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Published: Friday, 5/25/2012

Facebook liability claims may top $100M

Broker-dealers seek payment by Nasdaq

REUTERS

NEW YORK -- Claims by four of Wall Street's main market makers against Nasdaq over Facebook's botched IPO are likely to exceed $100 million, as they and other traders continue to deal with thousands of problems with customer orders.

A technical glitch delayed the social networking company's market debut by 30 minutes last Friday. Many client orders were delayed, giving some investors and traders significant losses as the stock price dropped.

The exchange operator is facing lawsuits from investors and threats of legal action from brokers. Four of the top broker-dealers involved in the Facebook IPO -- Knight Capital, Citadel Securities, UBS AG, and Citi's Automated Trading Desk -- collectively have probably lost more than $100 million from problems arising from the deal, a senior executive at one of the firms said. Knight and Citadel are claiming losses of $30 million to $35 million each, potentially overwhelming a $13 million fund the exchange set up to deal with potential claims.

Facebook shares ended regular trading on Thursday up 3.2 percent at $33.03 a share, about $5 short of their offering price. Action on the stock, however, has essentially become secondary to the fallout from the IPO -- its price, its size, its execution, and questions about selective disclosure of its financial prospects.

Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin are looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter.

Advisers familiar with the situation said many investors are now finding out, nearly a week after the fact, that their orders were not executed at the prices they thought.

Fidelity said it was working with regulators and brokers on its clients' issues "and we will continue to do so until we are confident that Nasdaq has done everything it can to mitigate the impact to our customers."

Morgan Stanley, the lead investment bank in Facebook's troubled initial public offering, will compensate retail investors who overpaid when they bought Facebook's stock, a source familiar with the matter told the Associated Press on Thursday.

The person said the firm is reviewing orders its retail clients placed for Facebook stock, and will make price adjustments if the clients paid too much. The person spoke on condition of anonymity because they were not authorized to discuss the matter publicly.

The person did not say what amount constituted overpaying for Facebook's stock.

Nasdaq has said all orders were returned by 1:50 p.m. Friday, but a Morgan Stanley Smith Barney source told Reuters it did not get trade information in a "systemic, orderly way."

While brokerages may have received confirmation of trades made on Friday, many were still handling customer disputes over what price they received on the trades, officials said.

The question is "who is going to eat the cost" of compensating those investors, said Alan Haft, a financial adviser with California-based Kings Point Capital LLC, which has $200 million in assets.



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