Charter Communications operates cable companies throughout
Charter Communications operates cable companies throughout
Charter Communications operates cable companies throughout the United States. Both Scientific-Atlanta and Motorola supply Charter with digital cable converter boxes that Charter provides to its customers. In 2000, Charter became concerned that it would not meet cash flow projections causing it to miss the financial estimates Wall Street established. To remedy this shortfall, Charter arranged to overpay Scientific Atlanta and Motorola by the amount of $20 for each converter box. This deal was conditioned on these companies purchasing advertising from Charter in the amount equal to the overpayment. While these transactions had no economic impact, Charter recorded the advertisement purchases as revenue and capitalized the purchases of the converter boxes. This scheme allowed Charter to fool its auditor and to create financial statements that appeared to meet expectations by increasing its cash flow by about $1 7 million. Purchasers of Charter stock, upon discovering this fraud, sued Charter, Scientific-Atlanta, and Motorola under the 1934 Securities Exchange Act. The latter two companies asked the District Judge to dismiss these claims since the companies were not parties to any securities fraud and are not subject to a private cause of action under the securities laws. The District Court and the Eighth Circuit Court of Appeals ruled in favor of Scientific-Atlanta and Motorola finding there was not a private right of action against these third parties since they did not make a public misstatement and did not fail to disclose required information. The Supreme Court granted certiorari to address the conflict among the appellate courts concerning when third parties are liable under the 1934 Securities Exchange Act. KENNEDY, J.: … Though the text of the Securities Exchange Act does not provide for a private cause of action for § 1 O(b) violations, the Court has found a right of action implied in the words of the statute and its implementing regulation. In a typical § 1 O(b) private action a plaintiff must prove (1) a misrepresentation or by the do ; (2) scienter; ( 3) a connection between the station or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or ; (5) economic loss; and (6) loss : · . . . . . … [I]n § 104 of the Private Securltles Litigation Reform Act of 1995 (PSLRA), [Congress] directed prosecution of aiders and abettors by the SEC. ' The § 1 O(b) implied private right of action does not extend to aiders and abettors. The conduct of a secondary actor must satisfy each of the elements or preconditions for liability; and we consider whether the allegations here are sufficient to do so. The Court of Appeals concluded petitioner had not alleged that respondents engaged in a deceptive act within the reach of the § 1 O(b) private right of action, noting that only misstatements, omissions by one who has a duty to disclose, and manipulative trading practices … are deceptive within the meaning of the rule …. Conduct itself can be deceptive, as respondents concede. In this case, moreover, respondents' course of conduct included both oral and written statements, such as the backdated contracts agreed to by Charter and respondents. A different interpretation of the holding from the Court of Appeals opinion is that the court was stating only that any deceptive statement or act respondents made was not actionable because it did not have the requisite proximate relation to the investors' harm. That conclusion is consistent with our own determination that respondents' acts or statements were not relied upon by the investors and that, as a result, liability cannot be imposed upon respondents.
Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the§ 10(b) private cause of action. It ensures that, for liability to arise, the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury exists …. We have found a rebuttable presumption of reliance in two different circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the to whom the duty was owed need not provide specific proof of reliance. Second, under the fraud-on the-market doctrine, reliance is presumed when the statements at issue become public. The public information ts reflected in the market price of the security. Then It can be assumed that an investor who buys or sells stock at the market price relies upon the statement. Neither presumption applies here. Respondents had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presume, of ? dents' deceptive acts during the relevant . , as a result, cannot show reliance upon any of respondents' actions except in an indirect chain that we find too remote for liability. Invoking what some courts call “scheme liability,” petitioner nonetheless seeks to impose liability on respondents even absent a public statement. In our view this approach does not answer the objection that petitioner did not in fact rely upon respondents' own deceptive conduct. Liability is appropriate, petitioner contends, because respondents engaged in conduct with the purpose and effect of creating a false appearance of material fact to further a scheme to misrepresent Charter's revenue. The argument is that the financial statement Charter released to the public was a natural and expected consequence of respondents' deceptive acts; had respondents not assisted Charter, Charter's auditor would not have been fooled, and the financial statement would have been a more accurate reflection of Charter's financial condition …. In effect petitioner contends that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect. Were this concept of reliance to be adopted, the implied cause of action would reach the whole marketplace in which the issuing company does business; and there is no authority for this rule. … It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did …. Were we to adopt this construction of § 1 O(b), it would revive in substance the implied cause of action against all aiders and abettors except those who committed no deceptive act in the process of facilitating the fraud; and we would undermine Congress' determination that this class of defendants should be pursued by the SEC and not by private litigants …. The § 10(b) private cause of action is a judicial construct that Congress did not enact in the text of the relevant statutes. Though the rule once may have been otherwise, it is settled that there is an implied cause of action only if the underlying statute can be interpreted to disclose the intent to create one …. Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us. Though it remains the law, the § 1 O(b) private right should not be extended beyond its present boundaries …. Secondary actors are subject to criminal penalties and civil enforcement by the SEC. The enforcement power is not toothless. Since September 30, 2002, SEC enforcement actions have collected over $10 billion in disgorgement anti penalties, much of it for distribution to injured investors. And in this case both parties agree that criminal penalties are a strong deterrent. In addition some state securities laws permit state authorities to seek fines and restitution from aiders and abettors. All secondary actors, furthermore, are not necessarily immune from private suit. The securities statutes provide an express private right of action against accountants and underwriters in certain circumstances, and the implied right of action in § I OM continues to cover secondary actors who commit primary violations. Here respondents were acting in concert with Charter ion the ordinary course as Suppliers and, as matters then evolved in the not So ordinary course, as customers. Unconventional as the arrangement was, it took place in the marketplace for and services, not in the investment Sphere. Charter was free to do as it chose in preparing its hooks, conferring with its auditor, and preparing and then issuing its financial statements. In these circumstances the investors cannot he said to have relied of resinmdents' deceptive acts in the decision to purchase or sell seer rides; and as the requisite reliance cannot he shown, respondents have no liability to petitioner under the implied right of action. This conclusion is consistent. with the narrow dimensions we must give to a right of action Congress did not authorize when it first enacted the statute and did not expand when it the law.
Case Question
1. What is the relationship between Charter, Scientific-Atlanta, and Motorola?
2. How did Scientific-Atlanta and Motorola assist Charter in creating fraudulent financial statements ?
3. Why did the Supreme Court agree with the lower courts that Scientific-Atlanta and Motorola not 'Aye, t to the claims of shareholders under the 19.34 Securities Exchange Act?
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