## Facts

- Worlds of Wonder, Inc. (WOW), a toy company founded in 1985, achieved rapid early success with Teddy Ruxpin and later Lazer Tag.
- In June 1987, WOW completed a public offering of 9% unsecured debentures, raising about $80 million.
- The offering materials described WOW’s prior performance and included forward-looking statements about future prospects, accompanied by risk disclosures characterizing the debentures as speculative and warning of business uncertainties (including dependence on a small number of products and the possibility that past success would not continue).
- WOW’s sales declined later in 1987; the company defaulted on its first interest payment and filed for bankruptcy roughly six months after the offering, rendering the debentures essentially worthless.
- Purchasers of the debentures filed a securities-fraud class action against WOW officers/directors, outside auditors, underwriters, and certain shareholders, alleging material misstatements and omissions in the prospectus and financial statements.
- The district court granted summary judgment for all defendants on all claims, reasoning that most challenged statements were not actionable and that, even if certain 1987 financial statements were inaccurate, defendants established § 11 defenses as a matter of law.
- Plaintiffs appealed.

## Issues

1. Whether forward-looking statements and predictions in the offering materials were actionable under § 11 and Rule 10b-5 when accompanied by specific cautionary disclosures (the “bespeaks caution” doctrine).
2. Whether, and to what extent, defendants could obtain summary judgment on § 11 claims based on defenses including reasonable reliance (due diligence/good-faith belief in accuracy) and negative causation (the price decline resulted from other factors).
3. Whether plaintiffs raised triable issues on Rule 10b-5 claims, including falsity/materiality, scienter, and causation, against different categories of defendants.

## Decision

- The Ninth Circuit affirmed in part and reversed in part the summary judgment and remanded for further proceedings on remaining issues.
- The court held that many challenged forward-looking statements were not actionable when read in context with meaningful, specific risk disclosures that warned of the very contingencies that occurred.
- The court recognized § 11 defenses such as reasonable reliance and negative causation, but concluded they were not established as a matter of law for all defendants and all alleged misstatements on the record, requiring further proceedings on certain claims.
- For Rule 10b-5 claims, the court held that summary judgment remained proper where plaintiffs failed to raise triable issues on material deception or scienter, while allowing some claims tied to specific alleged inaccuracies or withheld adverse information to proceed past summary judgment.

## Legal Principles

- Forward-looking statements in offering documents may be non-actionable when accompanied by substantive, tailored cautionary language that discloses the principal risks and contingencies relevant to the projection (bespeaks-caution analysis tied to materiality and reliance).
- In assessing alleged misstatements or omissions, courts evaluate the offering materials as a whole; risk disclosures can render optimistic projections immaterial or not misleading as a matter of law.
- Under Securities Act § 11, expertised portions of a registration statement permit defenses based on reasonable investigation and reasonable belief in accuracy; defendants may also defeat or limit liability by showing negative causation—that the loss resulted from business or market developments rather than the challenged disclosure defect.
- Summary judgment is appropriate in securities cases when the record does not support a triable dispute as to a required element (including material falsity, scienter for Rule 10b-5, or causation), notwithstanding the complexity of the litigation.

## Conclusion

The Ninth Circuit largely rejected liability premised on optimistic forecasts where the offering materials gave specific warnings about dependence on a few products and the speculative nature of the debentures, while also holding that § 11 defenses and Rule 10b-5 elements could not be resolved uniformly as a matter of law for all defendants and alleged misstatements, requiring partial reversal and remand.


In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994)