[ by Howard Haykin ]

Citigroup is suing Nasdaq OMX for damages suffered by the the bank's market maker during the Facebook IPO last May.  Citi didn't suffer the biggest loss - it claims it lost $20 million.  The distinction of being the biggest loser hangs on the neck of UBS AG, which reportedly lost around $350 million. 

Citi filed the claim on Monday -  which is the deadline for applications from firms seeking to participate in the $62 million compensation plan.  The bank continues to look at all its options, as it seeks a balanced settlement between the Nasdaq exchange and its market maker members.  That has not happened, nor did the SEC help when it gave conditional approval to Nasdaq's $62 million settlement offer.  Unfortunately, the market makers, as a group lost upwards of $600 million. 

[C-I Note:  I'm reminded of Robert Frost's poem, "Stopping By the Woods on a Snowy Evening," whose main character knows he's far from home on this cold wintry evening - "And miles to go before I sleep, and miles to go before I sleep," - and he still has many unfulfilled obligations and chores.  Yet, that does not deter him from doing what he wants - to stop in these dark woods for a peaceful moment to appreciate nature's beautiful setting,

Citigroup, having incurred billions in legal settlements, could easily walk away from its losses of $20 million from the Facebook IPO, but money is not what motivates the bank in this case.  Instead, Citi seeks justice for itself and for its fellow Nasdaq market makers that stand to loss hundreds of millions - if they cannot get Nasdaq to step away from hiding behind its Immunity as an Exchange.  

What needs to happen is that Nasdaq - sooner rather than later - is for Nasdaq to accept that it may have been negligent or grossly negligent during the Facebook offering while serving its role not only as an exchange, but as a for-profit, publicly traded company that sought to maximize its profits when faced with largely insurmountable risk.  Nasdaq's actions and decisions on that fateful day may have led , in large part, to the numerous foul-ups during the FB offering, that resulted in the exaggerated losses borne by the market making firms.

Nasdaq, Citigroup and all the other market makers have far to go before this controversy is played out - "And many miles to go before I sleep, and many miles to go before I sleep." - and we're pleased to see Citigroup stand up for what's right.  If there's one thing that's been lacking too long on Wall Street, it's been Ethics, or Ethical Behavior. But it's never too late.

C-I hopes all parties will reach out and work together to negotiate a fair and equitable position among all the parties.  It can be might lonely and difficult to work alongside people with whom you don't communicate.]

A spokeswoman for Citi had no comment, nor did a spokesman for Nasdaq.

The filing was reported by the Wall Street Journal earlier on Monday.

Citi's market-making arm lost around $20 million in the May 18 IPO, a source told Reuters in May. That is just a sliver of the upwards of $500 million that market-making firms - which facilitate trades, backing them with their own capital - and brokers lost in the $16 billion IPO.

UBS AG has pegged its losses from the problematic IPO at above $350 million. It said on March 25 it had already filed an arbitration demand against Nasdaq to fully recover losses due to the exchange's "gross mishandling the IPO."

Citi has been highly critical of Nasdaq's compensation plan as well, saying in a letter to the U.S. Securities and Exchange Commission in August that the exchange operator should be liable for hundreds of millions of dollars more.

Liabilities at U.S. exchanges, which have some regulatory duties, are capped when fulfilling those duties. Nasdaq's cap for technical glitches is $3 million a month in most instances.

But the New York-based exchange should be fully liable for all of the IPO losses, Citi argued, because it was operating in the capacity of a for-profit company during the IPO, and as such it should not have regulatory immunity.

Citi said in the letter Nasdaq made "grossly negligent business decisions that caused market participants hundreds of millions of dollars of losses."

For further details, go to [Reuters, 4/8/13].

To contact the author, write to:  howard@compliance-insights.com/