Court warns that banks can be fiduciaries

Author: | Published: 1 Jul 2005

Defence lawyers have a new reason to feel nervous after a court ruling last month threatened to expose underwriters to new liabilities.

In a case that has received little media attention but could have far-reaching effects on the way initial public offerings (IPOs) are conducted, a New York court ruled that underwriters could be held to be fiduciaries when carrying out their normal work. The ruling could lead to new securities suits against banks already facing a broad and increasing threat of litigation.

In early June the New York Court of Appeals denied attempts to dismiss a case brought against Goldman Sachs concerning its work as lead underwriter on the 1999 flotation of internet retailer eToys. The case was brought by a committee of unsecured creditors on behalf of eToys, which filed for Chapter 11 protection in 2001 and is now known as EBC I.

The committee alleged in...