## Facts

- Facebook conducted its May 18, 2012 initial public offering on the NASDAQ stock market.
- NASDAQ’s electronic systems allegedly malfunctioned during the IPO, delaying order processing and confirmations and impairing cancellations and executions.
- Purchasers of Facebook Class A common stock in or traceable to the IPO alleged they suffered losses from the disruptions and sued NASDAQ LLC and its parent, NASDAQ OMX Group, Inc.
- Plaintiffs asserted two main categories of misconduct:
  - “Technology” conduct: negligent design, testing, implementation, and marketing of NASDAQ’s IPO-related trading software and representations about system capacity and reliability.
  - “Trading” conduct: decisions not to halt trading and not to cancel or break certain trades after the malfunctions became apparent.
- NASDAQ, a registered national securities exchange and self-regulatory organization (SRO) under the Securities Exchange Act, moved to dismiss on absolute immunity grounds; NASDAQ OMX sought similar protection as NASDAQ’s parent.

## Issues

1. Whether NASDAQ is absolutely immune from damages claims based on alleged negligent design, testing, and promotion of trading technology used for the IPO.
2. Whether NASDAQ is absolutely immune from damages claims challenging decisions not to halt trading and not to cancel or break trades during the disruption.
3. Whether NASDAQ OMX, as a for-profit parent company and not an SRO, may invoke absolute immunity for the challenged conduct.

## Decision

- The court applied a functional test and held absolute immunity turns on whether the challenged conduct is quasi-governmental regulation rather than proprietary market activity.
- The court dismissed the “trading” claims, holding NASDAQ’s decisions about trading halts and trade cancellations were regulatory functions protected by absolute immunity.
- The court denied dismissal in relevant part as to “technology” claims, holding alleged negligent development and commercial promotion of the exchange’s trading platform were not categorically regulatory and could proceed to the extent pleaded as proprietary conduct.
- As to NASDAQ OMX, the court did not treat it as an SRO; immunity could not be claimed merely by corporate status, but derivative liability premised on NASDAQ’s immune regulatory decisions could not be used to circumvent immunity.

## Legal Principles

- An SRO has absolute immunity from private damages suits when performing regulatory or disciplinary functions delegated under the Exchange Act and overseen by the SEC.
- Absolute immunity is function-based, not status-based; courts examine the nature of the challenged act rather than the defendant’s label or internal decisionmaker.
- Decisions interpreting and applying exchange rules to maintain fair and orderly markets—such as whether to halt trading or cancel/break trades—are regulatory and immune.
- Designing, testing, and marketing exchange technology, and related reliability representations made to attract business, are generally proprietary/commercial activities and are not automatically immune.
- A non-SRO parent may not obtain blanket SRO immunity, but plaintiffs cannot impose liability on the parent solely to obtain damages for the exchange’s immune regulatory acts.

## Conclusion

The court drew a line between NASDAQ’s regulatory market-governance decisions, which were absolutely immune from damages claims, and alleged proprietary technology and marketing misconduct, which was not categorically immune and could proceed as pleaded.


In re Facebook, Inc., IPO Sec. & Derivative Litig., 986 F. Supp. 2d 428 (S.D.N.Y. 2013)