Facebook's Zuckerberg faces security fraud allegations

Facebook’s Mark Zuckerberg, who turned 26 last week, has just been accused of security fraud.

According to Venture Beat the accusations come from former Harvard schoolmates who say he and other Facebook executives tricked them into a $65 million settlement.

Divya Narendra and brothers Cameron and Tyler Winklevoss contend that they hired Zuckerberg to work on their social network, ConnectU, when they were all students at Harvard.

He delayed the product and used the code to start something called TheFacebook.

They managed to get support for the claim after instant messages from Zuckerberg bragging he had done it appeared in the press. After years of litigation ConnectU and Facebook reached a tentative settlement for $65 million in 2008.

However the Winklevoss brothers and Narendra have now appealed saying that the settlement was never finalised and that a judge acted improperly in allowing the settlement to proceed and awarding ownership of ConnectU to Facebook.

Apparently the legal maneuver allowed Facebook, as the owner of ConnectU, to fire ConnectU’s lawyers, who included the famed law firm of Boies Schiller & Flexner.

The security fraud argument is that Facebook executives and lawyers presented the cash-and-stock offer’s value as $65 million, relying on a valuation of $15 billion that Microsoft paid in 2007 when buying preferred shares in the company.

But the settlement, however, was to be paid in common shares, not preferred shares.

Facebook had been valuing itself at 75 percent less for the purposes of calculating taxes on stock-based compensation which cut the settlement’s offer roughly in half.

If this is proven then Zuckerberg would have to quit as  Facebook’s CEO.

Fortunately, for Zuckerberg,  a finding of securities fraud in a civil case like this one would not result in him going to jail.