NASDAQ Faces FB Investor Wrath

Following the Facebook Inc. (FB - Analyst Report) initial public offering (IPO) debacle, NASDAQ OMX Group Inc (NDAQ - Analyst Report) is facing the wrath of one of the IPO investors, who questioned NASDAQ’s failure to process orders to buy, sell or cancel requests for Facebook shares on time, causing losses to investors.

The investor hopes to obtain a class action status for a case he filed against the company regarding the same. The concerned investor had tried to both order and then cancel requests for Facebook shares but was unable to do so, owing to the technical glitch in the trading platform.

NASDAQ was confronted with a surge of order cancellations and updates on the very first day Facebook started trading, leading to technical problems and a delay in trading for 30 minutes. However, the solution deployed by the exchange to save the blushes was inadequate and led to delays in order confirmations for another two and a half hours.

Nevertheless, NASDAQ has already taken initiatives to rectify the procedures for IPOs following the hiccups faced during the Facebook IPO. For future IPOs, the exchange has decided to employ the software used for regular opening and closing trading, rather than persisting with the software that it used for the Facebook IPO.

However, the IPO remains a burning issue with both investors and regulatory authorities. The Securities and Exchange Board and Financial Industry Regulatory Authority have decided to review the events surrounding the IPO, thereby increasing the pressure on both the companies involved as well as the underwriter of the issue – Morgan Stanley (MS - Analyst Report).

The review was prompted by certain media reports that disclosed Morgan Stanley had reduced its revenue guidance prior to the IPO, while Facebook advised many of its underwriters to do the same. However, the information was provided only to select institutional investors and not made public.

This selective disclosure breaches the fair disclosure regulation, which requires public companies to make all material information available to all investors at the same time.

The state of Massachusetts is also set to conduct an investigation into the matter. The Secretary of Commonwealth of the state issued a subpoena to Morgan Stanley regarding the issue. However, Morgan Stanley maintains that it followed the same procedure for the Facebook IPO as it does for other IPOs and that these procedures are in compliance with relevant regulations.

NASDAQ currently carries a Zacks #4 Rank, which translates into a short-term Sell rating, while Facebook carries a Zacks #3 Rank (a short-term Hold).