NEW YORK, June 7, 2005 (PRIMEZONE) -- The New York State Court of Appeals has allowed a claim for breach of fiduciary duty to proceed against Goldman Sachs & Co. for alleged wrongdoing in connection with its underwriting of the initial public offering ("IPO") of eToys in 1999.
The action alleges that Goldman Sachs underpriced the eToys IPO in order to confer a gift of instant profits on its clients who could flip the securities in the aftermarket at significantly higher prices. Although Goldman set the eToys IPO price at $20, the stock rocketed over 400% on the first day of trading and remained well over the IPO price for many months after the offering.
The action alleges that Goldman had a fiduciary duty to price the IPO in eToys' interests, but that, in fact, Goldman underpriced the stock so that it could, among other things, benefit from the profits that its customers made from their IPO allocations, including "spinning" arrangements.
In its decision, which was released today, the Court of Appeals ruled that an underwriter may be liable for breach of fiduciary duty to its issuer client in situations where the underwriter advises the issuer as to the initial public offering price. The Court noted that "(t)o the extent that underwriters function, among other things, as expert advisors to their clients on market conditions, a fiduciary duty may exist." The Court further found that recognition of such a fiduciary duty is "not in conflict with an underwriter's general duty to investors under the Securities Act of 1933 to exercise due diligence in the preparation of a registration statement."
Stanley Grossman, one of the attorneys representing the plaintiff, stated "Goldman had represented to eToys that it would act in eToys' best interests in the IPO, and that eToys' interests would always come first. Such an undertaking is the very hallmark of a fiduciary relationship."
Plaintiff is represented by Stanley M. Grossman of Pomerantz Haudek Block Grossman & Gross LLP; William B. Wachtel of Wachtel & Masyr LLP; and Paul Traub of Traub Bonacquist & Fox LLP.
More information on this and other class actions can be found on the Class Action Newsline at www.primezone.com/ca.