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Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.

Supreme Court of the United States

October 9, 2007, Argued; January 15, 2008, Decided

No. 06-43

Opinion

 [*152]  [**766]  Justice Kennedy delivered the opinion of the Court.

We consider the reach of the private right of action the Court has found implied in § 10(b) of the Securities Exchange  [****7] Act of 1934, 48 Stat. 891, as amended, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 CFR § 240.10b-5 (2007). In this suit investors alleged losses after purchasing common stock. They sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors' company to mislead its auditor and issue  [*153]  a misleading financial statement affecting the stock price. We conclude the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations. We affirm the judgment of the Court of Appeals.

This class-action suit by investors was filed against Charter Communications, Inc., in the United States District Court for the Eastern District of Missouri. Stoneridge Investment Partners, LLC, a limited liability company organized under the laws of Delaware, was the lead plaintiff and is petitioner here.

Charter issued the financial statements  [***635] and the securities in question. It was a named defendant along with some of its executives and Arthur Andersen LLP, Charter's independent auditor during the period in question. We are concerned, though, with two other defendants,  [****8] respondents here. Respondents are Scientific-Atlanta, Inc., and Motorola, Inc. They were suppliers, and later customers, of Charter.

For purposes of this proceeding, we take these facts, alleged by petitioner, to be true. Charter, a cable operator, engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations for cable subscriber growth and operating cashflow. The fraud included misclassification of its customer base; delayed reporting of terminated customers; improper capitalization of costs that should have been shown as expenses; and manipulation of the company's billing cutoff dates to inflate reported revenues. In late 2000, Charter executives realized that, despite these efforts, the company would miss projected operating cashflow numbers by $ 15 to $ 20 million. To help meet the shortfall, Charter decided to alter its existing arrangements with respondents, Scientific-Atlanta and Motorola. Petitioner's  [*154]  theory as to whether Arthur Andersen was altogether misled or, on the other hand, knew the structure of the contract arrangements and was complicit to some degree, is not clear at this stage of the case. The point, however, is neither  [****9] controlling nor significant for our present disposition, and in our decision we assume it was misled.

Respondents supplied Charter with the digital cable converter (set top) boxes that Charter furnished to its customers. Charter arranged to overpay respondents $ 20 for each set top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cashflow numbers. Respondents agreed to the arrangement.

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552 U.S. 148 *; 128 S. Ct. 761 **; 169 L. Ed. 2d 627 ***; 2008 U.S. LEXIS 1091 ****; 76 U.S.L.W. 4039; Fed. Sec. L. Rep. (CCH) P94,556; 21 Fla. L. Weekly Fed. S 46

STONERIDGE INVESTMENT PARTNERS, LLC, Petitioner v. SCIENTIFIC-ATLANTA, INC., et al.

Subsequent History: On remand at Stoneridge Inv. Partners, LLS v. Scientific-Atlanta, Inc. (In re Charter Communs., Inc.), 519 F.3d 730, 2008 U.S. App. LEXIS 5418 (8th Cir. Mo., 2008)

Related proceeding at In re Scientific-Atlanta, Inc., 2008 U.S. Dist. LEXIS 59185 (M.D. Fla., July 24, 2008)

Prior History:  [****1] ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT.

Stoneridge Investment Partners, LLS v. Scientific-Atlanta, Inc. (In re Charter Communs., Inc.), 443 F.3d 987, 2006 U.S. App. LEXIS 8798 (8th Cir. Mo., 2006)

Disposition: Affirmed and remanded.

CORE TERMS

cause of action, investors, private cause of action, deceptive act, transactions, causation, aiding and abetting, respondents', securities law, violations, deceptive, aiders, private right of action, financial statement, securities exchange, common-law, abettors, courts, boxes, misstatement, fraudulent, damages, stock, misrepresentation, Communications, provisions, customers, top, securities market, private action

Securities Law, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Deceptive & Manipulative Devices, Express Liabilities, Misleading Statements, General Overview, Elements of Proof, Elements of Proof, Secondary Liability, Aiding & Abetting, Private Rights of Action, Reliance, Postoffering & Secondary Distributions, Scope of Provisions, Statutory Application & Interpretation, Evidence, Inferences & Presumptions, Presumptions, Creation, Duty to Disclose, Fraud on the Market, Causation, Initial Offerings of Securities, Securities Act Actions, Governments, Legislation, Interpretation, Constitutional Law, The Judiciary, Congressional Limits, Courts, Common Law, Heightened Pleading Requirements, Civil Liability Considerations, Regulators, US Securities & Exchange Commission, Penalties & Unlawful Representations, Primary & Secondary Liability