The Stoneridge decision is a huge win for investment banks, accountants and vendors. It’s a big loss for those who lose money on stocks issued by companies that commit fraud.
The facts in the case were not in dispute. A cable TV company persuaded Scientific-Atlanta and Motorola, two commercial sellers of cable-TV boxes, to jack up their prices and then use the extra profit to buy advertising on the cable system. The cable-TV then recorded the inflated price as a capital expense, and booked the advertising purchases as revenue. This allowed them to pretend to meet Wall Street’s revenue expectations. When the Cable-TV company’s true financial picture became known, its stock collapsed. Plaintiff, a shareholder, Stoneridge Investment Partners, filed the lawsuit.
The 5-to-3 decision held that the plaintiffs must be able to show that they relied on the deceptive behind-the-scenes behavior of the defendants in making their decision to acquire or hold stock, in order to have a cause of action. The majority held that, since the bad behavior wasn’t communicated to the marketplace, it can’t be said to have induced reliance.
Care to look into the case for yourself? Here are links to the instant case, and to a couple of key related cases:
Stoneridge v. Scientific-Atlantic
Basic Inc. v. Levinson, 485 U. S. 224 (1988)
Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164 (1994)
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