As people in the oil & gas business know, some wells never go dry. The IPO allocation shareholder litigation, which spawned hundreds of shareholder suits against investment banks who had improperly allocated shares in hot IPO’s to favored investors, is one such well that is now yielding tangible benefits for bankruptcy estates. In In re Quintus Corp, (2005 WL 2594600) (Bankr. D. Del. 10/13/05), the Bankruptcy Court for the District of Delaware, recently refused to dismiss a chapter 11 trustee’s complaint against Donaldson, Lufkin & Jenrette Securities Corporation. In Quintus, the trustee’s complaint alleged that DLJ caused the stock issued in Quintus’ 1999 IPO to be underpriced because it was simultaneously allocating the underpriced shares to favored clients who, in exchange, would share part of their profits with DLJ through side agreements. Notably, the Court in Quintus refused to dismiss any counts of the Complaint, which alleged not only breach of fiduciary duty, but also breach of the covenant of good faith and fair dealing, breach of contract, fraud and fraudulent concealment, negligence, and unjust enrichment.
This case represents another recent victory for bankruptcy estates in actions against securities underwriters who underpriced and misallocated an issuer’s IPO shares during the high-tech boom of the late 1990’s. Recently in EBC I Inc. v. Goldman Sachs & Co., (2005 WL 1346859) (N.Y., 6/7/05), for example, the New York Court of Appeals, in a case of first impression, held that a valid claim for breach of fiduciary duty had been asserted against Goldman Sachs, the lead underwriter in eToys’ IPO. There, the Court stated that when Goldman set the IPO price of eToys’ stock, it had a duty to advise eToys of conflicts of interest stemming from an alleged scheme that resulted in Goldman netting millions of dollars in kickbacks from clients who had flipped the debtor’s discounted stock into the market at a windfall. This case, brought by the Creditors’ Committee in the eToys bankruptcy case, is also notable because the New York Court of Appeals held that the complaint failed to state a claim for breach of contract, professional malpractice, or unjust enrichment. As such, unlike the Bankruptcy Court in Quintus, the Court in EBC I narrowed the complaint to a single breach of fiduciary duty count based on Goldman’s role as adviser in setting the IPO price, while simultaneously failing to disclose its relationships with clients to whom it had allocated the discounted shares.
© Steve Jakubowski 2005