Shareholder Claims Proceed Against Nasdaq Over Facebook IPO

, New York Law Journal

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SHAREHOLDER claims against Nasdaq OMX Group Inc. over Facebook Inc.'s botched IPO will move forward after a federal judge found that the exchange was not immune from liability over the technical glitches that occurred that day.

Southern District Judge Robert Sweet refused to dismiss about a dozen lawsuits against the exchange, which argued it was protected from lawsuits as a "self-regulatory organization" under U.S. Securities and Exchange Commission rules. The exchange also argued that investors, who have no contractual relationship with the exchange, cannot sue under New York's economic loss doctrine.

Sweet disagreed on Dec. 12, upholding claims that Nasdaq was negligent for the technical problems.

"Nasdaq's software is an integral part of Nasdaq's overall business package, intended to create a market for new, revenue-producing IPO business, not in furtherance of any purported regulatory function," he wrote.

But he dismissed other claims, calling Nasdaq's decision not to halt trades "a quintessentially regulatory function" that immunized the exchange from liability.

A hearing is scheduled for Feb. 3.

Sweet, overseeing all the litigation over the Facebook IPO, which was coordinated for pretrial purposes, has not yet ruled on separate motions to dismiss about 30 other lawsuits filed against Facebook and its executives, including chief executive officer Mark Zuckerberg, and various underwriters of the offering.

Douglas Thompson, co-lead counsel for the negligence cases against Nasdaq and a partner at Washington's Finkelstein Thompson, said in an email to The National Law Journal that he "is gratified that Judge Sweet, in a well-reasoned opinion, rejected Nasdaq's over-broad and sweeping claims of regulatory immunity from liability for its own negligence in connection with the Facebook IPO. Retail investors will now have the opportunity to proceed with discovery and litigation to recoup losses caused by the Nasdaq system failures."

Nasdaq attorney Stephen Kastenberg, a partner at Ballard Spahr in Philadelphia, did not respond to a request for comment.

On May 8, 2012, Facebook's public offering price of $38 per share plummeted soon after its debut, causing millions of dollars in investor losses. The exchange 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 the IPO.

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