Nasdaq hit with $10 million fine over Facebook IPO

Facebook founder, Chairman and CEO Mark Zuckerberg, center, rings the Nasdaq opening bell from Facebook headquarters in Menlo Park, Calif. Robert Greifeld, second from right, CEO of the Nasdaq-OMX Stock Market, Inc. on May 18, 2012 Zef Nikolla/Facebook

(MoneyWatch) It is a small measure of comeuppance for one player in the debacle known as the Facebook (FB) IPO. The Securities and Exchange Commission said Wednesday that it has slapped the Nasdaq stock exchange with a $10 million fine for its part in the social networking giant's bungled stock offering in May of 2012.

"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," said George Canellos, co-director of the SEC's division of enforcement, in announcing the settlement.

The SEC focused on the behavior of Nasdaq officials in the opening minutes of trading during Facebook's May 18 IPO, criticizing them for ad hoc decisions they made despite the fact that they didn't fully understand the technological problems at the heart of the trading problems. The problems "caused more than 30,000 Facebook orders to remain stuck in Nasdaq's system for more than two hours when they should have been promptly executed or cancelled," the SEC said.

Among other problems, the SEC noted that Nasdaq violated its own rules by maintaining a short position in Facebook shares in an unauthorized account.  

The SEC trumpeted the fine as "the largest ever against an exchange."

The hype before the social network's debut on May 18, 2012, was thunderous, but a software glitch at Nasdaq delayed the IPO by 30 minutes. Investors couldn't confirm whether trades had been made as the market was gyrating wildly.

Worse, investor demand underwhelmed. After pricing at $38, Facebook shares closed the day, with institutional support, at $38.23. Shares continued to fall in subsequent months.

In March, parent company Nasdaq OMX issued an apology to investors and agreed to pay $62 million for money lost due to the trading snafu.

Facebook's bad day on Wall Street didn't only leave Nasdaq with a black eye. Morgan Stanley (MS), the underwriter of Facebook's IPO, was fined $5 million by the state of Massachusetts for charges that one of its top bankers improperly influenced analysts the days before trading began and told only large investors about lower revenue forecasts.

In conjunction with the settlement, Nasdaq Robert Greifeld outlined other steps the exchange has taken since the Facebook debacle, including changing how buy and sell orders are matched in an IPO, and created a dedicated engineering team to monitor and analyze daily system performance, and a new quality assurance organization that tests its trading systems.

Greifeld also said Nasdaq had creating positions of Chief Information Officer and Global Head of Market Systems, and "filled those important jobs with widely respected and experienced executives."

  • Charles Wilbanks

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