Nasdaq had argued that its status as a self-regulatory organization (SRO) gave it immunity from claims it broke securities laws and was negligent in how it executed orders to buy and sell shares of the social media company on May 18, 2012, the first day of trading.
In a 97-page decision, U.S. District Judge Robert Sweet in Manhattan agreed that SRO status gave Nasdaq immunity from some claims, including the decision not to halt the IPO.
But he rejected Nasdaq's effort to dismiss claims over the design and testing of its systems, including that it allegedly knew its advertised "on-time, on-target and ready-to-launch" had not undergone the "stress tests" needed to ensure it was up to handling trading in Facebook.
Sweet said the plaintiffs adequately alleged that Nasdaq's inadequate disclosures caused them to lose money through failed trade executions and possible "artificial downward pressure" on Facebook's share price.
"Once this testing revealed inadequacies and flaws in light of the upcoming largest IPO in Nasdaq history, Nasdaq had a duty to correct its prior statements as to its capabilities," the judge wrote. "Nasdaq's failure to correct flawed information about its technology capabilities could have impacted plaintiffs' decision to participate in Facebook's offering and ability to trade during that offering."
Joseph Christinat, a Nasdaq spokesman, declined to comment on the decision, which is dated December 12.
Vincent Cappucci, a lawyer for some of the plaintiffs, said in an email he is pleased that the case can go forward.
The judge did not rule on the merits of the plaintiffs' surviving claims. He said the plaintiffs might amend their lawsuit with respect to claims not protected by SRO immunity.
Facebook, based in Menlo Park, California, went public at $38 per share. Its share price rose as high as $45 on the first day, but quickly fell below the offering price and remained there for more than a year.
In May, Nasdaq agreed to pay $10 million, a record penalty against a stock exchange, to settle U.S. Securities & Exchange Commission charges over its alleged "poor systems and decision-making" when handling Facbeook's IPO. Nasdaq did not admit wrongdoing in agreeing to settle.
The investor lawsuit against Nasdaq is part of nationwide Facebook IPO litigation that Sweet oversees.
Investors also sued Facebook, Chief Executive Mark Zuckerberg and dozens of banks for allegedly being misled prior to the IPO about the company's financial condition.
Facebook has since become profitable, and is expected to join the Standard & Poor's 500 index after the close of trading on December 20.
In Monday trading, Facebook shares closed up 49 cents at $53.81, and Nasdaq shares rose 17 cents to $38.72.
The case is In re Facebook Inc IPO Securities and Derivative Litigation, U.S. District Court, Southern District of New York, No. 12-md-02389.
(Reporting by Jonathan Stempel in New York. Editing by Andre Grenon)
By Jonathan Stempel