Why eToys IPO still matters 14 years later

You might remember this being a very big initial public offering - the Santa Monica-based start-up was at the center of the Internet explosion. The offering price was $20 a share, and on the first day of trading the stock closed at $77. eToys raised $164 million, but it could have been several times that number had the company been priced to reflect demand. Except that the underwriter - Goldman Sachs - deliberately set the price artificially low, according to the plaintiffs of a lawsuit that's still going on. From NYT columnist Joe Nocera:

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.

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Goldman carefully calculated the first-day gains reaped by its investment clients. After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman's I.P.O.'s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case. "What specifically do you recall" your Goldman broker wanting, asked one of the plaintiffs' lawyers in a deposition with an investor named Andrew Hale Siegal. "You made $50,000, how about $25,000 back?" came the answer. "You know, you made a killing."

Nocera has some of the correspondence that seems to corroborate the plaintiffs case. It's an old story, but the shenanigans reflect an attitude on Wall Street that some say still exists. By the way, eToys filed for bankruptcy protection in 2001, with KB Toys acquiring the company's remaining assets for $5 million.