Small Investors Seek Answers to the Confusion of Facebook Trading

By Nathaniel Popper

John Hoag thought he had dodged the botched initial public offering of Facebook stock when he canceled his order last week for 100 of the company’s shares. This week, Mr. Hoag, 63, a property manager in Tennessee, learned from his Scottrade broker that he was being charged $3,805 for the shares anyway, plus a commission fee.

When he made a complaint, he was told by e-mail that he would have to go through the compliance office, which typically takes seven to 10 days to respond. These are the days of the runaround for thousands of ordinary investors who were snagged when the much ballyhooed initial offering had problems on Friday.

By Nasdaq’s own admission, 30 million Facebook shares were executed improperly because of technical flaws on the exchange, the largest such problem the exchange has experienced. On a normal day, most of the trading would be done by big financial institutions and trading firms, but on Friday an unusually large proportion of the trading was done by ordinary investors, hungry for riches from the biggest Internet initial offering ever, through brokers like Scottrade, Charles Schwab and Fidelity.

These retail investors have spent much of this week looking for someone to address their losses, or even just to answer questions about where they can take their complaints. The stockbrokers have generally said the problems were caused by Nasdaq, where technical issues delayed the start of trading by 30 minutes and mishandled large numbers of orders to execute or cancel shares.

But retail investors are not members of Nasdaq and cannot file complaints with the exchange, as large financial institutions can do. Brokers like Scottrade have almost universally declined to take direct responsibility for the losses their customers suffered. The frustration of these customers has played into a broader sense that small investors got the short end of the stick in the bungled Facebook offering.

“They are just spitting in the face of the retail investor and protecting the people that are responsible for this I.P.O.,” said Mr. Hoag.

Whitney Ellis, a Scottrade spokesman, said the “issues were industrywide and beyond our control.”

“Clients who have shares of Facebook stock in their accounts can trade their shares at any time,” Mr. Ellis said. “We have tried to address every client’s concerns on an individual basis and will continue to do so until everything has been resolved.”

Not all financial institutions have treated their customers the same. On Thursday, the bank that led the offering, Morgan Stanley, held a conference call for its employees in which it detailed a plan to take losses on behalf of customers who lost money because of to first-day errors, even when the problems were caused by Nasdaq. This provided some positive attention for Morgan Stanley, which has been the subject of intense scrutiny for how it handled the public offering.

Knight Capital, a major trading firm, said late Wednesday that it had incurred around $30 million of losses as a result of the issues at Nasdaq. The firm later said that some of those losses were the result of absorbing hits that it could have passed along to its institutional customers.

Javier Paz, a brokerage analyst at the Aite Group, said that the liability for the losses suffered during the bungled I.P.O. were in a murky legal territory and would probably “be decided in the courts.”

Mr. Paz said that at a minimum brokers should take responsibility for situations like the one Mr. Hoag encountered, where he was forced to take shares after his broker had led him to believe that his order had not been filled.

“If they have said one thing, they cannot turn around and do another,” Mr. Paz said.

At the end of Friday, Scott Grusky, a California retail investor, received a message from Fidelity saying an order he placed for 100 shares earlier in the day had been “canceled verified.”

On Monday, he opened his account to find that message gone. In its place, he was told that his order had been filled, not at the $34 price where Facebook was trading on Monday, but instead at the $40.50 where it had been trading when he initially placed his order.

Mr. Grusky said that when he complained to Fidelity, the customer service representative told him that the same thing had happened to many other customers, and blamed Nasdaq for the problem.

“Once a transaction is complete, I’m pretty sure the legal precedent is that you can’t change your mind,” Mr. Grusky said.

A Fidelity spokesman, Stephen Austin, said that all the problems customers had encountered “were a result of Nasdaq reporting issues.”

Mr. Austin said Fidelity was seeking compensation for its customers from Nasdaq and would “continue to do so until we are confident that Nasdaq has done everything it can to mitigate the impact to our customers.”

Nasdaq executives have said that the exchange’s legal liability will be limited to the $3 million cap set by regulations. Nasdaq is putting aside another $10 million to cover customer losses. It has asked its members, including brokerage and trading firms, to submit any complaints before Monday.

Nasdaq’s pool is likely to be overwhelmed by the scale of claims against it. Citadel, which executes trades for retail brokers, has sustained losses on the same scale as the $30 million to $35 million at Knight, according to people familiar with the matter. The two firms handle about half of all retail orders, so the total losses are expected to be well over $100 million.

There were many opportunities for investors to ponder whether Facebook was worth a $38 offering price, and even if the trades had gone flawlessly they might have lost money. The shares, which started trading on Friday at $42.05 and closed that day at $38, ended Thursday’s session at $33.03. That is up about 3 percent for the day but down 13 percent from the offering price.

Regulators including the Securities and Exchange Commission are examining several irregularities around the offering, including the technical problems on Nasdaq. One Maryland investor, Phillip Goldberg, has filed a lawsuit against Nasdaq in federal court in Manhattan, seeking to create a class-action case. Mr. Hoag said he was considering legal action against Scottrade, which tapped his account for a trade he thought had been canceled. When he was told Wednesday of the charge, Mr. Hoag said he asked the broker not to put the order through. He said he was met with silence.

“I said, ‘You can’t do that,’ ” Hoag said later. “To me, it’s tantamount to theft.”

Susanne Craig and Evelyn M. Rusli contributed reporting.