In a recent decision, New York’s Appellate Division affirmed a grant of summary judgment by a New York trial court that dismissed claims of fraud and breach of fiduciary duty against an IPO underwriter. The Appellate Division’s decision in EBC I, Inc. v. Goldman Sachs & Co., No. 601805/02 (1st Dep’t Dec. 8, 2011), rejected plaintiff eToys’ attempts to establish that Goldman Sachs, the underwriter of eToys’ IPO, owed fiduciary or other duties beyond the obligations set forth in the underwriting agreement.


In early 1999, eToys allegedly engaged Goldman Sachs to underwrite its IPO. The IPO was priced at $20 per share. The stock price jumped sharply at first, but soon began its precipitous decline, with the stock becoming nearly worthless in early 2001. eToys filed for bankruptcy shortly thereafter.

eToys brought suit against Goldman Sachs alleging that, as underwriter, Goldman Sachs had misled it into underpricing its IPO. eToys alleged that Goldman Sachs had wronged it in two ways: first that Goldman Sachs had breached fiduciary duties it owed to eToys by underpricing the IPO, and second that Goldman Sachs had fraudulently misrepresented its relationships with its customers with respect to the IPO, in addition to making misleading statements about the fairness of the IPO price. The New York trial court dismissed the claims on summary judgment, and eToys appealed.

The Fiduciary Duty Claims

The Appellate Division began its analysis by examining whether the relationship between Goldman Sachs and eToys had even become a fiduciary relationship. The court noted that the primary basis for the parties’ relationship was a contractual arrangement. For fiduciary duties to arise out of such a contractual relationship, the relationship must involve a higher degree of trust than would arise from the contract alone.  

eToys alleged that, in addition to underwriting the IPO, Goldman Sachs had advised it on how to proceed with and price the IPO, thereby establishing a relationship of trust Stebingerbeyond the underwriting agreement that would support the existence of fiduciary duties. The court, however, disagreed, rejecting the assertion that advice from Goldman Sachs to eToys was sufficient to create a fiduciary relationship. The court noted that, as a factual matter, Goldman Sachs had not been compensated for any alleged advice outside the contract, nor was there any advisory letter from Goldman Sachs to eToys regarding the IPO price. Although advice may constitute part of a fiduciary relationship, the court held that barebones allegations of advice were insufficient to establish the relationship of trust required to establish fiduciary duties. Further, the testimony of eToys’ CEO suggested that Goldman Sachs had not taken any action to invite a higher degree of trust by eToys, but instead that eToys merely felt that it could rely on Goldman Sachs’ wisdom because of Goldman Sachs’ expertise in underwriting — found by the court to be a one-sided sentiment wholly insufficient to support the creation of a fiduciary relationship between the parties.  

The court also wrote that no fiduciary relationship existed between eToys and Goldman Sachs because the relationship between the parties was clearly adversarial. Goldman Sachs had an “inherent interest in limiting its exposure by negotiating for a low offering price,” whereas eToys would have benefitted from a higher price. Goldman Sachs and eToys had negotiated the underwriting contract at arm’s-length. A law firm that had represented both eToys and Goldman Sachs even wrote to notify Goldman Sachs that “it would be providing advice to eToys that [was] adverse to Goldman Sachs.” The court held that, because the trust that is the foundation of fiduciary duties cannot spring from an adversarial relationship, the adversarial relationship between eToys and Goldman Sachs could not establish fiduciary duties with respect to the IPO. Therefore, without any fiduciary duties to be breached, the Appellate Division agreed with the lower court’s dismissal of the breach of fiduciary duty claim.

Dissenting in part, Judge Abdus-Salaam disagreed with the majority’s holding that an adversarial contractual relationship ruled out the possibility of an independent fiduciary relationship. Judge Abdus-Salaam noted that precedent underlying the majority’s decision was substantially narrower than the majority’s holding let on, and merely stated that fiduciary relationships end when parties become adversaries in litigation. Nevertheless, the majority disagreed with Judge Abdus-Salaam, and found the adversarial dealings between the parties to preclude the existence of a fiduciary relationship.  

Finally, the court found that, even assuming the existence of fiduciary duties, there had been no breach of such duties. The testimony of eToys’ officers refuted any allegations that they had been “duped” into underpricing their IPO. Indeed, eToys’ CEO testified that he was concerned eToys would not even be able to justify a price as high as the $20 discounted price of the IPO, and that he would have opposed any increase in price. Given the CEO’s testimony and other similar evidence, the court did not find eToys’ allegations that Goldman Sachs had breached its duty by tricking eToys into underpricing its IPO to be credible, and affirmed the trial court’s dismissal of the claims.

The Fraud Claims

The Appellate Division similarly affirmed the dismissal of eToys’ fraud claims. eToys alleged that Goldman Sachs had concealed the nature of its agreements with its customers with respect to the IPO, and that Goldman Sachs had made misleading statements that the pricing of the IPO reflected a fair value of eToys’ stock.  

The court first found that the facts demonstrated that Goldman Sachs had not concealed its arrangements with its other customers. eToys asserted that Goldman Sachs represented that only long-term holders would participate in the IPO, whereas some of the purchasers quickly flipped their stock. Similarly, eToys alleged that Goldman Sachs had not disclosed that it allocated portions of the IPO to its large institutional customers. The court disagreed, noting that at no point had Goldman Sachs promised that only long-term holders would participate in the IPO. Further, testimony established that eToys’ officers knew of Goldman Sachs’ practice of allocating shares for its institutional customers, although such practices were contrary to eToys’ preference. The court also rejected eToys’ assertion that Goldman Sachs’ statements that the IPO price represented “fair value” of eToys’ stock constituted fraud, because such statements were merely non-actionable opinions. Therefore, finding that Goldman Sachs had not made the alleged misrepresentations at issue regarding the nature of the IPO purchasers, and that the remaining allegedly fraudulent statements were non-actionable opinions, the Appellate Division affirmed the lower court’s dismissal of the fraud claims.


In sum, the Appellate Division rejected eToys’ attempt to bring claims based on alleged fiduciary duties going beyond its contractual relationship with the underwriter of its IPO, Goldman Sachs. Similarly, eToys’ attempts to establish Goldman Sachs’ fraud when it was aware of the underwriter’s practices, though it may have disagreed with those practices, failed as a factual matter. eToys was therefore unable to recover against Goldman Sachs for the allegedly underpriced IPO preceding its eventual Chapter 11 filing.