EBC I, INC., Formerly Known as eTOYS, INC., by the Official Committee of Unsecured Creditors of EBC I, Inc., Respondent, v.
GOLDMAN, SACHS & CO., Appellant.
Court of Appeals of the State of New York.
5 N.Y.3d 11 (2005)
Before Chief Judge KAYE and Judges G.B. SMITH, ROSENBLATT, GRAFFEO and R.S. SMITH concur with Judge CIPARICK. Judge READ dissents in part in a separate opinion.
OPINION OF THE COURT
Plaintiff, the Official Committee of Unsecured Creditors of EBC I, Inc., formerly known as eToys, Inc., brought this action against defendant Goldman, Sachs & Co., the lead managing underwriter of its initial public stock offering, alleging five causes of action related to the underwriting agreement: breach of fiduciary duty, breach of contract, fraud, professional malpractice and unjust enrichment. We hold that plaintiff's complaint fails to state claims for breach of contract, professional malpractice and unjust enrichment. We therefore modify the Appellate Division order to dismiss these claims and, as modified, affirm to allow the fiduciary duty cause of action to proceed. Leave to replead the fraud cause of action was correctly granted; plaintiff has filed an amended complaint, but the sufficiency of that pleading is not before us on this appeal. I.
This case involves the underwriting process by which investment banks help take securities to the market in an initial public offering (IPO). Companies may decide to make such an offering for several reasons, including a desire to raise new capital and to create a public market for their shares (see 1 Thomas Lee Hazen, Securities Regulation § 3.1  [5th ed]; see also Larry D. Soderquist, Understanding the Securities Law § 2:2 et seq. [Practising Law Institute 4th ed]). A "firm commitment underwriting," at issue here, typically involves an agreement whereby the "issuer" — or company seeking to issue the security (see Securities Act of 1933 [48 US Stat 74, as amended] § 2 [codified at 15 USC § 77b (a) (4)]) — sells an entire allotment of shares to an investment firm who purchases the shares with a view to sell them to the public (see Securities Act of 1933 § 2 [15 17*17 USC § 77b (a) (11)] [defining an "underwriter"]; see also 1 Hazen, Securities Regulation § 2.1  [B]; Louis Loss and Joel Seligman, Fundamentals of Securities Regulation ch 2A [3d ed]). As underwriter, the functions of the investment firm include negotiating an initial public offering price for the securities with the issuer, purchasing the securities from the issuer at a discount and reselling them on the market at the public offering price. The difference or "spread" between the amount the underwriter pays for the securities and the price at which the securities are sold to the public makes up the underwriter's compensation for its services. Because in a firm commitment underwriting the underwriter owns, and is obligated to pay the issuer for the securities regardless of whether it can resell them, it may assemble a group of underwriters, known as a syndicate, to help absorb the risk. As stated in plaintiff's complaint, in the late 1990's, eToys, Inc., an Internet retailer specializing in the sale of products for children, sought to go public in order to obtain financing necessary to further implement its business plan. In January 1999, eToys retained Goldman Sachs as lead managing underwriter of its initial public offering. Within the context of its engagement, Goldman Sachs met with potential investors, responded to inquiries about eToys' business and gauged investors' indications of interest in eToys' shares. On April 19, 1999, eToys and Goldman Sachs finalized the underwriting agreement. eToys agreed to sell 8,320,000 shares of its stock to Goldman Sachs and the other underwriters for $18.65 per share with the option to buy an additional 1,248,000 shares at the same price to cover overallotments. The agreement also provided that Goldman Sachs would offer the shares for public...
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