Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.

552 U.S. 148 (2008)

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Nature of the Case

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Facts

Charter (D) engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations. To help with the fraud, D decided to alter its existing arrangements with Scientific-Atlanta (R) and Motorola (R). D arranged to overpay Rs $20 for each set-top box it purchased until the end of the year, with the understanding that R would return the overpayment by purchasing advertising from D. D would then record the advertising purchases as revenue and capitalize its purchase of the set-top boxes. This was blatantly in violation of generally accepted accounting principles. It would produce financial statement showing it met projected revenue and operating cash flow numbers. Rs agreed to the arrangement. To fool the auditor, the companies drafted documents to make it appear the transactions were unrelated and conducted in the ordinary course of business. The agreements were backdated to them appear that they were negotiated a month before the advertising agreements. D recorded the advertising payments to inflate revenue and operating cash flow by approximately $17 million. The inflated number was shown on financial statements filed with the Securities and Exchange Commission (SEC) and reported to the public. Rs had no role in preparing or disseminating d's financial statements. It is alleged. Rs knew or were in reckless disregard of D's intention to use the transactions to inflate its revenues and knew the resulting financial statements issued by D would be relied upon by research analysts and investors. P filed a fraud class action on behalf of purchasers of D stock alleging section 10(b) and Rule 10b-5 violations. The Court granted Rs' motion to dismiss for failure to state a claim on which relief can be granted. P's allegations did not show that Rs made misstatements relied upon by the public or that they violated a duty to disclose; and on this premise, it found no violation of § 10(b) by respondents. At most Rs had aided and abetted D, and there is no private right of action for aiding and abetting a § 10(b) violation. The court of appeals affirmed, and the Supreme Court granted certiorari.