Wharf Holdings Ltd., et al. v. United International Holdings, Inc. (05/21/2001)

By: Katherine Ritchey, Medill News Service

Questions presented

(1) Whether the 10th Circuit erred in holding that Section 10(b) of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5 apply to disputes over the ownership of securities where there is no claim that financial information was misrepresented or not disclosed? (2) Whether the 10th Circuit erred in holding that Section 10(b) and Rule 10b-5 apply where a plaintiff's only claim seeks damages for nonperformance of an alleged unenforceable oral option?

Brief

When the Hong Kong government announced in 1991 that it was accepting bids for an exclusive license to operate a cable system in the country, Wharf Holdings Limited saw a chance to make some money.

But the Hong Kong investment company didn't have much experience in the cable industry, so it turned to United International Holdings, Inc., a Denver-based company that owns, operates and invests in cable television systems worldwide.

UIH told Wharf it didn't want to work as a consultant on the project. But it did say it would contribute its resources in exchange for the right to invest in the cable franchise if Wharf were awarded the contract.

In June 1992, representatives from Wharf and UIH met in Singapore. Wharf said it had chosen UIH as its partner in the cable system. Wharf also told UIH that it was in serious talks about a telephone partnership with NYNEX Network Systems Co., another business with experience in the cable industry.

When the UIH representative returned to Denver, he sent a memo to the chair of his company:

""It looks like we are in for 10 percent of the Hong Kong project,"" he wrote.

A few months later, UIH sent several of its employees to Hong Kong to help Wharf hammer out contracts, design the cable system and organize financing. UIH's financial specialist contacted banks about its 10 percent contribution, which would kick in if UIH exercised its option.

UIH and Wharf also outlined several letters of intent and shareholders' agreements. The first letter, which was drafted by Wharf, noted the ""intention of the parties to cooperate together and invest"" in the cable system. It also said that UIH would hold 10 percent of the share capital.Yet this draft said the letter was not ""legally binding."" Instead, it said that ""each of the parties will negotiate in good faith, and use all reasonable endeavors to conclude the terms of a formal, legally binding shareholders' agreement"" by Sept. 25, 1992.

But no letter was ever signed, and with the deadline for submitting the bid to the government quickly approaching, Wharf began to worry.

So to prove that it had enough technical help on the project, Wharf signed separate ""technical cooperation agreements"" with NYNEX and UIH on Sept. 25. UIH would not have to do anything until Wharf was awarded the license. The agreement also said that UIH did not have a right to the company or the cable system unless a different agreement was signed.

On Sept. 30, Wharf submitted the bid for the cable franchise under its own name, but added that ""if Wharf Cable is successful in its license application, Wharf will consider the introduction at the appropriate time of NYNEX, UIH and other strategic partners as co-investors to purchase up to 40 percent of the share"" of the cable system.

This ambiguous wording concerned UIH, but it agreed to continue to provide resources if its right to invest were definite.

In December, NYNEX dropped out of the venture, and Wharf told UIH they should put ownership issues on hold.

Then in May 1993, the Hong Kong government granted Wharf the license. UIH raised $66 million in a public offering for its initial investment in the project, and told Wharf it had fulfilled the conditions of its option agreement and wanted to start exercising its options.

According to UIH, a representative from Wharf hinted for the first time that fall that without NYNEX, there may not be a deal. UIH reiterated that it expected to invest at least 10 percent in the project.

In November, following discussions between UIH and Wharf about their relationship, UIH prepared a statement:

""[UIH] is currently negotiating the acquisition of the 10 percent interest in Wharf Cable ... [UIH] anticipates that the terms of this investment will be finalized during the first three months of 1994.""

In December, Wharf circulated an internal memo about UIH's statement:

""[Proper] legal disclaimers have been inserted in the language so as to not bind us to UIH's representation which speaks to an 'opportunity' to acquire a 10 percent interest in Wharf Cable. Our next move should be to claim that our directors got quite upset over these representations and have therefore instructed us to 'settle up' on the [technical cooperation agreement] only.""

In March 1994, a UIH representative met with Wharf's board in Hong Kong. He said UIH would be happy to be partners with Wharf and have the right to invest.

Two hours later, Wharf told UIH it was not ""ready to entertain your investment at this time.""

UIH sued in November 1994, contending that by reneging on its verbal agreement to sell UIH a stake in the cable franchise, Wharf had committed securities fraud, a violation of the federal 1934 Securities Exchange Act.

In 1997, a federal jury in Denver sided with UIH and awarded it $154 million in damages: $67 million for financial losses, $58.5 million in punitive damages and $28.2 million in interest.

During post-judgment proceedings, the district court also held Wharf in contempt of court for failure to comply with the court's turnover order, sanctioned Wharf in the amount of $944,000 and awarded UIH post-judgment attorney fees of another $144,000.

Wharf appealed, contending that the award was excessive and that UIH knew the agreement was not binding.

In April 2000, a unanimous 10th Circuit Court of Appeals panel affirmed, agreeing that Wharf committed securities fraud because it did not plan to follow through with the deal.

""[T]he evidence depicts reprehensible conduct,"" Judge Mary Beck Briscoe wrote for the appeals court. ""Wharf used UIH's name, contacts and expertise ... to obtain the franchise and then used its financial and negotiating leverage to string on UIH for several months.""

On Nov. 6, 2000, the U.S. Supreme Court granted certiorari in the case and limited review to questions 1 and 2 in Wharf's petition, as noted above.

On May 21, 2001, the Court affirmed 9-0, holding that Wharfs secret intent not to honor the cable system option it sold United violates §10(b) of the Securities Exchange Act of 1934.

Justice Stephen Breyer wrote the Court's unanimous opinion.