* 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 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.
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
"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
"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.
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.