Nasdaq agrees to pay $10M to settle SEC charges over Facebook IPO

NEW YORK (CNBC) -- The Securities and Exchange Commission slapped the Nasdaq stock exchange with a $10 million fine for alleged securities laws violations resulting from its "poor systems and decision-making" during the Facebook IPO.

Nasdaq agreed to pay the fine without admitting or denying the allegations. This is the largest fine ever levied against an exchange by the SEC.

"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 a statement. "[D]espite 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."

Facebook's IPO on May 18, 2012 was marred by technical glitches that left the market makers - who facilitate trades for brokers and are crucial to the smooth operation of stock trading - in the dark for hours as to which trades had gone through.

Nasdaq said it "tested extensively" its systems before the IPO but the testing did not reveal the "design flaw" that caused the glitches.

The SEC said several members of Nasdaq's senior leadership team convened a "Code Blue" conference call, at the SEC's request, and opted to not delay the start of secondary market trading in shares of Facebook, thinking they had fixed the problem by removing a few lines of code.

But they didn't understand the root cause of the problem, the SEC said. The decision to resume trading without fully understanding the problem resulted in violations of several rules, according to the SEC, including Nasdaq's own rule governing the price/time priority for executing trade orders.

Trading was delayed until 11:30 am the day of the IPO. Confirmation of the initial trades didn't post until 1:50 pm. That left more than 30,000 Facebook orders to remain stuck in the Nasdaq's system for more than two hours when they should have been promptly executed or canceled, the SEC said.

"This action against Nasdaq tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets," George S. Canellos, co-director of the SEC's Division of Enforcement, said in a statement.

"We have been embarrassed and certainly we apologize to the industry," Nasdaq OMX Group CEO Robert Greifeld said in an interview with CNBC a few weeks after the IPO.

This fine is in addition to what Nasdaq has already agreed to pay to investors in compensation.


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