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. 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. 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.
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. 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. 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.
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. 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. 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.
The District Court granted respondents' motion to dismiss for failure to state a claim. The Court of Appeals for the Eighth Circuit affirmed, holding that the allegations showed at most aiding and abetting by respondents. The Supreme Court granted certiorari to review the judgment.
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