Stoneridge: A Good Explanation

By October 6, 2007Briefly Legal

In noting the Washington Post’s coverage of the Stoneridge v. Scientific Atlanta case to be heard Tuesday before the Supreme Court, we criticized the all-too-common storyline that the issue was all about Enron.

But, to fair about it, the issue is complicated, hard to explain in a quick way to a general audience, so a simplifying storyline with heroes and villains is an understandable approach.

This preface comes as a way to emphasize how nice of a job today’s Wall Street Journal editorial page does in laying out the case and its implications for the U.S. economy, “A Class Action Scheme“:

Seven years ago, Scientific-Atlanta and Motorola agreed to sell cable boxes to Charter Communications. In both cases, Charter offered to pay a premium that was then paid back to Charter as a “marketing expense.” So far, so routine. But then Charter got “creative,” immediately booking the advertising revenue from the cable-box makers while spreading out the cost of the premium over time.

No one was the wiser until April 2003, when Charter announced that it had misstated its financial results in a variety of ways, one small part of which was the revenue booked from the marketing deals with Scientific-Atlanta and Motorola. The two cable-box makers themselves booked no net gain from the way the transactions were structured and accounted for them properly on their own books. It is not even clear whether they were aware of what Charter was up to. The deals were not publicly disclosed and the modest revenue gains were not broken out separately in Charter’s cooked books.

But then came Stoneridge, an investment firm that had owned Charter stock. It sued the two suppliers, alleging they engaged in a “scheme” with Charter management to defraud investors in Charter stock. In fact, Scientific-Atlanta and Motorola did no more than enter into contracts with a customer on terms requested by the customer. No one bought or sold Charter stock on the basis of Charter’s accounting for those contracts, because no one outside of Charter knew what Charter had done. The lawsuit, therefore, represents a brazen attempt to drag deep-pocketed suppliers into a fraud in which they played, at most, a minor and essentially passive part.

The Journal notes that lower courts have dismissed Stoneridge’s arguments, that Congress declined to write the sought policy into law, and that the Bush Administration — after some odd indecision — has come out on the right side in arguing for the defendants. And the conclusion is one we heartily agree with:

The Supreme Court under Chief Justice John Roberts has a pretty good track record on restoring sanity to corporate law. In both Bell Atlantic v. Twombly and Credit Suisse v. Billing last term, the Roberts Court reined in overreaching trial lawyers looking to break new ground. Stoneridge is an opportunity to add to that record. This is one that should be unanimous.

The NAM’s news release and amicus brief can be found here.

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