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Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc. - 552 U.S. 148, 128 S. Ct. 761 (2008)


Under the Securities Exchange Act at § 78j(b), a private right of action has been found to be implied in the words of the statute and its implementing regulation. In a typical § 78j(b) private action, a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.


Charter participated in a multitude of fraudulent practices in order for its quarterly reports to meet Wall Street expectations. It was soon realized by Charter executives that even with the fraudulent efforts certain financial predictions still would not be realized by the company. Charter elected to change its current arrangements with its customers/suppliers, Scientific-Atlanta and Motorola, who agreed to the altered arrangements in order to help with the shortfall. Charter was allowed to trick its auditor into authorizing a financial statement demonstrating that the predicted revenue and operating cash flow numbers were met even though the transactions they entered into has no economic substance. Alternatively, preparation or dissemination of the financial statement was not performed by the customers/suppliers.


Is a third-party customer/supplier of a company considered a prime participant where investors wishing to bring the action have not relied on the third-party customer/supplier’s acts, for purposes of a private cause of action under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5?




The Eighth Circuit correctly ruled that the allegations did not show respondents made misstatements relied upon by the public or that they violated a disclosure duty. The § 78j(b) implied private right of action did not extend to aiders and abettors. Respondents had no role in preparing or disseminating the financial statements. Respondents had no duty to disclose and their deceptive acts were not communicated to the public. No member of the investing public had knowledge of respondents' deceptive acts during the relevant times. Thus, reliance could not be shown except in an indirect chain that was too remote for liability. The company, not respondents, misled its auditor and filed fraudulent financial statements. Nothing respondents did made it necessary or inevitable for the company to record the transactions as it did, thus, the investors' "scheme liability" theory failed. In 15 U.S.C.S. § 78t(e), Congress amended the securities laws to provide for limited coverage of aiders and abettors, in actions to be brought by the Securities and Exchange Commission, but not by private parties. Concerns with the judicial creation of a private cause of action cautioned against its expansion.

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