June 08, 2005
Underwriters as Fiduciaries
Posted by Christine Hurt

The NY state Court of Appeals is allowing a case brought by the bankruptcy committee of eToys against Goldman, Sachs to proceed under a breach of fiduciary duty cause of action.  Goldman represented eToys in its IPO and offered its expert opinion in setting the original IPO share price.  Goldman did not disclose to eToys that it would be selling its shares after the price popped and that its customers were giving Goldman kickbacks in return for IPO allocations.  Those customers then sold their shares at the higher, post-IPO price.  Although the court did not believe that this conflict of interest was breach of conduct or evidence of professional malpractice, the court did assert that when an investment bank renders expert advice, it is acting as a fiduciary.  The trial will continue.

I believe that under this theory, agency losses due to spinning could finally be captured.  Because spinning was not per se illegal, although prosecutors pretended it was in the Quattrone obstruction of justice case, recouping losses from that activity have been difficult.  The only other theory that has prevailed is a breach of the duty of loyalty claim brought by shareholders of corporations whose officers were spinnees.  Those claims, however, do not reimburse the true victims of spinning, the issuers and the retail investors.

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