UBS May Sue NASDAQ Over Facebook Losses That it Likely Caused Itself

Swiss banking giant UBS (NYSE: UBS  ) noted in its latest earnings report that it has seen its net profit fall by more than half from Q1 to Q2, equivalent to a $356 million loss. Interestingly, the entire amount was lost on just one trade: the Facebook (Nasdaq: FB  ) IPO this past May. Now the bank is looking to Nasdaq (Nasdaq: NDAQ  ) to make up that difference.

The news earlier this month that UBS is planning legal action against Nasdaq, which the bank accuses of mishandling the deal, is noteworthy for its magnitude. The kitty set up by the exchange to handle such complaints is a mere $62 million, an amount that Nasdaq felt confident would cover any claims regarding losses due to its bungling of Facebook’s IPO. Obviously, the exchange was not expecting a loss on a scale such as that claimed by UBS.

UBS is not the only financial entity seeking remuneration. Citigroup (NYSE: C  ) claims to have lost in the neighborhood of $20 million, while Knight Capital Group (NYSE: KCG  ) estimates its damages will be somewhere around $30 million to $35 million. How did UBS manage to lose so much money?

The complaint against Nasdaq centers on its wonky computer software, which delayed the opening, and failed to alert traders and brokers about the status of their trades. Unable to sell until they knew how many shares they were holding, traders and others got stuck holding a bag of shares that they didn’t really want.

This included UBS, who also couldn’t be notified due to the glitch, but kept entering orders, anyway. Once the computer program caught up and entered all the orders, UBS wound up with more shares than everyone else put together, it seems.

Why were others able to limit loss, but not UBS? The bank itself seemed to have a buggy computer system that day, whereby at least some of the duplicated orders were caused by an order loop from which the computer couldn’t extricate itself. This happened over and over, apparently, until someone finally noticed.

Fool’s Take
For a bank with UBS’ history of paying out fines and settlements, $356 million must look rather tame. Surely its payout to investors in 2008 of nearly $23 billion, to settle charges of securities fraud, must have hit the bank’s balance sheet a bit harder. The bank may appear to have a recent history of corruption but, in the Facebook IPO situation, it looks a lot more like ineptitude. Sure, Nasdaq was responsible for some of the bank’s losses, but UBS was more at fault for the sheer breadth of the loss. After all, Citi’s losses were also a result of automated trading, but they were able to contain the damage.

A recent Dealbreaker article notes that any investment bank worth its salt would never have made a blunder of such scope. I agree -- and then, to compound the matter by trumpeting your own carelessness, and laying the blame squarely at someone else’s door, seems like a really good way to lose both customers and investors.

Happily, it seems that UBS is moving away from investment banking, and that is a good thing.

Facebook’s IPO is still grabbing headlines, but there really is much more to know about this popular company. If you would like an in-depth look into Facebook, including both specific risks and opportunities it now faces, sign up for our premium report, which will give you must-watch areas to focus on as Facebook evolves and grows. This isn’t a one-time thing -- it also comes with a full year of updates, so click here for access.

Fool contributor Amanda Alix owns no shares in the companies mentioned above.

The Motley Fool owns shares of Facebook and Citigroup. Motley Fool newsletter services have recommended buying shares of Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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