Nasdaq Fined $10 Million By SEC Over Law Violations During Facebook IPO

Eliane Chavagnon Reporter 31 May 2013

Nasdaq Fined $10 Million By SEC Over Law Violations During Facebook IPO

The US stock exchange Nasdaq is to pay a $10 million penalty after the Securities and Exchange Commission charged it with securities laws violations during the initial public offering and secondary market trading of Facebook shares in May 2012.

The US authority said the fine is the “largest ever” against an exchange.

“Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market,” the SEC said.

The authority said that, “despite widespread anticipation that the Facebook IPO would be among the largest in history,” a design limitation in Nasdaq’s system to match IPO buy and sell orders caused disruptions.

“NASDAQ then made a series of ill-fated decisions that led to the rules violations,” it said.

According to the SEC’s order, “several members” of the stock exchange’s senior leadership team convened a “code blue” conference call, during which they decided not to delay the start of secondary market trading in Facebook.

They thought the system limitation had been fixed by removing a “few lines of computer code,” the authority said. “However, they did not understand the root cause of the problem.”

The problem caused some 30,000 Facebook orders to remain stuck in Nasdaq’s system for over two hours, by which time they should have been “promptly executed or canceled.”

According to the SEC's order, Nasdaq further violated its rules when it assumed a short position in Facebook of over three million shares in an unauthorized error account. “Nasdaq’s rules do not permit it to use an error account for any purpose.”

The stock exchange subsequently covered that short position for a profit of approximately $10.8 million, which was also in violation of its rules, the authority said. 

The SEC’s order also charges Nasdaq’s affiliated third party broker-dealer, Nasdaq Execution Services, for failing to maintain sufficient net capital reserves on the day of the Facebook IPO. This was due to the exchange’s own Facebook trading through the unauthorized error account, the SEC said.

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