WHARF HOLDINGS LTD. v. UNITED INTERNATIONAL HOLDINGS
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?
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Yes. In a unanimous opinion delivered by Justice Stephen G. Breyer, the Court held that an oral agreement to give an option to buy stock while secretly intending never to honor that option violates the Securities Exchange Act of 1934's prohibition of deceptive devices. Justice Breyer wrote for the Court that there was 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."
Argument of Paul M. Dodyk
Chief Justice Rehnquist: We'll hear argument on Number 00-347, The Wharf Limited, et al., v. United International Holdings.
Mr. Dodyk: Mr. Chief Justice, and may it please the Court--
Let me start by suggesting that whether my client Wharf Holdings misrepresented its intention to sell stock of Wharf Cable to UIH is a matter of no concern under the '34 Act.
The paradigm Section 10(b) plaintiff is an investor who has purchased a security which has been inflated by deception, the price of which was been inflated by deception or manipulation.
I submit the central purpose of the '34 Act is to protect such investors from financial loss.
The '34 Act, I submit, was not passed to provide a Federal remedy to plaintiffs who complained of their inability to purchase stock.
The '34 Act was not passed for the purpose of Federalizing the adjudication of disputes over the ownership of securities.
Justice Scalia: It depends on what you consider the security to be in this case.
Mr. Dodyk: In part that is true, Your Honor, but I think not solely.
I think there are also issues going to the nature of the misrepresentation involved, and the first--
Justice Scalia: But first about what the security is.
Mr. Dodyk: --Yes, Your Honor.
Justice Scalia: And what the Respondents say, and what the court below believed is that the security here was an option.
And the definition of security in the Act includes an option to purchase securities.
Mr. Dodyk: That is correct.
That is correct, Your Honor.
But what I am suggesting to Your Honor is that the oral expression which passes or is asserted to be a security in this case should not be accepted as such, that in this case that what you're basically dealing with is a conversation which gave rise to an asserted right to purchase common stock in a subsidiary.
The answer to why, as I understand the law, Your Honor, is rooted in the Blue Chip Stamps case.
And as I interpret that case, Your Honor, I believe it to reflect a reluctance on the part of the Court to accept oral assertions as satisfying the predicate to establish standing to sue as a purchaser of securities.
Justice Ginsburg: Mr. Dodyk, how far do you take that?
Are you saying that no oral representations count under the Exchange Act?
Are you saying that that goes for the SEC as well as what we have here, private suitor?
Mr. Dodyk: Well, certainly Your Honor, I'm not saying then oral statement cannot constitute a misrepresentation.
Far be it from me to suggest that.
Going to the second part of your question, Your Honor, I certainly think that distinctions can be made between the breadth of section 10(b) in the hands of the SEC and the breadth of the judicially implied private right of action under Section 10(b).
And as Your Honor is aware, there are distinctions.
In an SEC action, it is of no concern whether anyone relied on misrepresentation.
In fact, there is no purchaser requirement constraining the SEC's enforcement bar.
So I think the contours of the private right of action which is implied under Section 10(b) are quite different from the contours within which the SEC might bring an enforcement action.
Justice Ginsburg: Are you saying, Mr. Dodyk, that there can't be any oral options as a matter of Federal securities law?
Mr. Dodyk: Your Honor, I think as a matter of Federal securities law, as I read the Blue Chips Stamps case, that a conversation which a person asserts via an oral option should not, under the doctrine of that case, be accepted as a security.
Chief Justice Rehnquist: Well, that would certainly take it beyond the holding of the case.
Mr. Dodyk: There is no question about that.
The holding of the case itself was limited to a situation in which the offerees in that situation did not purchase the stock.
But what I say to Your Honor is I don't think given what I understand to be... and of course Your Honor would know better than I... the thrust of that opinion.
The reluctance of the Court to accept wholly oral testimony not for the purpose of saying whether or not there has been a misrepresentation, but for the purpose of satisfying the threshold predicate requirement of whether or not the plaintiff has purchased securities.
The Court, time and again in the course of that opinion, said that the principal advantage of that doctrine was to place as a requirement for standing in a 10(b) case a transaction which could be proven by document.
Justice Scalia: But that isn't the issue here... whether the plaintiff purchased or not.
The issue here is whether the security existed.
Whether there was, indeed, an option, or there wasn't an option.
If there was an option, there's no doubt that this plaintiff purchased it.
It isn't a question of whether the plaintiff, you know, agreed to accept the option or not.
That's, as I understand it, not an issue.
The question is was there an option.
Mr. Dodyk: Well, I'm not sure that Your Honor is correct in saying that there's no question as to whether or not there was a purchase of an option here in a contractually binding sense, because as Your Honor is aware, it certainly is our position that the court, the district court, failed to properly instruct the jury with respect to the statute of fraud.
Justice Scalia: It's quite a different question in Blue Chip.
The question in Blue Chip is whether the plaintiff would have bought the stock or not.
You have no idea whether the plaintiff would have bought this stock.
Plaintiff said I would have but for this misrepresentation, or I would have sold it but for the misrepresentation.
It's totally up in the air.
The question here is much simpler, much more focused.
Was there a promise by the alleged seller of the option to deliver the stock or not?
Mr. Dodyk: I don't think it's simpler, Your Honor, in the sense in which Blue Chip Stamps saw a difficulty, if I could explain.
Justice Scalia: Okay.
Mr. Dodyk: It's not simpler for the following reasons, What was the core, as I understand it, of Blue Chips Stamps' concern was that you'll get someone who attempts to establish standing to bring a Section 10(b) action based on an oral assertion of what it is they would have done.
Now I submit to Your Honor, that this case is no different in that respect.
The oral option... the purchase of the oral option... all of that is a lawyer's description of what happened in a conversation.
And just as in--
Justice Scalia: It's not a description of would have, could have, should have.
I mean, and that's what was at issue in Blue Chip.
Oh, had I known this, I would have.
Had I not known it, I would not have.
And it's all speculation about the future.
There's no speculation about the future here.
It is a simple past fact.
Was there this promise to deliver the stock in exchange for certain actions by the other side, or was there not?
That's not at all as hard to prove as the would have, could have, should have stuff is.
Mr. Dodyk: --I think it is, if I may.
I think this is a would have, could have, should have case.
No question about it.
Don't forget that in the Blue Chips Stamps case, you weren't talking about a drive by offeree in the market place.
What you were talking about in Blue Chip Stamps were a group of retailers who as a result of a plan of reorganization that was entered after a consent decree had the right to purchase a determinate number of shares which was defined in the consent decree.
Therefore, their right to make the purchase was clearly documented.
In addition, in terms of the damage claim in that action, in terms of the injury, they were pointing to the difference between what the price the stock was trading at currently and the price which it was offered at in the prospectus.
And they said that is the measure of my damages.
Here, you're dealing with I think very much a weaker case in the sense that the alleged act of purchase, the existence of the option, was throughout a lawyer's description of an oral event.
And the would have, could have, should have goes like this, I would have exercised my option; I would over a period of years have invested fifty million dollars in this business; the business would have succeeded, and the stock market would have valued my stock interest at X million dollars.
Justice Souter: Well, you've raised... it seems to me in your last point you've raised two points.
One is a valuation point, which I don't think is directly what Justice Scalia is concerned with.
The other, the would have, should have point is I would have exercised my option.
But as I understand it, it's not open to us to assume that that is the case.
As I understand it, the finding was that they did exercise the option.
That they exercised the option by going ahead in effect and paying part of the consideration for that... for getting the option which was the help that they gave to your client in getting the license.
So that as I understand it, we have a finding that this is not a hypothetical should have or would have case, but a case in which we did.
We went ahead, and when we performed... when we did the part performance, at least... that sealed the deal for the option.
We had the option, and there is no question as I understand it that they sought to exercise the option at a later time.
So I don't see where the subjunctive gets into this.
Mr. Dodyk: Well, I think where the subjunctive gets in... and perhaps it's not a subjunctive as such... what I'm saying to you is that the nature of the jury's conclusion in this particular case, I think, should not be relevant to the determination which the Court is making, if my construction of the Blue Chip Stamps case is accurate.
Justice Souter: Well, your construction... I thought your construction is that yes, Blue Chip Stamps, as Justice Scalia put it, is a would have, should have case, and this is a would have, should have case.
And I don't think this is.
Mr. Dodyk: No it's not... I'm not saying... I think it's a would have, should have case in many regards, Your Honor, in many regards.
But what I'm saying with respect to the reason why Blue Chip Stamps should be applied to the facts of this case is that I don't see any difference in the quality of the oral evidence, or the oral event which gave rise to the finding, and the quality of the oral evidence which drove the Court in Blue Chip Stamps to say no, I'm not going to extend the doctrine to that situation.
Justice Souter: Then I think you in essence are saying that they cannot be the oral creation of the security within the meaning of the Act.
Mr. Dodyk: That's what I am saying.
Justice Souter: Yeah.
Mr. Dodyk: That's right.
I'm not saying that oral representation cannot be fraudulent.
What I am saying is where a plaintiff cannot satisfy the threshold requirement of purchase of a security except by a purely oral event, then I would--
Justice Ginsburg: There's a statute that lists a whole bunch of things that constitute a security; one of them is an option.
It doesn't say anything about in writing in the text of the statute.
Mr. Dodyk: --Well, Your Honor, as to that I would suggest that if you look at Section 3810 that all of the elements of a security there as defined are elements which are ordinarily written instruments... common stock, bonds, notes.
There is nothing I think, Your Honor, in 3810... no one of the individual elements... which is not a written document and therefore--
Justice Scalia: Do you think that Blue Chip would have come out differently if there were a writing from the president of the purchaser to his mother saying we intend to purchase this stock of this corporation next week.
Do you really think that the only problem in Blue Chip was the lack of a writing, or was it the inherent difficulty of showing what somebody would have done when it has not, in fact, been done.
Whereas the claim here is that something has been done; not that it would have been done, but that it has been.
Mr. Dodyk: --I'm not saying that that... I can't tell you what element alone would have sufficed for the conclusion.
Justice Scalia: You think a letter might have done the job, if--
Mr. Dodyk: No, I don't.
I don't think it would have.
No, I don't.
Justice Scalia: --I don't think it would have, either.
Chief Justice Rehnquist: I think it has very little to do with the writing and much more to do with the inherent ineffability of future intentions.
Mr. Dodyk: Well, that is certainly true.
Justice Souter: If that is true, then you have to admit that Blue Chip doesn't stand for the proposition that you can't have an orally created security, and that we are, as Justice Scalia started out by saying, going to have to go beyond Blue Chip to hold your way here.
Mr. Dodyk: Well, I'm not suggesting that the Blue Chip Stamps opinion governs the facts of this case, but I would point out to Your Honor is that two circuit courts have interpreted Blue Chip Stamps to bar standing to a plaintiff who sought to assert... satisfied the purchase requirement and sought to assert standing on the basis of an oral agreement to purchase securities.
Justice Souter: Why--
Mr. Dodyk: In the Kagen case... the Kagen case--
Justice Souter: --Yes?
Mr. Dodyk: --in the Seventh Circuit, and the Pelletier case in the Eleventh Circuit both held that, and those are, to my understanding, the only reasoned interpretations of Blue Chip Stamps since that case was decided with respect to this particular issue.
Justice Souter: Let me ask you this question.
You're in effect saying that the '34 Act should be construed as, in effect, incorporating the statute of frauds for purposes of determining how a security, or what can qualify as a security within the meaning of the Act.
My question is, why should we interpret it when the statute of frauds has traditionally had an independent life of its own, and of course incidentally in this case, the statute of frauds has either been satisfied by part performance, or has been satisfied by part performance as I understand it in the findings of the jury.
Mr. Dodyk: Well, Your Honor, I would say a couple of things about that.
First of all, certainly the courts of appeal have construed Blue Chip Stamps to hold that if you had a purely oral event to satisfy the purchase requirement which is unenforceable under the statute of frauds, that under Blue Chips Stamps that didn't suffice, number one.
Number two, the argument I was making about Blue Chip Stamps and the significance of oral evidence is not limited to the statute of frauds.
After all, you're talking about the meaning of the Federal statute, and my interpretation of Justice Rehnquist's opinion in Blue Chip Stamps... excuse me, the Court's opinion in Blue Chip Stamps as underlying the Kagen and Pelletier decisions is that where the quality of the satisfaction of the purchase is oral, the quality of the evidence is purely oral, that the claim is too dubious in its nature to satisfy that threshold requirement--
Justice Souter: So you're saying there could be an oral contract, and there could be the oral creation of a security, but that the act of exercise cannot be oral.
Mr. Dodyk: --No, I'm not saying that.
Justice Souter: I thought that's what you just said.
Mr. Dodyk: No, no, no.
Justice Souter: I'm sorry.
Mr. Dodyk: No, what I was saying was that where for purposes of construing the Federal statute, irrespective of the statute of fraud, that the rule is a Federal rule, and the rule should be that where the event which is said to satisfy the purchase of a security requirement is wholly oral, that that should be insufficient for very much the same reasons as the underlay of the Blue Chip Stamps requirement.
Now, with respect to--
Justice Ginsburg: Mr. Dodyk, may I ask?
There is an aspect of this case that is very disturbing to me, and I want you to get to it before your time runs out.
Mr. Dodyk: --Yes, Your Honor.
Justice Ginsburg: This is a case with one Federal claim.
I think there were ten or eleven State claims.
It was thoroughly tried.
There were determinations of those State claims.
The damages, as I understand them, would have been the same if you never had 10(b) in the picture.
And at this stage, at least going in, I mean, you're urging that the Court hold something today that it has never held before.
There is an arguable question of the interpretation of Federal law.
The State claims were pended to that and thoroughly tried.
This is not a case that was dismissed at the threshold.
Why are we... it seems to me that we're talking about something that is academic in this case if a judgment is going to stand based on the adjudication of the State claims.
Mr. Dodyk: Well, let me speak to that if I may, and also it comes back to the second part of Justice Souter's question.
And this has to do with the significance of the statute of frauds in this case.
And the proposition which I'm going to advance, Justice Ginsburg, is that the errors committed by the district court and by the Eleventh Circuit with respect to the statute of frauds are clear and undeniable and are fatal to every cause of action which was asserted in this case, State or Federal.
Now, grant me the indulgence of assuming, although I've had little indication of this, that the Kagen and Pelletier approach would prevail, and that the Court was at least open to the argument that, well, Blue Chip Stamps means that if you have an oral event upon which you are basing your purchase argument, and you don't have an enforceable contract under the statute of frauds, you don't have a purchase.
Now, I think... and I don't mean to be rude or over reaching... but I think it's clear that both the district court and the Eleventh Circuit committed undeniable errors in the way they treated the statute of frauds question.
In the court of appeals they said that the statute of frauds did not apply to this case because the oral option, although a security for Securities Act purposes was not a security for the purpose of the statute of frauds.
Now, bear in mind that what we're talking about here is an oral agreement contract option for the sale of securities.
And I submit that there can't be any question that the proper analysis on these facts is that the oral option was the contract for the sale of securities which the statute of frauds rendered unenforceable.
Justice Ginsburg: Then one might say, if we accepted everything you said, that the Federal claim would fail on a 12(b)(6).
But there was Federal question jurisdiction by virtue of a claim... of an arguable claim.
And there was indeed a trial.
And I just don't understand why, even if I accepted what you just said, that touches the fact that there was Federal question jurisdiction, that everything that you're talking about would go to, has there been a claim for relief stated?
Mr. Dodyk: Well, Your Honor, if I understand where we're at at this point, and that is, what is the... what should be the consequence of a decision in this case?
That there was no Section 10(b) violation because of the existence of the State claim.
If I can address that question briefly.
My position on that question is that if you take a look at the decided case authorities since Santa Fe and Blue Chip Stamps, there are two lines of authority which unanimously would have resulted in the dismissal of these claims.
Now, we've been talking about one of those lines, and that is to say whether or not you can create a purchase out of an oral event.
There is another line of cases which doesn't deal with the purchase question.
Another line of cases which says that where you have a misrepresentation of a party's intention to sell securities, as distinguished in the language of the courts, from a misrepresentation going to the value of the securities, you don't have a Section 10(b) violation.
There are four circuit courts that have come to that conclusion; there are two district court cases within the last three years that have followed those cases.
Just this year--
Chief Justice Rehnquist: What's the reasoning, Mr. Dodyk?
You know, there's some English chancellor hundreds of years ago said that the state of a man's mind is as much a question of fact as the state of his digestion.
Unknown Speaker: [Laughter]
Mr. Dodyk: --Yes, indeed, and that made it all the way into the restatement, did it not?
Did it not?
But what I say to you is this, and it's not a simple thought to get across, but to the extent we're talking about whether or not that type of statement which has been made in this case is actionable, that we've gone a long way beyond the state of the digestion, and where we have gotten to in the United States, generally speaking, is to the economic loss doctrine, which is squarely applicable to the facts of this case.
And I think it's also, Your Honor, a doctrine which this Court should take into account in deciding what types of misrepresentation are actionable under Section 10(b).
The proposition is--
Justice Scalia: Even giving you the point that the only kind of misrepresentation that counts under 10(b) is a misrepresentation of value, do you really think that an option to purchase from someone who, when he gives you the option, has no intention of ever selling you what he has promised to sell you?
Is it worth as much as an option from someone who when he gives you the option intends to go through with the delivery of stock if you exercise it?
Mr. Dodyk: --Your Honor--
Justice Scalia: Doesn't that... I can't imagine what would more go to the value of the option than the intent of the optionor to follow through on the contract or not.
Mr. Dodyk: --Your Honor, I think whether or not you recognize the distinction here depends on how you characterize the purpose of the Securities Act... if we're talking about a 10(b)(5) case, which is what we're talking about.
And what I mean to say by that is there are lots of actions which can undermine the value of a security or an option to purchase a security.
But I submit that there is a very clear distinction between a misrepresentation about the financial condition of a company and the refusal to accede to an asserted contractual obligation to delivery securities, and I suggest to Your Honors that given the way in which this Court has articulated the purpose of the '34 Act that a line should be drawn between those representations which in the garden variety Section 10(b)(5) case speak to the value of a security in a situation such as this in which a person says he should have sold me the stock and he didn't, and he lied about it in the first place.
Justice Ginsburg: Mr. Dodyk, you still haven't gotten to why, even if we accept what you said, there should be any redoing of this case when the State claims were tried, and the same damages would apply to those.
Mr. Dodyk: I keep trying to get there, but I get diverted.
And the reason is this, and this is the reason that I was speaking to the other reason why you shouldn't find a Section 10(b) violation here, which is in terms of the character of the representation which has been made here, and the limited purpose of the '34 Act.
And I was about to get to that point when I said there are four circuit courts who have decided uniformly, consistently, that the '34 Act does not apply to an alleged misrepresentation of a party's intention to sell securities.
Justice Breyer: But the question--
Mr. Dodyk: I'm about there... I'm about there.
And the answer is... the answer is that is the kind of decision which can be made in a Rule 12 case.
Now I understand Your Honor's formulation of well, if they've got jurisdiction and there is a decision, what is all this about?
What I'm saying to you is this.
There is a great deal of difficulty with a standard which says whether or not the court should proceed to adjudicate the State law claims depends on the degree of frivolity of the Federal action.
I say to you that those courts... those circuit courts... which have decided that if you have a case which is dismissable under Rule 12, then you shouldn't go forward and adjudicate the State claims is squarely applicable here.
Justice Ginsburg: --The question is, we're not in the posture of should you go forward?
They have gone forward, and what you're saying is that we should upset this entire adjudication.
If we were back in the beginning and the question was should the Federal court go forward on the State claims once the Federal claim is out of the picture, one gets one answer.
But we're at the end of the line, and these cases have, in fact, been tried.
Mr. Dodyk: Well, I say that that factor is not worth consideration which Your Honor is according to it for the following reason.
Number one, there is a value in having important, unsettled questions of State law decided by State courts, and that is why the courts have been restricted from asserting jurisdiction over the State claim when they have dismissed the Federal claim prior to the trial.
Now, I say that if you accept my construction of Section 10(b), if you accept my construction of Blue Chip Stamps as six circuit courts have done, the answer is when that case came up on a Rule 12 motion, Judge King should have thrown it out.
Now, he should not have gone forward at that point to have adjudicated the State cause of actions, and I say to you--
Justice Ginsburg: And that is a matter of lack of jurisdiction, but abuse of discretion.
Mr. Dodyk: --That's correct.
Abuse of discretion, because had he made the right decision assuming, granting me the assumption, that there is no 10(b)(5) action here, he should have thrown the case out at that point.
Now you have to ask yourself, well, does it make a difference that we have had some investment of time as a result of a judicial mistake?
And, again, a couple of circuits have said no, it doesn't make any difference because there are values in restraining the Federal judiciary from deciding State court issues in those circumstances which are not excused by the fact that someone made a mistake at the district court level and we should therefore vacate that decision.
That's what happened in Tully v. Mott Supermarkets, for example.
Now, I say to you also--
Justice Ginsburg: We would not reach that judgment if we thought that the case for the Federal claim was a lot more solid than you suggest, even if you would ultimately win on it, that this was not frivolous by any means.
Mr. Dodyk: --That is true but for one other consideration, Your Honor, and that's this.
I say to you that the Tenth Circuit and the district court were unquestionably wrong in the way they decided the statute of frauds question, and in the way they decided the economic loss doctrine question.
A proper decision on either one of those theories would have thrown out every cause of action in this case, and I suggest to you that where you're in a situation where there is in fact at the end of the day no Federal question, and you present it with a--
Justice Scalia: Thank you, Mr. Dodyk.
Mr. Cohen, we'll hear from you.
Argument of Louis R. Cohen
Mr. Cohen: Thank you, Mr. Chief Justice, and may it please the Court--
UIH pleaded and the jury found that UIH purchased a security, an option, and paid for that separate security with services that Wharf requested and crucially needed.
Justice Kennedy: I have one question.
Justice Souter asked counsel for Petitioner whether or not the option was not exercised when these additional services were performed, I take it after October 8, 1992.
Mr. Cohen: Thank you.
Justice Kennedy: --And I thought there was some agreement from Petitioner's counsel that that was in fact the theory of the case.
Of course, he says there's no option at all.
When was this option exercised?
Mr. Cohen: It was both a purchase and a separate attempt to exercise.
Justice Kennedy: When was it exercised in here?
Mr. Cohen: In the spring of 1993, after Wharf got the cable franchise from the broadcast authorities.
Justice Kennedy: Okay, so the option was--
Mr. Cohen: Wharf had conducted a public offering, raised the money, called Mr. Ing and sought to exercise the option.
Justice Kennedy: --So the option was not exercised in your view immediately after October 8 when the additional services were performed.
Mr. Cohen: It could not be.
Its terms were that UIH would have the option, and had bought the option.
In return for these massive services, it would have the option to invest ten percent of the capital required by this newly formed company and get ten percent of the stock.
That option would be exercisable... this is all in our complaint... would be exercisable for six months after the award of the franchise to Wharf Cable by the broadcast authority, because without that award there would be nothing.
Justice Scalia: Mr. Cohen, I must say I just marvel at the bon homme or the old fashioned nature of your client to gamble all of this money on an oral handshake deal.
Do people still do that out there?
Mr. Cohen: They do.
Justice Scalia: I mean, how much money was involved in this deal?
Mr. Cohen: Well, the cost of providing the services with which we purchased the option was about a million dollars out of pocket, but it was the time of people who were investors in these businesses.
Justice Scalia: You know, I wouldn't even buy an automobile without a written contract.
Mr. Cohen: Well, there was a good deal of testimony at trial--
Justice Scalia: I'm not sure that we ought to protect this kind of recklessness.
If you want to rely on a handshake deal, then you better be sure you're shaking the hand of somebody who can be trusted.
Mr. Cohen: --It was a handshake deal that had been preceded by a written reference to an option in the bid that Wharf submitted to the broadcast authority, that language was pulled at the last minute.
It's an option that is referenced in later internal Wharf documents.
Justice Scalia: We have over a million lawyers in this country, and one of the main things they do is to make sure that people make things easy by putting it in writing.
Mr. Cohen: And UIH would have been well advised to come out of that meeting, call its lawyer and say how do we document this?
But the agreement at that meeting was that documentation would be prepared.
The agreement at that meeting also was that Wharf needed--
Justice Scalia: You went ahead before the documentation was prepared.
Mr. Cohen: --Yes, because Wharf--
Justice Scalia: And I'm making a serious point here, I'm just not saying your client was foolish.
I'm questioning whether we ought to protect foolish people like that... whether we ought to enable strike suits, enable people to be accused of having sold an option in order to protect somebody who's foolish enough to invest a million dollars on the basis of a handshake.
Mr. Cohen: --The kind of person you're talking about is a person who is a victim of an unscrupulous securities salesman who calls up and says I've got an oil company here, and I've got some shares to sell you, and fails to say there isn't any oil and says give me your credit card number, or send me a check and I'll send you a certificate.
Justice Breyer: Unlike those typical securities situations, what worries me about this case is the pizza man says, Smith, my customer told me over the phone that if I got the pizza there on time he'd give me fifty shares of his stock.
Do we have a securities fraud?
Mr. Cohen: You have a fraud if there--
Justice Breyer: No, in my example.
Mr. Cohen: --If--
Justice Breyer: In my example.
In my example the pizza man calls up... pizza man, I called him yesterday, and he said if I got the pizza there in fifteen minutes he would sell me fifty shares of his stock for forty dollars.
Is that a securities fraud?
Mr. Cohen: --I think yes.
Justice Breyer: Yes?
Mr. Cohen: Yes, because I think--
Justice Breyer: I thought you'd say no to that one.
I was about to tell you--
Mr. Cohen: --No, because I think there is a contract.
I don't think I need that one.
I think my case is much easier.
Justice Breyer: --You're saying then that any kind... any time a person claims that somebody sold them a share of stock, or promised to sell them a share of stock orally, that becomes a Federal securities case.
I didn't think you were going to say that, but if you are, I'm quite interested.
Mr. Cohen: Any time someone has a provable, enforceable contract to buy a share of stock--
Justice Breyer: We're saying the same thing, and I guess the argument against that would be that the securities statute doesn't intend to have every oral contract for selling some stock to become a securities fraud case.
There was no intention to have that done, there is no reason to have it done.
It's perhaps a contract action.
Most States wouldn't permit it because it would be oral, but--
Mr. Cohen: --Justice Breyer, what we have here is not merely an executory contract to purchase some stock.
We have a completed, consummated contract to sell and purchase an option which is a separate security as defined--
Justice Breyer: --I know, but I'm trying to get at the policy that would underlie my concession exactly right.
The pizza man says I have a completed executory contract to sell me an option in return for my getting the pizza there on time.
Mr. Cohen: --He hasn't--
Justice Breyer: He has promised to sell me fifty shares of stock.
Now, that's an option.
Mr. Cohen: --He hasn't been defrauded out of anything except perhaps driving fast to deliver the pizza.
We have been defrauded out of services... the valuable services... that we undertook to deliver only because Wharf agreed to grant and granted us an option.
That option is a separate security which we were then--
Justice Breyer: You're missing my question, and I won't pursue it except to add what I thought you'd answer.
I thought you'd answer my question no, because there's no fraud there.
And then I was about to say, but all you have to do is add the allegation.
And at the time he intended not to carry it out.
And that allegation always can be added, for after all he is defending the case, isn't he?
And if he's defending the case, that's pretty good evidence that he intended not to carry it out, and therefore you've made all, or almost all, oral promises into securities cases, contrary to the intent of the statute.
Now, I was trying to get you to address the policies that might refute my hypothetical, but maybe it's too complex, and maybe you can't do that easily.
Mr. Cohen: --Well, let me say this about the policy.
First, there is the difference between a mere breach of contract and an intent at the time that a contract is entered into not to perform, and several courts of appeals have spoken to that.
Second, we are talking here about the defendants' intention quite different from the problem in Blue Chip of the plaintiff proving the plaintiff's own intention by his own affidavit, an inherently untestable thing that gets into the jury to get past the defendant's intention, a statement that he intended to fulfill the contract, the plaintiff is going to have to come up with some concrete evidence.
We had that evidence here... written evidence from Wharf's files that Wharf did not intend at the time that it entered into the contract to fulfill it.
And furthermore, Congress has taken much of this burden off the Court's shoulders, if you'll excuse me for just a second, by adding the requirement in the Private Securities Litigation Reform Act of 1995 in which it recognized a 10(b)(5) claim and cited how to cabin it, and it requires a specific pleading of facts sufficient to create a quote strong inference of intent to defraud, and if you can't do that, your claim is dismissed under that statute.
Justice Scalia: Okay.
Mr. Cohen: So that policy has been addressed.
Justice Scalia: Somewhere in that long sentence you made the point that in Blue Chip there was no solid written evidence as you say there was in your case.
Do you think Blue Chip would have come out differently if there was solid written evidence to demonstrate that the alleged purchaser would have purchased?
Mr. Cohen: No.
Blue Chip was interpreting the statute.
Justice Scalia: Right.
So what difference--
Mr. Cohen: The statute requires a purchaser--
Justice Scalia: --Okay, what difference does it make if you have written evidence?
And Blue Chip didn't.
Mr. Cohen: --I don't--
Justice Scalia: If Blue Chip wouldn't come out any differently, written evidence or not, what difference does it make?
Mr. Cohen: --The difference is that we have a completed purchase.
We have a completed purchase that is sustained by testimony--
Justice Scalia: Well, that's fine, but the evidence makes up... the evidence, or the existence of written evidence or not makes no difference.
Mr. Cohen: --Let me say one other thing about Blue Chip--
Justice Scalia: Yes or no?
The existence of written evidence or not in this case makes no difference.
Mr. Cohen: --I think it makes no difference to the outcome.
Chief Justice Rehnquist: Mr. Cohen, I think... what if this contract were found to be void because it didn't comply with the Colorado statute of fraud?
Could it nonetheless be acted upon?
In other words, would that be a final death knell for your suit, or can you say that under Federal securities law that isn't conclusive?
Mr. Cohen: Well, first, of course, it was valid under the Colorado securities--
Chief Justice Rehnquist: Could you get to the answer?
Mr. Cohen: --No, I don't think you would be--
Chief Justice Rehnquist: You can't get to the answer?
Mr. Cohen: --I don't think it would be a death knell.
I'm trying to answer the question.
Chief Justice Rehnquist: Then even though we're invalid under Colorado statute of frauds, it could proceed under the Federal Securities Act?
Mr. Cohen: I think the sale of a security that is an invalid security that is represented to be a security is sufficient under Blue Chip to support a 10(b)(5) claim, whether the security is enforceable or not, and I think the majority of the courts of appeals have agreed with that.
Justice Breyer: If you win... this is just what's worrying me.
Imagine every State says sales of goods or services over ten million dollars has to be in writing.
Now, to a person who's... that would make no difference.
That statement I just made would be, as a practical matter, irrelevant because anybody in the stock area, because anybody who wanted to allege an oral contract to sell ten million dollars' worth of stock would run right into Federal court and say it's a securities claim.
Mr. Cohen: Well, it has to have a security--
Justice Breyer: No, what he says is he promised to sell me some stock.
The promise is an option on your view, and therefore it is a security.
Mr. Cohen: --The promise... that promise is not an option on my view.
An option is a security that you pay separate consideration for that gives you the right but not the obligation to purchase another security.
Justice Breyer: A promise.
Mr. Cohen: That's what we have here.
Justice Breyer: I'm sorry.
In return for my services, he promised that he would sell me some stock.
Mr. Cohen: Yes.
Justice Breyer: All right.
All those cases which would be outlawed by the State statute of frauds, I've imagined, would suddenly come into Federal court as securities claims.
It's the same problem I have.
What's bothering me is the sweep of a decision in your favor, and that's what I want you to--
Mr. Cohen: What I've tried to say is that you can decide this case in my favor without reaching that by determining... agreeing with the court of appeals that what you had here was a completed actual paid for sale of a different security, an option which the parties intended to document but didn't end up documenting, because that was part of the fraud, and then there was a--
Justice Scalia: --Why wasn't that sale worth a million dollars, or whatever the statute of frauds limit is?
Mr. Cohen: --The statute of frauds--
Justice Scalia: I mean, surely that contract is worth something, and what was the value of that?
Mr. Cohen: --It was, and we paid for it in services that had a cost to us of about a million dollars, and--
Justice Scalia: And is that below the State's statute of frauds amount?
That million dollars?
Mr. Cohen: --Justice Scalia, first of all, the present statute in Colorado and every other State says sales of securities are enforceable without a writing.
There is no statute of frauds applicable to securities.
Justice Scalia: That's the answer, then.
Mr. Cohen: And at the time there was a statute of frauds which was determined not to apply because of the... because of Wharf's... because of UIH's completed performance of its obligations.
Justice Souter: Mr. Cohen, I just want to go back to Justice Breyer's question--
Mr. Cohen: Performance took this out of the statute of frauds.
Justice Souter: --Tell me if I'm wrong here.
I think we've got to say something definite about what the statute of fraud rule is that will underlie our case, even if you are right on part performance, and I will assume you are, because we could construe the statute either to say there is no requirement of writing in the statute.
In other words, it has no built in statute of frauds.
Or we could say there is some kind of a built in statute of frauds, but it is satisfied by part performance.
Or we could say possibly... I don't know whether we should... but we could say the Federal statute in effect simply leaves the problem of writing to State law.
If State law would in fact recognize the contract under its statute of frauds, then that contract is sufficient to create a security, or whatnot, for the purposes of the Securities Act.
I think we've got to say one of those three things.
Which should we say?
Mr. Cohen: I think you should say that the question whether there has been a sale of securities is a question of State law, as it has been.
Justice Souter: And then the question of whether there is a creation of the security in the case of the creation of the option... that too... I mean, that's essentially a contractual act, and that too is a question to be governed by the State statute of frauds.
Mr. Cohen: Yes, I think whether the resulting contract fits the definition of a security is, of course, a question of Federal law.
Justice Scalia: Mr. Cohen, though, the Federal court determined what the State statute of frauds was in this case, and the Federal court determined that performance took this out of the statute?
Mr. Cohen: Yes, as a matter of--
Justice Scalia: What if I disagree with that?
Mr. Cohen: --matter of State law.
Justice Scalia: I mean, it seems to me performance takes a contract out of the statute where you have a bilateral contract.
I promise to do one thing, you promise to do another.
One of us performs.
The contract is then out of the statute of frauds.
But when you have something that is called a unilateral contract, if you do something... you don't have to... but if you do something, then I am obligated to do something else.
And that's what you have here.
Mr. Cohen: No.
Justice Scalia: If you did these things, you will have... I will give you an option.
Mr. Cohen: No.
Justice Scalia: You did the things, you got the option.
That is what concluded the contract, and I would not hold it, if I were the State supreme court judge, that that statute was out of the State statute of frauds.
Mr. Cohen: What we had was not a unilateral contract.
It was a bilateral contract as the jury found.
Wharf sold us an option on April 8... on October 8, 1992.
Justice Scalia: Were you obliged... were you obliged to go out and do those acts which created the option for you?
Mr. Cohen: Yes, we were.
Justice Scalia: Did you promise to do those acts?
Mr. Cohen: Yes, we did.
Yes, we did.
But we also... but we promised to do--
Justice Scalia: That contract was within the statute of frauds then, because there certainly wasn't any performance of that.
Mr. Cohen: --Yes, there was.
There was a performance of our contract to acquire an option by providing services that Wharf requested which included dispatching named people immediately to Hong Kong at our expense to serve as officers of Wharf Cable--
Justice Kennedy: And you could have been sued if you didn't do that?
Mr. Cohen: --We could have been sued if we hadn't done that.
Justice Scalia: That is not an option.
That promise is not a security.
If you promise to do some act, and I, in exchange, promise that if you do the act I will give you an option... that contract is not an option and is not therefore a security.
Mr. Cohen: It wasn't an if.
They granted... they entered into a contract... this is a jury finding on a stipulated verdict forum... they entered into a contract granting UIH an option.
In that contract, granting us an option, we promised, and immediately did, pay for that option by providing required services.
There was a completed actual sale here.
That's what this trial was about for eleven weeks.
Unknown Speaker: But it still turns on characterizing what was done here as going in never intending to perform, and the concern that Justice Breyer expresses is that you could make that up.
Justice Ginsburg: How do you extinguish between a garden variety breach of contract where somebody doesn't perform and one where from day one there was no intent to perform?
Mr. Cohen: You need to prove that at day one there was no intent to perform.
You need to get past some... motion to dismiss, to have concrete evidence of that, and there needs to be a completed contract... completed sale... in connection with it, which that misrepresentation is made.
Argument of Matthew D. Roberts
Chief Justice Rehnquist: Thank you, Mr. Cohen.
Mr. Roberts, we'll hear from you.
Mr. Roberts: Mr. Chief Justice, and may it please the Court--
When the seller of a stock option misrepresents its intention to permit the buyer to exercise the option, the seller violates Section 10(b).
The text of Section 10(b) prohibits the use of any manipulative or deceptive device in connection with--
Justice O'Connor: The seller of an option?
Mr. Roberts: --The seller of the option.
Justice O'Connor: Would you rephrase that?
Mr. Roberts: Which here is Wharf Cable... sold the stock option which was the right to purchase... excuse me.
Justice O'Connor: It was not an agreement to be performed?
Do you think the sale took place?
Mr. Roberts: A sale took place.
At the meeting, there was a contract, as was explained, the contract was an exchange of a promise to provide services for the sale of the option.
The promise was performed--
Justice O'Connor: You say what happened was that Wharf said I give you an option today, and in return you must, in the future, perform certain services.
Was that the agreement?
Mr. Roberts: --I sell you an option in exchange for your promise to perform services, and that there was performance, which would take that contract out of the statute of frauds.
Justice Scalia: And you think that the Respondent here could have been sued for breach of contract if the Respondent did not perform those services?
I didn't read the transaction as really envisioning that.
Mr. Roberts: Under the understanding that there was a sale for a promise, yes.
You know, under the understanding there was a sale for services.
Justice Scalia: Yes, that would follow, but you think that that was the reality?
That the Respondent could have been sued if it didn't send those people over to do the work that was... you see, I viewed it as much more of a unilateral contract.
If you send the people over, you'll have an option.
Mr. Roberts: I don't think it makes any difference, Your Honor.
Justice Scalia: I think it does for the statute of fraud purpose.
Mr. Roberts: Well, there was performance of the promise which would take it out of the statute of frauds.
Even if it is was a contract that was unilateral, the performance of the services would take it out of the statute of frauds as well, and once the option was purchased, the option was a security, and the misrepresentation of the intention to permit the exercise of the option was a misrepresentation.
Justice Kennedy: Well, I think it is important, and you agree with the counsel for the Respondent that this was a bilateral contract in which they could have been sued if they did not provide the necessary services, and those services were sufficiently specific to have a contract that was not illusory in the trial courts, and the jury so found?
Mr. Roberts: What the jury found was that they entered into a contract selling them an option for... to purchase ten percent of the stock.
I don't recall right at the moment... I don't have it in front of me... that finding.
I'm not sure whether it said in exchange for the promise or not in the specific language of that finding, but the finding was on page E21.
Justice O'Connor: I think the concern, Mr. Roberts, is that we not sweep in under the Securities Act a lot of breach of contract suits.
Mr. Roberts: Yes, Your Honor, and you don't do that, because in order for there to be a 10(b)(5) violation, there must be a misrepresentation.
There has to be a fraud, not just a breach of contract.
Justice Breyer: That was exactly why I asked.
Justice O'Connor: Yes, it's easily--
Justice Breyer: --That's why I asked... it seems like the simplest thing in the world, look, this will come up in families.
No brokers, no securities, Uncle Joe promised to lend me... to give me securities if I would take care of him for a year or two, which I did.
Okay, we've got your option.
And you say, oh, well, but what about the misrepresentation?
Well, if Uncle Joe is alive.
Look... he's defending the case, isn't he?
And therefore if you believe that he made the oral statement, why didn't he carry it out?
So he's here defending it, so he must have intended not to carry it out.
Now, maybe that isn't totally sufficient, but you'd be well along the way.
Mr. Roberts: It's not sufficient, Your Honor.
Just as it's easy to allege, it's very hard to prove.
In order to avoid dismissal under the Private Litigation Securities Reform Act, the plaintiff has to allege with particularity facts that give rise to a belief that there was misrepresentation--
Justice Breyer: He is here... he is here defending the case which proves he never intended from day one to follow his oral thing and, besides, I remember his saying that once.
Mr. Roberts: --That would be insufficient to meet that burden, Your Honor.
The fact that he's defending a suit, obviously, would be insufficient.
And the plaintiff's own testimony about what he thought the defendant's intention was does not prove the state of the defendant's mind, nor does the fact that the defendant failed to perform prove anything more than a breach of contract.
The restatement makes that clear... that same principle would apply.
Failure to perform alone is not sufficient.
There has to be additional evidence, and there was additional evidence in this case... both testimonial and documentary evidence... that there was no intention to perform at the time.
In addition, it's important to understand that... it's important to cover oral contracts such as these because many contracts for the purchase of securities are oral, such as when customers contract with their brokers over the telephone to buy stock.
And oral contracts for the sale of securities are generally enforceable under the law of all fifty States.
In addition to that, the Act does not require that there be a writing to make someone a purchaser or a seller of a security.
The Act provides that the options are securities, and the Act also provides that a purchase includes any contract purchase.
Justice Souter: Do you agree that the statute, in effect, looks to State law on the question of statute of frauds issues?
Mr. Roberts: No, I don't, Your Honor.
I think the statute of frauds is irrelevant to a violation of Section 10(b).
The statute of frauds is a--
Justice Souter: So there is either a standard implied in the statute itself, or there is no... a requirement implied in the statute itself, or there is no requirement, period.
Mr. Roberts: --There is no requirement.
Even under common law, the traditional rule is that fraud in inducing a contract is actionable, even if the contract is unenforceable under the statute of frauds.
The same principle applies to Section 10(b), as well, and--
Chief Justice Rehnquist: Whether or not something is a contract... does that depend on State law?
Mr. Roberts: --Whether something... no, a contract is a Federal term in the statute; it is a Federal question, I think whether it's a contract--
Chief Justice Rehnquist: Is there a court authority for that?
Mr. Roberts: --There's court authority for the fact that purchasers... parties to an oral contract to purchase are purchasers of securities.
Chief Justice Rehnquist: They say notwithstanding State law?
Mr. Roberts: Notwithstanding State law?
Chief Justice Rehnquist: State contract law, not statute of frauds.
Mr. Roberts: No, they don't specifically address notwithstanding State law, but in the court of appeals case that comes to mind, the Threadgill case from the D.C. Circuit, the district court had said that there was no purchase or sale because the contract had not been performed, fully performed, and the court of appeals reversed and said that the Act defines contract to include... the Act defines purchase, excuse me, to include any contract to purchase.
Justice Souter: Yes, but that leaves open the question of what a contract is.
And don't we look to State law to determine what that contract is?
Mr. Roberts: I don't think so, Your Honor.
It wouldn't serve the purposes of the Securities Act for--
Justice Souter: Well, it would open the doors of the Securities Act, presumably, to claims that State law would not recognize and that in itself might be a good reason, if we knew nothing else, to say that the question of contractual formation is a State law question.
Mr. Roberts: --First, you don't have to address that issue here because there is a--
Justice Souter: Well, but we may... we may get very close to it if we have to address what the source of any writing requirement or the dispensation of any writing requirement is.
And if we look to State law on that, presumably it would be odd if we didn't look to State law as well for what a contract is.
Mr. Roberts: --I don't think that you should look to State law for any of these questions, Your Honor.
It's a question of--
Justice Scalia: How old do you have to be to buy a security?
You mean we can adopt a Federal rule that sixteen year olds can buy securities?
Mr. Roberts: --If there's fraud--
Justice Scalia: Surely that's a question of State law, isn't it?
Mr. Roberts: --Whether it's a sale under State law is a question of State law, whether it's a sale for purposes of the Securities Act is a question of Federal law.
And it wouldn't serve the purposes of Section 10(b) to hold that because there isn't a sale that's enforceable under State law--
Chief Justice Rehnquist: But to say it wouldn't serve the purposes of Section 10(b) isn't the final answer on a case like this.
Congress legislates with a background of what has been decided under State law, and what is a matter of Federal law.
Mr. Roberts: --Yes, Your Honor, Congress does.
But Congress simply used the term contract in the definition of purchase to include any contract, and used the term contract, and that was commonly understood at that time, if I may issue that answer.
Chief Justice Rehnquist: No, you may not.
Thank you, Mr. Roberts.
Unknown Speaker: [Laughter]
Mr. Roberts: Sorry.
Chief Justice Rehnquist: The case is submitted.
Argument of Justice Breyer
Mr. 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.