SEC fines Nasdaq $10M for botched Facebook IPO

Matt Krantz | USA TODAY

Facebook's calamitous IPO a year ago claimed yet another victim Wednesday as regulators fined Nasdaq $10 million for bungling the social network's stock offering.

In the largest fine ever levied against an exchange, the Securities and Exchange Commission charged Nasdaq with violating securities laws during Facebook's May 2012 IPO. It's yet another blemish on Facebook's barely year-long stint as a publicly traded company after being the largest-ever technology IPO.

Facebook, the No. 1 social-networking site, was plagued with trading errors and problems at the start. Initial trading was delayed and even once trading began, buyers faced long delays finding out if their orders went through and at what price.

According to the SEC's order against Nasdaq, leaders of the exchange made a series of poor decisions regarding the Facebook IPO and relied on systems that weren't appropriate to handle the anticipated trading volume. Still, the $10 million fine amounts to just 3% of the $352 million earned by Nasdaq's parent, Nasdaq OMX Group, in 2012.

But that's just one of a string of missteps associated with the Facebook IPO, says Andrew Stoltmann of securities law firm Stoltmann Law Office. "Small investors have been left with a bad taste in their mouth with Facebook," he says. Other Facebook stumbles in its year after the IPO include:

• Association with botched trading and technology. A problem in the design of Nasdaq's systems, and the way it pairs up IPO buy and sell orders, was at the root of the problem with Facebook, the SEC says. Several members of the Nasdaq leadership team chose to not delay the start of the trading in Facebook because they thought the problem could be fixed by making slight changes to the system's programming. But the problems were deeper, the SEC says, and failure to understand that is a violation of the SEC rules, including those governing price and time of order executions.

"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," says George Canellos, co-director of the SEC's Division of Enforcement. Nasdaq CEO Robert Greifeld in a letter said that Nasdaq had "conducted more than a hundred IPOs using the same or similarly designed systems, without incident" prior to the IPO of Facebook and that improvements have been made.

• Pile of lawsuits. More than 30 lawsuits had been filed against Facebook in association with the handling of the IPO, Stoltmann says. Litigation also named Facebook in questions on whether information about the company's struggles in the emerging business of mobile use was shared with all investors, he says.

• Lingering losses for early investors. Facebook shares were grabbed not just by the standard large institutions, such as pension plans and mutual funds, but also individual investors, many of whom were fans of the website. Shares were priced at $38 a share. Facebook shares are still nearly 40% below that.

The problems with Facebook's IPO are just the latest example of issues that hurt the trust of investors in the markets and the way they work, says Joe Saluzzi of Themis Trading. "We have to trust the exchanges, but we question them all the time," he says. "It's only getting worse and not going away."

Facebook shares closed down 78 cents Wednesday to $23.32, a 3.2% loss.