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eToys Faces Class Action Lawsuit

By Clare Saliba
Jul 5, 2001 12:29 PM PT

Defunct e-tailer eToys became the latest company that will have to face off against shareholders in court, as investors filed a class action lawsuit alleging that the former online toy seller's initial public offering (IPO) prospectus was "materially false and misleading."

eToys Faces Class Action Lawsuit

Specifically, the suit charges that a portion of the e-tailer's IPO registration statement, which was filed with the U.S. Securities and Exchange Commission (SEC), did not disclose that Goldman Sachs, Robertson Stephens and Merrill Lynch had "solicited and received excessive and undisclosed" commissions from certain investors.

In exchange for the commissions, the action said, the investment firms allocated to their customers "material portions" of the restricted number of eToys IPO shares.

Agreements Questioned

The lawsuit also maintains that the three investment firms had entered into agreements with investors to buy additional eToys shares for pre-determined prices at a later date in exchange for their IPO purchase.

eToys stock traded at a peak of US$84.35 in October 1999, but then began a fall from which it never recovered.

Launched in 1998, eToys' meteoric rise and full-blown advertising campaign quickly made the company one of the most recognizable names in cyberspace. In May 1999, the company went public with 8.32 million shares of common stock at an offering price of $20 per share.

Expanding Caseload

The Bala Cynwyd, Pennsylvania-based law firm of Schiffrin & Barroway is representing shareholders who purchased eToys stock between May 19, 1999 and December 6, 2000.

The complaint, which was filed in the U.S. District Court for the Southern District of New York, is seeking to recover damages on behalf of shareholders who purchased during that time frame.

Schiffrin & Barroway is also handling litigation against a number of high-tech firms, including AremisSoft, CacheFlow, Commerce One, DoubleClick, Expedia, InfoSpace and MP3.com.

According to the Securities Class Action Clearinghouse at Stanford University Law School, the number of class action suits involving securities fraud filed to date this year has hit 154. If cases continue to be filed at this rate, the total will surpass the record 231 similar actions that were filed in 1994.

Out With a Whimper

Although eToys was one of the first companies to benefit from the dot-com boom, the company's balance sheet was marred by red ink in 1999 and 2000 as the value of its stock plummeted. The current class action suit is a postscript to eToys' short-lived history.

After sales during the year 2000 holiday season failed to meet goals, the struggling e-tailer slashed 70 percent of its workforce, or about 700 employees, in January. A month later, eToys began winding down its operations, laying off its remaining employees by the beginning of April.

On March 7th, eToys filed for bankruptcy in U.S. Bankruptcy Court in Delaware and put its assets -- including inventory, warehouses and customer database -- on the selling block.

Brick-and-click toy store KB Toys subsequently spent $5.4 million to acquire "substantially all" of eToys inventory, which had an estimated retail value of $40 million. KB Toys also purchased the defunct company's Web site, name and logo for $3.35 million at a bankruptcy auction held in May.

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