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The Unending eToys.com Bankruptcy

Though it technically went bankrupt in 2001, the online retail company eToys.com has weaved in and out of the news for over a decade. The news is never good and today is no different as a previous trustee in the bankruptcy case is making public accusations of impropriety and double dealing by those managing the eToys bankruptcy process. A process that, amazingly, only recently ended.

eToys.com was once a leader in the new wave of web based businesses. Many of which, like pets.com, would ride the dotcom bubble sky high only to crash and burn when tulip mania 2.0 reached its inevitable conclusion. Though even for a dotcom company eToys.com had a notably rough ride packed with dysfunction and intrigue that would ultimately result in further reputational damage for Goldman Sachs and a nightmarish bankruptcy process.

As the public would learn years after the fact thanks to Joe Nocera at The New York Times, eToys.com’s problems as a public company started early. eToys.com had hired Goldman Sachs as their underwriter to take the company public in 1999. The Initial Public Offering (IPO) ended up being rigged by Goldman Sachs and eToys.com received less revenue from going public than it should have – whether that contributed to its ultimate demise is debatable. Nocera got a hold of documents showing that – despite promising to support the stock as an underwriter should – Goldman had helped its other clients flip the stock and received a kickback from those other clients in exchange. The founder and former CEO of eToys.com, Toby Lenk, told Nocera that after he was shown documents by the SEC detailing Goldman’s activities he realized that his company had gotten “screwed.”

Goldman Sachs later paid $7.5 million to eToys.com’s creditors to settle a lawsuit over Goldman’s conduct during the IPO.

But a problematic 1999 IPO was just the beginning of the eToys.com tragedy. The company would file for Chapter 11 bankruptcy in 2001 the remaining assets were bought by KB Toys which would itself file for bankruptcy in 2004. The KB Toys bankruptcy would later get considerable coverage due to the involvement of Bain which was at the time of the bankruptcy led by 2012 GOP presidential nominee Mitt Romney. Romney and Bain’s handling/mishandling of KB Toys was famously described by Matt Taibbi in a Rolling Stone piece titled “Greed and Debt: The True Story of Mitt Romney and Bain Capital.”

Meanwhile, the eToys.com bankruptcy process went on and had its own share of drama. The US trustee in the case learned that two people involved in the bankruptcy process who were supposed to be in an adversarial role were actually business partners. Paul Traub of Traub, Bonacquist & Fox represented the creditors in the eToys.com bankruptcy and had recommended Barry Gold to serve as CEO of eToys.com. But unknown to the bankruptcy court at the time was that Traub and Gold were partners in Asset Disposition Associates. The trustee at the time who filed the complaint, Kelly Stapleton, said that “the failure to disclose is difficult to understand as inadvertent rather than deliberate.”

Traub and Gold later apologized to the court and escaped any serious sanction. Traub was also involved with the KB Toys bankruptcy raising questions about possible problems with that case too.

The bankruptcy process is by all appearances over though a former eToys.com bankruptcy trustee, Steve “Laser” Haas, seems committed to continuing on. Haas was removed from the case and replaced by Gold as trustee but has nonetheless tried to insert himself into the proceedings. His involvement has been met with scorn and indifference in one exchange the bankruptcy judge in the case, Judge Mary Walrath, told Haas she would not be hearing his motion and wanted to “get back to Tweeter [sic].” Haas is now banned from her court.

Nonetheless, as the recent press release indicates, Haas is committed to continuing his quixotic quest and is now alleging racketeering that involves Mitt Romney, Goldman Sachs, and Paul Traub. It is unlikely the case is going anywhere and has already been ruled (per the press release) “insubstantial” by the 9th Circuit Court of Appeals. Nevertheless, Haas plans to take the case all the way to the Supreme Court and hopes others will look into the case. And on and on it goes.

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Dan Wright

Dan Wright

Daniel Wright is a longtime blogger and currently writes for Shadowproof. He lives in New Jersey, by choice.