Charter Communications, Inc.

Charter, headquartered in St. Louis, Missouri, purported at the time of the litigation to be the nation’s fourth largest cable operator. From the outset of the class period, Charter portrayed itself as a booming company with a steady internal growth rate of new subscribers, along with increased operating “cash flow” and reduced losses.

In fact, however, the plaintiffs alleged that Charter had inflated its internal customer growth rate with fabricated metrics, by deliberately delaying “disconnects” for over 100,000 customers who were no longer paying their bills, or who had advised the company they wished to terminate their service. By keeping these accounts in its customer base, Charter was able to meet Wall Street customer growth rate forecasts. The complaint further alleged that Charter improperly recognized “up front” all revenues it received in connection with the launch of new programming channels, rather than spreading those revenues out over the term of the programming contract.

In addition, the complaint alleged that Charter entered into kickback arrangements with two of its equipment vendors, defendants Scientific-Atlanta and Motorola, whereby Charter would pay an additional $17 million for digital set-top boxes used by cable customers, and the suppliers would kick those overpayments back to Charter as “advertising fees.” These advertising fees artificially inflated Charter’s revenues and cash flow.

The recovery here was particularly remarkable given Charter’s dire economic straits. It had a significant debt load and was losing money. The recovery represents nearly 100% of the damages estimated by Pomerantz’s expert to have been incurred during the period covered by an indictment against four senior officers charged in the scheme to inflate Charter’s customer count. The recovery also represents a significant portion of the damages sustained by class members for the longer period covered by the accounting claims.

Two defendants, Scientific-Atlanta and Motorola, had been dismissed from the case and did not participate in the settlement. Pomerantz, arguing that these companies should be held liable for secondary participation in the fraud, appealed the dismissal of those claims to the Eighth Circuit Court of Appeals, which affirmed the dismissal. Pomerantz then appealed to the U.S. Supreme Court and, in March 2007, the Court agreed to review the decision.

At issue was the concept of “scheme liability”: whether private plaintiffs can sue third-party business partners under Section 10(b) and Rule 10b-5 unless the investors relied on the third party’s own public misstatements or deceptive concepts.

On January 15, 2008, in a 5–3 ruling, the Supreme Court ruled against the investors, by determining that liability does not extend to secondary actors who engage in deceptive business transactions if their acts are not communicated to the public.

The case was led by Of Counsel, Marc I. Gross.