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Facebook and erstwhile rival social network ConnectU reached a settlement last month, after a lengthy court battle. ConnectU’s founders were given Facebook stock, in what was a de facto acquisition of the company by Facebook. But ConnectU’s founders have been trying to keep the case open — they’ve claimed to have new evidence that Facebook low-balled the value of the stock they received for the settlement.

This new evidence, according to a court document obtained by the New York Times, is as follows:

The Term Sheet and Settlement Agreement is also unenforceable because it was procured by Facebook’s fraud. Indeed, based on a formal valuation resolution approved by Facebook’s Board of Directors but concealed from ConnectU, the stock portion of the purported agreement is worth only one-quarter of its apparent value based on Facebook’s public press releases.

So, ConnectU has apparently obtained a copy of a tax document showing that Facebook valued itself at $3.75 billion after Microsoft and other investors put millions into the company at a $15 billion valuation, but before the settlement was concluded. If ConnectU’s founders, brothers Cameron and Tyler Winklevoss and Divya Narendram, had gotten the stock at the lower price, they would be able to sell the stock for well below the $15 billion valuation and still make a hefty profit. Because they got the stock at the $15 billion valuation, they won’t be able to make a profit until they can sell the stock for above that valuation. In other words, ConnectU is walking away with less than it thinks it deserves.

However, as many of our readers know very well, private company valuations are murky. In this case, Facebook sold Microsoft preferred stock as part of a larger deal, such as an advertising agreement whereby Microsoft would exclusively sell some ads for Facebook. This preferred stock likely has all sorts of rights that the common stock issues as options to employees doesn’t.

Meanwhile, rumors have been popping up recently that Facebook employees are in fact trying to sell some of their own shares, based on a rumored $3-$4 billion valuation. The myriad ways that Facebook could have structured its valuations and equity terms over the years could make any number of things possible. We probably won’t know how much the company is actually worth until the company files for an initial public offering, because we don’t have enough information.

But we do know one way that Facebook employees could be selling stock at valuations less than $15 billion. Facebook’s first investor was Peter Thiel, who also founded venture firm the Founders Fund. This firm allows founders and early employees to sell stock during subsequent funding rounds, a class of stock it calls “Series FF“. So at any point over the last several years, at least a handful of early Facebook employees could quite legitimately have been selling shares at less than the then-current valuation, and making a profit.

The Founders Fund itself has also participated in subsequent funding rounds, and it — and maybe the other investors — could have built Series FF-style stock sale agreements into the employee stock option pool.

In other words, only Facebook — and maybe ConnectU and the courts — have much of an idea of what’s happening with Facebook stock sales.

Note for those who haven’t been following the case: Before founding Facebook, Mark Zuckerberg used to write code for a rival college-focused social network called ConnectU. The latter company, which has never gained significant traction, has been trying to sue Facebook to reclaim what they say is intellectual property stolen by Zuckerberg and used to make Facebook successful.

[Picture of Zuckerberg superimposed over another picture of the brothers Winklevoss, via the Sydney Morning Herald.]

A federal judge just issued a ruling that may finally end the legal dispute between social networking companies Facebook and ConnectU. They reached a confidential settlement earlier this year, but ConnectU’s founders have been trying to back out and reopen the lawsuit, saying they’ve found new evidence to support their case.

Judge James Ware’s response to ConnectU’s claims came earlier tonight, and he sided with Facebook, meaning that ConnectU’s founders are stuck with the settlement. Apparently, their legal argument was that the deal was fraudulent, because Facebook misrepresented itself during the talks. But Ware writes that ConnectU “failed to tender sufficient evidence of fraud … as to create a genuine dispute about whether the Agreement was fraudulently induced.”

According to the ruling, both companies must appear in court on July 2 “to show cause why a judgement should not be entered ordering the parties to take the actions required of them in the Settlement Agreement.”

This ruling looks like the end of the lawsuit’s last gasp; I had thought it was over when the settlement was announced earlier this year. The background here is that Facebook founder Mark Zuckerberg worked for ConnectU’s founders — brothers Cameron and Tyler Winklevoss, along with Divya Narendra — to help set up a dating site called Harvard Connection back when they were all students at the university in 2003. Narendra and the Winklevoss brothers alleged that Zuckerberg delayed their site while stealing code and ideas for Facebook.

Regardless of whether the accusations had any merit, it was certainly in Facebook’s interest to bring the case to an end as soon as possible. The dispute brought up some unflattering details to light about Zuckerberg, and also cast a shadow on rumors of a possible IPO.

A Facebook spokesperson sent us a copy of the ruling, as well as a statement from the company, which concludes: “We were disappointed that we had to litigate the settlement, as we believed we were caught in the middle of a fee dispute between ConnectU’s founders and its former counsel. Nevertheless, we can now consider this chapter closed and wish the Winklevoss brothers the best of luck in their future endeavors.”

I’ll try to contact the Winklevoss’ attorneys or see if they’ve released a statement; if so, I’ll update this post.

It looks like social networking site ConnectU’s lawsuit against Facebook may not be over yet. Although the two companies agreed to settle in April (and have since signed the paperwork) ConnectU attorney John Hornick told a judge yesterday that his clients want to pull out of the deal, according to Bloomberg News.

Since reaching the agreement, Hornick said ConnectU has found instant messages on Facebook’s computers that are a “smoking gun” backing the company’s allegations. U.S. District Judge James Ware still needs to approve the deal, and Hornick said that if they’re “forced into a settlement,” ConnectU’s founders will file a fraud claim.

Judge Douglas Woodcock didn’t have much sympathy for Hornick’s argument, characterizing it as “buyer’s remorse.”

Back in 2003, when they were all at Harvard, Facebook founder Mark Zuckerberg worked for ConnectU’s co-founders Cameron and Tyler Winklevoss, helping them develop a campus dating site called Harvard Connect. After Facebook took off, the Winklevoss brothers filed suit against Zuckerberg and his startup; they alleged he stalled their project while stealing ideas and code for himself. The case has revealed some embarrassing details about Zuckerberg, including his diary, and could also be liability if Facebook wants to make a public offering. The details of the settlement are secret, but it will definitely be a step backward of Facebook can’t put this legal battle behind it.

I emailed Facebook, but a spokesperson declined to comment on the case.

I won’t waste your time weighing in on whether this makes Facebook look more or less guilty, because your guess is as good as mine. But I will reiterate Woodcock’s point that it looks silly and embarrassing to reach a settlement while you’re still going through the evidence, and then try to call the whole thing off when (surprise!) you find new information in that evidence. The Winklevoss brothers may agree, and are apparently unhappy with the legal advice that led to the settlement — CNET reports that they’ve hired a new attorney.

Updated

Facebook is about to end a lawsuit that’s been a long-time thorn in its side. The social networking site plans to settle with competitor ConnectU for an undisclosed amount, according to the New York Times.

ConnectU’s founders — brothers Cameron and Tyler Winklevoss, along with Divya Narendra — had accused Facebook founder Mark Zuckerberg of stealing their idea in 2003, while they were all at Harvard. Zuckerberg helped them set up a campus dating site called Harvard Connection, and ConnectU alleged that he stalled the project while stealing ideas and code for what would eventually become Facebook. [Update: VentureBeat DigitalMedia Editor Eric Eldon doesn't think much of the code-stealing accusation, as he explains in the comments.]

It’s important for Facebook to get this suit behind it, particularly if the company plans to make a public offering. The case brought some unflattering details about Zuckerberg to light — some of them casting doubt on his ingenuity and originality, like the disappearance of Facebook’s early code base (which was supposed to be a key part of Facebook’s defense), others just plain awkward and embarrassing, like Zuckerberg’s diary.

The Times says motions to dismiss the case should be filed “within weeks.” Facebook had also filed a suit against ConnectU alleging unfair business practices, and all the motions in that case have been terminated.

It’s hard to say whether Facebook settled because it was genuinely worried, or because it wanted to be rid of a legal nuisance. But the settlement seems to undermine Zuckerberg’s claim that the suit was completely baseless, and we have to wonder how much money is involved.

Before he launched Facebook at Harvard, Mark Zuckerberg worked for two brothers on a project called HarvardConnect.com that also wanted to connect students and alumni.

Zuckerberg later left that project, and showed up with Facebook. The brothers claim Zuckerberg stole their code, and sued him three years ago. The brothers later changed their company’s name to ConnectU.

They’ve been fighting ever since, and all the while Zuckerberg and Facebook have maintained the suit isn’t going anywhere. This month, however, there’s a federal court hearing on the case. Portfolio has a good summary.

The lawsuit, filed by brothers Cameron and Tyler Winklevoss, and Divya Narendra, accuses Zuckerberg, Facebook’s 23-year-old C.E.O, of stealing the source code, design, and business plan for Facebook in 2003 when he briefly worked in the Harvard dorms as a programmer for their own fledgling social-networking site, now known as ConnectU.

The plaintiffs have demanded that Facebook be shut down and that full control of the site - and its profits - be turned over to them.

Here’s an early summary of the case, after it was filed three years ago.

What’s surprising is that this case hasn’t gone away. The stakes have only increased, now that Facebook is widely considered worth more than $1 billion, and as much as $8 billion depending on who you listen to.

Three years later, we’re still no closer to knowing whether he stole code or not. What code did write for them, and was he paid for? How much were these agreements in writing, how much of it was simply oral agreements?

The most likely worst case for Facebook: Zuckerberg and his investors will agree to settle this for many millions of dollars.