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New York man who sued Facebook faces criminal charges

By Emily Flitter and Grant McCool

(Reuters) - A New York man was arrested Friday on charges he forged documents in a multibillion-dollar scheme to defraud Facebook Inc and its chief executive, Mark Zuckerberg, through a lawsuit claiming a huge ownership stake in the Internet company.

Paul Ceglia, 39, a one-time wood pellet salesman from Wellsville, New York, was charged with mail and wire fraud over what federal prosecutors and the U.S. Postal Inspection Service said was fabricated evidence to support his claim to a large stake in Facebook through a 2003 deal with Zuckerberg.

Ceglia's accusations against Zuckerberg had marked a bizarre twist to Facebook's march toward its highly anticipated initial public offering in May. Facebook's origins were also the focus of a separate legal challenge by Zuckerberg's Harvard University classmates, the twins Cameron and Tyler Winklevoss, in a saga chronicled in the 2010 film, "The Social Network."

Ceglia sued the Silicon Valley company and its chief executive in 2010, claiming that a 2003 contract he signed with Zuckerberg entitled him to a stake in the social media network. Zuckerberg had done programming work for Ceglia's company, StreetFax.com, while at Harvard University.

This past March, as part of that case, Facebook attorneys released emails sent by Zuckerberg to show Ceglia's claims were false. The attorneys cited work by forensic experts who found that Ceglia had typed text into a Microsoft Word document and declared it was the text of emails with Zuckerberg.

Ceglia sought "a quick pay day based on a blatant forgery," U.S. Attorney Preet Bharara in Manhattan said in a statement announcing the criminal charges. "Dressing up a fraud as a lawsuit does not immunize you from prosecution."

A lawyer for Ceglia could not immediately be reached for comment.

"Ceglia used the federal court system to perpetuate his fraud and will now be held accountable for his criminal scheme," Orin Snyder, a partner at law firm Gibson Dunn who is representing Facebook and Zuckerberg in the civil case, said in a statement.

PARTNERSHIP CLAIMS

In his lawsuit, filed in federal court in Buffalo, New York, Ceglia had claimed that Zuckerberg shared his plans for a social networking site with him while working at StreetFax. He contended that their contract granted him part ownership in Zuckerberg's project in exchange for a $1,000 investment.

To build his case, Ceglia submitted what he said were emails from Zuckerberg that proved the pair had discussed the project that would eventually become Facebook.

But Zuckerberg said he had not even conceived of the idea for Facebook until December 2003, and submitted his own emails to prove his version of the timeline.

Ceglia went through a string of lawyers from prominent firms, including DLA Piper and Milberg, who worked with him on the case but later withdrew.

Ceglia was arrested at his home on Friday morning and appeared in federal court in Buffalo in the afternoon. In the hearing, a federal judge set bail at $21,000 and stayed the bail order until Monday at noon to give prosecutors a chance to appeal it, authorities said.

Each of the charges against him carries a maximum sentence of 20 years in prison.

Investigators for the Postal Inspection Service, which is conducting the probe, made the arrest following Ceglia's return to the United States this week after spending time out of the country, according to a source familiar with the matter who was not authorized to speak publicly on the case.

The judge in Friday's hearing ordered Ceglia and his family to surrender their travel documents.

Separately on Friday, Massachusetts fined Citigroup Inc $2 million to settle charges that two bank analysts improperly released confidential information about Facebook's financials before the technology company went public.

The case is USA v. Paul Ceglia, U.S. District Court, Southern District of New York.

(Additional reporting by Nate Raymond; editing by Martha Graybow, Bernadette Baum and Matthew Lewis)

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