No. 00-347 

In the Supreme Court of the United States 

THE WHARF (HOLDINGS) LIMITED, ET AL., 
PETITIONERS 

v. 
UNITED INTERNATIONAL HOLDINGS, INC., ET AL. 

ON WRIT OF CERTIORARI TO 
THE UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT 

BRIEF FOR THE 
SECURITIES AND EXCHANGE COMMISSION 
AS AMICUS CURIAE SUPPORTING RESPONDENTS 

DAVID M. BECKER 
General Counsel 
MEYER EISENBERG 

Deputy General Counsel 
JACOB H. STILLMAN 

Solicitor 
KATHARINE B. GRESHAM 

Assistant General Counsel 
SUSAN S. MCDONALD 

Senior Litigation Counsel 
CHRISTOPHER PAIK 

Special Counsel 
Securities and Exchange 

Commission 
Washington, D.C. 20549 

BARBARA D. UNDERWOOD 
Acting Solicitor General 

Counsel of Record 

EDWIN S. KNEEDLER 

Deputy Solicitor General 

MATTHEW D. ROBERTS 

Assistant to the Solicitor 

General 

Department of Justice 
Washington, D.C. 20530-0001 
(202) 514–2217 

QUESTIONS PRESENTED 

1. Whether an action under Section 10(b) of the Securi- 
ties Exchange Act of 1934, 15 U.S.C. 78j(b), and Securities 
and Exchange Commission Rule 10b-5, 17 C.F.R. 240.10b-5, 
may be based on misrepresentations about a person’s inten- 
tion to sell securities. 

2. Whether an action under Section 10(b) and Rule 10b-5 
may be based on misrepresentations made in connection 
with an oral contract to purchase or sell a security. 

(I) 

TABLE OF CONTENTS 

Page 

Interest of the Securities and Exchange Commission ........... 
1 

Statement ........................................................................................ 2 

Summary of argument .................................................................. 

6 

Argument: 

I. Actions under Section 10(b) may be based on 
misrepresentations about the intention to sell 

securities ........................................................................... 8 

A. The language of Section 10(b) does not 
limit the subject matter of the misrepresenta- 
tions that it prohibits .............................................. 

9 

B. Precedent supports Section 10(b) actions 
based on misrepresentations about the 

intention to sell securities ...................................... 

14 

C. Limiting the scope of Section 10(b) as 
petitioners urge would undermine the 

Act’s purposes .......................................................... 

17 

D. Section 10(b) actions based on misrepresenta- 
tions about the intention to sell securities 

neither federalize state law contract disputes 
nor conflict with Santa Fe ..................................... 
19 

II. An action under Section 10(b) may be based 

on an oral contract for the purchase or sale 
of a security ...................................................................... 

22 
A. Section 10(b) applies to an oral contract 

to sell a security ....................................................... 

23 

B. Blue Chip Stamps does not preclude claims 
based on oral contracts for the purchase 

or sale of securities .................................................. 

28 

Conclusion ....................................................................................... 30 

(III) 

IV 

TABLE OF AUTHORITIES 

Cases: Page 

A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 
1967) ............................................................... 

6, 7, 10, 12, 15, 18 

Abrams v. Oppenheimer Gov’t Sec., Inc., 737 

F.2d 582 (7th Cir. 1984) .................................................... 

11, 17 

Alley v. Miramon, 614 F.2d 1372 (5th Cir. 1980) ........... 
11-12 

Allico Nat’l Corp. v. Amalgamated Meat Cutters 
& Butcher Workmen of N. Am., 397 F.2d 727 
(7th Cir. 1968) ......................................................................... 
15 

Ames Dep’t Stores, Inc., Stock Litig., In re, 991 

F.2d 953 (2d Cir. 1993) .......................................................... 

13 

Anderson v. Francis I. DuPont & Co., 291 F. 

Supp. 705 (D. Minn. 1968) ..................................................... 

25 

Angelastro v. Prudential-Bache Sec., Inc., 764 

F.2d 939 (3d Cir.), cert. denied, 474 U.S. 935 
(1985) ........................................................................................ 17 

Arrington v. Merrill Lynch, Pierce, Fenner & 

Smith, Inc., 651 F.2d 615 (9th Cir. 1981) ........................ 
17-18 

Basic Inc. v. Levinson, 485 U.S. 224 (1988) .................. 
11, 26 

Blue Chip Stamps v. Manor Drug Stores, 421 

U.S. 723 (1975) .......................................... 
2, 8, 9, 13, 28, 29, 30 

Brockett v. Spokane Arcades, Inc., 472 U.S. 491 
(1985) ........................................................................................ 23 

Brody v. Bock, 897 P.2d 769 (Colo. 1995) ...................... 

11, 26 

Brown v. Ivie, 661 F.2d 62 (5th Cir. 1981), cert. 
denied, 455 U.S. 990 (1982) .................................................. 
11 

Burgdorfer v. Thielemann, 55 P.2d 1122 (Or. 
1936) ......................................................................................... 26 

Canadian Imperial Bank of Commerce Trust Co. 

v. E.R. Fingland, 615 F.2d 465 (7th Cir. 1980) .............. 

25 

Costello v. Oppenheimer & Co., 711 F.2d 1361 
(7th Cir. 1983) ......................................................................... 
17 

Desser v. Ashton, 408 F. Supp. 1174 (S.D.N.Y. 
1975), aff ’d, 573 F.2d 1289 (2d Cir. 1977) ........................... 27 

V 

Cases—Continued: Page 

Durland v. United States, 161 U.S. 306 (1896) ......... 
6, 10, 19 

Ernst & Ernst v. Hochfelder, 425 U.S. 185 
(1976) .................................................................................... 
15, 18 

Fogarty v. Security Trust Co., 532 F.2d 1029 
(5th Cir. 1976) ............................................................... 
16, 19, 27 

Formosa Plastics Corp. USA v. Presidio Eng’rs 
& Contractors, Inc., 960 S.W.2d 41 (Tex. 1998) .............. 
11 

Gurwara v. Lyphomed, Inc., 937 F.2d 380 (7th 

Cir. 1991) ................................................................................. 

16 

Herman & MacLean v. Huddleston, 459 U.S. 
375 (1983) ............................................................................. 
10, 15 

Hunt v. Robinson, 852 F.2d 786 (4th Cir. 1988) ............... 
17 

Kagan v. Edison Bros. Stores, Inc., 907 F.2d 690 
(7th Cir. 1990) ......................................................................... 
27 

Kehr v. Smith Barney, Harris Upham & Co., 
736 F.2d 1283 (9th Cir. 1984) ............................................... 
17 

Landreth Timber Co. v. Landreth, 471 U.S. 681 
(1985) ................................................................................ 
25, 27 

Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986) ............... 
16, 19 

Madison Consultants v. FDIC, 710 F.2d 57 
(2d Cir. 1983) ................................................... 
7, 16, 20, 22, 27 

Marbury Mgmt., Inc. v. Kohn, 629 F.2d 705 (2d 

Cir.), cert. denied, 449 U.S. 1011 (1980) ......................... 

13, 18 

McGrath v. Zenith Radio Corp., 651 F.2d 458 
(7th Cir.), cert. denied, 454 U.S. 835 (1981) .................. 
13, 16 

National Collegiate Athletic Ass’n v. Smith, 
525 U.S. 459 (1999) ................................................................ 
23 

One-O-One Enters., Inc. v. Caruso, 848 F.2d 
1283 (D.C. Cir. 1988) ............................................................. 
9 

Pelletier v. Stuart-James Co., 863 F.2d 1550 
(11th Cir. 1989) ....................................................................... 
27 

Phillips Petroleum Sec. Litig., In re, 881 F.2d 
1236 (3d Cir. 1989) ............................................................. 16, 19 

VI 

Cases—Continued: Page 

Richardson v. MacArthur, 451 F.2d 35 
(10th Cir. 1971) ....................................................................... 
16 

Santa Fe Indus., Inc. v. Green, 430 U.S. 462 
(1977) ......................................................................... 
7, 18, 20, 21 

Sea-Land Serv., Inc. v. O’Neal, 297 S.E.2d 647 
(Va. 1982) ................................................................................. 
11 

SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985) ..................... 
14 

SEC v. Clark, 915 F.2d 439 (9th Cir. 1990) ....................... 
11 

SEC v. Drysdale Sec. Corp., 785 F.2d 38 (2d Cir.), 
cert. denied, 476 U.S. 1171 (1986) ....................................... 
13 

SEC v. First Jersey Sec., Inc., 101 F.3d 1450 
(2d Cir. 1996), cert. denied, 522 U.S. 812 (1997) ............... 
14 

SEC v. Jakubowski, 150 F.3d 675 (7th Cir. 1998), 
cert. denied, 525 U.S. 1103 (1999) ................................... 
12, 16 

SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 
(5th Cir. 1974) ......................................................................... 
25 

SEC v. Rana Research, Inc., 8 F.3d 1358 
(9th Cir. 1993) ......................................................................... 
14 

SEC v. W.J. Howey, Co., 328 U.S. 293 (1946) ............... 
24, 25 

Stanford v. Humphrey, 894 F.2d 410 (9th Cir. 
1990) ......................................................................................... 17 

Superintendent of Ins. v. Bankers Life & Cas. Co., 
404 U.S. 6 (1971) ...................... 

2, 6, 10, 11, 12, 15, 21, 26, 27 

Tenzer v. Superscope, Inc., 702 P.2d 212 (Cal. 
1985) ......................................................................................... 26 

Threadgill v. Black, 730 F.2d 810 (D.C. Cir. 
1984) ................................................................................. 

6, 16, 27 

Tully v. Mott Supermarkets, Inc., 540 F.2d 187 
(3d Cir. 1976) .......................................................................... 
17 

United States v. Naftalin, 441 U.S. 768 (1979) ......... 
6, 14, 15 

United States v. O’Hagan, 521 U.S. 642 (1997) ................ 
6, 7, 

8, 10, 12, 14, 17, 19, 29 
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 
1083 (1991) ........................................................................... 20, 29 

VII 

Cases—Continued: Page 

Walker v. U-Haul Co. of Miss., 734 F.2d 1068 
(5th Cir. 1984) ......................................................................... 
26 

Walling v. Beverly Enters., 476 F.2d 393 (9th 

Cir. 1973) ................................................................................. 

16 

Statutes and regulation: 

Private Securities Litigation Reform Act of 1995, 

Pub. L. No. 104-67, 109 Stat. 737 ........................................ 

14 

Securities Act of 1933, 15 U.S.C. 77a et seq: 
§ 2(1), 15 U.S.C. 77b(1) ........................................................ 
24 

§ 2(10), 15 U.S.C. 77b(10) (1994 & Supp. IV 
1998) ..................................................................................... 24 

§ 17, 15 U.S.c. 77q ................................................................. 

15 

§ 17(a), 15 U.S.C. 77q(a) .................................................. 
14, 15 

Securities Exchange Act of 1934, 15 U.S.C. 78a et seq: 
§ 3(a)(10), 15 U.S.C. 78c(a)(10) (1994 & Supp. IV 
1998) .............................................................. 

6, 9, 22, 23, 24 

§ 3(a)(13), 15 U.S.C. 78c(a)(13) ............................ 
6, 13, 22, 23 

§ 3(a)(14), 15 U.S.C. 78c(a)(14) ............................ 
6, 13, 22, 24 

§ 10(b), 15 U.S.C. 78j(b) ................................................ 
passim 

§ 14(a), 15 U.S.C. 78n(a) ...................................................... 
21 

§ 28(a), 15 U.S.C. 78bb(a) ................................................ 
20, 21 

Ala. Code § 8-9-2(8) (1999) ....................................................... 
26 

S.C. Code Ann. § 36-8-113 (Law. Co-op 2000) ..................... 
26 

U.C.C. (1995): 
§ 8-113 ..................................................................................... 
25 

§ 8-113 (official cmt.) ............................................................ 
27 

17 C.F.R. 240.106-5 ............................................................. 
passim 

Miscellaneous: 

Dan D. Dobbs, The Law of Torts (2000) ................................ 

26 

3 E. Allan Farnsworth, Farnsworth on Contracts 
(1990) ........................................................................................ 20 

Egon Guttman, Investment Securities Law: New 

Federal and State Developments and Their Effect 
on Article 8, 24 U.C.C. L.J. 307 (1992) ........................... 26, 27 

VIII 

Miscellaneous—Continued: Page 

5A Arnold Jacobs, Litigation and Practice Under 

Rule 10b-5 (1996) ................................................................... 
22 

W. Page Keeton, Prosser and Keeton on Torts 
(5th ed. 1984) .......................................................................... 
26 

Louis Loss & Joel Seligman, Securities Regulation: 

Vol. 8 (3d ed. 1991) ................................................................. 

14 

Vol. 9 (3d ed. 1992) ................................................................. 
20 

Restatement (First) of the Law of Contracts 
(1932) ........................................................................................ 24 

Restatement (Second) of Torts (1977) ..................... 

6, 7, 10, 26 

1 Richard A. Lord, Williston on Contracts (4th ed. 
1990) ......................................................................................... 
8, 9 

[State UCC Variations] U.C.C. Rep. Serv. (CBC) at 
xxi-xxii (West Sept. 2000) .................................................... 25 

In the Supreme Court of the United States 

No. 00-347 

THE WHARF (HOLDINGS) LIMITED, ET AL., 
PETITIONERS 

v. 
UNITED INTERNATIONAL HOLDINGS, INC., ET AL. 

ON WRIT OF CERTIORARI TO 
THE UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT 

BRIEF FOR THE 
SECURITIES AND EXCHANGE COMMISSION 
AS AMICUS CURIAE SUPPORTING RESPONDENTS 

INTEREST OF THE SECURITIES AND EXCHANGE 
COMMISSION 

The Securities and Exchange Commission (SEC or Com- 
mission) administers and enforces the federal securities 
laws. This case involves the scope of Section 10(b) of the 
Securities Exchange Act of 1934 (1934 Act or Exchange 
Act), 15 U.S.C. 78j(b), and the Commission’s Rule 10b-5, 17 
C.F.R. 240.10b-5, which implements it. The case also in- 
volves the scope of a private action under those provisions. 
The Commission has an interest in this case because of its 
potential impact on government enforcement actions, as well 
as private actions, which serve an important role in com- 
plementing government enforcement and compensating 
injured investors. 

(1) 

2 

STATEMENT 

1. Section 10(b), in relevant part, makes it unlawful “[t]o 
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 Commission may prescribe as necessary or appropriate 
in the public interest or for the protection of investors.” 15 
U.S.C. 78j(b). Rule 10b-5 implements Section 10(b) by de- 
claring it unlawful, “in connection with the purchase or sale 
of any security,” “(a) [t]o employ any device, scheme, or 
artifice to defraud, (b) [t]o make any untrue statement of a 
material fact or to omit to state a material fact necessary in 
order to make the statements made * * * not misleading, 
or (c) [t]o engage in any act, practice, or course of business 
which operates or would operate as a fraud or deceit upon 
any person.” 17 C.F.R. 240.10b-5. Section 10(b) affords an 
implied right of action to purchasers or sellers of securities 
who have been injured by its violation. Superintendent of 
Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971); see 
also Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 
(1975). 

2. As described by the court of appeals, the Section 10(b) 
action in this case has its origins in the 1991 decision by the 
Government of Hong Kong to grant an exclusive license for 
the operation of a cable television system there. Pet. App. 
B2. Petitioner Wharf (Holdings) Limited (hereinafter 
Wharf ), a Hong Kong company, desired to secure the license 
but had little experience in the cable television business. 
Wharf therefore decided to seek the assistance of a more 
experienced company. To that end, Steven Ng, a managing 
director of Wharf, met with Mark Schneider, a vice president 
of respondent United International Holdings, Inc. (UIH), a 
company based in Denver, Colorado, that owns, operates, 
and invests in cable television systems. Schneider made 
clear that UIH was not interested in serving as a consultant 

3 

for a fee but would assist Wharf in exchange for the right to 
invest in the Hong Kong cable system. Ibid. 

UIH provided Wharf with substantial assistance before 
Wharf submitted its bid for the Hong Kong license. Pet. 
App. B3. According to UIH, Wharf had promised that the 
bid to be submitted to the Hong Kong Government would 
refer to UIH’s prospective investment in Cable Network 
Communications Limited (Wharf Cable), the company Wharf 
created to operate the cable system. Id. at B5. The bid 
actually submitted, however, made only a noncommittal 
reference to the possibility of a UIH investment. Id. at B6. 
UIH officials therefore met with Ng in Denver on October 8, 
1992. At the meeting, Ng requested that UIH continue its 
assistance until Wharf could hire suitable permanent 
employees. UIH officials agreed to do so only if UIH’s right 
to invest was “absolutely firm.” Ibid. According to UIH 
witnesses, Ng agreed that Wharf would grant UIH an option 
to purchase ten percent of the stock in Wharf Cable in 
exchange for UIH’s continued services. Ibid. The 
agreement was not put in writing, and, at trial, Ng denied 
selling UIH the option. Id. at B7. 

In April 1993, UIH filed a Form S-1 registration state- 
ment with the Commission in which UIH disclosed that it 
owned an option to purchase ten percent of the equity in 
Wharf Cable. Pet. App. B8. In June 1993, the Hong Kong 
government awarded Wharf the license. UIH then con- 
ducted a public offering and raised $66 million for its initial 
investment in the system. In late July or early August, UIH 
informed Ng that it was ready to exercise the option. Ibid. 

According to internal documents, Wharf ’s executives dis- 
cussed the possibility of a UIH investment during this pe- 
riod, but Wharf ’s chairman expressed misgivings. Pet. App. 
B9. Ng asked another Wharf executive: “How do we get 
out?” Ibid. At a meeting in Hong Kong, UIH executives 
brought up UIH’s right to invest, and Wharf’s chairman 
looked surprised. Id. at B9-B10. 

4 

In November 1993, UIH filed another Form S-1, which 
stated that UIH “continues to pursue its opportunity to 
acquire * * * a 10% interest in Wharf Cable” and “is 
currently negotiating the acquisition of the 10% interest.” 
Pet. App. B10. An internal Wharf document from December 
1993 states that “[o]ur next move should be to claim that our 
directors got quite upset over these representations” and 
that, “[p]ublicly, we do not acknowledge [UIH’s] opportu- 
nity” to acquire the ten percent interest. Ibid. Another 
Wharf document talks about the need to “start to back 
pedal.” Id. at B11. In the margin of a letter from Schneider 
discussing UIH’s “expectation of an investment into Wharf 
Cable,” Ng wrote “be careful, must deflect this! how?” Ibid. 
Finally, on March 18, 1994, Ng told Schneider that Wharf 
was “not ready to entertain [a UIH] investment at this 
time.” Ibid. 

3. a. UIH filed suit against Wharf in federal district court 
alleging that Wharf had violated Section 10(b) and Rule 10b- 
5. Pet. App. B11-B12. UIH also raised various state law 
claims, including violation of the Colorado Securities Act, 
breach of contract, common law fraud, breach of fiduciary 
duty, and negligent misrepresentation. Id. at B12. At trial, 
UIH contended that, at the meeting on October 8, 1992, 
Wharf sold UIH an option to invest in Wharf Cable in 
exchange for UIH’s services, but that Wharf never intended 
to honor the option. Ibid.; see also id. at B15; 5 J.A. EM1- 
EM3. The jury found for UIH on all claims. Pet. App. B1. 

b. The court of appeals affirmed the judgment. Pet. App. 
B1-B46. As relevant to the questions before this Court, the 
court of appeals rejected Wharf ’s argument that the district 
court lacked jurisdiction over the state law claims because 
UIH had not stated an actionable federal claim. Id. at B12- 
B18. The court of appeals held that pendent jurisdiction is 
proper if a party alleges “a substantial and nonfrivolous 
federal claim,” id. at B18, and the court concluded that UIH’s 

5 

allegations “clearly [were] not frivolous” but were “sufficient 
to state a claim under Rule 10b-5.” Ibid. 

The court of appeals explained that, to state a claim under 
Section 10(b) and Rule 10b-5, a private plaintiff must allege 
that the defendant, with scienter, made a material misrep- 
resentation “in connection with the purchase or sale of a 
security,” and that the plaintiff relied on the misrepresenta- 
tion and sustained damages as the proximate result. Pet. 
App. B14-B15. The court stated that “UIH has asserted 
throughout this case, without challenge from Wharf, that the 
security for 10b-5 purposes is * * * the option” to purchase 
stock in Wharf Cable. Id. at B15. Because “Wharf does not 
contest on appeal the classification of the option as a secu- 
rity,” the court “assume[d] the option is a security” under 
federal securities law. Ibid. The court further explained 
that UIH alleged that it purchased the option on October 8, 
1992, “in exchange for its continued and expanded assistance 
to Wharf in the pursuit of the cable television bid.” Ibid. 
The court noted that UIH also alleged “that Wharf made 
material misrepresentations and omissions regarding the 
option” and that those representations “were made either 
with knowledge of their falsity or with reckless disregard for 
their truth or falsity.” Ibid. Because “the misrepresenta- 
tions were made to influence UIH’s investment decision,” 
the court concluded that they “were made in connection with 
the purchase or sale of a security.” Id. at B16. 

The court of appeals rejected Wharf ’s argument that Blue 
Chip Stamps precluded UIH’s Section 10(b) claim. Pet. App. 
B16. The court explained that UIH purchased the option to 
acquire stock in Wharf Cable, and purchasers of options are 
purchasers of securities under Blue Chip Stamps. Ibid. The 
court also rejected Wharf ’s argument that misrepresenta- 
tions about one’s intention to perform a contract to sell a 
security are not actionable under Section 10(b). Id. at B16- 
B17. Finally, in ruling on Wharf ’s challenges to the state law 
claims, the court rejected the contention that the option was 

6 

unenforceable under Colorado’s statute of frauds. Id. at B21- 
B25. 

SUMMARY OF ARGUMENT 

I. Actions under Section 10(b) may be based on misrep- 
resentations about a person’s intention to sell securities. 
The language of Section 10(b) does not limit the subject 
matter of the misrepresentations that may form the basis for 
liability. The statute covers “any manipulative or deceptive 
device or contrivance,” 15 U.S.C. 78j(b) (emphasis added), 
and prohibits “all fraudulent schemes in connection with the 
purchase or sale of securities.” Bankers Life, 404 U.S. at 11 

n.7 (quoting A.T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (2d 
Cir. 1967)). Misrepresentation of one’s intention to perform 
a promise, such as the promise to sell securities as provided 
in an option or other contract, is a well recognized form of 
fraud. See Durland v. United States, 161 U.S. 306 (1896); 
Restatement (Second) of Torts § 530 cmt. c (1977). A mis- 
representation is made “in connection with the purchase or 
sale of any security” when the misrepresentation and the 
securities transaction are part of the same fraudulent 
scheme. See, e.g., United States v. O’Hagan, 521 U.S. 642, 
655-656 (1997). Under the 1934 Act, an option on a security 
is itself a security. 15 U.S.C. 78c(a)(10) (1994 & Supp. IV 
1998). Moreover, a contract to purchase or sell a security is a 
purchase or sale of a security. 15 U.S.C. 78c(a)(13) and (14). 
Therefore, a misrepresentation of one’s intention to sell secu- 
rities, as promised in an option or other contract, is made “in 
connection with the purchase or sale of any security.” 
Decisions of this Court and the courts of appeals confirm 
that violations of Section 10(b) may be premised on misrep- 
resentations about the intention to buy or sell securities and 
are not limited to misrepresentations about the value of 
securities bought or sold. See, e.g., United States v. 
Naftalin, 441 U.S. 768 (1979); Threadgill v. Black, 730 F.2d 
810, 811-812 (D.C. Cir. 1984) (per curiam) (Wright, Wilkey, 

7 

and Scalia, JJ.); Madison Consultants v. FDIC, 710 F.2d 57, 
61 (2d Cir. 1983); A.T. Brod, 375 F.2d at 397. Restricting 
claims to misrepresentations about value would undermine 
the Act’s purpose “to insure honest securities markets” 
(O’Hagan, 521 U.S. at 658) because it would remove from the 
Act’s purview many pernicious kinds of fraud, including 
insider trading based on misappropriated information. 
Limiting the subject matter of the misrepresentations pro- 
hibited by Section 10(b) is also inconsistent with the 
“philosophy of full disclosure” embodied in the Act. Santa 
Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977). Because 
claims based on misrepresentations about the intention to 
sell securities involve deception, which lies at the heart of 
what Section 10(b) prohibits, they neither federalize state 
law contract disputes nor conflict with Santa Fe. 

II. This case does not present the question whether an 
action under Section 10(b) may be based on an oral contract 
to sell a security that is unenforceable under the applicable 
statute of frauds, because respondents’ theory of liability 
and the court of appeals’ decision are premised on a com- 
pleted sale of a security—UIH’s purchase of an option, which 
is itself a security. Moreover, the court of appeals held that 
the option is enforceable under Colorado law. 

To the extent the question is properly presented, Section 
10(b) applies to an oral contract to sell a security. Nothing in 
the language of Section 10(b) suggests that contracts for the 
sale of securities (or securities themselves) must be written 
in order to form the basis for liability. Oral contracts to sell 
securities are generally enforceable under the laws of all 50 
States. Moreover, under the prevailing common law rule, a 
fraud claim based on misrepresentation of a party’s intention 
to fulfill a promise is actionable even if the contract itself is 
oral and unenforceable under the statute of frauds. Restate- 
ment (Second) of Torts § 530 cmt. c. 

Blue Chip Stamps does not preclude claims based on oral 
contracts. In Blue Chip Stamps, this Court held that private 

8 

plaintiffs suing under Section 10(b) must be purchasers or 
sellers of securities. 421 U.S. at 731. The Court recognized, 
however, that holders of options and other contractual rights 
to purchase or sell securities qualify as purchasers or sellers. 
Id. at 751. The Court in Blue Chip Stamps was concerned 
not about oral testimony per se, but about “the abuse 
potential and proof problems inherent in suits by investors 
who neither bought nor sold.” O’Hagan, 521 U.S. at 664. 
Suits based on oral contracts do not present comparable 
problems of proof or potential for abuse. 

ARGUMENT 

I. ACTIONS UNDER SECTION 10(b) MAY BE BASED 

ON MISREPRESENTATIONS ABOUT THE INTEN- 
TION TO SELL SECURITIES 

Petitioners characterize (Br. 22) this case as involving 
only a “dispute[] over the ownership of securities,” and they 
contend (Br. 22-32) that actions under Section 10(b) may not 
be based on misrepresentations about a person’s intention to 
sell securities. Petitioners’ characterization of the case is 
based on the mistaken assumption that the only security 
involved is the Wharf Cable stock: They assert that “UIH 
did not purchase any security” because it “did not purchase 
the common stock of Wharf Cable.” Pet. Br. 23. Contrary to 
that assertion, the jury found that Wharf sold UIH an 
option—the right to acquire a ten percent ownership inter- 
est in Wharf Cable—in exchange for UIH’s assistance to 
Wharf in pursuit of the Hong Kong license. 5 J.A. EP7, 
EP21, EP25. The court of appeals correctly held that UIH’s 
purchase of that option was the purchase of a security under 
Section 10(b). See Pet. App. B15.1 

1 When an offeree gives valuable consideration to an offeror to hold an 
offer open, the transaction results in an “option contract” (1 Richard A. 
Lord, Williston on Contracts § 5:16, at 726-727 (4th ed. 1990)), “a unilat- 
eral contract which binds the optionee to do nothing, but grants him the 

9 

Because “Wharf [did] not contest on appeal the classifica- 
tion of the option as a security,” the court of appeals 
assumed that the option was a security under the federal 
securities laws. Pet. App. B15. That assumption was cor- 
rect. An option is itself a security under Section 3(a)(10) of 
the 1934 Act, which defines “security” to include both “any 

* * * option * * * on any security” and “any * * * right 
to * * * purchase, any of the foregoing,” including “stock.” 
15 U.S.C. 78c(a)(10) (1994 & Supp. IV 1998). See One-O-One 
Enters., Inc. v. Caruso, 848 F.2d 1283, 1288 (D.C. Cir. 1988) 
(R.B. Ginsburg, J.). Thus, as the purchaser of an option, 
UIH was the purchaser of a security under Section 10(b). 
Blue Chip Stamps, 421 U.S. at 751 (holders of “options” are 
“ ‘purchasers’ or ‘sellers’ of securities”). This case therefore 
does not involve a “dispute[] over the ownership of securi- 
ties” (Pet. Br. 22).2 
Petitioners’ further contention that Section 10(b) does not 
cover misrepresentations about a person’s intention to sell 
securities is incorrect. That contention is inconsistent with 
the text of Section 10(b), judicial precedent interpreting that 
provision, and the purposes of the Act. 

A. The Language Of Section 10(b) Does Not Limit The 

Subject Matter Of The Misrepresentations That It 
Prohibits 

Section 10(b) makes it unlawful “[t]o use or employ, in con- 
nection with the purchase or sale of any security * * *, any 
manipulative or deceptive device or contrivance in contra- 
vention of such rules and regulations as the Commission may 
prescribe.” 15 U.S.C. 78j(b). Rule 10b-5 implements that 

right to accept or reject [an] offer in accordance with its terms” (id. at 
717). 

2 Even if the only relevant “security” were the Wharf Cable stock, the 
case would still involve fraud in connection with the purchase of the stock. 
As we explain at pp. 13, 23-24, infra, a “purchase” of a security under 
Section 10(b) includes “any contract” to purchase a security. 

10 

proscription by declaring it unlawful, “in connection with the 
purchase or sale of any security,” “(a) [t]o employ any device, 
scheme, or artifice to defraud, (b) [t]o make any untrue 
statement of a material fact or to omit to state a material 
fact necessary in order to make the statements made * * * 
not misleading, or (c) [t]o engage in any act, practice, or 
course of business which operates or would operate as a 
fraud or deceit upon any person.” 17 C.F.R. 240.10b-5. The 
statute and rule are coextensive in scope. O’Hagan, 521 U.S. 
at 651. 

1. The text of Section 10(b) covers “any manipulative or 
deceptive device or contrivance” (emphasis added). It does 
not require that the deception involve any particular subject 
matter. Rather, Section “10(b) is a ‘catchall’ antifraud pro- 
vision.” Herman & MacLean v. Huddleston, 459 U.S. 375, 
382 (1983). The text of Rule 10b-5 also makes that compre- 
hensive coverage clear. Section 10(b) and Rule 10b-5 thus 
“prohibit all fraudulent schemes in connection with the pur- 
chase or sale of securities.” Bankers Life, 404 U.S. at 11 n.7 
(quoting A.T. Brod, 375 F.2d at 397). 

As the text of Rule 10b-5 demonstrates, 17 C.F.R. 
240.10b-5(b), misrepresentations are a well recognized cate- 
gory of fraud. And misrepresentation of one’s intention to 
perform a promise, such as a promise to sell securities as 
provided in an option contract, is itself a well recognized kind 
of fraud. More than a century ago, in Durland, 161 U.S. at 
312-314, this Court held that the mail fraud statute, which 
applied to “any scheme or artifice to defraud,” criminalized 
the defendant’s sale of bonds that he did not intend to honor. 
As this Court noted in O’Hagan, the coverage of the mail 
fraud statute provides “a particularly apt source of guid- 
ance” in determining the coverage of Section 10(b). 521 U.S. 
at 654. 

Misrepresentation of the intention to perform an agree- 
ment is also a recognized form of fraud under the common 
law. See Restatement (Second) of Torts § 530 cmt. c (1977) 

11 

(“Since a promise necessarily carries with it the implied as- 
sertion of an intention to perform, it follows that a promise 
made without such intention is fraudulent.”); e.g., Formosa 
Plastics Corp. USA v. Presidio Engr’s & Contractors, Inc., 
960 S.W.2d 41, 46-47 (Tex. 1998); Brody v. Bock, 897 P.2d 
769, 775-776 (Colo. 1995) (en banc); Sea-Land Serv., Inc. v. 
O’Neal, 297 S.E.2d 647, 651 (Va. 1982). Wharf ’s misrepre- 
sentation of its intention to sell UIH the stock of Wharf 
Cable as promised in the option falls squarely within this 
category of fraud.3 

2. Petitioners attempt (Br. 23, 26) to ground their pro- 
posed bar to liability for misrepresentations about the inten- 
tion to sell securities in Section 10(b)’s requirement that 
misrepresentations be made “in connection with the pur- 
chase or sale of any security.” That requirement, however, 
does not limit the subject matter of prohibited misrepre- 
sentations. Rather, it demands a “connection” or relation- 
ship between the misrepresentation and the purchase or sale 
of a security. See Bankers Life, 404 U.S. at 12 (paraphrasing 
“in connection with” as “touching”).4 
The necessary connection exists “when the proscribed 
conduct and the sale [or purchase] are part of the same 
fraudulent scheme.” Alley v. Miramon, 614 F.2d 1372, 1378 

3 Misrepresentations must be material to trigger liability under 
Section 10(b). See 17 C.F.R. 240.10b-5(b). A misrepresentation is material 
if a reasonable person would attach importance to the fact misrepresented 
in determining his course of action with respect to the transaction. Basic 
Inc. v. Levinson, 485 U.S. 224, 238 (1988). Misrepresentation of one’s 
intention to honor one’s promise under an option or other contract unques- 
tionably is material, because the expectation that one will do so provides 
the inducement for the other party to purchase the option or enter into the 
contract. 

4 See also SEC v. Clark, 915 F.2d 439, 449 (9th Cir. 1990) (“in connec- 
tion with” requires “some nexus” between the deceit and a securities 
transaction); Abrams v. Oppenheimer Gov’t Sec., Inc., 737 F.2d 582, 593 
(7th Cir. 1984) (“some nexus but not necessarily a direct and close relation- 
ship”); Brown v. Ivie, 661 F.2d 62, 65 (5th Cir. 1981) (“a nexus”), cert. 
denied, 455 U.S. 990 (1982). 

12 

n.11 (5th Cir. 1980) (Wisdom, J.). That principle is illustrated 
by O’Hagan, in which this Court found the “in connection 
with” requirement satisfied when a fiduciary, without dis- 
closure to his principal, uses confidential information to pur- 
chase securities from, or sell them to, another party. The 
Court explained that the “in connection with” requirement is 
met because “the fiduciary’s fraud is consummated, not when 
the fiduciary gains the confidential information, but when, 
without disclosure to his principal, he uses the information to 
purchase or sell securities.” 521 U.S. at 655-656. 
Misrepresentations about the value of securities bought or 
sold fall within the “in connection with” language because 
those misrepresentations bear on the appropriate considera- 
tion for the purchase or sale. However, contrary to peti- 
tioners’ contention (Br. 25-27, 31), neither that phrase nor 
any other language in Section 10(b) or Rule 10b-5 “would 
indicate that those provisions were intended to deal only 
with fraud as to the ‘investment value’ of securities, and, 
indeed, it is established that a 10b-5 action will survive even 
though the fraudulent scheme or device is unrelated to 
‘investment value.’ ” 
A.T. Brod, 375 F.2d at 396-397; see 

SEC v. Jakubowski, 150 F.3d 675, 679-680 (1998) (Easter- 
brook, J.), cert. denied, 525 U.S. 1103 (1999). Thus, in 
O’Hagan, the misrepresentation was the fiduciary’s false 
profession of his intention to honor his duty of loyalty to his 
principal, 521 U.S. at 653-654, a misrepresentation that did 
not concern the value of the securities in which the fiduciary 
traded. And, in Bankers Life, the misrepresentation was 
that a corporation that sold bonds would receive their pro- 
ceeds, when insiders actually intended to misappropriate 
those proceeds for their own use. 404 U.S. at 9-10. 

The courts of appeals have also repeatedly applied Section 
10(b) to fraud that did not involve misrepresentations about 
the securities themselves or the consideration paid. See, e.g., 
Jakubowski, 150 F.3d at 679 (defendant misrepresented his 
identity “in order to induce the issuer to accept his offer to 

13 

buy”); Marbury Mgmt., Inc., v. Kohn, 629 F.2d 705, 707 (2d 
Cir.) (trainee’s misrepresentation that he was an experi- 
enced stockbroker “not only induced the purchase of the 
securities involved but their retention as investments as 
well”), cert. denied, 449 U.S. 1011 (1980). It is thus well 
established that the “in connection with” requirement is met 
when there is a “straightforward cause and effect” relation- 
ship between the misrepresentation and a securities trans- 
action. In re Ames Dep’t Stores, Inc. Stock Litig., 991 F.2d 
953, 967-968 (2d Cir. 1993); see also SEC v. Drysdale Sec. 
Corp., 785 F.2d 38, 42-43 (2d Cir.), cert. denied, 476 U.S. 1171 
(1986); McGrath v. Zenith Radio Corp., 651 F.2d 458, 467 
(7th Cir.), cert. denied, 454 U.S. 835 (1981). 

That the “in connection with” language poses no obstacle 
to liability for misrepresentation of the intention to sell secu- 
rities is particularly clear because a “contract to purchase or 
sell securities is expressly defined by § 3(a) of the 1934 Act 

* * * as a purchase or sale of securities for the purposes of 
that Act.” Blue Chip Stamps, 421 U.S. at 750-751; see 15 
U.S.C. 78c(a)(13) and (14). Section 10(b) thus prohibits not 
only deception “in connection with the purchase or sale of 
any security,” but also deception “in connection with a con- 
tract to purchase or sell any security.” 
When a party enters into a contract to purchase 
securities—either an option or a conventional contract—few 
deceptions could be more closely connected to the trans- 
action than the other party’s misrepresentation about its 
intention to sell the securities. That deceit affects the value 
of the option or other contractual right and consequently the 
price the purchaser is willing to pay. A contract that the 
seller secretly does not intend to honor has little value. 
Even if the purchaser successfully sues to enforce the con- 
tract, its value is significantly reduced by the costs of litiga- 
tion and delay. Moreover, the false representation of inten- 
tion to sell induces the buyer to enter into the contract, 
because no one would contract to buy from someone who 

14 

does not intend to sell. In this case, Wharf ’s misrepresenta- 
tion that it would sell UIH Wharf Cable stock pursuant to 
the option when Wharf did not intend to sell satisfied the “in 
connection with” requirement because it affected the value 
of the option and induced UIH to expend valuable resources 
to purchase the option.5 

B. Precedent Supports Section 10(b) Actions Based On 

Misrepresentations About The Intention To Sell 
Securities 

Contrary to petitioners’ contention (Br. 24-32), the deci- 
sions of this Court and the courts of appeals establish that 
actions under Section 10(b) may be premised on misrep- 
resentations about the intention to sell securities. For 
example, in United States v. Naftalin, 441 U.S. 768 (1979), 
this Court upheld a criminal conviction under Section 17(a) of 
the Securities Act of 1933, 15 U.S.C. 77q(a), that was based 
on the defendant’s misrepresentation about his intention to 
sell securities. The defendant falsely represented that he 
owned stock that he entered into a contract with a broker- 

5 This case therefore does not require the Court to explore the outer 
limits of the “in connection with” requirement. We note, however, that a 
misrepresentation may satisfy the “in connection with” requirement even 
if it does not induce the securities transaction. 8 Louis Loss & Joel Selig- 
man, Securities Regulation 3686-3687 (3d ed. 1991); see, e.g., O’Hagan, 521 
U.S. at 655-656 (discussed at p. 12, supra). The “in connection with” 
requirement does, however, preclude actions based on circumstances not 
involving the purchase or sale of a security. Moreover, the other 
requirements of Section 10(b) must be satisfied—that there was a 
deceptive or manipulative device or misrepresentation, that it was mate- 
rial, and that it was made with scienter. See SEC v. First Jersey Sec., Inc., 
101 F.3d 1450, 1467 (2d Cir. 1996), cert. denied, 522 U.S. 812 (1997). A 
private plaintiff (but not the government) must also establish reliance (or 
causation) and damages. SEC v. Rana Research, Inc., 8 F.3d 1358, 1364 
(9th Cir. 1993); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). And, a 
private plaintiff seeking damages must establish standing under Blue 
Chip Stamps as a purchaser or seller and satisfy the pleading 
requirements of the Private Securities Litigation Reform Act of 1995, 
Pub. L. No. 104-67, 109 Stat. 737. 

15 

dealer to sell; in fact, he did not own the stock, and he was 
unable to deliver it because it rose in price before the 
settlement date. 441 U.S. at 770-771. The Court’s conclusion 
that a misrepresentation concerning the ability and intention 
to deliver stock can form the basis for liability under Section 
17(a) is instructive with respect to the scope of Section 10(b), 
because Section 17(a)’s prohibition on fraud “in the offer or 
sale of any securities” is analogous to Section 10(b)’s prohibi- 
tion on fraud “in connection with the purchase or sale of 
securities.” See Herman & MacLean, 459 U.S. at 383 (char- 
acterizing Naftalin as “applying § 17(a) of the 1933 Act to 
conduct also prohibited by § 10(b)”); Naftalin, 441 U.S. at 
773 n.4 (suggesting that “in” and “in connection with” are 
coterminous); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 213 

n.32 (1976) (noting substantial overlap between the texts of 
Rule 10b-5 and Section 17). 

Although this Court has not ruled on the same issue in a 
Section 10(b) case, in Bankers Life, 404 U.S. at 10 n.7, the 
Court cited with approval two court of appeals decisions that 
held deception about a party’s intention to buy or sell 
securities actionable under Section 10(b). In one of those 
cases, A.T. Brod, 375 F.2d at 397, the Second Circuit held 
that a customer’s misrepresentation that he would pay for 
stock he ordered, when he intended to pay only if the value 
of the stock had increased by the settlement date, violated 
Section 10(b). In the other, Allico National Corp. v. Amal- 
gamated Meat Cutters & Butcher Workmen of North Amer- 
ica, 397 F.2d 727, 729-730 (1968), the Seventh Circuit held 
that the plaintiff stated a claim under Section 10(b) when it 
alleged that the seller of securities breached an installment 
sales contract by entering into a more favorable contract 
with another buyer and converting shares for which the 
plaintiff had already paid in order to sell them to the second 
buyer. 

Other courts of appeals have likewise held that actions 
under Section 10(b) may be based on misrepresentations of 

16 

an intention to buy or sell securities. See Threadgill, 730 
F.2d at 811-812 (“fraud in the purchase or sale includes 
‘[e]ntering into a contract of sale [of a security] with the 
secret reservation not to fully perform’ ”); Madison Consult- 
ants, 710 F.2d at 61 (allegations that defendants lied about 
their intention not to purchase plaintiffs’ stock stated a 
claim); Fogarty v. Security Trust Co., 532 F.2d 1029, 1032- 
1033 (5th Cir. 1976) (action under Rule 10b-5 could be valid if 
defendant promised to buy stock but did not intend to keep 
the promise); Walling v. Beverly Enters., 476 F.2d 393, 396 
(9th Cir. 1973) (plaintiff stated valid claim by alleging that 
defendant entered into an agreement to sell stock to plaintiff 
“with the intent not to perform its obligations unless it later 
determined that it was in its best interests to do so”); 
Richardson v. MacArthur, 451 F.2d 35, 40 (10th Cir. 1971) 
(Rule “10b-5 has been found to be a proper civil remedy for a 
scheme whereby individuals were induced into contracting 
for the purchase of stock which the seller had no intention of 
giving up.”). See also Luce v. Edelstein, 802 F.2d 49, 55 (2d 
Cir. 1986) (“making a specific promise to perform a particu- 
lar act in the future while secretly intending not to perform 
that act may violate Section 10(b) where the promise is part 
of the consideration for the transfer of securities”); accord In 
re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1245 & n.13 
(3d Cir. 1989); McGrath, 651 F.2d at 466.6 

6 The four cases on which petitioners rely do not hold to the contrary. 
In Gurwara v. Lymphomed, Inc., 937 F.2d 380, 381 (7th Cir. 1991), the 
plaintiff alleged that his employer misrepresented his rights under a stock 
option to induce him to take action that made him ineligible to exercise 
those rights. The court of appeals rejected the plaintiff’s claim, which 
identified the underlying stock as the security, but expressly declined to 
decide whether he “might have sued successfully under section 10(b) for 
misrepresentations in connection with his option contract.” Id. at 382 n.2. 
Moreover, in Jakubowski, 150 F.3d at 679, the Seventh Circuit rejected as 
incorrect the dicta in Gurwara that suggested that a misrepresentation 
must relate to the value of the security. In two of the other cases cited by 
petitioners, the plaintiffs apparently did not allege that, at the time that 

17 

C. Limiting The Scope Of Section 10(b) As Petitioners 

Urge Would Undermine The Act’s Purposes 

Congress’s purposes in enacting Section 10(b) would be 
seriously undermined by a rule that misrepresentations 
about the intention to sell securities are outside its scope or 
that Section 10(b) encompasses only misrepresentations 
about the value of a security. Such a rule would frustrate 
Section 10(b)’s purpose “to insure honest securities markets” 
(O’Hagan, 521 U.S. at 658) by removing from its purview 
many pernicious varieties of fraud. For example, the misap- 
propriation theory of insider trading upheld in O’Hagan 
involves a deception that does not relate to the value of the 
securities traded. And the frauds perpetrated by customers 
against broker-dealers in Naftalin and A.T. Brod involved 
misrepresentations about intentions to buy or sell securities. 
In addition, fraud by broker-dealers against customers often 
involves misrepresentations about salesperson qualifications, 
risks of margin trading, a brokerage firm’s solvency, or the 
level of trading in a customer’s account.7 

the defendants entered into the contracts to sell the securities, the 
defendants did not intend to honor the contracts; moreover, the courts of 
appeals did not consider whether there was fraud in connection with the 
contracts. See Stanford v. Humphrey, 894 F.2d 410 (9th Cir. 1990) (Table) 
(1990 WL 4659); Hunt v. Robinson, 852 F.2d 786 (4th Cir. 1988). In the last 
case cited by petitioners, Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 
191 (3d Cir. 1976), the plaintiffs alleged that the defendants sold stock to 
others without affording the plaintiffs a right of first refusal. The 
defendants, however, were not parties to the agreement creating the right 
of first refusal, see id. at 190, so the plaintiff s had no claim that the 
defendants entered into that agreement with the intent not to perform. 
Moreover, elsewhere in its opinion, the court held that the “plaintiffs 
possessed no entitlement or contractual right to purchase [the] stock on a 
preferential basis.” Id. at 193. 

7 See Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 946 (3d 
Cir.), cert. denied, 474 U.S. 935 (1985); Abrams v. Oppenheimer Gov’t Sec., 
Inc., 737 F.2d 582, 588 (7th Cir. 1984); Kehr v. Smith Barney, Harris 
Upham & Co., 736 F.2d 1283, 1286 (9th Cir. 1984); Costello v. Oppen- 
heimer & Co., 711 F.2d 1361, 1368 (7th Cir. 1983); Arrington v. Merrill 

18 

Moreover, “the fundamental purpose of the 1934 Act ‘to 
substitute a philosophy of full disclosure for the philosophy 
of caveat emptor’ ” would also be eroded by petitioners’ 
proposed rule. Santa Fe, 430 U.S. at 477 (citation omitted). 
A philosophy of full disclosure is inconsistent with subject 
matter limitations on which misrepresentations are prohib- 
ited. Permitting misrepresentations as fundamental as mis- 
statements of one’s intention to buy or sell securities in 
accordance with one’s promises under a contract for sale 
would create a significant gap in the full disclosure regime. 

Indeed, permitting misrepresentations about the intention 
to buy or sell securities as promised would strike at a core 
purpose of Section 10(b)—to prevent “intentional or willful 
conduct designed to deceive or defraud investors by control- 
ling or artificially affecting the price of securities.” Ernst & 
Ernst, 425 U.S. at 199. As the Commission explained in its 
amicus brief in A.T. Brod, “the artificial demand created by 
purchasing securities which are not to be paid for unless the 
market value of the stock rises[] can have an unsettling and 
potentially manipulative effect on the securities market.” 
375 F.2d at 397. The same is true of selling securities that 
the seller does not intend to deliver unless the market value 
of the securities falls, as in Naftalin. 

Finally, a rule exempting certain categories of misrepre- 
sentations from Section 10(b) would also create uncertainty 
about its scope and could increase, rather than decrease, 
litigation. For example, in this case, there is a dispute 
whether Wharf ’s misrepresentation affected the value of the 
security that UIH purchased. Compare Pet. Br. 25-26 with 
pp. 13-14, supra. 

Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981); 

Marbury Mgmt., 629 F.2d at 707. 

19 

D. Section 10(b) Actions Based On Misrepresentations 

About The Intention To Sell Securities Neither 
Federalize State Law Contract Disputes Nor Conflict 
With Santa Fe 

Contrary to petitioners’ contention (Br. 25-26, 31, 32), per- 
mitting Section 10(b) actions based on misrepresentations 
about the intention to buy or sell securities does not federal- 
ize state law actions for breach of contract. Furthermore, 
petitioners err in arguing (Br. 24-25) that actions based on 
those misrepresentations conflict with this Court’s decision 
in Santa Fe. 

Claims based on misrepresentations about the intention to 
buy or sell securities differ from ordinary breach-of-contract 
claims because they involve alleged fraud in the inducement 
of a securities transaction. If a person enters into a contract 
to purchase or sell a security with the intent to perform and 
subsequently fails to honor the contract, the failure to 
perform gives rise to an action for breach of contract, but 
there is no action under Section 10(b). If, however, a person 
enters into a contract to purchase or sell a security but 
secretly does not intend to honor the contract, an action can 
be brought under Section 10(b) based on the misrepresenta- 
tion. See In re Phillips Petroleum Sec. Litig., 881 F.2d at 
1245 & n.13; Luce, 802 F.2d at 56; Fogarty, 532 F.2d at 1033. 
Cf. Durland, 161 U.S. at 312-314 (rejecting contention that 
sale of bonds with intent not to honor them entails only a 
breach of contract). Because Section 10(b) “trains on con- 
duct involving manipulation or deception,” a Section 10(b) 
action that is premised on deception presents no improper 
federalization of state law. O’Hagan, 521 U.S. at 655. 

A state law claim for breach of contract is thus fundamen- 
tally different from a federal securities fraud action. The 
former seeks to enforce a contract; the latter is based on 
deception. That difference is reflected in the applicable 
measure of damages. In a typical breach-of-contract action, 

20 

the plaintiff is entitled to damages measured by the benefit 
of the bargain. 3 E. Allan Farnsworth, Farnsworth on Con- 
tracts § 12.8, at 186 (1990). In contrast, in actions under Sec- 
tion 10(b), the basic measure of damages, with certain excep- 
tions, is the out-of-pocket loss caused by the deception. See 
9 Louis Loss & Joel Seligman, Securities Regulation 4413- 
4415 (3d ed. 1992).8 

When there is fraud in the inducement of a contract to 
purchase or sell securities, and the party committing the 
fraud fails to perform under the contract, the injured party 
has a state law claim for breach of contract as well as a claim 
under Section 10(b). The fact that the plaintiff also has a 
state law claim for breach of contract does not preclude 
liability under Section 10(b). See Madison Consultants, 710 
F.2d at 65. 

This Court’s decision in Santa Fe in no way points to a 
contrary conclusion. That case involved a claim that the 
defendant majority shareholder, although it made full dis- 
closure, breached its fiduciary duty to minority shareholders 
in a freeze-out merger. The Court ruled that that claim, 
standing alone, did not state a cause of action under Section 
10(b). The primary basis for the Court’s holding was not 
that the case involved issues traditionally governed by state 
law, but rather that “the transaction, if carried out as alleged 
in the complaint, was neither deceptive nor manipulative.” 
430 U.S. at 474. The Court distinguished the situation in 
Santa Fe, which involved only a breach of fiduciary duty, 
from cases “in which the breaches of fiduciary duty held 
violative of Rule 10b-5 included some element of deception.” 
Id. at 475 & n.15. 

8 Thus, the benefit-of-the-bargain damages awarded in this case might 
not have been appropriate if the only claim had been under Section 10(b). 
Also, the district court correctly limited the punitive damages to the state 
law claims because only “actual damages” are available under the Ex- 
change Act. 15 U.S.C. 78bb(a). See 9 Loss & Seligman, supra, at 4423- 
4424. 

21 

This Court has since confirmed that misrepresentations 
about matters of corporate governance may be actionable 
under the federal securities laws. In Virginia Bankshares, 
Inc. v. Sandberg, 501 U.S. 1083, 1090-1098 (1991), the Court 
held that misrepresentations in proxy materials about the 
fairness of a proposed transaction could give rise to a claim 
under the federal securities laws. Distinguishing Santa Fe, 
the Court explained that, while state law governs internal 
corporate affairs, Section 14(a) of the 1934 Act, which gov- 
erns proxy solicitations, “does impose responsibility for false 
and misleading proxy statements.” Id. at 1093 n.6. The 
Court elaborated that, “[a]lthough a corporate transaction’s 
‘fairness’ is not, as such, a federal concern, a proxy state- 
ment’s claim of fairness presupposes a factual integrity that 
federal law is expressly concerned to preserve.” Ibid. The 
same analysis applies to Section 10(b) actions involving mis- 
representations with respect to securities contracts: Con- 
tract disputes, as such, are not a federal concern, but Section 
10(b) is expressly designed to prohibit fraud in connection 
with contracts to purchase or sell securities. 

Although the Court in Santa Fe expressed concern over 
the unwarranted encroachment of federal law into areas 
traditionally regulated by state law, that concern arose from 
the prospect of federal regulation absent deceptive conduct. 
See 430 U.S. at 478-479 (absent deception, federal action 
could “interfere” with or “overrid[e]” state law and policies). 
The Court recognized that “the existence of a particular 
state-law remedy is not dispositive of the question whether 
Congress meant to provide a similar federal remedy.” Id. at 
478. In cases like the one now before this Court, “[s]ince 
there was a ‘sale’ of a security and since fraud was used ‘in 
connection with’ it, there is redress under [Section] 10(b), 
whatever might be available as a remedy under state law.” 
Bankers Life, 404 U.S. at 12; see also 15 U.S.C. 78bb(a) 
(Subject to limited exceptions not relevant here, “[t]he 
rights and remedies provided by this chapter shall be in 

22 

addition to any and all other rights and remedies that may 
exist at law or in equity.”). Creating an exception from 
liability under Section 10(b) for misrepresentations that are 
actionable under state law would eliminate Section 10(b) as a 
meaningful check on securities fraud, because defendants 
could reformulate almost all allegations of false statements 
as allegations of breaches of a state law duty. See Madison 
Consultants, 710 F.2d at 65; 5A Arnold Jacobs, Litigation 
and Practice Under Rule 10b-5, § 11.01, at 1-323 to 1-325 
(1996). 

II. AN ACTION UNDER SECTION 10(b) MAY BE 

BASED ON AN ORAL CONTRACT FOR THE 
PURCHASE OR SALE OF A SECURITY 

Petitioners also argue (Br. 32-39) that an action under 
Section 10(b) may not be based on an oral contract that is 
unenforceable under the applicable state statute of frauds. 
That question is not actually presented by this case, for two 
reasons: First, as we have explained, the decision of the 
court of appeals does not premise Wharf ’s liability on a “con- 
tract” to purchase or sell a security or on the Act’s provi- 
sions (15 U.S.C. 78c(a)(13) and (14)) defining “purchase” and 
“sale” to include such a contract. Rather, the court held 
Wharf liable based on a completed sale of a security—UIH’s 
purchase at the October 8, 1992, meeting of an option, which 
is itself a “security.” See pp. 5, 8-9, supra. The court of ap- 
peals assumed that the option qualified as a security under 
Section 10(b) because it concluded that petitioners had not 
contested that classification. Pet. App. B15. It is not clear 
that petitioners contend even now that the oral option is not 
a “security” under Section 10(b).9 In any event, this Court 

9 Petitioners argue (Br. 36-37, 41) that recognition of an “oral 
security” in this case is inconsistent with Blue Chip Stamps. 

Blue Chip 

Stamps, however, concerns a private plaintiff ’s standing to bring a dam- 
ages action under Section 10(b) and in no way suggests that the definition 
of “security” in 15 U.S.C. 78c(a)(10) (1994 & Supp. IV 1998) excludes oral 

23 

ordinarily does not address questions that were not raised in 
or decided by the court of appeals. National Collegiate 
Athletic Ass’n v. Smith, 525 U.S. 459, 470 (1999). 

Second, the court of appeals expressly rejected peti- 
tioners’ contention that the option was unenforceable under 
Colorado’s statute of frauds. Pet. App. B21-B25. This Court 
normally defers to the construction given a state statute by 
the court of appeals unless that court’s decision is plainly 
erroneous. Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 
499-500 & n.9 (1985). Reconsideration of the state law issues 
in this case is particularly unwarranted because Colorado 
law no longer subjects contracts for the sale of securities to 
the statute of frauds. Pet. App. B22 n.2. Indeed, as we 
explain below, oral contracts for the sale of securities are 
now generally enforceable under the law of all 50 States. 
See pp. 25-26, infra. 

To the extent the question posed by petitioners is prop- 
erly presented, petitioners’ contentions are incorrect: A 
violation of Section 10(b) can be predicated on an oral con- 
tract, and Blue Chip Stamps does not preclude private 
actions based on such a violation. 

A. Section 10(b) Applies To An Oral Contract To Sell A 

Security 

1. Section 10(b) applies to the “purchase or sale of any 
security.” 15 U.S.C. 78j(b). The 1934 Act defines “purchase” 
and “sale” to include “any contract” to purchase or sell a se- 
curity. 15 U.S.C. 78c(a)(13) (“The terms ‘buy’ and ‘purchase’ 
each include any contract to buy, purchase or otherwise 

agreements. Neither the text of Section 78c(a)(10) nor any case law of 
which we are aware requires that securities in general or options in par- 
ticular be written. Courts have recognized that investment contracts, 
which are defined as securities under Section 78c(a)(10), can be oral. See 

p. 25, infra. Furthermore, when Congress intended to require a writing, it 
did so explicitly. See p. 24, infra. Finally, as we explain at pp. 28-30, 
infra, Blue Chip Stamps does not preclude private damages actions based 
on oral agreements. 

24 

acquire.”); 15 U.S.C. 78c(a)(14) (“The terms ‘sale’ and ‘sell’ 
each include any contract to sell or otherwise dispose of.”). 
Excluding oral contracts from the coverage of Section 10(b) 
would improperly read the word “any” out of, or the word 
“written” into, the statutory phrase “any contract.” 

When Congress intended to require a writing under the 
securities laws, it did so explicitly. See 15 U.S.C. 77b(10) 
(1994 & Supp. IV 1998) (defining prospectus as “any * * * 
communication, written or by radio or television, which 
offers any security for sale or confirms the sale of any secu- 
rity”). Indeed, even if an oral contract were unenforceable 
as a matter of state law, which the contract in this case was 
not, it would be included within the protection of the federal 
securities laws. The word “contract” was commonly under- 
stood during the early 1930s, when the securities laws were 
enacted, to include both enforceable and unenforceable 
contracts. See Restatement (First) of the Law of Contracts 
§ 1 cmt. e (1932) (“The term contract is generic. As com- 
monly used, and as here defined, it includes varieties de- 
scribed as voidable, unenforceable, formal, informal, express, 
implied, * * * unilateral, bilateral.”) (emphasis added). The 
Restatement defined an “unenforceable contract” as “one 
which the law does not enforce by direct legal proceedings, 
but recognizes in some indirect or collateral way as creating 
a duty of performance,” and gave as an example a contract 
that does not satisfy the statute of frauds. Id. § 14. The 
term “contract” in the Exchange Act should be construed in 
accordance with that contemporaneous understanding. 

That is the approach this Court took in SEC v. W.J. 
Howey Co., 328 U.S. 293 (1946), when construing the term 
“investment contract” in the definition of “security” in Sec- 
tion 2(1) of the Securities Act of 1933, 15 U.S.C. 77b(1). 

10 

10 Both Section 2(1) of the Securities Act of 1933 and Section 3(a)(10) of 
the Exchange Act, 15 U.S.C. 78c(a)(10) (1994 & Supp. IV 1998), define the 
term “security” to include “investment contract.” The definitions of “secu- 
rity” in the two Acts “are virtually identical and [are] treated as such in 

25 

Noting that the term is “undefined by the Securities Act or 
by relevant legislative reports,” the Court considered how 
the term was used under state blue sky laws prior to adop- 
tion of the federal statute, and determined that it had been 
“broadly construed * * * so as to afford the investing 
public a full measure of protection.” 328 U.S. at 298. Based 
on that analysis, the Court held that “an investment contract 
for purposes of the Securities Act means a contract, trans- 
action or scheme whereby a person invests his money in a 
common enterprise and is led to expect profits solely from 
the efforts of the promoter or a third party.” Id. at 298-299. 
The Court nowhere suggested that an investment contract 
must be written. And the courts have since recognized that 
investment contracts can be oral in whole or in part. See, 

e.g., Canadian Imperial Bank of Commerce Trust Co. v. 
E.R. Fingland, 615 F.2d 465, 466-467 & n.5 (7th Cir. 1980); 
SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 
1974); Anderson v. Francis I. DuPont & Co., 291 F. Supp. 
705, 708 (D. Minn. 1968). 

2. Not only is there no basis in the text of Section 10(b) 
to exclude oral contracts from its scope, but there is also no 
policy reason to do so. Oral contracts for the sale of securi- 
ties are generally enforceable under state law. The Uniform 
Commercial Code was amended in 1994 to make the statute 
of frauds inapplicable to securities contracts. See U.C.C. § 8- 
113 (1995) (“a contract for the sale or purchase of a security 
is enforceable whether or not there is a writing”). That 
provision has been adopted by all 50 States with only minor 
variations. See [State UCC Variations] U.C.C. Rep. Serv. 
(CBC) at xxi-xxii (West Sept. 2000) (Table of Enactments of 
1994 Amend. (rev. art. 8)) (noting adoption of Section 8-113 

[this Court’s] decisions.” Landreth Timber Co. v. Landreth, 471 U.S. 681, 
686 n.1 (1985). 

26 

by all States except South Carolina); S.C. Code Ann. § 36-8- 
113 (Law. Co-op. 2000) (adopting Section 8-113). 

11 

Moreover, under the traditional common law rule, a fraud 
claim based on misrepresentation of a party’s intention to 
perform a contract is actionable even if the contract itself is 
oral and unenforceable under the statute of frauds. See 
Restatement (Second) of Torts § 530 cmt. c. Although, as 
petitioners note (Br. 35), that rule is not followed in all 
jurisdictions, it is the traditional majority rule. See Dan D. 
Dobbs, The Law of Torts 1377 (2000); W. Page Keeton, 
Prosser and Keeton on Torts 763-764 (5th ed. 1984); e.g., 
Walker v. U-Haul Co. of Miss., 734 F.2d 1068, 1076-1078 (5th 
Cir. 1984); Brody, 897 P.2d at 776; Tenzer v. Superscope, 
Inc., 702 P.2d 212, 218-219 (Cal. 1985); Burgdorfer v. Thiele- 
mann, 55 P.2d 1122, 1125-1128 (Or. 1936). Section 10(b), 
which prohibits “all fraudulent schemes in connection with 
the purchase or sale of securities,” Bankers Life, 404 U.S. at 
11 n.7, and is “in part designed to add to the protections pro- 
vided investors by the common law,” Basic, Inc. v. Levinson, 
485 U.S. 224, 244 n.22 (1988) (emphasis added), certainly 
should not be construed more narrowly than common law 
fraud. 

Indeed, excluding oral contracts from the coverage of Sec- 
tion 10(b) would seriously undermine its antifraud protec- 
tions. A large part of the business of the securities markets 
is transacted orally or through electronic means of commu- 
nication. See U.C.C. § 8-113 (official cmt.); Egon Guttman, 
Investment Securities Law: New Federal and State Develop- 
ments and Their Effect on Article 8, 24 U.C.C. L.J. 307, 334 
(1992). Moreover, fraud often occurs through oral misrep- 
resentations. If a plaintiff could not bring a securities fraud 

11 The only variation that appears relevant here is that Alabama law 
requires a writing when the security is not traded on “a national stock 
exchange or * * * the over-the-counter securities market.” Ala. Code 
§ 8-9-2(8) (1999). 

27 

action without a written contract, unscrupulous brokers 
could keep all dealings with purchasers oral, or fail to follow 
through on commitments to memorialize oral agreements in 
writing, in order to preclude liability under Section 10(b). 
Limiting the scope of Section 10(b) to written contracts is 
thus “unsuited to the realities of the securities business.” 
U.C.C. § 8-113 (official cmt.). 

12 

3. It is therefore not surprising that most courts of 
appeals that have considered the question have held that 
Section 10(b) covers oral contracts. See Threadgill, 730 F.2d 
at 811-812 (“There is no exception for oral contracts.”); 
Fogarty, 532 F.2d at 1034 (“Of course, state statutes of 
frauds do not bar recovery under 10b-5.”); Desser v. Ashton, 
573 F.2d 1289 (2d Cir. 1977) (Table), affirming without 
written opinion 408 F. Supp. 1174, 1175 (S.D.N.Y. 1975) 
(“contract could satisfy the ‘purchaser-seller’ requirement if 
it was not an enforceable contract under the applicable law”); 
see also Madison Consultants, 710 F.2d at 66 (finding valid 
claim under Section 10(b) after noting that state law contract 
claim “might be barred by the statute of frauds”). 

13 

12 As this case illustrates, private securities transactions, which, like 
transactions in the public markets, are subject to Section 10(b), Landreth, 
471 U.S. at 692; Bankers Life, 404 U.S. at 10, also frequently involve oral 
representations and agreements. 

13 Petitioners cite two decisions to the contrary. In one of those deci- 
sions, however, the court also endorsed the proposition that “an allegation 
that a securities transaction was fraudulently induced by a promise, even 
an unenforceable one, to perform a future act can be actionable under 
Section 10(b) if the promise is part of the consideration of the sale.” 
Pelletier v. Stuart-James Co., 863 F.2d 1550, 1556 (11th Cir. 1989). In the 
other, Kagan v. Edison Brothers Stores, Inc., 907 F.2d 690, 691 (7th Cir. 
1990), the court concluded that exclusion of oral contracts from the scope 
of Section 10(b) was mandated by the U.C.C. provision that subjected 
securities contracts to the statute of frauds and by this Court’s decision in 
Blue Chip Stamps. As we have explained (see p. 25, supra), however, that 
U.C.C. provision has been repealed; and, as we explain below, Blue Chip 
Stamps does not preclude actions under Section 10(b) based on oral 
contracts for the purchase or sale of securities. See also Guttman, supra, 
at 335 (criticizing Kagan as inconsistent with the principle that failure to 

28 

B. Blue Chip Stamps Does Not Preclude Claims Based On 

Oral Contracts For The Purchase Or Sale Of Securities 

Petitioners’ contention (Br. 32-45) that this Court’s deci- 
sion in Blue Chip Stamps precludes private actions based on 
oral contracts for the purchase or sale of securities is also 
mistaken. Blue Chip Stamps held that the class of private 
plaintiffs in damages actions under Section 10(b) is limited to 
“actual purchasers and sellers” of securities. 421 U.S. at 731. 
The Court recognized that “the holders of puts, calls, 
options, and other contractual rights or duties to purchase or 
sell securities have been recognized as ‘purchasers’ or 
‘sellers’ of securities for purposes of Rule 10b-5 * * * 
because the definitional provisions of the 1934 Act them- 
selves grant them such a status.” Id. at 751. As we have 
explained, those provisions encompass oral as well as writ- 
ten, and enforceable as well as unenforceable, contracts. See 
pp. 23-27, supra. Thus, rather than supporting petitioners’ 
argument, Blue Chip Stamps requires that it be rejected. 

14 

Petitioners misread Blue Chip Stamps as establishing a 
general rule against Section 10(b) actions based on oral 
testimony. The Court’s concern in Blue Chips Stamps was 
not about oral testimony per se, but about “the abuse 
potential and proof problems inherent in suits by investors 

comply with the statute of frauds only makes a contract unenforceable, not 
illegal or void). 

14 It might be argued that a plaintiff is not an “actual” purchaser (Blue 
Chip Stamps, 421 U.S. at 731) if the contract for sale is unenforceable 
under state law, even though there is a “purchase” and “sale” as defined in 
the securities laws. That conclusion, however, would have to be based on 
extra-textual “policy considerations,” and such considerations are not 
appropriate here because, unlike in Blue Chip Stamps, the “express 
‘intent of Congress’ ” can be “divine[d] from the language of § 10(b).” 421 
U.S. at 737. In any event, as we have explained above, the contract for 
sale in this case was enforceable under state law, as the Tenth Circuit 
found, see Pet. App. B21-B25, and, as we explain in the text following this 
note, policy considerations do not justify precluding private actions under 
the circumstances here. 

29 

who neither bought nor sold, but asserted they would have 
traded absent fraudulent conduct by others.” O’Hagan, 521 
U.S. at 664. Allowing plaintiffs to base claims on their own 
testimony about an otherwise unverifiable decision not to 
purchase or sell a security would allow them “to manufacture 
claims of hypothetical action, unconstrained by independent 
evidence.” Virginia Bankshares, 501 U.S. at 1093. As the 
Court explained in Blue Chip Stamps, “[p]laintiff ’s entire 
testimony could be dependent upon uncorroborated oral 
evidence,” and “[t]he jury would not even have the benefit of 
weighing the plaintiff ’s version against the defendant’s ver- 
sion, since the elements to which the plaintiff would testify 
would be in many cases totally unknown and unknowable to 
the defendant.” 421 U.S. at 746 (emphasis added). “Rec- 
ognizing liability to merely would-be investors * * * would 
have exposed the courts to litigation unconstrained by any 

* * * anchor in demonstrable fact, resting instead on a 
plaintiff ’s ‘subjective hypothesis’ about the number of shares 
he would have sold or purchased.” Virginia Bankshares, 501 
U.S. at 1092 (quoting Blue Chip Stamps, 421 U.S. at 734- 
735). “[B]ystanders to the securities marketing process 
could await developments on the sidelines without risk, 
claiming that inaccuracies in disclosure caused nonselling in 
a falling market and that unduly pessimistic predictions by 
the issuer followed by a rising market caused them to allow 
retrospectively golden opportunities to pass.” Blue Chip 
Stamps, 421 U.S. at 747. 

15 

Those concerns are not present in actions based on oral 
contracts to purchase or sell securities. A suit based on the 
plaintiff’s decision not to buy or sell securities would require 
the plaintiff to establish only his own mental processes. By 

15 Thus, the Court in Blue Chip Stamps recognized the “worth and 
frequent high value of oral testimony” (421 U.S. at 743) and simply sought 
to ensure that there “will generally be an objectively demonstrable fact in 
an area of the law otherwise very much dependent upon oral testimony” 
(id. at 747). 

30 

contrast, a suit based on an oral contract requires the 
plaintiff to establish that he and the defendant exchanged 
words of offer and acceptance that resulted in a contract for 
the sale of a security. Moreover, in a suit such as this one, 
the plaintiff must also prove the defendant’s intention not to 
honor the contract’s terms. The crucial facts are thus far 
from “unknown and unknowable to the defendant” (Blue 
Chip Stamps, 421 U.S. at 746), and he can present his own 
testimony and evidence in rebuttal. The jury can then 
“weigh[] the plaintiff ’s version against the defendant’s” 
(ibid.) as in any other lawsuit. 

CONCLUSION 

The judgment of the court of appeals should be affirmed. 

Respectfully submitted. 

DAVID M. BECKER 
General Counsel 
MEYER EISENBERG 

Deputy General Counsel 
JACOB H. STILLMAN 

Solicitor 
KATHARINE B. GRESHAM 

Assistant General Counsel 
SUSAN S. MCDONALD 

Senior Litigation Counsel 
CHRISTOPHER PAIK 

Special Counsel 
Securities and Exchange 

Commission 
BARBARA D. UNDERWOOD 
Acting Solicitor General 
EDWIN S. KNEEDLER 

Deputy Solicitor General 

MATTHEW D. ROBERTS 

Assistant to the Solicitor 

General 

JANUARY 2001