Wharf (Holdings) Ltd. v. United International Holdings, Inc.
2001 U.S. LEXIS 3812, 532 U.S. 588, 149 L. Ed. 2d 845 (2001)
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Rule of Law:
Selling a security, such as an option to purchase stock, while secretly intending not to honor the terms of that security constitutes a 'deceptive device' in violation of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
Facts:
- The Wharf (Holdings) Limited, a Hong Kong firm, sought to bid on a government license to operate a cable television system in Hong Kong.
- Wharf enlisted the help of United International Holdings, Inc., a Colorado company with cable system experience, to assist in preparing its bid.
- In exchange for its services, United sought the right to invest in the cable system if Wharf won the license.
- In October 1992, Wharf's managing director orally granted United an option to purchase 10% of the future cable system's stock under specified terms, though the agreement was never reduced to writing.
- Internal Wharf documents from before and after the oral agreement indicated that Wharf's chairman and other executives never intended to allow United to exercise the option.
- In May 1993, Wharf was awarded the cable franchise.
- After raising the necessary funds, United attempted to exercise its option in the summer of 1993, but Wharf refused to sell it any stock.
Procedural Posture:
- United International Holdings, Inc. sued The Wharf (Holdings) Limited in the U.S. District Court for the District of Colorado for violations of § 10(b) and state laws.
- A jury found in favor of United, awarding both compensatory and punitive damages.
- Wharf, as the appellant, appealed the verdict to the U.S. Court of Appeals for the Tenth Circuit.
- The Court of Appeals affirmed the judgment in favor of United, the appellee.
- The U.S. Supreme Court granted Wharf's petition for a writ of certiorari.
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Issue:
Does a party's secret intent not to honor an oral option to purchase stock, sold to another party, constitute a 'deceptive device' in connection with the sale of a security under § 10(b) of the Securities Exchange Act of 1934?
Opinions:
Majority - Justice Breyer
Yes. Selling an option to purchase a security while secretly intending never to perform the obligations of that option is a 'deceptive device' prohibited by § 10(b). The Court's reasoning is threefold. First, the security at issue is the option itself, which is explicitly covered by the Securities Exchange Act's definition of a 'security.' Second, the Act applies to oral as well as written contracts for the sale of securities; the concern in Blue Chip Stamps v. Manor Drug Stores about proof problems for potential purchasers does not apply to actual purchasers in an oral sale, where both parties can testify. Third, the secret intent not to perform is a material misrepresentation regarding the value of the security; by selling an option it knew it would not honor, Wharf sold a security that was, unbeknownst to the buyer, valueless. This is not a mere breach-of-contract claim but securities fraud, because the seller's fraudulent intent existed at the time of the sale, as proven by documentary evidence.
Analysis:
This decision clarifies that § 10(b) securities fraud is not limited to misrepresentations about a company's financial health or the intrinsic value of its stock. It extends to a party's misrepresentation of its own intent to perform its obligations under a securities contract. The ruling establishes that a secret intent not to perform at the moment of sale transforms what might otherwise be a state-law breach of contract claim into a federal securities fraud claim. This strengthens protections for purchasers of all types of securities, including options and oral contracts, but also underscores the need for plaintiffs to provide strong evidence of contemporaneous fraudulent intent to succeed on such a claim.
