The Securities and Exchange Commission (SEC) has finally approved Nasdaq OMX’s compensation scheme for members that lost money during the Facebook IPO, but the deal may not be sufficient to stop legal action against the US bourse.
The total compensation available to members affected by the social media giant’s botched listing on Nasdaq last May is US$62 million, which covers “claims related to system difficulties in the Nasdaq halt and imbalance cross process”, according to the SEC filing.
Normally, Nasdaq OMX’s compensation liability is a maximum of US$500,000 per month, or the amount of the money it obtains under any insurance policy.
The payout relates to the inability of Nasdaq OMX’s systems to calculate an opening price for the Facebook stock, which delayed trading for 25 minutes and left many investors unsure of their exposure. The final IPO price was US$38 and the first trade came in at US42.05.
Under the SEC-approved plan, losses related to the Facebook listing can only be recouped under four different scenarios. These include: sell orders that were submitted between 11:11 and 11:30 ET on 18 May that were priced at $42.00 or less and did not execute; sell orders during the same period that executed at a lower price; buy orders for USS$42 but were not immediately confirmed and; buy orders that were priced above US$42 that were not immediately confirmed but subsequently cancelled before 13.50 ET.
Legal challenge
But despite the SEC approval, Nasdaq’s restitution plan is not likely to satisfy brokers that claim to have lost much more than the total compensation offered.
In its Q2 2012 results, UBS said that its role as a market maker for the Facebook IPO led to losses of CHF 349 million (US$367.9 million). UBS explained that orders in Facebook were entered multiple times before confirmations from Nasdaq were received, causing the Swiss bank to be exposed to many more shares than clients had ordered.
UBS will continue to pursue legal action against Nasdaq, despite the SEC’s approval of the bourse’s reimbursement plans.
“We have previously filed comment letters to the SEC in August and November 2012 condemning Nasdaq’s proposed compensation plan as inadequate and insufficient, and the SEC’s approval of the plan does not change our opinion,” read a statement from UBS issued yesterday. “Moreover, UBS has already filed an arbitration demand against Nasdaq for the full extent of our losses over Nasdaq’s gross mishandling of the Facebook IPO in May 2012 and its substantial failures to perform its duties.”
Citi is also believed to be considering legal action, with its losses estimated at around US$20 million. The US bank declined to comment on the SEC approval of Nasdaq’s plan.
Nasdaq had initially offered US$40 million in compensation, with approximately US$13.7 million to be paid in cash and the remainder used to reduce the trading fees for affected members over the next six months. The plan came under fire from many, with rival US exchange NYSE Euronext describing it as “tantamount to forcing the industry to subsidise Nasdaq’s missteps”.
The ability for Nasdaq to determine its own compensation plan also raised questions on the self-regulatory nature of US stock exchanges. As self-regulatory organisations, US exchanges are responsible for establishing standards that prevent fraud and market manipulation and propose new functionality, such as order types and post-flash crash measures such as limit up-limit down circuit breakers, subject to final approval by the SEC. Critics have argued this role is out of sync with bourses’ responsibility to shareholders.
The Facebook IPO was one the largest in history, with 460 million shares traded on the first day. The IPO raised US$16 billion, the third largest in US history.