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July 31, 2000

The Fall Out Over Nasdaq Sale Plan Can Potential Lawsuit and Barbs Derail Demut

By William Hoffman

Nasdaq demutualization opponents may return to the courts before the process is completed, according to Bill Singer, a former counsel to the Independent Broker Dealers Association, the umbrella group for small firms.

"A momentous event like the public offering of Nasdaq stock may coalesce the opposition of a lot of interests," said Singer, a regulatory partner at the New York law firm of Singer Frumento.

Allocation of share options, and the choice of an underwriter for Nasdaq's public offering, could unite and mobilize opponents of the controversial plan.

"The quicker [the National Association of Securities Dealers] get this thing done, the better their chance of getting it done successfully," Singer said.

Singer originally opposed demutualization, but thinks it probably makes sense now. "I'm a big believer of laissez-faire," he said. "You had an election and you have to abide by the results of that election." Approval by 84 percent of NASD members voting last April deflated much of the opposition.

The NASD completed the first phase of demutualization in June, announcing that approximately 40 percent of Nasdaq has been placed with more than 2,800 investors other than the NASD. Nasdaq raised in excess of $260 million during this first phase; NASD raised an additional $74 million through a private placement.

Small Firms

NASD officials declined to comment on potential challenges to the continuing demutualization. But Alan Davidson, president of IBDA and of Zeus Securities, Inc., in Smithtown, N.Y., noted, "Forty percent of Nasdaq is now in the hands of 2,800 investors. That means the issuers as well, who are not members. So obviously, there was a lot less participation by NASD members in phase one." Davidson also said small NASD member firms received much smaller allocations of stock or warrants during phase one than large member firms.

Demutualization's second phase is expected to reduce NASD's ownership interest in Nasdaq on a fully-diluted basis to less than one-third. Singer, who expects that to proceed smoothly, said problems might surface as the first public offering of stock approaches. "I believe we're going to have significant layoffs among [member] firms," he said, citing press reports in mid-July about brokerages contemplating cutbacks.

With 5,000 NASD member firms pressing for a smaller slice of the Nasdaq pie, such layoffs could prompt smaller members to demand the plan be restructured, Singer said.

Vulnerable Firms

Davidson added that if Nasdaq is registered as an exchange, it could encourage larger firms to depart. Smaller firms would be left with the costs of supporting the NASD.

Larger businesses could get the regulation and name-brand cache of Nasdaq without the financial burden of NASD membership. "I think there are a lot of problems that NASD members face in the future," Davidson said. "In my estimation, the NASD membership is going to regret this."