In Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., No. 06-43, 552 U.S. ___ (January 15, 2008),
the Supreme Court today ruled that secondary actors cannot be liable to private plaintiffs under the federal
securities laws for statements made by others. What the Court said about so-called “scheme” liability should
come as welcome news to Wall Street and those suppliers, business partners, accountants, banks, lawyers, and others who conduct business with and work for public companies that are sued by shareholders.
In Stoneridge, a case on review from the U.S. Court of Appeals for the Eighth Circuit, the plaintiff investors
sued Charter Communications, Inc. for violations of Section 10(b) of the Securities Exchange Act of 1934, the
securities regulation most frequently invoked by private litigants. The plaintiffs also sued secondary actors —
certain suppliers of Charter, including, among others, Scientific-Atlanta and Motorola. The plaintiffs claimed
that the suppliers engaged in a scheme with Charter to defraud Charter’s shareholders. The complaint alleged
that Charter entered into unlawful agreements with the suppliers whereby Charter overpaid for “set top” boxes
and other hardware. In exchange for this overpayment, the suppliers agreed to purchase advertising from
Charter. Charter then recorded the advertising purchases as revenue, artificially inflating the total revenue that
Charter reported to the market.
Charter’s shareholders sued Charter’s suppliers even though the suppliers were not alleged to have had any part in the preparation of the financial reports that Charter disseminated to the market. The Eighth Circuit ruled
for the suppliers.
The Supreme Court affirmed the Eighth Circuit’s judgment for the suppliers and resolved a Circuit-split in holding that “scheme” claims are not viable.