Background on Stoneridge

Stoneridge Investment Partners v. Scientific-Atlanta, Inc.,
443 F.3d 987 (8^th Cir. 2006), cert. granted 127 S.Ct. 1873, (U.S. Mar. 26, 2007) (No. 06-43)

Background:     Stoneridge Investment Partners filed a securities fraud class action on behalf of investors who purchased Charter Communications stock between 1999 and 2002. Plaintiffs alleged that Charter engaged in a “pervasive and continuous fraudulent scheme intended to artificially boost the Company's reported financial results” by entering into sham transactions with two equipment vendors, Scientific-Atlanta, Inc., and Motorola, Inc., that improperly inflated Charter's reported operating revenues and cash flow.

Procedure:    The United States District Court for the Eastern District of Missouri, dismissed the claims against vendors under section 10(b) of the Securities Exchange Act of 1934 (See Endnote 1) and the SEC's implementing regulation, Rule 10b-5.(See Endnote 2) The Court of Appeals affirmed holding that that the Plaintiffs’ allegations did not state § 10(b) securities fraud claim against vendors as primary violators.  The Supreme Court will hear oral arguments in the case during the upcoming Fall Term.

The issue presented:    Does liability exist for knowingly participating in a scheme to defraud investors under §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) where the actors engaged in contrived financial transactions with a public corporation to distort and falsify its financial statements regardless of whether the actors made a false or misleading statement? 

Implications:

• The Supreme Court’s decision in the Stoneridge case will determine if the investors defrauded in the Enron scandal can recover their losses from the banks that participated in the fraud.

• The Supreme Court’s decision in Stoneridge will most likely resolve a split in the Federal Circuits.   The Fifth, Eighth and Ninth Circuits have all ruled differently on the issue of scheme liability.

Fifth Circuit Decision—Enron: The Fifth Circuit rejected scheme liability, denying shareholders the right to hold the banks liable because the banks themselves did not make any “false statements” about their conduct, they could not be liable to the victims even if they knowingly participated in the scheme to defraud Enron’s shareholders.

Ninth Circuit Decision—Simpson: A recent Ninth Circuit decision upheld scheme liability. The court did not agree that 10(b) liability only applied when a defendant uttered a material misstatement; rather, the court held that the scope of § 10(b) includes deceptive conduct in furtherance of a “scheme to defraud,” when all elements of § 10(b) are otherwise satisfied.

Eighth Circuit---Stoneridge:    As stated above, Stoneridge is an appeal from an Eighth Circuit opinion rejecting scheme liability.  The question presented in the Stoneridge case is the same one raised in the Enron case.