The Wharf (Holdings) Ltd. v. United International Holdings

PETITIONER:The Wharf (Holdings) Ltd.
RESPONDENT:United International Holdings
LOCATION:White House

DOCKET NO.: 00-347
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 532 US 588 (2001)
ARGUED: Mar 21, 2001
DECIDED: May 21, 2001

Louis R. Cohen – Argued the cause for the respondent
Matthew D. Roberts – As amicus curiae, supporting the respondent
Paul M. Dodyk – Argued the cause for the petitioner

Facts of the case

In return for United International Holdings, Inc.’s assistance in preparing its application, contracts, system, and financing for a cable television system in Hong Kong, Wharf Holdings Ltd. orally granted United an option to buy 10% of stock in the system. The parties never reduced the agreement to writing. Ultimately, Wharf refused to allow United to exercise its option. United then sued Wharf in Federal District Court, claiming that Wharf violated 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.” Wharf’s internal documents, which suggested that Wharf never intended to carry out its promise, supported United’s claim. A jury found in United’s favor. The Court of Appeals affirmed.


Does an oral agreement to grant an option to buy stock, while secretly intending not to honor the option, violate the Securities Exchange Act of 1934?

Media for The Wharf (Holdings) Ltd. v. United International Holdings

Audio Transcription for Oral Argument – March 21, 2001 in The Wharf (Holdings) Ltd. v. United International Holdings

Audio Transcription for Opinion Announcement – May 21, 2001 in The Wharf (Holdings) Ltd. v. United International Holdings

Stephen G. Breyer:

Now, the second case is called Wharf Holdings v. United International Holdings, and it is a Federal Security’s case.

Now, as many know, the Federal Securities Act, as it has been elaborated by Rule 10b-5, forbids the use of any deceptive device, any fraud or deceit which includes the making of any materially untrue statement or fact, and it includes the omission of such a fact “in connection with the purchase or sale of any security”.

Now, in this case we have to take as given the following facts so they were much disputed below but we must take them as given.

Wharf, which is a Hong Kong company, obtained the help of United, which is a Colorado company in helping Wharf prepare a bid for an exclusive Hong Kong cable television franchise.

In return, Wharf, orally granted United an option to buy 10% of the resulting cable system shares if Wharf proves successful, which Wharf did prove.

But, at the same time that Wharf was saying this, Wharf’s Chairman was simultaneously and secretly writing other things for example no, no, no, we don’t accept that, referring to the option.

A fact that, along with other evidence convinced the jury that Wharf had a secret reservation.

It secretly intended not to live up to its word.

Wharf has here tried to convince us, as it tried to convince the Court of Appeals that circumstances of this kind fall outside, not inside the scope of the Securities Act, but like the Court of Appeals, we conclude that Wharf is wrong.

We think the Securities Act does cover this kind of case.

On its face the Act’s term seems satisfied.

Wharf would seem to have sold the security, namely the option to United in return for United services.

Wharf would seem to have made a false material statement of fact or more accurately, a material omission, in failing to tell United about its secret reservation not to follow through on its premises and the omission would seem to have taken place in connection with the sale of the security, namely the option.

Wharf, however, makes three basic claims to the contrary: first it points out that its promise to grant the option was oral and it argues that this Court’s Blue Chip Stamps case in effect takes oral promises outside the Act’s scope.

Well, we disagree with that interpretation of the case and we note that States recognize in their statute of frauds’ oral contracts to buy securities and we hold the oral nature does not make a difference.

Second, it argues, the act does not cover the kind of material misrepresentation or omission here at issue.

A failure to disclose the secret reservation, not to perform, because Wharf says that misrepresentation did not relate to the value of the security.

Well, assuming that it has to it does.

But we think if you have the secret reservation, not to follow through that makes the option makes the option worth a lot less.

Third, Wharf argues that this kind of failure to disclose should not count as a misrepresentation within the Acts term because it will be too easy to sweep within Federal Securities Law, ordinary state law breach-of-contract claims, just failure to live up to a promise to sell by recharacterizing them as secret reservation cases, so, you didn’t intend to sell all the time.

Here, however United proved that its case was not a simple breach-of-contract case.

It showed the secret reservations with documentary evidence and the practical problems that Wharf points to just happen to risen in circuits that have permitted secret reservation cases.

For these and related reasons, we reject Wharf’s argument.

We affirm the Court of the Appeals determination in favor of United.

The decision is unanimous.