OCTOBER TERM, 2000
Syllabus
THE WHARF (HOLDINGS) LTD. ET AL.
v. UNITED INTERNATIONAL
HOLDINGS, INC., ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH
CIRCUIT
No. 00-347. Argued March 21, 200l-Decided May 21, 2001
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 § lO(b). Pp. 592-597.
(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)(lO). Pp. 593-594.
(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. 594-596.
(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
589
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. P. 596.
(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. 596-597.
210 F.3d
1207, affirmed.
BREYER, J., delivered the opinion for a unanimous Court.
Paul M. Dodyk argued the cause for petitioners. With him
on the briefs was
William R. Jentes.
Louis R. Cohen argued the cause for respondents. With him on the
brief were Jonathan J. Frankel, David B. Wilson, and Jeffrey A.
Chase.
Matthew D. Roberts argued the cause for the Securities and
Exchange Commission as amicus curiae urging affirmance. With him on
the brief were Acting Solicitor General Underwood, Deputy Solicitor
General Kneedler, David M. Becker, Meyer Eisenberg, Jacob H.
Stillman, Katharine B. Gresham, and Susan S. McDonald.
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 §
lO(b) of the Securities Exchange Act of
590
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 television 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 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
591
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, N g
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-l.
In September 1993, after
592
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-l. In December 1993, after United had
filed documents with the Securities and Exchange Commission (SEC)
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, N g wrote, "[B]e careful, must
deflect this! [H]ow?"
Id., at DI-l. Other Wharf documents
referred to the need to "back ped[al]," id., at DG-1, and "stall,"
id., at DJ-l.
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 (CAlO 2000). And we granted certiorari to determine
whether Wharf's oral sale of an option it intended not to honor is
prohibited by § 10(b).
II
Section 10(b) of the Securities Exchange Act makes it "unlawful
for any person ... [t]o use or employ, in connection with the
purchase or sale of any security ... , any manipulative or
deceptive device or contrivance in contravention of
593
such rules and regulations as the [SEC] may prescribe." 15 U. S.
C. § 78j.
Pursuant to this provision, the SEC has promulgated Rule 10b-5.
That Rule forbids the use, "in connection with the purchase or sale
of any security," of (1) "any device, scheme, or artifice to
defraud"; (2) "any untrue statement of a material fact"; (3) the
omission of "a material fact necessary in order to make the
statements made ... not misleading"; or (4) any other "act,
practice, or course of business" that "operates ... as a fraud or
deceit." 17 CFR § 240.10b-5 (2000).
To succeed in a Rule 10b-5 suit, a private plaintiff must show
that the defendant used, in connection with the purchase or sale of
a security, one of the four kinds of manipulative or deceptive
devices to which the Rule refers, and must also satisfy certain
other requirements not at issue here. See,
e. g., 15 U. S.
C. § 78j (requiring the "use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of any
national securities exchange");
Ernst & Ernst v.
Hochfelder, 425 U. S. 185, 193 (1976)
(requiring scienter, meaning "intent to deceive, manipulate, or
defraud");
Basic Inc. v.
Levinson, 485 U. S. 224, 231-232
(1988) (requiring that any misrepresentation be material); id., at
243 (requiring that the plaintiff sustain damages through reliance
on the misrepresentation).
In deciding whether the Rule covers the circumstances present
here, we must assume that the "security" at issue is not the cable
system stock, but the option to purchase that stock. That is
because the Court of Appeals found that Wharf conceded this point.
210 F. 3d, at 1221 ("Wharf does not contest on appeal the
classification of the option as a security"). That concession is
consistent with the language of the Securities Exchange Act, which
defines "security" to include both "any ... option ... on any
security" and "any ... right to ... purchase" stock. 15 U. S. C. §
78c(a)(10) (1994 ed., Supp. V); see also
Blue Chip Stamps v.
Manor Drug Stores, 421 U. S. 723, 751 (1975)
("[H]olders of ... options,
594
and other contractual rights or duties to purchase ...
securities" are" 'purchasers' ... of securities for purposes of
Rule 10b-5"). And Wharf's current effort to deny the concession, by
pointing to an ambiguous statement in its Court of Appeals reply
brief, comes too late and is unconvincing. See Reply Brief for
Petitioners 16, n. 8 (citing Reply Brief for Appellants in Nos.
97-1421, 98-1002 (CAlO), pp. 5-6). Consequently, we must decide
whether Wharf's secret intent not to honor the option it sold
United amounted to a misrepresentation (or other conduct forbidden
by the Rule) in connection with the sale of the option.
Wharf argues that its conduct falls outside the Rule's scope for
two basic reasons. First, 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 § 10(b) does not cover oral
contracts of sale. Wharf points to
Blue Chip Stamps, in
which this Court construed the Act's "purchase or sale" language to
mean that only "actual purchasers and sellers of securities" have
standing to bring a private action for damages. See 421 U. S., at
730-731. Wharf notes that the Court's interpretation of the Act
flowed in part from the need to protect defendants against lawsuits
that "turn largely on which oral version of a series of occurrences
the jury may decide to credit."
Id., at 742. And it claims
that an oral purchase or sale would pose a similar problem of proof
and thus should not satisfy the Rule's "purchase or sale"
requirement.
Blue Chip Stamps, however, involved the very different
question whether the Act protects a person who did not actually buy
securities, but who might have done so had the seller told the
truth. The Court held that the Act does not cover such a potential
buyer, in part for the reason that Wharf states. 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 said nothing to suggest that oral purchases or sales
fall outside the scope of
595
the Act. Rather, the Court's concern was about "the abuse
potential and proof problems inherent in suits by investors who
neither bought nor sold, but asserted they would have traded absent
fraudulent conduct by others."
United States v.
O'Hagan, 521
U. S. 642, 664 (1997). Such a "potential purchase" claim would
rest on facts, including the plaintiff's state of mind, that might
be "totally unknown and unknowable to the defendant," depriving the
jury of "the benefit of weighing the plaintiff's version against
the defendant's version."
Blue Chip Stamps, supra, at 746.
An actual sale, even if oral, would not create this problem,
because both parties would be able to testify as to whether the
relevant events had occurred.
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 the purchase or sale of a
security. 15 U. S. C. §§ 78c(a)(13), (14). 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. See U. C. C. § 8-113 (Supp. 2000) ("A contract
... for the sale or purchase of a security is enforceable whether
or not there is a writing signed or record authenticated by a party
against whom enforcement is sought"); see also 2C U. L. A. 77-81
(Supp. 2000) (table of enactments of U. C. C. Revised Art. 8
(amended 1994)) (noting adoption of § 8-113, with minor variations,
by all States except Rhode Island and South Carolina); R. I. Gen.
Laws § 6A-8-322 (Supp. 1999) (repealed effective July 1, 2001)
(making oral contracts for the sale of securities enforceable); §
6A-8-113 (2000 Cum. Supp.) (effective July 1, 2001) (same); S. C.
Code Ann. § 36-8-113 (Supp. 2000) (same); U. C. C. § 8-113 Comment
(Supp. 2000) ("[T]he statute of frauds is unsuited to the realities
of the securities business"). Any exception for oral sales of
securities would significantly limit the Act's coverage, thereby
undermining its basic purposes.
596
Wharf makes a related but narrower argument that the Act does
not encompass oral contracts of sale that are unenforceable under
state law. But we do not reach that issue. The Court of Appeals
held that Wharf's sale of the option was not covered by the
then-applicable Colorado statute of frauds, Colo. Rev. Stat. §
4-8-319 (repealed 1996), and hence was enforceable under state law.
Though Wharf disputes the correctness of that holding, we
ordinarily will not consider such a state-law issue, and we decline
to do so here.
Second, Wharf argues that a secret reservation not to permit the
exercise of an option falls outside § 10(b) because it does not
"relat[e] to the value of a security purchase or the consideration
paid"; hence it does "not implicate [§ 10(b)'s] policy of full
disclosure." Brief for Petitioners 25, 26 (emphasis deleted). But
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. Cf.,
e. g., Restatement (Second) of Torts § 530, Comment
c
(1976) ("Since a promise necessarily carries with it the implied
assertion of an intention to perform[,] it follows that a promise
made without such an intention is fraudulent"). For similar
reasons, the secret reservation misled United about the option's
value. Since Wharf did not intend to honor the option, the option
was, unbeknownst to United, valueless.
Finally, Wharf supports its claim for an exemption from the
statute by characterizing this case as a "disput[e] over the
ownership of securities." Brief for Petitioners 24. Wharf expresses
concern 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-actions that lie outside the Act's basic
objectives. United's claim, however, is not simply that Wharf
failed to carry out a prom-
597
ise to sell it securities. It is a claim that Wharf sold it a
security (the option) while secretly intending from the very
beginning not to honor the option. And United proved that secret
intent with documentary evidence that went well beyond evidence of
a simple failure to perform. Moreover, Wharf has not shown us that
its concern has proved serious as a practical matter in the past.
Cf.
Threadgill v.
Black, 730 F.2d
810, 811-812 (CADC)
(per curiam) (suggesting in 1984
that contracting to sell securities with the secret reservation not
to perform one's obligations under the contract violates § 10(b)).
Nor does Wharf persuade us that it is likely to prove serious in
the future. Cf. Private Securities Litigation Reform Act of 1995,
Pub. L. 104-67, § 21D(b)(2), 109 Stat. 747, codified at 15 U. S. C.
§ 78u-4(b)(2) (1994 ed., Supp. V) (imposing, beginning in 1995,
stricter pleading requirements in private securities fraud actions
that, among other things, require that a complaint "state with
particularity facts giving rise to a strong inference that the
defendant acted with the required [fraudulent] state of mind").
For these reasons, the judgment of the Court of Appeals is
Affirmed.
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