The New York state appellate court recently ruled that the lead underwriter in an initial public offering does not owe a fiduciary duty to the issuer of securities to disclose conflicts of interest in connection with the pricing of the securities, unless the two parties have a distinct relationship of higher trust that arises apart from the underwriting agreement.

Background

On December 8, 2011, the New York State Appellate Division, First Department, held in EBC I, Inc. v Goldman Sachs & Co. that Goldman Sachs & Co. (“Goldman Sachs”), the lead underwriter for the initial public offering of common stock (the “IPO”) by EBC I, Inc., formerly known as eToys, Inc. (“eToys”), was not eToys’ fiduciary.

According to the amended complaint, in January 1999, eToys, an internet start-up company that specialized in children’s products, retained Goldman Sachs to act as lead underwriter of the IPO, which launched on May 20, 1999. Goldman Sachs entered into a firm commitment underwriting agreement with eToys to purchase 8,320,000 shares of eToys common stock for $18.65 per share and to offer such shares for sale to the public at $20 per share. On the first day of trading, eToys’ stock opened at $79 per share. It peaked at $85 per share and ultimately closed on the first day of trading at $76.56 per share. By December 1999, the price of eToys’ stock in the secondary market had declined to about $25 per share. In March 2001, eToys filed for Chapter 11 bankruptcy. In 2002, the Official Unsecured Creditors’ Committee of eToys (“Creditors’ Committee”) sued Goldman Sachs on behalf of eToys.

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