Regulators cleared Nasdaq OMX Group Inc.’s plan to pay $62 million to compensate brokers for its mishandling of Facebook Inc.’s public debut, dealing a defeat to Wall Street firms that say they lost many times that amount.
The Securities and Exchange Commission approved Nasdaq’s request to change its rules and expand the compensation pool for member firms in the May 18 initial public offering. The funds will go to traders who lost money after a design flaw in the exchange’s computers delayed Facebook’s open and left traders confused about how many shares they owned.
Nasdaq’s proposal was opposed by Citigroup Inc. and UBS AG, which said in letters urging the SEC to reject it that losses within their market-making units exceeded $62 million. Nasdaq, balancing its role as an organization with legal immunity for technology breakdowns with its obligations to members, said the pool covers “objective, discernible” losses suffered by brokers.
While agreeing the proposal won’t compensate all purported losses, the SEC said it provides “significantly more compensation for eligible claims, outside of litigation, than would otherwise be available,” according to its order. “Accordingly, approval of the proposed rule change will make more funds available to compensate investors and Nasdaq members under Nasdaq rules, which the commission believes is in the public interest,” it wrote.
Scott Helfman, a spokesman for Citigroup, declined to comment on the settlement. Megan Stinson, a New York-based spokeswoman for UBS, did not immediately respond to a request for comment.
Claim Ceiling
Under existing rules, Nasdaq’s liability for losses related to computer malfunctions is $3 million, and may have been as low as $500,000 in the Facebook case, the SEC said in its order.
“We’re pleased that the Securities and Exchange Commission has approved our accommodation plan, which will enable our customers and members and market participants to receive appropriate restitution as FINRA promptly begins processing claims,” Joseph Christinat, a spokesman for Nasdaq OMX, said by phone today.
IPO Cross
The pricing of the first public transaction on May 18, a trade known as the IPO cross, took a half hour longer than Nasdaq planned because of technical malfunctions. In May, Nasdaq OMX Chief Executive Officer Robert Greifeld acknowledged “poor design” in software put the opening auction into a loop that delayed its completion.
Nasdaq’s handling of the Facebook IPO may still end up in court. In approving the rule change needed to accommodate the payouts, the SEC said the question of whether Nasdaq is entitled to regulatory immunity in its handling of the offering is outside the scope of the decision. Nasdaq has made releasing it from legal liability a condition for receiving compensation.
That immunity argument was raised in a letter sent to the commission in August by Citigroup. Decisions made by the second- largest U.S. equity trading venue in the IPO were aimed at protecting profits rather than member firms, the company said.
“Market participants suffered hundreds of millions of dollars of losses as a result of Nasdaq’s profit-driven conduct prior to and during the Facebook IPO, not as a result of protected regulatory activity by Nasdaq, or routine system failures,” Citigroup wrote in August. “Nasdaq should not be permitted to hide behind regulatory immunity.”
