High Court Rules in Favor of Scientific-Atlanta

WASHINGTON — The U.S. Supreme Court ruled Tuesday that investors may not sue Scientific-Atlanta Inc. for its role in an equipment-for-advertising barter scheme that a corporate customer used to inflate its earnings.

The 5-3 decision was a victory for Scientific-Atlanta and a setback for investors who blamed the company for enabling a large cable television provider to issue bogus financial statements that artificially pumped up stock prices.

The ruling also dealt a blow to one of the largest class-action suits in history, an ongoing effort by investors to collect some $33 billion in alleged damages from attorneys and banks who assisted the failed Enron Corp. while it was issuing fraudulent financial statements of its own.

Drawing a line on shareholders' rights, the majority on the high court ruled that helping to enable a customer to commit fraud isn't enough to make a supplier like Scientific-Atlanta liable for stock losses stemming from the chicanery.

"At most," the court ruled, Scientific-Atlanta and Motorola Inc., "aided and abetted" the fraud, but "investors did not rely upon their statements or representations."

Susan Hurd, an Atlanta-based attorney representing Scientific-Atlanta in the case, said Tuesday's ruling means the company will not be held liable for false and misleading statements "they essentially had nothing to do with."

Scientific-Atlanta issued a terse statement, saying only that "we are pleased" that the court upheld an earlier decision by a lower court "and resolved this matter."

Seven years ago, Charter Communications, Inc., of St. Louis, inflated its earnings projections, using a barter scheme involving Scientific-Atlanta and Motorola, of Schaumburg, Ill.

At Charter's request, Scientific-Atlanta issued backdated agreements stating - falsely, the court found - that its production costs were up and it had to charge more for equipment it sold to Charter.

Charter, in turn, paid the increase through a barter deal by which it provided Scientific-Atlanta with advertising at no charge.

Then, in its financial statements, Charter accounted for the advertising as increased revenues, misleading analysts and investors into thinking the company took in $17 million more than it actually received in the fourth quarter of 2000.

Four Charter employees later pleaded guilty to conspiracy in connection with the fraud, and Charter agreed to pay $144 million in damages to a group of investors led by Stoneridge Investment Partners, of Malvern, Pa.

Stoneridge then sued Scientific-Atlanta and Motorola, alleging that they were culpable in the scheme.

In its ruling, the court found that it was Charter, not its suppliers, that provided misleading information to investors.

"It was Charter, not respondents (Scientific Atlanta and Motorola), that misled its auditor and filed fraudulent financial statements," the ruling reads. "Nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did."

The majority ruling was written by Justice Anthony Kennedy, with Chief Justice John Roberts, Anthony Scalia, Clarence Thomas and Samuel Alito concurring. Justice Stephen Breyer recused himself from the proceedings.

The three dissenting members of the court agreed with the investors, however, saying the cooperation of Scientific-Atlanta and Motorola was essential to the fraud committed by Charter.

"It could not have done so absent the knowingly fraudulent actions of Scientific Atlanta, Inc., and Motorola, Inc.," read the dissenting view, written by Justice John Stevens and concurred with by David Souter and Ruth Bader Ginsburg.

The dissenters accused the majority on the court of waging a "continuing campaign" to weaken shareholders' right to sue actors that enable other companies in misleading the public, saying the court is embarked on an effort to render investor protections "toothless."

Hurd, a partner in the securities litigation group with the Atlanta law firm of Alston & Bird, said the issue was whether investors relied upon information provided by Scientific-Atlanta.

"The false and misleading statements that allegedly caused harm to Charter shareholders were statements that were made by Charter," she said. "The equipment suppliers never spoke to shareholders and never had a duty to speak."

Tuesday's ruling set a precedent expected to sharply limit investors' ability to seek damages from attorneys, investment bankers and others that served Enron, the Texas energy conglomerate that bilked more than $40 billion out of investors before it collapsed in 2002. Shareholders have collected some $7 billion in settlements from Enron's investment banks and are seeking more, alleging that the institutions enabled Enron to mask massive debt and show fake profits.