A divided U.S. appeals court rejected UBS AG’s bid to force Nasdaq OMX Group Inc to arbitrate a dispute over the exchange operator’s alleged “catastrophic mismanagement” of Facebook Inc’s $16 billion initial public offering.
The 2nd U.S. Circuit Court of Appeals in New York on Friday said UBS’ agreement with Nasdaq to help make a market for Facebook shares did not entitle the Swiss bank to arbitration, in its effort to recoup more than $350 million of losses.
Circuit Judge Reena Raggi wrote for a 2-1 majority that the agreement was subject to a Nasdaq rule that “specifically disallows” claims over trading losses, showing that “the parties did not intend to submit such foreclosed claims to binding arbitration.”
UBS had no immediate comment. Nasdaq spokesman Joseph Christinat declined to comment.
Facebook’s first day of trading on May 18, 2012 was plagued by technology problems, resulting in a delayed opening and tens of thousands of trade and cancellation orders being stuck in Nasdaq’s system for more than two hours.
While market makers lost an estimated $500 million on Facebook’s IPO, federal regulators last year approved a plan for Nasdaq to repay only about $41.6 million.
Friday’s decision may therefore make it more difficult for UBS to recoup anything close to its estimated losses.
It upheld a June 2013 preliminary injunction issued by U.S. District Judge Robert Sweet barring arbitration.
Nasdaq agreed in May 2013 to pay a $10 million penalty, a record for a stock exchange, to settle U.S. Securities & Exchange Commission charges over its alleged “poor systems and decision-making” for the IPO.
The exchange operator did not admit wrongdoing. Facebook investors are also suing Nasdaq over the IPO.
In its March 2013 arbitration demand, UBS claimed that Nasdaq had not been “up to the task” of handling such a big IPO, and was “grossly negligent” in allowing shares to trade despite lacking the necessary software.
UBS said this resulted in many duplicate or errant orders, made it impossible to determine what trades had been made, and caused the bank to unintentionally amass a net 40.2 million Facebook shares by the end of the first trading day.
Dissenting from Friday’s decision, Circuit Judge Chester Straub said federal courts had no power to review UBS state law claims premised on the rules of Nasdaq, a private company. He said the majority’s reasoning could flood courts with new cases.
“It simply cannot be true that every time a case involves a famous company or a multibillion-dollar IPO, federal courts have jurisdiction,” he wrote.
The case is Nasdaq OMX Group Inc et al v. UBS Securities LLC, 2nd U.S. Circuit Court of Appeals, No. 13-2657.