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Monday, May 27, 2024 | Back issues
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UBS-Nasdaq Arbitration on Facebook IPO Averted

MANHATTAN (CN) -Nasdaq's allegedly "catastrophic mismanagement" of the $16 billion initial public offering by Facebook two years ago does not necessitate arbitration with Swiss banking giant UBS, the 2nd Circuit ruled, 2-1.

One of the largest IPOs in history, Facebook hit the market on May 18, 2012, offering 421 million shares of common stock on at $38 per share.

Trading peaked at $45 on the first day and ended at $31.

Technical glitches on that day with a system known as IPO "Cross" delayed the start of trading by almost exactly 30 minutes later than the intended 11 a.m. start time.

More than 30,000 orders placed within that interlude fell by the wayside.

When regulators slapped Nasdaq for this and other problems, the Securities and Exchange Commission set up a system by which exchange members injured from the Facebook IPO could seek compensation.

UBS shunned this route in favor of an arbitration demand, but U.S. District Judge Robert Sweet issued the exchange an injunction last year against such proceedings.

A divided three-judge panel of the 2nd Circuit affirmed Friday, split on the question of whether UBS and Nasdaq had a dispute fit for federal court.

While UBS sued the exchange under state law, the majority found federal intervention necessary to fulfill the Exchange Act's mandates of keeping a "fair and orderly market."

"We here conclude that the disputed federal issue in this case - whether NASDAQ violated its Exchange Act obligation to provide a fair and orderly market in conducting an IPO - is sufficiently significant to the development of a uniform body of federal securities regulation to satisfy the requirement of importance to 'the federal system as a whole,'" Judge Reena Raggi wrote for the majority.

Judge Pierre Leval joined her in the 62-page opinion.

Judge Chester Straub wrote in a similarly lengthy dissent that his colleagues had improperly assumed jurisdiction over a closely watched case.

"Sixteen billion dollars," Straub wrote. "Over four hundred million shares. Facebook. The high-profile nature of this case sways the majority's analysis. It is true that the Facebook IPO was front-page news. But it simply cannot be true that every time a case involves a famous company or a multi-billion dollar IPO, federal courts have jurisdiction."

Straub was not impressed by the majority's finding that granting jurisdiction would draw a flurry of federal court litigation.

"The majority's uncabined holding could lead to a 'tremendous number of cases' being pulled into federal court - a possibility that should give us pause," he wrote.

UBS did not respond to a request for comment.

Nasdaq declined to comment.

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