eToys and the Rigged IPO Game

Joe Nocera in the Times last Sunday unearthed some Goldman emails about the eToys IPO from the dotcom era.  eToys raised $164 million in a 1999 IPO and then subsequently failed.  The story is familiar by now.  The IPO was underpriced and Goldman spun shares off to preferred clients.  After the company failed, creditors sued. It's emails produced in connection with that suit that Nocera uncovered.  The emails and creditors raise an important question:  who was Goldman working for during the IPO?

The plaintiffs charge that Goldman Sachs had a fiduciary duty to maximize eToys' take from the I.P.O. Instead, Goldman purposely set an artificially low price, so that its real clients, the institutional investors clamoring for the stock, could pocket that first-day run-up. According to the suit, Goldman then demanded that some of those easy profits be kicked back to the firm. Part of their evidence for the calculated underpricing of eToys, according to the plaintiffs' complaint, was that Lawton Fitt, the Goldman executive who headed the underwriting team and was thus best positioned to gauge the market demand, actually made a bet with several of her colleagues that the price would hit $80 at the opening.

If you are interested in learning more about this kind of thing, Sean Griffith has a good article on the practice of spinning in IPOs that appeared a couple of years in the Brooklyn Law Review. 

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