How to dodge a court clash

Mastermind fraudster Paul Ceglia has disappeared while a million-dollar lawsuit for fraud against Facebook Inc. awaits him.

In early March, the story of Paul Ceglia, who was facing serious fraud charges in relation to his claim that he owns half of Facebook Inc., took a bizarre twist.

Ceglia, his wife, Iasia, their two children (ages 10 and 11) and Buddy, the family dog, disappeared after the 41-year-old apparently cut off the ankle bracelet he had been ordered to wear as part of a US$250,000 bail agreement negotiated in 2012. US marshals, armed with a search warrant, discovered the tracking device, which was motorized and mounted on a ceiling, attached to a homemade contraption that simulated the movements of a person walking around.

In court papers filed following Ceglia’s disappearance, Assistant US Attorney Alexander Wilson said, “The purpose of the contraption appeared to be to keep the bracelet in motion using a stick connected to a motor that would rotate or swing the bracelet.” A timer was connected to the bracelet’s charger so monitors would think Ceglia was at home charging it, Wilson added.

In revoking Ceglia’s bail, which his family will likely have to pay, Manhattan Federal Court Judge Vernon Broderick noted that “it’s not easy to tamper with an ankle bracelet — it’s something that took a fair amount of planning.”

The judge also wondered if Ceglia had masterminded a way to fund his disappearance. Broderick noted that Ceglia’s bail had been amended in September, allowing him to hire lawyers. “I’d like to know if the money freed up to retain counsel … he may be using in connection with his flight.”

The marshals had raided Ceglia’s home in Wellsville, in upstate New York about a two-hour drive south of Canada, after a pretrial services officer was unable to contact Ceglia by phone, text or email, according to Bloomberg News. The accused fraudster was due in a Manhattan court on May 4 to begin his trial on charges that he fabricated documents to make it appear Facebook founder Mark Zuckerberg had agreed to pay Ceglia 50% of the social media company, plus an additional 1% interest in the business per day after January 1, 2004, until the website was completed, in return for a US$1,000 fee negotiated between the men in April 2003. If paid in full, Ceglia (who also claimed damages) would end up owning 84% of Facebook.

Following an investigation by the US Postal Inspection Service into Ceglia’s claims, he was charged with mail fraud and wire fraud, which carried a possible sentence of up to 40 years in prison. He pleaded not guilty.

At the time of this writing, Ceglia had not been located. A prevalent theory was that Ceglia had taken his family to Ireland, his mother’s birthplace and where he had once lived. Another conjecture had him in the Bahamas, where he had worked for several years.

Although Ceglia had to surrender his passport as a bail condition in 2012, Iasia’s family, who think she was coerced into fleeing with her husband, believe he could have obtained a new one. They called him “a master manipulator.”

The backstory of Ceglia’s master plan to extort an incredible amount of money from Facebook — in early 2015 it had a market capitalization of more than US$200 billion, according to Yahoo Finance — might tempt film director Aaron Sorkin to consider making a sequel to The Social Network, his highly successful film about the creation of Facebook.

The villain, of course, would be Ceglia, who has what is often referred to as a checkered past. “In 1997, he pleaded guilty to possession of hallucinogenic mushrooms in Texas, and [in 2010], he was arrested, charged with fraud and had his business shut down by Andrew Cuomo, then the New York State attorney general,” the New York Times reported. The latter case concerned Allegany Pellets, a company founded in 2009 by the Ceglias, which made and sold pellets as environmentally friendly heating fuel. “Eight months later, Mr. Ceglia was arrested by the state police and accused of defrauding customers. In a complaint filed by Mr. Cuomo’s office, Mr. Ceglia is accused of taking in more than US$200,000 from customers, but failing to deliver the pellets. Mr. Cuomo obtained a court order preventing Mr. Ceglia from operating the business.”

The couple was charged with 12 counts each of fourth-degree grand larceny and one count each of first-degree scheme to defraud. The allegations had not been resolved at the time of the couple’s disappearance.

These blots on his background didn’t deter Ceglia from alleging in 2010 that years earlier, in 2003, he had worked with Zuckerberg on several projects. According to Ceglia, he placed an advertisement on Craigslist that year looking for a programmer for a business he was trying to start up called StreetFax. He said Zuckerberg answered the ad and agreed to do the work for US$1,000. The pair signed a contract, a fact not disputed by the Facebook founder.

“After that, the accounts diverge,” the Times reported. “Mr. Ceglia claims the contract shows that he also paid Mr. Zuckerberg an additional US$1,000 for a 50% stake in a project called ‘The Face Book,’ in one place, and ‘The Page Book,’ in another.”

In his lawsuit, Ceglia produced emails that he said clearly demonstrated negotiations between him and Zuckerberg concerning the creation of the social media site. “At one point, Mr. Zuckerberg asks Mr. Ceglia for an additional US$1,000 to move forward with the project. And twice, Mr. Zuckerberg appears to plead with Mr. Ceglia to rescind a clause that gives Mr. Ceglia 1% additional ownership for every day that Mr. Zuckerberg is late with the project,” the newspaper said. “I’d like to suggest that you drop the penalty completely and that we officially return to 50/50 ownership,” Mr. Zuckerberg is shown to have written.

Zuckerberg denied any such communications about Facebook, claiming that Ceglia had fabricated the emails. In 2012, lawyers for the Palo Alto, Calif.-based company produced forensic evidence supporting Zuckerberg’s contention, after US District Judge Richard Arcara had ordered the testing to take place. An examination of Ceglia’s hard drive, Facebook’s lawyers said, proved that Ceglia had forged the emails and the contract.

“The results — including allegations that Ceglia employed a hex editor [a type of computer program that allows changing of computer file data] to manipulate the text of the disputed contract in order to make the date stamps look accurate — were submitted [in court],” Wired magazine reported in March 2012. “The documents also say Ceglia employed a method called ‘baking’ by which he allegedly exposed a forged contract to light, which produced tan lines ‘where Ceglia appears to have used clothespins or binder clips to suspend the document and expose it to sunlight.’ ”

Facebook also told the court it had discovered the original Work for Hire contract on Ceglia’s computer and one emailed in 2004 to Ceglia’s lawyer, neither of which mentioned Facebook.

As a result of these findings, the charges Ceglia faced on May 4 were eventually laid.

The Ceglia case was by no means the only challenge Zuckerberg faced with his creation of Facebook. As depicted in The Social Network, Olympic rowing twins Cameron and Tyler Winklevoss claimed Zuckerberg stole their idea for Facebook, which they had called HarvardConnection (later called ConnectU), when all three attended Harvard.

The twins eventually accepted a US$65-million cash-and-stock settlement from Facebook but later tried to reopen their claim, charging that the settlement “was fraudulent because Facebook hid information from them, and that they deserved more money,” Reuters reported. In 2011, however, they decided against taking their case to the Supreme Court, as they had threatened, and took the deal.

In a less contentious dispute, Facebook negotiated an out-of-court settlement with one of its genuine cofounders, Brazilian-born Eduardo Saverin, for an undisclosed amount. It is public knowledge, however, that Saverin’s worth exceeds US$2 billion.

It is hardly surprising that when a business enterprise such as Facebook skyrockets from a brainstorming idea on a college campus to become a multibillion-dollar international empire, that allegations and lawsuits would emerge.

If there’s a lesson for entrepreneurs, accountants and others who might be engaged in, or advising, fledgling business ventures, it’s the critical importance of keeping clear and accurate documentation from the very outset. Although most seemingly wild ideas never achieve the success of Facebook, some do. And in this age of ever-changing technological advances, it’s inevitable more success stories will emerge.

Often they begin with an exchange of ideas among colleagues and friends. Untold wealth, however, can result in some unfriending very quickly, and a battle over ownership that can lead to a loss of face as well as claims of stolen fortunes.

About the Author

David Malamed


David Malamed, CPA, CA•IFA, CPA (Ill.), CCF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto.

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