Court says Winklevoss twins must accept Facebook deal

http://www.reuters.com/article/2011/04/11/us-facebook-winklevoss-idUSTRE73A5DX20110411

by jedwhite • 15 years ago

80 41 15 years ago

timmyd• 15 years ago

"Fool me once - shame on you. Fool me twice - shame on me."

KE4ZNR• 15 years ago

Maybe it is just me being the lowly I.T. Geek I am but I do have a difficult time feeling any sympathy for the "Wonder Twins". They were set for life before pursuing this litigation and will still be set even with this ruling. I guess since I was not lucky enough to be born in the "Silver Spoon" way of living it makes my care threshold for them set very low :)

imjk• 15 years ago

"At some point, litigation must come to an end," Chief Judge Alex Kozinski wrote. "That point has now been reached."

kenjackson2• 15 years ago

Doesn't litigation come to an end when justice has been served? I don't know the details of the case, nor do I have a stake in this, but it seems odd to limit damages if one party illegally withheld information.

This coupled with the recent Supreme Court ruling that prosecutors effectively can't be held accountable for hiding evidence that would exonerate a defendent -- seems to be saying that your best strategy in the legal system is to illegally withhold information, because the legal system will eventually not care, even if the actors in the case still do.

shasta• 15 years ago

Doesn't litigation come to an end when justice has been served?

You mean once justice has taken its cut, right?

fleitz• 15 years ago

I think more to the point the amount awarded the Winklevoss twins is sufficient to cover their damages. Also, IIRC Facebook didn't withhold information from the court, they withheld information during a settlement negotiation.

When purchasing private securities via any mechanism the purchasing party should to due diligence to ensure they are receiving fair value for it. I think they have a latin phrase for this something like 'caveat emptor'.

That the Winklevosses have this much money, that many connections, and manage to get themselves duped by the same guy is impressive.

tedunangst2• 15 years ago

Litigation ending only when justice is served is an impossible standard. The losing party (whichever side it is in that round) will obviously feel justice has not been served and appeal endlessly. If the two sides agreed on what constituted justice, there wouldn't be a court case.

cabalamat2• 15 years ago

They should think themselves lucky to get $65 million for essentially nothing. They are really no different from people who post on Craigslist that they have a great new startup idea and just need someone to code it for them. The only difference is that because they are rich and well-connected they were able to unjustifiably extract money from Zuckerberg, who unlike them made something people want.

Jabbles• 15 years ago

In terms of facebook's most recent valuation, you could argue that the idea was "0.1%", and execution the 99.9%, in line with the general HN agreement that "ideas are nothing, execution is everything".

(That is, of course, assuming that MZ owes them anything for the idea.)

phlux5• 15 years ago

I have no love for the twins, however I also cant agree with your statement.

There is a difference between posting on CL with an idea. and having an idea/site and plan laid out - recruiting a developer who decides to work with you who obviously would add value to the design/plan - and then him turning around after agreeing to work with you and implementing his own version of it.

If, for example, he had read an ad on CL - which the ad alone ignited something inside him and he went and implemented it on his own - then I could agree. He was recruited and agreed to work on the project for/with them.

Then, he fucked them over in the negotiations as well.

Anyway this is looked at, Zuckerberg is a complete douchebag.

Successful? Yes. Within legal rights? Sure - but an amoral untrustworthy douchebag none-the-less.

I am not saying the twins should receive [whatever it was they were seeking] - but I am tired of people defending mark zuckerberg.

dasil003• 15 years ago

Sure, Zuckerberg acted unprofessionally, and so they do probably deserve something. But it's important to realize that they came out ahead by $65m. There's not a chance in hell that if Zuckerberg had simply delivered what they asked and then severed ties in an ethical manner that they would have created a company worth anywhere near that.

adrianwaj• 15 years ago

What should have MZ done differently?

More interestingly, in hindsight, if the twins had the choice of hiring MZ or Joe PHP, who do you think they would've chosen?

"Go ahead Mark, we'll get our pound of flesh from you whatever you do" is the vexatious vibe I'm getting. Maybe the film portrayal is adding to their greed. Self-entitled douchebags. What websites or businesses have they built since Harvard Connection? http://www.connectu.com is down, surprised?

cabalamat2• 15 years ago

> Anyway this is looked at, Zuckerberg is a complete douchebag.

I agree. I'm not defending Zuckerberg's character, I'm merely pointing out that Z actually made something whereas the W brothers haven't made anything and certainly haven't created $65 million of value for others.

If I had been the judge I would have awarded the W brothers nothing but required Z to pay $65 million to charity.

esoteriq• 15 years ago

That would imply self-awareness, which does not seem to be their strength.

grellas3• 15 years ago

If anyone still cares, this was the case that created such an uproar last May when it was widely reported that Mark Zuckerberg had been accused of committing "securities fraud," allegedly adding to his supposedly shady legal woes (prior HN discussion here: http://news.ycombinator.com/item?id=1362379).

In fact, the securities-fraud claim was merely some legal legerdemain by which the Winklevoss brothers sought to set aside the $65 million settlement they had struck with Facebook in their quest to obtain more. It is basically absurd to say that a party settling a legal case must comply with the disclosure laws for making a private placement in offering a stock component as part of a settlement package in a mediation context.

The Ninth Circuit panel here obviously agreed, and the writing was on the wall on this issue even after the oral argument held three months ago (see my comment here: http://news.ycombinator.com/item?id=2096370).

The case is not necessarily dead, at least in theory, since the Winklevoss brothers might petition to have it reconsidered en banc by the full Ninth Circuit and can file for a writ to the Supreme Court. At this stage, though, such options are long-shot options at best.

I note one irony in passing. The ratio of the stock value to cash payment that made up the original settlement was not coincidental. The $65 million value consisted of 1.2 million Facebook shares originally valued at $45 million plus $20 million in cash. Receipt of such stock is a taxable transaction and, indeed, would constitute ordinary income to the Winklevoss brothers. Thus, they were to have received $65 million in taxable income, including $20 million in cash to help cover the tax. But that was then. Having chosen to fight the issue, they would not have realized any form of taxable income on this deal until they actually received the stock. As a result, when they now receive the cash/stock package, they will realize an estimated $170 million in taxable income (the cash plus FB stock worth $150 million), with only $20 million to help defray taxes. That stock will not be immediately marketable, even on the secondary exchanges and will require FB's permission to be sold there. The net result, unless I mis-analyze, is that the Winklevoss brothers have by their choosing to fight managed to convert over $100 million in stock value from what would have been a long-term capital gain into ordinary income, will have to pay much higher taxes accordingly, and will (I would assume) be faced with a serious logistical problem in the form of a short-term cash squeeze in raising funds to cover the taxes. I am not a tax specialist and may be wrong on this, but I don't think so.

FB dodged a bullet on this one. Had the settlement been set aside, the liability overhang would very likely have messed up its IPO, among other serious consequences. That was the gamble apparently made by the Winklevoss brothers - that they would be able to exact a much larger settlement as a result of their leverage obtained from having the issues re-opened. It appears, though, that they gambled and lost and not without detriment to themselves. For its part, FB now seems to be in the clear.

dhimes5• 15 years ago

It is basically absurd to say that a party settling a legal case must comply with the disclosure laws for making a private placement in offering a stock component as part of a settlement package.

Why is it absurd? In particular, is it legal to lie about the value of the stock in a negotiation? I'm genuinely curious.

phlux5• 15 years ago

When Lockheed Martin was buying a company I was with a few years ago - the company was telling the employees that the private stock price was X. And that they were not going to sell the company.

Then, when the deal came through - the sale price was effectively 20% of the price that was previously told all the employees, and that any employees that joined the company in the last 12 months would receive nothing for their shares.

They additionally, gave executive stock bonuses to the C-level team to compensate for the difference between the original stated price and the ultimate selling price.

Further, they didn't allow any ESPP and gave no lockheed stock to any employees (except the C-Level).

Had the employees been allowed to exchange their stock options dividends for money to buy Lockheed stock for street value - the employees would have made out ok - lockheeds stock tripled in the next 12 months due to the war on terror.

Instead - they sold into Lockheed and had no incentive package for any new employees, fucked over existing employees and any employees who were there for <12 months got nothing.

Employees pretty much left after that - and HR had no answer as to how they were incentivising any new hires with anything more than a paycheck.

alexqgb2• 15 years ago

@dhimes - I think the point is that valuations are something others apply. In the case of a stock offer (where the company and the issuer are - presumably - working together for their mutual benefit) disclosure tends to be far deeper and more detailed than it is in a case where a hostile, and possibly devious party is attempting to inflict/extract maximum damages. So it's not about lying, per se. Rather, it's about providing the least information possible, and letting the negotiations center on the whatever value the plaintiffs can infer from that disclosure.

It's also worth remembering that the value (which is always changing) is based on factors beyond FB's knowledge or control. Given the opacity of GS, no one outside of that firm really knows what related transactions they may be a part of that are also contributing to the value they place on FB. So even if the Winkelvi did have all the information that GS had, that still doesn't mean they'd be able to value the company in the same way. In other words, they're just saying "well, if GS sees more value than we do, and for reasons we don't begin to understand, we want a piece of THAT action - even though we'd already settled for a different price before they got involved."

It's a bit like selling your house to a guy who fixes it up, then flips it for even more money, only to have you sue a year later to "correct" the price you received. In a word, absurd.

grellas3• 15 years ago

Securities laws were obviously not intended for a mediation context. Innocent investors buying stock from an issuer presumably trust that the issuer will be truthful about the value of the stock and about the material facts that affect that value. No such trust exists in an adversarial context where it is presumed that, in negotiating deals, it is every man for himself. Moreover, if securities laws applied in this context, then parties would need to do Regulation D/blue sky compliance to ensure that they were not sued after-the-fact. This is wholly impractical and would basically negate the ability of parties to settle by offering stock or other forms of equity to one another. In all the many years since the U.S. securities laws were enacted back in the early 1930s, these laws have never been applied in the manner suggested by the Winklevoss brothers. Since the issue is one of what Congress intended in enacting those laws, the failure of anyone even to raise the issue for so long a time is a good indicator that Congress never intended them to apply to this context.

drags• 15 years ago

Normally when restricted stock grants vest, doesn't the recipient have the option to pay the tax by having the company withhold the requisite number of shares?

Isn't this similar in form to a restricted stock grant (in the sense that there wasn't just a substantial risk of forfeiture, they were claiming that their interest had been wrongly forfeited)? Could the Winklevoss's exercise the share withholding option in this case?

grellas3• 15 years ago

Restricted stock, as relevant to 83(a) and 83(b) of the Internal Revenue Code, is a form of property granted in exchange for services. It is not taxable immediately under 83(a) upon its receipt by the service provider while it remains subject to a substantial risk of forfeiture. Once that risk lapses, it is subject to tax. Thus, anyone whose grant vests over, say, 48 months at 1/48th per month would be potentially subject to up to 48 taxable events, one for each increment of stock that vests over the 4 years. Of course, people don't want to be subject to this, and that is why they file 83(b) elections. With an 83(b) election, the restricted stock recipient elects to be taxed at once on the full value of the grant on the day it was made, notwithstanding that it remains subject to a substantial risk of forfeiture. Thus, when you get your million share grant at $.001 per share, you elect to pay tax on the difference between the $1K you paid for it and the $1K that it is worth on the date of grant. Hence, you pay tax on $-0-.

In this context, the "substantial risk of forfeiture" analysis is not relevant. The idea of "risk of forfeiture" applies only when someone already owns stock and can lose it. Here, the Winklevoss brothers never owned the FB stock (nor were they receiving it in exchange for any services they were performing and so neither 83(a) nor 83(b) applies).

tedunangst2• 15 years ago

Even if Facebook buys back the shares to pay the taxes, the net result is the same: The settlement is substantially smaller.

orijing• 15 years ago

Just a note, the original 1.2 million Facebook shares are before the 5-for-1 split last October. So in terms of "new" shares, the settlement contains 6 million shares.

The irony you point out is very telling, but would be less ironic if Facebook's stock value had not risen since the settlement day?

yuhong• 15 years ago

Personally I wonder why the IMs were not revealed until after the settlement.

Court says Winklevoss twins must accept Facebook deal

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