Facebook Finds Old Contract Saying Investor Does Not Own Half the Company as Claimed

Aug. 8, 2011 — -- On Friday, Facebook's lawyers made news when they told a court hearing a lawsuit brought by the alleged initial investor in Facebook, Paul Ceglia, that they'd found the "smoking gun" proving the alleged investment contract was a fraud.

But the document filed to the court that contained the "smoking gun" allegations didn't specify what the smoking gun was.

The answer?

Facebook says they've found the "authentic contract" between Ceglia and Zuckerberg. Facebook is also charging that Ceglia, who they say is now living in Ireland, is holding back electronic storage devices he intentionally tried to hide from them.

Both parties agree that in 2003 Ceglia hired Zuckerberg, then a Harvard undergrad, to do work for his StreetFax company. But Ceglia filed suit in 2010, saying the contract also included $1,000 initial funding for Facebook, and that he's entitled to more than half of the social networking giant.

Facebook argues the contract Ceglia produced electronically is a forgery and that Ceglia is a known con artist.

And now Facebook says that in the course of discovery — where Ceglia's lawyers turned over to Facebook a number of computers and hard drives — that it has found the original "authentic contract" and proof that there are other "storage devices" that Ceglia is intentionally hiding from them in violation of a court order.

But the problem is Ceglia is claiming the "authentic contract" is shielded from use in the suit by designating them as "confidential" under the rules of an agreement between the two parties. Facebook is asking the federal judge overseeing the case in New York State to overrule that designation, in a detailed Friday filing where many of the documents were completely redacted due to the claims of confidentiality.

If indeed Facebook has a copy of the "authentic contract" and it does not include any investment in Facebook, the social networking giant could be close to finally putting aside the legal dramas over the site's founding in 2004. Earlier this year, the Winkelvoss twins, who was made famous by the movie "The Social Network," declined to ask the Supreme Court to let them re-litigate their settlement with Facebook over Zuckerberg's alleged theft of their idea.

These newly revealed details were also filed on Friday in court, alongside the document that led to a flurry of stories about Facebook finding an unspecified "smoking gun" in the case.

But the press, including Wired.com, missed the details by focusing on the strongly worded memo supporting the proposed motion, rather than looking at the proposed motion itself — which Facebook's lawyers failed to redact.

On Saturday, Facebook's lawyers brought attention to the original memo by asking the court to remove that document from its electronic system, due to improper redaction, and instead substitute a redacted version. The court complied and the original proposed order is no longer available through the court's electronic document system, known as PACER.

But Wired.com has both versions. Take a look HERE.

In the court filing, Facebook says that after it combed through the digital archives provided to it, it found 120 documents that were relevant to the case. It provided that list to Ceglia's lawyers, who said that all of them were confidential and couldn't be used. The lawyers argued back and forth with each other, but Ceglia's lawyers refused to budge.

Facebook is now asking the judge in the case to allow all 120 documents to be used..

For their part, Ceglia's lawyers say the confidentiality designations are correct and that they've provided all the material relevant to the case. Now Ceglia's lawyers say, it's time Zuckerberg provide all his e-mails to Ceglia and provide numerous hand-writing samples. (The staggered timing was intended to prevent Ceglia from using the Zuckerberg e-mails and handwriting to be used to create evidence, according to Facebook's lawyers.)

An oral argument in the case before Oral Argument Judge Leslie G. Foschio of the U.S. District Court Western District of New York is scheduled on August 17.