The Wharf (Holdings) Ltd. v. United Int'l Holdings Inc.

• Decision Date: 21 May 2001
• Docket Number: 00347
• Citation: 532 U.S. 588,121 S.Ct. 1776,149 L.Ed.2d 845
• Parties: The Wharf (HOLDINGS) LIMITED, et al., PETITIONERS v. UNITED INTERNATIONAL HOLDINGS, INC. et al.SUPREME COURT OF THE UNITED STATES
• Court: U.S. Supreme Court

532 U.S. 588

121 S.Ct. 1776

149 L.Ed.2d 845

NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press

The Wharf (HOLDINGS) LIMITED, et al., PETITIONERS v UNITED INTERNATIONAL HOLDINGS, INC. et al.

No. 00-347

SUPREME COURT OF THE UNITED STATES

Argued March 21, 2001

Decided May 21, 2001

Syllabus

Petitioner The Wharf (Holdings) Limited orally granted respondent United International Holdings, Inc., an option to buy 10% of the stock in Wharf's Hong Kong cable system if United rendered certain services, but internal Wharf documents suggested that Wharf never intended to carry out its promise. United fulfilled its obligation, but Wharf refused to permit it to exercise the option. United sued in Federal District Court, claiming that Wharf's conduct violated, inter alia, 10(b) of the Securities Exchange Act of 1934, which prohibits using "any manipulative or deceptive device or contrivance" "in connection with the purchase or sale of any security." 15 U.S.C. 78j(b). A jury found for United, and the Tenth Circuit affirmed.

Held: Wharf's secret intent not to honor the option it sold United violates 10(b). Pp. 4-9.

(a) The Court must assume that the "security" at issue is not the cable system stock, but the option to purchase that stock, because Wharf conceded this point below. That concession is consistent with the Act's language defining "security" to include both "any . . . option . . . on any security" and "any . . . right to . . . purchase" stock. 78c(a)(10). P. 5.

(b) Wharf's claim that 10(b) does not cover oral contracts of sale is rejected. This Court held in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, that the Act does not protect a person who did not actually buy securities, but who might have done so had the seller told the truth. But United is not a potential buyer; by providing Wharf with its services, it actually bought the option that Wharf sold. And Blue Chip Stamps did not suggest that oral purchases or sales fall outside the Act's scope. Neither is there any other convincing reason to interpret the Act to exclude oral contracts as a class. The Act itself says that it applies to "any contract" for a security's purchase or sale, 78c(a)(13), (14), and oral contracts for the sale of securities are sufficiently common that the Uniform Commercial Code and statutes of frauds in every State consider them enforceable. Pp. 5-7.

(c) Also rejected is Wharf's argument that a secret reservation not to permit the exercise of an option falls outside 10(b) because it does not relate to the value of a security purchase or the consideration paid, and hence does not implicate 10(b)'s full disclosure policy. Even were it the case that the Act covers only misrepresentations likely to affect the value of securities, Wharf's secret reservation was such a misrepresentation. To sell an option while secretly intending not to permit the option's exercise is misleading, because a buyer normally presumes good faith. Similarly, the secret reservation misled United about the option's value, which was, unbeknownst to United, valueless. Pp. 7-8.

(d) Finally, the Court rejects Wharf's claim that interpreting the Act to allow recovery in a case like this one will permit numerous plaintiffs to bring federal securities claims that are in reality no more than ordinary state breach-of-contract claims lying outside the Act's basic objectives. United's claim is not simply that Wharf failed to carry out a promise to sell it securities, but that Wharf sold it a security (the option) while secretly intending from the very beginning not to honor the option. Moreover, Wharf has not shown that its concern has proved serious as a practical matter in the past or that it is likely to prove serious in the future. Pp. 8-9. 210 F.3d 1207, affirmed.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

Breyer, J., delivered the opinion for a unanimous Court.

Opinion of the Court

Justice Breyer delivered the opinion of the Court.

This securities fraud action focuses upon a company that sold an option to buy stock while secretly intending never to honor the option. The question before us is whether this conduct violates 10(b) of the Securities Exchange Act of 1934, which prohibits using "any manipulative or deceptive device or contrivance" "in connection with the purchase or sale of any security." 48 Stat. 891, 15 U.S.C. 78j(b); see also 17 CFR 240.10b-5 (2000). We conclude that it does.

I

Respondent United International Holdings, Inc., a Colorado-based company, sued petitioner The Wharf (Holdings) Limited, a Hong Kong firm, in Colorado's Federal District Court. United said that in October 1992 Wharf had sold it an option to buy 10% of the stock of a new Hong Kong cable system. But, United alleged, at the time of the sale Wharf secretly intended not to permit United to exercise the option. United claimed that Wharf's conduct amounted to a fraud "in connection with the . . . sale of [a] security," prohibited by 10(b), and violated numerous state laws as well. A jury found in United's favor. The Court of Appeals for the Tenth Circuit upheld that verdict. 210 F.3d 1207 (2000). And we granted certiorari to consider whether the dispute fell within the scope of 10(b).

The relevant facts, viewed in the light most favorable to the verdict winner, United, are as follows. In 1991, the Hong Kong government announced that it would accept bids for the award of an exclusive license to operate a cable television system in Hong Kong. Wharf decided to prepare a bid. Wharf's chairman, Peter Woo, instructed one of its managing directors, Stephen Ng, to find a business partner with cable system experience. Ng found United. And United sent several employees to Hong Kong to help prepare Wharf's application, negotiate contracts, design the system, and arrange financing.

United asked to be paid for its services with a right to invest in the cable system if Wharf should obtain the license. During August and September 1992, while United's employees were at work helping Wharf, Wharf and United negotiated about the details of that payment. Wharf prepared a draft letter of intent that contemplated giving United the right to become a co-investor, owning 10% of the system. But the parties did not sign the letter of intent. And in September, when Wharf submitted its bid, it told the Hong Kong authorities that Wharf would be the system's initial sole owner, Lodging to App. AY-4, although Wharf would also "consider" allowing United to become an investor, id., at AY-6.

In early October 1992, Ng met with a United representative, who told Ng that United would continue to help only if Wharf gave United an enforceable right to invest. Ng then orally granted United an option with the following terms: (1) United had the right to buy 10% of the future system's stock; (2) the price of exercising the option would be 10% of the system's capital requirements minus the value of United's previous services (including expenses); (3) United could exercise the option only if it showed that it could fund its 10% share of the capital required for at least the first 18 months; and (4) the option would expire if not exercised within six months of the date that Wharf received the license. The parties continued to negotiate about how to write documents that would embody these terms, but they never reduced the agreement to writing.

In May 1993, Hong Kong awarded the cable franchise to Wharf. United raised $66 million designed to help finance its 10% share. In July or August 1993, United told Wharf that it was ready to exercise its option. But Wharf refused to permit United to buy any of the system's stock. Contemporaneous internal Wharf documents suggested that Wharf had never intended to carry out its promise. For example, a few weeks before the key October 1992 meeting, Ng had prepared a memorandum stating that United wanted a right to invest that it could exercise if it was able to raise the necessary capital. A handwritten note by Wharf's Chairman Woo replied, "No, no, no, we don't accept that." App. DT-187; Lodging to App. AI-1. In September 1993, after meeting with the Wharf board to discuss United's investment in the cable system, Ng wrote to another Wharf executive, "How do we get out?" Id., at CY-1. In December 1993, after United had filed documents with the Securities Exchange Commission representing that United was negotiating the acquisition of a 10% interest in the cable system, an internal Wharf memo stated that "[o]ur next move should be to claim that our directors got quite upset over these representations . . . . Publicly, we do not acknowledge [United's] opportunity" to acquire the 10% interest. Id., at DF-1 (emphasis in original). In the margin of a December 1993 letter from United discussing its expectation of investing in the cable system, Ng wrote, "[B]e careful, must deflect this! [H]ow?" Id., at DI-1. Other Wharf documents referred to the need to "back ped[al]," id., at DG-1, and "stall," id., at DJ-1.

These documents, along with other evidence, convinced the jury that Wharf, through Ng, had orally sold United an option to purchase a 10% interest in the future cable system while secretly intending not to permit United to exercise the option, in violation of 10(b) of the Securities Exchange Act and various state laws. The jury awarded United compensatory damages of $67 million and, in light of "circumstances of fraud, malice, or willful and wanton conduct," App. EM-18, punitive damages of $58.5 million on the state-law claims. As we have said, the Court of Appeals upheld the jury's award. 210 F.3d 1207 (CA10 2000). A...