In the case between Stoneridge Investment Partners v. Scientific-Atlanta, the plaintiffs who are the stakeholders at Charter communications claimed that the Charter engaged in continuous and pervasive schemes with a major aim of boosting the company’s financial reports. For example, Charter entered into sham transactions with the vendors, which inflated the operating cash flows and revenues of Charter. The plaintiffs claimed Scientific-Atlanta and Motorola entered into the sham transactions with Charter knowing that the intention of the company intended to account for the transactions improperly. The vendors also knew that the financial analysts would use the inflated financial statements to make financial recommendations. The shareholders also claimed that the vendors’ actions were reckless because they knew about the sham transactions. They also reported that they relied on the manipulated financial statements to make their financial decisions (Gregory & Johnson, 2009).
The court provided that it is not a requirement that there should be a written or oral statement before liability is considered under Sec. 10(b) or Rule 10b-5. The conduct itself is considered as deceptive, which acts as a basis for liability. In theory, the conduct of the vendors constitutes fraud in terms of the purchase and sale of securities. The court stated that the investors did not meet the reliance element, which means that the vendors did not have any duty to state their conduct to the investors. In addition, the investors could not proof before the court that they relied on the actions of the vendors. Their claims, according to the court, were too remote for liability. The investors claimed that they see no need for proving reliance because reliance can be presumed through the market theory on fraud. The court did not agree with their argument because their conduct was not made public (Gregory & Johnson, 2009).
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I disagree with the ruling because the use of reliance by the court was aimed at exonerating the vendors. It was wrong for the court to use expediency to determine liability rather than thoughtful analysis. The decision of the court does not lead to the exoneration of any of the vendors as it was not guided by legal principles. The court claimed that the Congress has never mentioned anything about aiding and abetting, which means that they never intended to make secondary parties liable for their fraudulent actions. The problem with the court’s decision is that it did not include a statement that aiding and abetting is irrelevant, because it could have led to the application of the universal rule.
The court had an option of revisiting the 1994 Central Bank standard of aiding and abetting in order to determine the primary and secondary liability. The rule provides that abettors and aiders are liable for their actions, especially if the actions led to manipulative tendencies and financial loses. By revisiting the case, the court would have created scheme liability. This would have made vendors liable for their harmful actions and discourage other businesses from engaging in such kind of legal activities.
In this case, the vendors acted unethically because they supported the actions of Stoneridge to engage in creative accounting. The investors lost money as a result because the actions of the company and the vendors cost the investors an opportunity to earn high returns from an extortionate settlement. Therefore, making the vendors liable for their actions will be fair for the investors, and it will discourage other vendors from engaging in similar actions. Congress needs to revise the law to ensure the aiders and abettors are held liable for their negative actions.
References
Gregory, W. A., & Johnson, S. (2009). Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.: The Evisceration of Investor Protection . S. Ill. ULJ, 34, 251.
