In re Facebook, Inc., IPO Sec. & Derivative Litig.

• Decision Date: 13 February 2013
• Docket Number: Case No. 12 Civ. 6439.,MDL No. 12–2389.
• Citation: 922 F.Supp.2d 475
• Parties: In re FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION.
• Court: U.S. District Court — Southern District of New York

922 F.Supp.2d 475

In re FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION.

MDL No. 12–2389.

Case No. 12 Civ. 6439.

United States District Court, S.D. New York.

Feb. 13, 2013.

Gary S. Graifman, Esq., Kantrowitz Goldhamer & Graifman, P.C., Chestnut Ridge, NY, Howard T. Longman, Esq., Stull, Stull & Brody, Lynda J. Grant, Esq., The Grant Law Firm, PLLC, New York, NY, for the Plaintiff Michael Zack.

William A. Slaughter, Esq., Margaret Osborne Padilla, Esq., Paul Lantieri, III, Esq., Stephen J. Kastenberg, Esq., Ballard Spahr LLP, Philadelphia, PA, for NASDAQ Defendants.

OPINION & ORDER

SWEET, District Judge.

Plaintiff Michael Zack (“Zack” or the “Plaintiff”) has moved to remand the proposed class action, on behalf of himself and other similarity situated individuals, to the Supreme Court for the State of New York, New York County (the “State Court”), pursuant to 28 U.S.C. § 1447(c). Plaintiff originally filed a complaint in State Court on behalf of all investors, charging the NASDAQ OMX Group, Inc. and the NASDAQ Stock Market LLC (collectively “NASDAQ” or the “Defendants”) with negligence under New York law in the design of their systems and conduct during the May 18, 2012 initial public offering (“IPO”) of Facebook, Inc. (“Facebook”). Defendants removed this action to the Southern District of New York and Plaintiff now moves to remand the case back to State Court.

Upon the facts and conclusions set forth below, the motion is denied.

I. Prior Proceedings

The facts and prior proceedings underlying this action are set out in this Court's May 9 Opinion, In re Facebook. IPO Secs. & Derivative Litig., 288 F.R.D. 26 (S.D.N.Y.2012), familiarity with which is assumed. Accordingly, only a brief recapitulation of the relevant facts will be provided here.

This action is one of eleven class actions filed against NASDAQ relating to the Facebook IPO (collectively, the “NASDAQ Actions”).¹ The NASDAQ Actions were filed on behalf of retail investors who contended that their orders to purchase or sell Facebook stock were not properly executed or confirmed as a result of systems issued experienced by NASDAQ on the day of the Facebook IPO.

Plaintiff, a New York citizen, commenced his original action on June 26, 2012 by filing a complaint in the Supreme Court of the State of New York on behalf of all investors, of any citizenship, whose orders were allegedly affected by NASDAQ's systems issues on the date of Facebook's IPO. (Original Compl. ¶ 48). On July 16, 2012, NASDAQ removed that action to the Southern District of New York under Section 4 of the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d), and on the basis of federal questions concerning NASDAQ's obligations and privileges as a self-regulatory organization (“SRO”) under the Securities Exchange Act of 1934 (the “Exchange Act”) (No. 12–CV–5466–RWS, Dkt. No. 1). On July 25, 2012, Plaintiff voluntarily dismissed that action pursuant to Rule 41(a)(1)(A)(i) of the Federal Rules of Civil Procedure.

On August 7, 2012, Plaintiff filed the instant action in New York state court, limiting the class to all persons or entities resident in New York State and who “sought to purchase and/or sell shares of Facebook during the early stages of its IPO process, and suffered damages from order execution problems.” (Compl. ¶ 3). On August 23, 2012, NASDAQ moved to remove the case, asserting that the action “raises issues of federal law” under the Exchange Act “and is thus subject to federal question jurisdiction under 28 U.S.C. § 1331.” (No. 12–cv–6439–RWS, Dkt. No. 1, ¶ 4). On September 24, 2012, Plaintiff timely filed his motion to remand this action to New York state court.

On September 20, 2012, the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”) held a hearing to determine whether the pending 41 filed actions should be transferred to the Southern District of New York. On October 4, 2012, the MDL Panel issued a transfer order, finding that the “Southern District of New York is an appropriate transferee district for pretrial proceedings in this litigation,” and reasoning that “[m]uch of the relevant discovery will be located in New York, including most discovery relating to alleged NASDAQ trading errors and discovery from the underwriter defendants, many of whom are located in New York.” In re Facebook. IPO Secs. & Derivative Litig., 899 F.Supp.2d 1374, 1376–77 (J.P.M.L.2012). The cases were assigned to this Court for coordination or consolidation of the pretrial proceedings. Id.

On October 10, 2012, this Court issued a Practice & Procedure Order Upon Transfer Pursuant to 28 U.S.C. § 1407 (the “October 10 Order”), governing the practices and procedures for the 41 related actions filed against NASDAQ, the Facebook defendants, and certain underwriter defendants. On October 26, 2012, this Court issued an order denying without prejudice “any of the actions transferred to this Court by the MDL Panel or removed to this Court[.]” (the “October 26 Order”). Pre-trial conferences were held on November 7 and 14, 2012, in which a briefing schedule was set for all remand motions.

Plaintiff accordingly re-filed the instant motion to remand on November 14, 2012 and it was marked fully submitted on December 12, 2012,

II. Facts

NASDAQ is a major American stock exchange and a SRO registered with the U.S. Securities and Exchange Commission (the “SEC”) to operate as a national securities exchange pursuant to Section 6 of the Exchange Act. See In the Matter of the Application of The NASDAQ Stock Mkt. LLC for Registration as a Nat'l Sec. Exchange.; Findings, Opinion, and Order of the Comm'n, SEC Rel. No. 34–53128 (Jan. 13, 2006), 71 Fed. Reg. 3550 (Jan. 23, 2006). It has operated as a for-profit publicly traded company since 2000.

After engaging in a competitive bidding process with the New York Stock Exchange (“NYSE”), NASDAQ won the right to host the eagerly anticipated IPO of Facebook. On May 18, 2012, Facebook offered 421 million shares of its common stock to the public at $38.00 per share on the NASDAQ stock exchange, thereby valuing the total size of the IPO at more than $16 billion. The IPO was initially set to open at 11:00 a.m. Eastern Standard Time under the NASDAQ ticker symbol “FB,” but was delayed.

According to the Complaint, the “opening was delayed due to malfunctions in NASDAQ's automated system for processing order cancellations and matching orders, which prevented certain trades from processing properly.” (Compl. ¶ 25). Normally, trades and cancellations placed by retail investors through brokerage services execute nearly immediately. (Id. ¶ 26). However, given the size of Facebook's offering, coupled with the heavy demand among retail investors, the auction software could not keep up with the rush of last minute modifications. (Id. ¶ 28).

More specifically, according to NASDAQ's proposal to amend Rule 4626, ² starting at 11:05:10 a.m., having proceeded with the Display–Only period and the Quote–Only period, NASDAQ experienced system difficulties during the NASDAQ Halt and Imbalance Cross Process (the “Cross”), until 11:30 a.m. See Notice of Filing of Proposed Rule Change to Amend Rule 4626—Limitation of Liability, SEC Rel. No. 34–67507 (July 26, 2012), 77 Fed. Reg. 45,706, 45,709 (Aug. 1, 2012) (“Accommodation Proposal”) (attached to Graifman Decl. Dkt. No. 13). The Cross process during the first minutes of the Facebook IPO did not operate as expected. ( Id. at 9). To protect the “integrity of the IPO process, the system [for executing the Cross] is designed to recalculate the IPO auction if the matching engine's view of the auction book has changed between the time of the final calculation and the printing of the opening trade.” ( Id.). In the case of the Facebook IPO, “[a]fter the initial calculation of the Cross was completed, but before the opening trade was printed, additional order modifications were received by the system, changing the auction order book.” ( Id. at 10). “As designed, the system recalculated the Cross to factor in the new state of the book[, but again], changes were received before the system could print the opening trade.” ( Id.). “This condition persisted, resulting in further delay of the opening print [.]” ( Id.).

During this period, NASDAQ continued to receive new order, cancel and replace messages, and they were added to the Cross order book. ( Id.). New order, cancel and replace messages received before approximately 11:11 a.m. were acknowledged and incorporated into the Cross order book in real time. ( Id.).

NASDAQ determined that a system modification was needed to resolve these issues and determined to institute the modification, but it proceeded with the IPO rather than to halt the Cross auction process. ( Id.). “At 11:30:09 a.m., NASDAQ completed the Cross, printed [the opening trade] at $42.00 to the tape, and opened continuous trading,” which proceeded without incident. ( Id.). According to NASDAQ, at the time the system modification was implemented, it was expected that “all Cross transaction confirmation messages would be disseminated immediately thereafter.” ( Id.).

Some orders received by NASDAQ between 11:11 a.m. and 11:30 a.m., however, were not executed in the Cross; some were cancelled in the ordinary course by members before the Cross; some were entered into the continuous trading market at 11:30 a.m. as they should have been, and the remainder were either cancelled or released into the market at 1:50 p.m. ( Id. at 11). In addition, transaction confirmation messages for orders executed in the Cross at 11:30 a.m. were not disseminated until 1:50 p.m. ( Id.). In the period between 11:30 a.m. and 1:50 p.m., although system issues had prevented NASDAQ from immediately disseminating Cross transaction reports, NASDAQ determined not to halt trading in Facebook stock. ( See Id. at 4).

Following the commencement of trading, NASDAQ believed that the remaining system issues would be resolved...