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Stoneridge Investment Partners Llc Vs Scientific-Atlanta Inc


Stoneridge Investment Partners Llc Vs Scientific-Atlanta Inc document sample

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									        Case 5:05-cv-00410-JMH                Document 109         Filed 01/29/2008   Page 1 of 4

                                    UNITED STATES DISTRICT COURT
                                   EASTERN DISTRICT OF KENTUCKY
                                   CENTRAL DIVISION AT LEXINGTON

KEVIN J. GRILLO, Individually and on     )
behalf of all others similarly situated. )                     Lead Case No. 5:05-cv-00410-JMH
                                         )                     Consolidated with No. 5:05-cv-
                        Plaintiff        )                     00421-JMH; 5:05-cv-00455-JMH;
                                         )                     5:05-cv-00485-JMH; 5:05-cv-00486-
                                         )                     JMH.
vs.                                      )
et al.                                   )
                        Defendants.      )

                           DEFENDANT TA ASSOCIATES, INC.’S

           On January 15, 2008, the United States Supreme Court issued a landmark securities law

decision that mandates dismissal of Plaintiffs’ claims against TA Associates, Inc. in this action.

Thus, TA Associates respectfully submits this notice of supplemental authority in further support

of its currently pending Motion To Dismiss The First Amended Consolidated Complaint.

           In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., No. 06-43 (Jan. 15,

2008),1 the plaintiffs alleged that public company Charter Communications (a cable television

operator) created bogus sales contracts with certain of its suppliers which had the effect of

allowing the Company to publicly report inflated revenues. More specifically, the plaintiffs

alleged that the suppliers colluded with Charter to enable it to meet a revenue shortfall by

agreeing to overcharge Charter for cable boxes over the course of the year, and then returning the

overcharges at the end of the year by purchasing an equivalent amount of advertising from

    A copy of the Stoneridge opinion is attached hereto.

     Case 5:05-cv-00410-JMH           Document 109         Filed 01/29/2008       Page 2 of 4

Charter. Id. at 2-3. According to the Plaintiffs, the suppliers agreed to this “round trip”

arrangement and generated false and backdated documentation to enable Charter to carry it out,

fully aware of the fraudulent nature of the transactions. Id. at 3. The consequence of these

transactions, which the plaintiffs alleged were devoid of economic substance, was that Charter

was able to inflate the revenue and cash flow reported in its financial statements and public

filings by approximately $17 million. Id. The Plaintiffs sued not only Charter and its

executives, but also the suppliers, claiming each should be held liable under §10(b) for the

Company’s allegedly false and misleading statements. Id. at 2.

       The Supreme Court affirmed dismissal of the plaintiffs’ claim against Charter’s suppliers,

holding that the plaintiffs were unable to plead that anything the suppliers said or did was relied

upon by investors. The Court explained that “[r]eliance by the plaintiff upon the defendant’s

deceptive acts is an essential element of the §10(b) private cause of action.” Id. at 8. It went on

to explain that a presumption of reliance can be shown in two ways:

       First, if there is an omission of a material fact by one with a duty to disclose, the
       investor to whom the duty was owed need not provide specific proof of reliance.
       Second, under the fraud-on-the-market doctrine, reliance is presumed when the
       statements at issue become public. The public information is reflected in the
       market price of the security. Then it can be assumed that an investor who buys or
       sells stock at the market price relies upon the statement.

Id. (internal citation omitted). The Court concluded that neither presumption applied, as the

suppliers had no duty to Charter’s investors to disclose any information, and their alleged acts

were not communicated to the public. Id.

       The Supreme Court likewise rejected plaintiffs’ argument that even though the suppliers

had not made any public statements and were not alleged to be under a duty to disclose, they

nonetheless should be held liable because Charter’s investors indirectly relied upon their actions.

Id. at 9. Disagreeing with plaintiffs, the Court concluded:

     Case 5:05-cv-00410-JMH            Document 109         Filed 01/29/2008       Page 3 of 4

                respondents’ deceptive acts, which were not disclosed to the
                investing public, are too remote to satisfy the requirement of
                reliance. It was Charter, not respondents, that misled the auditor
                and filed false financial statements; nothing respondents did made
                it necessary or inevitable for Charter to record the transactions as it

Id. at 10. The Court further explained “Charter was free to do as it chose in preparing its books,

conferring with its auditor, and preparing and issuing its financial statements.” Id. at 16. That

the defendants’ conduct assisted, or even was essential to Charter’s misconduct, or that

defendants engaged in a conscious scheme to defraud, did not alter the fundamental fact that

plaintiffs in no way relied on the actions of the supplier defendants, a defect that was fatal to

plaintiffs’ claims.

        The parallels to TA Associates’ arguments in the Tempur Pedic litigation are clear. As

with the supplier defendants in Stoneridge, here TA Associates is not alleged to have made any

of the challenged statements, nor is it alleged to have had a duty to disclose. (Indeed, as a mere

shareholder of Tempur Pedic it could not have had any such duty.) Also as in Stoneridge, there

are no allegations that anything TA Associates ever did “made it necessary or inevitable” for

Tempur Pedic to make any of the challenged statements. Thus, even if Plaintiffs’ allegations that

Tempur Pedic made false statements were true (TA Associates does not believe they are), under

the controlling U.S. Supreme Court precedent in Stoneridge, there can be no cause of action

against TA Associates.

        Finally, in reasoning particularly apt here, the Supreme Court found that plaintiffs’ theory

of liability stretched Section 10(b) beyond its reasonable bounds. It held that plaintiffs’ claims

would, in effect, revive private causes of action for aiding and abetting primary violations of

Section 10(b) – a step which Congress specifically elected not to take. Id. at 12. Likewise, here,

extending liability to a private investor like TA Associates, which is not alleged to have made

      Case 5:05-cv-00410-JMH                Document 109            Filed 01/29/2008          Page 4 of 4

any of the statements challenged in the Amended Complaint, would open the floodgates of

private litigation to a whole new realm of secondary actors. Id. Such a result would be contrary

to the mandate of the U.S. Supreme Court in Stoneridge, and as such, the case against TA

Associates must be dismissed.2

Dated: January 28, 2008                              Respectfully submitted,

                                                     /s/ P. Douglas Barr
                                                     STOLL KEENON OGDEN PLLC
                                                     P. Douglas Barr
                                                     300 West Vine Street
                                                     Suite 2100
                                                     Lexington, KY 40507
                                                     Tel: (859) 231-3046
                                                     Fax: (859) 253-1093

                                                     GOODWIN PROCTER LLP
                                                     Stephen D. Poss, admitted pro hac vice
                                                     Alexis L. Shapiro, admitted pro hac vice
                                                     Exchange Place
                                                     53 State Street
                                                     Boston, MA 02109
                                                     Tel: (617) 570-1000
                                                     Fax: (617) 523-1231

                                                     Attorneys for Defendant TA Associates,

 Because Plaintiffs’ Section 10(b) claim against TA Associates fails under Stoneridge, so too must its 20A claim,
because without a predicate 10(b) violation, there can be no 20A claim. See TA Associates’ MTD Brief at 16.


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