Assignment:
The Wharf (Holdings) Limited v. United International Holdings, Inc.
United States Supreme Court
United International Holding, Inc., sued the Wharf (Holdings) Limited in federal district court for securities fraud for violating Section 10(b) and Rule 10(6)-5 of the 1934 Exchange Act.
The Wharf (Holdings) Limited is a Hong Kong firm that was interested in obtaining a license to operate a cable television system in Hong Kong. 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 find a business partner with cable system experience. Wharf located United International Holdings, Inc., a Colorado-based company with substantial experience in operating cable television systems. Wharf orally agreed to grant United an option to buy 10 percent of the stock of the new Hong Kong cable system if Wharf was awarded the license.
In May 1993, Hong Kong awarded the cable franchise to Wharf. When United raised $66 million and tried to exercise its option to invest 10 percent in the new cable company, Wharf refused to permit United to buy any of the new company’s stock. Documents and other evidence showed that at the time Wharf orally granted United the 10 percent stock option, it had not intended ever to sell
United any stock in the new venture. The jury held for United and awarded it $67 million in compensatory damages and $58.5 million in punitive damages against Wharf. The court of appeals affirmed. The U.S. Supreme Court granted review.
Justice Breyer
Wharf points out that its agreement to grant United an option to purchase shares in the cable system was an oral agreement. And it says that Section 10(b) does not cover oral contracts of sale. There is no convincing reason to interpret the Act to exclude oral contracts as a class. The Act itself says that it applies to “any contract” for the purchase or sale of a security. Oral contracts for the sale of securities are sufficiently common that the Uniform Commercial Code and statutes of frauds in every State now consider them enforceable. To sell an option while secretly intending not to permit the option’s exercise is misleading, because a buyer normally presumes good faith. Since Wharf did not intend to honor the option, the option was, unbeknownst to United, valueless.
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