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

Facts

1. 9 Private investor transaction causation not pleaded

   Respondents supplied Charter with the digital cable converter (set-top) boxes that Charter furnished to its customers. Charter arranged to overpay respondents $20 for each set-top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is 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 cashflow numbers. Respondents agreed to the arrangement.

2. 9 Private investor transaction causation not pleaded

   To return the additional money from the set top box sales, Scientific-Atlanta and Motorola signed contracts with Charter to purchase advertising time for a price higher than fair value. The new set-top box agreements were backdated to make it appear that they were negotiated a month before the advertising agreements. The backdating was important to convey the impression that the negotiations were unconnected, a point Arthur Andersen considered necessary for separate treatment of the transactions. Charter 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.

3. 9 Private investor transaction causation not pleaded

   Respondents had no role in preparing or disseminating Charter’s financial statements. And their own financial statements booked the transactions as a wash, under generally accepted accounting principles. It is alleged respondents knew or were in reckless disregard of Charter’s intention to use the transactions to inflate its revenues and knew the resulting financial statements issued by Charter would be relied upon by research analysts and investors.

4. 9 Private investor transaction causation not pleaded

   Reliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the § 10(b) private cause of act

5. 9 Private investor transaction causation not pleaded

   Neither presumption applies here. Respondents had no duty to disclose; and their deceptive acts were not communicated to the public.

6. 9 Private investor transaction causation not pleaded

   In all events we conclude respondents’ deceptive acts, which were not disclosed to the investing public, are too remote to satisfy the requirement of reliance.