Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-01974/USCOURTS-ca8-05-01974-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-1974

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In re: Charter Communications, Inc., *

Securities Litigation, *

------------------------------------------------ *

*

Stoneridge Investment Partners, LLS, *

* Appeal from the United States

Plaintiff - Appellant, * District Court for the

* Eastern District of Missouri.

v. *

*

Scientific-Atlanta, Inc; Motorola, Inc., *

*

Defendants - Appellees. *

*

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Submitted: December 12, 2005

Filed: April 11, 2006

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Before LOKEN, Chief Judge, WOLLMAN and RILEY, Circuit Judges.

___________

LOKEN, Chief Judge.

This is a securities fraud class action by Stoneridge Investment Partners on

behalf of those who purchased Charter Communications, Inc., stock between

November 8, 1999 and August 16, 2002. Plaintiffs alleged that Charter -- one of the

nation’s largest cable television providers -- engaged in a “pervasive and continuous

fraudulent scheme intended to artificially boost the Company’s reported financial

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The HONORABLE CHARLES A. SHAW, United States District Judge for the

Eastern District of Missouri. 

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results” by deliberately delaying the disconnecting of customers no longer paying

their bills, improperly capitalizing labor costs, and entering into sham transactions

with two equipment vendors that improperly inflated Charter’s reported operating

revenues and cash flow. Named as defendants were Charter; ten Charter executives

during all or part of the class period; Arthur Andersen, LLP, Charter’s independent

auditor during the class period; and the two equipment vendors, Scientific-Atlanta,

Inc., and Motorola, Inc. (collectively, “the Vendors”). 

Relying on Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S.

164 (1994), the district court1

 granted the Vendors’ motion to dismiss plaintiffs’

claims under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),

and the SEC’s implementing regulation, Rule 10b-5, 17 C.F.R. § 240.10b-5. The

court then denied plaintiffs’ motions to reconsider the dismissal and to grant leave to

file an amended complaint. Stoneridge appeals. We have jurisdiction because the

district court entered a separate final judgment under Rule 54(b) of the Federal Rules

of Civil Procedure. We affirm. 

I.

1. The Standard of Review. Plaintiffs’ sixty-eight-page complaint is factually

detailed, as it must be to satisfy the heightened pleading requirements of the Private

Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b). Our de novo review

accepts the facts as alleged in the complaint and draws all reasonable inferences in

favor of Stoneridge in deciding whether the complaint satisfied these pleading

requirements. See In re Navarre Corp. Sec. Litig., 299 F.3d 735, 740-48 (8th Cir.

2002). 

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2. The Scheme Alleged. At the time in question, Charter delivered cable

services through set-top boxes installed on customers’ TV sets. Charter purchased the

set-top boxes from third-parties, including the Vendors. In August 2000, although

Charter had firm contracts with the Vendors to purchase set-top boxes at a set price

sufficient for its present needs, Charter agreed to pay the Vendors an additional $20

per set-top box in exchange for the Vendors returning the additional payments to

Charter in the form of advertising fees. 

Plaintiffs alleged that these were sham or wash transactions with no economic

substance, contrived to inflate Charter’s operating cash flow by some $17,000,000 in

the fourth quarter of 2000 in order to meet the revenue and operating cash flow

expectations of Wall Street analysts. Charter accomplished the deception with

fraudulent accounting by improperly capitalizing the increased equipment expenses

while treating the returned advertising fees as immediate revenue. Plaintiffs alleged

that the Vendors entered into these sham transactions knowing that Charter intended

to account for them improperly and that analysts would rely on the inflated revenues

and operating cash flow in making stock recommendations. Plaintiffs did not allege

that the Vendors played any role in preparing or disseminating the fraudulent financial

statements and press releases through which Charter published its deception to

analysts and investors.

3. The Governing Law. Section 10(b) makes it unlawful, directly or indirectly,

“[t]o use or employ, in connection with the purchase or sale of any security . . . any

manipulative or deceptive device or contrivance in contravention of such rules and

regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Rule 10b-5 provides:

It shall be unlawful for any person, directly or indirectly . . . (a) [t]o

employ any device, scheme, or artifice to defraud, (b) [t]o make any

untrue statement of a material fact or to omit to state a material fact

necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading, or (c) [t]o

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engage in any act, practice, or course of business which operates or

would operate as a fraud or deceit upon any person in connection with

the purchase or sale of any security. 

17 C.F.R. § 240.10b-5. 

In Central Bank, the Supreme Court confirmed that § 10(b) prohibits only

“manipulative or deceptive” devices or contrivances, and that private plaintiffs “may

not bring a [Rule] 10b-5 suit against a defendant for acts not prohibited by the text of

§ 10(b).” 511 U.S. at 173. In earlier cases, the Court held that “deceptive” conduct

involves either a misstatement or a failure to disclose by one who has a duty to

disclose. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 474-75 & n.15 (1977);

Affiliated Ute Citizens of the State of Utah v. United States, 406 U.S. 128, 153-54

(1972); accord United States v. O’Hagan, 521 U.S. 642, 653-655 (1997).

“Manipulative,” as used in the securities context, is a “term of art”and refers to illegal

trading practices such as “wash sales, matched orders, or rigged prices, that are

intended to mislead investors by artificially affecting market activity.” Santa Fe, 430

U.S. at 476-77, citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 & n.21 (1976),

and Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 43 (1977). 

Based upon these earlier cases and the text and legislative history of the 1934

Act, the Court in Central Bank rejected the contrary position of the SEC and held that

Rule 10b-5 does not reach those who only aid or abet a violation of § 10(b):

As in earlier cases considering conduct prohibited by § 10(b), we

again conclude that the statute prohibits only the making of a material

misstatement (or omission) or the commission of a manipulative act. . . .

The proscription does not include giving aid to a person who commits a

manipulative or deceptive act.

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511 U.S. at 177. However, the concluding section of the Central Bank majority

opinion added an important caveat:

The absence of § 10(b) aiding and abetting liability does not mean that

secondary actors in the securities markets are always free from liability

under the securities Acts. Any person or entity, including a lawyer,

accountant, or bank, who employs a manipulative device or makes a

material misstatement (or omission) on which a purchaser or seller of

securities relies may be liable as a primary violator under 10b-5,

assuming all of the requirements for primary liability under Rule 10b-5

are met.

Id. at 191 (emphasis in original). This is one of many cases that have tested the

boundaries of that caveat. 

4. The District Court’s Decision. In a thorough Memorandum and Order, the

district court concluded that Central Bank, as uniformly applied by a number of our

sister circuits, precludes plaintiffs’ claims against the Vendors as nothing more than

claims they aided and abetted Charter in committing § 10(b) violations:

The Court concludes plaintiffs’ claims against [the Vendors] are

claims for aiding and abetting. Plaintiffs do not assert that [the Vendors]

made any statement, omission or action at issue or that plaintiffs relied

on any statement, omission or action made by either of them. Plaintiffs

also do not allege that [the Vendors] were responsible for, or were

involved with the preparation of Charter’s allegedly false or misleading

financial statements; Charter’s allegedly improper internal accounting

practices; or the allegedly false or misleading public statements made by

Charter and its former executives. Plaintiffs also do not allege that any

of the allegedly misleading statements listed in the amended complaint

were made, seen, or reviewed by [the Vendors]. Instead, plaintiffs

contend that [the Vendors] are liable to Charter’s investors on the basis

that they engaged in a business transaction that Charter purportedly

improperly accounted for.

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Nor can [the Vendors] be held liable for any purported omissions

as plaintiffs have not alleged that [the Vendors] had any duty to

Charter’s investors. . . . The Court can find no precedent for the

conclusion that business partners, such as [the Vendors], made false and

misleading statements by virtue of engaging in a business enterprise with

a company such as Charter, the entity purported to have made the

statements at issue. 

Plaintiffs then filed motions for reconsideration and for leave to amend their

complaint, citing additional cases and pleading additional facts. The district court

denied both motions, concluding that the additional citations were unpersuasive and

the proposed amendment would be futile because it merely reiterated the prior

allegations with additional particularity.

II.

On appeal, Stoneridge argues that plaintiffs properly alleged a primary violation

of the securities laws within the meaning of Central Bank because the Vendors

violated Rule 10b-5(a) and (c) by participating in a “scheme or artifice to defraud” and

by engaging in a “course of business which operates . . . as a fraud or deceit.” The

argument emphasizes that Rule 10b-5(a) and (c) are broadly worded and, unlike Rule

10b-5(b), do not require proof of a fraudulent misrepresentation or failure to disclose.

The argument depends on the assertion that Central Bank’s analysis did not affect the

scope of primary liability under subparts (a) and (c), relying primarily on a recent

district court decision, In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 492-503

(S.D.N.Y. 2005). 

Like the district court, we reject Stoneridge’s narrow interpretation of Central

Bank. We conclude that Central Bank and the earlier cases on which it relied stand

for three governing principles: (1) The Court’s categorical declaration that a private

plaintiff “may not bring a 10b-5 suit against a defendant for acts not prohibited by the

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We agree with then-district judge Patrick Higginbotham that the Supreme

Court in Santa Fe intended to limit § 10(b) claims of unlawful manipulation (as

opposed to deception) to “transactions in the [securities] marketplace, the effects of

which were to prevent the market price from accurately reflecting the market’s

unimpeded judgment of the stock’s value.” Hundahl v. United Benefit Life Ins. Co.,

465 F. Supp. 1349, 1360 (N.D. Tex. 1979).

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text of § 10(b),” 511 U.S. at 173, included claims under Rule 10b-5(a) and (c), as well

as Rule 10b-5(b). (2) A device or contrivance is not “deceptive,” within the meaning

of § 10(b), absent some misstatement or a failure to disclose by one who has a duty

to disclose. See Santa Fe, 430 U.S. at 474-75. (3) The term “manipulative” in § 10(b)

has the limited contextual meaning ascribed in Santa Fe, id. at 476-77.2

 Thus, any

defendant who does not make or affirmatively cause to be made a fraudulent

misstatement or omission, or who does not directly engage in manipulative securities

trading practices, is at most guilty of aiding and abetting and cannot be held liable

under § 10(b) or any subpart of Rule 10b-5. Accord Fidel v. Farley, 392 F.3d 220,

235 (6th Cir. 2004); Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194,1204-06 (11th Cir.

2001); Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998), cert. denied,

525 U.S. 1104 (1999); Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1225-27 (10th

Cir. 1996); In re Software Toolworks, Inc. Sec. Litig., 50 F.3d 615, 628 n.3 (9th Cir.

1994); In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804, 914-16 (S.D. Tex. 2004);

In re Homestore.com, Inc. Sec. Litig., 252 F. Supp. 2d 1018, 1040-41 (C.D. Cal.

2003). 

In this case, the focus of plaintiffs’ § 10(b) and Rule 10b-5 claims was

deception -- they alleged a “continuous course of conduct” in which Charter allegedly

“made and/or failed to correct public representations which were or had become

materially false and misleading regarding Charter’s financial results and operations.”

Indeed, eighteen pages of the amended complaint alleged in fifty detailed paragraphs

the fraudulent financial reports and press releases published by Charter during the

class period. However, neither Motorola nor Scientific-Atlanta was alleged to have

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engaged in any such deceptive act. They did not issue any misstatement relied upon

by the investing public, nor were they under a duty to Charter investors and analysts

to disclose information useful in evaluating Charter’s true financial condition. None

of the alleged financial misrepresentations by Charter was made by or even with the

approval of the Vendors. Accordingly, the district court properly dismissed the claims

against the Vendors as nothing more than claims, barred by Central Bank, that the

Vendors knowingly aided and abetted the Charter defendants in deceiving the investor

plaintiffs. 

Like the district court and the court in In re Homestore.com, 252 F. Supp. 2d

at 1041, we are aware of no case imposing § 10(b) or Rule 10b-5 liability on a

business that entered into an arm’s length non-securities transaction with an entity that

then used the transaction to publish false and misleading statements to its investors

and analysts. The point is significant. To impose liability for securities fraud on one

party to an arm’s length business transaction in goods or services other than securities

because that party knew or should have known that the other party would use the

transaction to mislead investors in its stock would introduce potentially far-reaching

duties and uncertainties for those engaged in day-to-day business dealings. Decisions

of this magnitude should be made by Congress. 

III.

Finally, Stoneridge argues that the district court abused its discretion in denying

plaintiffs’ post-dismissal motions to reconsider the dismissal order and to grant

plaintiffs leave to amend the complaint. A district court has broad discretion to

reconsider an order granting dismissal or summary judgment, but “[a] motion to alter

or amend judgment cannot be used to raise arguments which could have been raised

prior to the issuance of judgment.” Hagerman v. Yukon Energy Corp. 839 F.2d 407,

414 (8th Cir.), cert. denied, 488 U.S. 820 (1988). Here, plaintiffs argued that the

district court overlooked or misapplied prior decisions from district courts in other

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circuits. The district court briefly reviewed those cases and concluded it “is not

inclined to reach a different result.” Denial of the motion to reconsider on this ground

was not an abuse of discretion. Indeed, we agree with the court’s analysis of those

non-controlling cases. 

The district court denied the post-dismissal motion to amend because the

proposed pleading would be futile -- the additional allegations as to the Vendors’ role

and knowledge set forth in the proposed amended complaint did not cure the flaws in

plaintiffs’ § 10(b) theory. Denial of a motion to amend on this ground, particularly

a motion filed after the district court’s final ruling, is not an abuse of discretion. See,

e.g., Grandson v. Univ. of Minn., 272 F.3d 568, 575 (8th Cir. 2001), cert. denied, 535

U.S. 1054 (2002). 

The Final Judgment of the district court dated February 15, 2005, is affirmed.

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