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Facebook’s revenge in court

FORTUNE — On March 30, 2011 — 19 months before federal authorities finally arrested and charged Paul Ceglia with pressing a fraudulent suit against Facebook based on a forged contract that purported to give him a 50% interest in the company — Ceglia’s lawyers learned of the existence of strong forensic evidence of fraud, according to a key document that was quietly unsealed and filed in court last week.

In the document, a letter written April 13, 2011, a lawyer at the high-powered litigation firm of Kasowitz Benson Torres & Friedman, which had been evaluating whether to represent Ceglia, explained to Ceglia’s other lawyers that his firm’s forensic analysis of Ceglia’s computer hard-drives showed that Ceglia’s contract was “fabricated,” that his firm would make its experts available to them, that Kasowitz was dropping all involvement, and warning the lawyers of their ethical obligations, including a possible duty to report “the misconduct that has occurred” to the presiding judge.

The existence of such a document has been known since this past summer, but its unsealing—apparently not previously reported—sheds light on, and gives texture to, the likely basis for the suit Facebook has vowed to bring against at least some of Ceglia’s lawyers. That Facebook plans to bring such a suit was reported by Andrew Ross Sorkin in his Dealbook column of the New York Times on October 29, and Facebook’s (FB) intent was reiterated in a document it filed Tuesday in federal court in Buffalo, where Ceglia’s lawsuit is still pending, though Facebook has moved to have it dismissed.

“Defendants intend to hold accountable all those who aided in Ceglia’s fraud — including his attorneys and former attorneys,” wrote Facebook’s attorneys at Gibson Dunn & Crutcher, who are led by Orin Snyder, in response to a request by Ceglia lawyer Dean Boland, of Lakewood, Ohio, to withdraw. By Gibson Dunn’s tally, Boland’s would be the tenth law firm to come and go on Ceglia’s behalf since he filed the case in June 2010. Others who have represented Ceglia along the way include former New York State Attorney General Dennis Vacco of Buffalo; Robert Brownlie of 3700-lawyer DLA Piper, one of the largest law firms in the world; and Sanford Dumain, who chairs the executive committee of the well-known class-action firm Milberg.

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In a letter to Fortune Vacco writes, “Our firm acted, has acted, and always will act with the highest ethical standards.” Neither Brownlie nor Dumain had responded to calls or emails as of publication.

Ceglia, of Wellsville, N.Y., southeast of Buffalo, is in custody. At a telephonic bail hearing held on October 31, he argued that his contract’s authenticity was supported by expert testimony, and suggested that Facebook CEO Mark Zuckerberg might have hacked into his computers to plant phony documents. “The fact that…the prosecution is attempting to slight [my] world-renowned experts for [Facebook’s] benefit I think is wrong.” (Facebook declined comment for this story.)

Ceglia’s only remaining civil attorney, Paul Argentieri of Hornell, N.Y., did not return an email or phone call, but did email Fortune last week, in response a different inquiry: “We’re very disappointed that our legal arguments and expert reports have not been objectively scrutinized by the fourth estate. Not to be difficult, but until somebody understands our case (which is not complex), there is no point in responding to questions.”

In court filings, Ceglia’s lawyers have characterized the authenticity of the contract as hinging on a good-faith swearing match between opposing banks of forensic experts and, accordingly, a dispute which can be resolved only by a jury.

Originally represented by Argentieri and a small local firm, Ceglia filed the case in state court in Allegany County in June 2010, appending a copy of what purported to be an April 28, 2003 contract between him and Mark Zuckerberg, who was then a Harvard freshman and is now the founder and CEO of Facebook. The contract’s terms gave Ceglia at least a 50% interest in Facebook — and, under certain circumstances, as much as an 84% interest — in exchange for Ceglia’s $1,000 investment in the project.

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Facebook had the case transferred to federal court. From the outset, Zuckerberg acknowledged having done programming work for Ceglia while he was a student in 2003. But he maintained that the contract appended to Ceglia’s complaint was a forgery, and that the real contract made no mention of Facebook, which Zuckerberg had not even conceived of creating until about December 2003. The actual contract pertained solely to a startup Ceglia was trying to launch at the time, called StreetFax, according to Zuckerberg.

While the parties engaged in early skirmishes over whether to send the case back to state court or not, Argentieri drew up a brochure about the case in an attempt to entice big-time litigators into the case. Kasowitz Benson was one of the firms courted. On March 29, it had outside forensic specialists at Capsicum Group examine Ceglia’s laptop, hard-drives and floppy disks. The next day the experts reported back that they had retrieved scans of the original Ceglia-Zuckerberg contract, which Ceglia had appended to an email he had sent to outside lawyer on March 3, 2004. Just as Zuckerberg maintained, that contract made no reference to Facebook, and pertained solely to StreetFax. Kasowitz attorney Aaron Marks informed Argentieri of the result that same day and cancelled his firm’s involvement (never having entered a formal appearance), according to a letter he wrote two weeks later—the document unsealed last week.

Ten days later, to Marks’ evident surprise, Argentieri filed an amended complaint on Ceglia’s behalf, expanding Ceglia’s claims and reappending the same contract that Marks had believed to be “fabricated.” The amended complaint was also signed by Brownlie of DLA Piper and former attorney general Vacco, of Buffalo’s Lippes, Mathias, Wexler Friedman.

On April 12 and, again, on April 13, Marks wrote to Argentieri, Vacco, and the DLA Piper attorneys to express his concerns. In the second letter, he wrote that he would “refrain from reporting to the District Court the misconduct that has occurred” until 3 p.m. the next day “in light of your representation that your firm will undertake an investigation of the concerns set forth in my April 12 letter. … Upon your firm’s reporting to me on the findings of your investigation and the steps your firm will take as a result thereof, we will again assess our firm’s professional obligations. Please note your firm’s obligations to the District Court under [New York Rules of Professional Conduct] Rule 3.3, should your investigation demonstrate that the amended complaint contains false statements of fact.”

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In his letter to Fortune, Vacco writes that both DLA Piper and his firm contacted Marks “for the purpose of reviewing issues he raised regarding the available expert opinions. After completing our review, we believed that the continuation of our representation in the suit was proper in all respects.” Both Vacco’s firm and DLA Piper continued in the case for two months, until June 28, 2011, when they were substituted for by a San Diego law firm, Jeffrey A. Lake, APC. The departure of Vacco’s firm “had nothing to do with the concerns raised by Mr. Marks,” Vacco says.

According to legal ethics expert Stephen Gillers, a professor at New York University School of Law, the rule in New York, as in most states, is that when an attorney representing someone in court learns that a false document has been submitted or false testimony given, his “duty to the tribunal” trumps his “duty of confidentiality to the client,” and he must take “reasonable, remedial measures,” which “can include, and may have to include, disclosure of the false document or testimony” to the court. However, he adds, the duty applies “only if you ‘know’ the document is false. Belief, even strong belief, is not enough.” The lawyer has to have “a high level of confidence” that the document is false to trigger this duty. Gillers adds that the duty to report would not apply to a firm like Kasowitz Benson, which had not entered an appearance in the case.

The Lake firm, which replaced Vacco’s firm and DLA Piper, itself withdrew in October 2011, and was replaced by Dean Boland of Lakewood, Ohio. Neither Lake nor Boland immediately responded to emails seeking comment.

In March 2012, the Milberg firm signed onto Ceglia’s team, along with two smaller firms. All three firms withdrew three months later, on May 30, leaving Boland and Argentieri.

Boland asked to withdraw on October 30, four days after Ceglia’s arrest. In a memo accompanying the request, he wrote: “Myself and prior counsel all have and had a duty to bring to this court any evidence of fraud, even fraud by our own client, should we have come across it. No prior counsel and current counsel, including the undersigned have done so. The undersigned, at no time, has encountered evidence of fraud by Plaintiff…The undersigned feels it is important to emphasize in the strongest terms possible, that the reasons underlying this request [to withdraw] have
nothing to do with any belief by the undersigned that Plaintiff is engaged in now or has been engaged in during the past, fraud regarding this case
.” (Emphasis in the original.)

589-18-Kasowitz letter