Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.
In Stoneridge Inv. Partners v. Scientific-Atlanta, 2008 U.S. LEXIS 1091 (Jan. 15, 2008), the U.S. Supreme Court ruled against class action lawsuits seeking to recover from third parties with respect to losses in a company's stock value resultant from fraud. This ruling ends class-action lawsuits seeking billions of dollars in connection with crashes in stock market value, as in Enron.
This case itself concerned Charter Communications, a cable television provider, which allegedly inflated its stock value by engaging in fraudulent transactions with two of its suppliers, Scientific-Atlanta and Motorola. These suppliers provided Charter with the digital cable converter boxes that Charter, in turn, furnished to its customers. Charter arranged to overpay suppliers $20 for each set top box it purchased until the end of the year, with the understanding that suppliers would "kickback" the overpayment, by purchasing advertising from Charter.
The transactions, it was alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers. The suppliers agreed to the arrangement. So that Arthur Andersen, Charter's accountant, would not discover the link between Charter's increased payments for the boxes and the advertising purchases, the companies drafted documents to make it appear the transactions were unrelated and conducted in the ordinary course of business.
Justice Anthony Kennedy wrote the opinion for the 5-3 Court, with the liberal wing in dissent. Justice Stephen Breyer took no part in the decision.
Justice Kennedy wrote in defense of the suppliers of Charter as follows. “Unconventional as the arrangement was, it took place in the marketplace for goods and services, not in the investment sphere. Charter was free to do as it chose in preparing its books, conferring with its auditor, and preparing and then issuing its financial statements.”
Justice Kennedy added that “the investors cannot be said to have relied upon any of [suppliers’] deceptive acts in the decision to purchase or sell securities” and that without investor reliance, suppliers “have no liability to petitioner under the implied right of action.” His holding was an example of judicial restraint, declaring that it “is consistent with the narrow dimensions we must give to a right of action Congress did not authorize.”
This decision constituted another significant pro-business decision by the Roberts Court.