NASDAQ Could Be Fined $5 Million Over Facebook IPO

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Investors lost as much as $500 million when Facebook went public, but the stock exchange says it’s not to blame

NASDAQ, the second largest stock exchange in the world, could face a $5 million fine issued by the US Securities and Exchange Commission (SEC) for mistakes made during Facebook’s infamous Initial Public Offering (IPO).

NASDAQ has already offered $62 million in compensation to its customers – a lot more than $13.7 million that was initially discussed in June.

However, analysts have estimated the overall losses for Wall Street to be around $500 million. Last year, the Swiss bank UBS alone claimed losses of around $350 million.

The blame game

On 18 May, Facebook became the first American company to debut on the stock exchange with a value of more than $100 billion. The launch itself was plagued by technical problems and many investors had claimed the shares were overvalued. By August, Facebook lost 40 percent of its valuation, and the shares now trade at around $28.6, as opposed to the $38 IPO price.

Facebook IPO © lev radin, Shutterstock 2012Securities laws and NASDAQ’s own policies have mostly shielded it from responsibility for any technical glitches. This hasn’t gone down well with the investors and banks, which have incurred heavy losses during the IPO.

For example, when NASDAQ systems were overwhelmed, orders from UBS were mistakenly entered multiple times. As a result, the bank received about 40 million Facebook shares, instead of the 800,000 it wanted. It was then forced to quickly sell the stock at a loss of $8 or $9 apiece.

Facebook itself was criticised for lowering its revenue and earnings estimates just days before going public, while keeping the share price at $38 and increasing the number of shares being sold by 25 percent.

Following the IPO, the SEC launched an investigation into the matter, which is still ongoing. According to the Wall Street Journal, “people involved with the discussions” have hinted that the stock exchange will be fined $5 million.

During the settlement talks, the SEC was particularly interested in NASDAQ’s lack of control over its systems, and the steps it would take to prevent a similar incident from happening in the future.

It should be noted that these are just the preliminary talks, and the settlement conditions might change in the coming weeks.

NASDAQ denies that it wasn’t prepared for the much-hyped IPO. “We continue to believe we acted appropriately and in the best interests of investors under challenging circumstances,” a spokesman for the exchange told Wall Street Journal.

NASDAQ isn’t the only organisation drawing flak from the authorities. Lead underwriter of the IPO Morgan Stanley is currently under investigation, accused of selective disclosure of important information that might have given an advantage to institutional investors.

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