Stoneridge Investment v. Scientific-Atlanta

Stoneridge Investment Partners sued Charter Communications, a cable television provider, and some of its business affiliates (including Scientific-Atlanta, a cable equipment vendor), for securities fraud in violation of § 10(b) of the Securities Exchange Act . Stoneridge alleged that Charter engaged in a fraudulent scheme to artificially boost its reported financial results by, among other things, entering into sham transactions with Scientific-Atlanta that improperly inflated Charter’s reported operating revenues and cash flow.

The district court dismissed the claims against Scientific-Atlanta, and the Eighth Circuit Court of Appeals affirmed, relying on the Supreme Court case, Central Bank, N.A. v. First Interstate Bank, N.A. In Central Bank, the Supreme Court held that parties who merely "aid and abet" violations of § 10(b) are not liable under the statute. The Eighth Circuit concluded that any defendant who "does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices," is at most guilty of aiding and abetting and cannot be held liable under § 10(b). In this case, the vendors could not be liable for securities fraud because they were not involved in making any of the alleged misstatements. The Eighth Circuit further commented that there would be "potentially far-reaching duties and uncertainties for those engaged in day-to-day business dealings" if a court imposed liability for securities fraud on one party to an arm’s length business transaction in goods or services other than securities because that party knew or should have known that the other party would use the transaction to mislead investors. Such a decision is better left to Congress.

Question Presented:

Whether this Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation’s financial statements, but where Respondents themselves made no public statements concerning those transactions.

Decision under Review

Supreme Court Opinion