm."
"They have the burden of proof," Myers told the court.
Ware said he wanted to protect the privacy enjoyed by parties who are in mediation. He said he had promised ConnectU and Facebook that their discussions would not be part of the public record and he would have to go back on his word: "The integrity of the court is an issue," Ware said.
Myers, from the San Francisco law firm of Holme Roberts & Owen, wasn't altogether happy with the judge's decision to redact information from the transcript.
"It's not clear what he's going to redact," Myers said later. "Whether we think the redactions go too far, it's going to be hard to say until we see them. I think he's going to redact what was said in the mediation...In the documents that were filed with respect to the proposed judgment that includes a copy of the term sheet of the settlement, the only thing that was redacted was financial information: how much money was going to be paid and how much stock was going to be given.
"It sounds like he's (going to redact more than that) in the transcript," Myers continued. "We think that goes too far...There's hundreds of documents filed under seal. We think that most of them should not have been sealed. There's some things that (Facebook) can keep confidential, like their source code and trade secrets but they've gone way overboard here."
As for Zuckerberg's IM logs, Myers said: "Those should not have been sealed. There's been no showing made that would justify keeping that information under seal, so those should be released."
After the discussion about unsealing documents ended, Ware turned to address a third-party claim on some of ConnectU's settlement money. Before ConnectU co-founders Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra can pocket the money and stock Facebook agreed to pay to settle the case, they have to pay off their former lawyers.
Lawyers representing Quinn Emanuel, the law firm that once represented ConnectU, made every attempt to persuade the judge not to disperse the settlement money and stock before they've been paid.
The legal spat is winding down between Mark Zuckerberg and the former college classmates who accused him of stealing Facebook's business plan from them.
The two sides will be in U.S. District Court in San Jose, Calif., on Wednesday to iron out the details of a settlement between Facebook and ConnectU, founded by Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra.
The three ConnectU founders claimed in a lawsuit filed in 2004 that Zuckerberg, Facebook's founder, stole ConnectU's code and business plan while all four were students at Harvard University.
ConnectU tried to back out of the settlement after a computer-forensics expert it hired discovered some of Zuckerberg's instant-messaging logs that the company claims is relevant to the case.
Once it obtained the logs, ConnectU accused Facebook of fraud and asked the judge to throw out the settlement. One of the reasons ConnectU gave was that Facebook never disclosed that it had altered the value of its common stock not long before February's settlement was reached.
Facebook, which is not publicly traded, did not deny that it had altered its valuation, and the judge in the case found nothing in Facebook's actions to be fraudulent.
As for what was revealed in Zuckerberg's IM logs, we don't know because the court has prevented the public from gaining access to much of the information in the case.
Indeed, the only fireworks left in the dispute might come from a third party: CNET Networks, parent company of News.com. CNET objected to U.S. District Judge James Ware's decision to close the courtroom for a June 23 hearing between Facebook and ConnectU and is pursuing a request to have the court unseal documents related to the proceedings. (CNET Networks has since been acquired by CBS in a deal that closed Monday.)
The reason for barring the public appears clear. Facebook doesn't want to reveal financial information, the content of Zuckerberg's IM logs, and the terms of the settlement. case. As my colleague Declan McCullagh wrote in a recent blog, the term "under seal" appears at least 234 times in the official court docket.
McCullagh wrote: "Not only should the courtroom not have been closed, but any audio recording or transcript of the proceedings should be released."
Updated 1:12 p.m. PDT to reflect that the hearing session has ended.
SAN JOSE, Calif.--A hearing in a dispute between Facebook and ConnectU wrapped up early Monday afternoon with no ruling, after the federal judge overseeing the matter had closed the proceedings to the public and the press.
U.S. District Judge James Ware plans to issue a ruling before too much time has elapsed, attorneys involved in the matter said as they left the courthouse here following the hearing, which lasted somewhat less than two hours.
Reporters from CNET News.com, the San Jose Mercury News, and Bloomberg had objected to the courtroom being closed, which is uncommon in federal civil cases, and asked for a delay so their attorneys could be present. Ware rejected the request, saying he would "set up a time to make objections."
"I've made a judgment that it could be beneficial to the court" to conduct at least the first portion of the hearing "in a closed courtroom," Ware said Monday morning.
A lawsuit between ConnectU and Facebook was settled earlier this year. ConnectU now says Facebook, the most popular social network in the world, entered into the settlement fraudulently. Therefore, it says, the case must be reopened.
The beef stems from allegations by ConnectU's founders that Facebook's Mark Zuckerberg stole their business idea in 2003, when the founders were students at Harvard University.
Many documents in the case have been filed under seal, including instant messages reportedly sent by Zuckerberg to colleagues at Facebook.
BOSTON--A federal judge in a Massachusetts district court gave the founders of college-based social networking site ConnectU two weeks to revise the complaint that they have filed against Facebook, its CEO Mark Zuckerberg, and four other early employees of the fast-growing social network. The ConnectU founders, twins Cameron and Tyler Winklevoss and their fellow 2004 Harvard graduating classmate Divya Narendra, have accused Zuckerberg and his company of stealing their code and business plan when Zuckerberg was casually employed as a programmer for ConnectU in the 2003-2004 academic year.
Judge Douglas P. Woodlock, during the case's dismissal hearing on Wednesday afternoon, requested that the plaintiffs revise their complaint and refile it by August 8, after which point Facebook has an additional two weeks to file for a dismissal. The reason, the judge said, was that there simply was not a factual basis to the majority of the ten claims listed by ConnectU in its original complaint.
"You're really going to have to do this with particularity," Woodlock said to ConnectU's counsel, "because this is a most evanescent of explanations."
UPDATE: Facebook has released an official statement on the matter to the press: "We are pleased with the outcome of the hearing today. We continue to disagree with the allegations that Mark Zuckerberg stole any ideas or code to build Facebook. We intend to honor the judge's request not to comment further in the media and will continue to vigorously defend this case in court."
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