Friend This: Why Those Damaged During the Facebook IPO Will Recover (Almost) Nothing from NASDAQ

Table of ContentsI. Introduction 1520II. SRO Liability Today 1525A. SROs Within the Present Regulatory Scheme and NASDAQ's Place Within It 1525B. Determining Absolute Immunity 15281. Actions Afforded Absolute Immunity 15302. Actions Denied Absolute Immunity 15403. Absolute Immunity and SROs-The Tests Employed 1545III. NASDAQ's Conditional Absolute Immunity in Light of the Facebook IPO 1546A. The Events of the Facebook IPO 1547B. The Present Law Applied to NASDAQ's Conduct During the Facebook IPO 15511. The Argument for Absolute Immunity 1551a. IPOs Constitute a Regulatory Function 1551b. NASDAQ's Actions in Effectuating the Facebook IPO Are Entitled to Absolute Immunity 15542. The Argument Against Absolute Immunity 1556a. IPOs Constitute a Private, For-Profit Business Activity 15563. Why a Court Should Find that NASDAQ Is Entitled to Absolute Immunity for Its Actions During the Facebook IPO 1558a. IPOs Will Be Considered a Regulatory Function 1558IV. Regulatory Functions and Absolute Immunity:A New Approach 1561A. The New Approach 1562B. The New Approach as Applied to the Facebook IPO 1563C. Counterarguments to the New Approach 1564V. Conclusion 1567I. IntroductionFacebook, Inc. (Facebook) "went public" on NASDAQ on May 18, 2012, raising $16 billion-the third-largest initial public offering (IPO) in the history of the United States.1 In the first 30 seconds of trading, 80 million shares changed hands.2 By the end of the first day, 567 million shares had been traded.3 This was the highest volume of shares traded in an IPO, "smashing" General Motors Co.'s previous record of 450 million shares.4 The records do not stop there, however.The Facebook IPO also resulted in the largest number of lawsuits ever filed due to an IPO.5 As of September 2012, only four months after the IPO, twenty-nine securities class action lawsuits had been filed.6 By December 2012, seven months after the IPO, forty-one actions, and counting, were filed.7 As a result of "system difficulties" experienced by NASDAQ, major market makers and broker dealers lost approximately $500 million in the IPO.8 Losses of this scale, and in this context, prompt a difficult question: What is the extent of NASDAQ's liability for its system difficulties?9 The extent of NASDAQ's liability is complicated.Pursuant to the Securities Exchange Act of 1934 (Exchange Act),10 Congress established a regulatory system that relies upon self-regulatory organizations (SROs) to regulate and administer the day-to-day conduct of the national securities exchanges under the supervision of the Securities and Exchange Commission (SEC).11 Since that time, many of the SROs have become private, for-profit corporations.12 NASDAQ is an SRO, a national securities exchange, and a "quasi-private" regulatory entity that "operate[s] as an additional layer of investor protection" in the regulatory system.13 NASDAQ is also a private company with $3.4 billion in gross revenues, net income of $383 million, and over 173 million shares of common stock.14In light of the governmental functions it provides, NASDAQ is protected by absolute immunity when it performs its quasigovernmental, "statutorily delegated adjudicatory, regulatory, and prosecutorial functions."15 But NASDAQ is not entitled to absolute immunity when it acts pursuant to its "nongovernmental" and "private business interests."16 The question raised by the Facebook IPO is whether the $500 million loss was a result of NASDAQ's "statutorily delegated adjudicatory, regulatory, and prosecutorial functions." NASDAQ unequivocally asserts that the actions it took during the IPO were undertaken pursuant to its regulatory function and are thus covered by absolute immunity.17 Additionally, NASDAQ has agreed to "pay [the SEC] $10 million, the largest fine ever levied against an exchange, to settle accusations that it had violated numerous rules before and after the IPO" with its "poor systems and decision making. …