Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc
Filed: January 15, 2008
Cite as 06-43
Docket: 06-43, Appealed From: Eighth Circuit Court of Appeals

High Court Rules Out Parties’ Liability In Controversial Fraud Case

The controversial lawsuit arose when cable television company Charter Communications reportedly paid inflated prices to two suppliers so that those companies could boost their advertising payments to Charter accordingly. The scheme accounted for a $17 million infusion of “revenue” to Charter and allowed the company to hit its expected financial targets for 2000.

Investors eventually brought a class action suit against Charter and, in a bid to maximize their damages, added as defendants the suppliers Motorola and Scientific American.

The district court in St. Louis dismissed the case against the suppliers, and the Eighth Circuit Court of Appeals affirmed. The two courts agreed that the Supreme Court’s landmark securities case Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994) barred suits against those who merely aid and abet securities fraud.

The issue in both the Central Bank and Stoneridge cases is the meaning of Sec. 10(b) of the Securities Exchange Act of 1934 and the coordinating Securities and Exchange Commission regulation, Rule 10b-5.

The Act bars market actors from using any “manipulative or deceptive device or contrivance . . . in connection with the purchase or sale of any security . . . .” On the other hand, the Rule prohibits the use of any “device scheme or artifice to defraud,” any “untrue statement of a material fact [or omission of fact],” or any “act practice, or course of business which operates or would operate as a fraud or deceit upon any person,” in connection with the sale or purchase of stock.

However, plaintiffs in the Stoneridge case argued that the law permits them to sue actors or parties who participate in a fraudulent scheme, not as aiders or abettors, but as “primary violators” who are ultimately tied to market movements.

In response, the defendants countered that the law applies only those who make deceptive communications to shareholders or engage in fraudulent trading on the market. Further, they held that even if their conduct falls within that covered by the law, the plaintiffs still lose because they did not rely on Motorola or Scientific-American’s conduct in making their investment decisions and cannot trace their stock losses directly to those companies’ conduct.

As a result of the ensuing controversy, the Securities and Exchange Commission (SEC) stepped in and asked the Solicitor General to file a brief supporting the investors’ theory. The Solicitor General likewise asked the High Court to reject scheme liability. In addition, several members of Congress have filed papers urging the Court to adopt a more consumer-friendly approach.

In ruling, the Supreme Court, in an opinion penned by Justice Anthony Kennedy, held that securities fraud plaintiffs cannot sue aiders and abettors under Rule 10b-5. Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito joined the opinion. Justice John Paul Stevens dissented, and Justices David Souter and Ruth Bader Ginsburg joined the dissent.

The decision was based on the following grounds:

• in the light of the Private Securities Litigation Reform Act that explicitly did not provide for aider and abettor liability, the Court could not infer a private right of action against such actors.


• Plaintiffs must either plead and prove reliance on a securities fraud defendant's actions, or must plead and prove that the defendant remained silent in the face of duty to act or put information into the marketplace upon which investors relied.


• Neither of those conditions was satisfied in the case.

In contrast, Justice John Paul Stevens, who had a dissenting opinion, held that the defendants in Stoneridge had undertaken plainly deceptive acts and therefore did not come within the zone of protection described by Central Bank.

Further, Justice Stevens reasoned that although Charter would not have been able to mislead the market without the defendants’ actions, they were still liable for defrauding of market participants. He also accused the majority of trying ‘to vitiate the implied private right of action’ under Sec. 10(b).

Finally, the issue was resolved based on the following grounds:

• Private right of action for misrepresentation in the sale of securities under Sec. 10(b) of the Securities Exchange Act of 1934 applies only as against persons who made misrepresentations relied upon by plaintiff investors and not as against those who merely aided and abetted such misrepresentations.


• Investors are not entitled to a presumption of reliance on misrepresentation unless there was an omission of a material fact by one with a duty to disclose, or the statements at issue were communicated to the investing public at the relevant times.


• Allegations that defendants, acting both as customers and suppliers of corporation, agreed to arrangements that allowed corporation to mislead its auditor and issue a misleading financial statement affecting the stock price did not state a claim under Sec. 10(b) where plaintiffs could not prove reliance upon any such statement.


• Under theory of fraud on the market, investors are presumed to rely on public statements, but there is no presumption of reliance upon the transactions those statements reflect.

The Supreme Court therefore affirmed the decision of the appeals court which held that investors who were deceived by public companies cannot sue other actors who participated in the fraudulent schemes.