Nasdaq has agreed to pay $10 million, the largest penalty ever lodged against an exchange, to settle civil charges concerning its handling of Facebook’s market debut a year ago, which was marred by technical problems.
In a filing released Wednesday, the Securities and Exchange Commission (SEC) accused Nasdaq of failing to ensure its trading systems were running properly before initiating the Facebook trades and making “ill-fated” decisions that violated the exchange’s rules.
The technology failed to match buy and sell orders, creating huge disruptions in early trading May 18, 2012, when 30,000 Facebook orders got stuck in the system, the SEC said. Nasdaq’s leadership recognized the problem but did not halt trading because it thought the issues were fixed after a few lines of computer code were removed.
The SEC alleges Nasdaq did not fully understand the cause of the problem when it made that decision, violating one of the exchange’s core rules. Nasdaq agreed to settle the case without admitting or denying wrongdoing.
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“This action against Nasdaq tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest [initial public offerings] in history, but produced serious and pervasive violations of fundamental rules governing our markets,” George Canellos, co-director of the SEC’s enforcement division, said in a statement.
The agency imposed its first penalty against an exchange last year, when the New York Stock Exchange agreed to pay $5 million to settle charges it provided real-time market information to proprietary customers before distributing it to the public at large, violating regulations that require fair access to market data.
Nasdaq’s botched Facebook debut cost many firms millions of dollars. In March, the SEC approved a plan by Nasdaq to pay qualified customers $62 million to make up for the losses. But some firms might seek more.
Switzerland’s UBS has said it is taking legal action to get fully reimbursed for its losses of more than $350 million.
In a statement, Robert Greifeld, chief executive of Nasdaq OMX, said the settlement is “another important step forward.”
Before the Facebook debut, “Nasdaq had conducted more than a hundred IPOs using the same or similarly designed systems, without incident,” he said. “While we prepared extensively for the Facebook initial public offering, including thorough tests of our systems with member firms, the challenges we encountered that day were unprecedented.”
Nasdaq has put several trading safeguards in place in the past year.
The SEC is also investigating whether Facebook and its underwriters — led by Morgan Stanley — selectively disclosed information immediately before the IPO about Facebook’s moneymaking prospects. But the agency did not address that Wednesday or confirm whether the investigation is ongoing.
Since its initial public offering, Facebook has spent the past year battling concerns about whether it can make money and keep its more than 1 billion users tethered to the social network. Its stock price has recovered some of its worst losses, though it has not rebounded to the $38 per share it hit on its market debut.
A number of factors, including investor doubts about its advertising model might have contributed to the slack, but some have said the company’s IPO left a black mark on the stock in the year that followed.
Facebook has taken several steps in the past year to attract advertisers and improve its products on smartphones and tablets, including redesigning the site to make it easier to navigate through friends’ posts and to look at ads on smaller screens.
Since the IPO, Facebook itself has lost about $75 billion in market capitalization, down to $50 billion Wednesday from $104.2 billion at the end of its first day of trading.