An interesting decision involving securities fraud with respect to an option to buy stock was Wharf (Holdings) Ltd. v. United Int’l Holdings, Inc., a 2001 decision by the Supreme Court of the United States. The decision in the case was unanimous and it was delivered by Justice Breyer. A jury found in United’s favor and the case was appealed to the U.S. Court of Appeals for the Tenth Circuit which upheld the verdict. The case then was appealed to the Supreme Court.
The case discusses two particularly interesting issues – the first whether the case was really a breach of contract case and not a fraud case, and the second whether a oral contract was covered by Section 10(b) of the Securities Exchange Act of 1934.
The case involved the question of whether a company that sold an oral option to buy stock while secretly intending never to honor the option violated Section 10(b) of the Securities Exchange Act of 1934. The Court held that the secret intent never to honor the option did violate Section 10(b).
In the Wharf case, one of the assertions made by Wharf was that United’s claim was in reality no more than a ordinary state breach of contract claim. The Supreme Court found otherwise. The Supreme Court stated that United’s claim “…is not simply that Wharf failed to carry out a promise 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.” The court made clear that the fraud claim could be distinguished from a breach of contract claim because from “the very beginning” the intent was not to honor the option to purchase stock. Not only that, the Court made clear that the secret intent not to honor the option from the very beginning was sufficiently proved. The Court stated “United proved that secret intent with documentary evidence that went well beyond evidence of a simple failure to perform.”
Additionally, the Supreme Court refused to dismiss the claim that Wharf violated Section 10(b) of the Securities Exchange Act of 1934 because it involved an oral contract. The Court did not find any “convincing reason to exclude oral contracts as a class.” The Court went on to state “Any exception for oral sales of securities would significantly limit the Act’s coverage, thereby undermining its basic purposes.”
Please note that the blog post above is for general information purposes only. Nothing in the above blog post should be taken as legal advice for any individual, business, case or situation.