Ruth San Pedro (ALS B2015)

Securities Regulations Atty. Francis Lim

WHARF (HOLDINGS) LIMITED v.UNITED (2001)

Hint: Sale of option with secret intent not to honor
Facts:
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, a HK
firm, prepared a bid thru its chairman Peter Woo and its managing director Stephen
Ng got a business partner in United, a Colorado based company. United employees
were sent to HK to prepare everything for the bid and as payment they be given right
to invest in the cable system. A draft letter of intent containing an option to buy 10%
of the stock, thereby making United a co-investor, was executed but not signed. In
Wharfs bid to the HK government it declared itself as sole owner but would
consider allowing United to invest.
In Oct. 1992, United told Ng it would continue to help only if Wharf gave United an
enforceable right to invest which Ng granted ORALLY. The terms are as follows:
(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 previ- ous 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 subsequent negotiations were never reduced to writing.
In May 1993, the franchise was awarded to Wharf and United raised $ 66M to buy the
10%, but Wharf refused to sell any stocks. 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 Uniteds desired payment for their service. A handwritten note
by Wharf's Chairman Woo replied, No, no, no, we don't accept that. Another
meeting with the board contained a note from Ng saying how do we get out? In
December, United filed with SEC documents stating their negotiation for the 10%
acquisition and an internal Wharf memo stated that [o]ur next move should be to
claim that our directors got quite upset over these representa- tions.... Publicly, we do
not acknowledge [United's] opportunity to acquire the 10% in- terest. In the margin
of a December 1993 letter from United discussing its expectation of investing in the
cable system, Ng wrote, Be careful, must deflect this! How? Other Wharf
documents referred to the need to back pedal and stall.
United sued in Colorado District Court. 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 Rule 10(b). Damages were
awarded for circumstances of fraud, malice, or willful and wanton conduct. CA

Ruth San Pedro (ALS B2015)

Securities Regulations Atty. Francis Lim

affirmed. It was brought to SC on certiorari.

Issue: WON sale of option with secret intent not to honor it violated Rule 10(b)?
Held: YES! DC and CA decision affirmed by SC.
Ratio:
Securities Exchange Act 10(b) states that it is unlawful for any person ... to use or
employ, in connection with the purchase or sale of any security ..., any manipulative
or deceptive device or contrivance in contravention of such rules and regulations as
the [SEC] may prescribe. It 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.
The security at issue is the option to purchase that stock. Wharf does not contest on
appeal the classification of the option as a security. It is consistent with the language
of the Act, which defines security to include both any option on any security and
any right to purchase stock. Wharf argues that the Act doesnt contemplate oral
agreement but the court said it does not distinguish. 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. Limitation on oral contract
would limit the act and undermine its basic purpose.
Wharf further claimed that the secret reservation doesnt concern the value so policy
of full disclosure doesnt apply. The SC said to sell an option while secretly intending
not to permit the option's exercise is misleading, because a buyer normally presumes
good faith. Uniteds claim is that Wharf executed the agreement with intent not to
honor it, not a mere failure to do a promise. There is obvious misrepresentation, fraud,
etc as seen in the evidence.