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1. ABACUS SECURITY CORPORATION VS AMPIL
G.R. NO. 160016, February 27, 2006
In a margin account, the securities company extends credit. A
margin account is covered by a margin agreement which
stipulates the terms and conditions for maintaining such an
account. Under the present law, the amount of credit that
may be initially extended is limited to 50 percent of the
current market price of the security.” (Comment of the
Philippine Stock Exchange, Inc. [PSE] dated August 9, 2005,
p. 2); “A margin account x x x is an account in which the
broker lends the customer cash with which to purchase
securities. Unlike a cash account, a margin account allows an
investor to buy securities with money that he does not have,
by borrowing the money from the broker. The RSA limits
margin borrowing to a maximum of 50% of the amount
invested.
Facts:
Abacus Security Corporation is engaged as a broker and dealer
of securities of listed companies at the Philippine Stock
Exchange Center.
Ruben Ampil opened a cash or regular account with Abacus for
the purpose of buying and selling securities. As a result of
Ampil’s trading activities, he accumulated an outstanding
obligation in favor of Abacus in the principal sum of Php
6,617,036.22 as of April 30, 1997.
Ampil failed to settle his obligations with Abacus and the latter
was forced to sell Ampil’s securities to be applied to his unpaid
account. A balance of P3,364,313.56 remained which Abacuse
referred to its legal counsel for collection.
Ampil claims that he was induced to trade by Abacus because
the latter allowed offset settlements wherein he is not obliged
1
to pay the purchase price. Rather, it waits for the customer t
sell. And if there is a loss, Abacus only requires the payment of
the deficiency (i.e., the difference between the higher buying
price and the lower selling price). However, if the customer
sells and there is a profit, Abacus deducts the purchase price
and delivers only the surplus - after charging its commission.
The RTC Makati held that Abacus violated Sections 23 and 25
of the Revised Securities Act (RSA) and Rule 25-1 of the RSA
Rules. Abacus allowed Ampil to continue trading securities
despite his failure to pay his outstanding obligations.
The trial court also found Ampil to be equally at fault by
incurring excessive credits and waiting to see how his
investments turned out before deciding to invoke the RSA.
Thus, the RTC concluded that the parties were in pari
delicto and therefore without recourse against each other.
Abacus contended that the trial court lacked jurisdiction to
determine violations of the RSA. The Court of Appeals upheld
the jurisdiction of the RTC and its application of the pari
delicto rule.
Issue:
Whether or not the Court of Appeal’s ruling on petitioner’s
alleged violation of the Revised Securities Act is in accord with
law and jurisprudence since the lower court has no jurisdiction
over violations of the Revised Securities Act?
Ruling:
Securities Transactions Regulations 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
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protect the economy from excessive stock market speculations,
and are thus mandatory.
Section 23(b) of the Revised Securities Act 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.
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.
. 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.
Mandatory Close-Out Rule (Obligation of Brokers). 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 Abacus 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
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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.
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.
Client Liable for the First, But Not for the Subsequent Trades
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 Abacus can
still collect from respondent Ampil 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, i.e., Article 1236 of the Civil
Code, which provides: "Whoever pays for another may demand
from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to the
debtor."
Since a brokerage relationship is essentially a contract for the
employment of an agent, principles of contract law also govern
the broker-principal relationship.
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The right to collect cannot be denied to Abacus as the initial
transactions were entered pursuant to the instructions of
Ampil. The obligation of Ampil for stock transactions made
and entered into on April 10 and 11, 1997 were valid and the
obligations incurred by him concerning his stock purchases on
these dates subsist. At that time, there was no violation of the
RSA yet. Abacus’ fault arose only when it failed to: 1) liquidate
the transactions on the fourth day following the stock
purchases; and 2) complete its liquidation no later than ten
days thereafter, applying the proceeds thereof as payment for
respondent's outstanding obligation.
nonmargin transactions, are specifically prohibited under
Section 23(b). Thus, Abacus 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, Ampil is equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. As an
experienced trader, he knowingly speculated on the market by
taking advantage of the "no-cash-out" arrangement extended
to him by Abacus.

In securities trading, the brokers are essentially the In this case, the pari delicto rule does not apply to all the
counterparties to the stock transactions at the Exchange. Since transactions entered into by the parties but applies only to
the principals of the broker are generally undisclosed, transactions entered into after the initial trades made on April
the broker is personally liable for the contracts thus made. 10 and 11, 1997.
Hence, Abacus, as broker, was duty-bound to advance the
payment to the settlement banks for Ampil’s trades, without
prejudice to the right of Abacus to collect later from the
client.Brokers have a right to be reimbursed for sums
advanced by them with the express or implied authorization of
the principal.

The pari delicto rule is expressed in the maxims "Ex dolo malo
non oritur action" and "In pari delicto potior est conditio
defendentis" The pari delecto rule refuses legal remedy to
either party to an illegal agreement and leaves them where
they were.

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.

By failing to ensure Ampil's payment of his first purchase ‘

transaction within the period prescribed by law, Abacus
effectively converted Ampil’s cash account into a credit
account. However, extension or maintenance of credits on
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2. PHILIPPINE STOCK EXCHANGE, INC. VS. COURT
OF APPEALS
G.R. NO. 125469. OCTOBER 27, 1997
The SEC is the entity with the primary say as to whether or
not securities, including shares of stock of a corporation, may
be traded or not in the stock exchange.
Facts:
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, was issued a Permit to Sell its shares to the public
by the Securities and Exchange Commission (SEC). To
facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the
Philippine Stock Exchange, Inc. (PSE), for which purpose it
filed with PSE an application to list its shares. The Listing
Committee of the PSE, upon a perusal of PALI’s application,
recommended to the PSE’s Board of Governors the approval of
PALI’s listing application. The Board of Governors of the PSE
received a letter from the heirs of Ferdinand E. Marcos,
claiming that the late President Marcos was the legal and
beneficial owner of certain properties of PALI, and requested
PALI’s application to be deferred. The PSE rejected PALI’s
application, citing the existence of serious claims, issues and
circumstances surrounding PALI’s ownership over its assets
that adversely affect the suitability of listing PALI’s shares in
the stock exchange. PALI brought the matter to the SEC,
requesting that the SEC, in the exercise of its supervisory and
regulatory powers over stock exchanges under Section 6(j) of
P.D. No. 902-A, review the PSE’s action on PALI’s listing
application and institute such measures as are just and proper
under the circumstances. The SEC rendered its Order,
reversing the PSE’s decision. Dissatisfied with this ruling, the
PSE appealed to the Court of Appeals. The Court of Appeals
dismissed PSE’s Petition for Review.
4
Issue:
Is the reversal of PSE’s decision by the SEC proper?
Ruling:
No, the reversal was not proper. The Court affirms that
the SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be
traded or not in the stock exchange. This is in line with the
SEC's mission to ensure proper compliance with the laws, such
as the Revised Securities Act and to regulate the sale and
disposition of securities in the country. As the appellate court
explains:
Paramount policy also supports the authority of
the public respondent to review petitioner's
denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the
national economy, as the business is affected
with public interest. As a matter of fact, it has
often been said that the economy moves on the
basis of the rise and fall of stocks being traded.
By its economic power, the petitioner certainly
can dictate which and how many users are
allowed to sell securities thru the facilities of a
stock exchange, if allowed to interpret its own
rules liberally as it may please. Petitioner can
either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless
accompanied by control, becomes subject to
abuse; hence, considering public interest, then
it should be subject to government regulation.
This is not to say, however, that the PSE's management
prerogatives are under the absolute control of the SEC. The
PSE is, after all, a corporation authorized by its corporate
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franchise to engage in its proposed and duly approved
business. One of the PSE's main concerns, as such, is still the
generation of profit for its stockholders. Moreover, the PSE has
all the rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to enter (or
not to enter) into contracts with third persons, and to perform
all other legal acts within its allocated express or implied
powers. Thus, notwithstanding the regulatory power of the
SEC over the PSE, and the resultant authority to reverse the
PSE's decision in matters of application for listing in the
market, the SEC may exercise such power only if the PSE's
judgment is attended by bad faith. In Board of Liquidators
vs. Kalaw, it was held that bad faith does not simply connote
bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest of ill
will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of
PALI, the PSE considered important facts, which, in the
general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock
exchange. During the time for receiving objections to the
application, the PSE heard from the representative of the late
President Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the Marcos
estate. In time, the PCGG confirmed this claim. In fact, an
order of sequestration has been issued covering the properties
of PALI, and suit for reconveyance to the state has been filed in
the Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and
MSDC to Rebecco Panlilio, and to the private respondent
PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to
serious doubt as to the integrity of PALI as a stock issuer. The
petitioner was in the right when it refused application
of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised
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Securities Act, after all, is to give adequate and effective
protection to the investing public against fraudulent
representations, or false promises, and the imposition of
worthless ventures.
3. SECURITIES AND EXCHANGE COMMISSION
VS. INTERPORT RESOURCES CORPORATION
G.R. No. 135808, October 6, 2008
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.
Facts:
The Board of Directors of IRC approved a Memorandum of
Agreement with Ganda Holdings Berhad (GHB). Under the
Memorandum of Agreement, IRC acquired 100% or the entire
capital stock of Ganda Energy Holdings, Inc. (GEHI), which
would own and operate a gas turbine power-generating barge.
In exchange, IRC will issue to GHB 55% of the expanded
capital stock of IRC.
On the side, IRC would acquire 67% of the entire capital stock
of Philippine Racing Club, Inc. (PRCI). Under the Agreement,
GHB, shall extend or arrange a loan required to pay for the
proposed acquisition by IRC of PRCI.
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 the SEC, the IRC sent press
release announcing the approval of the agreement was sent
through facsimile transmission to the Philippine Stock
Exchange and the SEC
The SEC averred that it received reports that IRC failed to
make timely public disclosures of its negotiations with GHB
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and that some of its directors, respondents herein, heavily
traded IRC shares utilizing this material insider information.
The SEC Chairman issued a directive requiring IRC to submit
to the SEC a copy of its aforesaid Memorandum of Agreement
with GHB and explain IRC's failure to immediately disclose the
information as required by the Rules on Disclosure of Material
Facts.
The SEC Chairman issued an Order finding that IRC violated
the Rules on Disclosure of Material Facts, in connection with
the Old Securities Act of 1936, when it failed to make timely
disclosure of its negotiations with GHB. In addition, the SEC
pronounced that some of the officers and directors of IRC
entered into transactions involving IRC shares in violation of
Section 30, in relation to Section 36, of the Revised Securities
Act.
The case was elevated to the CA. Eventually CA determined
that there were no implementing rules and regulations
regarding disclosure, insider trading, or any of the provisions
of the Revised Securities Acts which the respondents allegedly
violated. The Court of Appeals likewise noted that it found no
statutory authority for the SEC to initiate and file any suit for
civil liability under Sections 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.
Issue:
1. Whether sections 30, and 36 of the Revised Securities
Act require the enactment of implementing rules to
make them binding and effective?
6
Ruling:
No, In the absence of any constitutional or statutory infirmity,
which may concern Sections 30 and 36 of the Revised
Securities Act, this Court upholds these provisions as legal and
binding. It is well settled that every law has in its favor 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 mere
absence of implementing rules cannot effectively invalidate
provisions of law, where a reasonable construction that will
support the law may be given.
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.
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4. SECURITIES AND EXCHANGE COMMISSION VS.
THE HONORABLE COURT OF APPEALS,
CUALOPING SECURITIES CORPORATION AND
FIDELITY STOCK TRANSFERS, INC.
G.R. NOS. 106425 & 106431-32 JULY 21, 1995
The Revised Securities Act (Batas Pambansa Blg. 178) is
designed, in main, to protect public investors from fraudulent
schemes by regulating the sale and disposition of securities,
creating, for this purpose, a Securities and Exchange
Commission to ensure proper compliance with the law.
Facts:
Cualoping Securities Corporation (CUALOPING for brevity) is
a stockbroker, Fidelity Stock Transfer, Inc. (FIDELITY for
brevity), on the other hand, is the stock transfer agent of Philex
Mining Corporation (PHILEX for brevity).
Certificates of stock of PHILEX representing 1,400,000 shares
were stolen from the premises of FIDELITY. These stock
certificates consisting of stock dividends of certain PHILEX
shareholders had been returned to FIDELITY for lack of
forwarding addresses of the shareholders concerned.
Later, the stolen stock certificates ended in the hands of a
certain Agustin Lopez, a messenger of New World Security
Inc., an entirely different stock brokerage firm. Agustin Lopez
brought the stolen stock certificates to CUALOPING for
trading and sale with the stock exchange. When the said stocks
were brought to CUALOPING, all of the said stock certificates
bore the "apparent" indorsement (signature) in blank of the
owners (the stockholders to whom the stocks were issued by
PHILEX) thereof. At the side of these indorsements
(signatures), the words "Signature Verified" apparently of
FIDELITY were stamped on each and every certificate.
Further, on the words "Signature Verified" showed the usual
initials of the officers of FIDELITY.
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Upon receipt of the said certificates from Agustin Lopez,
CUALOPING stamped each and every certificate with the
words "Indorsement Guaranteed," and thereafter traded the
same with the stock exchange.
After the stock exchange awarded and confirmed the sale of
the stocks represented by said certificates to different buyers,
the same were delivered to FIDELITY for the cancellation of
the stocks certificates and for issuance of new certificates in
the name of the new buyers. Agustin Lopez on the other hand
was paid by CUALOPING with several checks for P400,000.00
for the value of the stocks.
After acquiring knowledge of the pilferage, FIDELITY
conducted an investigation with assistance of the National
Bureau of Investigation (NBI) and found that two of its
employees were involved and signed the certificates.
After two (2) months from receipt of said stock certificates,
FIDELITY rejected the issuance of new certificates in favor of
the buyers for reasons that the signatures of the owners of the
certificates were allegedly forged and thus the cancellation and
new issuance thereof cannot be effected.
The Brokers and Exchange Department ("BED") of the SEC
disposed of the matter in this manner and rules that Fidelity
Stock Transfers, Inc., is ordered to replace all the subject
shares and to cause the transfer thereof in the names of the
buyers within ten days from actual receipt hereof.
Cualoping Securities, INC., for having violated Section 29 a (3)
of the Revised Securities Act is hereby ordered to pay a fine of
P50,000.00 within five (5) days from actual receipt hereof.
The decision was appealed to the Court of Appeals the
appellate court reversed the SEC and set aside SEC's order
"without prejudice to the right of persons injured to file the
proper action for damages."
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The Commission has brought the case to this Court in the
instant petition for review on certiorari, contending that the
appellate court erred in setting aside the decision of the SEC.
Issue:
Whether or not SEC has regulatory power to impose fine?
Ruling:
Yes. The Revised Securities Act (Batas Pambansa Blg. 178) is
designed, in main, to protect public investors from fraudulent
schemes by regulating the sale and disposition of securities,
creating, for this purpose, a Securities and Exchange
Commission to ensure proper compliance with the law. Here,
the SEC has aptly invoked the provisions of Section 29, in
relation to Section 46, of the Revised Securities Act.
According to Supreme Court, no question that both FIDELITY
and CUALOPING have been guilty of negligence in the conduct
of their affairs involving the questioned certificates of stock. To
constitute, however, a violation of the Revised Securities Act
that can warrant an imposition of a fine under Section 29(3),
in relation to Section 46 of the Act, fraud or deceit, not mere
negligence, on the part of the offender must be established.
Fraud here is akin to bad faith which implies a conscious and
intentional design to do a wrongful act for a dishonest purpose
or moral obliquity; it is unlike that of the negative idea of
negligence in that fraud or bad faith contemplates a state of
mind affirmatively operating with furtive objectives. Given the
factual circumstances found by the appellate court, neither
FIDELITY nor CUALOPING, albeit indeed remiss in the
observance of due diligence, can be held liable under the above
provisions of the Revised Securities Act. We do not imply,
however, that the negligence committed by private
respondents would not at all be actionable; upon the other
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hand, as we have earlier intimated, such an action belongs not
to the SEC but to those whose rights have been injured.
5. PINEDA VS. LANTIN
No. L-15350. November 30, 1962
Jurisdiction; Injunction against Securities and Exchange
Commission; Where power to issue is lodged. —A court of
first instance has no jurisdiction to grant an injunctive relief
against the Securities and Exchange Commission. That power
is lodged exclusively with the Supreme Court.
Review of orders or rulings of Securities and Exchange
Commission. —A party who is aggrieved by or disagrees with
an order or ruling of the Securities and Exchange
Commission, may file a petition for review with the Supreme
Court; he cannot seek relief from courts of general
jurisdiction.
Facts:
Minority stockholders of Bacolod Murcia Milling filed a
complaint with the SEC against the said company and its
president, Araneta. The SEC Commissioner Pineda ordered the
investigation of the case.
In a letter addressed to the SEC, Tersa Cuaycong and Apeles
Lopez, stockholders of Bacolod-Murcia, complained of various
actions of the said corporation that were in violation of its
articles of incorporation, the Corporation Code, and the SEC
rules, all prejudicial to its minor stockholders.
Petitioner Pineda, the SEC Commissioner, ordered the
investigation of the company, with the other petitioners
assigned as part of his investigation team.
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The issue here began when the petitioners addressed a
subpoena duces tecum to respondent Araneta and the trasurer
and secretary of B-M.
The respondents questioned the subpoena in a Petition to
Reconsider Order and to Set Aside Subpoena Duces Tecum,
saying that the subpoena has to be issued in accordance with
the rules adopted by the SEC, but it had no rules yet that could
guide the subpoena. SEC DENIED the petition.
They then filed a Motion to Quash and Discontinue Entire
Proceedings, reiterating the same arguments as their previous
petition. They also imputed conspiracy and oppressive
behavior on the part of the stockholders. SEC DENIED the
petition.
Aggrieved, the respondents filed a special civil action for
prohibition with respondent Judge Lantin of the Manila CFI.
The petitioners then filed a motion to dismiss, arguing that the
CFI does not have jurisdiction over the subject matter of
appeal from/review of an SEC decision-- such lies with the
Supreme Court under Rule 43 and CA 83 as amended. CFI
DENIED the motion to dismiss. They filed an MR, which was
also denied. Though an answer was submitted at this point, the
petitioners filed this present petition for certiorari and
prohibition.
Issue:
Whether or not the CFI may issue injunctive reliefs against the
SEC?
Ruling:
NO. Appellate jurisdiction is lodged entirely with the SC,
effectively making the SEC a court on the same level as the
CFI.
9
This Tribunal holds the view that under the Rules of Court and
the law applicable to the case at bar, a Court of First Instance
has no jurisdiction to grant injunctive reliefs against the
Securities and Exchange Commission. That power is lodged
exclusively with this Court, pursuant to Section 1 of Rule 43
and Section 35 of Commonwealth Act No. 83 as amended by
RA 635, creating as setting forth the powers and function of
the SEC.
Beyond doubt, therefore, whenever a party is aggrieved by or
disagrees with an order or ruling of the Securities and
Exchange Commission, his remedy is to come to this Court on
a petition for review. He is not permitted to seek relief from
courts of general jurisdiction.
The role of the Securities and Exchange Commission in our
national economy cannot be minimized. The legislature has
entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not
otherwise vested in some other government offices. Being
charged, therefore, with overseeing the operations of those
various corporate enterprises from which our government
derives great revenues and income, it cannot afford to be
impeded or restrained in the performance of its functions by
writs of injunction emanating from tribunals subordinate to
this Court. If every Court of First Instance can enjoin the
Commission from pursuing its objectives, and, in the premises,
substitute its judgment for that of the Commission on what
should or should not be done, then, no one will suffer thereby
but the economy of our body politic and, eventually, this
country's citizenry. Certainly, the legislature could never have
intended that.
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7. POWERHOMES UNLIMITED CORP. VS.
SEC G.R. No. 164182, February 26, 2008
Thus, to be a security subject to regulation by the SEC, an
investment contract in our jurisdiction the Howey Test is
applied, it requires a transaction, contract, or scheme
whereby a person (1) makes an investment of money, (2) in a
common enterprise, (3) with the expectation of profits, (4) to
be derived solely from the efforts of others.
Facts:
Petitioner is a domestic corporation duly registered with public
respondent SEC on October 13, 2000 under SEC Reg. No.
A200016113. Its primary purpose is:
To engage in the transaction of promoting, acquiring,
managing, leasing, obtaining options on, development, and
improvement of real estate properties for subdivision and
allied purposes, and in the purchase, sale and/or exchange of
said subdivision and properties through network marketing
On October 27, 2000, respondent Noel Manero requested
public respondent SEC to investigate petitioner’s business. He
claimed that he attended a seminar conducted by petitioner
where the latter claimed to sell properties that were inexistent
and without any broker’s license. On November 21, 2000, one
Romulo E. Munsayac, Jr. inquired from public respondent
SEC whether petitioner’s business involves "legitimate network
marketing." On the bases of the letters of respondent Manero
and Munsayac, public respondent SEC held a conference on
December 13, 2000 that was attended by petitioner’s
incorporators John Lim, Paul Nicolas and Leonito Nicolas. The
attendees were requested to submit copies of petitioner’s
marketing scheme and list of its members with addresses.
10
The following day or on December 14, 2000, petitioner
submitted to public respondent SEC copies of its marketing
course module and letters of accreditation/authority or
confirmation from Crown Asia, Fil-Estate Network and
Pioneer 29 Realty Corporation. On January 26, 2001, public
respondent SEC visited the business premises of petitioner
wherein it gathered documents such as certificates of
accreditation to several real estate companies, list of members
with web sites, sample of member mail box, webpages of two
(2) members, and lists of Business Center Owners who are
qualified to acquire real estate properties and materials on
computer tutorials.
On the same day, after finding petitioner to be engaged in the
sale or offer for sale or distribution of investment contracts,
which are considered securities under Sec. 3.1 (b) of Republic
Act (R.A.) No. 8799 (The Securities Regulation Code), but
failed to register them in violation of Sec. 8.1 of the same Act.
SEC ruled against petitioner. Hence, they appealed to the CA,
however it also denied the prayer of petitioner. Hence, the
appeal.
Issue:
Whether or not petitioner’s business constitutes an investment
contract which should be registered with public respondent
SEC before its sale or offer for sale or distribution to the
public?
Ruling:
Yes, it is an investment contract.
Public respondent SEC found the petitioner "as a marketing
company that promotes and facilitates sales of real properties
and other related products of real estate developers through
effective leverage marketing." An investment contract is
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defined in the Amended Implementing Rules and Regulations
of R.A. No. 8799 as a "contract, transaction or scheme
(collectively ‘contract’) whereby a person invests his money in
a common enterprise and is led to expect
profits primarily from the efforts of others."
Prescinding from these premises, we affirm the ruling of the
public respondent SEC and the Court of Appeals that the
petitioner was engaged in the sale or distribution of an
investment contract. Interestingly, the facts of SEC v. Turner
are similar to the case at bar. In Turner, the SEC brought a suit
to enjoin the violation of federal securities laws by a company
offering to sell to the public contracts characterized as self-
improvement courses. On appeal from a grant of preliminary
injunction, the US Court of Appeals of the 9 Circuit held that
self-improvement contracts which primarily offered the buyer
the opportunity of earning commissions on the sale of
contracts to others were "investment contracts" and thus were
"securities" within the meaning of the federal securities laws.
This is regardless of the fact that buyers, in addition to
investing money needed to purchase the contract, were obliged
to contribute their own efforts in finding prospects and
bringing them to sales meetings.
The business scheme of petitioner in the case at bar is
essentially similar. An investor enrolls in petitioner’s program
by paying US$234. This entitles him to recruit two (2)
investors who pay US$234 each and out of which amount he
receives US$92. A minimum recruitment of four (4) investors
by these two (2) recruits, who then recruit at least two (2) each,
entitles the principal investor to US$184 and the pyramid goes
on. We therefore rule that the business operation or the
scheme of petitioner constitutes an investment contract that is
a security under R.A. No. 8799. Thus, it must be registered
with public respondent SEC before its sale or offer for sale or
distribution to the public. As petitioner failed to register the
same, its offering to the public was rightfully enjoined by
11
public respondent SEC. The CDO was proper even without a
finding of fraud. As an investment contract that is security
under R.A. No. 8799, it must be registered with public
respondent SEC, otherwise the SEC cannot protect the
investing public from fraudulent securities. The strict
regulation of securities is founded on the premise that the
capital markets depend on the investing public’s level of
confidence in the system.
8. CAROLINA INDUSTRIES v. CMS STOCK
BROKERAGE, INC.
GR No. L-46908, May 17, 1980
Facts:
The plaintiff Carolina Industries Inc. filed a case
against the defendant CMS Stock brokerage, Inc., which is
engaged in the business of buying and selling of stocks and
securities for and in behalf of investors. The defendant made a
stock purchases in favor of plaintiff notwithstanding that the
plaintiff’s account was under margin of above the 50% ceiling
required under Section 18 (a) (1) of the Securities Act.
Issue:
Whether or not the defendant’s excessive extension of credit in
favor of plaintiff violates the Security Act?
Ruling:
Yes.
The Supreme Court notice that the defendant brokerage firm
extended to plaintiff excessive credit because it is provided
under section 18 of the Securities Act that "for the purpose of
preventing the excessive use of credit for the purchase or
carrying of securities", one of the standards set is that the
credit extended should not exceed "fifty per centum of the
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current market price of the security" (Section 18, par. (a), (1),
Securities Act).
In other words, applying the said standard on the maximum
limit of allowable credit fixed by law to the case at bar,
considering that the value of plaintiff's security position with
the defendant brokerage firm was P1,168,478.00 as of
September 12, 1969, the maximum credit that could legally be
extended to plaintiff should only be fifty per cent of
P1,168,478.00 or P584,239.00 at most, instead of the
P804,179.69 actually extended by the defendant brokerage
firm to plaintiff. Stated in the reverse, since the debit balance
of plaintiff's margin account was P804,179.69 as of September
12, 1969, the value of its security position with the defendant
brokerage firm should have been at least P1,608,359.38,
instead of the P1,168,478.00 that it then had.
Aside from that, the court took into account the stock market
boom of the period and the heavy volume of trading resulting
therefrom, which prompted the Securities and Exchange
Commission to suspend trading at the Manila and Makati
Stock Exchanges on Wednesdays in order to enable stock
brokers to update their records. The Supreme Court, in view of
the circumstances obtaining, respondent brokerage firm,
applying Sections 28(a) (2) and 40 of the Securities Act, had
not wilfully violated the Securities Act.
The Supreme Court said that no evidence has been presented
by plaintiff to prove that the defendant brokerage firm
"willfully" violated Section 18 of the Securities Act. On the
contrary, the evidence presented by the defendants, through
witness Carlos Moran Sison, proved beyond doubt that if there
was any violation of the law at all, it was done in absolute good
faith and without malice what soever, considering the
circumstances surrounding the case.
12
9. Nestle Philippines vs. Court of Appeals and
Securities and Exchange Commission,
G.R. No. 86738, November 13, 1991
By limiting the class of exempt transactions contemplated by
the last clause of Section 6(a)(4) to issuances of stock done in
the course of and as part of the process of increasing the
authorized capital stock of a corporation, the SEC is enabled
to examine issuances by a corporation of previously
authorized but theretofore unissued capital stock, on a case-
to-case basis, under Section 6(b); and thereunder, to grant or
withhold exemption from the normal registration
requirements depending upon the perceived level of need for
protection by the investing public in particular cases
Facts:
Sometime in February 1983, the authorized capital stock of
petitioner. Nestle Philippines Inc. was increased from P300
million divided into 3 million shares with a par value of
P100.00 per share, to P600 million divided into 6 million
shares with a par value of P100.00 per share. Nestle
underwent the necessary procedures involving Board and
stockholder’s approvals and effected the necessary filings to
secure the approval of the increase of authorized capital stock
by respondent Securities and Exchange Commission ("SEC"),
which approval was in fact granted. Nestle has only two (2)
principal stockholders: San Miguel Corporation and Nestle
S.A. The other stockholders, who are individual natural
persons, own only one (1) share each, for qualifying purposes,
i.e., to qualify them as members of the Board of Directors
being elected thereto on the strength of the votes of one or the
other principal shareholder. Subsequently, the Board of
Directors and stockholders of Nestle approved resolutions
authorizing the issuance of 344,500 shares out of the
previously authorized but unissued capital stock of Nestle,
exclusively to San Miguel Corporation and to Nestle S.A. San
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Miguel Corporation subscribed to and completely paid up
168,800 shares, while Nestle S.A. subscribed to and paid up
the balance of 175,700 shares of stock. Thereafter, petitioner
Nestle filed a letter signed by its Corporate Secretary, M.L.
Antonio, with the SEC seeking exemption of its proposed
issuance of additional shares to its existing principal
shareholders, from the registration requirement of Section 4 of
the Revised Securities Act and from payment of the fee
referred to in Section 6(c) of the same Act. Nestle expressly
represented in the same letter that all the additional shares
proposed to be issued would be issued only to San Miguel
Corporation and Nestle S.A. and that no commission or other
form of remuneration had been given, directly or indirectly, in
connection with the issuance or distribution of such additional
shares of stock.
In a letter, the SEC through its then Chairman Julio A. Sulit,
Jr. responded adversely to petitioner's requests and ruled that
the proposed issuance of shares did not fall under Section
6(a)(4) of the Revised Securities Act, since Section 6(a)(4) is
applicable only where there is an increase in the authorized
capital stock of a corporation. Chairman Sulit held, however,
that the proposed transaction could be considered by the
Commission under the provisions of Section 6(b) of the
Revised Securities Act which reads as follows:
"(b) The Commission may, from time to time and subject
to such terms and conditions as it may prescribe, exempt
transactions other than those provided in the preceding
paragraph, if it finds that the enforcement of the requirements
of registration under this Act with respect to such transactions
is not necessary in the public interest and for the protection of
the investors by reason of the small amount involved or the
limited character of the public offering."
13
The Commission then advised petitioner to file the
appropriate request for exemption and to pay the fee required
under Section 6(c) of the statute, which provides:
"(c) A fee equivalent to one-tenth of one per centum of the
maximum aggregate price or issued value of the securities shall
be collected by the Commission for granting a general or
particular exemption from the registration requirements of
this Act."
Petitioner moved for reconsideration of the SEC ruling,
without success.
Issue:
Whether or not the proposed issuance of shares fall under the
exempt transactions under Section 6(a)(4) of the Revised
Securities Act?
Ruling:
No. The reading by the SEC of the scope of application of
Section 6(a)(4) permits greater opportunity for the SEC to
implement the statutory objective of protecting the investing
public by requiring proposed issuers of capital stock to inform
such public of the true financial conditions and prospects of
the corporation. By limiting the class of exempt transactions
contemplated by the last clause of Section 6(a)(4) to issuances
of stock done in the course of and as part of the process of
increasing the authorized capital stock of a corporation, the
SEC is enabled to examine issuances by a corporation of
previously authorized but theretofore unissued capital stock,
on a case-to-case basis, under Section 6(b); and thereunder, to
grant or withhold exemption from the normal registration
requirements depending upon the perceived level of need for
protection by the investing public in particular cases.
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When capital stock is issued in the course of and in
compliance with the requirements of increasing its authorized
capital stock under Section 38 of the Corporation Code, the
SEC as a matter of course examines the financial condition of
the corporation, and hence there is no real need for exercise of
SEC authority under the Revised Securities Act. Thus, one of
the multiple documentation requirements under the current
regulations of the SEC in respect of filing a certificate of
increase of authorized capital stock, is submission of "a
financial statement duly certified by an independent Certified
Public Accountant (CPA) as of the latest date possible or as of
the date of the meeting when stockholders approved the
increase/decrease in capital stock or thereabouts. When all or
part of the newly authorized capital stock is proposed to be
issued as stock dividends, the SEC requirements are even more
exacting; they require, in addition to the regular audited
financial statements, the submission by the corporation of a
"detailed or Long Form Report of the certifying Auditor."
Moreover, since approval of an increase in authorized capital
stock by the stockholders holding two-thirds (2/3) of the
outstanding capital stock is required by Section 38 of the
Corporation Code, at a stockholders meeting held for that
purpose, the directors and officers of the corporation may be
expected to take pains to inform the shareholders of the
financial condition and prospects of the corporation and of the
proposed utilization of the fresh capital sought to be raised.
Upon the other hand, as already noted, issuance of
previously authorized but theretofore unissued capital stock by
the corporation requires only Board of Directors approval.
Neither notice to nor approval by the shareholders or the SEC
is required for such issuance. There would, accordingly, under
the view taken by petitioner Nestle, no opportunity for the SEC
to see to it that shareholders (especially the small
stockholders) have a reasonable opportunity to inform
themselves about the very fact of such issuance and about the
14
condition of the corporation and the potential value of the
shares of stock being offered.
On the other hand, petitioner Nestle’s second claim for
exemption is from payment of the fee provided for in Section
6(c) of the Revised Securities Act, a claim based upon
petitioner's contention that Section 6(a)(4) covers both
issuance of stock in the course of complying with the statutory
requirements of increase of authorized capital stock and
issuance of previously authorized and unissued capital stock.
Petitioner claims that to require it now to pay one-tenth of one
percent (1%) of the issued value of the 344,500 shares of stock
proposed to be issued, is to require it to pay a second time for
the same service on the part of the SEC. Since the Court have
above rejected petitioner's reading of Section 6(a)(4), last
clause, petitioner’s claim about the additional fee of one-tenth
of one percent (1%) of the issue value of the proposed issuance
of stock (amounting to P34,450 plus P344.50 for other fees or
a total of P37,794.50) need not detain for long. The fee, upon
the other hand, provided for in Section 6(c) which petitioner
will be required to pay if it does file an application for
exemption under Section 6(b), is quite different; this is a fee
specifically authorized by the Revised Securities Act, (not the
Corporation Code) in connection with the grant of an
exemption from normal registration requirements imposed by
that Act. The Court did not find such fee either unreasonable
or exorbitant.
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10. Nicolas vs. Court of Appeals (Sixth Division)
G.R. No. 122857. March 27, 1998.
No broker shall sell any securities unless he is registered with
the Securities and Exchange Commission.
An unlicensed person may not recover compensation for
services as a broker where a statute or ordinance requiring a
license is applicable and such statute or ordinance is of a
regulatory nature; Stock market trading, a technical and
highly specialized institution in the Philippines, must be
entrusted to individuals with proven integrity, competence
and knowledge, who have due regard to the requirements of
the law.
Facts:
On February 19, 1987, petitioner Roy Nicolas and private
respondent Blesito Buan entered into a Portfolio Management
Agreement, wherein the former was to manage the stock
transactions of the latter for a period of three months with an
automatic renewal clause. However, upon the initiative of the
private respondent the agreement was terminated on August
19, 1987, and thereafter he requested for an accounting of all
transactions made by the petitioner.
Three weeks after the termination of the agreement, Nicolas
demanded from Buan the amount of P68,263.67 representing
his alleged management fees covering the periods of June 30,
July 31 and August 19, 1987 has provided for in the Portfolio
Management Agreement. But the demands went unheeded,
much to the chagrin of Nicolas.

 Rebuffed, petitioner filed a complaint for collection of sum
of money against the private respondent before the trial court.
In his answer, private respondent contended that petitioner
mismanaged his transactions resulting in losses, thus, he was
not entitled to any management fees.
15
The trial court rendered its decision in favor of plaintiff.
The Court of Appeals reversed the trial court’s finding and
ruled against the petitioner.
Issue:
Whether or not a broker can sell securities absence of
registration or license from the SEC?
Ruling:
No. Under the Portfolio Management Agreement, it was agreed
that private respondent would pay the petitioner 20% of all
realized profits every end of the month as his management
fees.
Unfortunately, the profit and loss statements presented by the
petitioner are nothing but bare assertions, devoid of any
concrete basis or specifics as to the method of arriving at the
amounts indicated in the documents. In fact, it did not even
state when the stocks were purchased, the type of stocks
(whether Class “A” or “B” or common or preferred) bought,
when the stocks were sold, the acquisition and selling price of
each stock, when the profits, if any, were delivered to the
private respondent, the cost of safekeeping or custody of the
stocks, as well as the taxes paid for each transaction. With
respect to the alleged losses, it has been held that where a
profit or loss statement shows a loss, the statement must show
income and items of expense to explain the method of
determining such loss. However, in the instant petition,
petitioner hardly elucidated the reasons and the factors behind
the losses incurred in the course of the transactions.
In short, no evidentiary value can be attributed to the profit
and loss statements submitted by the petitioner. These
documents can hardly be considered a credible or true
reflection of the transactions. It is an incomplete record
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yielding easily to the inclusion or deletion of certain matters.
The contents are subject to suspicion since they are not
reflective of all pertinent and relevant data. Thus, even
assuming the admissibility of these alleged profit and loss
statements, they are devoid of any evidentiary weight, for the
amounts are conclusions without premises, its bases left to
speculation, conjectures, assertions and guesswork.
The futility of petitioner’s action became more pronounced by
the fact that he traded securities for the account of others
without the necessary license from the Securities and
Exchange Commission (SEC). Clearly, such omission was in
violation of Section 19 of the Revised Securities Act which
provides that no broker shall sell any securities unless he is
registered with the SEC. The purpose of the statute requiring
the registration of brokers selling securities and the filing of
data regarding securities which they propose to sell, is to
protect the public and strengthen the securities mechanism.
 purchase securities, then the broker has violated the law and
American jurisprudence emphasizes the principle that: “x x x,
an unlicensed person may not recover compensation for
services as a broker where a statute or ordinance requiring a
license is applicable and such statute or ordinance is of a
regulatory nature, was enacted in the exercise of the police
power for the purpose of protecting the public, requires a
license as evidence of qualification and fitness, and expressly
precludes an unlicensed person from recovering compensation
by suit, or at least manifests an intent to prohibit and render
unlawful the transaction of business by an unlicensed person.”
We see no reason not to apply the same rule in our
jurisdiction. Stock market trading, a technical and highly
specialized institution in the Philippines, must be entrusted to
individuals with proven integrity, competence and knowledge,
who have due regard to the requirements of the law.
16
We see no reason not to apply the same rule in our
jurisdiction. Stock market trading, a technical and highly
specialized institution in the Philippines, must be entrusted to
individuals with proven integrity, competence and knowledge,
who have due regard to the requirements of the law.
11. CAROLINA INDUSTRIES, INC. VS. CMS STOCK
BROKERAGE, INC.
G.R. NO L-46908 MAY 17, 1980
Generally speaking, when a statute has been adopted from
another State and such statute has previously been construed
by the courts of such State or country, this statute is deemed
to have been adopted with the construction so given it. It has
been uniformly held that if a broker extends credit to a
customer in violation of the Securities Act or the regulations
promulgated pursuant thereto, all to induce a customer to
the customer may recover from him any loss proximately
resulting therefrom. The customer’s right of action is not
affected by his participation in the transaction “Since the
legislation regarded him as incapable of protecting himself.”
It has been held that such protection was intended to apply
only to innocent investors as distinguished from those who
lose their innocence and wait to see how their investments
turn out before deciding to invoke the act. The acts of
protecting of investors extends to corporations as well as to
individuals.
Facts:
Defendant CMS Stock Brokerage, Inc. (formerly Sison, Luz &
Jalbuena, Inc.), for the calendar year 1969, was a licensed
securities broker and dealer engaged, for compensation, in the
business of buying and selling stocks and securities for and in
behalf of investors, such as the plaintiff. The CMS Stock
Brokerage, Inc. is a member firm of the Makati Stock
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Exchange. Defendant Carlos Moran Sison is the president and
at the same time the major and controlling stockholder of
defendant corporation. Defendants, in admitting the foregoing
facts, made the qualification that during the period from
January 10 to August 29, 1969, Arsenio N. Luz III was the
president of defendant corporation.
On or about June 17, 1969, plaintiff opened a margin account
with defendants for purchasing, carrying and selling stocks
and securities listed in the Makati Stock Exchange, as
evidenced by a 'Margin Account Agreement' executed on that
date by plaintiff through its treasurer and controlling
stockholder, Mariano T. Lim, and approved by defendant
corporation, acting through its vice-president and general
manager, defendant Luis F. Sison
The plaintiff Carolina Industries Inc. filed a case against the
defendant CMS Stock brokerage, Inc.,. The defendant made a
stock puchases in favor of plaintiff nothwithstanding that the
plaintiff’s account was undermargin or above the 50% ceiling
required under Section 18 (a) (1) of the Securities Act.
Issue:
Whether or not the defendant’s excessive extension of credit in
favor of plaintiff violates the Security Act.
Ruling:
Yes. The Supreme Court generally follow American
interpretations of laws adopted from the United States like the
Securities. They have previously stated that in case of laws
patterned after or adopted from those of the United States,
decisions of United States courts construing similar laws are
entitled to great weight. Generally speaking, when a statute has
been adopted from another State and such statute has
previously been construed by the courts of such State or
17
country, this statute is deemed to have been adopted with the
construction so given it. It has been uniformly held that if a
broker extends credit to a customer in violation of the
Securities Act or the regulations promulgated pursuant
thereto, all to induce a customer to purchase securities, then
the broker has violated the law and the customer may recover
from him any loss proximately resulting therefrom. The
customer’s right of action is not affected by his participation in
the transaction “Since the legislation regarded him as
incapable of protecting himself.” It has been held that such
protection was intended to apply only to innocent investors as
distinguished from those who lose their innocence and wait to
see how their investments turn out before deciding to invoke
the act. The acts of protecting of investors extends to
corporations as well as to individuals.
12. Baviera vs. Paglinawan
G.R. No. 170602, February 8, 2007
A criminal charge for violation of the Securities Regulation
Code is a specialized dispute, hence, it must first be
referred to an administrative agency of special
competence, i.e., the Securities and Exchange Commission,
and where the complaint is criminal in nature, the
Securities and Exchange Commission (SEC) shall endorse
the complaint to the Department of Justice for preliminary
investigation and prosecution.
Facts:
Manuel Baviera, petitioner, was the former head of the HR
Service Delivery and Industrial Relations of Standard
Chartered Bank-Philippines (SCB). SCB is a foreign banking
corporation duly licensed to engage in banking, trust, and
other fiduciary business in the Philippines.
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Baviera entered into an Investment Trust Agreement with SCB
wherein he purchased US$8,000.00 worth of securities upon
the bank’s promise of 40% return on his investment and a
guarantee that his money is safe. After six (6) months,
however, the value of his investment went down to
US$7,000.00. He tried to withdraw his investment but was
persuaded by Antonette de los Reyes of SCB to hold on to it for
another 6 months in view of the possibility that the market
would pick up. Baviera’s investment went down further to only
US$3,000.00.
On October 26, 2001, Baviera learned from the head of the
SCB Legal and Compliance Department, that since August 17,
1998, SCB had been prohibited by the BSP to sell GPTMF
(GLOBAL THIRD PARTY MUTUAL FUND) securities because
such securities are not registered with the SEC. Baviera then
filed with the BSP a letter-complaint demanding compensation
for his lost investment. But SCB denied his demand on the
ground that his investment is "regular." On July 15, 2003,
Baviera filed with the DOJ a complaint charging the SCB
Board of Directors and other officials, with syndicated estafa.
On February 7, 2004, Baviera also filed with the DOJ a
complaint for violation of Section 8.19 of the Securities
Regulation Code against SCB, et al. The DOJ dismissed
Baviera’s complaint for syndicated estafa, and later on his
complaint for violation of the SRC.
Issue:
Whether or not a criminal charge for violation of SRC may be
directly filed with the DOJ
Ruling:
NO. Section 53.1 of the SRC provides, among others, that “x x
x all criminal complaints for violations of this Code and the
implementing rules and regulations enforced or administered
18
by the Commission shall be referred to the Department of
Justice for preliminary investigation and prosecution before
the proper court x x x”.
Under the above provision, a criminal complaint for violation
of any law or rule administered by the SEC must first be filed
with the latter. If the Commission finds that there is probable
cause, then it should refer the case to the DOJ. Since petitioner
failed to comply with the foregoing procedural requirement,
the DOJ did not gravely abuse its discretion in dismissing his
complaint
A criminal charge for violation of the Securities Regulation
Code is a specialized dispute. Hence, it must first be referred to
an administrative agency of special competence, i.e., the SEC.
Under the doctrine of primary jurisdiction, courts will not
determine a controversy involving a question within the
jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion
requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate
matters of fact. The SRC is a special law. Its enforcement is
particularly vested in the SEC. Hence, all complaints for any
violation of the Code and its implementing rules and
regulations should be filed with the SEC. Where the complaint
is criminal in nature, the SEC shall indorse the complaint to
the DOJ for preliminary investigation and prosecution as
provided in Section 53.1 earlier quoted.
13. Same case with #1
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14. LOPEZ, LOCSIN, LEDESMA & CO., INC. VS. HON.
COURT OF APPEALS AND CMS STOCK BROKERAGE,
INC.,
G.R. NO. L-41291, DECEMBER 8, 1988
In the event of a Selling Member failing to make delivery
within a reasonable period of time of shares sold under
delayed delivery contract, it shall be the Buying Member duty
to advise the Selling Member in writing giving him 1 full
business day from the time of receipt of said letter of demand
to make delivery. x x x Fifteen days shall be considered a
reasonable period of time within which to effect delivery
unless otherwise stated in the sales contract.
Facts:
CMS Stock Brokerage, Inc. (CMS) sold to Lopez, Locsin,
Ledesma and Co., Inc. (LLL) in the Makati Stock Exchange
2,650 Benguet Consolidated shares on a ten (10) to twenty
(20) days delayed delivery basis. CMS failed to deliver to LLL
the shares within said period allegedly due to oversight owning
to the huge volume of transactions. 4 months later, CMS made
known to LLL that it would deliver the shares of stock the
following day, but LLL refused to accept the delivery since its
clients for whom the purchases were made had elected to
cancel the orders. For such refusal of LLL, CMS referred the
issue to the Board of Governors of the Makati Stock Exchange,
which rendered a decision holding both CMS and LLL liable
for violating the Rules and Regulations of the Makati Stock
Exchange – LLL for failure to notify CMS of the cancellation or
purchase, and CMS for failure to give notice to LLL for the
delayed delivery of the stocks.
CMS filed a civil complaint with the CFI against LLL to compel
the latter to accept the shares of stock. LLL filed a motion to
dismiss on the ground of lack of cause of action, but was
denied by the CFI. LLL, in its answer, alleged that the Rules
19
and Regulations of the Makati Stock Exchange do not affect
the contractual relations between the parties which are solely
governed by Civil Laws. The CFI held in favor of CMS, holding
LLL liable to CMS for the purchased shares of stock. On
appeal, the CA affirmed the CFI decision.
Issue:
Whether or not LLL is liable to CMS for the shares of stocks?
Ruling:
Yes, LLL is liable to CMS for the shares of stock.
An exchange has the power to adopt its own constitution, by-
laws, rules and regulations so far as they are not contrary to
law or public policy and which will secure to the members
exclusive rights and privileges which the courts have fully
recognized. Anyone who becomes a member of the exchange
voluntarily submits himself to the operation of these rules and
is expected to be bound by and to respect them.
It is the petitioner's main contention that the law on contracts
is controlling in this case: Hence, CMS' failure to deliver the
2,650 Benguet Consolidated shares of stocks within the
stipulated time of ten (10) to twenty (20) days warrants the
rescission of the exchange contracts in question. The petitioner
states that it cannot, therefore, be compelled to accept the
belated delivery of these shares of stocks about four (4)
months after they were ordered.
There is no dispute that the exchange contracts in question
were drawn up on the floor of the Makati Stock Exchange
between two (2) member stockbrokers, CMS as the seller and
LLL, as the buyer for and on orders of the third parties. As
members of the stock exchange, they are bound by the rules
and by-laws of the exchange.
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The rule at issue in the instant case is Section I, Article V of the
Rules and Regulations. It reads: In the event of a Selling
Member failing to make delivery within a reasonable period of
time of shares sold under delayed delivery contract, it shall be
the Buying Member duty to advise the Selling Member in
writing giving him 1 full business day from the time of receipt
of said letter of demand to make delivery. x x x Fifteen days
shall be considered a reasonable period of time within which to
effect delivery unless otherwise stated in the sales contract.
The rule is clear that the exchange contracts in question fall
under the last clause. The parties have merely specified the
period within which delivery must be made which is ten (10) to
twenty (20) days. Such qualification does not in any way
change the nature of the exchange contracts. The buying
member's duty under the rules remains. It would, therefore, be
safe to say that unless the buying member timely notifies the
seller that he is canceling his orders, then the orders placed by
the buying member still stand. LLL must, therefore, accept the
delivery of the shares of stocks.
Moreover, the contention that rules and regulations of the
exchange should not apply to or affect contracts which may
involve third persons is likewise without merit. As a general
rule and subject to certain limitations, a customer who engages
a broker to execute an order on a stock or produce exchange
confers authority on such broker to conduct the transaction
according to the rules and established customs of the exchange
on which he deals, and the customer is thereby bound by such
rules and customs, even though he may not have actual
knowledge of them. Hence, the exchange contracts in question
are definitely subject to the rules and regulations of the
exchange.
15. Same Case with #11
20
16. SECURITIES AND EXCHANGE COMMISSION VS.
PERFORMANCE FOREIGN EXCHANGE
CORPORATION, G.R. NO. 154131, JULY 20, 2006
There are two essential requirements that must be complied
with by the SEC before it may issue a cease and desist order:
First, it must conduct proper investigation or verification;
and Second, there must be a finding that the act or practice,
unless restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or
prejudice to the investing public.
Facts:
Performance Foreign Exchange Corporation, herein
respondent, has a license with the Securities and Exchange
Commission (SEC), herein petitioner, to operate as a broker
between market participants in transactions involving foreign
exchange and as a money changer, among others. Petitioner
SEC alleged that it inquired on respondent’s business
operations for possible violation of RA No. 8799 (Securities
Regulation Code) and concluded that respondent was engaged
in trading foreign currency futures contracts without the
necessary license. After hearing, the SEC issued a cease and
desist order (CDO) against respondent for engaging in the
questioned transactions. Respondent filed a motion with the
SEC to lift the CDO, arguing that their business involves spot
currency trading, not currency futures contracts. The SEC later
sent a letter to the Bangko Sentral ng Pilipinas (BSP),
requesting a definitive statement if respondent’s business
transactions are a form of financial derivatives. Without
waiting for the reply of the BSP, petitioner SEC denied
respondent’s motion to lift the CDO and shall subsist until
respondent submits the appropriate endorsement from the
BSP that it can engage in financial derivative transactions. The
SEC later issued an order making the CDO permanent.
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Respondent filed a petition for certiorari with prayer for a
temporary restraining order and preliminary injunction with
the CA, alleging that petitioner SEC acted without or in excess
of its jurisdiction or with grave abuse of discretion when it
issued the CDO and later making it permanent without waiting
for the BSP’s determination of the real nature of respondent’s
business operation. The BSP later made an answer to
petitioner SEC’s letter, stating that respondent’s business
activity does not fall under the category of futures trading and
cannot be classified as financial derivatives transactions. The
CA held in favor of respondents.
Issue:
Whether or not the issuance of the CDO was proper?
Ruling:
No, the issuance of the CDO was not proper.
There are two essential requirements that must be complied
with by the SEC before it may issue a cease and desist order:
First, it must conduct proper investigation or verification; and
Second, there must be a finding that the act or practice, unless
restrained, will operate as a fraud on investors or is otherwise
likely to cause grave or irreparable injury or prejudice to the
investing public (Sec. 64 of RA No. 8799).
Here, the first requirement is not present. Petitioner did not
conduct proper investigation or verification before it issued the
challenged orders. The clarificatory conference undertaken by
petitioner regarding respondent’s business operations cannot
be considered a proper investigation or verification process to
justify the issuance of the Cease and Desist Order. It was
merely an initial stage of such process, considering that after it
issued the said order following the clarificatory conference,
petitioner still sought verification from the BSP on the nature
21
of respondent’s business activity. The issuance of the CDO
even before it could finish its investigation and verification on
respondent’s business activity obviously contravenes Section
64 of R.A. No. 8799.
Worse, when respondent filed a motion praying that the same
order be lifted for being premature, petitioner, in its Order
dated February 9, 2001, even denied the motion despite its
admission therein that it cannot determine certain material
facts involving respondent’s transactions and, as such, the
matter must be referred to the BSP for determination.
Which brings us to the second requirement. Before a cease and
desist order may be issued by the SEC, there must be a
showing that the act or practice sought to be restrained will
operate as a fraud on investors or is likely to cause grave,
irreparable injury or prejudice to the investing public. Such
requirement implies that the act to be restrained has been
determined after conducting the proper
investigation/verification. In this case, the nature of the act to
be restrained can only be determined after the BSP shall have
submitted its findings to petitioner. However, there is nothing
in the questioned Orders that shows how the public is greatly
prejudiced or damaged by respondent’s business operation.
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17. Same with case # 2
18. SEC VS. PROSPERITY.COM, INC.
G.R. NO. 164197. JANUARY 25, 2012
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.
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.
Facts:
Prosperity.Com, Inc. (PCI) sold computer software and
hosted websites without providing internet service. To make a
profit, 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 United States, and insurance
coverage worth P50,000.00.
To benefit from this scheme, a PCI buyer must enlist
and sponsor at least two other buyers as his own down-lines.
These second tier of buyers could in turn build up their own
22
down-lines. For each pair of down-lines, the buyer-sponsor
received a US$92.00 commission. But referrals in a day by the
buyer-sponsor should not exceed 16 since the commissions due
from excess referrals inure to PCI, not to the buyer-sponsor.
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 PCI's actual operations.
GVI then filed a complaint with the SEC against PCI,
alleging that the latter had taken over GVI's operations. The
SEC ruled that PCI's scheme constitutes an Investment
contract and, following the Securities Regulations Code, it
should have first registered such contract or securities with the
SEC.
Instead of asking the SEC to lift its CDO in accordance
with Section 64.3 of RA 8799, PCI filed with the CA a petition
for certiorari against the SEC with an application for a TRO
and preliminary injunction. Because the CA did not act
promptly on this application for TRO, on January 31, 2001 PCI
returned to the SEC and filed with it before the lapse of the
five-day period a request to lift the CDO. On the following day,
February 1, 2001, PCI moved to withdraw its petition before
the CA to avoid possible forum shopping violation.
During the pendency of PCI's action before the SEC,
however, the CA issued a TRO, enjoining the enforcement of
the CDO. In response, the SEC filed with the CA a motion to
dismiss the petition on ground of forum shopping. In a
Resolution, the CA initially dismissed the petition, finding PCI
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Cases 1-21
guilty of forum shopping. But on PCI's motion, the CA reversed
itself and reinstated the petition.
CA rendered a decision, granting PCI's petition and
setting aside the SEC-issued CDO. It ruled that following
the Howey test, PCI's scheme did not constitute an investment
contract that needs registration pursuant to R.A. 8799.
Issue:
Whether or not PCI's scheme constitutes an investment
contract that requires registration under R.A. 8799.
Ruling:
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.
Here, PCI's 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,
23
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.
Actually, PCI appears to be engaged in network
marketing, a scheme adopted by companies for getting people
to buy their products outside the usual retail system where
products are bought from the store's shelf. Under this scheme,
adopted by most health product distributors, the buyer can
become a down-line seller. The latter earns commissions from
purchases made by new buyers whom he refers to the person
who sold the product to him. The network goes down the line
where the orders to buy come.
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.
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.
COMMERCIAL LAW REVIEW || SRC Law
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19. Same with case # 4
20. JULIO E. T. SALES AND GEORGE V. AGONIAS, IN
THEIR OWN BEHALF, AND IN BEHALF OF SIPALAY
MINING EXPLORATION CORPORATION, ET
AL.,, VS. SECURITIES AND EXCHANGE
COMMISSION, STATE INVESTMENT HOUSE, INC.,
ET AL.,
G.R. NO. L-54330 JANUARY 13, 1989
SEC has the power to compel the officers of a corporation to
call meetings of stockholders under its supervision.
Facts:
Respondent State Investment House, Inc. (formerly State
Financing Center, Inc.) entered into a sales agreement with
Sipalay Mining whereby the latter sold to the former
200,000,000 common shares of its capital stock in the amount
of P2,600,000.00.The sales agreement between Sipalay
Mining and State Investment contained the following terms
and conditions:1. That we shall dispose, sell or assign these
shares to the general public through a duly licensed
stockbroker after the approval of the registration and/or
licensing of shares of the Corporation under terms and
conditions and at the price determined by us; 2. That the
stockbroker shall not sell more than 1,000,000 shares per
buyer, to the extent practicable;
The 200,000,000 shares of stock of Sipalay Mining,
covered by ten certificates of stock, were delivered to State
Investment. Subsequently, the restriction on the sale of the
shares was modified. On October 19, 1974, the Board of
Directors of Sipalay Mining approved the amendment of the
sales agreement by allowing sale in blocks of 5,000,000 shares
per buyer.
24
On December 22, 1975, State Investment addressed a letter to
Sipalay Mining requesting that the latter transfer the
200,000,000 shares to Anselmo Trinidad & Co., Inc.
(hereinafter referred to as ATCO), to which it had sold the
shares. Sipalay Mining complied with this request.During the
time that ATCO held the shares, it voted them in the
stockholders' meetings of Sipalay Mining.
On July 17, 1978, or some two and a half years later, ATCO
in turn sold 198,500,000 of the shares to respondent
VULCAN. Sipalay Mining was requested by ATCO to transfer
the 198,500,000 shares to the name of VULCAN.
Eight days prior to the scheduled annual stockholders'
meeting of Sipalay Mining on July 18,1979, petitioners
filed before the SEC a petition to nullify the sale of the
shares to VULCAN, with a prayer for the issuance of a writ
of preliminary injunction to enjoin VULCAN from voting the
shares.
SEC temporarily restrained VULCAN from voting its
198,500,000 shares at the 1979 annual stockholders' meeting
pending resolution of petitioners' petition for the issuance of a
writ of preliminary injunction. The annual stockholders'
meeting of Sipalay Mining proceeded on July 18, 1979 without
the participation of VULCAN's 198,500,000 shares and the
members of the Board of Directors were elected.
The SEC denied the petitioners' application for the
issuance of the writ of preliminary injunction and respondents'
motion to dismiss to be both without merit. As the appeal of
the assailed orders to the SEC en banc was not allowed under
the rules of the Commission,** petitioners on July 23, 1980
filed the instant petition before this Court.
On August 1, 1980, the Court issued a temporary restraining
order enjoining the SEC from enforcing its orders dated June
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Cases 1-21
13, 1980 and July 17, 1980, particularly from enforcing its
order to create the committee (composed of one representative
of the Securities and Exchange Commission, as Chairman, and
one representatives each from the respondents and the
petitioners, as members) to supervise and control the conduct
of the proceeding in the annual stockholders meeting of
Sipalay Mining and from stopping the Board of Directors and
officers of Sipalay Mining from calling and conducting said
meeting; and respondent VULCAN from voting the questioned
198,500,000 shares of capital stock of Sipalay Mining at the
forthcoming regular annual stockholders' meeting.
Petitioners claim that the SEC acted arbitrarily and with
grave abuse of discretion when its ordered the creation of the
committee, on the grounds: (1) that the controversy is not one
of those mentioned in Presidential Decree No. 902-A; and (2)
that P.D. No. 902-A specifies that only in appropriate cases
may the SEC compel officers of any corporation or association
registered by it to call meetings of stockholders or members
thereof under its supervision.
Issue:
Whether or not the SEC acted arbitrarily and with grave abuse
of discretion, tantamount to lack of jurisdiction, when it
ordered the creation of the committee to supervise and control
the conduct of the proceedings and perform the functions of
the Corporate Secretary, in relation to the regular annual
stockholders' meeting of Sipalay Mining
Ruling:
The Court finds that the order of the SEC creating the
committee is fully supported by P.D. No. 902-A, as amended
by P.D. No. 1653 (1979), provides:
25
Sec. 3.The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchise and/or
a license or permit issued by the government to operate in the
Philippines; and in the exercise of its authority, it shall have
the power to enlist the aid and support of any and all
enforcement agencies of the government, civil or military.x x x
Sec. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and
decrees, its shall have original and exclusive jurisdiction to
hear and decide cases involving.x x xb) Controversies arising
out of intra-corporate or partnership relations, between and
among stockholders members, or associates; between any or
all of them and the corporation, partnership or association of
which they are stockholders members or associates,
respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual
franchise or right to exist as such entity:c) Controversies in
the election or appointments of directors, trustees,
officers or managers of such corporations,
partnerships or associations.
As correctly pointed out by the Solicitor General, the case
before the SEC involves a controversy regarding the election of
directors of a corporation:
Respondent Commission had to address itself to the
controversy by issuing its questioned order dated June 13,
1980, directing the holding of the annual stockholders'
meeting of Sipalay Mining for the year 1980 as mandated in its
by-laws, and creating a committee to supervise and control the
conduct of the proceedings to insure an orderly stockholders
meeting and forestall possible controversy in the sending of
notices, processing and validation of proxies and closing of the
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stock and transfer book. Certainly, the Commission cannot be
faulted, much less can it be said that it exceeded its
jurisdiction, for having taken all proper measures to insure
that an orderly meeting and election are held in Sipalay Mining
in the light of the issues raised in SEC Case No. 1751 pending
before the Commission.
Sec. 5(c) of P.D. No. 902-A would, therefore, clothe the
SEC with jurisdiction over the matter.
The court likewise finds that it was within the powers of
the SEC to compel the officers of Sipalay Mining to call a
stockholders' meeting under its supervision.
As discussed above, under Section 5 of P.D. No. 902-A, the
SEC had original and exclusive jurisdiction over the
controversy. It was "in order to effectively exercise such
jurisdiction", to borrow the language of P.D. No. 902-A, that
the SEC ordered the creation of the committee, in the exercise
of its broad powers of control and supervision over
corporations and its more specific power to compel the
officers of a corporation to call meetings of
stockholders under its supervision.
21. PHILIPPINE VETERANS BANK VS. JUSTINA
CALLANGAN
GR No. 191995, Aug 03, 2011
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 PVB, whose shares are offered
only to a specific group of people, are considered a public
company, if they meet the requirements in 17.2 SRC.
26
Facts:
Callangan, an SEC director, sent Philippine Veterans 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
whose shares of stock are available only to a limited class or
sector, i.e., to World War II veterans, and not to the general
public.
Director Callangan rejected the Bank's explanation and
assessed it a total penalty of (P1,937,262.80) for failing to
comply with the SRC reportorial requirements from 2001 to
2003.
Issue:
Whether Philippine Veterans Bank is required to comply with
the reportorial requirements in Section 17 of the SRC?
Ruling:
Yes.
Subsection 17.2 of the SRC provide:
17.2. The reportorial requirements of Subsection 17.1 shall
apply to the following:
c) An issuer with assets of at least Fifty million pesos
(P50,000,000.00) or such other amount as the Commission
shall prescribe, and having two hundred (200) or more holders
each holding at least one hundred (100) shares of a class of its
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Cases 1-21

equity securities: Provided, however, That the obligation of

such issuer to file reports shall be terminated ninety (90) days
after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100)
shares is reduced to less than one hundred (100).

From these provisions, 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 above.

In the case at bar, the Bank has assets exceeding P50 M 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.