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Supreme Court takes case of fraud law, stock options

THE BALTIMORE SUN

WASHINGTON - The Supreme Court took on a $154 million investment dispute yesterday that could clarify when federal securities fraud law applies to options to buy stock.

At issue in a case that began in Hong Kong is an investor's right to sue for damages for fraud when a company grants an option to buy into a planned joint venture, but then scuttles the deal.

A federal appeals court ruled in April that a contract to sell stock through an option amounts to the sale of a security when the option is given in exchange for help on a joint project.

If the company granting the option has a secret plan not to fully carry out the deal, that amounts to securities fraud, according to the ruling by the 10th U.S. Circuit Court of Appeals in Denver.

The appeals court found serious misrepresentations by a Hong Kong company, Wharf Holdings Ltd., in a deal it entered into with United International Holdings Inc., a Denver company that owns, operates and invests in worldwide cable television systems.

Wharf wanted United's help in putting together a bid for an exclusive franchise to set up a cable TV system in Hong Kong. As part of their negotiations, Wharf gave United an option to buy 10 percent of the stock of the cable franchise, if Wharf won the license.

After Wharf gained the license in 1993, United raised $66 million in a public offering to finance the purchase of stock under the option. But the deal fell through when Wharf refused to let United exercise its option. United sued.

United won $154 million in damages - $67 million to compensate for its financial losses, $58.5 million in punitive damages, and $28.2 million in interest while the case was in court.

Wharf took the issue on to the Supreme Court, arguing that lower courts are divided on when securities fraud law applies to disputes over ownership rights in stock.

The Supreme Court agreed to hear the appeal; it will hold a hearing in late winter, and decide the case by spring.

In another case, involving the communications industry, the justices refused to clear up a conflict among lower courts on the right of cell phone companies to install equipment to reach all of their customers in a given community.

Omnipoint Communications Enterprise, a wireless phone company, found that it could not serve all of its customers in the town of Newtown Square, Pa., unless it installed new antennas to close a "gap" in its local access.

The local zoning board refused to approve installation of the antennas on top of an apartment building. Omnipoint lost in lower courts on a claim that, if any single cell phone provider is shut out of any part of a community by a local zoning decision, that violates the federal Telecommunications Act.

The 3rd U.S. Circuit Court of Appeals, in Philadelphia, ruled in July that, if one cell phone provider can reach the entire community, it is not illegal for local officials to allow a gap to remain in another provider's service area.

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