NOTE: The following commentary by Neal L. Wolkoff was originally published on his blog.
When a publicly listed for-profit exchange handles the initial public offering or IPO of a legendary company, should it be held responsible for investors’ losses if the offering goes badly because of trading glitches caused by the exchange’s technology?
Intuitively, the answer appears to be yes, because companies of all stripes have had to compensate victims who suffered losses caused by the corporation’s negligence. However, since 1934 the securities markets have operated in large part as surrogates for the federal regulator, the Securities and Exchange Commission, in maintaining fair and orderly markets and upholding principles of just and equitable principles of trade. When they operate under the mantle of surrogate of the SEC, exchanges are called Self-Regulatory Organizations, or SROs, and they are given wide latitude to act, or not act, in the best interests of the investing public. The courts have held that SROs when performing the quasi-governmental role as an SRO in regulating the marketplace have the right to be protected, just as the regulator would be, from lawsuits and damages resulting from a regulatory decision under a doctrine called “absolute immunity.” In re NYSE Specialists Securities Litig., 503 F. 3d 89, 90-91 (2d Cir. 2007); Mandelbaum v. New York Mercantile Exchange, 894 F. Supp. 676 (SDNY 1995).
The question of whether Nasdaq was acting in its SRO role when it made various decisions surrounding the Facebook IPO may determine whether it will face the consequences of having to repay angry investors their losses – now totaling hundreds of millions of dollars – or be able to escape from any court imposed damages.