Nasdaq's Facebook plan comes under mounting fire

UBS AG decried a proposal from Nasdaq OMX Group Inc. to make up losses for firms damaged in the Facebook Inc. stock-market debut, joining a growing chorus of Wall Street players that are calling on regulators to reject the exchange operator's plan.

Nasdaq last month proposed a $62 million, all-cash compensation package that would be split up among afflicted firms—a plan that itself was modified after an outcry over the terms of the original $40 million proposal of cash and discounted trading fees. Estimates of Wall Street's total losses in the Facebook debut on May 18 have been put at some $500 million.

The Swiss banking group, which has pegged its own losses in the episode at $356 million, urged regulators weighing the Nasdaq plan to reconsider the exchange company's cap on damages payable because of problems with its technology. UBS, in a letter to the Securities and Exchange Commission dated Wednesday, called the plan "woefully inadequate."

"We strongly urge the commission to reconsider the level of the proposed cap in light of the actual damages caused by Nasdaq in its mismanagement of the Facebook IPO," UBS officials wrote in the letter.

Spokesmen for the SEC and Nasdaq declined to comment. Shares in Nasdaq fell 1.4% to $22.87 on Thursday. The stock is down about 0.6% since May 18.

Last month, Nasdaq Chief Executive Robert Greifeld called the $62 million proposal the exchange group's "definitive word" on the Facebook debacle.

The UBS news follows on a similar plea from Citigroup Inc., which in a filing Wednesday also called on regulators to reject Nasdaq's payback plan, calling it insufficient and poorly constructed.

Smaller firms and investors also heaped on criticism. Lawyers representing a trio of trading houses, including First New York Securities LLC, T3 Trading Group LLC and Avatar Securities LLC, in a letter urged regulators to hold off on any decision until a number of inquiries into Nasdaq's conduct in the IPO are completed. Those firms, which estimated that they traded $300 million of Facebook stock on May 18, separately have filed a lawsuit against Nasdaq to recoup losses.

Brokerage firm Watermill Institutional Trading LLC said Nasdaq's determination on which orders would be covered by the plan was flawed, according to a separate letter. Attorneys writing on behalf of a group of retail, or individual, investors told the SEC that Nasdaq's current plan would benefit big market players but not the mom-and-pop investors who also lost money when their Facebook orders weren't filled as expected.

"The proposal contains no provisions to reimburse ordinary retail investors for their losses, and it does not provide any degree of certainty that any amount of compensation will trickle down to the retail investor level," the individual investors' lawyers wrote Wednesday in a letter.

The mounting opposition follows support for the revised $62 million plan from Knight Capital Group Inc. and Citadel LLC. Citadel backed the plan in a separate letter this week, and Knight was swayed after Nasdaq changed the plan last month, according to a person familiar with that firm's position.

Those firms both lost roughly $35 million trading Facebook's rocky debut, and their support was initially seen by observers as key to winning regulatory approval. But the new objections throw into question whether the revised plan will be approved.

"It would be far better for everybody if Nasdaq came up with a plan that everyone could accept," said Howard Schiffman, a a veteran securities lawyer and partner with Schulte Roth & Zabel LLP who isn't involved in the Nasdaq case "It's a good idea for the SEC to try and exert pressure on Nasdaq to come up with a revised plan."

The dispute got its start on the day of Facebook's IPO, when a torrent of cancellations and changes to standing orders that morning overwhelmed Nasdaq's usual process of matching up orders to form the initial trade. Then, steps taken to open the stock resulted in millions of dollars of trades lingering unconfirmed for hours.

Without confirmations from Nasdaq on the trades, firms were forced to guess at their positions and in some cases found themselves far off the mark when confirmations were received.

In its letter, UBS also told regulators that Nasdaq's method of calculating which trades would be covered by its payback proposal was too narrow and objected to the idea that firms may have to waive legal claims against the exchange group should they seek coverage under Nasdaq's plan.

Citigroup also objected to Nasdaq's requirement that covered firms would have to waive legal rights. Citigroup said in its letter to the SEC that by submitting its comments, it doesn't intend to waive its right to seek relief from Nasdaq "through appropriate legal channels." The firm's letter urges the SEC to reject Nasdaq's proposal and encourage the exchange group to come up with a better solution for aggrieved members.

Formal comments on Nasdaq's proposal were due Wednesday, though regulators continued to publish letters from market participants after the deadline passed.

Under SEC rules, the agency has an initial 45 days from the date Nasdaq's proposal was published in the Federal Register—Aug. 1—to consider the proposal. Regulators can extend that period, however, if they determine they need more time to review such a proposal.

The SEC would be required to turn in a decision on the Nasdaq plan by March 29.

(Published by WSJ - August 23, 2012)