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eToys, Inc.

Case Update:
In a seminal ruling, the New York State Court of Appeals recognized that underwriters of IPOs owe fiduciary duties to investors. The case has been extensively litigated. At this point, Pomerantz is appealing the Court's grant of summary judgment to defendant, Goldman Sachs. Case History On February 10, 2009, the New York Supreme Court granted Pomerantz's motion to amend the complaint. Earlier in the case Pomerantz obtained a landmark ruling from the New York State Court of Appeals, where the Court allowed a claim for breach of fiduciary duty to proceed against Goldman Sachs & Co. for alleged wrongdoing in connection with its underwriting of the initial public offering ("IPO") of eToys in 1999. The court rejected Goldman Sachs' argument that it had only a commercial arm's-length relationship with the issuer. We believe that this is the first time that a higher court has recognized that underwriters can owe fiduciary duties to issuers. The action alleges that Goldman Sachs underpriced the eToys IPO to confer a gift of instant profits on its clients who could flip the securities in the aftermarket at significantly higher prices. Although Goldman Sachs set the eToys IPO price at $20, the stock rocketed over 400% on the first day of trading and remained well over the IPO price for many months after the offering. The Plaintiff claims that Goldman Sachs had a fiduciary duty to price the IPO in eToys' interests, but that, in fact, Goldman Sachs underpriced the stock so that it could, among other things, benefit from the profits that its customers made from their IPO allocations, including "spinning" arrangements. In its decision, the Court of Appeals ruled that an underwriter may be liable for breach of fiduciary duty to its issuer client in situations where the underwriter advises the issuer as to the initial public offering price. The Court noted that "[t]o the extent that underwriters function, among other things, as expert advisors to their clients on market conditions, a fiduciary duty may exist." Pomerantz partner, Stanley Grossman, one of the attorneys representing the plaintiff, stated "Goldman had represented to eToys that it would act in eToys' best interests in the IPO, and that eToys' interests would always come first. Such an undertaking is the very hallmark of a fiduciary relationship."