Between November 1999 and August 2002 Charter Communications allegedly padded its books with $17 million in round-trip sales involving two equipment vendors--Scientific Atlanta and Motorola. Charter agreed to pay an extra $20 for each set-top box it purchased, in exchange for an equal amount of advertising fees paid by the two vendors. In effect, the scheme boosted Charter's ad-sales profits with money from its capital budget.
When Charter's shareholders sued Charter for securities fraud in 2002, the lawsuit named the two vendors as co-defendants because they participated in the sham transactions. Charter settled the case for $144 million in 2004. But Scientific Atlanta and Motorola contested the claims against them, arguing private shareholders did not have standing to sue them. In April 2006 the 8th Circuit affirmed a district court's decision to dismiss the case, Stoneridge Investment Partners v. Scientific-Atlanta Inc. The Supreme Court will hear the case in its October 2007 term.
The 8th Circuit affirmed the decision, citing Central Bank as well as Santa Fe Industries v. Green, in which the Supreme Court defined "manipulative" under Section 10(b) as directly engaging in fraudulent securities-trading practices. The Supreme Court granted cert because of a conflicting standard used in the 9th Circuit.
In Simpson v. AOL Time Warner, the 9th Circuit said shareholders can sue third parties for "conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme."