Citigroup Inc. (C) plans to file a claim seeking compensation
from Nasdaq OMX Group Inc. (NDAQ) for losses the bank suffered
trading in last May's market debut of Facebook Inc. (FB), according
to people close to the discussions.
Citigroup is exploring its potential recovery of losses under a
controversial Nasdaq compensation plan approved by regulators last
month that allotted a total of $62 million for all claims in the
botched Facebook debut. Any payout to Citigroup would likely cover
only a portion of the roughly $20 million it lost in the episode,
and Citigroup has yet to rule out pursuing legal action against
Nasdaq to recoup the full scope of its losses, one of the people
close to the discussions said.
Monday is the deadline for claims and supporting documents to be
filed to the Financial Industry Regulatory Authority, which is
overseeing Nasdaq's compensation plan. The Securities and Exchange
Commission approved the plan on March 25.
The Nasdaq plan that has split Wall Street's biggest securities
firms, which collectively lost around $500 million trading in newly
minted Facebook stock due to problems with Nasdaq's exchange
systems.
Major handlers of trading for online brokerages took the brunt
of losses in the episode, and some, including Knight Capital Group
Inc. (KCG) and Citadel LLC, have chosen to file claims under
Nasdaq's plan, according to brokerage officials. Both firms lost
about $35 million each in the Facebook trading.
UBS AG (UBS), the firm seen suffering the heaviest blow with
losses of $356 million, last month said it would seek full coverage
of the loss through arbitration.
While Citigroup's Facebook trading loss was relatively small for
a bank of its size, the hit to its market-making unit arrived at a
time when brokerages' profits generally were under pressure due to
a prolonged slide in stock-trading activity and the kind of market
volatility that helps traders make profits. Nasdaq's mismanagement
of the Facebook stock-market debut--one of the biggest initial
public offerings in history--added to "a level of mistrust that
continues to plague the market," Citigroup officials wrote in a
letter to the SEC last summer.
Citigroup and other companies that file claims don't immediately
give up their right to pursue arbitration or other legal avenues
against Nasdaq in the Facebook matter. Citigroup is expected to
decide on whether to accept payment for a portion of its losses
once all claims are tabulated and Nasdaq outlines how much each
firm is due. If firms accept payment, they must then waive the
right to pursue legal action against the exchange.
A Nasdaq spokesman declined to comment on Citigroup's claim or
on how long it may take to evaluate claims.
Nasdaq originally proposed a $40 million compensation package
that included $27 million in discounted trading fees, but that drew
rebukes from both traders and rival exchanges. Nasdaq increased the
compensation plan to its current size last summer, but both
Citigroup and UBS in August sharply criticized the new plan as too
small and ill-conceived.
In submitting claims on the package, firms must outline how much
they believed they lost due to Nasdaq's troubles bringing Facebook
shares to market on May 18. That morning Nasdaq delayed several
times the opening trade in Facebook's stock as exchange officials
struggled to manage a flood of orders submitted to buy and sell the
social network's shares.
When the stock began trading, some traders bought and sold
shares for hours on behalf of customers without receiving
confirmation of trades from Nasdaq, forcing brokerages to guess at
their positions. Part of firms' submissions to Finra includes data
on trades placed during that period, according to Nasdaq's outline
of the process.
Write to Jacob Bunge at jacob.bunge@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires