Fidelity, Knight problems add to Nasdaq's Facebook woes By Jessica Toonkel and John McCrank Thu May 24, 2012 4:27pm EDT (Reuters) - The repercussions from Facebook's botched initial public offering deepened on Thursday as Fidelity Investments found itself dealing with "thousands" of customers with order problems and at least two firms reported tens of millions of dollars in trading-related losses to Nasdaq. A technical glitch delayed Facebook's market debut by 30 minutes on Friday and many client orders were delayed, giving some investors and traders significant losses as the stock price dropped. The exchange operator is facing lawsuits from investors and threats of legal action from brokers. Knight Capital and Citadel Securities are each claiming losses of $30 million to $35 million, potentially overwhelming a $13 million fund the exchange set up to deal with potential claims. Nasdaq also has to contend with the outside prospect that it could lose the Facebook listing entirely after having just obtained it. Facebook shares ended regular trading on Thursday up 3.2 percent at $33.03, about $5 short of their offering price. Action on the stock, however, has essentially become secondary to the fallout from the IPO -- its price, its size, its execution and questions about selective disclosure of its financial prospects. Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority and Massachusetts Secretary of the Commonwealth William Galvin are now looking into how the IPO was handled. Advisers familiar with the situation at Fidelity said many investors are now finding out, nearly a week after the fact, that their orders were not executed at the prices they thought. Fidelity, in a statement, said it was working with regulators and market makers on its clients' issues "and we will continue to do so until we are confident that Nasdaq has done everything it can to mitigate the impact to our customers." Morgan Stanley is also still tending to trade orders placed by brokerage customers on Friday, two people familiar with the situation said. Nasdaq has said all orders were returned by 1:50 p.m. EDT last Friday, but a Morgan Stanley Smith Barney source said it did not get trade information in a "systemic, orderly way. While brokerages may have received confirmation on trades Friday, many of them still are handling customer disputes over what price they received on the trades, officials said. The question is "who is going to eat the cost" of compensating those investors, said Alan Haft, a financial adviser with California-based Kings Point Capital LLC, which has $200 million in assets. The claims by Knight and Citadel could end up dwarfing some of the brokerage issues, though. "They are certainly facing the specter of some significant lawsuits if this pool is not enough," a source familiar with Knight's situation said of the Nasdaq claims pool. Citadel has also sent its losses to Nasdaq for potential compensation, a source familiar with the matter said. Citadel's hedge fund was not affected. Several analysts who cover exchanges said Nasdaq's legal liability should be limited, though. According to the analysts, securities rules give Nasdaq wide discretion in determining what, if any, compensation it should pay to customers who claim that they suffered losses due to trading execution. Other firms said they did not have similar problems to those of Knight, raising questions about the scope of the losses. "The problems were where people were trying to cancel orders; we didn't have that," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. Because we didn't have a problem doesn't mean there weren't problems. E*Trade Financial Corp said its market making operations realized losses of "well under a million dollars." Charles Schwab Corp had a "small number" of the "tens of thousands of clients" who traded Facebook whose issues still have not been resolved, a spokesman said. Each one requires some analysis to resolve, which can be time consuming. Nasdaq's troubles were reminiscent of the "Big Bang" era in the 1980s, which opened the London Stock Exchange to individual investors who would no longer have to trade through middlemen, said Larry Goldfarb, a New York-based compliance consultant. Goldfarb, who worked in an accounting unit of the former Salomon Brothers at the time, was dispatched to London for nearly six months to help reconcile millions of transactions that overwhelmed technology at the exchange, he said. Shares of Nasdaq fell 1 cent to $21.80 on Thursday. As of Thursday the stock was down nearly 6 percent from its last close before the Facebook debacle. Over the same period NYSE Euronext is down just 0.2 percent. The slide in the shares is adding to the pressure on Nasdaq Chief Executive Robert Greifeld, who defended the exchange's performance at its annual meeting last Tuesday. Additional reporting by Jed Horowitz, David Randall, Edward Krudy, Suzanne Barlyn and Jonathan Stempel in New York, Tim McLaughlin in Boston, Dan Levine in San Francisco and Ashutosh Pandey in Bangalore; Writing by Ben Berkowitz in Boston; Editng by Steve Orlofsky