Nasdaq OMX Offers All Cash Deal for Facebook IPO Losses
Nasdaq OMX has sweetened the pot for investors who lost money from Facebook's botched initial public offering on May 16.
Instead of paying them $13.7 million in cash with the remainder in trading fee credits, it will now pay them entirely in cash. And the affected investors will be paid out of a $62 million cash pot of money instead of the original $40 million.
The US exchange operator has just filed a revised offer with the Securities and Exchange Commission giving its members seven days in which to file a claim. All claims would be reviewed by the Financial Industry Regulatory Authority, the self-regulatory watchdog for the brokerage industry with payouts taking place six months after firms agree to take the money and not sue Nasdaq OMX.
The revised plan came after plenty of criticism from rival exchanges -- namely NYSE Euronext -- over the cash and trading fee credit offer on the grounds it would promote further trading on Nasdaq. But Nasdaq isn't exactly giving its members carte blanche over their compensation. A "reasonably diligent member" could have identified any unexpected customer losses or anticipated customer positions and taken steps to mitigate them within 45 minutes after all of the confirmations were sent out at 150PM EST on the day of the IPO before trading closed at 4PM EST. Using that barometer, Nasdaq says that it will establish a benchmark price of $40.527 as the maximum loss price parameter for determining payments. Losses over that benchmark price will be the responsibility of the member firm to deal with. For orders that were placed to sell at the open but did not go through until later when Facebook's share price had dropped, resulting in a loss Nasdaq proposed in its plan using $40,527 as the benchmark price and compensating at a maximum of $1.473 a share.
"If exchanges could be called upon to bear all costs associated with system malfunctions and varying reactions of market participants taken in their wake, the potential would exist for a single catastrophic event to bankrupt one or multiple exchanges," says Nasdaq in its filing.
Facebook's botched IPO cost four of the largest market makers an estimated $200 million in losses and some estimate the amount to be even higher. Orders placed on Nasdaq OMX are usually confirmed within seconds but in the case of Facebook's initial public offering many orders were made between 111AM and 1130AM on the day of Facebook's IPO but not confirmed or processed until 150PM. That scenario left market makes and other customers uncertain of whether their buy, sell or cancel orders had gone through. Some orders were even lost altogether.
A cultural and business phenomenon, Facebook faces a reputational blemish for the poorly managed IPO. So does Nasdaq OMX. The shares of the firm have dropped to $38 a share since the initial IPO, while Nasdaq has become the target of regulatory investigations into its procedures.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com).