Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc, 552 U.S. 148 (2008)

In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the underlying dispute arose from a class-action lawsuit filed by investors against Charter Communications, Inc., alleging that the company engaged in fraudulent practices to mislead its auditors and inflate its financial statements. Stoneridge Investment Partners, as the lead plaintiff, claimed that Charter manipulated its financial reporting to meet Wall Street expectations, which included misclassifying customers, delaying the reporting of terminated customers, and improperly capitalizing expenses. To address a projected shortfall in operating cash flow, Charter altered its arrangements with its suppliers, Scientific-Atlanta and Motorola, leading to transactions that lacked economic substance but allowed Charter to falsely represent its financial health. The procedural history began when the investors filed their lawsuit in the United States District Court for the Eastern District of Missouri, naming Charter Communications, its executives, and its auditor, Arthur Andersen LLP, as defendants. Scientific-Atlanta and Motorola were also included as respondents in the case due to their roles as suppliers and customers of Charter. The case was ultimately appealed to the Eighth Circuit Court of Appeals, which ruled in favor of the respondents. The Supreme Court granted a writ of certiorari to review the case, focusing on the implications of the private right of action under §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The relevant background context includes the broader implications of investor protection under federal securities laws, particularly concerning the liability of third parties who may not have directly misled investors but were involved in transactions that contributed to misleading financial statements. The Supreme Court's decision would clarify the extent to which investors could hold these third-party entities accountable for their roles in facilitating fraudulent financial reporting, ultimately concluding that the investors did not have a valid claim against Scientific-Atlanta and Motorola as they did not rely on any direct statements or representations made by them.

Whether investors can impose liability on third-party companies under §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5 for misleading financial statements when the investors did not rely on the statements or representations of those third-party companies.

The judgment is reversed.