DealBook: Oracle to Leave Nasdaq for the Big Board

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DealBook: Oracle to Leave Nasdaq for the Big Board

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DealBook: Nasdaq Is Fined $10 Million Over Mishandled Facebook Public Offering

Bebeto Matthews/Associated PressNasdaq said it has put measures in place to prevent problems like the Facebook I.P.O. last May.

Nasdaq’s parent company will pay the largest fine ever levied against an exchange for “poor systems and decision making” both before and after the bungled Facebook initial public offering.

In the minutes after Facebook’s initial public offering spun out of control last year, executives at the Nasdaq stock exchange received an e-mail pleading for a pause.

“We are all trading blind,” said the message, which was sent by the chief executive of the trading firm Knight Capital, according to people briefed on the details of the e-mail. “Should you stop trading for some period of time so we can all catch up and actually understand our exposure?”

The confusion on the morning of May 18, 2012, had been caused by errors in Nasdaq’s computer programming, but executives at the exchange decided to ignore the request for a break and proceed with trading, leading to mounting confusion.

The back-and-forth is one of many details to come out on Wednesday when the Securities and Exchange Commission released the results of its investigation into the bungled Facebook I.P.O. The S.E.C. announced that the Nasdaq OMX Group will pay $10 million, the largest fine ever levied against an exchange, to settle accusations that it had violated numerous rules before and after the I.P.O.

The settlement helps Nasdaq put behind it an episode that hurt its reputation and damaged investor confidence in the stock market. But the investigation also suggests that Nasdaq’s shortcomings were, in some ways, much deeper and more widespread than previously understood.

The head of the S.E.C.’s market abuse unit, Daniel M. Hawke, said in a statement that there has been too much of a tendency to write off incidents like the Facebook I.P.O. as “technical ‘glitches.’ ”

“It’s the design of the systems and the response of exchange officials that cause us the most concern,” Mr. Hawke said.

Robert Greifeld, the chief executive of Nasdaq, wrote in an open letter on Wednesday that the company had put new safeguards in place to prevent future problems. But he also defended the company’s overall performance.

“While we prepared extensively for the Facebook initial public offering, including thorough tests of our systems with member firms, the challenges we encountered that day were unprecedented,” Mr. Greifeld wrote.

The mishandled Facebook I.P.O. was among a series of breakdowns that rocked the United States stock markets last year and led to questions about the safety and soundness of an increasingly complex and computer-driven system.

In addition to the $10 million fine, Nasdaq has already agreed to pay $62 million to the brokers who lost money because of the problems. Even that has not been enough to placate the firm that was hurt the most, UBS, which contends that it lost $356 million because of Nasdaq’s errors. UBS has said it plans to seek more money from Nasdaq through arbitration.

The S.E.C.’s findings could aggravate some of the remaining tensions over the Facebook I.P.O. because it reveals numerous and previously unknown ways that the exchange executives fumbled the incident.

The problems began before the I.P.O. when Nasdaq tested its computer programs, but only on 40,000 orders, according to the S.E.C. When it was time to begin actual trading, at 11 a.m. on May 18, the system was overwhelmed by 496,000 orders.

The deluge of orders sent Nasdaq’s computers into a continuous loop that made it impossible to establish a correct opening price for Facebook stock, which had priced at $38 a share the night before.

Nasdaq executives were immediately aware of the problems and summoned a “Code Blue” conference call, but they decided to proceed with the opening after making a few temporary fixes to the computer code and switching to an untested backup system, the S.E.C. found.

Once Facebook started trading at $42 soon after 11:30 a.m., numerous brokers contacted Nasdaq to complain that they still did not know how many shares of Facebook they had purchased. At 1:50 p.m., Nasdaq executives realized they had failed to execute tens of thousands of orders that had been sent in.

At that point, Nasdaq caused more problems by selling many of these shares into the market, leading to a sharp drop in Facebook’s share price. It closed at $38.23 after Facebook’s bankers stepped in to help support the stock. The company’s stock has never risen above its opening price of $42.05 and was trading down 3.2 percent on Wednesday, at $23.32.

The S.E.C. also reported that shortcomings in Nasdaq’s technology hit the stock of game-maker Zynga on the day of the Facebook I.P.O., causing big price swings in Zynga shares.

The S.E.C. said Wednesday that Nasdaq had broken market rules two other separate times. In October 2011 and August 2012, programming errors caused Nasdaq to mistakenly execute some customer orders below the publicly listed price.

Although the settlement could put to rest some of the speculation surrounding the exchange, it does not shine a positive light on Nasdaq and its management, said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital markets consulting firm.

“It sure looks like the guy who couldn’t shoot straight,” Mr. Healy said. “There’s no question that it’s an embarrassment.”

THQ Avoids NASDAQ De-Listing

THQ has announced that it has met the minimum share price to remain listed on the NASDAQ stock market. In fitting with NASDAQ’s minimum price, THQ stock has held a value above $1.00 per share for more than 10 consecutive business days, allowing it to stay on the market.

Earlier this month, THQ announced a reverse split of its stock, meaning that every 10 shares of company stock was converted into one share. This move cut the number of shares from 68.5 million to 6.9 million in an effort to maintain NASDAQ’s minimum $1.00 price.

Meeting NASDAQ’s minimum is good news for THQ, though it’s only the beginning of the company’s road to recovery. THQ has been in tough financial shape all year, following the failure of its uDraw tablets and subsequent lawsuits. THQ announced yesterday that Ron Moravek is its new executive vice president of production, and earlier this week it consolidated its quality assurance facilities.

THQ has several big games planned for 2013. For more about THQ moving forward, be sure to read our interview with Rubin as well as how THQ is protecting its future.

DealBook: Its I.P.O. Botched, Facebook Looks Hard at Nasdaq

Illustration by The New York Times

Facebook’s debut was supposed to be Nasdaq’s ultimate coup.

But in the weeks since the social network’s much-ballyhooed — and ultimately botched — initial public offering, the relationship has soured.

In Facebook parlance, it’s complicated.

Executives at the Internet company are pinning much of the blame on Nasdaq, according to several people close to the company and its underwriters, who spoke on the condition of anonymity because of continuing shareholder lawsuits. Tensions remain so high that Facebook is still considering switching exchanges and is weighing the costs of such a move, these people said.

As the drama plays out, Nasdaq, the first electronic stock market, faces one of its hardest tests since it was founded 41 years ago.

For years, the exchange, considered friendly to start-ups, was the preferred place for up-and-coming technology companies. Now, Nasdaq is trying to salvage its reputation with Facebook and the rest of Silicon Valley while also fending off the advances of its archrival, the New York Stock Exchange, which has ramped up efforts in the industry.

Steven Senne/Associated PressMark Zuckerberg, the chief of Facebook.Lucas Jackson/ReutersNasdaq’s chief executive, Robert Greifeld, has apologized to Facebook for the way his exchange handled the company’s stock market debut.Mark Lennihan/Associated Press

“Nasdaq will be wearing that albatross for quite a while,” said Lise Buyer, founder of Class V Group, an advisory firm for initial public offerings. “The errors associated with Facebook’s I.P.O. will now be part of Nasdaq’s conversations.”

Nasdaq, for its part, has expressed contrition, with its chief executive, Robert Greifeld, publicly acknowledging the firm’s arrogance during the I.P.O. The exchange has also agreed to set aside $40 million for broker losses. Even so, Nasdaq defends its position as a major player in technology listings.

“For more than two decades, Silicon Valley has played a vital role in Nasdaq’s evolution,” said Joseph G. Christinat, a Nasdaq spokesman. “Nasdaq will always strive to be part of the Valley’s start-up ecosystem.”

Nasdaq’s troubles come at a challenging time for the industry.

The Securities and Exchange Commission is pressing exchanges to bolster controls, with open investigations on Nasdaq, N.Y.S.E. and others. Authorities are focusing on the Facebook I.P.O., trying to determine if Nasdaq acted improperly as it scrambled to push Facebook live and clear orders. So far, Nasdaq has not been charged with any wrongdoing, but the scrutiny represents a marked shift for the S.E.C., which has traditionally had a light touch with exchanges.

Facebook and its underwriters have been criticized for being too aggressive on the size and price of the offering. Still, many experts argue that it’s impossible to discount the psychological impact of Nasdaq’s problems.

“Very small actions can trigger very large dynamic mechanisms,” said Dan Ariely, a professor of behavioral economics at the Fuqua School of Business at Duke.

Nasdaq is navigating a forest of questions, as rival N.Y.S.E. settles onto its turf.

N.Y.S.E., once known as the dowdy exchange of blue chips, has aggressively courted Silicon Valley in the last five years, calling on executives and holding private dinners at places like the Four Seasons in East Palo Alto, Calif. The Big Board recently snapped up the listings of a number of technology start-ups, including LinkedIn, Pandora and Yelp.

While N.Y.S.E.’s sales pitch used to center on its established brand, it now talks about technology and client services. A few years ago, the exchange also revised requirements to make it easier for smaller technology companies to list. The two exchanges battled for months over Facebook. Nasdaq won, in part, because it agreed to shorten the so-called seasoning period for newly public companies. The move would allow Facebook to join the Nasdaq 100 three months after its listing, people with knowledge of the matter have said.

But the short-lived victory has become an ordeal.

In recent weeks, the divide between Nasdaq and Facebook has deepened, as both face a bundle of shareholder lawsuits. In June, Facebook filed a motion alongside its lead underwriters to combine these lawsuits in New York. Nasdaq, which faces some of the same suits, was left out of the motion. Shares of Facebook, which hit a low of $25, currently trade around $31.10, well below the offering price of $38.

Facebook is upset about Nasdaq’s lack of communication, according to people close to the company. Executives were left out of important decisions like whether the stock should begin trading at all given the crush of early issues. Once trading did begin on May 18, Nasdaq did not contact Facebook’s chief financial officer, David Ebersman, who was the main point person for the I.P.O.

Executives at the social network have also grown frustrated by the technology problems. Many order confirmations were delayed. These were eventually released hours later, along with stock that ended up in a separate Nasdaq account. But the unexpected flood of shares looked like a giant order of roughly 11 million shares, weighing on the stock, according people with knowledge of the matter.

Facebook executives believe Nasdaq added to the woes the next week. Before the second trading day, Nasdaq alerted traders to file claims by noon if they wanted financial “accommodations” for the I.P.O. Executives believe the notice encouraged investors to dump shares to prove a loss on Facebook, prompting the stock to fall more than $4 in the first hour of trading that day.

Perhaps most disconcerting was Nasdaq’s conference call with reporters on Sunday, just days after the I.P.O. On the call, Mr. Greifeld, Nasdaq’s chief, assured the press that Nasdaq’s errors had not affected the stock’s performance.

“It would lead a reasonable person to conclude that it didn’t have an impact on the stock price,” he said.

The statement was tantamount to an act of betrayal, according to those close to Facebook. Once again, the Facebook team was baffled. Why didn’t the exchange warn them about Mr. Greifeld’s comments? Incensed, a Facebook executive told Mr. Greifeld, “You don’t understand the hole you’re in.”

Most start-ups hoping to go public are not worried about encountering Facebook’s problems. As the largest Internet I.P.O. on record, Facebook attracted a barrage of coverage. Many industry insiders interviewed believe Nasdaq will move quickly to improve its controls. It is currently working with I.B.M., for instance, to review its entire technical system.

Still, the fumbles are ugly blemishes for an exchange that has prided itself on its tech heritage. After dominating technology listings for the last decade, Nasdaq’s ranking has slipped. So far this year, Nasdaq has accounted for 11 of the 24 technology listings, with the rest going to N.Y.S.E., according to Renaissance Capital, an I.P.O. advisory firm. “It might be an anomaly,” said Aaron Levie, the chief executive of Box, a data storage company. “But Nasdaq is getting more competition from N.Y.S.E., which has been really proactive out here.”

Amid mounting pressure, Mr. Greifeld made one more visit to Menlo Park three weeks ago.

In a meeting with Mr. Ebersman and other executives, he apologized, according to people briefed on the meeting. He acknowledged that he had said that Nasdaq’s problems did not impact Facebook’s price, but conceded that that assessment did not fully factor in the psychology of the market.

After that, a chill settled in the room, as several executives quietly scrawled his statement on their notepads.

This post has been revised to reflect the following correction:

Correction: July 2, 2012

An earlier version of this article misidentified the location of the Four Seasons Hotel. It is in East Palo Alto, Calif., not Palo Alto.