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Fines & Fallout from Facebook’s IPO Highlight Risks for IT Firms

Fines & Fallout from Facebook’s IPO Highlight Risks for IT Firms

Facebook's botched IPO provides a cautionary tale for why IT and tech companies should carry Errors & Omissions Insurance.

Friday, January 10, 2014/Categories: errors-and-omissions

Today, the Securities and Exchange Commission (SEC) announced a $10 million fine for Nasdaq's parent company for events related to the initial public offering (IPO) of Facebook's stock in 2012. The fine is the largest a stock exchange has ever been saddled with and was announced as a penalty for sub-par decision making and systems during the IPO that left traders in the dark about the actual price of Facebook stock.

What's interesting for owners of tech and IT companies, though, is that when the bungled IPO occurred a year ago, Nasdaq blamed the problems primarily on "technical glitches." Glitches of a technical nature, of course, would have almost certainly been the fault of the IT professionals behind the programs and computers used for trading.

When a question of fault is attached to lost money, you can bet there's going to be a lawsuit involved. And the botched trading day was indeed connected to monetary losses: investment bank UBS claims that Nasdaq's mistakes cost it north of $350 million, and sources note that it plans to seek additional damages from Nasdaq through mediation.

So what happened between the IPO mix-up in 2012 and the announcement of the $10 million fine today? Here's a look.

The Long and Costly Legal Process of Demonstrating No Liability

While it's unclear whether and to what extent parties involved in the Facebook IPO sued (or are suing) each other in relation to lost money and damaged reputations, it's safe to bet that at least some of the affected parties turned to their legal teams to seek damages.

We now know that executive decision making was largely to blame for what went wrong, meaning that IT professionals were not primarily liable. However, the SEC's paperwork also noted that faulty "systems" were partially to blame. This could include…

  • Software systems, meaning that the designer, creator, or installer of these systems could be targeted in a liability suit. In addition, an IT contractor or company that advised Nasdaq to use these systems could be on the hook. In a lawsuit seeking damages, Nasdaq's lawyers would almost certainly name any and all of the above, in hopes of collecting as much in damages as possible.
  • Internal management or communication systems. These systems are not IT-based, but if they incorporate technology systems, the contractors or firms behind that technology could be named in a liability suit.
  • Hardware systems. If malfunctioning technology equipment contributed to the Nasdaq snafu, anyone responsible for installing, maintaining, repairing, or recommending that equipment could potentially be named in a liability suit regarding the failure.

So what does it mean to be "named" in a lawsuit if you're not ultimately found liable?

Primarily, a whole lot of money. That's because any company or contractor listed in a lawsuit is responsible for providing its own legal defense in court. So unless your company can afford a year's worth of attorney's fees, that could be a huge financial strain - in many cases, enough to push you into bankruptcy.

The Case for Errors & Omissions Insurance

Of course, with an E&O Insurance policy in place, those attorney's fees would be covered, as would any damages your firm was ultimately found responsible for paying. (For more on E&O claims for IT businesses, read "5 Most Common Errors & Omissions Claims for Technology Firms.")

Not sure whether you could be at risk for being named in a lawsuit? Talk to an insurance agent for more details about the kind of risks you're exposed to, based on the type of work you do.

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