By John McCrank
NEW YORK (Reuters) - In a first for a U.S. stock exchange, Nasdaq OMX Group on Thursday agreed to pay $26.5 million to settle a class-action lawsuit involving its bungling of Facebook Inc's $16 billion initial public offering, the plaintiffs' lawyers said.
The lawsuit said Nasdaq violated federal and state laws by not disclosing technology weaknesses in its IPO systems and failing to properly design and test them for the Facebook offering.
The settlement is significant because exchanges are responsible for policing their own markets and therefore are legally immune from private liability for damages incurred when they are performing regulatory functions like conducting an IPO.
"This is the first case that we are aware of where a class of investors has sued an exchange for market disruption, and the court has sustained those claims," said Vincent Cappucci, one of the lawyers representing retail investors harmed in the IPO.
Facebook's first day of trading on May 18, 2012, was rife with technology problems that resulted in a delayed opening and thousands of orders being stuck in Nasdaq's system for hours. Market-making firms lost an estimated $500 million as a result, and in 2013, Nasdaq voluntarily repaid about $41.6 million to them.
But retail investors must use brokers to send orders to the exchange and were not able to apply for compensation.
Thursday's settlement accounts for "a very favorable percentage" of the losses retail investors sustained, Cappucci said.
Still, the settlement should not have any effect on exchange immunity, Nasdaq Chief Executive Officer Robert Greifeld said in an interview.
Nasdaq said earlier on Thursday that it had set aside $31 million for litigation arising from Facebook's IPO.
"We are just happy to be able to move on," Greifeld said, adding that insurance would cover most, if not all, of the settlement.
The reserve will also cover expected costs of re-opening the voluntary compensation program for firms that did not submit a claim to Nasdaq in 2013.
UBS Group AG's market-making arm sued to recoup more than $350 million of losses from the IPO, rather than submit a claim to Nasdaq. In October, an appeals court rejected UBS's bid bring Nasdaq to arbitration.
"We are happy that UBS is probably going to apply to become a part of the accommodation policy," Greifeld said, "and we are certainly happy to open it up again for them."
Separately, Nasdaq agreed in May 2013 to pay a record $10 million penalty to settle U.S. Securities and Exchange Commission charges over Facebook's IPO. The exchange operator did not admit wrongdoing.
(Reporting by John McCrank; Editing by W Simon and Lisa Von Ahn)