Street Law – Law in the News

The recent string of high profile cases involving financial fraud following the dot-

com boom brings up the question of to what extent is a party liable for financial fraud.

One such case, Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc has

recently reached the Supreme Court and raises the question of scheme liability.

According to the Plaintiff (Stoneridge Investment Partners), Charter Communications

used various means of financial legerdemain to artificially inflate its cash flow by $17

million in order to meet Wall Street Analysts expectation and to increase its stock price.

The scheme involved paying equipment vendors additional monies off the books and in

return, they will funnel the money back to Charter Communications as advertising fees

and therefore can be counted as profit. Scientific Atlanta and Motorola were the vendors

involved in this scheme.

The Defendants argued that they can not be liable for the securities fraud of

Charter Communication because the extent of their participation was only "aiding and

abetting". It is easy to prove that the equipment vendors had prior knowledge of the

scheme and that they were in fact accessories to the scheme. However, there is a

technicality. Under a previous Supreme Court ruling, Central Bank, N.A. v. First

Interstate Bank, N.A, it was decided that parties that only aid and abet the commission of

a financial securities fraud can not be prosecuted under SEC Rule 10b-5. This section

defines the "manipulative and deceptive practices" that the Securities and Exchange

Commission can then use to prosecute claims. In the case of Stoneridge Investment

Partners, LLC v. Scientific-Atlanta, the lower Eight Circuit Court agreed with the
precedent set fourth in Central Bank, N.A. v. First Interstate Bank, N.A. They stated that

the participation of the Defendants in the financial fraud scheme, Scientific-Atlanta and

Motorola, is outside of the scope of SEC Rule 10b-5 and therefore they can not be held

liable for the damages caused by Charter Communications.

This ruling holds huge implications for similar financial fraud cases. How the

Supreme Court rules on this case will define the field of Plaintiffs that can be held liable

for financial fraud. The fallout from the Enron implosion resulted in a lot of lawsuits,

seeking billions of dollars. Unfortunately, Enron and its auditors are now defunct and

bankrupt. Expanding the liability of securities fraud to secondary parties who only aided

and abetted could expose more companies to Enron related lawsuits. The creditors of

Enron, such as, Credit Suisse, First Boston, Merrill Lynch and Barclays, are healthy and

quite profitable. They can make excellent targets for hungry Enron-ed investors looking

for a liable company with deeper pockets. The Supreme Court's ruling on Stoneridge

Investment Partners, LLC v. Scientific-Atlanta will have far reaching implications on

securities fraud related lawsuits and could potentially open up an explosion of

compensatory lawsuits.
 Works Cited

"Defend Main St., not Wall St." Los Angeles Times 30 May 2007: A Section. 30 May
2007
<http://www.latimes.com/news/printedition/asection/
la-ed-sec30may30,1,3511619.story?coll=la-news-a_section>.
Frank, Ted. "Alito will be the swing vote in Stoneridge Investment Partners v. Scientific-
Atlanta,
Inc." Weblog entry. 20 May 2007. Point of Law. 30 May 2007
<http://www.pointoflaw.com/
archives/003904.php>.
MASTERS, BROOKE. "'Abetted fraud' lawsuit revived." Financial Times 27 Mar. 2007:
3. ProQuest
Newspapers. ProQuest. 30 May 2007 <http://proquest.umi.com/login>.
"Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc." LawMemo. 30 May
2007
<http://www.lawmemo.com/sct/06/Stoneridge/>.