In the 1990s, eToys, Inc., an Internet retailer specializing in products for children, retained Goldman Sachs as lead managing underwriter for the initial public offering (IPO) of its stock. On April 19, 1999, eToys and Goldman entered into an underwriting agreement pursuant to which eToys agreed to sell 8,320,000 shares of its stock to Goldman and the other underwriters for $18.65 per share. eToys also granted Goldman an option to buy an additional 1,248,000 shares at the same price to cover overallotments. The agreement obligated Goldman to offer the shares for public sale on the terms set forth in the prospectus, which fixed the initial offering price at $20 per share, capping Goldman’s maximum return from the sale of eToys’ stock at $12,916,800, which represented 6.75% of the offering proceeds.

On the first day of trading, eToys’ stock opened at $79 per share, rose as high as $85 per share, and then closed at $76.56. Six months later, however, the stock fell below $20 and never rose above the IPO price again. In March 2001, eToys filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy court appointed the official committee of unsecured creditors and authorized it to bring an action alleging breach of fiduciary duty, among other things, on behalf of eToys, now known as EBC I, Inc.

The complaint alleged that eToys had relied on Goldman for its expertise in pricing the IPO and that Goldman gave advice to eToys without disclosing that it had entered into arrangements whereby its customers “were obligated to kick back to Goldman a portion of any profits that they made” from the sale of toys securities subsequent to the IPO. Because a lower IPO price would result in higher profits to these clients on resale and a higher payment to Goldman for the allotment, the plaintiff alleged that Goldman had an incentive to advise eToys to underprice its stock. As a result of this undisclosed conflict, Goldman was allegedly paid 20% to 40% of its clients’ profits from trading the toys securities.

Does advice provide to a client by underwriters on “market conditions” give rise to a fiduciary duty? If so, do the facts give rise to a claim for a breach of fiduciary duty? [EBC I, Inc. v. Goldman, Sachs & Co., 832 N.E.2d 26 (N.Y. 2005).]