Law School Case Brief
Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc. - 552 U.S. 148, 128 S. Ct. 761 (2008)
S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, encompasses only conduct already prohibited by § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b). Though the text of the Act does not provide for a private cause of action for § 78j(b) violations, a 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.
Alleging losses after purchasing Charter Communications, Inc., common stock, investors sued respondent suppliers and customers under S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, and the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), alleging that acting as Charter's customers and suppliers, respondents had agreed to arrangements that allowed Charter to mislead its auditor and issue a misleading financial statement affecting its stock price, but they had no role in preparing or disseminating the financial statement. The district court dismissed the case and on appeal, the United States Court of Appeals for the Eighth Circuit affirmed the district court’s decision, ruling that the allegations did not show that respondents made misstatements relied upon by the public or violated a duty to disclose.
Did the Charter investors rely upon respondents' statements or representations?
The U.S. Supreme Court affirmed the judgment of the Eighth Circuit. It held that the court of appeals 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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