Street Law – Law in the News

The recent string of high profile cases involving financial fraud following the dotcom 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. ScientificAtlanta, 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/>.