In Re Worlds Of Wonder Securities Litigation

35 F.3d 1407 (9th Cir. 1994)

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Nature of the Case

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Facts

Kingsborough formed D to manufacture and distribute 'The World of Teddy Ruxpin,' a product line featuring animated toy bears and accessories. Teddy Ruxpin became a top seller for the 1985 Christmas season and generating net sales of $93 million. D then launched 'Lazer Tag,' a product line featuring infrared toy weapons. Lazer Tag became another instantaneous hit. D posted two of the ten best-selling toys of the 1986 Christmas season. D recorded net sales of $327 million for fiscal 1987, which ended March 31, 1987. D conducted a public offering of unsecured 9% convertible subordinated debentures on June 4, 1987, raising $80 million. On an investment-grade scale, these bonds were 'junk bonds' because they bore an above-market interest rate to compensate for the risk associated with their 'below investment grade' rating. This capital proved inadequate to sustain D's uncontrolled growth and, almost immediately, D commenced a series of public disclosures that led to sharp declines in the market price of the debentures and, eventually, to a total financial collapse. On July 27, 1987, D reported losses of $10 million for the first quarter of fiscal 1988, ending June 30, 1987. Things began to spiral downward. On November 9, 1987, D reported net losses of $43 million for the second quarter of fiscal 1988, ending September 30, 1987, and announced price reductions on Teddy Ruxpin and Lazer Tag. D defaulted on the first interest payment of the debentures and, shortly thereafter, filed for bankruptcy on December 21, 1987, rendering the securities worthless. Ps filed this class action, alleging securities fraud. Ps claimed that the prospectus accompanying the offering was false and misleading in violation of sections 11 and 12(2) of the Securities Act of 1933 ('1933 Act') and section 10(b) of the Securities Exchange Act of 1934 ('1934 Act') and that the Directors and Shareholders had engaged in insider trading in violation of section 10(b). The district court granted summary judgment in favor of Ds. It court held that the Debenture Prospectus fully disclosed the risks of investing in D and that, as a result, under the 'bespeaks caution' doctrine the document was not false or misleading as a matter of law. Ps appealed.