Nasdaq OMX To Settle Facebook IPO Mistakes For $10 Million

Posted May 30, 2013

Nasdaq OMX has agreed to pay $10 million as part of the largest penalty ever levied against a stock exchange to settle civil charges filed in regards to mistakes made during Facebook’s IPO last year.  The U.S. Securities and Exchange Commission said that the Nasdaq’s decisions on the day of the IPO led to several regulatory violations.

The SEC said that Nasdaq senior executives knew about the technical problems, but decided to open up Facebook’s stock for secondary trading without dealing with the root cause of the problems first.  The technical issues affected trading throughout the day.  The SEC said that exchange’s chief economist noticed the discrepancies in trading volume and as the complaints continued to build, the exchange’s management decided not to stop trading.

“This action against Nasdaq tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets,” stated  George Canellos, the co-director of the enforcement division at the SEC.

Over 30,000 Facebook orders were stuck in the Nasdaq system for over 2 hours when they should have been executed or canceled.  Investors and market makers lost an estimated $500 million as a result.

The Nasdaq decided to settle the charges without admitting or denying allegations.  The Nasdaq also agreed to pay as high as $62 million to compensate market makers for the losses that were incurred.  UBS alone lost around $300 million so they are in arbitration with Nasdaq to recoup more money.

When Facebook went public, it was the largest ever in terms of the volume.  A software error at the Nasdaq led to a 30-minute delay before the company could go public.  The SEC said that Nasdaq’s senior management thought that the problem was fixed after a few lines of computer code was removed, but they decided to go ahead to avoid the delay of secondary market trading further.

The Nasdaq assumed a short position of over 3 million shares of Facebook in an unauthorized account, which is not allowed.  They covered that short position for a $10.8 million profit and this led to two violations of exchange rules.