It was the biggest lead balloon to crash on Wall Street in years. On May 8, 2012, Nasdaq opened Facebook Inc.'s initial public offering at $38 per share. The price plummeted. Investors lost hundreds of millions of dollars.

Now litigation over the botched IPO is moving forward — not just against Facebook, but also Nasdaq. A federal judge has scheduled arguments on the exchange's motion to dismiss for October 3.

The exchange so far has paid $10 million to settle claims brought by the U.S. Securities and Exchange Commission, and another $62 million to member companies, over its handling of Facebook's IPO. It is named in about a dozen lawsuits that were coordinated last year before U.S. District Judge Robert Sweet. A separate batch of lawsuits, also coordinated in the multidistrict litigation, name Facebook and its executives, including chief executive officer Mark Zuckerberg, and its board directors, as well as the various underwriters of the IPO.

The Nasdaq actions blame the exchange for investor losses.

"We're basically saying Nasdaq was negligent in the design, testing and implementation of its software system," said Douglas Thompson, a partner at Washington's Finkelstein Thompson and one of the lead plaintiffs attorneys in a consolidated complaint against Nasdaq. "The testing was inadequate to really replicate the circumstances that were predicted for the amount of interest and trading in this stock."

The hearing will arrive at a critical time. Since Facebook's IPO, glitches in Nasdaq's electronic trading have resurfaced. Last month, the exchange shut down for three hours because of problems with its software. SEC Chairwoman Mary Jo White said the event "should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants."

Most of the claims in the multidistrict litigation surrounding Facebook's IPO pin the blame on its executives and directors, plus the lead underwriters. A hearing on the Facebook defendants' dismissal motion is scheduled for October 8.

But Nasdaq — specifically, The Nasdaq Stock Market LLC and its parent, Nasdaq OMX Group Inc. — faces a separate consolidated complaint filed on April 30 over its role in the IPO. The litigation involves claims of negligence and securities violations on behalf of investors who suffered $500 million in losses on premarket and aftermarket orders due to Nasdaq's alleged failure to properly process their trades.

"Our case is really focused on people who bought in what's known as the pre-opening," said Thompson, who co-heads the claims for negligence against Nasdaq. "The exchange accepts the orders, and comes up with a market-clearing opening price to start the IPO."

The complaint, which also names the exchange's chief executive officer, Robert Greifeld, and Anna Ewing, chief information officer, argues that Nasdaq officials, driven by competition for business, went ahead with the Facebook IPO despite being aware of "unresolved technical issues" with its electronic trading system. The problems caused a 25-minute delay in trading on the day of the IPO. Furthermore, confirmation orders were delayed for two hours, leaving investors "flying blind."

"So the market opens, trading commences, the market price starts going down, but retail investors who bought the stock in pre-opening didn't know whether their orders had gone through or not," Thompson said. Soon after the IPO, Greifeld acknowledged software design flaws that may have contributed to the problems. The complaint also alleges that executives at Nasdaq, a public company, made false and misleading statements to the public about its electronic trading capabilities before and on the day of the IPO. Vincent Cappucci of New York's Entwistle & Cappucci, lead plaintiffs attorney in the securities claims, did not return a call for comment.


Nasdaq moved to dismiss the consolidated action on July 2, claiming immunity from litigation as a "self regulatory organization" protected under SEC rules. The exchange argued that the investors cannot move for economic losses because they have no contractual relationship with the exchange. The securities fraud claims also fail to allege any material misrepresentations or omissions — or how investors relied on, or suffered losses from, those statements, according to Nasdaq's motion.

Nasdaq attorney Stephen Kastenberg, a partner at Ballard Spahr in Philadel­phia, declined to comment.

In July 2012, Nasdaq submitted a proposal to the SEC to change its rules to distribute $62 million to member firms that suffered losses from Facebook's IPO. The SEC approved the deal on March 23.

UBS Securities LLC, which wrote letters to the SEC opposing the deal, brought an arbitration proceeding on March 15 against Nasdaq with the American Arbitra­tion Assoc­iation over $350 million in losses in the Facebook IPO. Nasdaq moved to halt the arbitration, arguing that the matter should be in federal court, and UBS countered with a motion to dismiss. In a recently unsealed order issued on June 18, Sweet denied UBS' dismissal and granted Nasdaq's preliminary injunction request.

UBS attorney Charles Davidow, a Washington partner at Paul, Weiss, Rif­kind, Wharton & Garrison, did not return a call for comment.

The exchange on May 29 agreed to pay $10 million to settle SEC charges related to failures involving Facebook's IPO. Plaintiffs lawyers in the Nasdaq complaint have sought access to documents in the SEC settlement. Nasdaq has opposed that demand. The discovery motion, filed on June 25, will be heard at the same hearing as Nasdaq's dismissal action.

"We're asking the judge for discovery of the SEC documents and the SEC testimonies so we can get a better understanding of what happened because there are still a lot of unanswered questions," Thompson said.

Meanwhile, plaintiffs attorneys Thomas Dubbs at Labaton Sucharow and Steven Singer at Bernstein Litowitz Berger & Grossmann filed a separate consolidated class action complaint on February 28 against the Facebook defendants, and the underwriters they say failed to inform investors about internal projections of decreased revenues due to increased use of mobile devices like smartphones. Neither Dubbs nor Singer returned calls for comment.

The Facebook defendants have moved to dismiss the consolidated complaint, arguing that they disclosed the potential effects of mobile-phone use on their business to investors, according to a motion filed on April 30. Andrew Clubok at Kirkland & Ellis in Washing­ton, writing on behalf of the Facebook defendants, declined comment.

In their motion, the Facebook defendants cite part of Sweet's February 13 dismissal of four shareholder derivative cases. In that ruling, the judge found that internal projections about the impact of increased mobile-device use didn't need to be disclosed prior to the IPO since Facebook had warned in SEC filings about the trend.

Amanda Bronstad can be contacted at