EToys sues Goldman Sachs for mishandling IPO
(Reuters 05/23 13:38:42)
NEW YORK, May 23 (Reuters) - EToys Inc. <ETYSQ.PK>, the
bankrupt Internet toy seller, on Thursday said it has filed a
lawsuit against Wall Street firm Goldman Sachs Group Inc.
<GS.N> for mishandling its 1999 initial public offering.
The suit -- filed in New York State Supreme Court --
alleges that Goldman, one of the leading underwriters of IPOs,
intentionally underpriced eToys' offering and received
kickbacks from its customers who profited when the shares
soared.
It charges Goldman with fraud and breach of contract and
fiduciary duty.
A Goldman spokeswoman declined to comment on the suit,
citing company policy.
Thousands of individual investors have sued dozens of
investment banks alleging fraud in the way they doled out
shares of IPOs. This case -- which echoes a federal
investigation into IPO allocation practices -- is unique
because a company is suing.
Goldman priced eToys' IPO at $20 a share, and the shares
closed at $76.56 in their Nasdaq debut on May 20, 1999, after
hitting an intraday high of $85. Shares of eToys now trade on
the Pink Sheets -- akin to a minor league exchange for
companies booted off the Nasdaq or New York Stock Exchange --
at less than a penny a share.
Goldman knew demand for the stock was such that it would
trade much higher than $20, but underpriced the IPO so its
customers could reap huge profits, eToys' lawyer, Stanley
Grossman told Reuters. The customers had agreed to later share
in the profits with Goldman, he said.
Goldman rival Credit Suisse First Boston in January paid
$100 million to settle charges it mishandled shares of IPOs
during the final days of the 1990s bull market. Regulators
accused the firm of charging big customers extraordinarily high
commissions in exchange for shares for hot IPOs.
The commissions -- allegedly as high as $3.15 a share
versus a typical charge of about 6 cents -- represented a
kickback for access to the IPO shares, regulators said.
EToys, which is now known as EBC I Inc., filed for
bankruptcy in March 2001, typically a death blow for a company.
EToys filed the suit after conducting a more than year-long
investigation that included talking to eToys executives and
Goldman clients such as hedge funds, Grossman said.
"One doesn't want to take litigation of this type, with
these types of allegations against Goldman, unless you feel
comfortable about it," Grossman said. "An investigation was
required."
((-- Brian Kelleher, Financial News Desk, 646 223-6124))
REUTERS
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