News

Set-Top Suit Tossed

1/18/2008 7:00 PM Eastern

The U.S. Supreme Court last week upheld a lower court in dismissing a lawsuit against set-top providers Scientific Atlanta and Motorola, stemming from the 2000 accounting fraud by executives at Charter Communications.

The case — Stoneridge Investment Partners v. Scientific Atlanta and Motorola — centered around the ability for shareholders to sue third parties involved in, but not directly responsible for, fraud.

The suit previously was dismissed by the U.S. District Court for the Eastern District of Missouri and the 8th U.S. Circuit Court of Appeals in 2006. It gained new life after the 9th Circuit Court of Appeals ruled in an unrelated case that, in some instances, third parties can be held liable if they engaged in deceptive conduct.

It was that last aspect that piqued the Supreme Court's interest. In April 2007 it agreed to hear the case during its October session.

Voting 5 to 3, the nation's highest court decided to stay with the status quo, upholding the 8th Circuit's decision.

“The private right of action does not reach respondents because Charter investors did not rely upon respondents' statements or representations,” Justice Anthony Kennedy wrote in his opinion.

Stoneridge's original suit claimed Motorola and SA (now owned by Cisco Systems) helped Charter inflate revenue and cash flow in 2000 by agreeing to marketing-support deals.

Stoneridge, an investment firm based in Malvern, Pa., that owned Charter stock, had claimed the St. Louis-based operator agreed to pay higher prices for set-top box equipment if the vendors agreed to buy 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 Charter's basic subscriber numbers by counting customers who had disconnected their cable service, so-called “managed disconnects.”

Charter — which was never accused of any wrongdoing as a company and fully cooperated with the government — in 2003 restated financial reports for the years 2000 through 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 2005. 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.

Justice Kennedy — who was joined by Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito in his opinion — found that neither SA nor Motorola had a duty to disclose their deceptive practices and those practices were never disclosed to the public.

“No member of the investing public had knowledge, either actual or presumed, of respondents' deceptive acts during the relevant times,” Kennedy wrote. “Petitioner, as a result, cannot show reliance upon any of respondents' actions except in an indirect chain that we find too remote for liability.”

In their dissent, Justices John Paul Stevens, David Souter and Ruth Bader Ginsberg wrote that the ruling was “a continuing campaign by the court to render” private shareholders' rights to sue “toothless.”

Justice Stephen Breyer, who owns Cisco stock, recused himself.

September