UPDATE 1-UBS says Nasdaq's Facebook compensation plan inadequate

Thu Aug 23, 2012 2:12pm EDT

* UBS says exchange should pay "full extent of losses"

* Firms lost upward of $500 million in the IPO

* SIFMA questions plan's timing legal waivers

By John McCrank

NEW YORK, Aug 23 (Reuters) - The $62 million compensation plan proposed by Nasdaq OMX Group for fallout from Facebook's botched IPO is "inadequate to address the magnitude of Nasdaq's unprecedented failures", UBS Securities LLC said in a letter to U.S. regulators.

UBS Securities, an arm of Swiss bank UBS AG, said it lost over $350 million when Nasdaq technical malfunctions led to a delay in order confirmations during the $16 billion May 18 IPO, causing UBS's systems to re-enter orders multiple times and leaving it with a huge position of unwanted stock.

Major market makers and broker dealers, including UBS, lost upward of $500 million in the IPO.

UBS also said the types of claims for trading losses that Nasdaq agrees to compensate "should be expanded to include the full extent of losses caused by Nasdaq, and that the requirement that participants in the program release other legitimate claims they may have against Nasdaq is fundamentally unfair".

"Simply put, Nasdaq's proposal to pay $62 million in the aggregate for all Facebook-related claims is woefully inadequate," UBS said in the letter to the U.S. Securities and Exchange Commission (SEC) dated Aug. 22.

The UBS letter was one of nine posted by market makers, brokers, a trade group, and lawyers, on the SEC's website on Thursday by around midday. Eight of the letters were critical of the proposal, calling for changes or the outright rejection of the plan. One urged for its passage.

A Nasdaq spokesman said the company had no comment.

DUAL ROLES

Citibank sent in a scathing letter to the SEC on Wednesday saying Nasdaq's actions on the day of the IPO amounted to "gross negligence."

The No. 3 U.S. bank's market-making arm, Automated Trading Desk, is said to have lost around $20 million in the IPO.

Liabilities at U.S. securities exchanges, which operate both as for-profit business, and to an extent as self-regulatory bodies, are capped in instances that occur while fulfilling their regulatory duties. Nasdaq's cap is $3 million.

The New York-based exchange's proposal would voluntarily raise its cap to $62 million for this specific event.

But Citi argued Nasdaq should not receive regulatory immunity in this case.

"Nasdaq cannot cloak its actions in immunity because it was acting exclusively as a for-profit business, and not as a market regulator, when it made the grossly negligent business decisions that caused market participants hundreds of millions of dollars of losses," Citi said in the letter.

The Securities Industry and Financial Markets Association made a similar argument in a separate letter on Wednesday.

SIFMA, a trade organization that counts hundreds of securities firms, banks and asset managers, as its members, said Nasdaq's proposal raises "significant policy and procedural issues."

"Nasdaq's purpose in competing for the Facebook listing, serving as Facebook's primary exchange, and opening trading in the Facebook IPO was to further its business objectives as a for-profit corporation," it said.

Hedge fund manager Citadel LLC, which is said to have lost around $30 million in the IPO, wrote in support of Nasdaq's plan.

"While the extent of exchange immunity from liability for mishandling orders is an important and complex public policy issue, we submit that any commission consideration of this issue should be addressed at a later time," Citadel said in a letter to the SEC on Wednesday.

LEGAL ACTION

Under Nasdaq's proposal, firms that take part in the compensation plan must give up their right to sue the exchange for losses associated with Facebook.

The proposal states that firms would be required to submit their claims for compensation to the exchange within seven days of the SEC approving the plan. Seven days after that, firms would have to sign a legal release.

But SIFMA noted that the amounts claimed by firms may then have to be reduced to accommodate all legitimate claims up to a maximum $62 million. Firms may not know what they would receive until after they have waived the right to take legal action.

"Accordingly, Nasdaq should clarify that the deadline for filing a release of claims will be set after member firms are notified of the final amount that Nasdaq is willing to pay under the compensation plan," SIFMA said.

Knight Capital Markets, which recently had its own technical glitch that cost it over $400 million and nearly bankrupted the firm, lost more than $35 million in the Nasdaq IPO.

It has yet to file a letter with the SEC regarding Nasdaq's plan, but a source familiar with the company's thinking said the firm was leaning towards supporting the proposal.

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