NASDAQ agrees to pay $10 mn in fines after SEC investigation of IPO trading delays finds multiple violations
The SEC charged NASDAQ with violating securities laws out of ‘poor systems and decision-making’ after the software problems that prompted losses among brokers during the initial public offering of Facebook last year.
NASDAQ, which has already agreed to pay $62 mn to compensate traders who claim they suffered hundreds of millions of dollars in damages due to the errors, also agreed to pay $10 mn in fines to the SEC. The exchange operator didn’t deny or admit guilt as part of the settlement.
‘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 Canellos, co-director of the SEC’s division of enforcement, says in a press release.
According to the SEC’s investigation, the delays in the Facebook IPO on the morning of May 18, 2012 came as the NASDAQ system that matches buy and sell orders encountered computer problems that prompted a 19-minute delay. As a result of the problems, which the SEC classified as a ‘design limitation’ in the software, 38,000 orders placed between 11:11 am and 11:30 am were either delayed until just after the start of the IPO or ‘stuck’ in the system.
The SEC concluded that NASDAQ officials had noted a discrepancy between the final indicative pricing and final totals, and the totals on its internal systems. The officials, however, failed to take action to resolve the issue, according to investigators. A further violation occurred when NASDAQ itself took a ‘short’ position of 3 mn Facebook shares in an error account, violating its own rules, and then covered the position for a profit of $10.8 mn. The SEC said it also recorded three other violations that day.
‘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,’ says Daniel Hawke, chief of the market abuse unit of the SEC enforcement division. ‘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.’
In March, NASDAQ agreed to pay $62 mn in compensation to settle claims by Citigroup, UBS and others that the NASDAQ computer problems inflicted hundreds of millions of dollars of losses. Some of the investors threatened to sue to raise the compensation amount.
