Screens display the start of trading in Facebook shares at the NASDAQ stock exchange on Times Square in New York, May 18, 2012.

NASDAQ Gets $10M SEC Penalty for Facebook IPO

SEC hands down 'largest ever' punishment for a stock exchange.

Screens display the start of trading in Facebook shares at the NASDAQ stock exchange on Times Square in New York, May 18, 2012.
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NASDAQ has agreed to pay a $10 million penalty for its poor handling of Facebook's initial public offering on May 18, 2012. The Securities and Exchange Commission touts the penalty as "the largest ever" against a stock exchange.

The SEC disclosed the fine in a Wednesday release, but negotiations over the penalty were publicly known. The Financial Times reported in April that NASDAQ disclosed the possible fine in a profits report.

"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 in its Wednesday statement.

NASDAQ's technology failed on the day of Facebook's eagerly anticipated IPO, causing first a delay in trading and then the misallocation of stock orders. The company's stock price closed that day at $38.23 per share, but peaked earlier in the day at $43, Time reported. A year later, one Facebook share is worth around $23.50.

[RELATED: Some Lessons From the Facebook IPO]

The stock exchange separately agreed to pay investors $62 million in a settlement approved by the SEC in March. The Wall Street Journal estimates that investors may have lost $500 million.

Multinational Swiss bank UBS, which says it lost $356 million because of NASDAQ, rejected the SEC-approved payout, calling it "inadequate and insufficient," the Journal reported. UBS is seeking more money through arbitration.

NASDAQ's profits for the first quarter of 2013 were $42 million, down 50 percent from the preceding quarter, the Financial Times reported.

The SEC says that NASDAQ "made a series of ill-fated decisions" that led to rules violations. NASDAQ's violations, according to the SEC's Wednesday statement, included:

  • "NASDAQ's decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ's fundamental rule governing the price/time priority for executing trade orders. The problem 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.
  • "NASDAQ further violated its rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. NASDAQ's rules do not permit it to use an error account for any purpose.
  • "NASDAQ subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules."
  • "NASDAQ further violated its rules in three other ways during the opening of trading after the end of the display-only period for Facebook and following a halt in Zynga trading."
  • "The SEC's order also charges NASDAQ's affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ's own Facebook trading through the unauthorized error account."

"Too often in today's markets, systems disruptions are written off as mere technical 'glitches' when it's the design of the systems and the response of exchange officials that cause us the most concern," said Daniel Hawke, chief of the SEC Enforcement Division's Market Abuse Unit, in a released statement. "Our focus in this investigation was on the design limitation in NASDAQ's system and the exchange's decision-making after that limitation came to light."

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