August 19, 2017
Special Commercial Law Lecture Notes
Topic: Securities Regulation Code
I. BACKGROUND:
AMAN SCAM
~ The interest rates they offered were so high such that returns of
traditional investment programs paled in comparison.
Investment offerings of Aman Futures Group: one “investment
product” yielded 62% return in just 20 days while another
“investment” gave investors 70% interest in just one week.
NBI reported that at least 15,000 people have been victimized by the
scam. At least P12 billions of money was involved and would most
likely be difficult to recover.
II. Securities Regulation Code
WHY termed as a BLUE SKY LAW?
To protect the public from unscrupulous promoters, who stake
business or venture claims which have no real basis, and sell shares or
interests therein to investors, who are then left holding certificates
representing nothing more than a claim to a square of the blue sky.
III. People vs. Tibayan
FACTS: RTC convicted accused appellants of the crime of Syndicated
Estafa. Tibayan Group Investment Company,Inc. (TGICI) is
investment company registered with(SEC). Sometime in 2002, the SEC
conducted an investigation on TGICI. It discovered that TGICI was
selling securities to the public without a registration statement in
violation of Republic Act No. 8799, otherwise known as "The Securities
Regulation Code”. The SEC revoked TGICI’s corporate registration for
being fraudulently procured. The foregoing led to the filing of multiple
criminal cases for Syndicated Estafa against the incorporators and
directors of TGICI, namely herein accused-appellants. Private
complainants were enticed to invest in TGICI due to the offer of high
interest rates. After giving their money to TGICI, private complainants
received a Certificate of Share and post-dated checks, representing
the amount of the principal investment and the monthly interest
earnings, respectively. Upon encashment, the checks were
dishonored, as the account was already closed, prompting private
complainants to bring the bounced checks to the TGICI office to
demand payment. At the office, the TGICI employees took the said
checks, gave private complainants acknowledgement receipts, and
reassured that their investments, as well as the interests, would be
paid. However, the TGICI office closed down without private
complainants having been paid and, thus, they were constrained to
file criminal complaints against the incorporators and directors of
TGICI. RTC rendered judgment convicting the accused of Estafa. CA
modified it to Syndicated Estafa.
ISSUE: whether or not accused-appellants are guilty beyond
reasonable doubt of the crime of Syndicated Estafa
RULING: YES.
RATIO: The elements of Estafa by means of deceit under this
provision are the following: (a) that there must be a false pretense or
fraudulent representation as to his power, influence, qualifications,
property, credit, agency, business or imaginary transactions; (b) that
such false pretense or fraudulent representation was made or
executed prior to or simultaneously with the commission of the fraud;
(c) that the offended party relied on the false pretense, fraudulent act,
or fraudulent means and was induced to part with his money or
property; and (d) that, as a result thereof, the offended party suffered
damage.
In this case, a judicious review of the records reveals TGICI’s modus
operandi of inducing the public to invest in it on the undertaking that
their investment would be returned with a very high monthly interest
rate ranging from three to five and a half percent (3%-5.5%).43 Under
such lucrative promise, the investing public are enticed to infuse funds
into TGICI. However, as the directors/incorporators of TGICI knew
from the start that TGICI is operating without any paid-up capital and
has no clear trade by which it can pay the assured profits to its
investors,44 they cannot comply with their guarantee and had to
simply abscond with their investors’ money. Thus, the CA correctly
held that accused-appellants, along with the other accused who are
still at large, used TGICI to engage in a Ponzi scheme, resulting in the
defraudation of the TGICI investors.
To be sure, a Ponzi scheme is a type of investment fraud that involves
the payment of purported returns to existing investors from funds
contributed by new investors. Its organizers often solicit new investors
by promising to invest funds in opportunities claimed to generate high
returns with little or no risk. In many Ponzi schemes, the perpetrators
 focus on attracting new money to make promised payments to earlier-
stage investors to create the false appearance that investors are
profiting from a legitimate business.45 It is not an investment strategy
but a gullibility scheme, which works only as long as there is an ever
increasing number of new investors joining the scheme. 46 It is difficult
to sustain the scheme over a long period of time because the operator
needs an ever larger pool of later investors to continue paying the
promised profits to early investors. The idea behind this type of
swindle is that the “con-man” collects his money from his second or
third round of investors and then absconds before anyone else shows
up to collect. Necessarily, Ponzi schemes only last weeks, or months at
the most.
In this light, it is clearthat all the elements of Syndicated Estafa,
committed through a Ponzi scheme,are present in this case,
considering that: (a) the incorporators/directors of TGICI comprising
more than five (5) people, including herein accused-appellants,, made
false pretenses and representations to the investing public – in this
case,the private complainants – regarding a supposed lucrative
investment opportunity with TGICI in order to solicit money from
them; (b) the said false pretenses and representations were made
prior to or simultaneous with the commission of fraud; (c) relying on
the same, private complainants invested their hard earned money into
TGICI; and (d) the incorporators/directors of TGICI ended up running
away with the private complainants’ investments, obviously to the
latter’s prejudice.
IV. Blue Chip Stocks
Definition: Blue chip stocks are shares of very large and well-
recognised companies with a long history of sound financial
performance. These stocks are known to have capabilities to
endure tough market conditions and give high returns in good
market conditions. Blue chip stocks generally cost high, as they
have good reputation and are often market leaders in their
respective industries.
The term has been used to refer to highly-priced stocks, but
now it is used more commonly to refer to high-quality stocks.
These are stocks that generally deliver superior returns in the
long run. Some people also relate blue chip stocks to blue
betting disks in the game of poker, where the blue disk has the
highest value while the white one has the lowest. Several
parameters can be considered to identify blue chip companies.
They include consistent annual revenue over a long period,
stable debt-to-equity ratio, average return on equity (RoE) and
interest coverage ratio besides market capitalisation and price-
to-earnings ratio (PE).
V. Ponzi Scheme
It is a scheme that was coined back in the 1920s. Charles Ponzi ran
an investment program in the United States wherein he offered a 50%
return on investment after just 45 days. Since there really was no
genuine business, Ponzi had to get money from new investors in order
to pay old investors back. Soon, it became a pyramid, so to speak.
The people at the bottom had to be so many in order to pay everyone
on top of the pyramid. Once new investments had been insufficient to
pay for maturing investments, that’s when the pyramid collapsed.
Side-bit: A bank should comply with the reportorial requirements of SRC if such
bank own shares that are listed in the stock market. A bank whose shares are
listed in the stock market is covered by the RSA and the Implementing Rule on the
reportorial requirements of the listed companies.
~ Generally, shares of stock of banking institutions are exempt from registration
requirements. Only those issued by a bank or a financial institution are covered.
VI. Investment Contract
Side-bit: Must be registered with SEC.
Securities are not just an investment contract.
SEC vs. Prosperity
FACTS: Prosperity.Com, Inc. sold computer software and hosted websites
without providing internet service. PCI devised a scheme in which, for the
price of US$234.00 (subsequently increased to US$294), a buyer could
acquire from it an internet website of a 15MB capacity. At the same time,
by referring to PCI his own down-line buyers, a first-time buyer could earn
commissions, interest in real estate in the Philippines and in the US, and
insurance worth P50,000.
Apparently, PCI patterned its scheme from that of Golconda
Ventures, Inc. (GVI), which company stopped operations after the SEC
issued a cease and desist order (CDO) against it. As it later on turned out,
the same persons who ran the affairs of GVI directed PCIs actual
operations. GVI filed a complaint with the SEC against PCI, alleging that
the latter had taken over GVIs operations.
After hearing, SEC issued a CDO against PCI. SEC ruled that PCI’s
scheme constitutes an Investment contract and it should have first
registered such contract or securities with the SEC. PCI filed with SEC a
request to lift the CDO. The Court of Appeals granted the PCI’s petition and
set aside the SEC-issued CDO. CA ruled that, following the Howey test,
PCIs scheme did not constitute an investment contract that needs
registration pursuant to R.A. 8799, hence, this petition.
ISSUE: Whether or not PCIs scheme constitutes an investment contract
that requires registration under R.A. 8799 (Securities Regulation Code).
RULING: NO. The CA is right in ruling that the last requisite in the Howey
test is lacking in the marketing scheme that PCI has adopted.
RATIO: The Securities Regulation Code treats investment contracts as
securities that have to be registered with the SEC before they can be
distributed and sold. An investment contract is a contract, transaction, or
scheme where a person invests his money in a common enterprise and is
led to expect profits primarily from the efforts of others.
The United States Supreme Court held in Securities and Exchange
Commission v. W.J. Howey Co. that, for an investment contract to exist,
the following elements, referred to as the Howey test must concur: (1) a
contract, transaction, or scheme; (2) an investment of money; (3)
investment is made in a common enterprise; (4) expectation of profits; and
(5) profits arising primarily from the efforts of others. Thus, to sustain the
SEC position in this case, PCIs scheme or contract with its buyers must
have all these elements.
Here, PCIs clients do not make such investments. They buy a product of
some value to them: an Internet website of a 15-MB capacity. The client
can use this website to enable people to have internet access to what he
has to offer to them, say, some skin cream. The buyers of the website do
not invest money in PCI that it could use for running some business that
would generate profits for the investors. The price of US$234.00 is what
the buyer pays for the use of the website, a tangible asset that PCI creates,
using its computer facilities and technical skills.
The CA is right in ruling that the last requisite in the Howey test is lacking in the
marketing scheme that PCI has adopted. Evidently, it is PCI that expects profit
from the network marketing of its products. PCI is correct in saying that the
US$234 it gets from its clients is merely a consideration for the sale of the
websites that it provides. The commissions, interest in real estate, and insurance
coverage worth P50,000.00 are incentives to down-line sellers to bring in other
customers. These can hardly be regarded as profits from investment of money
under the Howey test.
SEC vs. Santos
FACTS:
Sometime in 2007, yet another investment scam was exposed with the
disappearance of its primary perpetrator, Michael H.K. Liew (Liew), a self–styled
financial guru and Chairman of the Board of Directors of Performance Investment
Products Corporation (PIPC–BVI), a foreign corporation registered in the British
Virgin Islands.
To do business in the Philippines, PIPC–BVI incorporated herein as Philippine
International Planning Center Corporation (PIPC Corporation).
Because the head of PIPC Corporation had gone missing and with it the monies
and investment of a significant number of investors, the SEC was flooded with
complaints from thirty–one (31) individuals against PIPC Corporation, its directors,
officers, employees, agents and brokers for alleged violation of certain provisions
of the Securities Regulation Code, including Section 28 thereof. Santos was
charged in the complaints in her capacity as investment consultant of PIPC
Corporation, who supposedly induced private complainants Luisa Mercedes P.
Lorenzo (Lorenzo) and Ricky Albino P. Sy (Sy), to invest their monies in PIPC
Corporation.
The common recital in the 31 complaints is that:cha
x x x [D]ue to the inducements and solicitations of the PIPC corporation’s
directors, officers and employees/agents/brokers, the former were enticed to
invest their hard–earned money, the minimum amount of which must be
US$40,000.00, with PIPC–BVI, with a promise of higher income potential of an
interest of 12 to 18 percentum (%) per annum at relatively low–risk investment
program. The private complainants also claimed that they were made to believe
that PIPC Corporation refers to Performance Investment Product Corporation, the
Philippine office or branch of PIPC–BVI, which is an entity engaged in foreign
currency trading, and not Philippine International Planning Center Corporation.
Furthermore, it was relayed by the officers and agents to complainants–investors
that PIPC Corp. is the Philippine office of the Performance Group of Companies
affiliates situated in different parts of the world, particularly China, Indonesia,
Hong Kong, Japan, Korea, Singapore, and the British Virgin Islands (BVI), even
reaching Switzerland. With such basic depiction of the legitimacy and stability of
PIPC Corp., complainants–investors deduced that it was clothed with the authority
to solicit, offer [and] sell securities. As regards the officers and agents of [PIPC
Corp.], they secured proper individual licenses with the SEC as brokers/dealers of
securities to enable to solicit, offer and/or sell the same.
Official SEC documents would show that while PIPC Corp. is indeed registered with
the SEC, it having engaged in the solicitation and sale of securities was contrary to
the purpose for which it was established which is only to act as a financial
research. Corollarily, PIPC Corp.’s officers, agents, and brokers were not
licensed to solicit, offer and sell securities to the public, a glaring
violation of Sections 8 and 28 of the SRC.
Santos’ defense consisted in: (1) denying participation in the conspiracy and
fraud perpetrated against the investor–complainants of PIPC Corporation,
specifically Sy and Lorenzo; (2) claiming that she was initially and merely an
employee of, and subsequently an independent information provider for,
PIPC Corporation; (3) PIPC Corporation being a separate entity from PIPC–BVI
of which Santos has never been a part of in any capacity; (4) her not having
received any money from Sy and Lorenzo, the two having, in actuality, directly
invested their money in PIPC–BVI; (5) Santos having dealt only with Sy and the
latter, in fact, deposited money directly into PIPC–BVI’s account; and (6) on the
whole, PIPC–BVI as the other party in the investment contracts signed by Sy and
Lorenzo, thus the only corporation liable to Sy and Lorenzo and the other
complainants.
On 18 April 2008, the DOJ, in I.S. No. 2007–1054, issued a Resolution signed by a
panel of three (3) prosecutors, with recommendation for approval of the Assistant
Chief State Prosecutor, and ultimately approved by Chief State Prosecutor
Jovencito R. Zuño, indicting: (a) Liew and Gonzalez–Tuason for violation of
Sections 8 and 26 of the Securities Regulation Code; and (b) herein respondent
Santos, along with Cristina Gonzalez–Tuason and 12 others for violation of
Section 28 of the Securities Regulation Code. The same Resolution likewise
dismissed the complaint against 8 of the respondents therein for insufficiency of
evidence. In the 18 April 2008 Resolution, the DOJ discussed at length the liability
of PIPC Corporation and its officers, employees, agents and all those acting on
PIPC Corporation’s behalf.
In sum, the DOJ panel based its finding of probable cause on the
collective acts of the majority of the respondents therein, including
herein respondent Santos, which consisted in their acting as employees–
agent and/or investor–agents of PIPC Corporation and/or PIPC–BVI.
Specifically alluding to Santos as Investment Consultant of PIPC
Corporation, the DOJ found probable cause to indict her for violation of
Section 28 of the Securities Regulation Code for engaging in the
business of selling or offering for sale securities, on behalf of PIPC
Corporation and/or PIPC–BVI (which were found to be an issuer of
securities without the necessary registration from the SEC) without
Santos being registered as a broker, dealer, salesman or an associated
person.
Respondent Santos filed a petition for review before the Office of the Secretary of
the DOJ assailing the Resolutions dated 18 April 2008 and 2 September 2008 and
claiming that she was a mere clerical employee/information provider who never
solicited nor recruited investors, in particular complainants Sy and Lorenzo, for
PIPC Corporation or PIPC–BVI. Santos also claimed dearth of evidence indicating
she was a salesman/agent or an associated person of a broker or dealer, as
defined under the Securities Regulation Code. A Resolution dated 1 October 2009
which, as previously adverted to, excluded respondent Santos from prosecution for
violation of Section 28 of the Securities Regulation Code.
Section 28 of the Securities Regulation Code (SRC) reads:
SEC. [28]. Registration of Brokers, Dealers, Salesmen and Associated Persons . –
28.1. No person shall engage in the business of buying or selling securities in the
Philippines as a broker or dealer unless registered as such with the Commission.
28.2. No registered broker or dealer shall employ any salesman or any associated
person, and no issuer shall employ any salesman, who is not registered as such
with the Commission.
Jurisprudence defines an “agent” as a “business representative, whose function is
to bring about, modify, affect, accept performance of, or terminate contractual
obligations between principal and third persons.” x x x On the other hand, the
Implementing Rules of the SRC simply provides that an agent or a “salesman” is a
person employed as such or as an agent, by the dealer, issuer or broker to buy
and sell securities x x x.
A judicious examination of the records indicates the lack of evidence that
respondent Santos violated Section 28 of the SRC, or that she had acted as an
agent for PIPC Corp. or enticed Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy to
buy PIPC Corp. or PIPC–BVI’s investment products.
It is important to note that in the “Request Form,” one of the documents being
distributed by respondent Santos x x x, it is categorically stated therein that said
request “shall not be taken as an investment solicitation x x x, but is mainly for the
purpose of providing me with information.” Clearly, this document proves that
respondent Santos did not or was not involved in the solicitation of investments
but merely shows that she is an employee of PIPC Corp. In addition, the
“Information Dissemination Agreement” between her employer PIPC Corp. and
PIPC–BVI readably and understandably provides that she is prohibited from
soliciting investments in behalf of PIPC–BVI and her authority is limited only to
providing interested persons with the “necessary information regarding how to
communicate directly with PIPC.” Parenthetically, the decision to sign the
partnership Agreement with PIPC–BVI to invest and repeatedly reinvest their
monies with PIPC–BVI were made by Luisa Mercedes P. Lorenzo and Ricky Albino
P. Sy themselves without any inducement or undue influence from respondent
Santos.
Prescinding from the foregoing, a person must first and foremost be engaged in
the business of buying and selling securities in the Philippines before he can be
considered as a broker, a dealer or salesman within the coverage of the Securities
Regulation Code. The record in this case however is bereft of any showing that
[Santos] was engaged in the business of buying and selling securities in the
Philippines, whether for herself or in behalf of another person or entity. Apart from
[SEC’s] sweeping allegation that [Santos] enticed Sy and Lorenzo and solicited
from them investments for PIPC–BVI without first being registered as broker,
dealer or salesman with SEC, no evidence had been adduced that shows [Santos’]
actual participation in the alleged offer and sale of securities to the public,
particularly to Sy and Lorenzo, within the Philippines. There was likewise no
exchange of funds between Sy and Lorenzo, on one hand, and [Santos], on the
other hand, as the price of certain securities offered by PIPC–BVI. There was even
no specific proof that [Santos] misrepresented to Sy and Lorenzo that she was a
licensed broker, dealer or salesperson of securities, thereby inducing them to
invest and deliver their hard–earned money with PIPC–BVI. In fact, the
Information Dissemination Agreement between PIPC Corporation, [Santos’
employer], and PIPC–BVI clearly provides that [Santos] was prohibited from
soliciting investments in behalf of PIPC–BVI and that her authority is limited only
to providing prospective client with the “necessary information on how to
communicate directly with PIPC.” Thus, it is obvious that the final decision of
investing and reinvesting their money with PIPC–BVI was made solely by Sy and
Lorenzo themselves.
ISSUE: W/N Santos should be excluded from the Information for violation of
Section 28 of the Securities Regulation Code
HELD: No. In excluding Santos from the prosecution of the supposed violation of
Section 28 of the Securities Regulation Code, the Secretary of the DOJ, as affirmed
by the appellate court, debunked the DOJ panel’s finding that Santos was prima
facie liable for either: (1) selling securities in the Philippines as a broker or dealer,
or (2) acting as a salesman, or an associated person of any broker or dealer on
behalf of PIPC Corporation and/or PIPC–BVI without being registered as such with
the SEC.
To get to that conclusion, the Secretary of the DOJ and the appellate court ruled
that no evidence was adduced showing Santos’ actual participation in the final sale
by PIPC Corporation and/or PIPC–BVI of unregistered securities since the very
affidavits of complainants Lorenzo and Sy proved that Santos had never signed,
neither was she mentioned in, any of the investment documents between Lorenzo
and Sy, on one hand, and PIPC Corporation and/or PIPC–BVI, on the other hand.
The conclusions made by the Secretary of the DOJ and the appellate court are a
myopic view of the investment solicitations made by Santos on behalf of PIPC
Corporation and/or PIPC–BVI while she was not licensed as a broker or dealer, or
registered as a salesman, or an associated person of a broker or dealer.
To determine whether the DOJ Secretary’s Resolution was tainted with grave
abuse of discretion, we pass upon the elements for violation of Section 28 of the
Securities Regulation Code: (a) engaging in the business of buying or selling
securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or
(c) acting as an associated person of any broker or dealer, unless registered as
such with the SEC.
Tying it all in, there is no quarrel that Santos was in the employ of PIPC
Corporation and/or PIPC–BVI, a corporation which sold or offered for sale
unregistered securities in the Philippines. To escape probable culpability, Santos
claims that she was a mere clerical employee of PIPC Corporation and/or PIPC–BVI
and was never an agent or salesman who actually solicited the sale of or sold
unregistered securities issued by PIPC Corporation and/or PIPC–BVI.
Solicitation is the act of seeking or asking for business or information; it is not a
commitment to an agreement.
Santos, by the very nature of her function as what she now unaffectedly calls an
information provider, brought about the sale of securities made by PIPC
Corporation and/or PIPC–BVI to certain individuals, specifically private
complainants Sy and Lorenzo by providing information on the investment products
of PIPC Corporation and/or PIPC–BVI with the end in view of PIPC Corporation
closing a sale.
While Santos was not a signatory to the contracts on Sy’s or Lorenzo’s
investments, Santos procured the sale of these unregistered securities to the two
(2) complainants by providing information on the investment products being
offered for sale by PIPC Corporation and/or PIPC–BVI and convincing them to
invest therein.
What is palpable from the foregoing is that Sy and Lorenzo did not go directly to
Liew or any of PIPC Corporation’s and/or PIPC–BVI’s principal officers before
making their investment or renewing their prior investment. However, undeniably,
Santos actively recruited and referred possible investors to PIPC Corporation
and/or PIPC–BVI and acted as the go–between on behalf of PIPC Corporation
and/or PIPC–BVI.
The DOJ’s and Court of Appeals’ reasoning that Santos did not sign the investment
contracts of Sy and Lorenzo is specious. The contracts merely document the act
performed by Santos.
Individual complainants and the SEC have categorically alleged that Liew and PIPC
Corporation and/or PIPC–BVI is not a legitimate investment company but a
company which perpetrated a scam on 31 individuals where the president, a
foreign national, Liew, ran away with their money. Liew’s absconding with the
monies of 31 individuals and that PIPC Corporation and/or PIPC–BVI were not
licensed by the SEC to sell securities are uncontroverted facts.
The transaction initiated by Santos with Sy and Lorenzo, respectively, is an
investment contract or participation in a profit sharing agreement that falls within
the definition of the law. When the investor is relatively uninformed and turns over
his money to others, essentially depending upon their representations and
their honesty and skill in managing it, the transaction generally is considered
to be an investment contract.23 The touchstone is the presence of an
investment in a common venture premised on a reasonable expectation
of profits to be derived from the entrepreneurial or managerial efforts of
others.24
At bottom, the exculpation of Santos cannot be preliminarily established
simply by asserting that she did not sign the investment contracts, as
the facts alleged in this case constitute fraud perpetrated on the public.
Specially so because the absence of Santos’ signature in the contract is,
likewise, indicative of a scheme to circumvent and evade liability should
the pyramid fall apart.
Lastly, we clarify that we are only dealing herein with the preliminary investigation
aspect of this case. We do not adjudge respondents’ guilt or the lack thereof.
Santos’ defense of being a mere employee or simply an information provider is
best raised and threshed out during trial of the case.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in

CA–G.R. No. SP No. 112781 and the Resolutions of the Department of Justice
dated 1 October 2009 and 23 November 2009 are ANNULLED and SET ASIDE.
The Resolution of the Department of Justice dated 18 April 2008 and 2 September
2008 are REINSTATED. The Department of Justice is directed to include
respondent Oudine Santos in the Information for violation of Section 28 of the
Securities and Regulation Code.

Side-bit: Brokers/salesmen are required to be registered with SEC as required in

the SEC provision. It would be BAWAL if not!

VII. Elements of an Investment Contract. Howey Test (they must concur):

(1) a contract, transaction, or scheme;

(2) an investment of money;
(3) investment is made in a common enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of others.

VIII. Procedure for Registration of Securities

Side-bit: Who are you going to sue/who are liable? 2. Exempt Transactions – Securities sold or offered for sale in the following
transactions are exempt from the registration requirements.
~ You can sue the person who signed the registration statement or the
Certified Public Accountant for false statement.
~ Insurance Company/Insurer, for example, must register with SEC and
make full disclosure as required to divulge truthfully and accurately all material
information about themselves and the securities they sell for protection of the
investing public otherwise they would be under pain of administrative, criminal and
civil sanctions.

~ Generally: Brokers, marketing professionals shall comply with the

registration requirements prescribed by SEC.
Exemption: Exempt Transactions and Exempt Securities

IX. The following securities may be sold without the need of registration.

1. Exempt Securities
 Side-bit: Application for registration of securities does not ipso facto mean
approval.

XI. Civil Liabilities for false Registration Statement – Any person acquiring
security:

X. Isolated Transaction – you issue a security in exchange for a debt

XII. Reportorial Requirements
 XIII. Philippine Veterans Bank vs. Callangan
Facts:
On March 17, 2004, respondent Justina F. Callangan, the Director of the
Corporation Finance Department of the Securities and Exchange Commission
(SEC), sent the Bank a letter, informing it that it qualifies as a public company
under Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule
3(1)(m) of the Amended Implementing Rules and Regulations of the SRC. The
Bank is thus required to comply with the reportorial requirements set forth in
Section 17.1 of the SRC.
The Bank responded by explaining that it should not be considered a public
company because it is a private company, i.e. World War II veterans, whose
shares of stock are available only to a limited class or sector and not to the
general public.
In a letter dated April 20, 2004, Director Callangan rejected the Banks explanation
and assessed it a total penalty of One Million Nine Hundred Thirty-Seven Thousand
Two Hundred Sixty-Two and 80/100 Pesos (P1,937,262.80) for failing to comply
with the SRC reportorial requirements from 2001 to 2003. The Bank moved for the
reconsideration of the assessment, but Director Callangan denied the motion in
SEC-CFD Order No. 085, Series of 2005 dated July 26, 2005. When the SEC En
Banc also dismissed the Banks appeal for lack of merit in its Order dated August
31, 2006, prompting the Bank to file a petition for review with the Court of
Appeals (CA).
On March 6, 2008, the CA dismissed the petition and affirmed the assailed SEC
ruling, with the modification that the assessment of the penalty be recomputed
from May 31, 2004.
The CA also denied the Banks motion for reconsideration, opening the way for the
Banks petition for review on certiorari filed with this Court.
On June 16, 2010, the Court denied the Banks petition for failure to show any
reversible error in the assailed CA decision and resolution.
Issue:
Whether or not the reportorial requirements of the SEC are applicable to Banks.
Held:
We DENY the motion for reconsideration for lack of merit.
From the provisions of the SRC, it is clear that a public company, as
contemplated by the SRC, is not limited to a company whose shares of
stock are publicly listed; even companies like the Bank, whose shares
are offered only to a specific group of people, are considered a public
company, provided they meet the requirements enumerated in the
provisions.
The records establish, and the Bank does not dispute, that the Bank has assets
exceeding P50,000,000.00 and has 395,998 shareholders. It is thus considered a
public company that must comply with the reportorial requirements set forth in
Section 17.1 of the SRC.
The Bank also argues that even assuming it is considered a public company
pursuant to Section 17 of the SRC, the Court should interpret the pertinent SRC
provisions in such a way that no financial prejudice is done to the thousands of
veterans who are stockholders of the Bank. Given that the legislature intended the
SRC to apply only to publicly traded companies, the Court should exempt the Bank
from complying with the reportorial requirements.
Additionally, and contrary to the Banks claim, the Banks obligation to provide its
stockholders with copies of its annual report is actually for the benefit of the
veterans-stockholders, as it gives these stockholders access to information on the
Banks financial status and operations, resulting in greater transparency on the part
of the Bank. While compliance with this requirement will undoubtedly cost the
Bank money, the benefit provided to the shareholders clearly outweighs the
expense. For many stockholders, these annual reports are the only means of
keeping in touch with the state of health of their investments; to them, these are
invaluable and continuing links with the Bank that immeasurably contribute to the
transparency in public companies that the law envisions.
XIV. Protection of Shareholders’ Interest
Side-bit: Take note: Memorize the rules on PROXY SOLICITATIONS

UNFAIR USE OF INFORMATION BY DIRECTORS, OFFICERS ETC.

~ 6 months period, what is it? They acquire stocks and then dispose them
within 6 months.
~ What is sought to be prevented? Short-swing profits.
~ Officers are in the position to know the prices of stocks which will
increase and try to obtain profit from it.

XV. Manipulative Practices

 XVII. Beneficial Ownership

Sec. 36(1) of RSA refers to the beneficial owner which has been defined in the
following manner:
1. To indicate the interest of a beneficiary in trust property (also called
“equitable ownership”)
2. To refer to the power of a corporate shareholder to buy or sell the shares
though the shareholder is not registered in the corporation’s books as the
owner. Usually beneficial ownership is distinguished from naked
ownership, which is the enjoyment of all the benefits and privileges of
ownership as against possession of the bare title to property. Even
assuming that the term “beneficial ownership” was vague, it would not
affect respondents’ case, where the respondents are directors and/or
officers of the corporation, who are specifically required to comply with
the reportorial requirements under Sec 36(1) of RSA.
3. Beneficial ownership needs to be reported or registered.

XVIII. Judge’s Casino Example

Because of some reports saying that casinos are to be put up, the share worth
2 pesos went up to P100…Later, it was reported that the casino plan will not
happen. LUGI sila!
~Read People v. Tan (2010) . SC granted demurrer in evidence for there
are lapses in the presentation of evidence.

People v Tan:
Side-bit: Judge only mentioned “Marking the Close.” Focus na lang sa Marking the
Close.
Information filed against Tan:

XVI. Judge’s Valentine’s Day example

Flower sales go up during Valentine’s Day. Is it deemed a non-public
information?
No, because everyone knows of it! There is no need for full
disclosure. It is public information.
That on June 18, 1999, or thereabout, in the City of Pasig, Metro
Manila, Philippines, and within the jurisdiction of this Honorable Court,
the above-named accused being the beneficial owner of 75,000,000
Best World Resources Corporation shares, a registered security which
has been sold pursuant to Sections 4 and 8 of the Revised Securities
Act, which beneficial ownership constitutes 18.6% of the outstanding
shares of the company, way above the 10% required by law to be
reported, did then and there willfully, unlawfully and criminally fail to file
with the Securities and Exchange Commission and with the Philippine
Stock Exchange a sworn statement of the amount of all BWRC shares
of which he is the beneficial owner, within ten (10) days after he
became such beneficial owner, in violation of the Revised Securities
Act and/or the rules and regulations prescribed pursuant thereto.
RTC and CA granted Tan’s demurrer in evidence.
SC affirmed lower courts’ decision in admitting Tan’s motion to demurer
in evidence.
Ratio:
To secure conviction for the violations of RSA Secs. 32 (a-1)
and 36 (a), it is necessary to prove the following: (1) the BW
Resources Corporation (BW) has equity securities registered
under the Revised Securities Act; [2] that the equity securities
of BW Resources Corporation are divided into classes, and
that these classes are registered pursuant to the Revised
Securities Act; (3) the number of shares of BW Resources
Corporation (authorized the number of shares of BW
Resources (authorized capital stock) and the total number of
shares per class of stock; (4) the number of shares of a
particular class of BW stock acquired by the accused; (5) the
fact of the exact date, the accused [becomes] the beneficial
owner of ten (10%) percent of a particular class of BW shares;
and (6) the fact, the accused failed to disclose his ten (10%)
percent ownership within ten days from becoming such owner.
It is very clear from the evidence formally offered, that the
foregoing facts were not proven or established. These cases
were for Violations of RSA Rule 32 (a)-1 and Section 56 of
Revised Securities Act, however, it is very surprising that
the prosecution never presented in evidence the Article of
Incorporation of BW Resources Corporation. This
document is very vital and is the key to everything,
including the conviction of the accused. Without the Article
of Incorporation, the Court has no way of knowing the
capitalization authorized capital stock of the BW
Resources Corporation, the classes of shares into which its
stock is divided and the exact holdings of Dante Tan in the
said corporation. Its not being a prosecutions evidence
renders impossible the determination of the ten (10%)
percent beneficial ownership of accused Dante Tan, as
there is no focal point to base the computation of his
holdings, and the exact date of his becoming an owner of
ten (10%) percent.
XIV. SEC vs. Interport
Lecture: Issue mentioned in class: WON IRR is needed to make it binding and
effective?
Ruling mentioned in class: SEC had a finding that directors heavily traded
the shares. ~know first who is an insider
Side-bit:
Can a janitor be an insider? NO
Can a wife of a director/any officer be an insider? YES.
Insider can be the issuer himself or the director or officer’s wife and mistress
provided that the director gave the latter access
Government Employee who had access to non-public information. Such
information should be material because if it does not affect the pulse of the public,
then it is no material.
Facts: On August 6, 1994, the Board of Directors of IRC approved a Memorandum
of Agreement (MoA) with Ganda Holdings Berhad (GHB). Under the MoA, IRC
acquired 100% or the entire capital stock of Ganda Energy Holdings, Inc. (GEHI),
which would own and operate a 102 megawatt gas turbine power-generating
barge. Also stipulated is that GEHI would assume a five-year power purchase
contract with National Power Corp. At that time, GEHI’s power-generating barge
was 97% complete and would go on-line by mid-Sept 1994.
In exchange, IRC will issue to GHB 55% of the expanded capital stock of IRC
(amounting to 40.88 billion shares – total par value of P488.44 million). On the
side, IRC would acquire 67% of the entire capital stock of Philippine Racing Club,
Inc. (PRCI). PRCI owns 25.724 hectares of real estate property in Makati. Under
the Agreement, GHB, a member of the Westmont Group of Companies in
Malaysia, shall extend or arrange a loan required to pay for the proposed
acquisition by IRC of PRCI.
On August 8, 1994, IRC alleged that a press release announcing the approval of
the agreement was sent through fax to Philippine Stock Exchange (PSE) and the
SEC, but that the fax machine of SEC could not receive it. Upon the advice of
SEC, IRC sent the press release on the morning of 9 Aug 1994. SEC averred that
it received reports that IRC failed to make timely public disclosures of its
negotiations with GHB and that some of its directors heavily traded IRC shares
utilizing this material insider information.
On August 16, 1994 SEC Chairman issued a directive requiring IRC to submit
to SEC a copy of its aforesaid MoA with GHB and further directed all principal
officers of IRC to appear at a hearing before the Brokers and Exchanges
Dept (BED) of SEC to explain IRC’s failure to immediately disclose the
information as required by the Rules on Disclosure of Material Facts by
Corporations Whose Securities are Listed in Any Stock Exchange or
Registered/Licensed Under the Securities Act. IRC sent a letter to SEC,
attaching copies of MoA and its directors appeared to explain IRC’s alleged
failure to immediately disclose material information as required under the
Rules on Disclosure of Material Facts.
The SEC Chairman issued an Order dated September 19, 1994 finding that IRC
violated the Rules on Disclosure when it failed to make timely disclosure, and
that some of the officers and directors of IRC entered into transactions involving
IRC shares in violation of Sec 30, in relation to Sec 36 of the Revised Securities
Act. IRC filed an Omnibus Motion (later an Amended Omnibus Motion) alleging
that SEC had no authority to investigate the subject matter, since under Sec 8 of
PD 902-A, as amended by PD 1758, jurisdiction was conferred upon the
Prosecution and Enforcement Dept (PED) of SEC. IRC also claimed that SEC
violated their right to due process when it ordered that the respondents appear
before SEC and show cause why no administrative, civil or criminal sanctions
should be imposed on them, and thus, shifted the burden of proof to the
respondents. They filed a Motion for Continuance of Proceedings. No formal
hearings were conducted in connection with the Motions.
On January 25, 1995, SEC issued an Omnibus Order: creating a special
investigating panel to hear and decide the case in accordance with Rules of
Practice and Procedure before the PED, SEC; to recall the show cause orders;
and to deny the Motion for Continuance for lack of merit. Respondents filed a
petition before the CA questioning the Omnibus Orders and filed a Supplemental
Motion wherein they prayed for the issuance of a writ of preliminary injunction.
CA granted their motion and issued a writ of preliminary injunction, which
effectively enjoined SEC from filing any criminal, civil or administrative case
against the respondents.
CA promulgated a Decision dated August 20, 1998: Determined that there were no
implementing rules and regulations regarding disclosure, insider trading, or any of
the provisions of the Revised Securities Acts which respondents allegedly violated.
It found no statutory authority for SEC to initiate and file any suit for civil liability
under Sec 8, 30 and 36 of the Revised Securities Act, thus, it ruled that no civil,
criminal or administrative proceedings may possibly be held against the
respondents without violating their rights to due process and equal protection.
It further resolved that absent any implementing rules, the SEC cannot be allowed
to quash the assailed Omnibus Orders Further decided that the Rules of Practice
and Procedure before the PED did not comply with the statutory requirements
contained in the Administrative Code of 1997. Section 9, Rule V of the Rules of
Practice and Procedure before the PED affords a party the right to be present but
without the right to cross-examine witnesses presented against him, in violation of
Sec 12(3), Chap 3, Book VII of the Administrative Code.
Issues:
1. Do sections 8, 30, and 36 of the Revised Securities Act require the
enactment of implementing rules to make them binding and effective?
2. Does the right to cross-examination be demanded during investigative
proceedings before the PED?
3. May a criminal case still be filed against the respondents despite the
repeal of Sections 8, 30, and 36 of the Revised Securities Act?
4. Did SEC retain the jurisdiction to investigate violations of the Revised
Securities Act, re-enacted in the Securities Regulations Code, despite the
abolition of the PED?
5. Does the instant case prescribed already?
6. Is CA justified in denying SEC’s Motion for Leave to Quash SEC Omnibus
Orders?
Ruling: The petition is impressed with merit. It should be noted that while the case
was pending in SC, RA 8799 (Securities Regulation Code) took effect on 8 August
2000. Section 8 of PD 902-A, as amended, which created the PED, was already
repealed as provided for in Sec 76 of Securities Regulation Code. Thus, under the
new law, the PED has been abolished, and the Securities Regulation Code has
taken the place of the Revised Securities Act.
1. NO. Sections 8, 30, and 36 of the Revised Securities Act (RSA) do not
require the enactment of implementing rules to make them binding and
effective.The mere absence of implementing rules cannot effectively invalidate
provisions of law, where a reasonable construction that will support the law
may be given.
Absence of any constitutional or statutory infirmity, which may concern Secs 30
and 36 of RSA, the provisions are legal and binding. Every law has in its favour the
presumption of validity. Unless and until a specific provision of the law is declared
invalid and unconstitutional, the same is valid and binding for all intents and
purposes. The Court does not discern any vagueness or ambiguity in Sec 30 and
36 of RSA Sec 30 – Insider’s Duty to Disclose when Trading. Insiders are
obligated to disclose material information to the other party or abstain from trading
the shares of his corporation.
This duty to disclose or abstain is based on two factors:
(1) the existence of a relationship giving access, directly or indirectly, to
information intended to be available only for a corporate purpose and not for
the personal benefit of anyone
(2) the inherent unfairness involved when a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing.
The intent of the law is the protection of investors against fraud, committed
when an insider, using secret information, takes advantage of an uninformed
investor. In some cases, however, there may be valid corporate reasons for
nondisclosure of material information. Where such reasons exist, an issuer’s
decision not to make any public disclosures is not ordinarily considered as a
violation of insider trading. At the same time, the undisclosed information
should not be improperly used for non-corporate purposes, particularly to
disadvantage other persons with whom an insider might transact, and
therefore the insider must abstain from entering into transactions involving
such securities.
Sections 30 and 36 of the RSA were enacted to promote full disclosure in
the securities market and prevent unscrupulous individuals, who by their
positions obtain non-public information, from taking advantage of an
uninformed public.
Sec 30 prevented the unfair use of non-public information in securities
transactions, while Sec 36 allowed the Sec to monitor the transactions entered
into by corporate officers and directors as regards the securities of their
companies. The lack of implementing rules cannot suspend the effectivity of these
provisions.
2. NO. The right to cross-examination is not absolute and cannot be
demanded during investigative proceedings before the PED. Sec 4, Rule 1
of the PED Rules of Practice and Procedure, categorically stated that the
proceedings before the PED are summary in nature, not necessarily
adhering to or following the technical rules of evidence obtaining in the
courts of law Rule V – Submission of documents, determination of necessity
of hearing and disposition of case. A formal hearing was not mandatory, it
was within the discretion of the Hearing Officer whether there was a need for
a formal hearing. Since the holding of a hearing before the PED is
discretionary, then the right to cross-examination could not have been
demanded by either party.
Chapter 3, Book VII of the Administrative Code refers to “Adjudication” and
does not affect the investigatory functions of the agencies. The law creating
PED empowers it to investigate violations of the rules and regulations
promulgated by the SEC and to file and prosecute such cases. It fails to
mention any adjudicatory functions insofar as the PED is concerned. Thus,
PED Rules of Practice need not comply with the provisions of the
Administrative Code on adjudication. The only powers which the PED was
likely to exercise over the respondents were investigative in nature.
In proceedings before administrative or quasi-judicial bodies, such as NLRC and
POEA, created under laws which authorize summary proceedings, decisions may
be reached on the basis of position papers or other documentary evidence only.
They are not bound by technical rules of procedure and evidence. It is enough
that every litigant be given reasonable opportunity to appear and defend his right
and to introduce relevant evidence in his favour, to comply with the due process
requirements.
3. YES. The Securities Regulation Code (SRC) did not repeal Sections 8, 30, and
36 of the Revised Securities Act since said provisions were re-enacted in the new
law. When the repealing law punishes the act previously penalized under the old
law, the act committed before the re-enactment continues to be an offense and
pending cases are not affected. Sec 8 of RSA, which previously provided for the
registration of securities and the information that needs to be included in the
registration statements, was expanded under Sec 12 of the Securities
Regulations Code. Further details of the information required to be disclosed by
the registrant are explained.
Sec 30 of RSA has been re-enacted as Sec 27 of SRC, still penalizing an insider’s
misuse of material and non-public information about the issuer, for the purpose of
protecting public investors. Sec 23 of SRC was practically lifted from Sec 36 of
RSA. The legislature had not intended to deprive the courts of their authority to
punish a person charged with violation of the old law that was repealed.
4. YES. The SEC retained the jurisdiction to investigate violations of the Revised
Securities Act, re-enacted in the Securities Regulations Code, despite the
abolition of the PED.
Sec 53 of SRC clearly provides that criminal complaints for violations of rules and
regulations enforced or administered by SEC shall be referred to the DOJ for
preliminary investigation, while the SEC nevertheless retains limited investigatory
powers. SEC may still impose the appropriate administrative sanctions under Sec
54.
5. NO. The instant case has not yet prescribed. Respondents point out that the
prescription period applicable to offenses punished under special laws is 12 years.
Since the offense was committed in 1994, they reasoned that prescription set in as
early as 2006 and rendered this case moot.
It is an established doctrine that a preliminary investigation interrupts the
prescription period. A preliminary investigation is essentially a determination
whether an offense has been committed, and whether there is probable cause for
the accused to have committed as offense.
6. YES. The CA was justified in denying SEC’s Motion for Leave to Quash SEC
Omnibus Orders dated 23 October 1995. Since it found other issues that were
more important than whether or not the PED was the proper body to investigate
the matter, CA denied SEC’s motion for leave to quash SEC Omnibus Orders.
In all, the SC rules that no implementing rules were needed to render effective
Sections 8, 30, and 36 of the Revised Securities Act; nor was the PED Rules of
Practice and Procedure invalid, prior to the enactment of the Securities
Regulations Code, for failure to provide parties with the right to cross-examine the
witnesses presented against them. Thus, the respondents maybe investigated by
the appropriate authority under the proper rules of procedure of the Securities
Regulations Code for violations of Secs 8, 30, and 36 of the Revised Securities
Act. SC ruled that the instant Petition is GRANTED. This Court hereby
REVERSES the assailed Decision of the Court of Appeals and LIFTS the
permanent injunction issued pursuant thereto. This Court further DECLARES that
the investigation of the respondents for violations of Sections 8, 30 and 36 of the
Revised Securities Act may be undertaken by the proper authorities in
accordance with the Securities Regulations Code.
XV. SEC seeks to prevent speculation contract.
XVI. when you invest, look at the stability/financial records of the company.
XVII. Margin Trading
Side-bit: You trade on credit. Pina-pautang ka ng broker.
~ I wanna trade. I do not have money. I wanna buy ABS CBN stocks while they
are still cheap. Broker will lend me money.
Read Abacus vs. Ampil
ABACUS vs. AMPIL
GIST OF THE CASE AS CITED IN THE BOOK:
Stock market transactions affect the general public and the national economy. The
rise and fall of stock market indices reflect to a considerable degree the state of
the economy. Trends in stock prices tend to herald changes in business
conditions. Consequently, securities transactions are impressed with public
interest, and are thus subject to public regulation. In particular, the laws and
regulations requiring payment of traded shares within specified periods are meant
to protect the economy from excessive stock market speculations, and are thus
mandatory.
In the present case, respondent cannot escape payment of stocks validly traded by
petitioner on his behalf. These transactions took place before both parties violated
the trading law and rules. Hence, they fall outside the purview of the pari delicto
rule.
FACTS:
In April 1997, respondent opened a cash or regular account with petitioner for the
purpose of buying and selling securities as evidenced by the Account Application
Form. The parties’ business relationship was governed by the terms and
conditions.
Since April 10, 1997, respondent actively traded his account, and as a result of
such trading activities, he accumulated an outstanding obligation in favor of
petitioner in the principal sum of ₱6,617,036.22 as of April 30, 1997.
Despite the lapse of the period within which to pay his account as well as sufficient
time given by petitioner for respondent to comply with his proposal to settle his
account, the latter failed to do so. Such that petitioner thereafter sold respondent’s
securities to set off against his unsettled obligations.
After the sale of respondent’s securities and application of the proceeds thereof
against his account, respondent’s remaining unsettled obligation to petitioner was
₱3,364,313.56.
Petitioner demanded that respondent settle his obligation plus the agreed penalty
charges accruing thereon equivalent to the average 90-day Treasury Bill rate plus
2% per annum. Despite said demand and the lapse of said requested extension,
respondent failed and/or refused to pay his accountabilities to petitioner.
Respondent claims that he was induced to trade in a stock security with petitioner
because the latter allowed offset settlements wherein he is not obliged to pay the
purchase price. Rather, it waits for the customer to sell. And if there is a loss,
petitioner only requires the payment of the deficiency (i.e., the difference between
the higher buying price and the lower selling price). In addition, it charges a
commission for brokering the sale. However, if the customer sells and there is a
profit, petitioner deducts the purchase price and delivers only the surplus – after
charging its commission.
RTC- Makati City held that petitioner and respondent were in pari delicto and
therefore without recourse against each other. CA upheld the lower court’s finding
that the parties were in pari delicto. It castigated petitioner for allowing respondent
to keep on trading despite the latter’s failure to pay his outstanding obligations. It
explained that “the reason behind petitioner’s act is because whether respondent’s
trading transaction would result in a surplus or deficit, he would still be liable to pay
petitioner its commission. Hence, this Petition.
ISSUE:
Whether the pari delicto rule is applicable in the present case
RULING:
Applicability of the Pari Delicto Principle
The provisions governing the above transactions are Sections 23 and 25 of the
RSA and Rule 25-1 of the RSA Rules, which state as follows:
"SEC. 23. Margin Requirements. –
xxxxxxxxx
(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or
indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit
to or for any customer –
(1) On any security other than an exempted security, in contravention of the rules and
regulations which the Commission shall prescribe under subsection (a) of this Section;
(2) Without collateral or on any collateral other than securities, except (i) to maintain a credit
initially extended in conformity with the rules and regulations of the Commission and (ii) in
cases where the extension or maintenance of credit is not for the purpose of purchasing or
carrying securities or of evading or circumventing the provisions of subparagraph (1) of this
subsection.
x x x x x x x x x"
"SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent
indirect violations of the margin requirements under Section 23 hereof, the broker or dealer
shall require the customer in nonmargin transactions to pay the price of the security
purchased for his account within such period as the Commission may prescribe, which shall
in no case exceed three trading days; otherwise, the broker shall sell the security purchased
starting on the next trading day but not beyond ten trading days following the last day for the
customer to pay such purchase price, unless such sale cannot be effected within said period
for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer
to recover any deficiency from the customer. x x x."
"RSA RULE 25-1
"Purchases and Sales in Cash Account
"(a) Purchases by a customer in a cash account shall be paid in full within three (3)
business days after the trade date.
"(b) If full payment is not received within the required time period, the broker or dealer shall
cancel or otherwise liquidate the transaction, or the unsettled portion thereof, starting on the
next business day but not beyond ten (10) business days following the last day for the
customer to pay, unless such sale cannot be effected within said period for justifiable
reasons.
"(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the
customer, prior to any subsequent purchase during the next ninety (90) days, the customer
shall be required to deposit sufficient funds in the account to cover each purchase
transaction prior to execution.
xxxxxxxxx
"(f) Written application for an extension of the period of time required for payment under
paragraph (a) be made by the broker or dealer to the Philippine Stock Exchange, in the
case of a member of the Exchange, or to the Commission, in the case of a non-member of
the Exchange. Applications for the extension must be based upon exceptional
circumstances and must be filed and acted upon before the expiration of the original
payment period or the expiration of any subsequent extension."
Section 23(b) above -- the alleged violation of petitioner which provides the basis
for respondent’s defense -- makes it unlawful for a broker to extend or maintain
credit on any securities other than in conformity with the rules and regulations
issued by Securities and Exchange Commission (SEC). Section 25 lays down the
rules to prevent indirect violations of Section 23 by brokers or dealers. RSA Rule
25-1 prescribes in detail the regulations governing cash accounts.
The purpose of the statute is to regulate the volume of credit flow, by way of
speculative transactions, into the securities market and redirect resources into
more productive uses. It is to give a government credit agency an effective method
of reducing the aggregate amount of the nation’s credit resources which can be
directed by speculation into the stock market and out of other more desirable uses
of commerce and industry.
A related purpose of the governmental regulation of margins is the stabilization of
the economy. Restrictions on margin percentages are imposed in order to achieve
the objectives of the government with due regard for the promotion of the economy
and prevention of the use of excessive credit.
Otherwise stated, the margin requirements set out in the RSA are primarily
intended to achieve a macroeconomic purpose -- the protection of the overall
economy from excessive speculation in securities. Their recognized secondary
purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily upon
the brokers and dealers. Sections 23 and 25 and Rule 25-1, otherwise known as
the mandatory close-out rule, clearly vest upon petitioner the obligation, not just
the right, to cancel or otherwise liquidate a customer’s order, if payment is not
received within three days from the date of purchase. The word "shall" as opposed
to the word "may," is imperative and operates to impose a duty, which may be
legally enforced. For transactions subsequent to an unpaid order, the broker
should require its customer to deposit funds into the account sufficient to cover
each purchase transaction prior to its execution. These duties are imposed upon
the broker to ensure faithful compliance with the margin requirements of the law,
which forbids a broker from extending undue credit to a customer.
It will be noted that trading on credit (or "margin trading") allows investors to buy
more securities than their cash position would normally allow. Investors pay only a
portion of the purchase price of the securities; their broker advances for them the
balance of the purchase price and keeps the securities as collateral for the
advance or loan.25 Brokers take these securities/stocks to their bank and borrow
the "balance" on it, since they have to pay in full for the traded stock. Hence,
increasing margins i.e., decreasing the amounts which brokers may lend for the
speculative purchase and carrying of stocks is the most direct and effective
method of discouraging an abnormal attraction of funds into the stock market and
achieving a more balanced use of such resources.
The nature of the stock brokerage business enables brokers, not the clients, to
verify, at any time, the status of the client’s account. Brokers, therefore, are in the
superior position to prevent the unlawful extension of credit. Because of this
awareness, the law imposes upon them the primary obligation to enforce the
margin requirements.
Right is one thing; obligation is quite another. A right may not be exercised; it may
even be waived. An obligation, however, must be performed; those who do not
discharge it prudently must necessarily face the consequence of their dereliction or
omission.
Nonetheless, these margin requirements are applicable only to transactions
entered into by the present parties subsequent to the initial trades of April 10 and
11, 1997. Thus, we hold that petitioner can still collect from respondent to the
extent of the difference between the latter’s outstanding obligation as of April 11,
1997 less the proceeds from the mandatory sell out of the shares pursuant to the
RSA Rules. Petitioner’s right to collect is justified under the general law on
obligations and contracts.
The right to collect cannot be denied to petitioner as the initial transactions were
entered pursuant to the instructions of respondent. The obligation of respondent
for stock transactions made and entered into on April 10 and 11, 1997 remains
outstanding. These transactions were valid and the obligations incurred by
respondent concerning his stock purchases on these dates subsist. At that time,
there was no violation of the RSA yet. Petitioner’s fault arose only when it failed to:
1) liquidate the transactions on the fourth day following the stock purchases, or on
April 14 and 15, 1997; and 2) complete its liquidation no later than ten days
thereafter, applying the proceeds thereof as payment for respondent’s outstanding
obligation.
Since the buyer was not able to pay for the transactions that took place on April 10
and 11,the broker was duty-bound to advance the payment to the settlement
banks without prejudice to the right of the broker to collect later from the client.
In securities trading, the brokers are essentially the counterparties to the stock
transactions at the Exchange. Since the principals of the broker are generally
undisclosed, the broker is personally liable for the contracts thus made. Hence,
petitioner had to advance the payments for respondent’s trades. Brokers have a
right to be reimbursed for sums advanced by them with the express or implied
authorization of the principal, in this case, respondent. Not to require respondent to
pay for his April 10 and 11 trades would put a premium on his circumvention of the
laws and would enable him to enrich himself unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms and conditions
of its Agreement with respondent, specifically paragraph 8 thereof, purportedly
acting on the plea of respondent to give him time to raise funds therefor. These
stipulations, in relation to paragraph 4, constituted faithful compliance with the
RSA. By failing to ensure respondent’s payment of his first purchase transaction
within the period prescribed by law, thereby allowing him to make subsequent
purchases, petitioner effectively converted respondent’s cash account into a credit
account. However, extension or maintenance of credits on nonmargin transactions,
are specifically prohibited under Section 23(b). Thus, petitioner was remiss in its
duty and cannot be said to have come to court with "clean hands" insofar as it
intended to collect on transactions subsequent to the initial trades of April 10 and
11, 1997.
On the other hand, respondent is equally guilty in entering into the transactions in
violation of the RSA and RSA Rules. Respondent is an experienced and
knowledgeable trader who is well versed in the securities market and who made
his own investment decisions. In fact, in the Account Opening Form, he indicated
that he had excellent knowledge of stock investments; had experience in stocks
trading, considering that he had similar accounts with other firms. He knowingly
speculated on the market, by taking advantage of the “no-cash-out” arrangement
extended to him by petitioner.
Both parties acted in violation of the law and did not come to court with clean
hands with regard to transactions subsequent to the initial trades made on April 10
and 11, 1997.
Since the initial trades (April 10 and 11) are valid and subsisting obligations,
respondent is liable for them. Justice and good conscience require all persons to
satisfy their debts. Ours are courts of both law and equity; they compel fair dealing;
they do not abet clever attempts to escape just obligations.