Yarmouth Yachts

Yarmouth Yachts is a publicly-traded luxury boat builder ($2M avg. selling price). The company experienced rapid earnings growth and share price appreciation during 2005 and 2006. See Exhibit 1 for an overview of Yarmouth’s sales process. Over the course of 2006, management revised its FY06 earnings guidance upwards and maintained guidance of 20% earnings growth for FY07. On December 12, 2007, Yarmouth released record FY06 results that surpassed earlier guidance (89% net income growth) and revised its FY07 projection to 2 – 11% growth. Its stock closed at -22% for the day. Following the stock drop, a class action suit was filed alleging that executives inflated Yarmouth’s stock price during the time period from January 9, 2006 to December 12, 2007 (1/9/06 –1/12/07) by withholding information about a decline in showroom visits. This was the only allegedly concealed information. The plaintiff’s allegations were the following: 1. Misleading investors about growth prospects. Company revised FY07 estimates down from 20%. 2. Withholding crucial information. Plaintiffs allege executives had material inside information about a decline in customer showroom visits that would cause a decline in FY07 income. Yarmouth discloses the value of new contracts on a quarterly basis, but not showroom visits. Cornerstone has been retained by Yarmouth’s counsel to develop economic responses to the allegations. What types of questions would we want to ask to assess the reasonableness of the plaintiff’s claims?