Plaintiffs filed a class action alleging Section 11 and Rule 10b-5 violations.
Retained by Wilson Sonsini Goodrich & Rosati
After a highly successful holiday season with its top-selling product (Teddy Ruxpin), Worlds of Wonder, a high-tech toy manufacturer, went public. However, when sales declined the following year, the company declared bankruptcy. Shortly thereafter, a class action was filed alleging Section 11 and Rule 10b-5 violations.
Working with finance professor Randolph Westerfield of the University of Southern California, Cornerstone Research analyzed changes in the value of the company’s stock price to determine whether the market had anticipated the downturn in the company’s fortunes even before the bankruptcy announcement. We found evidence that investors were aware of the risky nature of the business, given the toy industry’s fierce competitiveness and short product life cycles. We also found that investors’ expectations for the company diminished following the October 1987 stock market crash, which heightened consumer uncertainty and pushed the entire toy industry into a severe downturn. Based on this analysis, Professor Westerfield submitted a declaration supporting the defendant’s motion for summary judgment, which was granted by the court.
