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Goldman Wins Dismissal of Some of EToys' Claims

The former Internet toy retailer accuses the firm of underpricing its IPO. The retailer can proceed on two fronts.

June 08, 2005|From Bloomberg News

Goldman Sachs Group Inc. on Tuesday won the dismissal of some claims in a lawsuit over accusations that it underpriced an initial public offering for Santa Monica-based EToys Inc. in 1999.

The New York State Court of Appeals dismissed three claims in the case that had been reinstated by a lower appeals court. But the court did allow EToys' creditors to proceed to trial on a claim that Goldman Sachs breached its fiduciary duty to the company.

EToys was the largest Internet retailer of toys before seeking Bankruptcy Court protection from creditors in March 2001. Its assets were later acquired by closely held KB Toys Inc.

An attorney for some of EToys' creditors said the ruling on the fiduciary duty claim was a "victory" for his clients and the case may go to trial as soon as next year.

"When underwriters make certain representations they have to follow through on them," said Stanley Grossman, a lawyer for EToys' official committee of unsecured creditors.

In the ruling released Tuesday, the court dismissed EToys' claims of breach of contract, professional malpractice and unjust enrichment. In addition to the fiduciary duty claim, the court said the creditors could refile fraud allegations in state court in Manhattan.

Goldman Sachs spokeswoman Andrea Rachman said the company couldn't comment on pending litigation.

The complaint alleges EToys "relied on Goldman Sachs for its expertise" in pricing the offering at $20 a share, according to the ruling. On the first day of trading the stock opened at $79 and rose to $85.

EToys claims Goldman Sachs "had an incentive" to advise it to underprice its stock because when some of Goldman Sachs' clients made money, "Goldman Sachs was allegedly paid 20% to 40% of the clients' profits from trading," the judges wrote.

EToys never made a profit and listed $285 million in debts when it filed Chapter 11 papers.

Shares of Goldman fell 2 cents to $98.40.

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