552 U.S. 148, 158 (2008)
Stoneridge Investment Partners, LLC, a Delaware limited liability company, served as lead plaintiff in a class action filed in the United States District Court for the Eastern District of Missouri on behalf of purchasers of Charter Communications, Inc., common stock.1 The suit named as defendants Charter itself, some of its executives, its independent auditor Arthur Andersen LLP, and two other companies that had acted as both suppliers and customers of Charter.2 Charter, a cable operator, engaged in a variety of fraudulent accounting practices throughout 2000 so that its quarterly reports would meet Wall Street expectations for subscriber growth and operating cash flow.3
By late 2000 Charter executives realized that these practices would still leave the company short of projected operating cash flow by fifteen to twenty million dollars.4 To close the gap, Charter entered into arrangements with Scientific-Atlanta, Inc., and Motorola, Inc., under which Charter overpaid the respondents twenty dollars for each digital cable converter box it purchased through the end of the year.5 In return, the respondents agreed to purchase advertising time from Charter at prices higher than fair value, with the transactions documented through backdated contracts and false statements about increased production costs.6
The arrangements had no economic substance, yet Charter recorded the advertising purchases as revenue and capitalized its purchases of the set-top boxes, thereby inflating reported revenues and operating cash flow by approximately seventeen million dollars on financial statements filed with the Securities and Exchange Commission and disseminated to the public.7 Respondents had no role in preparing or disseminating Charter's financial statements, and they recorded the transactions as a wash on their own books under generally accepted accounting principles.8 It is alleged that respondents knew or were in reckless disregard of Charter's intention to use the transactions to mislead research analysts and investors.9
The District Court granted respondents' motion to dismiss for failure to state a claim.10 The Court of Appeals for the Eighth Circuit affirmed, holding that the allegations showed at most aiding and abetting by respondents.11 The Supreme Court granted certiorari to review the judgment.12
Whether the private right of action implied under § 10(b) of the Securities Exchange Act of 1934 reaches secondary actors who participate in transactions allowing an issuer to issue misleading financial statements but make no public misstatements upon which investors rely?13
Although Central Bank determined that § 10(b) liability does not extend to aiders and abettors, the conduct of a secondary actor must satisfy each of the elements or preconditions for § 10(b) liability.14 The plaintiff must prove reliance upon a material misrepresentation or omission by the defendant.15
No. The respondents Scientific-Atlanta and Motorola participated in arrangements with Charter that allowed Charter to mislead its auditor and issue misleading financial statements.16 Respondents had no role in preparing or disseminating those statements.17 Their own financial statements recorded the transactions as a wash under generally accepted accounting principles.18 Because the conduct of secondary actors must satisfy every element including reliance, and the allegations show at most aiding and abetting, the private right of action does not reach respondents.19
The § 10(b) private right of action does not reach the respondents.20
Related opinions on this issue
Joined by Justices Souter And Ginsburg
Justice Stevens dissented.21 He maintained that respondents knowingly produced false documents claiming increased production costs and signed backdated contracts to disguise the connection between set-top box purchases and advertising purchases.22 Those actions constituted deceptive devices prohibited by § 10(b) itself, and investors relied on the resulting revenue statements when deciding to purchase Charter stock.23
The case differs critically from Central Bank because respondents engaged in deceptive acts rather than mere aiding and abetting without any deceptive conduct of their own.24 The majority's broad reading of Central Bank improperly immunizes actual violators of § 10(b) from private liability and departs from the statute's purpose of protecting investors through effective remedies.25
Whether investors can establish the reliance element of a § 10(b) claim against customer-supplier companies whose deceptive acts were not communicated to the investing public?26
Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action.27 The Court has found a rebuttable presumption of reliance only when there is an omission by one with a duty to disclose.28 The Court has also found a rebuttable presumption under the fraud-on-the-market doctrine when statements become public.29 Neither presumption applies when deceptive acts were not communicated to the public.30
No. Respondents had no duty to disclose.31 Their deceptive acts were not communicated to the investing public during the times when investors purchased Charter stock.32 Petitioner cannot show reliance upon any of respondents' actions except in an indirect chain that is too remote for liability.33 The fraud-on-the-market doctrine does not assist because the deceptive acts never reached the market in a form that investors could rely upon.34
Investors cannot establish the reliance element against the respondents.35
Whether so-called scheme liability permits recovery under § 10(b) from entities whose conduct was remote from the injury suffered by purchasers of the issuer's securities?36
Petitioner's concept of reliance under scheme liability would extend the implied cause of action to the whole marketplace in which the issuing company does business.37 Reliance is tied to causation.38 Respondents' deceptive acts, which were not disclosed to the investing public, are too remote to satisfy the requirement because it was Charter that misled its auditor and filed the fraudulent statements.39
No. Nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did.40 The acts occurred in the marketplace for goods and services rather than the investment sphere.41 Extending liability would revive in substance the implied cause of action against aiders and abettors that Congress rejected in the PSLRA by limiting such enforcement to the SEC.42
Scheme liability does not permit recovery from the respondents under these circumstances.43