Goldman Sachs finally ends litigation over 1999 eToys IPO

WILMINGTON, Delaware (Reuters) - Litigation over Goldman Sachs Group Inc's GS.N role in the spectacular rise and fall of eToys Inc finally ended on Thursday with court approval of a $7.5 million settlement.

A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange, April 26, 2010. REUTERS/Brendan McDermid

The online toy seller’s IPO in 1999 became a poster child for the excesses of the dot-com bubble. The stock quadrupled when it began trading, but two years later the company was in bankruptcy.

The case was brought by creditors of eToys, who alleged that Goldman Sachs underpriced the stock to ensure a huge pop in price on the first day of trading.

The litigation slowly worked through multiple appeals in New York state courts but never went to trial. The two sides struck a settlement earlier this year, on the eve of arguments in New York’s Court of Appeals to overturn a dismissal of the case.

On Thursday, U.S. Bankruptcy Judge Mary Walrath, who is overseeing the company’s Chapter 11 case in Wilmington, Delaware, approved the agreement, calling it a good result for creditors.

She refused to seal the terms of the deal, as Goldman Sachs had sought. The investment bank claimed the settlement contained information that could be misused if made public.

The U.S. Trustee, the part of the Department of Justice that oversees bankruptcy cases, objected. “It’s not the secret formula for Coca-Cola,” Mark Kenney, a lawyer for the U.S. Trustee, said in court on Thursday.

While Waltrath ruled that the settlement would be made public, the terms of the deal were not immediately available. Lawyers taking part in a later hearing over fees in the case said the settlement was $7.5 million.

The IPO OF eToys, at the time, was the fifth-biggest debut in history, giving a start-up with just $35 million in revenue a bigger market capitalization than Toys ‘R’ Us, which at the time had $11 billion in sales.

Creditors alleged the IPO enriched favored clients of the investment bank who had access to the stock at the IPO price of $20 per share.

Had the IPO been priced more closely to the $75 per share where it traded on the first day, eToys would have raised hundreds of millions of dollars more than it did, the creditors argued. Starved of capital, the company filed for bankruptcy when it was unable to build the warehouses needed to meet growing customer demand.

Reporting by Tom Hals; Editing by Leslie Adler