Cable operator Charter Communications Ins. Arranged to overpay Scientific Atlant
ID: 2590195 • Letter: C
Question
Cable operator Charter Communications Ins. Arranged to overpay Scientific Atlanta and Motorola $20 for each set-top box it purchased- with the understanding that they would return the overpayment by purchasing cable advertising from the Charter. The transactions, it was alleged, had no economic substance; but because Charter would then record the advertising purchases as revenue and capitalize its purchases of the set-top boxes-in violation of generally accepted accounting principles-the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected Wall Street revenue and operating cash-flow numbers. The suppliers agreed to the arrangement. Charter used the inflated number of $17 million on its financial statements that were filed with the SEC and reported to the public. The suppliers had no role in preparing or disseminating Charter’s financial statements, and their own statements booked the transactions as a wash. A private right of action was brought against the cable box suppliers by investors for damages under Section 10(b) of the 1934 Act as “aiders and abettors.” Decide. [Stoneridge Investment Partners, LLC v. Scientific Atlantic, Inc., 552 U.S. 148]
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Explanation / Answer
In this case the suppliers are held responsible and a private right of action can be brought against the suppliers as their actions have directly got involved in the transaction that had led to misstatement by giving the bills that resulted in over valuing the set top boxes, can be directly linked to the misstatements and hence, they can be sued for a private right of action for damages under section 10(b) of the 1934 Act. They can be treated as primary violators.