Fraudulent Scheme

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Jan16

Fraudulent Scheme

Linda Chan

January 16, 2008

Know More: Securities fraud Accounting fraud, Securities fraud

The following is not meant to be legal advice.

The United States Supreme Court held January 15, 2008 in Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc., that mere participation in a fraudulent scheme is insufficient to hold a party liable under Section 10(b) of the Securities Exchange Act of 1934.

In Stoneridge, plaintiffs alleged that Charter Communications, Inc. engaged in fake transactions with equipment vendors in order to boost revenues and operating cash flow. Charter is a provider of cable television services, and allegedly overpaid vendors for digital cable, with the intent that suppliers later return the overpaid amounts by purchasing advertising from Charter, resulting in wash transactions. An action for securities fraud will not be extended to a third party who participated in a fraudulent scheme if that party had no duty to disclose the information to the investing public.

Participation in a fraudulent scheme does not give rise to such liability because plaintiffs cannot show required proximate relation of defendants' conduct to the investors' harm.

United States Supreme Court

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