SEC approves Nasdaq’s $62 million Facebook IPO settlement

‘Unprecedented Failures’

The proposed plan is “inadequate to address the magnitude of Nasdaq’s unprecedented failures,” UBS told the SEC in a letter on Aug. 22. The bank entered multiple orders for Facebook shares because it didn’t receive confirmations, leading to losses of more than $350 million, UBS said. It asked the SEC to work with Nasdaq to reformulate the proposal to increase the amount paid and cover a broader range of trading losses.

Citigroup, Chicago-based Citadel, UBS in Zurich and Knight Capital Group Inc. in Jersey City, New Jersey, operate equity wholesaling groups, brokers that execute orders for individual investors sent by securities firms such as Charles Schwab Corp., TD Ameritrade Holding Corp. and Fidelity Investments. Combined, the firms claim they lost almost $500 million in the offering.

Citadel and Knight previously said they supported Nasdaq’s repayment proposal.

Protect Investors

The SEC confined its decision to issues of exchange rulemaking and said Nasdaq’s proposal was consistent with laws that require regulations to prevent fraud, remove impediments to a free and open market, protect investors and the public interest, and deter discrimination among customers, issuers, brokers and dealers.

“Commenters have raised a number of concerns about the proposed rule change, many contending that it is not a fair or equitable approach to compensating market participants,” the SEC wrote in its order. “Nasdaq has explained, however, that it did not design the proposed rule change to compensate all claims of loss suffered by market participants,” it said.

“Rather, Nasdaq, in the accommodation proposal, is proposing to change a Nasdaq rule that in its current form strictly limits the amount of compensation that may be paid to users of the Nasdaq Market Center,” it wrote. “In considering whether to approve the proposed rule change, the commission takes into account the existing circumstances and the manner in which the Nasdaq rule would operate if the commission disapproved the proposed rule change.”

Delayed Orders

Delays and malfunctions on the Nasdaq Stock Market were the first signs of trouble in the Facebook IPO that burned investors and prompted lawsuits against the company, its exchange and the underwriters. The stock has fallen more than 30 percent from the price set by underwriters. It slipped 0.9 percent to $25.51 as of 10:18 a.m. in New York.

Facebook was sold by underwriters at $38 on May 17. The pricing of the first public transaction, a trade known as the IPO cross, took place at 11:30 a.m. New York time the next morning, a half hour later than Nasdaq planned. About 30 minutes after that, the market owner reported a delay confirming trades from the opening auction with the brokers that placed orders.

The transaction reports, normally distributed immediately, were sent at 1:50 p.m., leaving market makers, brokers and their customers uncertain about whether orders submitted into Nasdaq’s opening cross had been executed. Traders and individuals couldn’t sell to limit losses until they received the reports and knew how many shares they held.

The payout proposal covered what’s “directly attributable to the system issues experienced by Nasdaq,” the exchange operator told the SEC in a Dec. 7 letter.

Bloomberg News

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