Opposition Brief — Stoneridge Inv. Partners v. Scientific-Atl.

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Supreme Court, U.S.

(2) ries

No. 06-43 OCT 19 2006

‘OFFICE OF THE CLERK

Iu The

Supreme Court of the Anited States

STONERIDGE INVESTMENT PARTNERS, LLC,

Petitioner,

Vv.

SCIENTIFIC-ATLANTA, INC. and MOTOROLA, INC.,

Respondents.

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Eighth Circuit

RESPONDENT SCIENTIFIC-ATLANTA, INC.’S

OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

OSCAR N. PERSONS

Counsel of Record

SUSAN E. HURD

KELLY C. WILCOVE

AMBREEN A. DELAWALLA

ALSTON & BirpD LLP

1201 West Peachtree Street

Atlanta, Georgia 30309-3424

(404) 881-7000

Counsel for Respondent

Scientific-Atlanta, Inc.

October 20, 2006

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342.2831

ee od 4

QUESTION PRESENTED

Do Central Bank, N.A. v. First Interstate Bank, N.A.,

511 U.S. 164 (1994), and Section 10(b) contemplate private

claims against secondary actors who make no misstate-

ments or omissions to investors (and who owe no duty),

but who are nevertheless alleged to have provided “be-

hind-the-scenes” aid or assistance to the party who actu-

ally made the misstatements and omissions to investors?

CORPORATE DISCLOSURE STATEMENT

On February 27, 2006, Scientific-Atlanta, Inc. became

a wholly owned subsidiary of Cisco Systems, Inc. Since

that date, Scientific-Atlanta, Inc. has had no outstanding

stock. No publicly held company owns 10% or more of the

stock of Cisco Systems, Inc.

ill

TABLE OF CONTENTS

Page

QUESTION PRESENTED ................ssesseesssereeceeceeeeeeees i

CORPORATE DISCLOSURE STATEMENT ................ ii

TABLE OF AUTHORITIES. ................cccsccssesssesssessseeeeees Vv

ITI chtictinisdhiidubiadecscscesbenngntendscegniatiesentstenses 1

STATEMENT OF THE CASE ...0........cccccceseeseeeseeseeeeeeees 2

REASONS FOR DENYING THE WRIT....................0. 4

I. THE CIRCUIT COURT CORRECTLY FOL-

LOWED PRIOR DECISIONS ON THE SCOPE

OF PRIMARY LIABILITY UNDER SECTION

A. “Deceptive Conduct” Involves Either A

Misstatement Or A Failure To Disclose By

One Who Has A Duty To Speak................... 5

B. “Manipulative” Conduct Refers To Illegal

Securities Trading Practices And Not To

Business Transactions...................0:0s000seeeees 11

C. Because S-A’s Conduct Was Neither Ma-

nipulative Nor Deceptive Under The Act,

Petitioner’s Claims Are At Most Aiding

ee iiiccinintninicrcenjamipsininnmntntiaanionnn 13

II. PETITIONER'S THEORY OF “SCHEME”

LIABILITY FAILS TO SATISFY THE RE-

QUIREMENTS FOR PRIMARY LIABILITY

AND DOES NOT SUPPORT THE UNDERLY-

ING PURPOSE OF THE ACT.............::ceccceseeeees 15

A. S-A’s Alleged Conduct Was Not “In Con-

nection With The Purchase Or Sale Of Any

SERINE HEUTE vicccsuiictslitenssenmsinasetenctenstite 15

TABLE OF CONTENTS - Continued

Page

B. Petitioner Cannot Satisfy The Mandatory

Requirement Of Reliance ....................0000000 17

C. Expanding The Scope Of Liability As Peti-

tioner Requests Would Not Fulfill The

Purpose Of The Act..............::sssssssssesssesseeeeee 19

Ill. THE DECISIONS FROM OTHER COURTS

CITED BY PETITIONER DO NOT SUPPORT

GRANTING CERTIORARI .............::0cecceeeeeeeeeees 20

CR icctcincttntesennjintatiarivennvisiinsinascinnsianinsieatiiitis 22

GF TIED ccttanseceniccnensistnicssintnhaiatsineniiananiainnaiinial App. 1

TABLE OF AUTHORITIES

Page

CASES

Affiliated Ute Citizens of the State of Utah v. United

States, 406 U.S. 128 (1972) ...........cccceeceseeeeeeeees 6, 7, 16, 19

Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th

ESSELTE ae 21

Basic Inc. v. Levinson, 485 U.S. 224 (1988)..............0000000 18

Central Bank of Denver, N.A. v. First Interstate

Bank of Denver, N.A., 511 U.S. 164 (1994) ............ passim

Chiarella v. United States, 445 U.S. 222 (1980)............... 16

Dinsmore v. Squadron, Ellenoff, Plesant, Sheinfeld

& Sorkin, 135 F.3d 837 (2d Cir. 1998) .................ccceeee 21 |

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336

EES Ce Tae 18

Dutton v. D&K Healthcare Resources, No.

4:04CV147SNL, 2006 WL 1778863 (E.D. Mo.

ET 21

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)........ 5, 12

Fidel v. Farley, 392 F.3d 220 (6th Cir. 2004) .................... 21

In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp.

Ee 21

In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804

Ec 21

In re Livent, Inc. Noteholders Sec. Litig., 174

F. Supp. 2d 144 (S.D.N.Y. 2001)....ccccccccsscsssssceseeseeseeneens 21

Marine Bank v. Weaver, 455 U.S. 551 (1982)................... 16

Santa Fe Indus., Inc. v. Green, 430 U.S. 462

Ecce passim

TABLE OF AUTHORITIES — Continued

Page

SEC v. U.S. Environmental, Inc., 155 F.3d 107 (2d

Pia Ti anisiscssttatntemdsesimnanmniiiminitintasantasaianiniaintesinl 14, 15

IEC v. Zandford, 238 F.3d 559 (4th Cir. 2001)................ 10

SEC v. Zandford, 535 U.S. 813 (2002) ............ eee. 9, 10, 16

Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997)................ 21

Simpson v. AOL Time Warner Inc., 452 F.3d 1040

EEN TEITIIIED inci itectnseniietmonbnnenndiouiinieniesiidanasiadighaiieagpiciniaies 21

Superintendent of Insurance v. Bankers Life &

' Casualty Co., 404 U.S. 6 (1971) .........ccccceseeeseeereeees 7,9,17

Tcherepnin v. Knight, 389 U.S. 332 (1967) ............cccecseeees 19

United States v. O'Hagan, 521 U.S. 642 (1997).....6, 8, 9, 16

Unterberg Harris Private Equity Partners, L.P. v.

Xerox Corp., 995 F. Supp. 437 (S.D.N.Y. 1998)............. 18

Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir.

SEE cecnicsiciesndenniininaiacsitndinnnddnintiansaduititiguealaniaininaiiieabanes 21

Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194 (llth

EE, ITE sxeptectnitnnsicnnsiamonentinnanniininissediimapennmmiiicnianeiintel 21

STATUTES AND RULES

es Oe WE enescnsnsencennsanennnnsenetarcaimmatemenageniatil passim

17 C.FR. § 240.10D-5 o..cceccccccssssessssecssssessssessneessseeeesees passim

INTRODUCTION

This Court should refuse to grant the requested writ

of certiorari. The Eighth Circuit’s ruling is squarely

grounded in this Court’s precedent defining the scope of

primary liability under the federal securities laws. (See

infra at 4-14.) Applying this precedent, the circuit court

held that Petitioner’s claims were foreclosed as a matter of

law. The Petition fails to identify any compelling reason to

revisit this decision.

All parties agree that Central Bank of Denver, NA. v.

First Interstate Bank of Denver, N.A., 511 U.S. 164, 191

(1994), precludes a plaintiff from bringing a private cause

of action for aiding and abetting another party’s purported

securities law violations. Central Bank also held that

primary liability exists only where the person or entity

accused “employs a manipulative device or makes a

material misstatement (or omission) on which a purchaser

or seller of securities relies ... , assuming all of the

requirements for primary liability ... are met.” Jd. (em-

phasis in original); see also id. at 177.' Petitioner’s theory

of liability violates Central Bank.

First, Petitioner seeks to pursue classic aiding and

abetting claims under the guise of the new label of

' Petitioner inaccurately suggests that this holding is “dictum.”

(See Pet. at 15.) This rule of law is, however, repeated twice in the

opinion. See Central Bank, 511 U.S. at 177, 191. Morecver, each time it

is discussed, it is clear from the context that the statement is not

“dictum,” but a repetition of long-established principles. See, e.g., id. at

177 (“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.”)

(emphasis added).

“scheme liability.” Second, Petitioner fails to allege either a

“manipulative device” or “a material misstatement (or

omission)” as to Scientific-Atlanta, Inc. (“S-A”) as required

under Section 10(b). (See infra at 5-12.) Third, because its

claims are aiding and abetting, Petitioner has not and

cannot satisfy all of the requirements for primary liability

under Section 10(b). (See infra at 13-20.) There was,

therefore, no error in the lower court’s decision to dismiss

these claims.

STATEMENT OF THE CASE

Petitioner is a Charter investor who sued Charter and

its former officers and directors for primary violations of

the federal securities laws. Months later, as an after-

thought, Petitioner added to the case S-A — a separate

public company that did business with Charter -— under an

aiding and abetting theory. (See Amended Consolidated

Class Action Complaint dated August 4, 2003, attached

hereto as Appendix (“Resp. App.”) at 2, 10.)’ Petitioner

alleged that Charter manipulated its accounting of busi-

ness transactions with its equipment suppliers: S-A and

Motorola, Inc. (See id. at 3-4.) Based on this allegation,

Petitioner purported to assert a cause of action under

Section 10(b) of the Securities Exchange Act of 1934 (the

“Act”), 15 U.S.C. § 78j(b), and SEC Rule 10b-5(a)-(c), 17

C.F.R. § 240.10b-5, for aiding and abetting the fraud on

* After dismissal, Petitioner sought permission to file a second

amended complaint, which was denied as futile by the lower court. See

In re Charter Communications, Inc. Securities Litigation, 443 F.3d 987,

993 (8th Cir. 2006), attached to the Petition for Certiorari as Appendix

A (“Pet. App.”) at lla.

Charter’s shareholders, which had allegedly been commit-

ted by Charter. (See id. at 79-80.)

According to the Complaint, S-A allegedly entered into

. a marketing support agreement with Charter at Charter’s

request whereby Charter would pay additional sums for

each set-top box purchased from S-A and S-A would return

this money to Charter in the form of marketing support for

advertising. (See id. at 3-4, 31-34.) Along with other

disclosures of accounting errors, Charter ultimately

announced that it had failed to properly account for this

transaction with S-A. (See id. at 63-70.) The transaction, if

properly accounted for, would have resulted in no net

economic benefit to either party. (See id. at 32-34.)

The Complaint was based exclusively on public state-

ments attributed only to Charter regarding Charter’s

financial results. (See, e.g., id. at 38-63.) The Complaint

did not allege that S-A drafted any of the purported

misleading statements, nor was it alleged to have had any

involvement in the contents of Charter’s public state-

ments, contro] over their circulation, or the ability or duty

to independently verify their accuracy. (See Pet. App. at

9a-10a.). Petitioner did not dispute that S-A’s accounting

treatment for this agreement was proper, nor did Peti-

tioner dispute that it was possible for Charter to have

accounted for the agreement properly on its books. (See

Resp. App. at 33-34.) Moreover, the Complaint did not

allege that S-A, a third-party vendor, had any involvement

in or control over the internal accounting decisions made

by Charter and its outside auditors. The Complaint also

did not allege any misstatement or omission by S-A to

Charter’s shareholders. (See Pet. App. at 10a (“(S-A] did

not issue any misstatement relied upon by the investing

public, nor w[as] [it] under a duty to Charter investors and

analysts to disclose information... .”).) Indeed, Petitioner

abandoned the claim it originally had against S-A for

Charter’s misstatements under Rule 10b-5(b). (See Resp.

App. at 80.)

Instead, Petitioner now stresses that its claims

against S-A — a supposed scheme “to commit a misstate-

ment” — are based on “conduct,” which it argues is covered

by subparts (a) and (c) of Rule 10b-5. (See id. at 3-4, 80.)

Petitioner did not allege, however, that it relied on S-A’s

alleged “scheme” in making its investment decision.

Petitioner alleged only that it relied on Charter’s alleged

misstatements and omissions in making its investment

decision. (See, e.g., id. at 79-80.)

REASONS FOR DENYING THE WRIT

I. THE CIRCUIT COURT CORRECTLY FOLLOWED

PRIOR DECISIONS ON THE SCOPE OF PRI-

MARY LIABILITY UNDER SECTION 10(B)

As a threshold matter, Petitioner’s request for a writ

of certiorari propounds an inaccurate reading of the court

of appeals’ decision. The Petition incorrectly suggests that

the Eighth Circuit held that Section 10(b) is limited “only

to misleading statements and omissions.” (Pet. at 12.) This

is incorrect. The circuit court specifically acknowledged

that, in addition to misstatements or omissions, certain

types of manipulative trading conduct can also be the

basis of Section 10(b) claims. (See Pet. App. at 5a.) There

are no such allegations against S-A. There are also no

allegations of any misstatements or omissions by S-A.

Indeed, as the lower court held, the conduct of which S-A

now stands accused is not prohibited by the text of Section

10(b). Dismissal was, therefore, appropriate. See Central

Bank, 511 U.S. at 173.

A. “Deceptive Conduct” Involves Either A Mis-

statement Or A Failure To Disclose By One

Who Has A Duty To Speak.

As the Eighth Circuit recognized, a private plaintiff

“‘may not bring a 10b-5 suit against a defendant for acts

not prohibited by the text of § 10(b).’” (Pet. App. at 8a

(quoting Central Bank, 511 U.S. at 173).) Section 10(b)

makes it unlawful “‘[t]o use or employ, in connection with

the purchase or sale of any security ... any manipulative

or deceptive device or contrivance... .’” (Pet. App. at 4a

(quoting 15 U.S.C. § 78j(b)).) Therefore, to state a claim for

primary liability under Section 10(b), Petitioner must

show that S-A’s alleged conduct constitutes a “manipulat-

ive or deceptive device or contrivance” within the meaning

of Section 10(b). The Eighth Circuit recognized that this

inquiry applies with equal force to any subpart of Rule

10b-5 on which a plaintiff purports to bring its claims. (See

Pet. App. at 8a.) Section 10(b) expressly requires either

deceptive or manipulative conduct, and Rule 10b-5 can be

no broader in application than the governing statute that

authorized that rule. See Ernst & Ernst v. Hochfelder, 425

U.S. 185, 214 (1976) (“[DJespite the broad view of the Rule

advanced by the Commission in this case, its scope cannot

exceed the power granted the Commission by Congress

under § 10(b).”).

The Eighth Circuit looked to this Court’s prior opin-

ions, which have held that “[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.” (Pet. App. at 8a.) The Eighth Circuit

correctly relied on the following three decisions, which

evidence this rule of law: Affiliated Ute Citizens of the

State of Utah v. United States, 406 U.S. 128 (1972); Santa

Fe Indus., Inc. v. Green, 480 U.S. 462 (1977); and United

States v. O'Hagan, 521 U.S. 642 (1997).

All of these cases support the circuit court’s analysis

that where, as here, there is no duty te disclose and no

corresponding misrepresentation or omission, there is no

deceptive device or contrivance on which a Section 10(b)

claim may be based. In each case, the issue of whether a

defendant’s conduct was “deceptive” turned on the exis-

tence (or lack thereof) of a duty to speak and a misstate-

ment or omission. These cases do not support Petitioner’s

contention that liability for “deceptive” conduct may exist

absent an alleged misstatement or omission.

Affiliated Ute. This Court found a cause of action in

Affiliated Ute because the defendants made material

omissions in the face of a duty of disclosure owed to the

injured shareholders. Affiliated Ute, 406 U.S. at 153

(describing the case as “involving primarily a failure to

disclose”). While observing that only subpart (b) of Rule

10b-5 speaks specifically in terms of affirmative misstate-

ments, this Court found that claims were stated under

subparts (a) and (c) and were “deceptive” within the

meaning of the Act because defendants withheld informa-

tion where they owed a duty of disclosure:

These defendants’ activities ... disclose, within

the very language of one or the other of those

subparagraphs, a ‘course of business’ or a ‘device,

scheme or artifice’ that operated as fraud upon

the Indian sellers. This is so because the defen-

dants devised a plan and induced the mixed-

blood holders of UDC stock to dispose of their

shares without disclosing to them material facts

that reasonably could have been expected to influ-

ence their decisions to sell.... It is no answer to

urge that ... these defendants may have made

no positive representation or recommendation.

The defendants may not stand mute.... The

sellers had a right to know that the defendants

were in a position to gain financially from their

sales and that their shares were selling for a

higher price in [the non-Indian] market.

Id. at 153 (emphasis added and citations omitted).

Santa Fe. In Santa Fe, the majority shareholders of a

company utilized a “short-form merger” transaction to

eliminate the interests of certain minority shareholders.

See 430 U.S. at 465-66. The minority shareholders opposed

the sale and claimed that the majority owners violated

Rule 10b-5(a) and (c) by paying an inadequate (low) price

for their shares and by obtaining a fraudulent appraisal of

their stock to justify the lower price. Jd. at 467-68.

This Court accepted the finding of the district court

that there were no omissions or misstatements in the

information about the merger sent to the minority share-

holders. Jd. at 474. It was the absence of omissions or

misstatements that set this case apart from other deci-

sions of the Court where liability was found to include

“some element of deception.” Jd. at 475.° For this reason,

the Court concluded that its prior cases “do not support

the proposition ... that a breach of fiduciary duty by

* The Court discussed Affiliated Ute and Superintendent of

Insurance, both of which, as discussed above and infra, involved

misstatements or omissions that gave rise to the necessary element of

deception. Santa Fe, 430 U.S. at 475 n.15.

majority stockholders, without any deception, misrepre-

sentation, or nondisclosure, violated the statute and the

Rule.” Jd. at 476.

Petitioner makes much of the fact that the Court

listed these items in the disjunctive (see Pet. at 12), but it

overlooks the holding of the case. Without a misrepresen-

tation or omission, the transaction at issue (which the

minority shareholders argued was without a “justifiable

business purpose”) could not form the basis of a securities

fraud claim. Santa Fe, 430 U.S. at 476:° In other words,

the Court explicitly refused to expand the scope of liability

where to do so would not serve the “fundamental purpose”

of the Act, which is to insure full and fair disclosure for

buyers and sellers of stock. Jd. at 477-78. Because there

had been full disclosure on the merger terms by one with a

duty to disclose, no “deceptive” conduct within the mean-

ing of the Act had been alleged and no claim could lie. Jd.

at 474-76. )

O’Hagan. This Court also made clear in O'Hagan

that “deceptive nondisclosure is essential to the § 10(b)

liability at issue” in cases involving trading on non-public

information. 521 U.S. at 660. Classic insider trading

“qualifies as a ‘deceptive device’ under § 10(b) . . . because

‘a relationship of trust and confidence [exists] between the

shareholders of a corporation and those insiders who have

obtained confidential information by reason of their

position with that corporation.’” Jd. at 652. “That relation-

ship . . . ‘gives rise to a duty to disclose [or to abstain from

* The Court’s finding that defendant’s conduct also was not

“manipulative” within the meaning of Section 10(b) is discussed infra at

11-12.

trading] because of the necessity of preventing a corporate

insider from ... takling) unfair advantage of ... unin-

formed . . . stockholders.’” Jd.

Similarly, the “misappropriation theory” adopted in

O’Hagan - where an outsider to a company trades on non-

public information — likewise turns on the existence of a

duty and a non-disclosure. See id. at 652-53. “[T]he misap-

propriation theory outlaws trading on the basis of nonpub-

lic information by a corporate ‘outsider’ in breach of a duty

owed not to a trading party, but to the source of the infor-

mation.” Jd. The misappropriators similarly “deal in

deception” through nondisclosure, pursuant to which

liability under Section 10(b) may attach. See id. at 653.

Superintendent of Insurance and Zandford.

Superintendent of Insurance v. Bankers Life & Casualty

Co., 404 U.S. 6 (1971), and SEC v. Zandford, 535 U.S. 813

(2002), do not assist Petitioner. Those cases involve decep-

tive conduct in the form of either misstatements or omis-

sions. In Superintendent of Insurance, the Court found

that a claim under Section 10(b) was stated where a

company’s board of directors was deceived into authorizing

the sale of its stock “by the misrepresentation that the

proceeds would be exchanged for a certificate of deposit of

equal value.” 404 U.S. at 167 n.1 (emphasis added).

Similarly, in Zandford, a broker had been given a

power of attorney that allowed him to execute stock

transactions for his clients. 535 U.S. at 817. The broker

represented to the clients that he would “conservatively

invest” their money and would pursue investment objec-

tives for the “safety of principal and income.” Jd. The

broker, however, sold the securities in the account and

personally pocketed the proceeds. Jd.

A cause of action existed under Section 10(b) because

“each sale [of stock] was made to further [the broker’s]

fraudulent scheme [and] each was deceptive because. it

was neither authorized by, nor disclosed to, the [clients].”

Id. at 820-21. The clients “were injured as investors

through [the broker]’s deceptions” and “were duped into

believing [he] would ‘conservatively invest’ their assets in

the stock market and that any transactions made on their

behalf would be for their benefit for the ‘safety of principal

and income.’” Jd. at 822. The broker was in a position of

trust and acted as a fiduciary to his clients. Accordingly, he

owed them a duty of disclosure and deceived them by

failing to disclose his true intention to use the stock sales

proceeds for his personal benefit. Jd. at 822-23.°

As the above discussion indicates, the Eighth Circuit

correctly followed this Court’s directives as to the type of

activity that qualifies as a “deceptive device or contriv-

ance” under the Act.

* Petitioner focuses on the following statement in Zandford:

“neither the SEC nor this Court has ever held that there must be a

misrepresentation about the value of a particular security in order to

run afoul of the Act.” (Pet. at 17 (quoting Zandford, 535 U.S. at 820).)

However, this Court was referring to the lower court’s reluctance to find

a claim where “[ijt is not even alleged that [the broker] misled [his

clients] about the relative merits or value of particular securities.” SEC

v. Zandford, 238 F.3d 559, 564 (4th Cir. 2001). Section 10(b) liability,

however, extends to both affirmative misrepresentations as discussed

by the lower court and omissions where a duty to speak exists. Indeed,

the Zandford Court stated that the distinction between affirmative

misstatem#ts and omissions is “illusory” where the context is a broker

who has a fiduciary duty to his or her clients. 535 U.S. at 823. Zand-

ford, thus, does not support the view that “deception” under the Act

extends beyond misrepresentations or omissions. Rather, Zandford

reflects the omissions variety of deceptive conduct previously recog-

nized by this Court.

B. “Manipulative” Conduct Refers To Illegal

Securities Trading Practices And Not To

Business Transactions.

An alternative basis for a Section 10(b) claim exists if

the conduct is “manipulative” under the Act. The Eighth

Circuit recognized that this term has been given “the

limited contextual meaning ascribed in Santa Fe.” (Pet.

App. at 8a.) “Manipulative” is considered to be “‘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 activ-

ity.’” (Pet. App. at 5a (quoting Santa Fe, 430 U.S. at 476).)

In Santa Fe, this Court declined to expand the term

beyond its commonly accepted usage. Thus, the request to

do so here does not justify granting the Petition.

In Santa Fe, this Court held that the term “manipu-

lative” as used in Section 10(b) did not extend to the

defendant’s actions in executing a short-form merger or in

obtaining an allegedly fraudulent appraisal to justify a

lower buy out price. 430 U.S. at 476-77. The Court found

that this business conduct was not the type of manipulat-

ive trading activity the securities laws were designed to

reach:

Section 10(b)’s general prohibition of practices

deemed by the SEC to be “manipulative” in this

technical sense of artificially affecting market ac-

tivity in order to mislead investors is fully consis-

tent with the fundamental purpose of the 1934

Act “to substitute a philosophy of full disclosure

for the philosophy of caveat emptor... .” Indeed,

nondisclosure is usually essential to the success

of a manipulative scheme. No doubt Congress

meant to prohibit the full range of ingenious de-

vices that might be used to manipulate securities

prices. But we do not think it would have chosen

this “term of art” if it had meant to bring within

the scope of § 10(b) instances of corporate mis-

management such as this. ...

Id. (citations omitted).

Ernst & Ernst is also instructive and was cited by the

Eighth Circuit. Ernst held that the term “manipulative”

“is and was virtually a term of art when used in connec-

tion with securities markets” referring to “intentional or

willful conduct designed to deceive or defraud investors-by

controlling or artificially affecting the price of securities.”

425 U.S. at 199. Petitioner cites to other definitions

discussed in Ernst, but tellingly avoids the Court’s discus-

sion of the word “manipulate.” (See Pet. at 11-12.) The

Ernst Court noted that “manipulate” when used in refer-

ence to “Exchanges” means “([t]o force (prices) up or down,

as by matched orders, wash sales, fictitious reports . . . ; to

rig.” Id. at 199, n.21.° This is consistent with the Eighth

Circuit’s opinion and Santa Fe. There was no error in the

circuit court’s handling of this issue or in the application of

precedent as demonstrated above.

* It is important to note that Petitioner cites to portions of the

Ernst decision that do not reflect the Court’s holding, but instead

summarize the position of the Securities and Exchange Commission

that was rejected by the Court. (See Pet. at 12 (citing Ernst, 425 US. at

212).)

C. Because S-A’s Conduct Was Neither Ma-

nipulative Nor Deceptive Under The Act,

Petitioner’s Claims Are At Most Aiding And

Abetting.

Petitioner suggests that the court of appeals erred in

its application of Central Bank — claiming that Central

Bank did not purport to address what constitutes a claim

for primary liability under Section 10(b). (See Pet. at 14.)

The circuit court’s decision that no claim was possible,

however, was based on both Central Bank’s prohibition

against aiding and abetting claims and this Court’s prior

interpretation of what constitutes deceptive or manipulat-

ive devices for purposes of primary liability. (See Pet. App.

at 8a-10a.) If the conduct of a defendant falls short of this

Court’s definition of primary liability, the conduct is at

most non-actionable aiding and abetting. The court of

appeals correctly concluded that “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.” (/d. at 9a.)

Here, it is undisputed that S-A made no statements to

Charter shareholders and could not be responsible for any

actionable omissions to them, given that it owed no duty to

speak to Charter’s investors (a fact which Petitioner does

not dispute). (See id. 9a-10a.) It is similarly without

dispute that S-A did not engage in any manipulative

trading practices regarding Charter stock that could have

affected its market or its prices. (See id.) Thus, Petitioner

has failed to plead a cognizable claim for primary liability.

Petitioner’s theory is based solely on S-A’s participa-

tion in the marketing support transaction — the only

conduct of S-A alleged in the Complaint. The Complaint,

however, concedes that this type of agreement could have

been accounted for properly by Charter — as S-A did on its

books. Further, Petitioner alleges no efforts by S-A to

misrepresent this transaction to Charter’s shareholders —

it alleges only that Charter misrepresented it.’ Petitioner

does not claim that any Charter shareholders were even

aware of the transaction. As this Court held in Central

Bank, “(w]e cannot amend [Section 10(b)] to create liability

for acts that are not themselves manipulative or deceptive

within the meaning of the statute.” 511 U.S. at 177-78.

Aiding and abetting claims are designed to “reach|{|

persons who do not engage in the proscribed activities at

all, but who give a degree of aid to those who do.” Jd. at

176. Because the only conduct alleged against S-A — an

agreement for marketing support — is not proscribed by

the statute, the claim asserted is one of aiding and abet-

ting the allegedly prohibited conduct of other parties,

which is barred by Central Bank. Id.’

" Petitioner makes additional allegations regarding certain

documentation on the marketing support transaction, attempting to

create the appearance of a “deceptive” act. (See Pet. at 21.) But Peti-

tioner never explains how this conduct supposedly reached or affected

Charter shareholders. Petitioner does not allege that any shareholders

ever saw these documents or that their contents were disclosed publicly.

Moreover, as discussed infra, these documents had no relation to the

purchase or sale of any Charter securities, and Charter investors did

rot purport to rely on these documents for purposes of making their

investment decisions.

* Petitioner's speculation that S-A “knew” Charter intended to use

the marketing support agreement to artificially inflate its reported

financial results does not save its claims. These allegations confuse “the

distinction drawn in Central Bank between primary violators and

aiders/abettors based on conduct with the separate issue of scienter.”

SEC v. U.S. Environmental, Inc., 155 F.3d 107, 111 (2d Cir. 1998).

(Continued on following page)

Il. PETITIONER’S THEORY OF “SCHEME” LI-

ABILITY FAILS TO SATISFY THE REQUIRE-

MENTS FOR PRIMARY LIABILITY AND DOES

NOT SUPPORT THE UNDERLYING PURPOSE

OF THE ACT

There can be no claim for primary liability under

Section 10(b) unless all of the necessary elements have

been met as to each defendant. Central Bank, 511 U.S. at

191. However, Petitioner has not pled, inter alia, (1) any

deceptive or manipulative act committed by S-A, as

discussed above, (2) that was in connection with the

purchase or sale of Charter stock, and (3) on which Peti-

tioner relied. Petitioner’s failure to plead all the well-

established and necessary elements of a claim under

Section 10(b) provides another basis for denying certiorari.

A. S-A’s Alleged Conduct Was Not “In Connec-

tion With The Purchase Or Sale Of Any

(Charter] Security.”

Central Bank observed that Section 10(b) “imposes

private civil liability on those who commit a manipulative

or deceptive act in connection with the purchase or sale of

securities.” 511 U.S. at 166 (emphasis added); see also 15

U.S.C. § 78). S-A, however, neither bought nor sold Char-

ter securities and is not alleged to have had any connec-

tion with the transactions by which Petitioner or other

putative class members became investors in Charter. The

Whether the defendant “was a primary violator rather than an aider

and abettor turns on the nature of his acts, not on his state of mind

when he performed them.” Jd. Accordingly, conclusory allegations of a

shared intent by S-A and Charter to mislead Charter’s investors cannot

create a cause of action against S-A under the Act.

marketing support agreement involved the sale of digital

set-top boxes, not the sale of Charter stock.

A commercial transaction unconnected to the pur-

chase or sale of a security cannot be deemed to fall within

Section 10(b) simply because the party standing on the

other side of the transaction was a public company whose

stock was purchased and sold by investors. Such a result

would extend the scope of liability far beyond the text of

the statute. Section 10(b) should not be interpreted so

broadly as to convert every allegation of common-law

fraud that happens to involve securities into a putative

Section 10(b) claim. See, e.g., Zandford, 535 U.S. at 820;

see also Marine Bank v. Weaver, 455 U.S. 551, 556 (1982)

(“Congress, in enacting the securities laws, did not intend

to provide a broad federal remedy for all fraud.”);

Chiarella v. United States, 445 U.S. 222, 232 (1980) (“[Njot

every instance of financial unfairness constitutes fraudu-

lent activity under § 10(b).”).

All the decisions of this Court on which Petitioner

purports to rely demonstrate the importance of the “in

connection with” requirement. In each of these cases, the

defendant had personally engaged in conduct directly “in

connection with the purchase or sale of a security,” unlike

here. See, e.g., Zandford, 535 U.S. at 824-25 (broker sold

customer’s securities without permission and without

disclosing intent to misappropriate proceeds); O'Hagan,

521 U.S. at 659 (holding that secretly using misappropri-

ated confidential information for trading purposes violated

Section 10(b)); Affiliated Ute, 406 U.S. at 151-53 (finding

that defendants could be liable under Rule 10b-5(a) and (c)

because they executed plaintiffs’ stock sales on which they

stood to personally profit and were also purchasers of the

same stock on their own behalf and on behalf of other

accounts they solicited, set up, and on which they received

commissions); Superintendent of Ins., 404 U.S. at 9-10

(misleading investor into selling treasury bonds on errone-

ous belief that it would receive proceeds from the sale)..

The marketing support agreement between S-A and

Charter is not, and has not been alleged to be, “in connec-

tion with the purchase or sale” of Charter stock. This

missing element is an independent basis for the correct-

ness of the circuit court decision and denial of the Petition.

B. Petitioner Cannot Satisfy The Mandatory

Requirement Of Reliance.

Petitioner’s theory of scheme liability also fails be-

cause it cannot plead reliance or transaction causation.

The inability to demonstrate reliance is one of the reasons

why aiding and abetting claims cannot be allowed. Central

Bank, 511 U.S. at 180. Under Central Bank, primary

liability under Section 10(b) requires “a manipulative

device or ... a material misstatement (or omission) on

which a purchaser or seller of securities relies....” 511

U.S. at 191 (emphasis added).

Petitioner has not pled that it relied on anything S-A

said or did. In fact, Petitioner shareholder does not dispute

that it relied solely on the public statements of Charter

and the purported effect of those statements on Charter’s

stock price. This is fatal to its claims. Under Central Bank,

there is no exception to the requirement of pleading

reliance simply because a plaintiff chooses to sue multiple

defendants whom it claims participated together in an

alleged “scheme.” Petitioner must plead individual reli-

ance or be able to avail itself of a judicially recognized

presumption of reliance, such as the “fraud-on-the-market”

theory from Basic Inc. v. Levinson, 485 U.S. 224 (1988).

The Petition makes reference to neither.

In any event, under the fraud-on-the-market theory,

only publicly available information and misleading state-

ments released to the market by Charter could have

influenced the price of Charter’s securities. See id. at 247

(“Because most publicly available information is reflected

in market price, an investor’s reliance on any public

material misrepresentations, therefore, may be presumed

for purposes of a Rule 10b-5 action.”) (emphasis added).

There were no statements issued to the market by S-A

regarding the subject transaction or Charter. Thus, the

essential element of reliance does not and cannot exist

here, which requires dismissal under Central Bank. See

511 U.S. at 180 (“Allowing plaintiffs to circumvent the

reliance requirement [through aiding and abetting claims]

would disregard the careful limits on 10b-5 recovery

mandated by our earlier cases.”).”

* Petitioner’s theory of scheme liability also fails because it cannot

allege sufficient facts to show loss causation, another mandatory

requirement of Section 10(b). See generally Dura Pharmaceuticals, Inc.

v. Broudo, 544 U.S. 336 (2005). Loss causation “cannot be found if an

intervening cause was responsible for the plaintiff’s economic loss.”

Unterberg Harris Private Equity Partners, L.P. v. Xerox Corp., 995

F. Supp. 437, 441 (S.D.N_Y. 1998). Petitioner alleges no facts to show

that the marketing support transaction itself (and not Charter’s

intervening alleged improper accounting) caused any of the purported

inflation of the price of Charter stock. Had Charter accounted for the

transaction properly, there would have been no purported artificial

inflation, and Petitioner concedes that such transactions could be

accounted for properly.

C. Expanding The Scope of Liability As Peti-

tioner Requests Would Not Fulfill The Pur-

pose Of The Act.

As prior precedent from this Court demonstrates, the

goal of the Act is to promote disclosure. See, e.g., Teherep-

nin v. Knight, 389 U.S. 332, 336 (1967) (noting that “[ojne

of [the Act’s] central purposes is to protect investors

through the requirement of full disclosure by issuers of

securities, ....”); see also Affiliated Ute, 406 U.S. at 151

(the Act “embrace[s] a ‘fundamental purpose .. . to substi-

tute a philosophy of full disclosure for the philosophy of

caveat emptor....’”). “[A] private cause of action under

the antifraud provisions of the ... Act should not be

implied where it is ‘unnecessary to ensure the fulfillment

of Congress’s purposes’ in adopting that Act.” Santa Fe,

430 U.S. at 477.

The recognition of a cause of action here would not

promote this essential goal of disclosure. The party which

Petitioner contends should have disclosed the “true” facts

is Charter. The proposed defendant S-A is a separate

entity altogether which owed the Charter shareholders no

disclosure obligations. S-A is also not alleged to have had

the ability to police the public statements of Charter or to

have been involved in their preparation or circulation.

Moreover, to recognize the cause of action sought by

Petitioner would add uncertainty to this area of the law.

As this Court found in Central Bank, “‘|s]uch a shifting

and highly fact-oriented disposition of the issue of who

may [be liable for] a damages claim for violation of Rule

10b-5’ is not a ‘satisfactory basis for a rule of liability

imposed on the conduct of business transactions.’” 511

U.S. at 188 (citations omitted). Concerns over expanding

the scope of potential liability too broadly are particularly

relevant in securities cases. “‘[L]itigation under Rule 10b-

5 presents a danger of vexatiousness different in degree

and in kind from that which accompanies litigation in

general.’” Jd. at 189 (citations omitted).

In this respect, it is ironic that Petitioner suggests

certiorari should be granted because Section 10(b) liability

presents “‘an area that demands certainty and predictabil-

ity,....’” (Pet. at 10 (citing Central Bank, 511 US. at

188).) It would, however, have this Court articulate a new

rule of law that would extend potential liability to parties

who owe no current duty under the law. The Eighth

Circuit acknowledged the dangers associated with such a

view, noting that it was for Congress to first decide such

matters. (See Pet. App. at 10a (recognizing that Peti-

tioner’s theory of liability “would introduce potentially far-

reaching duties and uncertainties for those engaged in

day-to-day business dealings.”).) It is not, therefore,

“critically important” to grant certiorari here to change the

law in a direction that would be contrary to the Act and

that has been rejected in prior decisions of this Court.

Ill. THE DECISIONS FROM OTHER COURTS

CITED BY PETITIONER DO NOT SUPPORT

GRANTING CERTIORARI

The Charter decision is consistent with the Act and

this Court’s prior decisions. Petitioner’s certiorari request

asks this Court to depart from prior precedent and em-

brace the decisions of certain district courts and a decision

of the Ninth Circuit that purport to adopt new standards

of liability. (See, e.g., Pet. at 18-20.)”°

The cases on which Petitioner relies are not persua-

sive for the reasons outlined above. They are in conflict

with this Court’s prior rulings, are inconsistent with the

text and purpose of Section 10(b), and authorize recovery

where all the mandatory requirements of a Section 10(b)

claim cannot be satisfied. They do not, therefore, provide a

basis for granting the Petition.

The following decisions from courts, other than this

Court, support the Eighth Circuit’s interpretation of

Section 10(b) and Central Bank: Fidel v. Farley, 392 F.3d

220 (6th Cir. 2004); Ziemba v. Cascade Int'l, Inc., 256 F.3d

1194 (11th Cir. 2001); Wright v. Ernst & Young LLP, 152

F.3d 169 (2d Cir. 1998); Dinsmore v. Squadron, Ellenoff,

Plesant, Sheinfeld & Sorkin, 135 F.3d 837 (2d Cir. 1998);

Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997); Anixter v.

Home-Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996);

Dutton v. D&K Healthcare Resources, No. 4:04CV147SNL,

2006 WL 1778863 (E.D. Mo. June 23, 2006); In re Dynegy,

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

Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549

(S.D.N.Y. 2004); and In re Livent, Inc. Noteholders Sec.

Litig., 174 F. Supp. 2d 144 (S.D.N.Y. 2001).

* The Ninth Circuit apparently does not believe that its decision in

Simpson v. AOL Time Warner Inc., 452 F.3d 1040 (9th Cir. 2006), is in

conflict with Charter. See Simpson, 452 F.3d at 1050 (citing Charter in

support of the point that “[pjarticipation in a legitimate transaction,

which does not have a deceptive purpose or effect, would not allow for a

primary violation even if the defendant knew or intended that another

party would manipulate the transaction to effectuate a fraud.”).

CONCLUSION

For the foregoing reasons, the Petition for Writ of

Certiorari should be denied.

Respectfully submitted,

OscaR N. PERSONS

Counsel of Record

SUSAN E. HURD

KELLY C. WILCOVE

AMBREEN A. DELAWALLA

ALSTON & BIRD LLP

1201 West Peachtree Street

Atlanta, Georgia 30309-3424

(404) 881-7000

Counsel for Respondent,

Scientific-Atlanta, Inc.

October 20, 2006

App. 1

JURY TRIAL DEMANDED

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

IN RE CHARTER MDL DOCKET

COMMUNICATIONS, INC. NO. 1506 (CAS)

SECURITIES LITIGATION ALL CASES

STONERIDGE INVESTMENT Consolidated Case

PARTNERS LLC, No. 4:02-CV-1186 CAS

Individually and On Behalf of

All Others Similarly Situated,

Plaintiff,

Vv.

CHARTER COMMUNICATIONS,

INC., PAUL ALLEN, JERALD

L. KENT, CARL E. VOGEL,

KENT KALKWARF, DAVID G.

BARFORD, PAUL E. MARTIN,

DAVID L. McCALL, BILL

SHREFFLER, CHRIS

FENGER, JAMES H. SMITH,

Ill, SCIENTIFIC-ATLANTA,

INC., MOTOROLA, INC. and

ARTHUR ANDERSEN, LLP,

Defendants.

AMENDED CONSOLIDATED CLASS

ACTION COMPLAINT FOR VIOLATIONS

OF FEDERAL SECURITIES LAW

(Filed Aug. 5, 2003)

Lead Plaintiff, by its attorneys, for its Consolidated

Class Action Complaint alleges the following upon personal

App. 2

knowledge as to itself and its own acts, and upon informa-

tion and belief based upon the investigation of Lead

Plaintiff’s attorneys as to all other matters. The investiga-

tion included the thorough review and analysis of public

statements, publicly filed documents of Charter Communi-

cations, Inc. (“Charter” or the “Company”), press releases,

news articles, and the review and analysis of accounting

rules and related literature.

The investigation also included extensive interviews

with numerous former Charter employees from offices in

virtually all regions in which the Company does business.

Such employees include individuals who held varied and

diverse positions with the Company: directors of opera-

tions and marketing, accounting managers, technical

supervisors and customer service representatives. The

allegations set forth herein reflect specific and credible

information provided by such individuals regarding

Charter’s ongoing practices, which were often corroborated

by multiple employees.

SUMMARY OF ACTION

1. This is a securities class action on behalf of

investors who purchased the securities of Charter during

the period from November 8, 1999, through July 17, 2002

(the “Class Period”). Lead Plaintiff complains of a fraudu-

lent scheme that injured purchasers of Charter stock

during the Class Period.

2. Charter is headquartered in St. Louis, Missouri

and purports to be the nation’s fourth largest cable opera-

tor.

App. 3

3. From the outset of the Class Period, Defendants

portrayed Charter as a booming company which was

experiencing a steady internal growth rate of new sub-

scribers (in contrast to new customers from acquired

companies), along with increased operating “cash flow”

and reduced losses. Indeed, the Company boasted that its

2+% internal growth rate for new customers was the

highest of the nation’s large cable companies, and that it

was likewise a leader in “operating cash flow” growth.

4. In order to maintain this upbeat image, defen-

dants engaged in a pervasive and continuous fraudulent

scheme intended to artificially boost the Company’s

customer dbase and reported financial results. But for this

scheme, Charter would have reported no net increase in

customers from internal growth. Moreover, Charter’s

critical growth rate of operating cash flow was materially

inflated during 2001, and was only half che amount

publicly reported.

5. Among other things, defendants inflated Charter’s

internal customer growth rate by deliberately delaying

“disconnects” for over 100,000 customers wh* were no

longer paying their bills, or who had advised the Company

they wished to terminate their service.

6. In addition, defendants materially inflated Char-

ter’s operating cash flow by improperly capitalizing labor-

related and other costs that should have been expensed.

Defendants also improperly recognized up front all reve-

nues received in connection with the launch of new pro-

gramining channels, rather than spreading such revenues

over the term of the programming contract.

7. As a further device to inflate the Company’s

reported performance, Charter entered into kickback

P App. 4

arrangements with defendants Scientific-Atlanta, Inc.

(“Scientific-Atlanta”) and Motorola, Inc. (“Motorola’), the

suppliers of key components for use by Charter’s custom-

ers. During the fourth quarter of 2000, Charter agreed to

pay Scientific-Atlanta and Motorola an additional $17

million for digital set-top boxes used by cable customers

above and beyond the amounts ordinarily charged for such

components. In exchange for these defendants agreed to

kickback all those additional monies to Charter in the

form of “advertising fees.” Charter booked the payments

to Scientific-Atlanta and Motorola as capital expenditures

(which were then depreciated over the life of the equip-

ment, and thus not included in Charter’s reported “operat-

ing cash flow” figures), while it improperly booked the

“advertising fees” received from Scientific-Atlanta and

Motorola as revenue (rather than a direct set-off against

costs), thereby inflating revenues and cash flow.

8. As a result of these fraudulent accounting prac-

tices, Charter’s reported revenues and operating cash flow

were materially inflated, and its losses were materially

understated.

9. Defendants engaged iu this uiulti-prong scheme

for one purpose — to “meet the numbers” that Wall Street

had projected for Charter, and thereby boost the price of

the Company’s stock, enabling it to acquire other compa-

nies using its inflated stock as currency.

10. As a result of these illegal practices, Charter’s

stock price rose to an artificial Class Period high of $26.31

per share.

11. On July 17, 2002, analysts voiced skepticism

regarding some of Charter’s accounting practices. Shortly

thereafter, on August 16, 2002, the Company revealed that

App. 5

a federal grand jury was conducting a criminal probe of

Charter’s accounting for capital expenses, and its inflating

the number of customer accounts. This followed the write-

off of 145,000 customers by Charter earlier in the year,

effectively wiping out all the previously reported internal

subscriber growth.

12. On October 22, 2002, the Company announced

that, due to the pendency or: the Grand Jury proceedings,

it was placing its Executive Vice President and Chief

Operating Officer, defendant David G. Barford, on paid

leave.

13. Subsequently, on December 23, 2002, the Com-

pany announced that both Barford and the Company’s

Chief Financial Officer, defendant Kent D. Kalkwarf, had

been fired following an internal investigation of various

matters, including those related to the Grand Jury inves-

tigation. The Company also stated that its books and

records for the years 2000 and 2001 were being reaudited

by the Company’s new accountants, KPMG LLP, who had

replaced defendant Arthur Andersen LLP.

14. On February 10, 2003, it was publicly disclosed

that the Grand Jury investigating Charter had subpoe-

naed records from Scientific-Atlanta.

15. On April 2, 2003, Charter announced its “pre-

liminary” restatement of reported results for 2000 and

2001, as well as the first three quarters of 2002. The

Company acknowledged for the first time that its “operat-

ing cash flow,” otherwise known as earnings before inter-

est, taxes, depreciation and amortization (“EBITDA”), had

been inflated for 2001 by 19.5% ($292 million), and for

2000 by 14.5% ($195 million). Most significantly, the

Company acknowledged for the first time that whereas it

App. 6

had reported operating cash flow had grown 12.5% during

2001 compared to 2000, in fact, such growth had been only

half that amount.

16. The foregoing fraudulent practices materially

inflated Charter’s stock price. Increasing skepticism

regarding the accuracy of the Company’s prior disclosures

caused Charter’s stock price to fall from over $20 in late

2001, to less than $10 by July 2002. Following the disclo-

sure of the Grand Jury Investigation, the price plum-

meted, falling to a 52-week low of $0.76 on October 11,

2002, down approximately 97% from its Class Period high.

17. On July 24, 2003, the Grand Jury returned an

indictment (“Indictment”) against four of the defendants —

David G. Barford, Kent D. Kalkwarf, David L. McCall and

James H, Smith, II], charging that they “knowingly

devised and intended to devise a scheme to defraud

investors in Charter securities.” The Indictment focused

specifically on deliberate inflation of Charter’s customer

count, and the kickbacks from Scientific-Atlanta and

Motorola. On July 25, 2003, defendant McCall entered a

guilty plea, signed a Plea Agreement, Guidelines Recom-

meéndations and Stipulations (“Plea Agreement”), and

acknowledged in Court that he had been instructed to

inflate subscriber counts.

ISDICTION VEN

18. This Court has jurisdiction over this action

pursuant to Section 27 of the Securities Exchange Act of

1934 (the “1934 Act”), 28 U.S.C. §§ 1331 and 1337. The

claims asserted herein arise under Section 11 of the

Securities Act of 1933 (the “1933 Securities Act”), 15

U.S.C. § 77 (k); Section 12 of the 1933 Securities Act, 15

App. 7

U.S.C. § 77(1); Section 15 of the Securities Act, 15 U.S.C.

§ 77(0); Sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C.

§§ 78j(b) and 78t(a); and Rule 10b-5, 17 C.F.R. § 240.10b-5,

promulgated thereunder by the SEC.

19. Venue is proper in this District pursuant to

Section 22 of the 1933 Act, 15 U.S.C. § 77(v); Section 27 of

the 1934 Act, 15 U.S.C. § 78aa; and, 28 U.S.C. § 1391(b).

Many of the Charter Related Defendants reside in this

District. Many of the acts giving rise to the violations

complained of, including the dissemination of false and

misleading public statements and financial information,

occurred in this District.

20. In connection with the wrongs alleged herein,

Defendants used the instrumentalities of interstate

commerce, including the United States mails, interstate

wire and telephone facilities, and the facilities of the

national securities markets.

THE PARTIES

21. Lead Plaintiff StoneRidge Investment Partners

LLC purchased shares of Charter commen stock in the

Company’s Initial Public Offering on November 8, 1999,

and during the Class Period, as set forth in its previously

filed Certification, and was damaged thereby.

22. Defendant Charter is a Delaware corporation

whose headquarters are located at 12405 Powerscourt

Drive, St. Louis, Missouri 63131. Charter is a cable opera-

tor that provides video, data, interactive and private

business network services to purportedly seven million

customers in forty States through the Company's broad-

band network of coaxial and fiber-optic cable. The Company

App. 8

offers traditional analog cable as well as digital television

services, along with an array of advanced products and

services such as high-speed Internet access, interactive

video programming and video-on-demand. By the end of

the Class Period, Charter’s customer base was approxi-

mately 7 million. As of May 24, 2002, Charter had

294,647,000 shares of common stock outstanding. Char-

ter’s shares trade on the Nasdaq National Market under

the symbol “CHTR.”

23. Defendant Paul Allen (“Allen”) is the founder,

Chairman and controlling shareholder of Charter. Defen-

dant Allen owns 56% of Charter’s outstanding shares

through a holding company, Vulcan Ventures Incorporated,

which is entitled to all of Charter’s tax losses.

24. Defendant Jerald L.. Kent (“Kent”) was the

President, Chief Executive Officer and director of Charter

from July 1999 through the time of his resignation, which

was effective as of September 28, 2001. Kent had previ-

ously served as Chief Financia} Officer of Charter Invest-

ment, Inc., a predecessor to, and affiliate of, the Company.

From 1979 to 1983 Kent worked in the Tax Division of

Aithw: Anderson.

25. Defendant Carl E. Vogel (“Vogel”) became Char-

ter’s President and Chief Executive Officer, and a director

of the Company, in October 2001.

26. Defendant Kent Kalkwarf (“Kalkwarf”) was,

during the Class Period, Executive Vice President and

Chief Financial Officer (“CFO”) of Charter. Kalkwarf was

formerly a partner of defendant Arthur Andersen LLP.

Defendant Kalkwarf has been indicted by the Grand Jury

investigating Charter’s misconduct.

App. 9

27. Defendant David G. Barford (“Barford”) was,

during the Class Period, Executive Vice President and

Chief Operating Officer of Charter. Defendant Barford has

been indicted by the Grand Jury investigating Charter’s

misconduct.

28. Defendant Paul E. Martin (“Martin”) was, during

the Class Period, Senior Vice President and Corporate

Controller (Principal Accounting Officer).

29. Defendant David L. McCall (“McCall”) was,

during the Class Period, Senior Vice President of Opera-

tions for Charter’s Eastern Division. In addition to his

salary, McCall was a member of a partnership that re-

ceived $177,600 in 2001 for office space leased to Charter.

In addition, in 2001, Charter paid $571,533 to a construc-

tion company controlled by McCall’s brother and $462,071

to a construction company controlled by McCall’s son.

Defendant McCall has been indicted by the Grand Jury

investigating Charter’s misconduct, and has entered a

guilty plea.

30. Defendant William Shreffler (“Shreffler”) was,

during the Class Period. Senior Vice President of Opera-

tions for Charter’s MidWest Division.

31. Defendant Chris Fenger (“Fenger”) was, during a

portion of the Class Period, Senior Vice President of

operations for Charter’s Western Division.

32. Defendant James H. Smith, III (“Smith”) was,

during a portion of the Class Period, Senior Vice-President

of Operations in charge of Charter’s Western Division.

Defendant Smith has been indicted by the Grand Jury

investigating Charter’s misconduct.

App. 10

33. Defendants Allen, Kent, Vogel, Kalkwarf, Bar-

ford, Martin, McCall, Shreffler, Fenger and Smith are

sometimes referred to herein as the “Individual Defen-

dants.” Collectively with Charter, the Individual Defen-

dants are referred to as the “Charter Related Defendants.”

34. Defendant Scientific-Atlanta, Inc. (“Scientific-

Atlanta”) is based in Atlanta, Georgia, and is one of the

nation’s leading manufacturers of electronic equipment,

including digital set-top boxes for use in the cable indus-

try. A digital set-top box is equipment that is placed on a

subscriber’s television enabling it to receive and view

digital television. Charter purchases this equipment and

supplies them to its customers so they can view Charter’s

cable television programs.

35. Motorola, Inc. (“Motorola”) is based in Schaum-

burg, Illinois, and is one of the nation’s leading manufac-

turers of electronic equipment, including digital set-top

boxes for use in the cable industry.

36. Defendant Arthur Andersen LLP (“Arthur

Andersen”) is an accounting firm headquartered in Chi-

eago, Mlinois, which served as (Charter’s independent

auditor during the Class Period.

BACKGROUND

Charter’s Corporate Structure

37. During the Class Period, Charter was headquar-

tered in St. Louis, Missouri, where all statements issued

to investors were prepared and disseminated. Through

2000, Charter was divided into two operating “divisions,”

the Eastern and Western Divisions. Defendant McCall was

the Senior Vice President of Operations for the Eastern

App. 11

Division, In 2001, the Western Division was divided into

the (i) Midwest and (ii) Western Divisions, at which time it

was headed by Senior Vice Presidents, defendants (i)

William Shreffler and (ii) Chris Fenger and James Smith,

III. Each of the Senior Vice Presidents for the Divisions

were featured in Charter’s Annual Reports. Within each of

the Divisions there were several “Operating Regions,” of

which there were 10-12 altogether.

38. The Divisions, Regions, and individual offices of

Charter were linked through two centralized computer

systems, known as “Cable Data” and “CSG,” that tracked

all customer account and billing information.

39. Accounting personnel at Charter’s Western

Division office, located in Denver Colorado, collected and

compiled financial data from the local and regional offices

and forwarded the results to corporate accounting at

Charter’s headquarters in St. Louis. Defendant Kalkwarf,

the Chief Financial Officer and defendant Martin, the Vice

President of Accounting, supervised the fina! compilation

of Charter’s financial numbers in St. Louis.

The Im ce of ti h Flow EBITDA

and Customer Growth in the Cable Industry

40. During the late 1990s, cable companies went

through a period of significant capital investment and

consolidation. Companies installed wire cable networks at

significant expense, while also acquiring smaller compa-

nies. During this period, it was not unusual for cable

companies’ expenses to exceed revenues. For stock market

analysts who followed the industry, though, the short term

losses were not important so long as the companies were

App. 12

building solid customer bases while sustaining a signifi-

cant positive cash flow growth rate.

41. Critical to the assessment of the strength of a

cable company’s customer base was the degree to which it

grew internally (rather than through acquisitions). Such

growth indicated that customers were pleased with ser-

vices and were not defecting. This became particularly

critical as the cable companies faced stiff competition from

satellite television companies, which did not rely upon

costly underground wire cable systems.

42. “Operating cash flow” was also an important

measure of cable companies’ performance. Technically

known as “EBITDA,” operating cash flow was a commonly

used alternative means of gauging the quality of a com-

pany’s performance. Until recently, EBITDA was also

perceived to be a more reliable measurement of the com-

pany’s results, since it reflected the company’s core operat-

ing costs during any period (rather than capital

investments whose benefits would be realized over a

longer time frame). Cable industry companies and ana-

lysts tended to use the terms EBITDA and “operating cash

flow” interchangeably.

Generally Accepted Accounting Principles Ap-

plicable to Cable Companies

43. Given the significance assigned operating cash

flow, it was critically important whether a company

expensed certain costs, or capitalized them over a period of

time (in which case they were excluded from operating

cash flow). Generally Accepted Accounting Principles

(“GAAP”) govern the accounting for such costs and the

determination of whether they are expensed or capitalized.

App. 13

44. Financial Accounting Standard (“FAS”) 51

governs the standards for accounting on specific issues

related to the cable industry. Among other things, FAS 51

states:

a. Labor costs associated with installing

new services on the first visit to an address can

be capitalized, and then depreciated over a pe-

riod no longer than the period used to depreciate

the cable television plant.

b. A portion of associated “indirect” costs,

that are associated with installation or upgrade

labor costs may likewise be capitalized.

c. The costs of subsequently disconnecting

or reconnecting a subscriber (or an address) must

be expensed. Thus, the second time a service is

enabled at an address (even if it is a new sub-

scriber), it must be expensed in the period in-

curred.

d. “Subscriber related costs” and general

administration expenses must be expensed in the

period incurred. These costs include:

Cost of billing and collection, bad debts,

mailings, repairs and maintenance of taps

and connections, general and administrative

systems costs such as salary of the system

manager and office rent, programming costs

for additional channels used in the market-

ing effort or costs related to revenues from

per channel or per program service, and di-

rect selling costs.

App. 14

Charter’s Accounting Policies

45. Throughout the Class Period, Charter’s stated

accounting policy for expenses conformed to GAAP. That

stated policy was:

Costs capitalized as part of new customer instal-

lations include materials, subcontractors costs,

internal direct labor costs, including service tech-

nicians and customer care representatives and in-

ternal overhead costs incurred to connect the

customer to the plant from the time of installation

scheduling through the time service is activated

and functioning. We capitalize incremental and

direct contract acquisition costs to the extent re-

alizable from future revenues. The overhead

rates established are based on a combination of

internal company-wide overhead analysis and in-

ternal time and motion studies of specific activi-

ties. These studies are updated to adjust for

changes in facts and circumstances. . . . The costs

of disconnecting and reconnecting a customer are

charged to expense in the period incurred. Ex-

penditures for repairs and maintenance are

charged to operating expense as incurred, while

equipment replacements and betterments, in-

cluding the replacement of drops, are capitalized.

[Emphasis Supplied].

46. While the Company’s stated policy conformed to

GAAP, in actual practice, as discussed below, the Company

consistently violated its own policy and GAAP by arbitrar-

ily capitalizing material portions of certain labor related

expenses in order to artificially enhance its operating cash

flow results in line with Wall Street’s expectations. This

dovetailed with Charter’s fraudulent inflation of its

internal customer growth rate, aiso detailed below.

App. 15

47. The favorable, though fraudulent, results that

Charter disseminated during the Class Period were

intended to enable the Company to meet analysts’ fore-

casts and thereby prop up the price of Charter stock. In

turn, this enabled the Company to continue to use its

stock as valuable currency on its acquisition spree. In 1999

and 2000 alone, Charter completed sixteen acquisitions.

Such transactions include: (i) the acquisition of Bresnan

Communications Company (involving cable systems in

Michigan, Minnesota, Wisconsin and Nebraska) for ap-

proximately $3.1 billion, in which $1.0 billion in Company

equity was utilized to finance such purchase price; (ii) a

stock for stock merger with Cablevision of Michigan, Inc.,

a cable system in Kalamazoo, Michigan, in which Charter

issued Class A common stock purportedly valued at

approximately $170.6 million; and, (iii) the acquisition of

several cable systems from Cable USA, Inc., and its

affiliates for a total purchase price of $100.3 million,

financing more than one-half of such purchase ($55.7

million) with the Company’s Series A Convertible Redeem-

able Preferred Stock.

THE FRAUDULENT SCHEME

48. Throughout the Class Period, defendants Kalk-

warf and Barford were principally responsible for making

sure that the Company met Wall Street’s expectations,

regardless of whether doing so reflected Charter’s true

operating and financial condition. These defendants

instructed lower level personnel, including the senior

operating officers of each division, to utilize certain

fraudulent techniques to insure that the “numbers” were

indeed “met.” In order to accomplish these ends, defen-

dants Kalkwarf and Barford instructed other personnel to

App. 16

inflate the customer counts and arbitrarily capitalize

certain costs. In addition, as discussed below, defendants

Kalkwarf and Barford engaged in kickback arrangements

with Scientific-Atlanta and Motorola for the sole purpose

of materially inflating Charter’s revenue and operating

cash flow.

Inflation of the Customer Counts and Internal

Growth Rates

49. As discussed above, Charter touted its 2+%

internal growth rate as being the best in the industry. To

meet this rate, the Company had to annually add up to

140,000 new customers to its subscriber base by means

other than purchasing other cable companies.

50. Analysts were enamored with the Company

because of this growth rate. As a Credit Suisse analyst

commented in a report issued on May 14, 2002: “Charter

has historically been one of the fastest-growing cable

MSO’s owing to industry-leading basic sub|scriber]

growth. ...” It also meant that Charter was successfully

confronting the increased competition from satellite

television companies.

51. This appearance of internal growth was a

fraudulent illusion created by defendants to cover up the

absence of any genuine internal customer growth. But for

this scheme, Charter would have reported that the inter-

nal customer growth rate was flat, rather than 2+%.

Plaintiffs’ investigation indicates that this scheme was

long-standing and grew exponentially throughout the

Class Period. The Grand Jury charged that the criminal

scheme to inflate subscribers commenced “in or about May

2001” when “it became clear to defendants that Charter

App. 17

would not reach its second quarter subscriber growth

projections if its normal business practices for disconnect-

ing customers were followed.”

52. Pursuant to this scheme, defendants Kalkwarf

and Barford instructed employees during weekly confer-

ence calls and in other communications to “manage”

disconnects of customers in order to reach subscriber

growth rate estimates projected by Wall Street analysts.

53. Among other things, Charter personnel inflated

the customer count by the following fraudulent techniques:

a. Whenever a customer requested termination,

or was otherwise 60 days or more behind in payments, the

customer should have been disconnected and/or no longer

counted in the subscriber base. In order to avoid the

adverse impact this would have had on reported figures,

Charter personnel routinely were told to “hold discon-

nects,” that is, to not process the paperwork for the termi-

nation. Company-wide, this amounted to over 100,000

customers during the Class Period. These terminations, if

treated properly, would have wiped out all of the Com-

pany’s reported internal customer growth rate.

b. At the beginning of the Class Period, the

practice was to hold disconnects until after the close of the

quarter, to enable Charter to make its numbers, and then

to process the terminations. Each quarter’s internal

growth figures was materially inflated by the failure to

exclude these customers who the Company knew were no

longer paying for the service. As the Class Period pro-

gressed, the period for holding disconnects was extended

beyond the end of one quarter, and cumulatively ex-

panded.

App. 18

c. Charter personnel were also instructed to hold

the disconnects of customers who had been given 3-6

months of free trial service, but had refused to pay after

the end of the trial period. Nonetheless, during the free

trial period, Charter assigned a nominal fee to these

accounts in order to include them as paying subscribers,

even though the Company did not generate a bill for these

accounts and did not receive any revenue from them.

d. Charter personnel were instructed to rou-

tinely double-count customers if they (i) moved from one

location to the next (counting both their prior and new

location); (ii) upgraded their account (counting the old

service and the additional service separately); and/or (iii)

reactivated service (counting the prior service and the

reactivated service separately).

e. Charter personnel were instructed to rou-

tinely misclassify its cable customers in order to paint a

false picture of internal growth. Charter offered customers

its basic cable package, or alternatively, just access to the

Internet (data access, or digital-only customers). The

former were much more desirable, since charges for the

basic package were considerably higher than Internet

access only. Charter thus routinely: (i) included 50% of the

monthly fee paid by digital-service-only customers in the

basic cable revenues; and, (ii) included such digital-only

customers in the total count of the basic cable customers.

This enhanced the false appearance of the Company’s

customer growth rate.

f. As further evidence of the fraudulent nature

of this overcounting scheme, Charter offices routinely

maintained two sets of books regarding customer counts:

(i) the first set included the inflated numbers, which

App. 19

incorporated “holds” on disconnects and other devices

which overstated Charter’s true subscriber count (but

reached the “quota” assigned to that office), and were

passed on to corporate headquarters; and, (ii) the second

set, which contained the actual, lower numbers, which

were utilized to calculate employee bonuses.

g. By way of example, during the period 1999

through 2002, Charter’s offices in Ceorgia actively en-

gaged in hold disconnects practices. Sometimes customers

were disconnected in the field, but the disconnect was not

processed in the Company’s billing system. Other times,

customers were not even disconnected in the field. Such

disconnects were held until the local office turned in its

subscriber count and financial reports to the regional

offices at the end of each quarter, after which the discon-

nects were processed.

54. Even though customers slated for disconnection

were not paying, or had requested termination, Charter

continued to routinely bill them. To avoid complaints from

customers who had requested termination, but whose

disconnects were subject to “holds,” Charter resorted to

issuing bills to these customers but changing the mailing

address to Charter’s own offices. This enabled the Com-

pany to record the customers as active (and record their

bills as payable). Such examples include:

a. Starting in July 2001, Charter’s General

Manager in Columbia, Tennessee, Don Grammar, follow-

ing instructions that were received from headquarters,

ordered his office to generate and mail out phony bills for

terminated customers (as it had previously), but to change

the addresses on such bills to Charter’s own office instead

of the customer. In some cases, the bills and envelopes

App. 20

were also addressed “ATTN DON,” reflecting the name of

the General Manager.

b. When an employee in the Columbia, Tennes-

see office raised questions about the legality of the inflated

subscriber counts, she was told by the General Manager’s

administrative assistant that corporate headquarters was

ordering all of its offices to delay processing the discon-

nects. Copies of such bills are attached.

55. Some offices took the fraudulent invoices process

one step further, and created fictitious accounts with

invoices mailed to Charter offices. For example:

a. In its Duluth, Georgia offices, a senior officer

instructed customer service representatives to create such

phony billings, have them mailed out to a Charter address

so that they would be returned to Charter, and locked in

the filing cabinet in his office. Fictitious customer names,

such as “Jack Daniels” and “Dale Earnhardt,” were util-

ized in such a scheme.

b. False subscriber accounts were also created at

Charter’s Stockbridge, Georgia offices at the direction of

Phil Skinner, the General Manager and Director of Opera-

tions for Charter’s Southern Region.

56. Several Charter employees, including defendants

McCall and Smith, raised objections to the practice of

holding disconnects in order to meet projected subscriber

numbers. Nonetheless, defendant Barford insisted that

employees hold the disconnects in order to make the

numbers. Despite their objections, Smith and McCall

relayed these instructions to subordinates knowing tnat

this would results in Charter publicly reporting materially

inflated subscriber counts.

App. 21

57. Charter made sure that its employees knew that

this was the way the Company did business by quickly

terminating any lower level personnel who questioned or

complained about the policy:

a. When employees in the Maryville, Illinois

office questioned these practices at a meeting in late 2001

or early 2002, they were threatened by the head of Human

Resources with the loss of their jobs and the loss of any

severance if they made any public disclosures of the above-

described practices.

b. Some of these terminations involved generous

severance packages that sought to preclude anyone from

discussing the Company’s illegal business practices with

anyone. William Reilly (Charter’s finance director for

Georgia) was the beneficiary of such a package.

58. Other specific examples of instances where

disconnects were delayed beyond the end of quarters so

that Charter could “make its numbers” during 2001

include:

a. In weekly conference calls, Kalkwarf and

Barford directed other Charter officers to inflate sub-

scriber growth rates in order to meet internal and ana-

lysts’ projections.

b. In response to these directives, defendant

McCall, Vice President of Operations for the Eastern

Region, specifically ordered Regional Directors in Georgia

(Phillip Skinner, William Reilly and Michael Davolt) to

hold disconnects until after the end of quarters. At the

hearing on July 25, 2003 where he entered his plea of

guilty to the indictment, defendant McCall admitted that

he was “instructed to meet certain quarterly expectations”

App. 22

about the number of subscribers, and further acknowl-

edged that the scheme involved “a lot of people in the

company.”

c. In response to these directives, defendant

Smith likewise ordered personnel to hold disconnects until

the end of quarter during 2001. At a meeting that took

place on September 14, 2001, that was attended by nu-

merous Charter executives, defendants Barford and

Kalkwarf presented information that Charter had, at the

time, 60,000 to 90,000 “managed” disconnects, i.e., cus-

tomers who had not paid their bills or had voluntarily

terminated their accounts, and were due to be cut-off, but

were not in order to enable Charter to make its subscriber

count growth rate numbers.

d. On or about October 5, 2001, defendant

Barford e-mailed employees at Charter’s divisions in-

structing them to provide “basic net gain in 4Q to get to

1% and 1.4% growth rate for the year.” Consistent with his

plan to maintain a reserve of disconnects that could be

used in the future to continue managing the subscriber

count growth rate, Barford added, “[Then] tell me how

many managed disconnects you would still have left over

after getting to these numbers.”

e. In response to these directives, in October

2001, defendant Shreffler, Vice President of Operations for

the Mid-West Division, ordered all disconnects that were

being processed in the field not to be processed in the data

system. These instructions were conveyed throughout the

Division to Charter’s offices such as that in Maryville,

Illinois (where Charter had been founded in 1993), with

the instructions “complete it in the field, but hold the

paperwork.”

App. 23

f. Consistent with Barford’s October 4, 2001

directive, throughout the fourth quarter of 2001, the

Maryville, Illinois system alone had approximately 2,400

customers who had either requested disconnects or had

already been physically disconnected, but who were still

being counted in the Company’s subscriber base. This

number can be verified by reviewing the “no truck” data

reports in the CableData system during and immediately

after the period. Indicative of the degree to which this

practice inflated the reported subscriber growth rates,

there were 50,000 total customers for the entire Maryville

region. Thus, the amount of disconnects still counted as

active customers totaled nearly 5%, which was over twice

the reported internal customer growth rate for the entire

Company.

g. Other Charter divisions likewise followed

Barford’s directive. In October, 2001, defendant Fenger,

the Senior Vice President of Operations for Charter’s

Western Division, specifically ordered that the processing

of all disconnects be halted for the remainder of the year.

Fenger did so with the knowledge of, and indeed in re-

sponse to, discussions with Kenneth Rhodes, a senior

officer in Charter’s management.

h. This directive was consistent with the policy

Fenger had been enforcing for several years. When previ-

ously questioned by a district director of operations about

this disconnect policy, Fenger bluntly replied “that’s just

how we do business.”

i. On December 6, 2001, Barford e-mailed

Kalkwarf and another senior Charter executive advising

that “Basic [i.e. internal] growth for December should be

over 60K holding discos.”

Avp. 24

j. In December 2001, an outside contractor for

Charter (Cabletex) was specifically instructed to hold the

3,300 disconnects that were scheduled to be performed in

the Dallas-Fort Worth market until after the close of the

quarters. On another occasion, Charter personnel in-

structed Cabletex to hold any disconnects until after a

shareholder’s meeting.

k. The specific directive to hold disconnects in

the Long Beach, California office in order to artificially

boost subscriber counts came from the Senior Vice Presi-

dent for that Region and was consistent with what was

happening throughout all of Charter’s local and regional

offices, as directed by corporate headquarters.

59. As 2001 drew to a close, Charter executives

began discussing an exit strategy from this scheme, fully

aware that the Company would have to purge from its

rolls those customers who should have been written off

long ago.

a. On December 7, 2001, Barford e-mailed

Kalkwarf and stated: “We are trying to figure out how

many we could disconnect in December and still be in line

with others. Is .5% or .6% sellable without revising down-

ward [guidance].”

b. In a December 2001 memo to defendant Bar-

ford, defendant Kalkwarf suggested that Charter might

“bleed the disconnects in over time” or “take the hit in the

first quarter on the call for the change in strategy.” Kalkwarf

concluded by stating: “We should still take a hit (140,000

customers times $3600 per customer is just under $1 per

share) but at least we are running the business and we can

argue that we did end the year at approximately 1%.”

App. 25

c. Shortly after, on December 10, 2001 Kalkwarf

e-mailed Barford and a senior Charter executive urging

that they “stick with original plan to get 61,000 net gain

for December” which would “help us get revenue and cash

flow for the year... .” In another e-mail of the same day,

Kalkwarf further urged that:

My thoughts are to discuss the issue in the first

quarter of next year as we are going to take a hit

for it no matter what and if we have 0 or nega-

tive growth this year after our statements of last

week and earlier we will take two hits — one for

customer growth and one for continued lack of

[credibility].

d. The exit strategy was sealed in a December

21, 2001 e-mail by defendant Barford to defendant Kalk-

warf and a senior Charter executive stating, “I want to

give the field direction to dump all the voluntary and 120

day or greater nonpays right after cut [for the year end

2001}....”

e. Charter personnel also sought to cover-up

evidence of illegal practices immediately following the

decision in early 2002 to write off over 125,000 accounts

for which disconnects were on “hold.” In Charter’s offices

in Duluth, Georgia, employees were instructed by Harold

Collins, the Vice President and director of finance for the

Georgia region, to shred financial documents and e-mails

going back to 1998. Employees were told by another senior

person in the officé, Mark Marshall, that if they were

asked about the practice of creating false bills “don’t say

anything.”

App. 26

C r’s Blatantly Improper Capitalization of

ts, Ov d and Admini tiv :

penses

60. In addition to chronically inflating subscriber

counts and revenues, defendants also distorted Charter’s

performance and profitability by improperly capitalizing

certain costs (particularly labor costs) that should have

been expensed, thereby materially inflating the Company’s

critical operating cash flow results. The purpose of this

scheme was to create the illusion that, just as the Com-

pany’s subscriber base was growing, so too were its earn-

ings from such subscribers, as measured by operating cash

flow/EBITDA.

61. But for this scheme, Charter’s reported rate of

operating cash flow growth would have been 6% for 2001

compared to 2000, rather than the 12.5% reported. The

operating cash flow growth rate was also materially

inflated for years 1999 and 2000.

62. The directives to capitalize portions of labor costs

that GAAP required to be expensed originated with

defendants Kalkwarf and Barford, who used Division and

Regional officers to communicate the need to increase the

rate of capitalization in order to avoid expected shortfalls

in operating cash flow. As the Vice President of the North-

east Region wrote in a memorandum sent to all its offices

during the Class Period, 35% of the salaries of customer

service representatives had to be capitalized (rather than

properly expensed) because the Company was “behind on

the numbers.”

63. Charter’s widespread practice of capitalizing

labor costs that should have been expensed not only

violated GAAP as detailed in J] 43-44, supra, but was

App. 27

inconsistent with its own policy as set forth in its public

filings, particularly the portion related to repair and

disconnection related expenses:

The costs of disconnecting a customer are charged

to expense in the period incurred. Expenditures

for repairs and maintenance are charged to oper-

ating expense as incurred, while equipment re-

placement and betterments are capitalized (See

q 45, supra.)

64. Charter’s improper labor capitalization practices

were applied to several areas:

a. Virtually all labor-related costs were capital-

ized to some degree depending on the amount needed to

make up the expected operating cash flow shortfall, even

though GAAP only permitted capitalization of new cus-

tomer installation costs.

b. Charter arbitrarily capitalized a significant

portion of certain technician labor costs associated with (i)

customer upgrades to digital service; (ii) repairs on instal-

lation; and, (iii) changes to splitters (devices in the home

that divides a signal into multiple paths), when all such

costs should have been expensed.

ec. Charter routinely capitalized significant

portions of the salaries related to customer service repre-

sentatives, and large portions of management salaries as

well. Both of those types of costs should have been ex-

pensed.

d. Charter routinely capitalized significant

portions of “reconnect” costs (reconnecting subscribers who

had requested that their cable be disconnected or whose

service had been terminated for failure to pay their bills).

App. 28

The percentage of capitalization changed from month to

month, depending on the amount of savings needed to

meet cash flow expectations. In the Duluth, Georgia office,

75% of these costs were capitalized during the Class

Period.

e. These improperly capitalized costs totaled $93

million in 2001 and $52 million in 2000.

f. In order to further improperly capitalize costs,

the Company also had outside contractors directly pay

distributors for supplies and similar items, and then had

the contractors include the costs of such goods in the bill

for contractors’ services. Charter then capitalized the

entire cost as “outside contracting,” when in fact the items

paid for by the contractors were strictly for Charter’s use

and should have been expensed.

g. At the direction of regional officers, including

John McFerron, the Regional Vice President of Finance for

Charter’s North Central region (based in Madison, Wis-

consin), Charter offices also improperly capitalized 100%

of the labor costs associated with its Internet Division.

Offices compounded this inflation by shifting additional

employees into the Internet division to maximize the

capitalization of labor costs.

h. Charter also paid third-party contractors to

conduct marketing campaigns. The Company improperly

deferred the cost of these services rather than expensing

them as incurred. As a result, $59 million in marketing

campaign expenses were improperly deferred rather than

expensed in 2001. Such accounting for marketing» cam-

paigns was in direct violation of Statement of Position 93-7

(“SOP 93-7”), Reporting on Advertising Costs, which governs

App. 29

the accounting for advertising costs under GAAP. SOP 93-

7 states the following:

The costs of advertising should be expensed ei-

ther as incurred or the first time advertising

takes place except for:

a. Direct-response advertising (1) whose pri-

mary purpose :s to elicit sales to customers

who could be shown to have responded spe-

cifically to the advertising and (2) that re-

sults in probable future economic benefits

(future benefits). Examples of the first time

advertising taking place include the first

public showing of a television commercial for

its intended purpose and the first appear-

ance of a magazine advertisement for its in-

tended purpose.

b. Expenditures for advertising costs that are

made subsequent to recognizing revenues

related to those costs.

65. Charter not only improperly capitalized the

direct labor costs described above, but also improperly

capitalized allegedly associated general and administra-

tive overhead expenses. By way of example, John

McFerron ordered that 47% of all general and administra-

tive expenses be capitalized.

66. These percentages of labor and other costs that

were capitalized were unrelated to the amount of time or

portion of expenditures that were appropriately spent on

customer implementation related services, but instead

related strictly to the amount of the operating cash flow

shortfall that Charter personnel were instructed to cover.

App. 30

67. As a result of this scheme, the amount of pur-

portedly related overhead and administration costs that

Charter capitalized per subscriber was nearly twice that of

Charter’s competitors.

68. While much of the implementation of the im-

proper capitalization was done at the local level, a signifi-

cant portion was also performed at a centralized location,

in Charter’s Denver, Colorado offices, where all the Com-

pany’s regional and divisional reports were consolidated.

Accounting personnel in this office were instructed to

“skew the numbers” by moving costs from one account

code (which was to be expensed) to another code (which

was to be capitalized) in order to make up any cash flow

shortfalls. :

69. In addition, accountants in Charter’s Denver

offices also artificially kept down the Company’s expenses

by directing the regional offices to hold payments due for

contract labor at the end of each quarter until the follow-

ing quarter, or even later. By the end of 2001, for example,

Crown Fiber, one of the Company’s largest outside contrac-

tors, was owed approximately $5 million by Charter.

Charter avoided recognizing this exvense by deferring the

payment and not recording any account payable.

70. Finally, Charter also improperly capitalized

certain promotional costs for new programs which should

have been expensed in the year incurred.

71. As a result of this improper capitalization of

expenses, Charter’s reported operating cash flow was

materially overstated by at least $146 million in 2001, and

by $87 million in 2000.

App. 31

Manipulation of Revenues

72. In order to maintain the illusion of internal

customer growth, Charter also had to show revenue

growth consistent with such inflated customer counts.

This was accomplished by manipulating the Company’s

centralized billing system. Under its own revenue recogni-

tion policies, Charter’s monthly numbers were supposed to

represent sales made from the 21st day of the month to

the 21st day of the following month. Bills had to be mailed

by the 21st of the month to have their charges booked as

revenue for the month.

73. Billing results for those offices using the CSG

billing system (which were only a small percentage) reflected

the amount of bills actually sent by the 21st of each month

(because the system had a hard-coded month-end cut-off date

set for the 21st of each month). However, the vast majority of

the Company’s offices, those using the Cable Data billing

system, had their closing extended to the Ist or 2nd day of

the following month unless it was the end of the quarter, in

which case Charter headquarters extended the billing cut-off

date for regional offices by four or five days.

74. Charter also inflated its revenues by including

all new program “launch fees” paid by suppliers at the

outset of program contract period, rather than amortizing

such fees over the entire term of the contract.

Charter Entered Sham Arrangements with De-

fendants Scientific-Atlanta and Motorola In-

tended To Artificially Boost Charter’s Revenues

and Operating Cash Flow

75. By way of background, in order to provide digital

cable television service, it was necessary for Charter to

App. 32

purchase digital cable converter boxes for installation in

customers’ homes. Purchases of these digital cable con-

verter boxes became a large capital expense for Charter,

and made Charter important customers of defendants

Scientific-Atlanta and Motorola, the nation’s two largest

manufacturers of such converter boxes and other equip-

ment used by cable companies.

76. In August, 2000, defendants Kalkwarf and

Barford realized that the Company was facing a year-end

short fall in operating cash flow relative to amounts

projected by Charter and those analysts who covered the

Company. In order to help cover that shortfall, the Com-

pany entered into sham agreements for “advertising” from

defendants Scientific-Atlanta and Motorola to inflate

Charter’s operating cash flow for the fourth quarter of

2000.

77. As part of these sham transactions, Charter

agreed to pay Scientific-Atlanta and Motorola an addi-

tional $20 for each digital converter so long as the suppli-

ers repaid that same amount to Charter in the form of

“advertising.” Thus, the price increases paid by Charter

and “advertising” payments made by the vendors consti-

tuted “wash” transactions with no economic substance.

78. Although these sham agreements could have no

legitimate effect on Charter’s operating cash flow, defen-

dants exploited such transactions by fraudulently account-

ing for them in such a way as to significantly and

artificially inflate Charter’s operating cash flow during the

Class Period, to wit, by treating the “payments” from

Scientific-Atlanta and Motorola as “revenues” when in fact

they were simply the return of Charter’s own monies.

“+

App. 33

79. On the other hand, Charter avoided any adverse

effect or decrease on its operating cash flow by capitalizing

the payments made to Scientific-Atlanta and Motorola,

under the pretext that they were related to the purchase of

equipment. Thus, although the advertising payments had

no economic effect whatsoever on Charter, through their

misleading and fraudulent accounting for the transactions,

the defendanis used them to artificially increase Charter’s

publicly disclosed operating cash flow by at least $17

million dollars during the fourth quarter of 2000. But for

this scheme, Charter’s reported revenues and operating

cash flow would have fallen short of analyst expectations.

80. Indicative of the deliberately fraudulent nature

of these transactions, defendant Kalkwarf discussed the

concept with defendant Arthur Andersen, the Company’s

outside auditors, in August 2000, prior to any payments

being exchanged. At the time, Arthur Andersen stated that

Charter could not recognize the advertising payments as

revenue because they appeared integrally related to the

cost increases being paid by Charter. Arthur Andersen

counseled that Charter could recognize the advertising

fees as revenues if the additional payments for the con-

verter boxes and the advertising were: (i) at fair market

value, (ii) unrelated to one another, and (iii) negotiated at

least a month apart. In late August 2000, defendant

Kalkwarf advised Arthur Andersen that Charter would

fulfill those conditions. In September 2000, Kalkwarf

falsely told Arthur Andersen that the advertising and

supply contracts with Scientific Atlanta and Motorola had

been negotiated by two separate departments at Charter a

month apart from one another. To lend further credibility

to these claims, even though the set-top box price in-

creases were not finalized with either vendor until late

App. 34

September 2000, the contracts were back dated to August

2000 on the instructions of defendants Barford and Kalk-

warf. This gave the false appearance that the set-up box

price agreements were negotiated a month before the

advertising contracts which were dated in late September.

81. _ Despite being aware that Charter was seeking to

generate additional revenue through a series of question-

able transactions with these two vendors, Arthur Ander-

sen accepted the explanations provided by Kalkwarf and

Barford, and failed to perform further audit checks (e.g.,

requesting additional verification from the vendors) as it

was required to do under Generally Accepted Auditing

Standards.

82. As noted earlier, on February 10, 2003, Scien-

tific-Atlanta disclosed that it had been subpoenaed by the

Grand Jury. Scientific-Atlantic had been previously

charged with entering into similar sham transactions with

another notorious cable company, Adelphia Communica-

tions, Inc. The Indictment returned by the Grand Jury

investigating Charter detailed this scheme, though it did

not identify Scientific Atlanta or Motorola by name.

Defe ’ Direct Participation in and Knowl-

e of the u

83. Defendants Kalkwarf and Barford were directly

involved in orchestrating directives in the Company to

ensure that Wall Street estimates were met, and negotiat-

ing the sham transactions with Scientific-Atlanta and

Motorola. They were fired because of their involvement in

the fraudulent scheme. They have since been indicted by

the Grand Jury.

App. 35

84 Defendant McCall, Senior Vice President for the

Eastern Division, was also actively involved in implement-

ing the “hold disconnects” practice. An e-mail from Josh

Jamison, one of the Regional Vice Presidents, to employees

in the Massachusetts region, requiring that the Company

hold all disconnects under 90 days past due, resulted from

a meeting between defendant McCall and Jamison. In his

Plea Agreement dated July 25, 2003, defendant McCall

admitted he was directed to hold or postpone disconnects

in order to “meet the forecasted numbers” for the sub-

scriber growth rates that Charter had publicly projected

for the second, third and fourth quarters of 2001. McCall

further admitted in his Plea Agreement that in response to

these directives, he:

a. [{G)jave instructions to hold disconnects to

each of the regional vice presidents working

below him. Soon after the end of the second,

third and fourth quarters of 2001, these held

disconnects would then be disconnected or

“cleaned-up.”

b. [K}new that the purpose of holding these

disconnects before the end of the quarter

and then cleaning up disconnects afterward

was to inflate Charter’s quarterly growth in

subscriber numbers that were intended to be

reported to the public. During these quar-

ters, without the holding of disconnects,

Charter would not have been able to meet

its quarterly subscriber forecasts.

85. Defendant Smith has been indicted by the Grand

Jury for instructing subordinates to hold disconnects

during the second, third and fourth quarters of 2001

“knowing that these instruction would result in Charter

App. 36

reporting inflated subscriber numbers to the investing

public.”

86. In response to the directives received from

Charter’s corporate senior officers, the senior officers of

Charter’s two (and subsequently three) Divisions informed

regional personnel of the steps to be taken to ensure those

numbers were met. By way of example, defendant Shref-

fler, the Senior Vice President of Operations for the Mid-

West Division told his assembled staff at an “all employee”

breakfast held on May 23, 200i, that he was brought in to

bring the numbers up: “whatever it takes to get the

numbers up ... It will happen no matter what, no matter

what it takes.”

87. Defendant Shreffler directed all of his system

managers to ensure that there would be “no disconnects”

at the end of the quarters and when shareholder meetings

were scheduled. This was intended to create the appear-

ance that the Company’s subscriber base was healthy and

growing. Shreffler’s employees were instructed to keep

track of the disconnects by maintaining a handwritten list,

so as to avoid any record of actual or pending disconnects

in the computerized billing system. In October, 2001,

defendant Shreffler ordered that all disconnects were not

to be processed in the system.

88. Defemdant Shreffler had worked his way up the

ranks at Charter (initially in Denver and Minnesota

regional offices) utilizing these same techniques, and was

rewarded by senior corporate officials until he rose to head

one of the Company’s three divisions. Defendant Shreffler,

known as “Coach” by his subordinates, accepted nothing

less than the goals or quotas that were set by corporate

App. 37

headquarters, refusing to accept numbers that fell short

and telling employees to “make it work.”

89. Consequently, when a customer service manager

in the Central Division was asked by another employee

why he was changing subscriber numbers, he replied tnat

he wasn’t going to give “Coach” numbers that he didn’t

like, and was “making the stockholders happy.” This was

consistent with Shreffler’s own practices. When he became

Senior Vice President of the Central Division in the middle

of 1999, the accurate count of subscribers was reported to

him on a daily basis. If he did not like the numbers, he

ordered them changed. This was done by entries into the

centralized data system, CableData or CSG.

90. In October, 2001, defendant Fenger ordered ail

disconnects to be held until after the close of the year.

91. Defendants Allen, Kent and Barford were other-

wise alerted to Charter’s practice of holding disconnects by

a certified mail letter dated April 19, 2001, from a Market-

ing Manager at Charter’s Long Beach, Califormia office, in

which he asserted that he had been fired on the pretext of

groundless sexual harassment charges made against him,

when in fact the real reason for his termination was

because he was “questioning the over 2000 disconnects

that were pending at the time.” No response was ever

received, although the “whistleblowing” employee did

receive confirmation of receipt af such letter. On informa-

tion and belief, defendant Kent was also at the September

14, 2001 meeting that, as described in the Grand Jury’s

Indictment, was “attended by numerous Charter execu-

tives’ at which defendants “Barford and Kalkwarf pre-

sented information that Charter had between 60,000 and

90,000 managed disconnects.”

App. 38

92. Defendant Allen, as Chairman and controlling

shareholder of Charter was responsible for creating the

culture at the Company that accepted nothing less than

meeting the numbers to “keep shareholders happy.” Allen

knew that the appearance of customer and operating cash

flow growth was essential in securing additional financing

that was critical to his plan to build a cable empire. He

demanded that Charter officers meet these goals and

recklessly turned a blind eye to this misconduct. Indeed,

when Kent signaled in September 2001 that the customer

growth rate might decline, Allen promptly fired him.

93. Defendant Vogel, Charter’s President after

defendant Kent’s departure in September 2001, was aware

of the true reasons for the write-off of over 120,000 cus-

tomers that Charter announced on February 11, 2002, but

deliberately mischaracterized those reasons in order to

divert attention from the Company’s prior fraudulent

misconduct. See J 136 (a)-(c), infra.

94. The Individual Defendants were otherwise aware

of, or recklessly disregarded, the fraudulent scheme by

virtue of their positions as senior operating and financial

personnel in the Company.

DEFENDANTS’ MISLEADING PUBLIC

STATEMENTS AND MATERIAL OMISSIONS

DURING THE CLASS PERIOD

The Misleading Nature Of The Statements

95. As detailed below, throughout the Class Period,

Charter portrayed itself as a company with “organic” or

“internal” growth of subscribers; apart from its numerous

acquisitions of other cable companies. The Company also

touted its operating cash flow growth rate and revenue

App. 39

growth. As detailed in the foregoing 9 48-82, supra, such

statements were materially false and misleading, for the

reasons summarized below:

a. Charter’s internal growth rate for subscribers

was artificially and materially inflated as a result of the

fraudulent scheme described above.

b. But for the fraudulent subscriber scheme, the

Company would not have been able to boast that it was

the industry leader “in generating internal growth.”

Indeed, as a result of the scheme, the Company would

have experienced no growth of its basic video cable sub-

scribers during two years of the Class Period.

c. Charter also materially inflated its operating

cash flow/EBITDA by: (i) improperly recognizing program

launch fees at the owtset of the contract rather than over

the entire term of the contract; (ii) failing to write off

custumers and related account receivables on a timely

basis; and, (iii) impreperly capitalizing labor and other

costs related to the serwieing and termination of accounts

and other general and administrative overhead expenses,

that GAAP and the Company's own accounting policies

required to be expensed.

d. But for such improper accounting. Charter

would not have been able to boast that its operating cash

flow rate was “twice that of any other cable operator.” In

fact, Charter’s 2001 EBITDA growth rate would have been

half the amount reported.

e. As a result of the foregoing schemes, Char-

ter’s reported financial results, including revenues, ex-

penses, and operating cash flow/EBITDA, were materially

App. 40

misstated throughout the Class Period, causing the price

of Charter stock to be artificially inflated.

The Statements

96. Charter’s Initial Public Offering commenced on

November 8, 1999, and the sale to the public of the

170,00,000 shares of common stock at $19.00 per share

raised approximately $3.23 billion. The November 4, 1999

Registration Statement and Prospectus represented in

connection with the offering stated, among other things,

that for the six months ended June 30, 1999, Charter had

$594 million in revenues, with over $237 million in

EBITDA. The IPO offering materials also represented that

the Company was currently serving 3.7 million customers,

and that an additional 2.5 million would be added through

acquisitions. In its Registration Statement and Prospec-

tus, Charter represented that its “internal customer

growth” in 1998, without giving effect to the cable systems

it acquired that year, “was 4.8%, more than twice the

national industry average of 1.7%.” The Registration

Statement was signed by defendants Allen, Kent and

Kalkwarf.

97. The statements regarding Charter’s cash flow,

customer growth rate and revenues were materially

misstated for reasons set forth in J 95 (a)-(e), supra.

98. On February 16, 2000, Charter announced its

fourth quarter 1999 financial results:

Charter Communications, Inc. Announces

Fourth Quarter Financial Results for 1999

ST. LOUIS — (BUSINESS WIRE) — Feb. 16, 2000

— Charter Communications, Inc. (Nasdaq:CdTR)

App. 41

announced today financial results for the three

months and the year ended December 31, 1999.

“Charter Communications ended 1999 with

strong fourth quarter operating results and the

company is in an excellent position to carry that

momentum into 2000,” said Jerald L. Kent,

President and CEO cf Charter. “We continued to

generate double-digit cash flow growth and once

again will be among the industry leaders in in-

ternal customer growth.” Charter reported that

pro forma fourth quarter revenues and adjusted

EBITDA were $763.1 million and $370.3 million,

respectively, which were in line with expecta-

tions. Further, fourth quarter revenues and ad-

justed EBITDA grew 9.9% and 12.3%,

respectively, and internal customer growth was

3.1% over the year-ago period for those cable sys-

tems owned or managed by Charter during the

comparable periods.

Revenues increased by $26.2 million or 9.9%

when comparing the revenues for the three

months ended December 31, 1999 to the results

for the comparable systems for the three months

ended December 31, 1998. This increase is due to

a net gain of approximately 68,500 or 3.1% basic

customers between quarters and retail rate in-

creases implemented in certain of the Company’s

systems.

The Company experienced growth in adjusted

EBITDA of approximately $15.5 million or 12.3%

when comparing adjusted EBITDA for the quar-

ter ended December 31, 1999 to the results for

App. 42

the same systems for the quarter ended Decem-

ber 31, 1999. Adjusted EBITDA margin increased

from 47.7% to 48.7% when comparing the similar

periods.

[Emphasis Supplied]

99. The February 16, 2000, press release was mis-

leading for the reasons set forth in J 95 (a)-(e), supra.

100. On March 28, 2000, Charter filed its Form 10-K

for the year-end 1999 with the SEC? The Form 10-K

repeated the same financial information that was an-

nounced in the press release of February 16, 2000, refer-

enced supra, and was signed by defendants Allen, Kent

and Kalkwarf. In its “Report of Independent Public Ac-

countants,” defendant Arthur Andersen gave the following

unqualified opinion on Charter’s financial statements

contained in its 1999 Form 10-K:

In our opinion, based on our audits and the re-

ports of other auditors, the financial statements

referred to above present fairly, in all material

respects, the financial position of Charter Com-

munications, Inc. and subsidiaries as of Decem-

ber 31, 1999 and 1998, and the results of their

operations and their cash flows for the year

ended December 31, 1999 and for the period from

December 24, 1998, through December 31, 1998,

in conformity with accounting principles gener-

ally accepted in the United States.

101. This statement is false and misleading for

reasons set forth in J 95(a)-(e), supra.

102. On May 3, 2000, Charter announced first

quarter 2000 results in a publicly disseminated press

release:

App. 43

Charter Communications, Inc. Announces

First Quarter 2000 Financial Results

ST. LOUIS — (BUSINESS WIRE) — May 3, 2000

— Charter Communications, Inc. (Nasdaq:CHTR)

today announced financial results for the three

months ended March 31, 2000. Pro forma for the

acquisition of Bresnan Communications in Feb-

ruary 2000, revenues were $759.3 million and

operating cash flow after deducting corporate

overhead was $352.0 million for the first quarter

of 2000...

Revenues increased by $27.2 million or 10.2%

when comparing the revenues for the three

months ended March 31, 2000 to the results for

the comparable systems for the three months

ended March 31, 1999. This increase is due to a

net gain of approximately 51,900 or 2.4% basic

customers between quarters and retail rate in-

creases implemented in certain of the Company’s

systems.

The Company experienced growth in operating

cash flow of approximately $17.4 million or

13.7% when comparing operating cash flow for

the quarter ended March 31, 2000 ti the results

for the same systems for the quarter ended

March 31, 1999. Operating cash flow margin in-

creased from 47.2% to 48.7% when comparing

the similar periods.

¢.

103. The foregoing 1Q00 results were materially

false and misleading for the reasons set forth in J 95(a)-

(e), supra.

App. 44

104. On May 12, 2000, Charter filed its Form 10-Q

for the first quarter of 2000 with the SEC. The Form 10-Q

repeated the same financial information that was an-

nounced in the press release of May 3, 2000, referenced

supra, 1nd stated (as did each subsequent Form 10-Q

issued during the Class Period) that the accompanying

consolidated financial statements “have been prepared in

accordance with generally accepted accounting principles

... for interim financial information and the rules and

regulations of the Securities and Exchange Commission,”

and “include all adjustments, which consist of only nomi-

nal recurring adjustments, necessary for a fair presenta-

tion of the results for the periods rresented.” The Form 10-

Q was signed by defendant Kalkwarf. It was materially

false and misleading for the reasons set forth in { 95(a)-

(e), supra.

105. On August 2, 2000, Defendants continued to

mislead investors, when announcing Charter’s second

quarter 2000 results in a press release:

Charter Communications, Inc. Announces

Second Quarter 2000 Financial Results; In-

creases in Revenue, Operating Cash Flow,

and Customers Continue

ST. LOUIS - (BUSINESS WIRE) — Aug. 2, 2000

— Charter Communications, Inc. (Nasdaq:CHTR)

today reported increases in revenue, operating

cash flow, and customers for the three months

ended June 30, 2000.

Revenue grew 9.8% to $794.8 million and operat-

ing cash flow increased 16.4% to $373.2 million

for the second quarter of 2000 compared to the

pro forma results for the second quarter of 1999.

For those cable systems owned or managed by

App. 45

Charter during the second quarter of both 2000

and 1999, revenue and operating cash flow grew

12.8% and 15.6%, respectively, and customer

growth was 2.3% over the year-ago period.

106. The foregoing 2Q00 results were materially

false and misleading for the reasons set forth in ¥ 95(a)-

(e), supra.

107. On August 14, 2000, Charter filed its Form 10-

Q for the second quarter of 2000 with the SEC. The Form

10-Q repeated the same financial information that was

announced in the press release of August 2, 2000, refer-

enced supra. The Form 10-Q was signed by defendant

Kalkwarf. It was materially false and misleading for the

reasons set forth in J 95(a)-(e), supra.

108. On November 2, 2000, Charter disseminated a

press release announcing the Company’s third quarter

2000 financial results. Again, the Company touted the

growth in Charter’s basic cable customer numbers:

Charter Communications Reports Contin-

ued Revenue, OCF, and Customer Growth

in Third Quarter 2000 Financial Results

Aggressive Digital Video Deployment Contrib-

utes to 20% OCF Growth

ST. LOUIS — (BUSINESS WIRE) —- Nov. 2, 2000 -

Charter Communications, Inc. (Nasdaq:CHTR)

today reported continued growth in revenues, op-

erating cash flow (OCF), and basic, digital and

data customers for the three months ended Sep-

tember 30, 2000, compared to pro forma year-ago

results.

App. 46

Third Quarter Highlights

Pro forma revenues increased 13.9% to $842.9

million and pro forma operating cash flow in-

creased 20.2% to $400.6 million for the third

quarter of 2000 compared to the pro forma re-

sults for the third quarter of 1999. Charter added

over 55,000 basic cable customers during the

third quarter, contributing to a year-to-year in-

crease of approximately 2.3% compared to the

pro forma customer level of 6,178,800 at Septem-

ber 30, 1999. ...

For “same-store” cable systems owned by Charter

during the third quarter of both 2000 and 1999,

revenues and system operating cash flow grew

12.8% and 19.5%, respectively. These systems

represented 2,671,000 customers at September

30, 2000, reflecting a 2.3% growth rate in basic

customers compared to a year ago.

109. The foregoing 3Q00 results were materially

false and misleading for the reasons set forth in J 95(a)-

(e), supra.

110. On November 13, 2000, Charter filed its Form

10-Q for the third quarter of 2000 with the SEC. The Form

10-Q repeated the same financial information that was

announced in the press release of November 2, 2000,

referenced supra. The Form 10-Q was signed by defendant

Kalkwarf. It was materially false and misleading for the

reasons set forth in J 95(a)-(e), supra.

111. On February 15, 2001, Charter continued to

mislead investors when announcing its 2000 year-end

results in the following press release:

App. 47

Charter Communications Reports Contin-

ued Revenue, OCF, and Customer Growth

in Fourth Quarter 2000 Financial Results

Aggressive Digital and High-Speed Data De-

ployment to Drive 2001 Growth

ST. LOUIS — (BUSINESS WIRE) - Feb. 15, 2001

— Charter Communications, Inc. (Nasdaq:CHTR)

today reported continued acceleration in the

growth of revenues, operating cash flow (OCF),

and basic, digital and data customers for the

three months ended December 31, 2000, com-

pared to pro forma year-ago results and com-

pared to all other quarters in 2000.

2000 Financial Highlights

Jerry Kent, President and CEO, said “I’m

pleased to report that we met, or in most cases

significantly exceeded, all of the goals we set at

the start of the year, as well as those expected by

Wall Street analysts. In the fourth quarter, we

capped the year with OCF growth that is almost

twice that of any other major cable operator. We

saw acceleration in core basic customer growth,

which indicates the success of our digital strat-

egy. And we ended the year with advanced ser-

vice deployments that exceeded our original

optimistic expectations... .”

For the fourth quarter of 2000, revenues in-

creased 15.8% to $893.9 million, and OCF in-

creased 28.9% to $433.2 million compared to the

pro forma resuits for the fourth quarter of 1999.

Pro forma revenues and OCF for the year 2000

increased 11.9% to $3.30 billion and 19.0% to

$1.56 billion, respectively, compared to pro forma

1999 annual results. Pro forma internal cus-

tomer growth was 2.5% for the year 2000. “We

App. 48

apparently retained our industry leadership in

generating internal customer growth,” Mr. Kent

said. “Our aggressive approach to competition

has enabled us to accelerate our internal cus-

tomer growth throughout the year,” he continued.

At December 31, 2000, Charter served 6,350,900

basic cable customers, compared to 6,193,700 pro

forma as of December 31, 1999, a pro forma net

gain of 157,200 customers.

For “same-store” cable systems owned by Charter

during the fourth quarter of both the years 2000

and 1999, revenues and system operating cash

flow grew 18.3% and 28.9%, respectively. These

systems represented 3,783,600 customers at De-

cember 31, 2000, reflecting a 2.2% internal

growth rate in basic customers compared to a

year ago.

[Emphasis Supplied].

112. The foregoing 4Q00 and year end 2000 results

were materially false and misleading for the reasons set

forth in 4 95(a)-(e), supra. In addition, the foregoing

results were materially inflated as a result of Charter’s

sham transactions with Scientific-Atlanta and Motorola by

which Charter agreed to pay additional monies for goods,

in return for these vendors paying Charter advertising

fees.

113. On February 28, 2001, Charter filed its Form

10-K for the year-end 2000 with the SEC. The Form 10-K

repeated the same financial information that was an-

nounced in the press release of February 15, 2001, refer-

enced supra, and was signed by defendants Allen, Kent

and Kalkwarf. Charter’s Form 10-K for the year ended

2000 was materially false and misleading. In its “Report

of Independent Public Accountants,” defendant Arthur

App. 49

Andersen gave the following unqualified opinion on

Charter’s financial statements contained in its 2000 Form

10-K:

In our opinion, based on our audits and the re-

ports of other auditors, the financial statements

referred to above present fairly, in all material

respects, the financial position of Charter Com-

munications, Inc. and subsidiaries as of Decem-

ber 31, 2000 and 1999, and the results of their

operations and their cash flows for the years

then ended, and for, the period from December

24, 1998, through December 31, 1998, in confor-

mity with accounting principles generally ac-

cepted in the United States.

114. On May 2, 2001, Charter announced its first

quarter 2001 results in the following press release:

Charter Communications Announces Solid

First Quarter Results; Digital Video and

High-Speed Data Deployments Exceed Ex-

pectations

ST. LOUIS — (BUSINESS WIRE) - May 2, 2001

— Charter Communications, Inc. (Nasdaq:CHTR)

today reported revenue and operating cash flow

growth at the high end of previously stated guid-

ance for the first quarter of 2001...

First Quarter Financia: Highlights

For the first quarter of 2001 revenues increased

14.4% to $873.8 million, and operating cash flow

(OCF) increased 9.7% to $387.9 million compared

to the pro forma results for the first quarter of

2000. Charter increased its customer base by

over 2.0% compared to pro forma first quarter

of 2000 to 6,349,800 customers. “We continue to

deliver by increasing revenue and OCF through

App. 50

internal and advanced broadband services cus-

tomer growth made possible by our digital plat-

form,” Mr. Kent said.

115. In a conference call with analysts following the

release of its quarterly results, senior Charter officers

expressed confidence that its annual basic customer

growth would exceed 2%, indicating an acceleration

throughout the balance of the year. The Company attrib-

uted this increase in growth, in part, to “decreasing

churn,” i.e. decreasing loss of existing customers. (See

UBS Warburg; ABN AMRO, 5/3/01).

116. The foregoing 1Q01 results and statements in

the conference call were materially false, misleading and

without reasonable basis for the reasons set forth in

qi 95(a)-(e), supra.

117. On May 15, 2001, Charter filed its Form 10-Q

for the first quarter of 2001 with the SEC. The Form 10-Q

repeated the same financial information that was an-

nounced in the press release of May 2, 2001, referenced

supra. The Form 10-Q was signed by defendant Kalkwarf.

It was materially false and misleading for the reasons set

forth in J 95(a)-(e), supra.

118. Indicative of the degree to which analysts were

beguiled by Charter’s fraudulent image, Credit Suisse

First Boston resumed coverage of the Company on June 4,

2001 with a “Strong Buy” recommendation based on

Charter’s perceived subscriber growth rate that was “twice

industry average,” attributable to “falling churn, better

customer service and more sophisticated settling tech-

niques.” On June 5, 2001, Deutsche Bank issued a report

projecting pro forma EBITDA growth at 14-16% for the

year. Recommendations such as these, which were based

App. 51

on defendants’ fraudulent representations and guidance to

analysts, propelied Charter’s stock price to over $22 per

share.

119. On July 30, 2001, Charter continued to mislead

investors when the Company announced its second quar-

ter 2001 results in the following press release, which

states in part:

Charter Communications Exceeds Revenue,

Operating Cash Flow Guidance; Strong

Digital Video, High-Speed Data and Basic

Customer Increases Continued During Sec-

ond Quarter ,

ST. LOUIS - (BUSINESS WIRE) —- July 30, 2001

— Charter Communications, Inc. (Nasdaq:CHTR)

today reported second quarter 2001 revenue and

operating cash flow growth exceeding Wall Street

estimates. Increases in digital video, high-speed

data, and basic video customers during the three-

month period ended June 30, 2001 were in line

with the company’s previously stated guidance,

according to Jerry Kent, President and CEO.

Second Quarter Financial Highlights

For the second quarter of 2001, revenue in-

creased 16.1% to $928.5 million, and operating

cash flow increased 14.1% to $428.1 million com-

pared to pro forma results for the second quarter

of 2000. This compares favorably to previous

guidance of 13%-15% revenue growth and 11.5%-

13.5% operating cash flow growth for the second

quarter. Charter reported internal customer

growth of 2.1% compared to pro forma second

quarter of 2000 for a total of 6,388,300 customers

App. 52

120. A conference call after the release of these

results reinforced the upbeat, albeit false, impression

provided analysts. As Richard Bilotti from Morgan Stanley

Dean Witter commented in a report issued at the time,

“The most important takeaway from the quarter and the

call with management is the company’s strong belief in the

sustainability of these growth rates.”

121. The foregoing 2Q01 results and statements to

analyst were materially false, misleading and without

reasonable basis for the reasons set forth in 7 95(a)-(e),

supra.

122. On August 13, 2001, Charter filed its Form 10-

Q for the second quarter of 2001 with the SEC. The Form

10-Q repeated the same financia! information that was

announced in the press release of July 30, 2001. The Form

10-Q was signed by defendant Kalkwarf. It was materially

false and misleading for the reasons set forth in 7 95(a)-

(e), supra.

123. On September 11, 2001, Charter announced

preliminary third quarter 2001 results:

Charter Communications Expects Acceler-

ated Growth in Third Quarter 2001 Ad-

vanced Services; Company Will Shift Focus

From Basic Customer Growth to Advanced

Services

PASADENA, Calif. - (BUSINESS WIRE) — Sept.

11, 2001 — Charter Communications, Inc. (Nasdaq:

CHTR) said today that based on third quarter

digital and high-speed data sales to date, it ex-

pects third quarter 2001 advanced services addi-

tions to exceed those of second quarter 2001.

Charter President and CEO Jerry Kent said the

App. 53

Company expects to meet or exceed the high end

of guidance for year-end digital and high-speed

data customers.

....+ Mr. Kent said Charter has made a strategic

decision to focus more of its marketing expendi-

tures and management time on advanced service

growth. “We’ve reviewed our internal marketing

plans, management focus and current operating

results in light of the current economic environ-

ment, and believe that a rebalancing of emphasis

to digital and data sales at the expense of mar-

ginal increases in basic customer growth is the

right business decision. Our number one priority

now is to increase digital and data customers

which provide higher profitability and competi-

tive advantage.”

Mr. Kent said he expects Charter’s basic customer

growth for 2001 to be less than the original guid-

ance of at least 2 percent as a result of this refo-

cus. “We'll remain mindful of the ongoing need

for internal basic customer growth, and I’m con-

fident Charter will continue to lead the industry

as we have for the past five years.”

“As advanced services are deployed to a rapidly

growing number of customers, operating cash

flow growth accelerates,” Mr. Kent said. “Pro

forma operating cash flow growth for the first

half of 2001 was 11.1 percent. Despite the slow-

down in economic conditions, this growth rate is

expected to accelerate for the remainder of the

year.”

(Emphasis Supplied.| é

App. 54

124. The foregoing statements were materially false

and misleading for the reasons set forth in ] 95(a)-(e),

supra.

125. While the foregoing representations were false

and misleading, they were the first signal of a decline in

Charter’s customer growth rate. Indicative of the stock

price inflation that had resulted from Charter’s reports

and projections of customer growth rates which had been

bloated by the “hold disconnects” practice and other

devices described above, this first disclosure triggered a

20% decline in the price of the Company’s stock price, from

a close of $20.04 on September 7, 2001, to a close of $16.00

on September 21, 2001, at 2-3 times the normal trading

volume.

126. Further indicative of the emphasis that defen-

dant Allen had placed on customer growth rate, following

this reported decline in rate, defendant Kent was ousted

as the Company’s President and CEO. This was an-

nounced on September 24, 2001. News reports attributed

Kent’s departure to undisclosed disagreements and per-

sonality conflicts with defendant Allen.

127. This news further unsettled investors, who

further bailed out of the Company, resulting in a decline in

the price of Charter’s stock to $12.00 per share on Sep-

tember 27, 2001. Consistent with the concerns raised by

these events, Goldman Sachs reduced its EBITDA esti-

mates for 2001, citing the “slower sub growth rate.”

(10/9/01)

128. On October 9, 2001, Charter named defendant

Vogel as the Company’s new President and CEO.

App. 55

129. On November 1, 2001, defendants announced

Charter’s final third quarter 2001 results in a press

release, which stated in part:

Charter Communications Reports Strong

Third Quarter Advanced Services Growth

Company Continues to Pace the Industry with

Internal Customer Growth

ST. LOUIS B Charter Communications, Inc.

(Nasdaq: CHTR) today reported double digit

revenue and operating cash flow growth for the

third quarter of 2001 resulting from continued

consumer demand for broadband services. These

results were highlighted by the addition of a re-

cord number of new cable modem customers dur-

ing the third quarter.

Third Quarter Financial Highlights

For the third quarter of 2001, revenue increased

more than 13% to $1.04 billion, and operating

cash flow increased more than 10% to $467.5 mil-

lion compared to pro forma results for the third

quarter of 2000. Charter continued to pace the

industry with internal customer growth of 1.1%

compared to pro forma third quarter of 2000 for a

total of 6,970,100 customers. “Basic customer

growth has slowed after a planned reduction in

discounting and basic service marketing efforts,

part of a previously announced strategic shift of

focus to advanced services that will better en-

hance operating cash flow growth. This focus is

starting to pay off, as evidenced by our impres-

sive advanced services growth. I’m especially

proud of the men and women of Charter for their

App. 56

perseverance in these challenging times,” Mr.

Vogel said.

130. The foregoing 3Q01 results were materially

false and misleading for the reasons set forth in J 95(a)-

(e), supra.

131. ‘On November 14, 2001, Charter filed its Form

10-Q for the third quarter of 2001 with the SEC. The Form

10-Q repeated the same financial information that was

announced in the press release of November 1, 2001,

referenced supra. The Form 10-Q was signed by defendant

Kalkwarf. It was materially false and misleading for the

reasons set forth in J 95(a)-(e), supra.

132. Investors became increasingly skeptical about

Charter following the departure of defendant Kent, and

particularly as concerns surfaced about the nature of its

previously reported significant customer growth rates. In

late 2001, the market began learning that Charter had

engaged in a “practice of aggressively driving basic sub-

scriber growth over the last two years” which had purport-

edly enabled the Company to increase its subscriber “base

roughly twice as fast as its peers in 1999, 2000, and

through much of 2001” (See October 4, 2002 Bank of

America Securities report). As the Company began ac-

knowledging that its growth rates were slowing, even

some analysts became more cautious about the Company

(still unaware that the prior growth rate was not simply

the result of aggressiveness, but of covert manipulation of

the figures).

133. Thus, on January 10, 2002, Morgan Stanley

analyst Richard Bilotti reduced his rating from “Strong

Buy” to “Outperform,” citing slowing EBITDA growth,

which, now at 10%, was “about 100-200 basis points below

App. 57

the industry average.” This came on the heels of the

Company’s acknowledgment on November 1, 2001, that its

subscriber growth rate, which had been at 2.3% a year

prior, had declined to 1.1% in the most recent quarter.

These concerns caused the market price of Charter stock,

which had been over $16 per share at the beginning of

2002, to plummet over 20% to $13 per share by January

18, 2002. (These growth rates, while reduced, were still

artificially buoyed by Charter’s “hold disconnects” prac-

tices detailed in J] 49 to 59, supra.)

134. On February 11, 2002, Charter continued to

mislead investors when it announced its 2001 year-end

results in a press release, which stated in part:

Charter 2001 Pro Forma Cable Modem and

Digital Customers Increase Nearly 165%

and 82%, Respectively

ST. LOUIS — Charter Communications, Inc.

(Nasdaq: CHTR) today reported revenue growth

that exceeded its guidance, and cash flow growth

at the top of its estimated range for the year

2001. These results were highlighted by the ad-

dition of a near record number of new cable mo-

dem customers during the fourth quarter.

As of December 31, 2001, Charter Digital Ca-

ble™ customers totaled 2,144,800 with fourth

quarter weekly additions averaging approxi-

mately 15,000 installations per week. “Charter

continues to experience strong demand for its

digital video service, resulting in industry lead-

ing penetration. As we continue to add interac-

tive products like video on demand (VOD), and

personal interactive channels, we see enhanced

App. 58

customer satisfaction, reduced digital churn, and

improved retention levels,” Mr. Vogel said.

Fourth Quarter Financial Highlights

Revenue during the fourth quarter of 2001 in-

creased 13.6% to $1.1 billion, and operating cash

flow increased 11.0% to $502.6 million compared

to pro forma results for the fourth quarter of

2000, before a special charge including the

@Home conversion of $17.6 million. Year-end

2001 pro forma revenue was over $4.1 billion, up

14.0% from pro forma 2000 revenue of $3.6 bil-

lion. Pro forma operating cash flow increased

10.9% from $1.65 billion to $1.83 billion for 2001,

before a special charge including the @Home

conversion of $17.6 million.

135. In connection with the announcement of these

year-end results, Charter hinted for the first time that its

customer base had been materially inflated. However, it

did so in a misleading manner so as to avoid any critical

examination of its prior representations. The Company

stated that it expected to remove approximately 120,000

“marginal customers” from its basic customer account in

the first quarter of 2002, and that it had increased its

reserves for uncollected accounts receivable as of Decem-

ber 31, 2001. This write-off represented two years of the

company’s basic customer subscriber growth.

136. The foregoing 4Q01 results were materially

false and misleading for the reasons set forth in 7 95(a)-

(e), supra. In addition:

a. The reasons given for the write-off of custom-

ers was false and misleading. The Company sought to give

App. 59

the impression that it was taking an initiative to make its

customer base even stronger by eliminating those that

may have paid their bills, but were “marginal” and thus

not profitable. Indeed, as an analyst at Banc of America

Securities characterized it, Charter had merely decided to

“disconnect unprofitable subscribers.” (April 29, 2002

report.)

b. In fact, the Company was now doing what it

should have done long before, i.e., write-off customers who

had themselves sought to terminate their accounts. The

statement was designed and intended to deflect attention

from the fact that Charter’s internal customer growth rate

had been materially smaller than represented. In fact, the

write-off of these customers was needed because the

Company had been holding disconnects of well over

100,000 customers cumulatively during the Class Period.

c. Moreover, the Company failed to disclose the

full extent of its potential write-off. At the same time

Charter wrote-off 120,000 customers, it created a “reserve”

for disconnecting 45,000 additional customers.

137. On March 29, 2002, Charter filed its Form 10-K

for the year-end 2001 with the SEC. The Form 10-K

repeated the same financial information that was an-

nounced in the press release of February 11, 2002, refer-

enced supra, and was signed by defendants Allen, Vogel

and Kalkwarf. The Company raised the number of cus-

tomers written off to 145,000 (from the previously an-

nounced 120,000). It was materially false and misleading

for the reasons set forth in J 95(a)-(e), supra.

138. In its “Report of Independent Public Account-

ants,” defendant Arthur Andersen gave the following

App. 60

unqualified opinion on Charter’s financial statements

contained in its 2001 For 10-K:

In our opinion, based on our audits and the re-

ports of other auditors, the financial statements

referred to above present fairly, in all material

respects, the financial position of Charter Com-

munications, Inc. and subsidiaries as of Decem-

ber 31, 2001 and 2000, and the results of their

operations and their cash flows for each of the

three years in the period ended December 31,

2001, in conformity with accounting principles

generally accepted in the United States.

139. This was false and misleading for the reasons

set forth in J 95(a)-(e), supra.

140. Defendants continued to mislead investors in a

press release dated April 29, 2002;

Charter Posts Strong Revenue and Cash

Flow Growth For the First Quarter of 2002

Strategic marketing and bundling of services

drives first quarter 2002 revenue and operating

cash flow growth

ST. LOUIS —- Charter Communications, Inc.

(Nasdaq: CHTR) exceeded expectations for reve-

nue and cash flow growth during the first quar-

ter of 2002.

First Quarter Financial Highlights

Revenue during the first quarter of 2002 in-

creased 13.1% to $1.1 billion, and operating cash

flow increased 10.4% to $449.2 million compared

to pro forma results for the first quarter of 2001.

“Our revenue and cash flow for the quarter ex-

ceeded the high end of our expectations and will

App. 61

provide a solid base of growth which we expect to

accelerate throughout the year,” Mr. Vogel said.

Charter reported basic and diluted loss per share

of $39 for the first quarter of 2002, compared to a

loss per share of $1.20 for the first quarter of

2001.

141. The foregoing 1Q02 results were materially

false and misleading for the reasons set forth in 7 95(a)-

(e), supra.

142. By this time though, even upbeat analysts were

beginning to acknowledge that the decline in the Com-

pany’s stock price (to a closing price of $7.79 per share on

May 13, 2002), was attributable to growing investor

skepticism triggered by the February write-off of custom-

ers. As a Credit Suisse analyst commented in a report

dated May 14, 2002:

The Company recently announced it would have

to write down 120,000 basic video subscribers

due to nonpayment, which represent 2 years of

subscriber growth and a significant credibility is-

sue with investors.

143. On May 14, 2002, Charter filed its Form 10-Q

for the first quarter of 2002 with the SEC. The Form 10-Q

repeated the same financial information that was an-

nounced in the press release of April 29, 2002, referenced

supra. The Form 10-Q was signed by defendants Kalkwarf

and Martin. It was materially false and misleading for the

reasons set forth in ¥ 95(a)-(e), supra.

144. The market price of Charter stock continued to

descend as investors, aware of the unraveling fraud at

Adelphia, were concerned that the same thing might have

occurred at Charter as well. By June 13, 2002, Charter’s

App. 62

stock price had sunk to $4.48 per share. At this point, one

of the company’s boosters, Morgan Stanley, came to the

Company's defense in an analyst report dated June 14,

2002, seeking to assure investors that Charter was not

another Adelphia. The report was written after further

communication with Charter management, including

defendants Barford and Kalkwarf:

We believe that Charter does not represent a risk

for accounting inconsistencies or revisions to

prior financial performance. Since its public of-

fering in late 1999, Charter has remained consis-

tent with respect to how it recognizes revenue,

capitalizes labor, and depreciates its network. We

believe that the panic selling that has occurred

over the last few months as the Adelphia situa-

tion has unraveled, represents a buying opportu-

Pee

We estimate that Charter capitalizes about $325-

350 million of installation and engineering labor

costs each year. These estimates are within the

range for the group, but not at the lower end of

the range for the industry . . . /t is very important

to recognize that Charter has consistently applied

its capitalization policies and has not made ac-

counting changes that might have distorted reve-

nue and EBITDA growth rates.

[Emphasis Supplied].

145. The foregoing statements by Morgan Stanley,

which helped boost the price of Charter stock by over 20%

in one day, were indicative of the degree to which defen-

dants had misled investors, since, contrary to the analyst’s

conclusions, Charter had indeed consistently capitalized

labor charges that it knew, even under its own policies,

should have been expensed.

App. 63

Rev i

146. On July 18, 2002, one day after the end of the

Class Period, Merrill Lynch published a Comment con-

cerning Charter by analyst Jessica Reif Cohen (“Cohen”)

entitled “Q2E: Basic Sub Losses Continue and Accounting

Worries Not Over; Downgrade to Neutral;”

We are reducing our intermediate term invest-

ment rating to Neutral from Strong Buy due to

Charter’s high leverage, lack of positive free cash

flow generating for at least 18 months and con-

tinued accounting worries in general for the sec-

tor. Additionally, investors remain averse to

highly leveraged companies with no earnings and

no free cash flow, i.e. companies with EBITDA-

based valuations.

Accounting Practices

We believe that Charter’s upcoming June 10Q fil-

ing will include more detail about its accounting

practices, including subscriber count calculations

and marketing deals with equipment vendors.

Further, Charter plans to offer more clarity in its

capital expenditures and debt covenants. While

we applaud Charter’s decision, the release of

more detail could be a double-edged sword. While

investors are likely to appreciate the more de-

tailed filing, since they have been clamoring for

more transparency, investors might not be reas-

sured by what they uncover.

While accounting practices are relatively similar

across the industry, there are some differences

across cable operators. We believe that Charter

has a more aggressive capitalization policy,

evidenced by its top-of-the-industry EBITDA

App. 64

margins and also its high capex spending per ba-

sic subscriber (although some of that is partially

due to Charter’s lower densities). Further Char-

ter includes some of its programming launch fees

in cable advertising revenue (similar to AOL but

unlike Cox, Comcast and Cablevision). This is ac-

tually significant and consisted of roughly one

third ($100 million) of total CY01 advertising

revenue at essentially 100% EBITDA margins. In

addition, we understand that Charter allocates

the $10/month incremental revenue from its

data-only subscribers (data-only subs. are typi-

cally charged an additional $10 for not taking a

bundle of data+video) to basic cable revenue and

hence includes the subscriber in the basic cable

subscriber count. While we believe this is a very

insignificant number, the mere fact that Charter

is taking such an aggressive stance could lead

investors to question all its practices. Moreover,

we understand that Charter has done some mar-

keting deals with equipment vendors (as dves

Comcast).

147. The partial disclosure of Charter’s improper

accounting practices, as described in Cohen’s July 18, 2002

Comment, had an immediate and sharply negative effect

on Charter’s stock price. On that day, Charter’s stock

dropped more than thirteen percent (13%), falling from the

previous day’s close of $4.06 per share, to close of $3.50 per

share on July 19, 2002.

148. Indeed, Charter’s use of misleading accounting

practices to artificially inflate its revenue and earnings

was further detailed in the August 12, 2002, issue of

Forbes, which quoted a July 12, 2002, report by Credit

Suisse First Boston concerning the cable industry. The

Forbes article stated in pertinent part:

App. 65

The [Credit Suisse] report provides a detailed

look at “churn,” which is essentially cable’s costs

for labor and advertising. Credit Suisse says that

cable companies have been hiding the impact of

their churn by capitalizing labor costs. In other

words, if they spend $50 to install cable in a

home, the cable guys only subtract $20 from

revenues to calculate the current period’s earn-

ings. Then they spread the rest over a dozen

years. The worst offender, Credit Suisse says, is

Charter Communications, which capitalizes $29

per customer.

149. On August 16, 2002, Charter acknowledged that

it had received a subpoena for documents from a federal

grand jury that was conducting a criminal investigation of

“the Company’s current and disconnected customers, and

its policies and procedures related to the capitalization or

expense of various costs and related matters.” The Com-

_ pany further admitted that the investigation probably

related in part to the matters raised by the CSFB and

Merrill Lynch analyst reports. The investigation also

followed on the heels of the Company’s announcement that

it was increasing its reserves to account for its decision to

disconnect 145,000 “marginal” customers.

150. On October 22, 2002, Charter announced that it

was placing its COO, defendant Barford, on paid leave,

pending the previously announced Grand Jury investiga-

tion.

151. On December 3, 2002, the Company announced

that defendant William Shreffler, who was then Senior

Vice President of Operations for the Midwest Division,

resigned his position, “citing personal reasons.”

App. 66

152. On December 23, 2002, Charter announced that

it was firing defendants Barford and Kalkwarf, and

reauditing its books for 2000 and 2001. “The terminations

of Messrs. Barford and Kalkwarf follow a review by the

Company of various matters, including those related to the

Grand Jury investigation,” a Company spokesman said.

153. Aé a result of these revelations, Charter’s

shares dropped to a 52-week low of $0.78 on October 11,

2002, down approximately 97% from its Class Period high

of $26.31.

154. On April 1, 2003, Charter announced the

“preliminary results” of the reaudit for years 2000 and

2001. As a result of the reaudit, the following major

restatements were made:

2001 ($ millions) 2000 ($ millions)

Revenue Reduced by: $146 $108

Expenses Increased by: $146 $87

EBITDA Reduced by: $292 $195

155. The Company acknowledged that as a result of

the foregoing, its pro forma adjusted EBITLA for 2001,

which had previously been reported as $1.8 billion, was

restated to only $1.543 billion. Similarly, whereas reported

pro forma adjusted EBITDA for 2000 had been previously

reported as $1.6 billion, it was restated to only $1.454

billion. Thus, in contrast to the previously reported

EBITDA growth rate between 2001 and 2000 of 12.5%, the

actual growth rate was only 6%.

156. There were further materially adverse adjust-

ments announced for the first 3 quarters of 2002, though

App. 67

there was no indication of the portion of those adjustments

that related only to the first quarter of 2002.

157. The April 1, 2003 press release also stated:

(a) Launch Incentives From Programmers.

Amounts previously recognized as advertising

revenue in connection with the launch of new

programming channels have been deferred in the

year such launch support was provided, and am-

ortized as a reduction of programming costs

based upon the relevant contract term. Such ad-

justments decreased revenue $30 million for the

first three quarters of 2002, and $118 million and

$76 million for the years ending December 31,

2001 and 2000, respectively. Additionally, for the

year ending December 31, 2000, the company in-

creased marketing expense by $24 million for

other promotional activities associated with

launching new programming services previously

deferred and subsequently amortized. The corre-

sponding amortization of such deferred revenues

reduced programming expenses by $36 million

for the first three quarters of 2002, and $27 mil-

lion and $5 million for the years ending Decem-

ber 31, 2001 and 2000, respectively.

(b) Capitalized Labor and Overhead Costs.

Certain elements of labor costs and related over-

head allocations previously capitalized as part of

the Company’s rebuild activities, customer in-

stallation and new service introductions have

been expensed in the period incurred. Such ad-

justments increased operating expenses by $73

million for the first three quarters of 2002, and

$93 million and $52 million for the years ending

December 31, 2001 and 2000, respectively.

App. 68

Certain customer acquisition campaigns were

conducted through third party contractors in

2000, 2001 and portions of 2002. The costs of

these campaigns were originally deferred and

recognized as amortization expense over the

relevant customer contract terms. These

amounts have been reported as marketing ex-

pense in the period incurred and totaled $32 mil-

lion for the first three quarters of 2002, and $59

million and $4 million and for the years ending

December 31, 2001 and 2000, respectively. The

company determined in the second quarter of

2002 that the benefits of this program did not

justify its continued practice and it was elimi-

nated in the end of the third quarter as contracts

for third party vendors expired.

158. In response to these disclosures, Deutsche Bank

Securities, Inc., issued analyst reports noting that Char-

ter’s “adjustments” of $487 million to previously reported

EBITDA represented “significant reductions relative to the

restated pro forma totals... .” [Emphasis Supplied]. A. G.

Edwards issued a similar report stating “we believe that

the breadth of these restatements are significant... .”

159. The Company also disclosed for the first time

that there had been “45,000 accounts that were reserved

at year end 2001 to address pending disconnects.” This

was in addition to the 120,000 customers the Company

had announced it would be writing off at the time. (In fact,

the Company wrote-off an additional 25,000 customers by

July 2002, and had no “reserve” for customer disconnects

at year end 2002.)

160. With respect to the ongoing Grand Jury investi-

gation, Charter stated:

App. 69

The adequacy of the 45,000 customer reserve, the

disconnect policies, the application of those poli-

cies and their effect on the customer totals re-

ported by the Company during 2001 and prior

periods are currently under investigation by the

United States Attorney’s Office for the Eastern

District of Missouri and the Securities and Ex-

change Commission.

161. Finally, the Company acknowledged that these

restated results were “preliminary” and that it had filed

for an extension “to provide additional time to finalize its

financial statements, related filings, disclosures and

audits.”

The Indictment and Guilty Plea

162. On July 24, 2003, the Grand Jury returned an

Indictment charging that:

Beginning in or about May 2001 and continuing

through in or about March 2002, Barford, Kalk-

warf, McCall and Smith knowingly devised and

intended to devise a scheme to defraud investors

in Charter securities and the investing public...

by falsely inflating Charter’s subscriber numbers

and subscriber growth numbers and by making

false statements relating to Charter’s subscriber

numbers and subscriber growth numbers, in or-

der to inflate artificially Charter’s stock price

.... (Indictment J 44).

163. The Indictment further charged that:

Beginning in or about August 2000, and continu-

ing through on or about February 11, 2001,

Kalkwarf and Barford knowingly devised and in-

tended to devise a scheme to defraud investors in

App. 70

Charter securities ... by falsely inflating Char-

ter’s publicly reported year end revenue and op-

erating cash flow and by making false

statements relating to the inflated revenue and

operating cash flow, in order to inflate artificially

Charters’ stock price. . . . (Indictment ] 17).

164. In his guilty plea entered the next day, on July

25, 2003, defendant McCall admitted that:

From in or about June of 2001 and continuing

until in or about March of 2002... David McCall

did knowingly and willfully participate in a

scheme to defraud Charter’s stockholders by

means of materially false and fraudulent pre-

tenses, presentations and promises. (Guilty Plea

at 9)

165. That same day, at a hearing before the Honor-

able Carol Jackson, defendant McCall stated:

I was instructed to meet certain quarterly expec-

tations, in terms of company expectations for

how many customers you gained on a quarterly

basis. Did that. And instructed people that

worked for me to do that and knowing that, you

know, that those numbers would in turn be used

to meet forecasts that would be done in a public —

to the public environment like Wall Street. (Tran-

script at 16-17)

CLASS ACTION ALLEGATIONS

166. Lead Plaintiff brings this action as a class

action pursuant to Rules 23(a) and 23(b)(3) of the Federal

Rules of Civil Procedure, individually and on behalf of all

persons or entities who purchased or acquired Charter

common stock during the Class Period and were damaged

App. 71

thereby, excluding the Defendants herein, their affiliates

and any officers or directors of Charter or its affiliates,

and any members of their immediate families and their

heirs, successors and assigns (the Class).

167. The Class is so numerous that joinder of all the

members of the Class is impracticable. Lead Plaintiff

believes there are hundreds of record holders of the Com-

panys common stock located throughout the United

States.

168. Lead Plaintiff's claims are typical of the claims

of absent Class members. Members of the Class have

sustained damages arising out of Defendants’ wrongful

conduct in violation of the federal securities laws in the

same way as Plaintiff sustained damages from the unlaw-

ful conduct.

169. Lead Plaintiff will fairly and adequately protect

the interests of the Class. Lead Plaintiff has retained

counsel competent and experienced in class action and

securities litigation.

170. A class action is superior to other available

methods for the fair and efficient adjudication of the

controversy. The Class is numerous and geographically

dispersed. It would be impracticable for each member of

the Class to bring a separate action. The individual

damages of any member of the Class may be relatively

small when measured against the potential costs of bring-

ing this action, and thus make the expense and burden of

this litigation unjustifiable for individual actions. In this

class action, the Court can determine the rights of all

members of the Class with judicial economy. Lead Plaintiff

does not anticipate any difficulty in the management of

this suit as a class action.

App. 72

171. Common questions of law and fact exist as to all

members of the Class and pre-dominate over any ques-

tions affecting solely individual members of the Class.

These questions include, but are not limited to, the follow-

ing:

a. whether defendants’ conduct as alleged herein

violated the federal securities laws;

b. whether the SEC filings, press releases and

statements disseminated to the investing public during

the Class Period misrepresented Charter’s financial

condition and results;

c. whether defendants acted knowingly or with

deliberate recklessness in omitting and/or misrepresenting

material facts;

d. whether the market price of Charter common

stock during the Class Period was artificially inflated; and

e. whether the members of the Class have been

damaged, and if so, what is the proper measure of dam-

ages.

172. Lead Plaintiff will rely, in part, upon the pre-

sumption of reliance established by the fraud-on-the-

market doctrine in that:

a. defendants made public misrepresentations or

failed to disclose material facts during the Class Period;

b. the omissions and misrepresentations were

material;

c. the stock of the Company traded on the

Nasdaq, an efficient market;

App. 73

d. the market reacted to public information

disseminated by the Company, and the Company was

followed and reported on by various securities analysts;

e. the misrepresentations alleged would tend to

induce a reasonable investor to misjudge the value of the

Company’s securities; and,

f. Lead Plaintiff and the members of the Class

purchased their Company stock between the time the

defendants or misrepresented material facts and the time

the true facts were disclosed, without knowledge of the

misrepresented facts.

COUNT I

VIOLATIONS OF §§ 11, 12 and 15 OF THE

SEC S ACT AGAINST CHARTER

RELATED DEFENDANTS OTHER THAN VOGEL

173. Lead Plaintiff repeats and re-alleges, as if fully

set forth herein, those paragraphs regarding the initial

public offering of Charter stock; the false and misleading

statements made in connection therewith; and the reasons

why those statements were false and misleading, i.e.,

{1 95-97, supra. This claim does not sound in fraud, and

neither fraud nor scienter is an element of this claim.

None of the paragraphs regarding defendants’ scienter are

incorporated herein.

174. This claim is brought by Lead Plaintiff on

behalf of all persons who purchased shares of Charter

stock pursuant to the IPO Registration Statement Lead

Plaintiff and other Class members acquired their shares

pursuant to or traceable to the Registration Statement.

App. 74

175. Defendants (other than Vogel, Scientific-Atlanta

and Arthur Andersen) issued and disseminated, caused to

be issued and disseminated, and participated in the

issuance and dissemination of, materially false and mis-

leading written statements to the investing public which

were contained in the Registration Statement, which

misrepresented or failed to disclose, inter alia, the facts set

forth above in {4 95(a)-(e), supra. Charter issued the

Prospectus and Registration Statement that accompanied

the IPO. Each of the Individual Defendants (other than

Vogel) was an officer, director, or controlling person of

Charter at the time of the IPO.

176. As a direct and proximate result of defendants’

acts and omissions in violation of the Securities Act, the

market price of Charter stock was artificially inflated in

the IPO, and Lead Plaintiff and the Class suffered sub-

stantial damage in connection with their purchase of

Charter common stock pursuant to the Registration

Statement and Prospectus.

177. At the times they purchased their shares in the

IPO, Lead Plaintiff and members of the Class who pur-

chased such shares were without knowledge of the facts

concerning the false or misleading statements or omissions

alleged herein.

178. Less th

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