SW Legal studies in Business

Failure to Sell an Option for a Security Based on Oral Agreement Violates Securities Act
Description Supreme Court affirmed a lower court holding that a company that orally promised another company an option for certain stock in exchange for services, breached the contract for sale of the securities when it failed to deliver the stock after the services were performed.
Topic Securities Law
Key Words Definition of Security; Sale; Breach of Contract; Rule 10b-5
C A S E   S U M M A R Y
Facts Wharf (Holdings) Limited orally granted United International Holdings an option to buy ten percent of the stock in Wharf's Hong Kong cable system if United provided certain services. United provided the services but Wharf refused to permit it to exercise the stock option, which it secretly had intended from the beginning. United sued Wharf in federal district court, claiming that Wharf violated the securities law, which prohibits "any manipulative or deceptive device or contrivance ... in connection with the purchase or sale of any security." The jury found for United and the appeals court affirmed. Wharf appealed.
Decision Affirmed. Wharf's secret intent not to honor the option violates § 10(b) of the Securities Exchange Act of 1934. The security at issue is not the cable system stock, but the option to purchase the stock. Securities include such options. Oral contracts of securities sales are covered by the Securities Act. United provided Wharf with services to obtain the securities, so it actually bought the option that Wharf sold. Wharf breached the contract for sale by failing to deliver. Oral contracts for the sale of securities are sufficiently common that the UCC and the statutes of frauds in every state considers them enforceable. Wharf's secret intent not to execute the deal is not relevant either; that was simply misrepresentation that also violates Rule 10b-5.
Citation The Wharf (Holdings) Limited v. United International Holdings, Inc., 121 S.Ct. 1776 (Sup. Ct., 2001)

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