eToys Accuses Goldman of Mispricing Its IPO

eToys, the Internet toy seller that went bankrupt early last year, claims it got low-balled on its IPO by Goldman Sachs (GS Quote) and is suing the bank over the money it left on the table.

eToys, now called EBCI Inc., said it incurred "hundreds of millions of dollars in damages and eventually had to declare bankruptcy as a result of Goldman Sachs' illegal conduct in underpricing the IPO and in receiving kickbacks." It's alleging breach of fiduciary duty, among other things.

On Goldman Sachs' recommendation, the IPO was priced at $20 a share, which eToys said was substantially lower than market conditions warranted given the high demand for its shares.

The company alleges that Goldman, which was the lead underwriter on the deal, deliberately underpriced the shares because it had entered into unlawful arrangements with its customers, who gave kickbacks to Goldman when the shares soared in the aftermarket.

On the first day of trading, more than 13 million shares changed hands, with prices reaching more than $85 a share, or more than four times the IPO price set by Goldman. The stock closed at $76.56 on its Nasdaq debut on May 20, 1999. Shares now trade on the pink sheets at less than a penny a share.

A spokesman for Goldman Sachs said the company does not comment on legal matters.

Scores of investors have filed lawsuits against investment banks for their handling of IPOs, and the Securities and Exchange Commission is also trying to determine whether four Wall Street firms -- Goldman Sachs, the Robertson Stephens unit of FleetBoston (FBF Quote), the securities unit of J.P. Morgan Chase (JPM Quote) and Morgan Stanley(MWD Quote) -- required clients who bought hot IPOs to buy additional shares to pump up the price once the stock began trading, according to The Wall Street Journal.

"There've been a lot of lawsuits against [brokers], but this is really the first company saying it's not happy with the offering and that it thinks it was mishandled," said Kyle Huske, a market analyst at IPO.com. "There are so many other companies that could follow."

Huske said there was speculation in the late 1990s about whether stocks were being priced appropriately and whether some of the money that was being made should have gone to the companies.

The fact that eToys has waited until now to file a lawsuit may be a reflection of the general backlash against brokers for the way they handled stocks during the boom. Huske also noted that brokers are more likely to settle such allegations out of court now, given that many of them are also under investigation by the New York State attorney general for conflicts of interest.

While eToys may have opened the door for other companies to file suit as well, Huske noted that many of the companies that might think they have claims probably don't have the funds to sue.

"So many of them have now gone out of business, who has the means?" she said.