WASHINGTON, D.C. - (Mealey's) In what is being called the largest ever penalty against an exchange, Nasdaq will pay a $10 million penalty to the Securities and Exchange Commission to settle claims that it violated federal securities laws as a result of its poor decision making during the initial public offering (IPO) and secondary market trading of Facebook Inc. shares, according to documents filed May 29 with the SEC (In the Matter of Nasdaq Stock Market LLC, et al., No. 3-15339, SEC).
(Order available. Document #57-130610-016R.)
According to the SEC's order against Nasdaq Stock Markets LLC and Nasdaq Execution Services LLC, "despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ's system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations."
"[S]everal members of NASDAQ's senior leadership team convened a 'Code Blue' conference call and decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. 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," the SEC said in its order.
According to the SEC, Nasdaq also improperly assumed a short position in Facebook of more than 3 million shares in an unauthorized error account, while Nasdaq Execution Services failed 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.
The SEC charged the defendants with violations of Sections 15(c)(3) and 19(g)(1) of the Securities Exchange Act of 1934, SEC Rule 15c3-1, Rule 201(b) of Regulation SHO and Rule 611 of Regulation NMS. Under the terms of the settlement, Nasdaq must cease and desist from committing or causing these violations and any future violations and must complete a number of corporate government changes.
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