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The U.S. Securities and Exchange Commission on Monday approved Nasdaq's plan to pay $62 million in compensation to brokers for mishandling the Facebook IPO. The Nasdaq missteps during Facebook's (Nasdaq: FB) debut cost Wall Street a collective $500 million and firms have fought to recoup those losses.
The amount was cleared by the SEC after Nasdaq offered to pay more than is allowed under its existing bylaws. As a self-regulatory organization, the Nasdaq enjoys certain legal protections which could have resulted in a significantly smaller settlement.
Nasdaq proposed the voluntary $62 million as more firms claimed that the exchange misrepresented facts of what went wrong in trading that day. The amount is much more than the $3 million cap its rules permit for technical glitches.
Not everyone's on board with the decision. Citigroup Inc (NYSE: C) and UBS AG (NYSE: UBS) urged the SEC to reject it, saying losses within their market-making units exceed $62 million. In fact, Citigroup raised the immunity argument last August in a letter to the SEC.
"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 a result of protected regulatory activity by Nasdaq, or routine system failures. Nasdaq should not be permitted to hide behind regulatory immunity," Citi wrote in a letter to the SEC.
UBS, which claims to have lost more than $350 million, told the SEC brokers should be made whole. Many agree.
"Why should the banks and brokers be left holding the bag for Nasdaq's snafus?" Scott Sales, a lawyer at Paul Hasting LLP who handles corporate listings and is not involved in the settlement, told The Wall Street Journal last month.
The SEC acknowledges the proposal won't compensate for all losses, but added it provides "significantly more compensation for eligible claims, outside of litigation, than would otherwise be available."
Facebook IPO Marred From the Start
The SEC's decision was the result of a string of problems surrounding the handling of Facebook's initial public offering.
Due to technical issues at the Nasdaq, the highly anticipated May 18 IPO, which raised $16 billion, was delayed by 30 minutes.
In an effort to open trading, the world's largest electronic exchange moved to a secondary system.
The outcome was a slew of delayed client orders and confirmations, as well as phantom and misplaced trades that lasted for some three hours. A number of investors and traders suffered sizable losses as Facebook shares slid after an initial gain on the open.
Indeed, Facebook's IPO has been costly to investors, market makers and its home exchange.
The costly disruption stoked debates over the reliability of computer-driven trading that now dominates markets. While the technology has lowered costs, it's widely criticized for complications.
Facebook Stock Then and Now
Facebook stock briefly traded upward of $42 a share during its first day of trading – only 9.5% higher than its $38 IPO price – before slipping. The slide continued in subsequent months, slicing the share price more than half before shares recovered some.
Nasdaq's missteps weren't the only problems surrounding the Facebook IPO deal. Allegations swirled that lead underwriter Morgan Stanley (NYSE: MS) and others provided insider information to their best clients that Facebook's earnings weren't what they seemed. Meanwhile, they peddled shares to eager retail investors who clamored for a piece of the hyped offering..
Facebook is anxious to put the whole Nasdaq IPO debacle to rest. And while Facebook's stock no longer looks like a falling knife, there are still plenty of things not to like. A number of analysts have downgraded shares and advised caution.
Concerns have grown about the mounting costs of finding ways to monetize its one million users. In addition, its "cool" factor is fading among young members who are spending less time on Facebook and more time on other sites.
And on its one-year anniversary (May 18), the last of millions of "lock-up" shares will flood the market.
Shares of Facebook slumped 2.29% Monday to close at $25.14.
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