Ceglia v. Zuckerberg et al
REPLY to Response to Motion re 426 MOTION to Vacate 348 Order on Motion to Stay, Scheduling Conference, Oral Argument,,,,,,,,,,,, NOTICE OF MOTION filed by Paul D. Ceglia. (Attachments: # 1 Exhibit, # 2 Exhibit, # 3 Certificate of Service)(Boland, Dean)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
PAUL D. CEGLIA,
Civil Action No. : 1:10-cv-00569-RJA
REPLY TO DEFENDANTS’
RESPONSE TO MOTION TO
MARK ELLIOT ZUCKERBERG, Individually, and
Paul A. Argentieri
188 Main Street
Hornell, NY 14843
1475 Warren Road
Lakewood, Ohio 44107
While the wording of the relevant rules on conflict of interest have changed since April
2009, the interpretation by courts has not. Courts continue to cite pre-April 2009 cases
considering dual representation issues. The April 2009 rule change does not alter the underlying
legal analysis. There is no substantial difference between the prior rule and the new code except
to make it more stringent to engage in dual representation. The new code also required written
consent to conflicts of interest inherent in dual representation. While there are situations
permitting dual representation under certain circumstances, this is not one of them.
Defendants counsel seek to avoid disqualification by raising standing issues, contesting
the timing of the motion and questioning the specific rule references that their conduct violates.
Even if Defendants obtained consents, they are invalid because Defendant Zuckerberg is charged
with a fraud, one that when proven becomes a fraud against Defendant Facebook as well.
The Plaintiff intends to rely on the jury to weigh the evidence and continue to rely on the
court to administer this case without bias to either side.
THERE ARE TWO DISTINCT TYPES OF DISQUALIFICATION MOTIONS
Disqualification motions based upon successive representation and those considering
dual representation rely on different standards.
Successive Representation Disqualification
Successive representation has its own test for disqualification. Successive representation
disqualification involves considering whether a party, or someone related to them, was formerly
represented by what is now opposing counsel. The burden is on the moving party in successive
representation disqualifications. In dual representation disqualifications, the burden to avoid
disqualification is on the non-moving party. See Strategem Dev Corp., et al below. Plaintiff’s
motion is a dual representation disqualification motion, therefore, no successive representation
disqualification opinions apply.
The court’s opinion, Doc. No. 451, comments on standing, a facet of successive
representation disqualifications. Standing is not a factor in dual representation disqualifications.
Defendants’ successive representation case citations and quotes led the court down the wrong
Dual Representation Disqualification
When considering dual representation courts apply a per se prohibition against dual
representation. Stratagem Dev. Corp. v. Heron Int'l N.V., 756 F. Supp. 789, 792 (S.D.N.Y. 1991).
See also, Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir.1976). “[I]n a
disqualification situation, any doubt is to be resolved in favor of disqualification.” Schmidt v.
Magnetic Head Corp. 476 N.Y.S.2d 151. Schmidt has been cited favorably by the Second
Circuit. See Hull v Celanese Corp. 513 F.2d 568, 571.
PLAINTIFF AND PLAINTIFFS COUNSEL
HAS STANDING TO BRING THIS MOTION
The court in Doc. No. 451 mentions Plaintiff’s lack of standing to raise the dual
representation disqualification on Defendant Facebook’s behalf. Id. at 7. The court reasons that
Plaintiff’s lack of ownership of stock in Defendant Facebook negates his standing. The law does
not require stock ownership in Defendant Facebook to confer standing on Plaintiff to raise the
dual representation disqualification.
“[S]ince an attorney has the authority and obligation to bring a possible ethical violation
to the attention of the court...the adverse party may properly move to disqualify the attorney for
an opposite party on the ground of conflict of interest”. 7A C.J.S., Attorney and Client, § 157, p.
224; SMI Industries Canada, Ltd. v. Caelter Industries, Inc. 586 F.Supp. 808, 815 (N.D.N.Y.
1984). Any lack of standing argument “must give way to a maxim that adequately addresses the
need to ensure both clients and the general public that lawyers will act within the bounds of
ethical conduct.” Vegetable Kingdom, Inc. v. Katzen 653 F.Supp. 917, 923, n. 4 (N.D.N.Y.1987);
Code of Professional Responsibility Disciplinary Rule 1–103(A), 22 NYCRR 1200.4(a).
Defendants’ cite to one case for the proposition that dual representation disqualification
motions require some standing. Doc. No. 452 at 4. However, Defendants’ cases do not consider
a lawyer’s ethical obligations which trump any standing argument.
TIMELINESS OF DISQUALIFICATION MOTION
Although the court in Doc. No. 451 gave no credence to Defendants’ timeliness
argument, it must be addressed nonetheless.
Successive representation disqualification motions involve information that a moving
party knows at the outset of litigation. In that circumstance, timeliness arguments have merit. In
contrast, lawyers engaged in dual representation encounter conflicts on an evolving basis.
Unknown or unanticipated conflicts at the outset of litigation emerge as the case proceeds.
Defendants’ cite cases involving disqualification motions made on the eve of trial. This matter
has not even begun regular discovery making Defendants’ cases on this point inapplicable.
Defendants’ argue, without case law support, that Plaintiff’s counsel’s duty to raise ethics
violations within dual representation have an expiration date. In fact, this precise motion is
properly raised multiple times throughout the litigation if facts develop causing Defendants’
interests to collide. Evidence from Defendant Zuckerberg’s Harvard era computers or via
deposition of Defendant Zuckerberg will confirm the authenticity of the Facebook Contract.
Once that occurs, it will cause an inarguable direct, nonconsentable conflict among Defendants.
DEFENDANTS ADMIT DIVERGENT INTERESTS
A reasonable lawyer would conclude that dual representation in this case involves the
lawyer representing differing interests. Defendants’ counsel have admitted a potential conflict by
virtue of requiring their clients sign informed consents. Defendants should be ordered to
produce those written consents from both parties in compliance with the rules. What conflicts
did the Defendants consent to? Who consented on behalf of Defendant Facebook? When did
they consent? If Defendants consented before Plaintiff’s experts evaluated the Facebook
Contract, it is impossible that Defendant Facebook knew of many emerging conflicts those
expert reports now present. Plaintiff knows the Facebook Contract is authentic as his experts’
undisputed analysis has proven. Can Defendant Facebook merely ignore that undisputed fact
proving the authenticity of the Facebook Contract and plunge forward as if their co-defendant
has honestly informed them about their risk?
See Exhibit A.
This conflict of waiving a right in one agreement, the signed consents Defendants’
counsel claims they obtained, while one Defendant
Exhibit A, is nonconsentable.
Defendant Facebook has reserved its right to introduce “separate and additional defenses” in this
litigation. See Doc. No. 40 at 22, Affirmative Defenses. Emphasis added. Defendant Facebook
logically reserved this right recognizing that facts may develop during litigation further
separating its most advantageous defense position from Defendant Zuckerberg’s. It would have
been a breach of its fiduciary duty to do otherwise. Those facts are now here, especially as of
June 4, 2012, and yet Defendant Facebook has failed to introduce those defenses - a result of the
conflicted dual representation.
In a dual representation disqualification case, one Defendant reserving such rights
mandated disqualification. Paladino v. Skate Safe, Inc., Slip Copy (2010), 28 Misc.3d 1227(A),
2010 N.Y. Slip Op. 51512(U). “The conflict is not [resolved] by the attorneys' assertion [that one
Defendant] did nothing wrong and did not intentionally harm the plaintiff.” Id.
DEFENDANTS CONFLICTS WERE UNFORESEEN AND ARE NON CONSENTABLE
Only if a jury finds Defendant Zuckerberg did not sign the Facebook Contract will
Defendants’ lack of conflict argument be realized. Plaintiff’s experts’ overwhelming and largely
undisputed conclusions will disable a jury from that finding. The unlikely scenario of a jury
ignoring Plaintiff’s undisputed expert testimony mandates Defendant Facebook file a cross claim
to protect the company’s interest.
Now that the Facebook Contract is established scientifically, indisputably authentic (See
below) the dual representing lawyers for Defendants now have a conflict. If both Defendants are
found liable, damages will be apportioned between them. Inversely, if only one Defendant is
found liable, that Defendant will be responsible for the full amount of damages. Defendants have
conflicting interests in defining their respective duties of care, notice, and breach because each
benefits from shifting liability to the other. Id. Those purported consents obtained by
Defendants’ counsel necessarily prohibit Defendant Facebook from exiting the case (e.g. arguing
lack of successor liability, lack of knowledge of Defendant Zuckerberg’s fraud, etc.). This
prohibition on Defendant Facebook’s legal arguments applies regardless of whether that option is
in its best interest at the time. Defendant Facebook’s answers to the Amended Complaint
disavow knowledge about nearly every aspect of Plaintiff’s claim. Therefore, Defendant
Facebook could not possibly intelligently waive unknown conflicts while reserving rights in
Exhibit A and honoring its fiduciary duty to all shareholders. This “lack of knowledge” answer
to the claims in the Amended Complaint was interposed by Defendant Facebook instead of the
flat denial submitted by Defendant Zuckerberg. Obviously, if Defendant Facebook believed
Defendant Zuckerberg’s denials in the Amended Complaint were accurate and true, it would
never have answered the Amended Complaint with “lack of knowledge” denials.
“A conflict may exist by reason of substantial discrepancy in the parties' testimony,
incompatibility in positions in relation to an opposing party or the fact that there are substantially
different possibilities of settlement of the claims or liabilities in question.” Rules of Professional
Conduct Rule 1.7, cmt. 23.
THE CONFLICTS IN THIS CASE ARE NONCONSENTABLE
“Ordinarily, clients may consent to representation notwithstanding a conflict. However,
as indicated in paragraph [Rule 1.7(b)], some conflicts are nonconsentable, meaning that the
lawyer involved cannot properly ask for such agreement or provide representation on the basis of
the client's consent.” Rules of Professional Conduct Rule 1.7, cmt. 14. Emphasis added.
Diligent representation required by 1.7(b)(1) of the Rules of Professional Conduct require
Defendant Facebook’s lawyer to have filed a cross-claim against Defendant Zuckerberg
protecting it in the conceivable event that either or both Defendants were found liable. See fn. 1.
How could counsel for Defendant Facebook diligently represent Defendant Facebook in its
claims against Defendant Zuckerberg when the Facebook Contract is determined to be authentic?
After the court’s careful review of all of Plaintiff’s experts’ reports and conclusions, the
most significant of which are undisputed, it will be undeniable that Defendant Facebook’s failure
to file a cross-claim is a clear breach of its fiduciary duty to shareholders other than Defendant
Zuckerberg. This is one of those cases in which the dual representation is “so fraught with the
potential for irreconcilable conflict” that it should not be allowed. Greene v. Greene, 47 N.Y.2d
447, 451– 452 (1979).
Despite this court’s invitation in Doc. No. 451, Defendants’ provided no declarations
verifying written consents by either Defendant. The content of those consents is a critical piece
of the analysis this court must undertake to determine compliance with the relevant rules.
DEFENDANT LIABILITY DIFFERS
In the event both Defendants are found liable, it takes little contemplation to realize their
relationship would become contentious. “In some situations, the risk of failure is so great that
multiple representation is plainly impossible. For example, a lawyer cannot undertake common
representation of clients where contentious litigation or negotiations between them are imminent
or contemplated.” Rules of Professional Conduct Rule 1.7, cmt. 29. Emphasis added. Differing
liability demonstrates a nonconsentable conflict.
DEFENDANT ZUCKERBERG CANNOT CONSENT FOR DEFENDANT FACEBOOK
“If the organization's consent to the dual representation is required by Rule 1.7, the
consent shall be given by an appropriate official of the organization other than the individual
who is to be represented, or by the shareholders.” Rules of Professional Conduct Rule 1.13(g).
Therefore, the only person qualified under the rule to consent on Facebook’s behalf
would be an independent director of the company after advice from counsel who is not
Defendants current counsel and not Defendant Facebook’s General Counsel. Both Defendants’
current counsel and Defendant Facebook’s General Counsel are conflicted from advising the
independent director whether to consent to the obvious conflicts. Defendant Facebook’s current
counsel is Defendant Zuckerberg’s counsel and Defendant Facebook’s General Counsel is
beholden to Defendant Zuckerberg for their employment.
Imagine if a court would have permitted dual representation of any of the following
CEOs accused of fraud: Bernie Madoff, CEO of Bernard L. Madoff Investment Securities LLC,
Dennis Kozlowski, CEO of TYCO Industries, Kenneth Lay, CEO of ENRON and Bernard
Ebbers, CEO of WORLDCOM. Perhaps at the outset of those cases, a court may have held that
it was unlikely that the interests of those CEOs would diverge from their corporate codefendants. Obviously, in hindsight, such a determination would have been incorrect and been
the cause of appellate issues, re-trials and various repeats of portions or all of that litigation once
the obviously improper dual representation was identified by an appellate court. The prejudice to
the Plaintiffs and shareholders of the corporate co-defendants noted above from dual
representation would far outweigh the claimed prejudice of the parties needing to seek new,
SOME OF DEFENDANTS’ COUNSEL DO NOT OPPOSE DISQUALIFICATION
The weakness of Defendants’ arguments is proven by the fact that their co-counsel
refused to sign their response. Defendants’ counsel Lisa Simpson and the Orrick Law Firm do
not oppose disqualification as they did not sign Doc. No. 452. In contrast, Defendants’ counsel
Gibson Dunn and Harris Beach, LLP insist that disqualification is improper. This conflicting
position on disqualification among Defendants’ counsel alone is sufficient to warrant
disqualification of all Defendants’ counsel. It certainly injects the type of doubt that the law
requires a court to rely on to disqualify. See Schmidt and Hull v Celanese Corp. (2nd Cir.),
above. Ms. Simpson and Orrick’s decision to not oppose the disqualification is analogous to a
summary judgment motion filed against multiple Defendants. Those non-responding defendants
invite the court to grant the motion against them.
MERITS OF DISQUALIFICATION MOTION
The Defendants ignore the merits of Plaintiff’s motion. They make no attempt to
dissuade this court of the obvious, detailed, existing conflicts inherent in the dual representation.
They do not deny Defendant Facebook has a claim against Defendant Zuckerberg reliant upon
the authenticated contract. They navigate around the substance with diversions into arguments
about standing, timeliness and false claims of Plaintiff’s ulterior motives. This court should not
provide Defendants the pass they seek on confronting the merits of Plaintiff’s motion.
Defendants’ failure to specifically deny the merits of the obvious conflicts Plaintiff
presented in their motion, leave their response as no support for an order denying the motion.
Plaintiff’s motion is not abstract. It lists with detail the existing and potential conflicts between
the Defendants. Defendants have rebutted none of those obvious conflicts.
Defendants should be ordered to provide to the court for an in camera inspection the
written consent waiver signed by both Defendants. They do not confirm the consents were
signed by someone other than Defendant Zuckerberg on behalf of Defendant Facebook.
Moreover, this court has no information about what conflicts the Defendants consented to
waiving. If the consents were obtained at the outset of the dual representation, it is obvious that
the facts developed thus far make those consents woefully inadequate.
The dual representation conflict analysis dramatically changed on June 4, 2012. With
Plaintiff’s experts’ analysis and conclusion regarding the Facebook Contract, Defendant
Facebook now knows Defendant Zuckerberg’s denials of having signed the Facebook Contract
are false. See Exhibit B. That reality necessarily means that both Defendants can no longer
ethically be represented by the same lawyers.
Plaintiff’s counsel has standing to seek disqualification of Defendants’ counsel.
Defendants’ counsel are conflicted in existing and potential ways mandating disqualification.
The claimed signed consent waivers are insufficient to resolve the nonconsentable conflicts.
Defendant Facebook cannot both waive conflicts in a consent waiver while simultaneously
, disparate answers to claims in the Amended
Complaint and Affirmative Defenses at the end of their answers. Along with the above
conflicts, the introduction of Plaintiff’s expert reports on June 4, 2012 changed everything
making dual representation improper.
Paul A. Argentieri
188 Main Street
Hornell, NY 14843
1475 Warren Road
Lakewood, Ohio 44107