Cable Operators

Set-Top Case Advances

4/06/2007 8:00 PM Eastern

The U.S. Supreme Court said it will consider an appeal by an investment group against two cable set-top box vendors that they allege aided Charter Communications in an accounting scandal in 2000.

Stoneridge Investment Partners v. Scientific-Atlantaand Motorola will be heard before the Supreme Court during its next session in October.

The case, which was previously dismissed by the federal district court for the Eastern District of Missouri and the 8th Circuit Court of Appeals last year, gained new life after the 9th Circuit Court of Appeals in an unrelated case ruled that in some instances, third parties can be held liable if they engaged in deceptive conduct.

That unrelated ruling stated that secondary parties in fraud schemes can sometime be held liable if “its conduct had 'the principal purpose and effect of creating a false appearance of fact' in support of a scheme to defraud,” according to a report by the Associated Press.

That conflict between lower courts apparently piqued the Supreme Court's interest.

If the court finds in favor of the plaintiffs, it could have wide-reaching implications for law firms, investment banks and other third parties that do business with companies that commit fraud, according to a report in the Wall Street Journal.

An earlier opinion by the Supreme Court prohibited suits brought against third parties that merely aided and abetted another company's fraud but did not bar private securities lawsuits being brought against third parties for “deceptive conduct,” the Journal said.

Stoneridge's original suit alleged that Motorola and SA (now Cisco Systems) helped Charter inflate its revenue and cash flow in 2000 by agreeing to marketing support deals. In the suit, Stoneridge alleged that Charter agreed to pay higher prices for set-top box equipment if the vendors agreed to purchase advertising with the cable company. The alleged scheme resulted in about $17 million in bogus operating cash flow for the cable company, according to the suit.

The marketing support deal was part of a wider accounting scandal unearthed in 2002 involving four former Charter executives — chief operating officer Dave Barford, chief financial officer Kent Kalkwarf, Western region senior vice president James Trey Smith III and Eastern region senior vice president David McCall. One of the charges brought against those executives was that they helped inflate basic subscriber numbers at the cable company by counting customers who had disconnected their cable service, so-called “managed disconnects.”

Charter, which was never accused of any wrongdoing and fully cooperated with the government, in 2003 restated its financial reports for the years 2000-2002. In 2004, the company settled a number of shareholder class action lawsuits for a total of $144 million in cash and stock, including one with Stoneridge. Barford and Kalkwarf pleaded guilty to one count each of conspiracy to commit wire fraud and were sentenced to 12 months and 14 months respectively in federal prison in 2003. They also received two years probation each and paid a $200,000 fine.

McCall and Smith also pleaded guilty to lesser charges and received probation and fines.

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