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UNIT 1 – GENERAL BACKGROUND

I. SECURITIES AND EXCHANGE COMMISSION

Section 1, Securities Regulation Code


This shall be known as “The Securities Regulation Code”.

Section 2, Securities Regulation Code


Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises,
enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not
totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market.
To achieve these ends, this Securities Regulation Code is hereby enacted.

Section 3, Securities Regulation Code


1. “Securities” are shares, participation or interests in a corporation or in a commercial enterprise or profit­making venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
(1) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
(2) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription;
(3) Fractional undivided interests in oil, gas or other mineral rights;
(4) Derivatives like option & warrants;
(5) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments;
(6) Proprietary or non proprietary membership certificates incorporations; &
(7) Other instruments as may in the future be determined by the Commission.
2. “Issuer” is the originator, maker, obligor, or creator of the security.
3. “Broker” is a person engaged in the business of buying and selling securities for the account of others. chan robles virtual law library
4. “Dealer” means any person who buys and sells securities for his/her own account in the ordinary course of business.
5. “Associated person of a broker or dealer” is an employee thereof who, directly exercises control of supervisory authority, but does not include a salesman, or an agent or a
person whose functions are solely clerical or ministerial.
6. “Clearing Agency” is any person who acts as intermediary in making deliveries upon payment to effect settlement in securities transactions.
7. “Exchange” is an organized marketplace or facility that brings together buyers and sellers and executes trades of securities and/or commodities.
8. “Insider” means:
(1) the issuer;
(2) a director or officer (or person performing similar functions) of, or a person controlling the issuer;
(3) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not
generally available to the public;
(4) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an
issuer or a security that is not generally available to the public; or
(5) a person who learns such information by a communication from any of the foregoing insiders.
9. “Pre-Need Plans” are contracts which provide for the performance of future services or the payment of future monetary considerations at the time of actual need, for which
planholders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which
the Commission may from time to time approve.
10. “Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration
therefor.
11. “Prospectus” is the document made by or on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed
with the Commission.
12. “Registration statement” is the application for the registration of securities required to be filed with the Commission.
13. “Salesman” is a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities.
14. “Uncertificated security” is a security evidenced by electronic or similar records.
 3.15. “Underwriter” is a person who guarantees on a firm commitment and/or declared
best effort basis the distribution and sale of securities of any kind by another company.

Section 4, Securities Regulation Code


Administrative Agency.

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4.1. This Code shall be administered by the SEC as a collegial body, composed of a Chairperson & 4 Commissioners, appointed by the President for a term of 7 years each and
who shall serve as such until their successor shall have been appointed and qualified. A Commissioner appointed to fill a vacancy occurring prior to the expiration of the term
for which his/her predecessor was appointed, shall serve only for the unexpired portion of such term. The incumbent Chairperson & Commissioners at the effectivity of this
Code, shall serve the unexpired portion of their terms under PD No. 902-A. Unless the context indicates otherwise, the term “Commissioner” includes the Chairperson.
4.2. The Commissioners must be natural-born citizens of the Philippines, at least 40 years of age for the Chairperson and at least 35 years of age for the Commissioners, of
good moral character, of unquestionable integrity, of known probity and patriotism, and with recognized competence in social and economic disciplines:
• Provided, That the majority of Commissioners, including the Chairperson, shall be members of the Philippine Bar.
4.3. The Chairperson is the chief executive officer of the Commission. The Chairperson shall execute and administer the policies, decisions, orders and resolutions approved by
the Commission and shall have the general executive direction and supervision of the work and operation of the Commission and of its members, bodies, boards, offices,
personnel and all its administrative business.
4.4. The salary of the Chairperson and the Commissioners shall be fixed by the President of the Philippines based on an objective classification system, at a sum comparable
to the members of the Monetary Board and commensurate to the importance and responsibilities attached to the position.
4.5. The Commission shall hold meetings at least once a week for the conduct of business or as often as may be necessary upon call of the Chairperson or upon the request of
3 Commissioners. The notice of the meeting shall be given to all Commissioners and the presence of 3 Commissioners shall constitute a quorum. In the absence of the
Chairperson, the most senior Commissioner shall act as presiding officer of the meeting.
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an individual Commissioner or staff member
of the Commission except its review or appellate authority and its power to adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any interested party any action of any department or office, individual Commissioner, or staff
member of the Commission.

Section 5, Securities Regulation Code


SEC. 5. Powers and Functions of the Commission.
5.1. The Commission shall act with transparency and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the
Investment Houses Law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the
Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities
market and propose legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and
orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm,
association or person in the implementation of its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure
of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the
cases before it, subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds
provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and purposes of these laws.
5.2. The Commission’s jurisdiction over all cases enumerated under Sec. 5 of PD No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate RTC:
Provided, that the SC in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within 1 year from the enactment of this Code.
The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

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Section 6, Securities Regulation Code
Indemnification and Responsibilities of Commissioners.
6.1. The Commission shall indemnify each Commissioner and other officials of the Commission, including personnel performing supervision and examination functions for all
costs and expenses reasonably incurred by such persons in connection with any civil or criminal actions, suits or proceedings to which they may be or made a party by reason
of the performance of their functions or duties, unless they are finally adjudged in such actions or proceedings to be liable for gross negligence or misconduct.
In the event of settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Commission is
advised by external counsel that the persons to be indemnified did not commit any gross negligence or misconduct.
The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Commission in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of the Commissioner, officer or employee to repay the amount advanced should it ultimately be determined
by the Commission that he/she is not entitled to be indemnified as provided in this subsection.
6.2. The Commissioners, officers and employees of the Commission who willfully violate this Code or who are guilty of negligence, abuse or acts of malfeasance or fail to
exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by the Commission or other institutions as a result of such
violation, negligence, abuse, malfeasance, or failure to exercise extraordinary diligence. Similar responsibility shall apply to the Commissioners, officers and employees of the
Commission for
(1) the disclosure of any information, discussion or resolution of the Commission of a confidential nature, or about the confidential operations of the Commission,
unless the disclosure is in connection with the performance of official functions with the Commission or with prior authorization of the Commissioners; or
(2) the use of such information for personal gain or to the detriment of the government, the Commission or third parties:
• Provided, however, That any data or information required to be submitted to the President and/or Congress or its appropriate committee, or to be published under
the provisions of this Code shall not be considered confidential.

Section 7, Securities Regulation Code


Reorganization.
1. To achieve the goals of this Code, consistent with Civil Service laws, the Commission is hereby authorized to provide for its reorganization, to streamline its structure and
operations, upgrade its human resource component and enable it to more efficiently and effectively perform its functions and exercise its powers under this Code.
2. All positions of the Commission shall be governed by a compensation and position classification systems and qualification standards approved by the Commission based on
a comprehensive job analysis and audit of actual duties and responsibilities. The compensation plan shall be comparable with the prevailing compensation plan in the Bangko
Sentral ng Pilipinas and other government financial institutions and shall be subject to periodic review by the Commission no more than once every two (2) years without
prejudice to yearly merit reviews or increases based on productivity and efficiency. The Commission shall, therefore, be exempt from laws, rules, and regulations on
compensation, position classification and qualification standards. The Commission shall, however, endeavor to make its system conform as closely as possible with the
principles under the Compensation and Position Classification Act of 1989 (Republic Act No. 6758, as amended).

SRC IRR 2015, Rule 4 (Relevant Provisions)


• There are 4 departments that perform SEC functions:
o Markets and Securities Regulation Department – capital market regulation for market instruments, with a focus on equity securities or debt instruments
o Corporate Governance & Finance Department – capital market regulation, with a focus on exchange-traded funds, mutual funds, membership certificates
o Enforcement & Investor Protection Department – registers domestic corporations
o Registration & Monitoring Department – compliance of all market participants with SRC IRR

SRC IRR 2015, Rule 5


Substantially similar to codals

SRC IRR 2015, Rule 6


Substantially similar to codals

SRC IRR 2015, Rule 7-7.2


Substantially similar to codals

Case Facts Issue & Held Key Takeaways


1. PSE v. CA The Puerto Azul Land, Inc. (PALI), a domestic real estate 1. Did SEC correctly reverse the PSE’s decision? 1. The SEC is the government agency,
corporation, wanted to offer its shares to the public to under the direct general supervision of the
raise funds to develop its properties and pay its loans No. SEC can only reverse the PSE BOG’s Office of the President.

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with several banking institutions. PALI was issued a decisions when made with bad faith; questions
Permit to Sell its shares to the public by the SEC. To of policy are necessarily left to the Board of PSE. 2. SEC’s power to look into rulings of the
facilitate the trading of its shares, PALI sought to The decision was based on the following facts: PSE, may be implied from or be considered
course the trading of its shares through the PSE; thus, (a) the PCGG confirmed the claim of the as necessary or incidental to the carrying
it filed with the said stock exchange an application to Marcoses; (b) an order of sequestration was out of the SEC’s express power to insure
list its shares. The Listing Committee of the PSE issued covering the properties of PALI, and suit fair dealing in securities traded upon a
recommended the approval of the listing to the PSE for reconveyance to the state was filed in the stock exchange.
Board of Governors (BOG). However, the BOG received Sandiganbayan; (c) how the properties were
a letter from the Marcoses stating that the late effectively transferred, despite the sequestration 3.BUT: Notwithstanding the regulatory
President Marcos was the legal and beneficial owner of order to PALI in only a short span of time, also power of the SEC over the PSE, and the its
certain properties of the Puerto Azul Beach Hotel and give rise to serious doubt as to the integrity of authority to reverse the PSE’s decision in
Resort Complex which PALI claimed to be among its PALI as a stock issuer. Thus, PSE was in the right matters of application for listing in the
assets & that the Ternate Development Corporation, a when it refused application of PALI, for a contrary market, the SEC may exercise such power
stockholder of PALI, was also held in trust by one ruling was not to the best interest of the general only if the PSE’s judgment is attended by
Panlilio for Marcos. The PSE thus denied PALI’s public. 
 bad faith.
application because of the serious doubts raised on the
ownership of its assets. PALI wrote the SEC for the 2. Can SEC require a full disclosure policy in
latter to exercise its regulatory power over stock approving the registration and sale of securities?
exchanges. Accordingly, the SEC reversed PSE’s
decision and ordered the immediate listing of PALI’s Yes. The question as to what policy is, or should
shares. be relied upon in approving the registration and
sale of securities in the SEC is not for the Court
to determine, but is left to the sound discretion
of the SEC. However, possible Grounds for the
Rejection of the registration of a security under
the Revised Securities Act must also be followed.
The intention of the lawmakers to make the
registration and issuance of securities
dependent, to a certain extent, on the merits of
the securities themselves, & of the issuer, to be
determined by the SEC. Hence, absolute reliance
on the full disclosure method in the registration
of securities is untenable.
2. SEC v. PFEC is a domestic corporation which operates as a Did SEC comply with due process requirements? There are two essential requirements that
Performance broker/agent between market participants in must be complied with by the SEC before it
Foreign transactions involving foreign exchange, deposits, NO. Here, the first requirement is not present. may issue a cease and desist order:
Exchange interest rate instruments, etc. SEC’s Compliance & SEC did not conduct proper investigation or 1. It must conduct proper investigation or
Corporation Enforcement Dept. (CED) called PFEC for a clarificatory verification before it issued the challenged verification; and
(PFEC) conference on its business operations for a possible orders. The clarificatory conference undertaken 2. There must be a finding that the act or
violation of the SRC (i.e., the selling of foreign by SEC cannot be considered a proper practice, unless restrained, will operate as
commodity futures without the necessary license). investigation or verification process to justify the a fraud on investors or is otherwise likely to
PFEC claimed it was only engaged in stock trading, not issuance of the Cease and Desist Order. It was cause grave or irreparable injury or
the selling of derivatives (the latter being something merely an initial stage of such process, prejudice to the investing public.
which only banks can do). After the conference, SEC considering that after it issued the said order
issued a cease & desist order (CDO). Only then did SEC following the clarificatory conference, petitioner
seek a statement from BSP regarding the nature of the still sought verification from the BSP.
transactions of PFEC, requesting a definitive statement
that PFEC’s business transactions are a form of The second requirement is also not present.
financial derivatives and, therefore, can only be Before a cease and desist order may be issued,
undertaken by banks or non-bank financial there must be a showing that the act sought to
intermediaries performing quasi-banking functions. be restrained will operate as a fraud on investors

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Without waiting for a reply from BSP, SEC denied or is likely to cause grave, irreparable injury or
PFEC’s MR. BSP, however, sided with PFEC. 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
PFEC’s business operation.
3. Bavierra v. Standard Chartered Bank (SCB), a foreign banking Did DOJ commit grave abuse of discretion (GAD) A criminal charge for violation of the SRC is
Paglinawan corporation, is subject to various conditions imposed by in dismissing B’s complaint for violation of a specialized dispute. Hence, it must first
the Monetary Board of BSP. However, SCB did not Securities Regulation Code? be referred to an administrative agency of
comply with the conditions. Instead, it acted as a special competence, i.e., the SEC. Under
stockbroker by soliciting from local residents NO. DOJ did not commit GAD. The Court upheld the doctrine of primary jurisdiction, courts
unregistered foreign securities. Notwithstanding BSP’s the ruling of CA that under Section 53.1 of the will not determine a controversy involving a
directive to stop selling without a license, SCB SRC, a criminal complaint for violation of any law question within the jurisdiction of the
continued to offer & sell unregistered securities. or rule administered by the SEC must first be administrative tribunal, where the question
Manuel Baviera entered into an Investment Trust filed with the latter. If the Commission finds that demands the exercise of sound
Agreement with SCB wherein he purchased US$8,000 there is probable cause, then it should refer the administrative discretion requiring the
worth of GPTMF securities. Baviera learned that SCB case to the DOJ. A criminal charge for violation of specialized knowledge and expertise of
had been prohibited by the BSP to sell these GPTMF the SRC is a specialized dispute. Hence, it must said administrative tribunal to determine
securities. Thereafter, he filed with the DOJ a complaint first be referred to an administrative agency of technical and intricate matters of fact. The
for violation of Section 8.1 of the Securities Regulation special competence, i.e., the SEC. Under the SRC is a special law. Its enforcement is
Code against the bank, but such was dismissed on the doctrine of primary jurisdiction, courts will not particularly vested in the SEC. Hence, all
ground that petitioner’s complaint should have been determine a controversy involving a question complaints for any violation of the Code
filed with the SEC. within the jurisdiction of the administrative and its IRR should be filed with the SEC.
tribunal, where the question demands the Where the complaint is criminal in nature,
exercise of sound administrative discretion the SEC shall indorse the complaint to the
requiring the specialized knowledge and DOJ for preliminary investigation and
expertise of said administrative tribunal to prosecution as provided in Section 53.1
determine technical and intricate matters of fact. earlier quoted.

II. REGISTRATION OF SECURITIES

Section 8, Securities Regulation Code


SEC. 8. Requirement of Registration of Securities.
1. Securities shall not be sold or offered for sale or distribution within the Philippines,
• WITHOUT a registration statement duly filed with & approved by the SEC
Prior to such sale, information on the securities, in such form & with such substance as the SEC may prescribe, shall be made available to each prospective purchaser.
2. SEC may conditionally approve the registration statement under such terms as it may deem necessary.
3. SEC may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale
under this Section.
4. A record of the registration of securities shall be kept in a Register of Securities in which shall be recorded orders entered by the SEC with respect to such securities. Such
register and all documents or information with respect to the securities registered therein shall be open to public inspection at reasonable hours on business days.
5. The SEC may audit the financial statements, assets and other information of a firm applying for registration of its securities whenever it deems the same necessary to insure
full disclosure or to protect the interest of the investors and the public in general.

Section 9, Securities Regulation Code


Exempt Securities (GRB-IHB-B)

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1. The requirement of registration under Subsec. 8.1 shall not as a general rule apply to any of the ff. classes of securities:
(1) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised
by, and acting as an instrumentality of said Government.
(2) Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of Reciprocity:
• Provided, that the SEC may require compliance with the form and content of disclosures the SEC may prescribe.
(3) Certificates issued by a receiver or by a trustee in Bankruptcy duly approved by the proper adjudicatory body.
(4) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing &
Land Use Regulatory Board, or the Bureau of Internal Revenue.
(5) Any security issued by a Bank
• EXCEPT its own shares of stock
9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of this Code with respect to
such securities is not necessary in the public interest & for the protection of investors.

Section 10, Securities Regulation Code


Exempt Transactions
(JPID-CSC-BE20-BIIPIO)
1. The requirement of registration under Subsec. 8.1 shall not apply to the sale of any security in any of the ff. transactions:
(a) At any Judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.
(b) By or for the account of a Pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery
• In the ordinary course of business &
• NOT for the purpose of avoiding the provisions of this Code
• To liquidate a bona fide debt, a security pledged in good faith as security for such debt.
(c) An Isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account,
such sale or offer for sale, subscription or delivery
• NOT being made in the course of repeated & successive transactions of a like character by such owner, or on his account by such representative and such
owner or representative not being the underwriter of such security.
(d) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders
as a stock Dividend or other distribution out of surplus.
(e) The sale of Capital stock of a corporation to its own stockholders exclusively
• Where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property
• Where the entire mortgage together with all the bonds or notes secured thereby are sold to a Single purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of Conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided,
• That the security so surrendered (1) has been registered under this Code or (2) was, when sold, exempt from the provisions of this Code, &
• That the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities
entitled to registration under this Code.
Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such
exchange are sold.
(h) Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading market.
(i) Subscriptions for shares of the capital stock of a corporation –
• Prior to the Incorporation thereof or
• In pursuance of an increase in its authorized capital stock under the Corporation Code,
when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only
when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.
(j) The Exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly
for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12-month period.

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(l) The sale of securities to any number of the ff. qualified buyers:
i. Bank; 

ii. Registered Investment house;
iii. Insurance company;
iv. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons
authorized by the Bangko Sentral to engage in trust functions;
v. Investment company; or
vi. Such Other person as the SEC may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under management.
10.2. The SEC may exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the
investors such as by reason of the small amount involved or the limited character of the public offering.
10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as
the Commission by rule may prescribe and with such notice shall pay to the Commission a fee equivalent to 1/10 of 1% of the maximum aggregate price or issued value of
the securities.

Section 11, Securities Regulation Code


Commodity Futures Contracts
No person shall offer, sell or enter into commodity futures contracts except in accordance with rules, regulations and orders the Commission may prescribe in the public
interest. The Commission shall promulgate rules and regulations involving commodity futures contracts to protect investors to ensure the development of a fair and
transparent commodities market.
• What’s this? According to SRC Rules 11.1.1, it is: a contract providing for the making or taking delivery at a prescribed in the future of a specific quantity and quality of
a commodity or the cash value thereof, which is customarily offset prior to the delivery date, and includes standardized contracts having the indicia of commodities
futures, commodity options and commodity leverage, or margin contracts.

Section 12, Securities Regulation Code


1. All securities required to be registered under Subsection 8.1 shall be registered through the filing by the issuer in the main office of the Commission, of a sworn registration
statement with respect to such securities, in such form and containing such information and documents as the Commission shall prescribe. The registration statement shall
include any prospectus required or permitted to be delivered under Subsec. 8.2, 8.3 & 8.4.
2. In promulgating rules governing the content of any registration statement (including any prospectus made a part thereof or annexed thereto), the Commission may require
the registration statement to contain such information or documents as it may, by rule, prescribe. It may dispense with any such requirement, or may require additional
information or documents, including written information from an expert, depending on the necessity thereof or their applicability to the class of securities sought to be
registered.
3. The information required for the registration of any kind, and all securities, shall include, among others, the effect of the securities issue on ownership, on the mix of
ownership, especially foreign and local ownership.
4. The registration statement shall be signed by the issuer’s executive officer, its principal operating officer, its principal financial officer, its comptroller, principal accounting
officer, its corporate secretary or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. The written
consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. Where the registration
statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement
contributed to by such selling shareholders shall also be filed.
5. (a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of not more than 1/10 of 1% of the maximum aggregate price at which such
securities are proposed to be offered. The Commission shall prescribe by rule diminishing fees in inverse proportion to the value of the aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in 2 newspapers of general circulation in the Philippines,
once a week for 2 consecutive weeks, or in such other manner as the Commission by rule shall prescribe, reciting that a registration statement for the sale of such security has
been filed, and that the aforesaid registration statement, as well as the papers attached thereto are open to inspection at the Commission during business hours, and copies
thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the Commission may prescribe.
6. Within 45 days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the Commission shall declare the registration
statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Sec. 14 hereof. The Commission shall enter an order
declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto, is on its face
complete and that the requirements have been complied with. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection
of the investors.
7. Upon effectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information

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are true and correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission to state a material fact required to be stated
therein or necessary to make the statement therein not misleading shall constitute fraud.

Section 13, Securities Regulation Code


Rejection and Revocation of Registration of Securities.
1. The Commission may reject a registration statement and refuse registration of the security thereunder, or revoke the effectivity of a registration statement and the
registration of the security thereunder after due notice and hearing by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that:
(a) The issuer:
i. Has been judicially declared insolvent;
ii. Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in
connection with the offering for which a registration statement has been filed;
iii. Has been or is engaged or is about to engage in fraudulent transactions;
iv. Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities;
v. Has failed to comply with any requirement that the Commission may impose as a condition for registration of the security for which the registration statement
has been filed; or
(b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements therein not misleading; or
(c) The issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent
judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the Commission
or other competent judicial or administrative body for violations of securities, commodities, and other related laws.
For purposes of this subsection, the term “competent judicial or administrative body” shall include a foreign court of competent jurisdiction as provided for under the Rules of
Court.
2. The Commission may compel the production of all the books and papers of such issuer, and may administer oaths to, and examine the officers of such issuer or any other
person connected therewith as to its business and affairs.
3. If any issuer shall refuse to permit an examination to be made by the Commission, its refusal shall be ground for the refusal or revocation of the registration of its securities.
4. If the Commission deems it necessary, it may issue an order suspending the offer and sale of the securities pending any investigation. The order shall state the grounds for
taking such action, but such order of suspension although binding upon the persons notified thereof, shall be deemed confidential, and shall not be published. Upon the
issuance of the suspension order, no further offer or sale of such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be
void.
5. Notice of issuance of such order shall be given to the issuer and every dealer and broker who shall have notified the Commission of an intention to sell such security.
6. A registration statement may be withdrawn by the issuer only with the consent of the Commission.

Section 14, Securities Regulation Code


Amendments to the Registration Statement.
14.1. If a registration statement is on its face incomplete or inaccurate in any material respect, the Commission shall issue an order directing the amendment of the
registration statement. Upon compliance with such order, the amended registration statement shall become effective in accordance with the procedure mentioned in
Subsection 12.6 hereof.
14.2. An amendment filed prior to the effective date of the registration statement shall recommence the forty-five (45) day period within which the Commission shall act on a
registration statement. An amendment filed after the effective date of the registration statement shall become effective only upon such date as determined by the
Commission.
14.3. If any change occurs in the facts set forth in a registration statement, the issuer shall file an amendment thereto setting forth the change.
14.4. If, at any time, the Commission finds that a registration statement contains any false statement or omits to state any fact required to be stated therein or necessary to
make the statements therein not misleading, the Commission may conduct an examination, and, after due notice and hearing, issue an Order suspending the effectivity of the
registration statement. If the statement is duly amended, the suspension order may be lifted.
14.5. In making such examination the Commission or any officer or officers designated by it may administer oaths and affirmations and shall have access to, and may demand
the production of, any books, records or documents relevant to the examination. Failure of the issuer, underwriter, or any other person to cooperate, or his obstruction or
refusal to undergo an examination, shall be a ground for the issuance of a suspension order.

Section 15, Securities Regulation Code


Suspension of Registration.
15.1. If, at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect, or

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the sale or offering for sale of the security registered thereunder may work or tend to work a fraud, the Commission may require from the issuer such further information as
may in its judgment be necessary to enable the Commission to ascertain whether the registration of such security should be revoked on any ground specified in this Code. The
Commission may also suspend the right to sell and offer for sale such security pending further investigation, by entering an order specifying the grounds for such action, and
by notifying the issuer, underwriter, dealer or broker known as participating in such offering.
15.2. The refusal to furnish information required by the Commission may be a ground for the issuance of an order of suspension pursuant to Subsec. 15.1. Upon the issuance
of any such order and notification to the issuer, underwriter, dealer or broker known as participating in such offering, no further offer or sale of any such security shall be made
until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void.
15.3. Upon issuance of an order of suspension, the Commission shall conduct a hearing. If the Commission determines that the sale of any security should be revoked, it shall
issue an order prohibiting sale of such security.
Until the issuance of a final order, the suspension of the right to sell, though binding upon the persons notified thereof, shall be deemed confidential, and shall not be
published, unless it shall appear that the order of suspension has been violated after notice. If, however, the Commission finds that the sale of the security will neither be
fraudulent nor result in fraud, it shall forthwith issue an order revoking the order of suspension, and such security shall be restored to its status as a registered security as of
the date of such order of suspension.

SRC IRR 2015, Rule 8

8.1.1.1. No Sale Without Registration


There can be no selling or offer to sell of a security unless –
1. The security is duly registered with the SEC through Form 12-1
2. The registration statement has been declared effective by the SEC
*EXCEPT:
1. Exempt securities (Sec. 10)
2. Exempt transactions

8.1.1.2. What Must Be Registered


All outstanding shares of the ff. corporations:
1. Corporations that will conduct Initial Public Offerings (IPOs)
2. Corporations that will apply for listing in an Exchange by way of introduction
• PSE Disclosure Rules: Initial listing by way of introduction shall refer to an application for listing of securities that are already issued or securities that will be
issued upon listing, where no public offering will be undertaken because the securities for which listing is sought would be of such an amount and would be so
widely held that their adequate marketability when listed can be assumed, or when listing in an exchange or public offering is mandated by law or by the
Commission or other government agencies, in the exercise of their powers under the law.

8.1.1.3. No Registration for Securities Issued by Banks


No registration shall be required for the outstanding shares of reporting corporations with shares already listed on an Exchange that were not registered with the Commission
pursuant to Section 5(a)(3) of the Revised Securities Act, now Section 9.1(e) [i.e., securities issued by a bank, except their own] of the Code.

8.1.1.5. When Sale Will Commence


• The sale of the securities subject of the registration statement shall commence within 10 business days from the date of the effectivity of the registration statement
and shall continue until the end of the offering period or until the sale is terminated by the Issuer.
• If the sale is not commenced within 10 business days, the RS shall be cancelled and all fees paid thereon forfeited.

8.1.1.6. Completion or Termination of Offering


A written notification of completion or termination of the offering shall be filed by the Issuer with the SEC within 3 business days from such completion or termination, and the
notice shall state the number of securities sold.

8.1.2. Delayed & Continuous Offering & Sale of Securities (Shelf Registration)
Securities, which are intended to be issued in tranches at more than one instance after the registration statement has been rendered effective by the SEC, may be registered
for an offering to be made on a continuous or delayed basis in the future, for a period not exceeding 3 years from the effective date of the RS under which they are being
offered and sold.
• Requirements:

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1. At least 5 business days prior to the offering or sale of the securities, it shall disclose to the SEC the required information using SEC Form 12-1-SR;
2. Filing Fees
o Upon filing of an RS, the total filing fee shall be computed based on Sec. 12.5 (a) of the SRC, payable per tranche of issuance and proportional to the
issued value.
o The filing fees of the subsequent tranches shall be payable within 7 business days prior to commencement of the offer/sale of the said securities.
3. Undertaking to pay the remaining registration fees not later than 30 business days prior to the expiry of the 3-year period reckoned from the date of the
effectivity of the RS

8.1.3. Submission of Prospectus


The prospectus shall be submitted to the SEC as part of the registration statement.

8.1.3.2. Contents of the Prospectus


Securities required to be registered pursuant to Secs. 8 and 12 of the Code shall not be offered for sale or sold unless the prospectus, or any information material which has
been filed with the registration statement in the form and containing the information described below, has been widely disseminated and sufficient copies have been made
available to interested parties.
Further, the prospectus contains the following statement in bold face print, at least 12 point type prominently displayed:
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SEC, BUT HAS NOT YET BEEN DECLARED EFFECTIVE. NO
OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS
BECOME EFFECTIVE THEREBY, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY
TIME PRIOR TO THE NOTICE OF ITS ACCEPTANCE. AN INDICATION OF INTEREST IN RESPONSE HERETO INVOLVES NO OBLIGATION OR COMMITMENT OF
ANY KIND. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR BE CONSIDERED A SOLICITATION OF AN OFFER TO BUY.

8.1.3.3. Wording of the Prospectus


The prospectus must be worded in a way that it can be understood by an ordinary person.

8.1.3.4. Presumption of Wide Dissemination.


There is a presumption that the prospectus has been widely disseminated if copies were distributed initially to –
1. All the participants in the distribution (e.g., underwriters and brokers);
2. The principal office of the Commission;
3. An Exchange, if the securities will be listed; and
4. 20 or more persons who are not qualified buyers under Section 10.1(I) of the Code.

8.1.3.7. Suspension of Prospectus & Right to Sell.


The prospectus shall not be used UNLESS all the information it contains are up to date and accurately reflect the terms of the offering and the financial condition of the Issuer.
Accordingly, until all appropriate amendments have been made and filed with the SEC under SRC Rule 14, the use of the prospectus and the right to sell and offer for sale may
be suspended under Section 15 of the Code if any of the ff events occurs:
1. There is a material change in any of the information provided (including, but not limited to, the occurrence of a material event that is required to be reported in Form
17-C);
2. The accompanying financial statements are more than 225 days old.

8.3. Written Communications Not Deemed Offers for Sale.


A notice, circular, advertisement, letter or other forms of communication do not constitute an offer for sale that violates Sec. 8 of the Code if it is published or transmitted to
any person after a registration statement has been filed and contains the ff. information:
1. The name of the issuer of the security;

2. The full title of the security and the amount being offered;
3. A brief indication of the general type of business of the issuer;
4. The price of the security or, if the price is not known, the method of its determination or the probable price range as specified by the issuer or the managing
underwriter;
5. In the case of a debt security with a fixed (non-contingent) interest provision, the yield or, if the yield is not known, the probable yield range, as specified by the issuer
or the managing underwriter;
6. The name and address of the sender of the communication and the fact that he is participating, or expects to participate, in the distribution of the security;

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7. The names of the underwriters;
8. The approximate date upon which the proposed sale to the public is anticipated to commence;
9. Whether the security is being offered through rights issued to existing security holders, and, if so, the class of securities the holders of which will be entitled to
subscribe, the subscription ratio, the actual or proposed record date, the date upon which the rights were issued or are expected to be issued, the actual or anticipated
date upon which they will expire, and the approximate subscription price, or any of the foregoing;
10. With respect to any class of debt securities, any class of convertible debt securities or any class of preferred stock, the security rating or ratings assigned to the class
of securities by any credit rating agency recognized or accredited by the Commission and the name of such rating agency which assigned such rating/s;
11. For preliminary prospectuses, the following statement in bold face:
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, BUT HAS
NOT YET BECOME EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR OFFERS TO BUY THEM BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT IS RENDERED EFFECTIVE. THIS COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR BE CONSIDERED A
SOLICITATION TO BUY.
12. A statement whether the security is being offered in connection with a distribution by the Issuer or a security holder, or both, and whether the issue represents new
financing or refinancing, or both;
13. The names and addresses of the persons from whom a prospectus that meets the requirements of Section 12 of the Code may be obtained.

SRC IRR 2015, Rule 9

9.1.1 & 9.1.2. Additional Exempt Securities


1. Any evidence of indebtedness issued by a financial institution that has been licensed by the BSP to engage in banking or quasi-banking shall be exempt from
registration under Section 8.1 of the Code
2. Evidence of indebtedness issued to the BSP under its open market and/or rediscounting operations
3. Bills of exchange arising from a bona fide sale of goods and services that are distributed and/or traded by banks or investment houses duly licensed by the
Commission and BSP through an organized market that is operated under the rules approved by the Commission
4. Any security issued or guaranteed by multilateral financial entities established through a treaty or any other binding agreement to which the Philippines is a party or
subsequently becomes a member (hereinafter referred as Multilateral Financial Entities or MFE), e.g., international financial institutions, multilateral development
banks, development finance institutions or any other similar entities; or by facilities or funds established, administered, and supported by MFEs
o Provided, that the issuer shall file an offering circular/ memorandum in a forrnat prescribed by the Commission and containing among others
(1) Information about the issuer and the security to be issued,
(2) Information about the MFE, and
(3) Inforrnation about the guarantee.
5. The registration requirements shall not likewise apply to evidence of indebtedness, e.g., commercial papers, that meet the ff. conditions:
(1) Issued to not more than 19 non-institutional lenders;
(2) Payable to a specific person;
(3) Neither negotiable nor assignable and held on to maturity; and
(4) In an amount not exceeding P 150,000,000 or such higher amount as the SEC may prescribe.

9.1.3. Compliance Despite Exemption.


Notwithstanding that a particular class of securities is exempt from registration, the conduct by any person in the purchase, sale, distribution of such securities, settlement and
other post-trade activities shall comply with the provisions of the Code and the rules issued thereunder.
Moreover, the purchase and sale of such security shall not be exempt from the coverage of the provisions of the Code on civil and other related liabilities, and other applicable
provisions of the Code on fraud.

9.1.4. What Those with Exempt Securities May Still Have to Report.
Consistent with public interest and for the protection of investors, the SEC may require an Issuer of a class of securities exempted from registration, to make available to
investors and file with the Commission periodic disclosures regarding the Issuer, its business operations, its financial condition, its governance principles and practices, its use
of investor funds, and other appropriate matters, and may also provide for suspension and termination of such requirement with respect to such Issuer.

SRC IRR 2015, Rule 10

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10.1.1. Disclosure to Investors.
Any person claiming exemption under Sec. 10.1 of the Code shall provide to any party to whom it offers or sells securities in reliance on such exemption a written disclosure
containing the following information:
1. The specific provision of Sec. 10.1 of the Code on which the exemption from registration is claimed; and
2. The ff. statement in bold face:
THE SECURITIES BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
REGULATION CODE. ANY FUTURE OFFER OR SALE OF THE SECURITIES IS SUBJECT TO THE REGISTRATION REQUIREMENTS UNDER THE CODE UNLESS SUCH
OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.

10.1.2. Restrictions for Transactions Under Sec. 10.1 (k) of the Code

10.1.2.1. Violating Sec. 8 & 12 of the Code.


Secs. 8 & 12 of the Code are violated if –
(a) The number of persons holding the exempt security under Section 10.1(k) exceeds 19 within a 12-month period or
(b) The sale, offer for sale, or distribution of a security, which is not exempt or which does not fall under an exempt transaction, is actively solicited from or marketed to
non-qualified buyers in the Philippines by any entity, including its agents, representatives, employees or any person acting on its behalf.
In proper cases, the issuer of the security and its directors and officers shall be held liable.

10.1.2.2. Prima Facie Presumption


i. A prima facie presumption of circumvention of Secs. 8 and 12 of the Code shall arise when the number of non-qualified investors shall exceed 19 within 1 year. The
issuer shall be liable for penalty in accordance with the Scale of Fines of the Commission, without prejudice to other actions which may be taken against the issuer.
ii. If the original purchaser/s shall resell said securities resulting in more than 19 holders, Secs. 8 and 12 of the SRC shall apply, notwithstanding the exemption of their
issuances, unless such succeeding sale shall qualify as an exempt transaction.

10.1.2.3. Debt Instruments Exceeding P150M


Debt instruments issued by companies without quasi-banking licenses in excess of P150,000,000 or such higher amount as the SEC may prescribe shall require prior
approval by the SEC.

10.1.2.4. Terms Accompanying Exemption under Sec. 10.1 (k)


A confirmation of exemption made under Section 10.1(k), shall be subject to the ff. terms and conditions:
1. The Issuer or seller claiming relief shall not engage in any form of general solicitation or advertising in that connection
2. Securities sold in any such transaction may only be sold to persons purchasing for their own account
3. The sale may be made to not more than 19 buyers
o A corporation, partnership or other entity shall be counted as 1 buyer;
o Provided, that if the entity is organized for the specific purpose of acquiring the securities offered and is not a qualified buyer under Section 10.1(I) of the Code,
or under these rules, then each beneficial owner of equity securities in the entity shall be counted as a separate buyer under this Rule;
4. The issuer or seller provides any person to whom it offers for sale or sells securities the following information in writing:
o Name of the issuer or seller and its or his predecessor, if any;
o Address of its principal executive office;

o Place of incorporation;

o Title and class of the security;
o Par or issue value of the security;
o Number of shares or total amount of securities outstanding as of the end of the issuer's most recent fiscal year;
o Name and address of the transfer agent;
o Nature of the Issuer's business;
o Nature of products or services offered;
o Nature and extent of the Issuer's facilities;
o Name of the chief executive officer and members of the board of directors;
o The Issuer's most recent financial statements for the 2 preceding fiscal years or such shorter period of existence;
o Whether the person offering or selling the securities is affiliated, directly or indirectly, with the Issuer;
o Whether the offering is being made directly or indirectly on behalf of the Issuer, or any director, officer or person who owns directly or indirectly more than 10%

12
of the outstanding shares of any equity security of the Issuer and, if so, the name of such person; and
o Information required under SRC Rule 10.1.1
 Provided, however, that if the Issuer is a reporting company under Sec. 17 of the Code, a copy of its most recent annual report may be used to provide
the required information.

10.1.3. Offer or Sale of Securities to Qualified Buyers under Sec 10.1(l) of the Code.
Sections 8 and 12 shall not likewise apply to securities issued and sold to the following qualified buyers:
1. Bank;

2. Registered investment house;
3. Insurance company;
4. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons
authorized by the BSP to engage in trust functions;
5. Investment company; or
6. Such other person as the SEC may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under management.

10.1.4. Issuance of Evidence of Indebtedness to Primary Institutional Lenders


Sections 8 and 12 shall not likewise apply to issuance of evidence of indebtedness to the ff. primary institutional lenders:
1. Banks, including their trust accounts wherein the bank-trustee is granted discretionary powers in the investment disposition of the trust funds,
2. Investment houses including their trust accounts wherein the investment house-trustee is granted discretionary powers in the investment disposition of the trust
funds,
3. Trust companies,
4. Financing companies,
5. Investment companies,
6. Pre-need companies,
7. Non-stock savings and loan associations,
8. Building and loan associations,
9. Venture capital corporations,
10. Insurance companies,
11. Government financial institutions,
12. Pawnshops,
13. Pension and retirement funds approved by the BlR,
14. Educational assistance funds established by the national government, and
15. Other entities that may be classified as primary institutional lenders by the BSP, in consultation with the SEC;
Provided all such evidence of indebtedness shall only be negotiated or assigned
1. To any of the aforementioned primary institutional lenders or
2. The Development Bank of the Philippines with respect to private development banks in relation with their rediscounting privileges;
Provided further that in case of non-banks without underwriting licenses, such negotiation or assignment shall be through banks or non-banks licensed to be an underwriter or
a securities dealer;
Provided finally, that in no case shall said instrument be negotiated or assigned to non-qualified investors.

10.1.5. Application for Confirmation or Declaration of Exemption


If the Issuer wants a confirmation of exemption under Section 10.1 of the Code, it shall file SEC Form 10.1 with the Commission.
 If the consideration for the offered securities is other than cash, except in the case of issuance of shares by way of stock dividends, a request for confirmation of
exemption from registration shall be filed with the Company Registration and Monitoring Department of the Commission and shall be deemed to include an application
for approval of valuation required under Section 62 of the Corporation Code and vice versa.

10.1.7. Isolated Transactions under Section 1O.1(c)


• A request for confirmation of exemption under Section 10.1(c) of the Code shall be available to issuers and sellers.
• The SEC may take any action it may deem appropriate in an application for confirmation even if it is filed after the offer or sale of the securities without prejudice to the
imposition of penalties if warranted.

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10.1.8. Exempt from Registration, But Not From Other Requirements and Liabilities
• Notwithstanding that a particular class of securities issued under Section 10.1 is exempt from registration, the conduct by any person in the purchase, sale,
distribution of such securities, settlement and other post-trade activities shall comply with the provisions of the Code and the rules issued thereunder.
• Moreover, the sale or offer for sale of a security in an exempt transaction under Section 10 of the Code shall not be exempt from civil liability and other related
liabilities and other applicable provisions of the Code on fraud, among others.
• Consistent with public interest and for the protection of investors, the Commission, may require an Issuer of a class of securities falling under exempt transactions, to
make available to investors and file with the SEC periodic disclosures regarding the Issuer, its business operations, its financial condition, its governance principles
and practices, its use of investor funds, and other appropriate matters, and may also provide for suspension and termination of such requirement with respect to such
Issuer.

10.1.10. Exemption Not Available For Scheme To Evade Compliance


A request for confirmation of exemption under Section 10 of the Code shall not be available to any Issuer or other persons to any transaction or chain of transactions that,
although it may appear to be in compliance with the Code and these Rules, is a part of a plan or scheme to evade compliance with the registration requirements of the Code.
In such cases, registration shall be mandatory.

10.1.11. Qualified Buyers Under Section 10.1 (I)(vi) of the Code


For purposes of Sec. 10 of the Code, a natural person shall be considered a qualified individual buyer if he has registered as such with entities that are authorized by the SEC
to act as registrar of qualified buyers pursuant to the rules provided under SRC Rule 39.1.4.
A natural person must possess the ff. qualifications:
1. Has an annual gross income of at least P10,000,000 at least 2 years prior to registration, or a total portfolio investment in securities registered with the Commission
of at least P10,000,000, or a personal net worth of not less than P30,OOO,000; &
2. Has been engaged in securities trading personally or through a fund manager for a minimum period of 1 year, or has held for at least 2 years a position of
responsibility in any professional business entity that requires knowledge or expertise in securities trading, such as, legal consultant, financial adviser, sales person, or
associated person of a broker-dealer, bank finance or treasury officer, trust officer or other similar executive officers.
A juridical person must possess the ff. qualifications at the time of registration:
1. Have gross assets of at least P100,OOO,OOO
2. A total portfolio investment in securities registered with the SEC or financial instruments issued by the government of at least P60,000,000

Rule 10.3. Application for Confirmation of Exemption


Any person applying or seeking for confirmation of an exemption under Section 10 of the Code shall file with the SEC a notice identifying the exemption relied upon on such
form and at such time as the SEC by rule may prescribe and with such notice shall pay to the SEC a fee equivalent to 1/10 of 1% of the maximum aggregate price or issued
value of the securities.
• Example: Those applying for exemption because of limited public offering (Rule 10.2) must pay this filing fee according to Rule 10.2.5.
*Power Homes Power Homes (PH)’s primary purpose is to engage in 1. Was PH denied due process? An investment contract as a contract,
v. SEC transactions managing properties. Manero requested transaction or scheme (collectively
SEC to investigate petitioner’s business. He claimed NO. The records reveal that SEC properly “contract”) whereby a person invests his
that he attended a seminar conducted by PH where the examined its business operations when it (1) money in a common enterprise and is led
latter claimed to sell properties that were inexistent called into conference its 3 incorporators, (2) to expect profits not solely but primarily
and without any broker’s license. Another individual, requested information regarding the nature of from the efforts of others.
Munsayac, inquired from SEC whether PH’s business their business operations, (3) asked them to
involves “legitimate network marketing.” Thus, SEC submit documents & (4) visited its business Thus, to be a security subject to regulation
launched an investigation, after which it issued a CDO premises and gathered information thereat. All by the SEC, an investment contract in our
against PH, stating that it was engaging in the sale or these were done before the CDO was issued by jurisdiction must be proved to be: (1) an
offer of sale of investment without registering with the the public respondent SEC. A formal trial or investment of money, (2) in a common
SEC. hearing is not necessary to comply with the enterprise, (3) with expectation of profits,
The scheme of the PH requires an investor to become a requirements of due process. Its essence is (4) primarily from efforts of others. This
Business Center Owner (BCO) who must sign its simply the opportunity to explain one’s position. test is derived from a US case and is
application form. The Terms and Conditions printed at referred to as The Turner Test.
the back of the application form indicate that the BCO 2. Does the business of PH involve a investment
shall mean an independent representative of Power contract that is considered security and thus, The Turner test (& not the Howey Test) is

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Homes, who is enrolled in the company’s referral must be registered prior to sale or offer for sale now the correct test, making the last
program and who will ultimately purchase real property or distribution to the public pursuant to Section requisite “PRIMARILY” instead of
from any accredited real estate developers, entitling 8.1 of the SRC? “SOLELY.”
him to a referral bonus. The Terms also indicate that
there exists no employer/employee relationship YES. The scheme is an investment contract. An
between the BCO & PH. investor enrolls in PH’s program by paying
The BCO is required to pay US$234 as his enrollment US$234. This entitles him to recruit 2 investors
fee. His enrollment entitles him to recruit two investors who pay US$234 each and out of which amount
who should pay US$234 each & out of which he he receives US$92. A minimum recruitment of 4
receives US$92. In case the two referrals would recruit investors by these 2 recruits, who then recruit at
a minimum of 4 persons each recruiting 2 persons who least 2 each, entitles the principal investor to
become his/her own down lines, the BCO will receive a US$184 and the pyramid goes on.
total amount of US$147.20 after deducting the amount Also, contrary to PH’s claim that the US$234 is
of US$36.80 as property fund from the gross amount just a seminar fee, the trainings are merely
of US$184. After recruiting 128 persons in a period of designed to enhance PH’s business of teaching
8 months for each Left and Right business groups or a its investors the know-how of its multi-level
total of 256 enrollees whether directly referred by the marketing business. An investor enrolls under
BCO or through his down lines, the BCO who receives a the scheme of to be entitled to recruit other
total amount of US$11,412.80 after deducting the investors & to receive commissions from the
amount of US$363.20 as property fund from the gross investments of those directly recruited by him.
amount of US$11,776, has now an accumulated Under the scheme, the accumulated amount
amount of US$2,700 constituting as his Property Fund. received by the investor comes primarily from the
This Property Fund is placed in account in Chinabank. efforts of his recruits.
This accumulated amount is used as partial/full down The scheme thus constitutes an investment
payment for the real property chosen by the BCO from contract. Thus, it must be registered with the SEC
any of PH’s accredited real estate developers. before its sale or offer for sale or distribution to
the public. As PH failed to register the same, its
offering to the public was rightfully enjoined. The
CDO was proper even without a finding of fraud.
Otherwise, the SEC cannot protect the investing
public from fraudulent securities.
Gabionza v. CA ASB Holdings, Inc. (ASBHI) was incorporated in 1996. Were ASBHI engaged in the sale of securities, The definition of “securities” includes
Roxas & Nolasco (private respondents) are the which should have been registered? “commercial papers evidencing
president & VP of ASBHI. Gabionza and Tan indebtedness of any person, financial or
(petitioners) had previously placed monetary YES. The Revised Securities Act generally non-financial entity, irrespective of
investment with BSA but they allege that between 1996 requires the registration of securities & prohibits maturity, issued, endorsed, sold,
and 1997, they were convinced by the officers of ASBHI the sale or distribution of unregistered securities. transferred or in any manner conveyed to
to lend, deposit or invest money with the corporation It is one thing for a corporation to issue checks to another.” A check is a commercial paper
and in return, they would receive checks from ASBHI for satisfy isolated individual obligations, & another evidencing indebtedness of any person,
the amount so lent, invested or deposited. 2 postdated for a corporation to execute an elaborate financial or non-financial entity. Since the
checks of DBS Bank are issued by ASBHI to its lenders, scheme where it would comport itself to the checks in this case were generally rolled
one representing the principal amount & the other public as a pseudo-investment house and issue over to augment the creditor’s existing
covering the interest thereon. However, in 2000, DBS postdated checks instead of stocks or traditional investment with ASBHI, they most definitely
Bank started to refuse to pay for the checks securities to evidence the investments of its take on the attributes of traditional stocks.
purportedly by virtue of stop payment orders from patrons. It is important to note that the definition
ASBHI. The latter filed for a petition for rehabilitation of securities set forth in Section 2 of the Revised
and receivership with SEC and was able to obtain an Securities Act includes commercial papers
order enjoining it from paying its outstanding liabilities. evidencing indebtedness of any person, financial
This led to the filing of complaints for: i) estafa under or non-financial entity, irrespective of maturity,
Article 315(2)(a) and (2)(d) of the Revised Penal Code; issued, endorsed, sold, transferred or in any
ii) estafa under PD No. 1689; iii) violation of the manner conveyed to another.

15
Revised Securities Act; and iv) violation of the General
Banking Act against ASBHI. The Secretary of DOJ Did the repeal of the Revised Securities Act by
concluded in its findings that probable cause exists and the Securities Regulation Code of 2000
directed the filing of 5 Informations for estafa under extinguish the criminal liabilities of Roxas &
Article 315(2)(a) of RPC and an Information for Nolasco?
violation of Sec. 4 in relation to Section 56 of the
Revised Securities Act. CA reversed said findings of the NO. The two laws punish the same offense. Also,
DOJ. the complained acts occurred during the
effectivity of the Revised Securities Act. Certainly,
the enactment of the new Code in lieu of the
Revised Securities Act could not have
extinguished all criminal acts committed under
the old law.
SEC v. Prosperity.Com, Inc. (PCI) sold computer software and Is the scheme of PCI considered an investment The United States Supreme Court held in
Prosperity Com. hosted websites without providing internet service. To contract using the Turner Test*? the Howey case [technically, should be
Inc. make a profit, PCI devised a scheme in which, for the Turner] that, for an investment contract to
price of US$234 (subsequently increased to US$294), [*Note that the case incorrectly refers to the test exist, the following elements, referred to as
a buyer could acquire from it an internet website of a as the Howey Test] the Turner test must concur: (1) a contract,
15-Mega Byte (MB) capacity. At the same time, by transaction, or scheme; (2) an investment
referring to PCI his own down-line buyers, a first-time NO. Here, PCI’s clients buy a product of some of money; (3) investment is made in a
buyer could earn commissions, interest in real estate in value to them: an Internet website. The client common enterprise; (4) expectation of
the Philippines and in the United States, and insurance can use this website to enable people to have profits; and (5) profits arising primarily
coverage worth P50,000. internet access to what he has to offer to them, from the efforts of others.
To benefit from this scheme, a PCI buyer must enlist say, some skin cream. The buyers of the website
and sponsor at least two other buyers as his own do not invest money in PCI that it could use for Example of investment contract: An
down-lines. These second tier of buyers could in turn running some business that would generate example that comes to mind would be the
build up their own down-lines. For each pair of profits for the investors. The price of US$234 is long term commercial papers that large
down-lines, the buyer-sponsor received a US$92 what the buyer pays for the use of the website, a companies, like San Miguel Corporation
commission. But referrals in a day by the buyer-sponsor tangible asset that PCI creates, using its (SMC), offer to the public for raising funds
should not exceed 16 since the commissions due from computer facilities and technical skills. that it needs for expansion. When an
excess referrals inure to PCI, not to the buyer-sponsor. Actually, PCI appears to be engaged in network investor buys these papers or securities,
Apparently, PCI patterned its scheme from that of marketing, a scheme adopted by companies for he invests his money, together with others,
Golconda Ventures, Inc. (GVI), which company stopped getting people to buy their products outside the in SMC with an expectation of profits
operations after SEC issued a CDO against it. As it usual retail system where products are bought arising from the efforts of those who
turned out, the same persons who ran the affairs of GVI from the store’s shelf. Under this scheme, manage and operate that company. SMC
directed PCI’s actual operations. Angry people from GVI adopted by most health product distributors, the has to register these commercial papers
complained to SEC that PCI had just taken over their buyer can become a down-line seller. The latter with the SEC before offering them to
business. earns commissions from purchases made by investors.
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.
People v. Petralba, together with her co-accused Houscht, Should Petralba be criminally liable? When the investor is relatively uninformed
Petraiba Gonzales, & Alcantara, were charged with violations of and turns over his money to others,
the Revised Securities Act. According to complainant NO. The foreign exchange trading transaction essentially depending upon their
Dr. Bailey, accused introduced herself as a that transpired between complainant and representations and their honesty and skill

16
representative of Lansdale Enterprises Limited. During Lansdale appears to be an investment contract in managing it, the transaction generally is
the course of their meetings, accused allegedly induced or participation in a profit sharing agreement considered to be an investment contract.
Dr. Bailey to invest in foreign exchange trading, by that falls within the definition of the law. The touchstone is the presence of an
claiming that the business was protected by a foreign However, the Court acquits the accused for investment in a common venture premised
company to the extent of US$4M. Convinced that her failure of the prosecution to prove beyond on a reasonable expectation of profits to
investment is protected, Dr. Bailey issued a check reasonable the exact and direct participation of be derived from the entrepreneurial or
worth $6,000 as starting capital. Bailey signed several the accused. The investment contract itself was managerial efforts of others.
documents like receipts, instruction purchase, and not presented by prosecution; as such, it was not
form letter. However, when Bailey demanded partial proven that the contract was an investment To make a party liable for failure to register
return of her investment from accused Petralba, the contract, rather than a mere buying and selling securities, the contract itself must be
latter failed to do so. Dr. Bailey also contacted the of foreign exchange. The documents and presented as evidence in court. Also, the
office of Lansdale, its officers including the manager testimonies presented were merely proof that Dr. testimony of the complainant must
and Petralba several times but they were always out. Bailey remitted the amount of US$6,000 to sufficiently establish that appellant herself
Thus, she went to the SEC and filed a complaint. RTC, Lansdale through the accused. No evidence was had uttered any words of assurance or
as affirmed by the CA found the accused guilty of presented to support the actual participation of committed a particular act as specified
violating Sections 4, 19 and 29 of the Revised appellant in the alleged offer and sale of under the law, to wit –
Securities Act. In this petition, Petralba contends that securities to the public within the Philippines, nor
the transaction that transpired between Dr. Bailey and was any evidence of misrepresentation shown. Section 29. Fraudulent transactions. —
Lansdale was just foreign exchange trading which is not (a) It shall be unlawful for any person,
covered by the term securities. directly or indirectly, in connection with the
purchase or sale of any securities—
(1) To employ any device, scheme, or
artifice to defraud, or
(2) To obtain money or property by
means of any untrue statement of a
material fact or any omission to
state a material fact necessary in
order to make the statements
made, in the light of the
circumstances under which they
were made, not misleading, or
(3) To engage in any act, transaction,
practice, or course of business
which operates or would operate as
a fraud or deceit upon any person.
(b) It shall be unlawful for any person to
describe a security to a second person,
without purporting to offer it, for a
consideration received or to be received
directly or indirectly from the issuer, any
other person interested in buying or selling
the security, an underwriter, broker, dealer,
or investment adviser, or a controlling,
controlled, or commonly controlled person
of any such person, unless
(1) He concurrently discloses the
source of the consideration or the
nature of or reason for his
employment or
(2) If the second person or his agent in
the transaction is identified, that

17
information is known to the second
person
PSE v. CA [Same as in Part I, SEC]
Union Bank v. Because its securities are exempt from the registration Should Union Bank be exempt from the Full That a bank is under the supervision of the
SEC requirements under Section 5(a)(3) of the Revised Material Disclosure Rule? Bangko Sentral ng Pilipinas (BSP) and the
Securities Act, Union Bank argues that it is not covered Philippine Stock Exchange (PSE) does not
by RSA IRR: NO. While banks are exempted from the exempt it from complying with the
• Rule ll(a)-l, which requires the filing of registration of their securities, nowhere does it continuing disclosure requirements
annual, quarterly, current predecessor and state or even imply that petitioner, as a listed embodied in the assailed Rules. A bank, as
successor reports; corporation, is exempt from complying with the a bank, is primarily subject to the control of
• Rule 34(a)-l, which mandates the filing of reports required by the assailed RSA the BSP; and as a corporation trading its
proxy statements and forms of proxy; and Implementing Rules. Union Bank is a commercial securities in the stock market, it is under
• Rule 34(c)-l, which obligates the submission banking corporation listed in the stock exchange. the supervision of the SEC. It must be
of information statements, pursuant to Thus, it must adhere not only to banking and pointed out that even the PSE is under the
SEC’s Full Material Disclosure Rule. other allied special laws, but also to the rules control and supervision of SEC. There is no
promulgated by SEC, the government entity over-supervision here. Each regulating
tasked not only with the enforcement of the authority operates within the sphere of its
Revised Securities Act, but also with the powers. That stringent requirements are
supervision of all corporations, partnerships or imposed is understandable, considering
associations which are grantees of government the paramount importance given to the
issued primary franchises and/or licenses or interests of the investing public.
permits to operate in the Philippines.
*Nestle Phil. v. Nestlé PH has only 2 principal stockholders: San 1. Is Nestle exempt from registering the issuance
CA Miguel Corporation and Nestlé S.A. The other of its previously authorized but unissued capital
stockholders, who are individual natural persons, own stock?
only 1 share each, for qualifying purposes, i.e., to The issuance of capital stock as part of
qualify them as members of the Board of Directors NO. The issuance of already authorized but still increasing the authorized capital stock of a
being elected thereto on the strength of the votes of unissued stock MUST be registered. Under the corporation need not be registered.
one or the other principal shareholders. reading urged by petitioner Nestlé of the reach HOWEVER, the issuance of already
In 1983, the Board of Directors and stockholders of and scope of the third clause of Section 6(a) (4) authorized but still unissued stock MUST
Nestlé approved resolutions authorizing the issuance of in the Securities Regulation Act, the issuance of be registered.
344,500 shares out of the previously authorized but previously authorized but unissued capital stock
unissued capital stock of Nestlé, exclusively to San would automatically constitute an exempt This ruling is NOT IN OPERATION
Miguel Corporation and to Nestlé S.A. San Miguel transaction, without regard to the length of time ANYMORE. The current rule is, if it’s for
Corporation subscribed to and completely paid up which may have intervened between the last your own stockholders, whether or not
168,800 shares, while Nestlé S.A. subscribed to and increase in authorized capital stock and the there is additional ACS, no need to disclose
paid up the balance of 175,700 shares of stock. On 28 proposed issuance during which time the
March 1985, petitioner Nestlé filed a letter with the condition of the corporation may have Under the SRC, if the sale of shares is
SEC seeking exemption of its proposed issuance of substantially changed, and without regard to EXCLUSIVELY to own stockholders, then it
additional shares to its existing principal shareholders, whether the existing stockholders to whom the is an exempt transaction. Nestle’s case
from the registration requirement of Section 4 of the shares are proposed to be issued are only two was issued previous to the SRC. The SRC
Revised Securities Act and from payment of the fee giant corporations as in the instant case, or are now modifies the provision to reflect the
referred to in Section 6(c) of the same Act. In that individuals numbering in the hundreds or ruling in the Nestle case (through Sec. 10
letter, Nestlé requested confirmation of 2 propositions: thousands. (e))
“1. That there is no need to file a petition for exemption In contrast, under the ruling issued by the SEC,
under Section 6(b) of the Revised Securities Act with an issuance of previously authorized but still
respect to the issuance of the said 344,500 additional unissued capital stock may, in a particular
shares to our existing stockholders out of our unissued instance, be held to be an exempt transaction by
capital stock; and the SEC under Section 6(b) so long as the SEC
2. That the fee provided in Section 6(c) of [the Revised finds that the requirements of registration under
Securities] Act is not applicable to the said issuance of the Revised Securities Act are “not necessary in

18
additional shares.” the public interest and for the protection of the
investors” by reason, inter alia, of the small
amount of stock that is proposed to be issued or
because the potential buyers are very limited in
number and are in a position to protect
themselves. In fine, Nestle’s proposed
construction of Section 6(a) (4) would establish
an inflexible rule of automatic exemption of
issuances of additional, previously authorized
but unissued, capital stock. We must reject an
interpretation which may disable the SEC from
rendering protection to investors, in the public
interest, precisely when such protection may be
most needed.

2. Must Nestle pay the fee?

YES. The fee collected in 21 Feb. 1983 by the


SEC was assessed in connection with the
examination and approval of the certificate of
increase of authorized capital stock then
submitted by petitioner. 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. We do not
find such fee either unreasonable or exorbitant.
Hertzberg v. Dignity Partners Inc. (Dignity) issued a registration Do petitioners have legal standing? The civil remedies accorded by [Section
Dignity Partners, statement for a preliminary public offering of Dignity 11] are given to all purchasers regardless
Inc. common stock. Dignity would purchase the rights to life YES. Section 11(a) provides that where a of whether they bought their securities at
insurance profits from persons with AIDS, accepting material fact is misstated or omitted from a the time of the original offer or at some
responsibility for payment of premiums & paying a lump registration statement accompanying a stock later date, provided, of course, that the
sum up front. This is referred to as a “viatical filing with the SEC, “any person acquiring such remedy is prosecuted within the period of
settlement.” Just after the offering, AIDS patients’ life security” may bring an action for losses caused limitations provided by Section 13. By
expectancy extended as a result of new AIDS by the misstatement or omission. The term “any expressly referring to purchasers who
treatments. Because of these new treatments, Dignity person” is quite broad, and we give words their bought their securities ―at some later
suffered enormous losses & the stock plunged. ordinary meaning. Thus, as long as Hertzberg is date‖ other than ―at the time of the
Hertzberg, Derosa, & Feinman (“Hertzberg”) are suing regarding this security, he is “any person original offer, the Report makes it clear
investors who purchased Dignity stock on the open purchasing such security,” regardless of whether that purchasers in the aftermarket are
market more than 25 days after the initial offering but he bought in the initial offering, a week later, or a intended to have a cause of action under
before the news of the longer life expectancy or large month after that the Section.
losses became public knowledge. They brought a class
action for several violations of the securities laws by
Dignity, including violation of Section 11 of the
Securities Act of 1933.
Hertzberg claims that Dignity knew of the longer life
expectancy but failed to disclose it in the registration

19
statement. The district court dismissed the Section 11
causes of action on the ground that, because
appellants had not bought their stock in the initial
public offering, or within 25 days thereof, they did not
have standing to bring the claim.
Escott v. BarChris built bowling alleys during the pinnacle of Were there material misstatements or omissions A plaintiff does not have a cause of action
BarChris bowling popularity. BarChris had different in the registration statement of BarChris? by just providing evidence of a
Construction Co. arrangements with customers when building an alley. misstatement in a registration statement.
They would either be paid to simply build an alley for a YES. The court reviewed many of the statements The misstatements need to be material
customer, or they would sell the interior & lease the contained in the registration statement filed by enough to cause an investor to rely on the
exterior of the building. They also offered financing Defendants. Some of the statements were within statement when they otherwise would not
options that were risky for BarChris. BarChris instituted normal accounting standards, and some of the have.
a public offering to raise money since their financing figures were only slightly different from what the
plans left them short of actual cash. BarChris, and court calculated. However, other statements The question to ask: Would it have
competing companies overpopulated the country with were misleading or omitted figures altogether, deterred an average prudent investor from
bowling alleys, and many alleys closed. BarChris also and the difference was significant enough to be purchasing these debentures if he had
made the following omissions or misstatements in its considered material under the Act. been informed? This question is a question
prospectus: of judgment.
1. Current assets on the 1960 balance sheet
were overstated No one shall be liable for false statements
2. Contingent liabilities of April 30, 1961, were or omissions in securities registration
understated statements as to parts which do not
3. Sales for the quarter ending March 31, 1961, purport to come from an authority or
were overstated expert.
4. Gross profit for the quarter ending March 31,
1961, were
5. Backlog of orders as of March 31, 1961, was
overstated
6. Loans to officers of BarChris of $386,615 were
not disclosed.
7. Customer delinquencies and BarChris's
potential liability thereto of $1,350,000 were
not disclosed.
8. The use of the proceeds of the debentures to
pay old debts was not disclosed.
Many customers of BarChris were defaulting on the
financing, & BarChris sold more debentures to keep
afloat. The registration statements filed with the public
offerings listed extensive assets liabilities that were
later found to be inaccurate. BarChris eventually
declared bankruptcy. Plaintiffs accused BarChris of
misstating or omitting facts in the registration
statements.
Akerman v. Oryx A business that produced and sold videotapes and Is it true that demonstrating that the decline in a Demonstrating that the decline in the
Communications DVDs, Oryx, filed a registration statement for initial stock’s value occurred due to supplementary stock’s value occurred due to
public offering of 700,000 shares of stock. The stock reasons allows for lessening or evasion of liability supplementary reasons allows one to
sold at $4.75. An inaccuracy was included in the under § 11 for substantial distortions in lessen or evade liability under § 11 for
prospectus within the registration statement where registration statements? substantial distortions in registration
Oryx reported a substantial transaction by a subsidiary statements.
one month later than usual. Therefore, the profits listed Yes. Liability under § 11 for substantial
in the financial statement were exaggerated in the distortions in registration statements may be A fundamental purpose of the Securities

20
prospectus. The distortion was revealed to the SEC by evaded or lessened by demonstrating that the Act of 1933 "was to substitute a philosophy
Oryx months later, when the stocks selling price was decline in the stock’s value occurred due to of full disclosure for the philosophy
$4.00. The day prior to Oryx revealing the error to the supplementary reasons. § 11 of the Securities of caveat emptor and thus to achieve a
public, a month after the reveal to the SEC, the stock Act enforces civil liability for damages caused to high standard of business ethics in the
was selling at $3.25. Akerman brought suit a month buyers of the securities on the issuer and securities industry."
after that, when the stock’s price was at $3.50, hoping signatories of a registration statement that
to recoup the variance in value between the initial includes substantial distortions or missing data. "[t]he question of materiality ... is an
purchase price and the value at the time the suit was Under § 11(e) though, defendants may lessen objective one, involving the significance of
started under § 11 of the Securities Act. Oryx replied their liability by demonstrating the diminished an omitted or misrepresented fact to a
that the diminishing value of the stock occurred due to value of the stock was not a result of the reasonable investor.... An omitted fact is
reasons other than distortion in the registration substantial distortions. Under § 11 (e) the material if there is a substantial likelihood
statement. The district court granted summary defendants carry a heavy burden of that a reasonable shareholder would
judgment to Oryx and Akerman appealed. demonstrating that supplementary reasons consider it important in deciding how to
caused the stock value to diminish due to vote."
Congress wanting to distribute the risk of
uncertainty to the issuers as opposed to the
buyers. Oryx showed confirmation that the error
made in the registration statement was hardly
substantial due to prospectus incorporating a
negative forecast of the performance of its
subsidiary. Therefore, perceptions about
performance are not likely to have changed due
to the accounting mistake and Oryx’s stock price
actually rose once the mistake was publicly
revealed. Akerman’s evidence that other stocks
did much better than Oryx holds no weight due to
it failing to take into account the innumerable
variables that have the potential to affect stock
performance. So, the burden of proving that
reasons aside from registration statement
mistake resulted in the devaluation of the stock
is met by Oryx.

In this case, Oryx stock remained stable in the


two-week period between disclosure and the
filing of this suit, and for several months
thereafter. NASDAQ records indicate that the
market price of Oryx units rose one-quarter point
in the period between the day before the public
announcement and November 25, 1981, the
date of suit. From November 25 into the third
week of February 1982, the price of Oryx units
remained slightly above or slightly below the
price at the date of suit.
*Gustafson v. The sole shareholders of Alloyd, Inc., a producer of Is the term “prospectus” only referring to As defined in the Securities Act of 1933,
Alloyd Co. plastic packaging and heat sealing machinery, were documents relating to public offerings? the term “prospectus” references
Gustafson and two other persons. In 1989, investors, in documents related to public offerings and
a private sale, committed to buy out Gustafson and the Yes. For reasons of deciding a right of rescission not secondary sales, for reasons of
2 co-shareholders. As a result of the doubts regarding under the Securities Act, the term “prospectus” deciding
 aright of rescission under §
the present financial status of Alloyd, the agreement is only referring to documents relating to public 12(2).
stipulated that if assessments failed to be true, when offerings. § 10 limits the definition to documents

21
new numbers were available, the party that was that need to contain the information from the An examination of §10 reveals that,
dissatisfied was allowed an alteration. Alloyd was registration statement, whereas, a registration whatever else "prospectus" may mean, the
eligible to receive $815,000 a year later under this statement is necessary but only in public term is confined to a document that,
clause, but opted to bring suit in district court to offerings. Only when there is an § 10 obligation absent an overriding exemption, must
withdraw the agreement under § 12(2) of the to issue the prospectus, as in a public offering, include the "information contained in the
Securities Act of 1933. Even though Gustafson paid the does § 12(2) liability attach. The contention that registration statement." By and large, only
adjustments, Alloyd persevered, alleging that the all offers are considered a prospectus under § public offerings by an issuer of a security,
contract of sale was a “prospectus” so that any 12 would necessitate a holding that the or by controlling shareholders of an issuer,
mistakes in it would permit § 12(2) liability. definition is more expansive in § 12 than in § 10. require the preparation and filing of
registration statements.

Q: Does the Gustafson case apply to the


Philippines?
A: This is a non-issue in the Philippines
because the U.S. law says “sale” but the
Philippine law says, “sale to the public.”
Thus the Philippine version qualifies the
statement.
UNIT 2 – REGULATION OF LISTED COMPANIES
1. DISCLOSURE REQUIREMENTS

Section 2, Securities Regulation Code


Already in Unit 1

Section 17, Securities Regulation Code


Periodic and Other Reports of Issuers.
17.1. Every issuer satisfying the requirements in Subsec.17.2 hereof shall file with the SEC:
(a) Within 135 days, after the end of the issuer’s fiscal year, or such other time as the SEC may prescribe, an annual report which shall include, among others –
1. A balance sheet,
2. Profit and loss statement &
3. Statement of cash flows, for such last fiscal year, certified by an independent certified public accountant, &
4. A management discussion and analysis of results of operations; &
(b) Such other periodical reports for interim fiscal periods & current reports on significant developments of the issuer as the SEC may prescribe as necessary to keep current
information on the operation of the business & financial condition of the issuer.

17.2. The reportorial requirements of Subsec. 17.1 shall apply to the ff.:
(a) An issuer which has sold a class of its securities pursuant to a registration under Sec. 12 hereof:
• Provided, however, That the obligation of such issuer to file reports shall be suspended for any fiscal year after the year such registration became effective if
such issuer, as of the first day of any such fiscal year, has less than 100 holders of such class of securities or such other number as the SEC shall prescribe
and it notifies the Commission of such;
(b) An issuer with a class of securities listed for trading on an Exchange; and
(c) An issuer with assets of at least P50,000,000 or such other amount as the SEC shall prescribe, & having 200 or more holders each holding at least 100 shares of a
class of its equity securities:
• Provided, however, That the obligation of such issuer to file reports shall be terminated 90 days after notification to the SEC by the issuer that the number of
its holders holding at least 100 shares is reduced to less than 100

17.3. Every issuer of a security listed for trading on an Exchange shall file with the Exchange a copy of any report filed with the Commission under Subsec. 17.1 hereof.
17.4. All reports (including financial statements) required to be filed with the Commission pursuant to Subsec. 17.1 hereof shall be in such form, contain such information and
be filed at such times as the Commission shall prescribe, and shall be in lieu of any periodical or current reports or financial statements otherwise required to be filed under
the Corporation Code.

22
17.5. Every issuer which has a class of equity securities satisfying any of the requirements in Subsec. 17.2 shall furnish to each holder of such equity security an annual report
in such form and containing such information as the Commission shall prescribe.

17.6. Within such period as the Commission may prescribe preceding the annual meeting of the holders of any equity security of a class entitled to vote at such meeting, the
issuer shall transmit to such holders an annual report in conformity with Subsection 17.5.

Section 18, Securities Regulation Code


Reports by 5% Holders of Equity Securities.
18.1. In every case in which an issuer satisfies the requirements of Subsec. 17.2 hereof, any person who acquires directly or indirectly the beneficial ownership of more than
5% of such class or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within 10 days after such acquisition or such reasonable time as fixed
by the SEC, submit to (1) the issuer of the security, to (2) the Exchange where the security is traded, & to (3) the Commission a sworn statement containing the ff. information
and such other information as the Commission may require in the public interest or for the protection of investors:
(c) The personal background, identity, residence, and citizenship of, and the nature of such beneficial ownership by, such person and all other persons by whom or on
whose behalf the purchases are effected; in the event the beneficial owner is a juridical person, the lines of business of the beneficial owner shall also be reported;
(d) If the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such
persons may have that will effect a major change in its business or corporate structure;
(e) The number of shares of such security which are beneficially owned, and the number of shares concerning which there is a right to acquire, directly or indirectly, by:
1. Such person, &
2. Each associate of such person, giving the background, identity, residence, and citizenship of each such associate; &
(f) Information as to any contracts, arrangements, or understanding with any person with respect to any securities of the issuer including but not limited to transfer, joint
ventures, loan or option arrangements, puts or calls, guarantees or division of losses or profits, or proxies naming the persons with whom such contracts,
arrangements, or understanding have been entered into, and giving the details thereof.

18.2. If any change occurs in the facts set forth in the statements, an amendment shall be transmitted to the issuer, the Exchange and the Commission.

18.3. The Commission, may permit any person to file in lieu of the statement required by Subsec. 17.1 hereof, a notice stating –
i. The name of such person,
ii. The shares of any equity securities subject to Subsec. 17.1 which are owned by him, the date of their acquisition &
iii. Such other information as the Commission may specify,
IF it appears to the SEC that such securities were acquired by such person in the ordinary course of his business & were not acquired for the purpose of & do not have the
effect of changing or influencing the control of the issuer nor in connection with any transaction having such purpose or effect.

Section 23, Securities Regulation Code


Transactions of Directors, Officers and Principal Stockholders.
23.1. Every person who is –
i. Directly or indirectly the beneficial owner of more than 10% of any class of any equity security which satisfies the requirements of Subsec. 17.2, or
ii. A director or an officer of the issuer of such security,
shall file, at the time either such requirement is first satisfied or within 10 days after he becomes such a beneficial owner, director, or officer,
(1) A statement with the Commission and,
(2) If such security is listed for trading on an Exchange, also with the Exchange, of the amount of all equity securities of such issuer of which he is the beneficial owner, &
(3) Within 10 days after the close of each calendar month thereafter, if there has been a change in such ownership during such month, shall file with the SEC & if such
security is listed for trading on an Exchange, shall also file with the Exchange, a statement indicating his ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month.

23.2. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to
the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of less than 6 months,
unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of
holding the security purchased or of not repurchasing the security sold for a period exceeding 6 months.
• Suit to recover such profit may be instituted before the RTC by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the
issuer shall fail or refuse to bring such suit within 60 days after request or shall fail diligently to prosecute the same thereafter, but no such suit shall be brought more
than 2 years after the date such profit was realized.

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• This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and
purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the
purpose of this subsection.

23.3. It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer if the person selling the security or his
principal:
(a) Does not own the security sold; or
(b) If owning the security, does not deliver it against such sale within 20 days thereafter, or does not within 5 days after such sale deposit it in the mails or other usual
channels of transportation;
• BUT no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to make such delivery or
deposit within such time, or that to do so would cause undue inconvenience or expense.

23.4. The provisions of Subsec. 23.2 shall not apply to any purchase and sale, or sale and purchase, and the provisions of Subsec. 23.3 shall not apply to any sale, of an
equity security not then or thereafter held by him in an investment account, by a dealer in the ordinary course of his business and incident to the establishment or
maintenance by him of a primary or secondary market, otherwise than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems
necessary or appropriate in the public interest, define and prescribe terms and conditions with respect to securities held in an investment account and transactions made in
the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market.

Section 36, Securities Regulation Code


Powers with Respect to Exchanges and Other Trading Market.
36.1. The Commission is authorized, if in its opinion such action is necessary or appropriate for the protection of investors and the public interest so requires, summarily to
suspend trading in any listed security on any Exchange or other trading market for a period not exceeding 30 days or, with the approval of the President of the Philippines,
summarily to suspend all trading on any securities Exchange or other trading market for a period of more than 30 but not exceeding 90 days:
• Provided, however, That the Commission, promptly following the issuance of the order of suspension, shall notify the affected issuer of the reasons for such
suspension & provide such issuer with an opportunity for hearing to determine whether the suspension should be lifted.
36.2. Wherever two or more Exchanges or other trading markets exist, the Commission may require and enforce uniformity of trading regulations in and/or between or among
said Exchanges or other trading markets.
36.3. In addition to the existing Philippine Stock Exchange, the Commission shall have the authority to determine the number, size and location of stock Exchanges, other
trading markets and commodity Exchanges and other similar organizations in the light of national or regional requirements for such activities with the view to promote,
enhance, protect, conserve or rationalize investment.
36.4. The Commission, having due regard to the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition
among brokers, dealers, clearing agencies, and transfer agents, shall promulgate rules and regulations for the prompt and accurate clearance and settlement of securities
transactions.
36.5. (a) The Commission may establish or facilitate the establishment of trust funds which shall be contributed by Exchanges, brokers, dealers, underwriters, transfer agents,
salesmen and other persons transacting in securities, as the Commission may require, for the purpose of compensating investors for the extraordinary losses or damage they
may suffer due to business failure or fraud or mismanagement of the persons with whom they transact, under such rules and regulations as the Commission may from time to
time prescribe or approve in the public interest.
(b) The Commission may, having due regard to the public interest or the protection of investors, regulate, supervise, examine, suspend or otherwise discontinue such and other
similar funds under such rules and regulations which the Commission may promulgate, and which may include taking custody and management of the fund itself as well as
investments in and disbursements from the funds under such forms of control and supervision by the Commission as it may from time to time require. The authority granted to
the Commission under this subsection shall also apply to all funds established for the protection of investors, whether established by the Commission or otherwise.

Section 51, Securities Regulation Code


Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability.
51.1. Every person who, by or through stock ownership, agency, or otherwise, or in connection with an agreement or understanding with one or more other persons, controls
any person liable under this Code or the rules or regulations of the Commission thereunder, shall also be liable jointly and severally with and to the same extent as such
controlled persons to any person to whom such controlled person is liable, unless the controlling person proves that, despite the exercise of due diligence on his part, he has
no knowledge of the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
51.2. It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this Code or any
rule or regulation thereunder.
51.3. It shall be unlawful for any director or officer of, or any owner of any securities issued by, any issuer required to file any document, report or other information under this

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Code or any rule or regulation of the Commission thereunder, without just cause, to hinder, delay or obstruct the making or filing of any such document, report, or information.
51.4. It shall be unlawful for any person to aid, abet, counsel, command, induce or procure any violation of this Code, or any rule, regulation or order of the Commission
thereunder.
51.5. Every person who substantially assists the act or omission of any person primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless
disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor for damages resulting from the conduct of the person primarily
liable: Provided, however, That an aider and abettor shall be liable only to the extent of his relative contribution in causing such damages in comparison to that of the person
primarily liable, or the extent to which the aider and abettor was unjustly enriched thereby, whichever is greater.

Section 57, Securities Regulation Code


Civil Liabilities Arising in Connection With Prospectus, Communications and Reports.
57.1. Civil Liability of Sellers of Securities.
Any person who:
(d) Offers to sell or sells a security in violation of Chapter III; or
(e) Offers to sell or sells a security, whether or not exempted by the provisions of this Code,
1) By the use of any means or instruments of transportation or communication,
2) By means of a prospectus or other written or oral communication,
which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall fail in the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may
sue to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for
damages if he no longer owns the security.
57.2. Civil Liability of Those Who Make Statements or Reports Other than Sellers.
Any person who shall make or cause to be made any statement in any report, or document filed pursuant to the SRC or its IRR, which statement was at the time and in the
light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person who, not knowing that such statement
was false or misleading, and relying upon such statements shall have purchased or sold a security at a price which was affected by such statement, for damages caused by
such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading.

Section 62, Securities Regulation Code


62.1. Limitation of Actions for Sec. 56 & 57.
No action shall be maintained to enforce any liability created under Sec. 56 or 57 of this Code unless
• Brought within 2 years after the discovery of the untrue statement or the omission, or,
• If the action is to enforce a liability created under Subsec. 57.1(a), brought within 2 years after the violation upon which it is based.
In no event shall any such action be brought to enforce a liability created under Sec. 56 or Subsec. 57.1
(a) More than 5 years after the security was bona fide offered to the public, or under Subsec. 57.1
(b) More than 5 years after the sale.

62.2. Limitation of Actions for Other Provisions.


No action shall be maintained to enforce any liability created under any other provision of this Code unless brought within 2 years after the discovery of the facts constituting
the cause of action and within 5 years after such cause of action accrued.

Section 63, Securities Regulation Code


Amount of Damages to be Awarded

63.1. Court with Jurisdiction & Awards That May be Granted.


All suits to recover damages pursuant to Secs. 56, 57, 58, 59, 60 & 61 shall be brought before the RTC, which shall have exclusive jurisdiction to hear and decide such suits.
• RTC is authorized to award damages in an amount not exceeding triple the amount of the transaction plus actual damages
• Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness in the violation of SRC or its IRR.
• RTC can also award attorney’s fees not exceeding 30% of the award.
63.2. Who is Liable.
The persons specified in Secs. 56, 57, 58, 59, 60 & 61 hereof shall be jointly & severally liable for the payment of damages.
• BUT: any person who becomes liable for the payment of such damages may recover contribution from any other person who, if sued separately, would have been liable

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to make the same payment, unless the former was guilty of fraudulent representation and the latter was not.

63.3. Equal Contribution of Liable Persons.


Notwithstanding any provision of law to the contrary, all persons, including the issuer, held liable under the provisions of Secs. 56, 57, 58, 59, 60 & 61, shall contribute equally
to the total liability adjudged herein.
• In no case shall the principal stockholders, directors & other officers of the issuer or persons occupying similar positions therein, recover their contribution to the
liability from the issuer.
• HOWEVER: The right of the issuer to recover from the guilty parties the amount it has contributed under this Section shall not be prejudiced.

SRC IRR 2015, Rule 17.1

17.1.1. Reporting Rules for Public and Reporting Companies


• GR: All public & reporting companies under Rule 3 must file their reports.
• EXC: The obligation of a company which has sold a class of its securities pursuant to a registration under Sec. 12 of the Code shall be suspended for any fiscal year if,
as of the 1st day of any such fiscal year, it has less than 100 holders of such class of securities and the SEC is notified of that fact. The suspension shall be availed of
only after the year the registration became effective.

17.1.2. Reports Required to be Filed.


The public and reporting companies shall file with the Commission:
• SEC Form 17-A - An annual report for the fiscal year in which the registration statement was rendered effective by the SEC, and for each fiscal year thereafter, within
105 calendar days after the end of the fiscal year.
• SEC Form 17-Q - A quarterly report within 45 calendar days after the end of each of the first 3 quarters of each fiscal year. The first quarterly report of the Issuer shall
be filed either within 45 calendar days after the effective date of the registration statement or on or before the date on which such report would have been required to
be filed if the Issuer had been required previously to file reports on SEC Form 17-Q, whichever is later.
• SEC Form 17-C - A current report, as may be necessary, to make a full, fair and accurate disclosure to the public of every material fact or event that occurs which
would reasonably be expected to affect the investors' decisions in relation to those securities.
o In the event a news report appears in the media involving an alleged material event, a current report shall be made within the period prescribed herein in order
to clarify the said news item which may create public speculation if not officially denied or clarified by the concerned company.

17.1.1.1.3(b). Guidelines for SEC Form 17-C.


1. Promptly to the public through the news media;
2. If the Issuer is listed on an Exchange, to that Exchange & to the SEC within 10 minutes after the occurrence of the event and prior to its release to the public through
the news media
• Provided that, disclosure by the Issuer to the Exchange may be deemed as filing with the SEC pursuant to a Memorandum of Agreement between the Exchange
and the SEC
• Provided further that, the Memorandum of Agreement shall provide for the ability of the SEC to download and upload the same information made available to
the Exchange
3. If the issuer is not listed on an Exchange, to the SEC through SEC Form 17-C within 5 calendar days after the occurrence of the event reported, unless substantially
similar information as that required by Form 17-C has been previously reported to the SEC by the Issuer.

17.1.1.2. When a Report is Deemed an Official Filing.


Any disclosure signed and filed with the SEC and the Exchange where the securities of the Issuer are listed, or released to the news media by any director, executive officer or
a principal (as defined under Sec. 23 of the Code) of an Issuer shall be considered as part of any report mentioned in SRC Rule 17.1.1.1.3(a) (SEC Form 17-C) and deemed as
an official filing of such company if it does not deny the subject information within 2 days from the filing or release of the disclosure. Any misleading statement,
misrepresentation or omission of a material fact therein shall be considered the joint responsibility of the Issuer and the reporting director, officer or principal.

17.1.1.3. Responsibility of Owner of More than 5% Voting Rights of a Public & Reporting Company.
An owner of more than 5% of the voting rights of a public and reporting company that meets the requirements of Section 17.2 of the Code who holds material information
which may materially affect such company may be required by the SEC to disclose such information within the period prescribed under SRC Rule 17.1.1.1.3 (regarding current
reports under SEC Form 17-C).

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• Failure to provide the required information shall subject the said stockholder to the sanctions applicable to violations of this Rule.

SRC IRR 2015, Rule 18.1


Reports to be Filed by Beneficial Owners

18.1.1. Who Must File Report


This Rule shall apply to any person who acquires in any manner the beneficial ownership of 5% of any class of equity securities of a company that satisfies the requirements of
Section 17.2 (Reportorial Requirements) of the Code.
• If the equity securities under the name of the legal owner are beneficially owned by another person/s, the legal owner and beneficial owner shall individually or jointly,
within 5 business days after such acquisition, submit to the Issuer, the Exchange where the security is traded, and to the Commission a sworn statement containing
the information required by SEC Form 18-A.

18.1.5. Not Deemed Beneficial Owners


1. A person who, in the ordinary course of business, is a pledgee of securities under a written agreement shall not be deemed to be the beneficial owner of such pledged
securities until the pledgee has taken all the steps required to declare a default and has determined that the power to vote or to dispose or to direct the disposition of
such pledged securities will be exercised;
2. A person engaged in the business of an investment house who acquires his securities through his participation in good faith in a firm commitment underwriting shall
not be deemed to be the beneficial owner of such securities until the expiration of six (6) months from the date of such acquisition; and

18.1.3. Short Form Report


A person required to file a report on SEC Form 18-A may, in lieu of such report, file with the Commission within forty five (45) days after the end of the year in which such
person became obligated, copies of a short form report on SEC Form 18-AS including all exhibits, and send one copy of such report to the Issuer at its principal office and to
each Exchange where the security is listed for trading; provided, that the percentage of the class of equity security beneficially owned as of the end of the calendar year is
more than 5%, and that:
1. Such person has acquired such securities in the ordinary course of business and not for the purpose of changing or influencing the control of the Issuer, nor in
connection with or as a participant in any transaction having such purpose or effect;
2. Such person is:
a. A broker or dealer registered under the Code;
b. A bank authorized to operate as such by the BSP;
c. An insurance company subject to the supervision of the Insurance Commission;
d. An investment house registered under the Investment Houses Law;
e. An investment company registered under the Investment Company Act;
f. A pension plan subject to the regulation and supervision by the BIR and/or the Insurance Commission; or
g. A group where all its members are persons specified above, and
3. Such person has promptly notified any other person on whose behalf it holds, on a discretionary basis, securities exceeding 5% of the class of any acquisition or
transaction on behalf of such other person which might be reportable by that person under Section 18.1(a) of the Code.
Any person who has reported an acquisition of securities on SEC Form 18- AS who later ceases to be a person specified above shall file within 3 business days thereafter a
sworn statement on SEC Form 18-A in the event such person is a beneficial owner at that time of more than 5% of the class of equity securities.

18.5.1.3. 2 or More Persons Acting in Concert


When 2 or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of the equity securities of an Issuer, the group formed in the process
shall be deemed to have acquired beneficial ownership for purposes of Sec. 18 of the Code, as of the date of such agreement, of all equity securities of that Issuer that are
beneficially owned by such persons.

18.2. Changes.
If any change occurs in the facts set forth in the statements, an amendment shall be transmitted to the issuer, the Exchange and the Commission.

SRC IRR 2015, Rule 23


Reports to be Filed by Directors, Officers & Principal Stockholders

23.1. Those Required to File.

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Every person who is –
1. Directly or indirectly, the beneficial owner of 10% or more of any class of any security of a company which satisfies the requirements of Subsec. 17.2 of the Code, or
2. A director or an officer of the issuer of such security

23.1.1. What Must be Filed.


• The person must, within 10 calendar days after the effective date of the registration statement for that security, or within 10 calendar days after he becomes such
beneficial owner, director or officer, subsequent to the effective date of the registration statement, whichever is earlier, file a statement with the SEC, and with the
Exchange, if the security is listed on an Exchange, on Form 23-A indicating the amount of securities of such issuer of which he is the beneficial owner;
• Within 10 calendar days after the close of each calendar month thereafter, if there has been any change in such ownership during the month, the person must file a
statement with the Commission and with the Exchange, if the security is listed on an Exchange, on Form 23-B indicating his ownership at the close of the calendar
month and such changes in his ownership as have occurred during that calendar month;
• Notify the SEC if his direct or indirect ownership falls below 10%, or if he ceases to be an officer or director of the Issuer. After filing such notification, he shall no longer
be required to file Form 23-8.
o However, a newly appointed officer, who has no beneficial ownership over the shares of the company, shall notify the Commission of such fact within 10
calendar days from such appointment.

PSE Disclosure Requirements

SECTION 1. Basic Principle


The basic principle of the Exchange is to ensure full, fair, timely and accurate disclosure of material information from all listed companies. This principle shall apply to all the
disclosure requirements under these Rules.

SECTION 2. Issuers must comply with the continuing disclosure requirements of the Exchange.
The Issuer must promptly make available all information, through the submission of structured and unstructured disclosures, that would enable a reasonable investor to
determine whether to buy, sell or hold securities, or in connection with the exercise of related voting rights. It must take reasonable steps to ensure that all investors have
equal access to such information.

Note: Corporate disclosures are classified into two: the structured and the unstructured corporate disclosures. Structured continuing disclosures are reportorial requirements
submitted within specific time frames such as annual, quarterly and monthly reports. Unstructured continuing disclosures are communications of corporate developments as
they occur and are intended to update the investing public on the activities, operations and business of the Issuer.
• These must be made available on their websites for specific time periods given in the PSE Rules.

SECTION 3. Reportorial Requirements under the Securities Regulation Code – Except as otherwise specified, the Exchange hereby fully adopts the requirements for filing,
including form and content, under the SRC. Accordingly, Issuers are required to furnish the Exchange copies of all reportorial requirements submitted to the Commission.
Note: Unless the reportorial requirements are already covered by Sections 4.1 and 4.4 below which require the disclosure of the matter to the Exchange within ten (10)
minutes from the receipt of such information or the happening or occurrence of said act, development or event, such reportorial requirement must be simultaneously
submitted to the Exchange.

SECTION 4. Unstructured Continuing Disclosure Requirements, Purpose –


The purpose for requiring unstructured disclosures is for the Issuer to update the investing public with any material fact or event that occurs which would reasonably be
expected to affect investors’ decision in relation to the trading of its securities.
Note: A material fact or event is one which would reasonably be expected to affect investors’ decisions in relation to those securities. This includes, but is not limited to, any
significant and relevant information relating to the business and operations of the Issuer that, if and when disclosed, would result in or would reasonably be expected to cause
a significant change in the trading and/or market value of the Issuer’s securities.

SECTION 4.1. Disclosure of Material Information – In addition to the reportorial requirements under the SRC, Issuers are hereby required to disclose to the Exchange once they
become aware of any material information or corporate act, development or event, within ten (10) minutes from the receipt of such information or the happening or occurrence
of said act, development or event. Disclosure must be made to the Exchange prior to its release to the news media.
The original copy of the disclosure must be delivered to the Exchange within twenty four (24) hours from the time of initial disclosure.
Any disclosure pursuant to the foregoing must be addressed to the attention of the Disclosure Department of the Exchange.
Should the act, development or event occur during trading hours, the Issuer must request a halt in the trading of its shares in order to ensure that the investing public would

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have equal access to the information. If, however, the said act, development or event occurs after trading hours but the Issuer is unable
to make a disclosure prior to the pre-open period of the next Trading Day, the Issuer must request a halt in the trading of its shares. In both cases, the trading halt shall be
lifted one (1) hour after the information has been disseminated to enable the investing public to digest the information. If the information is disseminated one (1) hour or less
prior to the close of market, the trading halt shall be lifted on the subsequent Trading Day.
Note: Under the Exchange’s Revised Trading Rules, “Trading Halt” means any “temporary stoppage in the trading of a security not lasting longer than one (1) Trading Day.”
Orders, other than Cross Transactions, can be posted, modified and cancelled notwithstanding the Trading Halt of a security.
In case of trading suspension, orders cannot be posted, modified or cancelled and no Trading Participant may carry out, directly or indirectly, any action involving a suspended
security.
However, the above rule shall not apply when the following instances are present:
4.1.1. The activity or development is still considered soft information.
4.1.2. The disclosure of the information would be in contravention to any existing laws of the land.
Note: Soft information is information that is indefinite in nature. It may, depending on attending facts and circumstances, include:
• Forward looking statements or disclosures about future prospects or plans and objectives for future operations, projections or estimates, a statement on future
economic performance; 

• Subjective, evaluative information prepared by analysts for strategic purposes or which contain management’s beliefs or opinions; or 

• Uncertainties and developments in process, incomplete proposals or preliminary negotiations, corporate transactions in the planning stage or bid submissions. 


SECTION 4.2. Selective Disclosure of Material Information – An Issuer is prohibited to communicate material non-public information about the Issuer to any person, unless the
Issuer is ready to simultaneously disclose the material non-public information to the Exchange. This section shall not apply if the disclosure is made to:
a. A person who is bound by duty to maintain trust and confidence to the Issuer such as but not limited to its auditors, legal counsels, investment bankers, financial advisers;
and b. A person who agrees in writing to maintain in strict confidence the disclosed material information and will not take advantage of it for his personal gain.
The Issuer shall establish and implement internal controls that will ensure that its officers, staff and any other person who is privy to the material non- public information shall
comply with the requirement of this section.
Note: Disclosure of material information must be made to the Exchange within the period stated in Section 4.1. and prior to its release to the media or any third party. Except
for disclosures to persons under Section 4.2. (a) and (b), all directors, officers, employees, agents, and/or representatives of the Issuer must refrain from making statements
especially if these are not yet disclosed to the Exchange.
For forward looking statements or soft information, the Issuer must emphasize the nature of such information and that the information is subject to change.

SECTION 4.3. Standard and Test in Determining Whether Disclosure is Necessary – A disclosure must be made promptly by the Issuer if it meets any of the following
standards:
• Where the information is necessary to enable the Issuer and the public to appraise their position or standing, such as, but not limited to, those relating to the
Issuer’s financial condition, prospects, development projects, contracts entered into in the ordinary course of business or otherwise, mergers and acquisitions,
dealings with employees, suppliers, customers and others, as well as information concerning a significant change in ownership of the Issuer’s securities owned by
insiders or those representing control of the Issuer; or 

• Where such information is necessary to avoid the creation of a false market for its securities; or 

• Where such information may reasonably be expected to materially affect market activity and the price of its securities. 
 Note: Subject to other provisions of the
Disclosure Rules, it shall be the sole 

responsibility of the Issuer to determine which information is material under these standards and is therefore disclosable to the Exchange.

SECTION 4.4. Events Mandating Prompt Disclosure - The following events, while not comprising a list of all the situations must be disclosed to the Exchange in compliance with
Sec. 4.1 hereof:
• A change in control of the Issuer; 

• The filing of any legal proceeding by or against the Issuer and/or its subsidiaries, involving a claim amounting to ten percent (10%) or more of the Issuer’s total
current assets or any legal proceeding against its President and/or any member of its Board of Directors in their capacity as such; 

• Changes in the Issuer’s corporate purpose and any material alterations in the Issuer’s activities or operations or the initiation of new ones; 

• Resignation or removal of directors, officers or senior management and their replacements and the reasons for such; 

• Any decision taken to carry out extraordinary investments or the entering into financial or commercial transactions that might have a material impact on the Issuer’s
situation; 

• Losses or potential losses, the aggregate of which amounts to at least ten percent (10%) of the consolidated total assets of the Issuer; 

• Occurrence of any event of dissolution with details in respect thereto; 

• Acts and facts of any nature that might seriously obstruct the development of corporate activities, specifying its implications on the Issuer’s business; 


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• Any licensing or franchising agreement or its cancellation which may materially affect the Issuer’s operations; 

• Any delay in the payment of debentures, negotiable obligations, bonds or any other publicly traded security; 

• Creation of mortgages or pledges on assets exceeding 10% or more of the Issuer’s total assets;
• Any purchase or sale of stock or convertible debt securities of other companies when the amount is 10% or more of the Issuer’s total assets;
• Contracts of any nature that might limit the distribution of profits, with copies thereof; 

• Facts of any nature that materially affect or might materially affect the economic, financial or equity situation of those companies controlling, or controlled by the
Issuer including the sale of or the constitution of sureties/pledges on a substantial part of its assets; 

• Authorization, suspension, retirement or cancellation of the listing of the Issuer’s securities on an exchange or electronic marketplace domestically or abroad; 

• Fines of more than ₱50,000.00 and/or other penalties on the Issuer or on its subsidiaries by regulatory authorities and the reasons therefor; 

• Merger, consolidation or spin-off of the Issuer; 

• Any modification in the rights of the holders of any class of securities issued by the Issuer and the corresponding effect of such modification upon the rights of the
holders; 

• Any declaration of cash dividend, stock dividend and pre-emptive rights by the Board of Directors; 

• Any change in the Issuer’s fiscal year and the reason(s) therefor; 

• All resolutions, approving material acts or transactions, taken up in meetings of the Board of Directors and Stockholders of the Issuer; 

• A joint venture, consolidation, acquisition, tender offer, take-over or reverse take-over and a merger; 

• Capitalization issues, options, directors/officers/employee stock option plans, warrants, stock splits and reverse splits; 

• All calls to be made on unpaid subscriptions to the capital stock of the Issuer; 

• Any change of address and contact numbers of the registered office of the Issuer; 

• Any change in the auditors of the Issuer and the corresponding reason for such change; 

• Any proposed amendment to the Articles of Incorporation and By- Laws and its subsequent approval by the Commission; 

• Any action filed in court, or any application filed with the Commission, to dissolve or wind-up the Issuer or any of its subsidiaries, or any amendment to the Articles of
Incorporation shortening its corporate term;
• The appointment of a receiver or liquidator for the Issuer or any of its subsidiaries;
• Any acquisition of shares of another corporation or any transaction resulting in such corporation becoming a subsidiary of the Issuer;
• Any acquisition by the Issuer of shares resulting in its holding 10% or more of the issued and outstanding shares of another Issuer or where the total value of its
holdings exceed 5% of the net assets of an unlisted corporation;
• Any sale made by the Issuer of its shareholdings in another listed or unlisted corporation: (1) resulting in such corporation ceasing to be its subsidiary; (2) resulting
in its shareholding falling below 10% of the issued capital stock;
• Firm evidence of significant improvement or deterioration in near- term earnings prospects;
• The purchase or sale of significant assets amounting to 10% or more of the Issuer’s total assets otherwise than in the ordinary course of business;
• A new product or discovery;

• The public or private sale of additional securities;
• A call for redemption of securities;
• The borrowing of a significant amount of funds not in the ordinary course of business;
• Default of financing or sale agreements;
• Deviation from capital investment funds equivalent to 20% of the original amount appropriated;
• Disputes with subcontractors, customers or suppliers or with any other parties;
• An increase or decrease by 10% in the monthly, quarterly and annual revenues on a year-on-year basis.

SECTION 4.5. Duty of the Issuer to Clarify Non-Public Material - Upon its receipt of any material non-public information, the Exchange shall request the Issuer concerned to
confirm or deny the veracity of the said information (e.g. newspaper/newswire reports, information coming from third parties, broker’s market letter, etc.) pertaining to the
Issuer or any of its subsidiaries.
Note: Public circulation of information, which has not yet been disclosed and/or insufficiently disclosed by the Issuer, and which may likely affect market activity, must be
promptly clarified or confirmed by the Issuer in accordance with the instructions/guidelines issued by the Exchange. This is to prevent the creation of a false market.
If any of its directors or officers are attributed as the source, the Issuer should substantiate or make an official disclosure. If what is reported is erroneous, the Issuer should
issue an announcement and clarify the information reported.
If the request for confirmation is made by the Exchange prior to the pre- open period of the said Trading Day, the Issuer must reply prior to the start of the said pre-open period.
However, if the Exchange makes a request for confirmation after trading hours, the Issuer must reply prior to the start of the pre-open period of the next Trading Day.
The Exchange shall impose a trading halt on the securities of the Issuer if it fails to confirm or deny the veracity of the said material non-public information. The halt shall be
lifted at 10:00 a.m. even in the absence of any reply from the Issuer verifying or clarifying the material information. The Exchange

30
must receive the Issuer’s reply not later than 11:00 a.m. of the same Trading Day. If by 11:00 a.m., the Issuer fails to reply or should the reply fail to sufficiently clarify the
material information requested by 11:00 a.m., it shall be fined the amount of Thirty Thousand Pesos (₱30,000.00). Thereafter, the Issuer shall be fined the additional amount
of P10,000 for 30 minutes of delay.
The imposition of the foregoing penalties shall be without prejudice to the imposition of penalty/ies for non-disclosure of material information after the same has been duly
established and the need to pursue investigation of a possible violation of the anti-manipulative and anti-fraudulent provisions of the SRC.

SECTION 5. Disclosure for Substantial Acquisitions & Reverse Takeovers -


When an Issuer or its subsidiary has merged or consolidated with or otherwise acquires a direct or indirect interest in an unlisted company, person or group, and said interest
is 10% or more of the total book value of the Issuer, the trading of the securities of the Issuer shall be suspended until the terms and conditions of the transaction, and the
details pertaining to the business or project acquired are actually disclosed and, if applicable, the latest audited financial statements of the unlisted company, are submitted to
the Exchange.
The foregoing, however, shall not apply to cases where the Issuer has merged or consolidated with or otherwise acquires an interest in its existing subsidiary(ies).
Note: This provision is applicable to substantial acquisitions by the Issuer of interests in an unlisted company resulting to the issuance of shares by the unlisted company in
exchange for the Issuer’s cash and/or assets (i.e. property).
For acquisitions/transactions resulting to issuance of shares by the Issuer (i.e. private placements, property-for-share swaps), the rule on Additional Listing of Securities
(Article V, Part A of the Listing Rules), particularly Sections 3 and 4 thereof, will apply.
Notwithstanding the foregoing, the Rules on Backdoor Listing (see Supplemental Rule 7) will apply for any acquisition by an unlisted company of shares in the Issuer which
results in a substantial change in the business, membership of the board of directors or voting structure of the Issuer.

SECTION 6. Disclosure of Dividend Declarations - The Issuer must disclose to the Exchange dividend declarations as approved by its Board of Directors and shareholders in
accordance with Section 4.1 above.

SECTION 6.1. Disclosure of Record Date - The Issuer must set the record date in accordance with the Rules of the Commission and when appropriate, of the Rules of the
Bangko Sentral ng Pilipinas. The disclosure of the record date must not be less than ten (10) Trading Days from the said date.

SECTION 6.2. Determination of Payment Date - The Issuer must set the Payment Date in accordance with the rules of the Commission and when appropriate, of the Rules of
the Bangko Sentral ng Pilipinas.
Note: For all cash and stock dividends accruing to shares lodged with the PDTC, whether from unissued capital or resulting from an increase in capital stock, the same shall
be remitted/credited to the PDTC for immediate distribution to its participants not later than eighteen (18) Trading Days from the record date set by the Commission.
(Guidance Note 16 – PSE Memo for Brokers No. 268-2002 dated 14 November 2002 re: Amendment to Section 10, Article XII (Stock Dividends), Listings and Disclosure
Rules)
On the other hand, for cash accruing to shares not lodged with the PDTC, the same shall be remitted/credited directly to the individual stockholders not later than eighteen
(18) Trading Days from the record date set by the Commission. (Guidance Note 17 – PSE Memo for Brokers No. 38-2003 dated 6 February 2003 re: Deadline of Remittance
of Cash Dividends Accruing to Shares not Lodged in PCD)
Further, the payment date shall not be more than eighteen (18) Trading Days from the record date. (Guidance Note 18 – PSE Memorandum No. 2008-0315 dated 30 June
2008 re: Disclosure of Record and Payment Date for Dividend Declarations)
Listed companies that are obliged to pay dividends may have a single declaration for several cash dividends within a year subject to the condition that their record and
payment dates are also explicitly provided. (Guidance Note 19 – PSE Memorandum No. 2009-0272 dated 13 May 2009 re: SEC Memorandum Circular No. 2 Series of 2009)

SECTION 7. Disclosure on Stockholders’ Meeting - For the holding of any stockholders’ meeting, the Exchange must be given a written notice thereof at least ten (10) Trading
Days prior to the record date fixed by the Issuer. The notice must include all the necessary details including the time, venue, and agenda of the meeting and the inclusive dates
when the stock and transfer books will be closed. The Issuer shall further submit within five (5) Trading Days after the record date the list of stockholders who are entitled to
notice and to vote at a regular or special stockholders’ meeting.
Note: The Issuer shall hold an annual/regular meeting of stockholders on a date fixed in its By-Laws. Any postponement of the scheduled meeting of stockholders, the
reason(s) for such postponement and the next schedule of the stockholders’ meeting must be disclosed to the Exchange.

SECTION 9. Disclosure of Acquisition of Outstanding Shares and Sale of Treasury Shares - The Issuer must promptly disclose any planned acquisition of its shares or
disposition of treasury shares. In addition, the Issuer must submit a disclosure regarding the actual number of shares and the transaction price for each acquisition or
disposition of its own shares prior to the pre-open period of the next Trading day after the transaction was executed. The planned acquisition or disposition must likewise be in
accordance with the rules and regulations of the Commission.

31
SECTION 10. Disclosure of Acquisition by the Issuer’s Subsidiaries, Affiliates and Others - The Issuer must submit a disclosure to the Exchange regarding the actual number of
shares and the transaction price for each acquisition or disposal of the Issuer’s shares by its subsidiaries, affiliates or entities controlled or managed by the Issuer prior to the
pre-open period of the next Trading Day after the transaction was executed or such other related information that the Exchange may require.

SECTION 11. Disclosure of Pending Release of Shares Held Under Voluntary Lock-up - The Issuer must notify the Exchange of the release of the shares held under escrow not
earlier than 15 Trading Days but not later than 10 Trading Days before the end of the voluntary lock-up period.

SECTION 12. Disclosure on Change of Stock Transfer Agent - The Issuer must notify the Exchange on or before the pre-open period of the next Trading Day of a decision to
terminate the services of its Stock Transfer Agent and the reasons for such termination. The notice should in any case be filed with the Exchange no later than thirty (30) days
prior to the effectivity of the termination.

SECTION 13.2. A Director or a Principal Officer of an Issuer must not deal in the Issuer’s securities during the period within which a material non- public information is obtained
and up to 2 full Trading Days after the price sensitive information is disclosed.

SECTION 14. Company and Analysts’/Investors’ Briefings – Issuer(s) must notify the Exchange of its company and analysts’/investors’ briefings at least three (3) Trading Days
prior to the scheduled date.

SECTION 15. Unusual Trading Activity – Unusual trading activity involving an Issuer’s securities which occurs without any apparent reason gives rise to the presumption that
there is insider trading or a rumor or report, whether true or false, about the Issuer.

Whenever there is unusual trading activity in an Issuer’s securities, the Issuer must respond promptly to any inquiry made by the Exchange concerning the unusual trading
activity. In this connection:
• If the unusual trading activity results from the “leak” of material information, the information in question must be announced promptly. If the unusual trading activity
results from a false rumor or report, the Exchange’s policy on correction of such rumors and reports should be complied with; and 

• If the listed Issuer is unable to determine the cause of the unusual trading activity, it must make a disclosure to the Exchange to the effect that there are no
undisclosed recent developments affecting the Issuer that would account for the unusual trading activity. 

• Any response made by the authorized Corporate Information Officer of an Issuer is presumed to have been made after consulting the Chairman of the Board,
President or Corporate Secretary of the Issuer. 


SECTION 16. Update of Prior Statements - Should subsequent events make a prior disclosure inaccurate, the Issuer has the duty to update and correct prior disclosures within
10 minutes after receipt of the updated information or upon determination of the discrepancy. Disclosure procedures under Section 4.1 shall apply.
Note: The Issuer is required to disclose updates, clarifications or corrections regarding prior disclosures that are no longer accurate and have been superseded by subsequent
events. Progress and/or developments regarding corporate actions, transactions or agreements entered into by listed companies are likewise required to be disclosed.

SECTION 17. Structured Continuing Disclosure Requirements for Listed Companies, Purpose - The purpose for requiring structured disclosures is to assure the public
availability of continuing adequate information on listed companies.
SECTION 17.1. General Definition - Structured continuing disclosures are the periodic reportorial requirements required by the Commission and the Exchange.
• Good summary: Follows same rules as SRC IRR 2015
• Anything filed with SEC must also be filed with PSE

SECTION 17.7. Amendments in Reports - If any material change occurs in the facts set forth in the beneficial ownership reports, such amendment shall be transmitted to the
Issuer, the Exchange and the Commission in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or
for the protection of investors.
For all other reports, any amendments thereof shall be transmitted to the Exchange and the Commission.
*Basic v. In Dec. 1978, Combustion Engineering, Inc., and Basic Is there material misrepresentation? Misleading statements during merger
Levinson Incorporated agreed to merge. During the preceding discussions will be material under Rule
two years, representatives of the two companies had YES. 10b-5 if the misstatements would have
various meetings regarding the possibility of a merger; 1. The standard set forth in TSC Industries, Inc. v. been considered significant by reasonable
during that time Basic made three public statements Northway, Inc., whereby an omitted fact is investor.
denying that any merger negotiations were taking place material if there is a substantial likelihood that
or that it knew of any corporate developments that its disclosure would have been considered The “agreement-in-principle” test is

32
would account for heavy trading activity in its stock. significant by a reasonable investor, is expressly rejected in favor of the “fraud-in-the
Respondents, former Basic shareholders who sold their adopted for the § 10(b) and Rule 10b-51 context. market” theory.
stock between Basic's first public denial of merger 2. The "agreement-in-principle" test, under which
activity and the suspension of trading in Basic stock preliminary merger discussions do not become This is a MERGER transaction and in a
just prior to the merger announcement, filed a class material until the would-be merger partners have MERGER transaction, THIS is the standard.
action against Basic & its directors, alleging that Basic's reached agreement as to the price and structure
statements had been false or misleading, & and that of the transaction, is rejected as a bright-line SC has not acknowledged this ruling; but
they were injured by selling their shares at prices materiality test. Its policy-based rationales do not there are times when Sir does not
artificially depressed by those statements. The district justify the exclusion of otherwise significant necessarily want this applied in the
court granted summary judgment to Basic. But CA held information from the definition of materiality. Philippines.
that, under the "fraud-on-the-market" theory, 3. CA’s view that information concerning
respondents' reliance on Basic’s misrepresentations otherwise insignificant developments becomes Materiality in the merger context depends
could be presumed. material solely because of an affirmative denial on the probability that the transaction will
CA reversed the grant of summary judgment and of their existence is also rejected: Statements be be consummated, and its significance to
remanded, rejecting the District Court's view that misleading as to a material fact. the issuer of the securities. Thus,
preliminary merger discussions are immaterial as a 4. Materiality in the merger context depends on materiality depends on the facts and is to
matter of law, and holding that even discussions that the probability that the transaction will be be determined on a case-by-case basis.
might not otherwise have been material, become so by consummated, and its significance to the issuer
virtue of a statement denying their existence. of the securities. Thus, materiality depends on According to Basic, in the context of a
the facts and is to be determined on a case-by- merger, there is materiality when the
case basis. probability already exists and there is
5. The courts below properly applied a magnitude. It is a question of PROBABILITY
presumption of reliance, supported in part by the and MAGNITUDE.
fraud-on-the-market theory, instead of requiring
each plaintiff to show direct reliance on Basic's
statements. Such a presumption relieves the
Rule 10b-5 plaintiff of an unrealistic evidentiary
burden, and is consistent with, and supportive of,
the Act's policy of requiring full disclosure and
fostering reliance on market integrity. The
presumption is also supported by common sense
and probability: an investor who trades stock at
the price set by an impersonal market does so in
reliance on the integrity of that price. Because
most publicly available information is reflected in
market price, an investor's reliance on any public
material misrepresentations may be presumed
for purposes of a Rule 10b-5 action.
6. The presumption of reliance may be rebutted:
Rule 10b-5 defendants may attempt to show that
the price was not affected by their
misrepresentation, or that the plaintiff did not
trade in reliance on the integrity of the market

1 Rule 10b-5: Employment of Manipulative and Deceptive Practices":


It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were
made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

33
price.
Wachovia Bank In late 1969 when the economic fortunes of the Do investors have a right of action under Sec. 10 Liability as to material misrepresentation
& Trust Co. v. National Student Marketing Corporation (NSMC) were (b) despite the existence of Sec. 11? applies to newly issued securities. Sec. 10
National most favorable and the reports on its financial (b) is a catch-all provision which provides
Student operations extremely optimistic, the Wachovia plaintiffs Yes. By the terms of Sec. 10 (b), it applies to ANY an alternative remedy to those who deal
Marketing Co. purchased $5M worth of that corporation's stock. The SECURITY, whether or not registered on a with ANY stock ASIDE from more special,
terms of the purchase were governed by two contracts national exchange. It also applies in private specific provisions of securities laws.
between the parties, dated December 17, 1969. White placements and with newly issued securities.
& Case, acting as NSMC's counsel, drafted a Common Sec. 10(b) applies only when there is fraud
Stock Purchase Agreement and issued a legal opinion in general in relation to the purchase and
to plaintiffs. Peat Marwick, the independent auditor of sale of securities, while, for example, Sec.
NSMC, certified the annual financial statements and 11 applies for omissions in the registration
played a role in preparation of interim financial reports statement.
and documents filed with the SEC.
In February of 1970, almost immediately following the Sec. 10 (b) applies even in private
Wachovia transaction, NSMC's fortunes suffered a placements.
sharp reversal and the stock's market price dropped
markedly. Shortly thereafter, in early 1970, two civil
actions arising out of the collapse were filed in the
Southern District of New York federal court.
Financial Financial Industrial (plaintiff), a mutual fund or W/N the silence of defendant at the date or To obtain relief under Sec. 1- (b), the
Industrial Fund, management investment company, bought a total of dates of the stock purchases by plaintiff here plaintiff must also exercise good faith in its
Inc. (FIFI) v. 80,000 shares of McDonnell Douglas (defendant), an give rise to a cause of action under Rule 10b-5. purchase and due diligence, & must
Mcdonnell aircraft manufacturing company. One or two days after No. demonstrate reliance on the acts or
Douglas the sale, Douglas made a public statement of the (1)The Court applied the “business judgment inaction of the defendant corporation.
Corporation decline in its earnings. This decline in earnings was due rule” saying that the timing of the disclosure of
to delay in the delivery of the components by Douglas’ material facts ". . . is a matter for the business Business judgment rule – directors &
suppliers which consequently resulted to Douglas’ judgment of the corporate officers entrusted with officers of corporations cannot be held
delay in the delivery of its airplanes. It was estimated to the management of the corporation within the liable for errors and mistakes in judgment
cause a loss of several million dollars for the month of affirmative disclosure requirements promulgated pertaining to a law or fact when they acted
May. As a result the public’s reaction in this statement, by the exchanges and by the SEC. on a matter calling for the exercise of their
the stock price of Douglas’ shares, substantially (2) It also held that the information about which judgment or discretion, and having done
declined. Eventually, Financial sold the shares it the issues revolve must be "available and ripe for such exercise in good faith. The evaluation
previously bought at a price lower than its original publication" before there commences a duty to of the significance of changes in earnings
purchase price. Financial brought a suit for damages disclose. To be ripe under this requirement, the as it might affect a corporation, its
against Douglas based on Rule 10b-52 of the contents must be verified sufficiently to permit stockholders or stakeholders calls for the
Securities and Exchange Commission. Financial the officers and directors to have full confidence exercise of discretion.
contends that Douglas intentionally delayed the public in their accuracy. In this case, there is no proof
statement. The trial jury awarded $712,500.00 plaintiff the loss sustained in May could have been
Financial. Douglas appealed. determined and translated into figures at an
earlier date to develop a statement ripe for
publication. In this case, the record shows that
the defendant McDonnell Douglas exercised
good faith and due diligence in the
ascertainment, the verification, and the
publication of the serious reversal of earnings in
May. The president of Douglas sent fifty to
seventy engineering, estimating, and accounting
officials to the Aircraft Division to investigate the
situation and it took them several days before
they were finally able to determine the inventory

34
write-down (i.e., the amount by which the value
of its inventory shall be reduced) needed to
reflect the decline in earnings. The company
financial group and the auditors also verified the
figures preparatory to a press release to be held.
(3) The Court also expressed that the plaintiff
who claims violation of SEC securities fraud rule
must exercise good faith in its purchase, exercise
due diligence, and demonstrate reliance on acts
or inaction of defendant.
(4) Lastly, Plaintiff had the burden of proof to
establish that it exercised due care in making its
stock purchase, that the defendant failed to
issue the special earnings statement when
sufficient information was available for an
accurate release, and to show there existed a
duty owed by the defendant to the plaintiff to so
disclose as to do otherwise would be a violation
of Rule 10b-5, and upon inaction under such
showing plaintiff relied to its detriment. Plaintiff
failed to discharge its burden.
*State Teachers Fluor was invited to bid on a billion dollar project in Was there tipping liability? It is the combination of the tip and the
v. Fluor South Africa for opening a coal plant. It won the bidding tippee's trading that poses the evil against
but was granted the contract on the condition that NO. There were just rumors flying around, so which the open market investor must be
there would be an EMBARGO on all publicity regarding everyone already knew about it. protected, and no injury occurs until the
the appointment of Fluor as contractor. Meanwhile, The corporation did not breach its duty to information is used by the tippee. The entry
there were already rumors on the matter in the market. disclose information regarding billion dollar into the market of a tippee with superior
construction contract or to halt trading in knowledge poses the threat that if he
corporation's stock in violation of section 10(b) trades on the basis of the inside
because in light of its agreement with SASOL to information he may profit at the expense of
make no announcement until March 10, Fluor investors who are disadvantaged by lack of
was under no obligation to disclose the contract. the inside information. For this both the
(2) corporation did not make statements which tipper and the tippee are liable.
misrepresented or omitted material facts in
violation of Rule 10(b)(5) There is a distinction Reliance is an essential element in a Sec.
between a company's right “to maintain a secret 10b-5 claim based on affirmative
when no statements are issued, and the misrepresentation.
affirmative obligations that attach under Rule
10b-5 when a corporation makes any sort of
statement.” And as to the last issue of whether
or not Fluor is guilty of tipping inside information
to the prejudice of State Teachers, the Court held
in the negative saying that even assuming that
Fluor told someone that a billion dollar contract
is on the works, it cannot be classified as
material inside information because it was public
knowledge that a SASOL project is in its planning
stage and that Fluor is one of the companies that
could handle the project.
Mitchell v. Texas Texas Gulf detected an anomaly in a plot of land called Was the discovery of vast resources during the
Gulf Sulphur Co. “Kidd 55” in Canada. Turns out, it was teeming with drilling material?

35
copper. Texas Gulf tried to hide it and every time it was
asked, it said it could not yet conclude the existence of YES. Here, notwithstanding the trial court's
ore (though it already knew). A journalist came & conclusion that the results of the first drill core,
released an article about the abundance of copper. K-55-1, were "too ‘remote’ to have had any
Texas Gulf, however, denied the discovery, made vague significant impact on the market, i.e., to be
statements all the way up to April 12, only officially deemed material," knowledge of the possibility,
announced the news that they had found a huge mine which surely was more than marginal, of the
to the public on April 16. Following this, 3 stockholders existence of a mine of the vast magnitude
sued Texas, alleging violations of Rule 10b-5 due to its indicated by the remarkably rich drill core located
misrepresentations in its press release statements. rather close to the surface (suggesting
They also sued certain individuals for insider trading. mineability by the less expensive open-pit
method) within the confines of a large anomaly
(suggesting an extensive region of
mineralization) might well have affected the price
of TGS stock and would certainly have been an
important fact to a reasonable, if speculative,
investor in deciding whether he should buy, sell,
or hold. After all, this first drill core was
"unusually good and excited the interest and
speculation of those who knew about it."
Knowledge of the results of the discovery hole, K-
55-1, would have been important to a
reasonable investor and might have affected the
price of the stock.
This means that all transactions of insiders who
knew about the discovery, prior to public
knowledge on the matter, violated Rule 10b-5.

May insiders accept stock options without


disclosing material information to the issuer?

NO. In this case the officers were given stock


option plans after their discovery of the vast
resources but prior to knowledge of the Board’s
Stock Option Committee (the body which granted
them the stocks).

Was the press statement denying the discovery


material?

YES. TGS relies on the holding of the court below


that "the issuance of the release produced no
unusual market action" and "In the absence of a
showing that the purpose of the April 12 press
release was to affect the market price of TGS
stock to the advantage of TGS or its insiders, the
issuance of the press release did not constitute a
violation of Rule 10b-5 since it was not issued in
connection with the purchase or sale of any
security" and, alternatively, "even if it had been
established that the April 12 release was issued

36
in connection with the purchase or sale of any
security, the Commission has failed to
demonstrate that it was false, misleading or
deceptive." But the Court held that Congress
meant for the Rule 10b-5 rules to have a catchall
provision, one that offers a broad interpretation
of the phrase “in connection with.” Therefore it
seems clear from the legislative purpose
Congress expressed in the Act, and the
legislative history of Section 10(b) that Congress
when it used the phrase "in connection with the
purchase or sale of any security" intended only
that the device employed, whatever it might be,
be of a sort that would cause reasonable
investors to rely thereon, and, in connection
therewith, so relying, cause them to purchase or
sell a corporation's securities. There is no
indication that Congress intended that the
corporations or persons responsible for the
issuance of a misleading statement would not
violate the section unless they engaged in
related securities transactions or otherwise
acted with wrongful motives; indeed, the obvious
purposes of the Act to protect the investing
public and to secure fair dealing in the securities
markets would be seriously undermined by
applying such a gloss onto the legislative
language.
Herman & Alleging that they were defrauded by Does the availability of an express remedy under There are two types of actions investors
Maclean v. misrepresentations in a registration statement and § 11 of the 1933 Act bar defrauded purchasers can avail of; these constitute two separate
Huddlestone prospectus for certain securities, purchasers of such of registered securities from maintaining an causes of action:
securities brought a class action in Federal District action under § 10(b) of the 1934 Act? 1. Sec. 11 - Purchasers of a registered
Court against most of the participants in the offering, security may sue on a false or
seeking recovery under § 10(b) of the Securities NO. The two provisions involve distinct causes of misleading information included in
Exchange Act of 1934 (1934 Act), which makes it action, and were intended to address different a registration statement; in this
unlawful for "any" person to use "any" manipulative or types of wrongdoing. Under § 11, a plaintiff need case the liability of an issuer of a
deceptive device or contrivance in the purchase or sale only show a material misstatement or omission security is virtually absolute, even
of "any" security. The trial judge instructed the jury to in a registration statement to establish a prima for innocent misstatements
determine whether the plaintiffs had proved their cause facie case. Such an action must be brought by a 2. Sec 10-b - There is also the “catch-
of action by a preponderance of the evidence, and purchaser of a registered security, and can only all” anti-fraud provision, which
judgment was entered on the basis of a jury verdict in be brought against certain parties. In contrast, § places burden to establish a cause
plaintiffs' favor. The Court of Appeals held that a cause 10(b) is a "catch-all" antifraud provision, and of action. It can be brought by the
of action may be maintained under § 10(b) for requires a purchaser or seller of a security, in purchaser or seller of ANY
fraudulent misrepresentations and omissions even order to establish a cause of action, to prove that SECURITY against ANY PERSON
when, as in this case, that conduct might also be the defendant acted with scienter. who has used any manipulative or
actionable under § 11 of the Securities Act of 1933 To exempt conduct actionable under § 11 from deceptive device or contrivance in
(1933 Act), which expressly allows purchasers of a liability under § 10(b) would conflict with the connection with the purchase or
registered security to sue certain enumerated parties basic purpose of the 1933 Act: to provide greater sale of a security. However, there
who play a direct role in a registered offering when protection to purchasers of registered securities. must be scienter, or intent to
false or misleading information is included in a It is hardly a novel proposition that the two Acts deceive or manipulate. Negligence
registration statement. However, the Court of Appeals prohibit some of the same conduct. cannot be tried here.

37
concluded that a plaintiff seeking recovery under §
10(b) of the 1934 Act must prove his case by "clear What level of evidence must be used by Act must be proven by preponderance of
and convincing" evidence, and reversed and remanded plaintiffs? evidence.
on other grounds.
Persons seeking recovery under § 10(b) need
prove their cause of action by a preponderance
of the evidence only, not by clear and convincing
evidence. The preponderance standard has been
consistently employed in private actions under
the securities laws. Reference to the traditional
use of a higher burden of proof in civil fraud
actions at common law is unavailing here. An
important purpose of the federal securities
statutes was to rectify perceived deficiencies in
the available common law protections by
establishing higher standards of conduct in the
securities industry. The balance of the parties'
interests in this case warrants use of the
preponderance standard, which allows both
parties to share the risk of error in roughly equal
fashion. While defendants face the risk of
opprobrium that may result from a finding of
fraudulent conduct, defrauded investors are
among the very individuals Congress sought to
protect in the securities laws, and if they prove
that it is more likely than not that they were
defrauded, they should recover.
Elkind v. Liggett Liggert initiated an “Analyst Program” wherein it Did Liggert have the duty to disclose or make The knowing use by corporate insiders of
& Myers encouraged closer contact between financial analysts corrections? non-public information for their own benefit
and Liggert’s management. or that of “tippees” by trading in corporate
In 1971, Liggert had a record year with $4.22 per NO. Liggett assumed no duty to disclose its own securities amounts to a violation of Rule
share. This spilled over to the first quarter of 1972. In forecasts or to warn the analysts (and the public) 10b-5, which may give rise to a suit for
March and May 1972, it issued a press release as well that their optimistic view was not shared by the damages by uninformed outsiders who
as its first quarter figures showing its prosperity which company. trade during a period of tippee trading.
led to optimism in the financial community over HOWEVER, while there was no liability for non- The duty imposed on a company and its
Liggert’s prospects. In said reports, it indicated that it disclosure in this aspect of the present case, it officers is an alternative one: they must
predicted a 10% increase in earnings in 1972 over the bears noting that corporate pre-release review of disclose material inside information either
1971 earnings and that it was well-positioned to take the reports of analysts is a risky activity, fraught to no outsiders or to all outsiders equally.
advantage of industry trends. It did nothing to deflate with danger. Management must navigate As with any claim under Rule 10b-5,
the enthusiasm. carefully between the “Scylla” of misleading scienter must be proven.
However, figures in April and May 1972 showed a stockholders and the public by implied approval However, if there is no trading by tippees
sharp decline and that, internally, only a 2% increase in of reviewed analyses and the “Charybdis” of (or those to whom the tippees convey their
earnings was projected. Share prices were also tipping material inside information by correcting information), there can be no damages for
projected to decline from $4.30 to $3.95. No public statements which it knows to be erroneous. A tipping under s 10(b). Trades by tippees
disclosure of the adverse financial developments were company which undertakes to correct errors in are attributed to the tipper. Tippee trading,
made at this time. reports presented to it for review may find itself therefore, is the primary and essential
On July 10, 1972, Peter Barry (analyst for Kuhn Loeb & forced to choose between raising no objection to element of the offense. The investor
Co.) spoke by phone with Daniel Provost (Liggert’s a statement which, because it is contradicted by otherwise has no right to confidential
Director of Corporation Communications). Provost internal information, may be misleading and undisclosed data from the company's files
confirmed with Barry that J&B Scotch sales were going making that information public at a time when even though it might, if disclosed, influence
down due to stockpiling by consumers who were corporate interests would best be served by his investment decision.

38
anticipating for a price increase for said commodity. confidentiality.
Moreover, it was also revealed that a new dog food was Management thus risks sacrificing a measure of REQUISITES:
adversely affecting Alpo’s sales. Provost did not also its autonomy by engaging in this type of program. 1. Revelation of non-public information
give a definitive answer when asked if the 10% Since Liggett had not undertaken to pass on 2. Taking advantage of the superior
earnings projection was realistic. After their earnings forecasts, however, it did not violate knowledge of an insider by trading in the
conversation, Barry relayed the information to his firm any duty to correct these figures. company’s stock (tippee trading)
and conveyed to its clients who had interests in Liggert. 3. Tipped information is material
As a result of this, a client who sold 100 Liggert sales Did Liggert make false, misleading statements? 4. Scienter, or bad faith (intent)
he owned. However, an investor owning 600,000
shares did not. NO. We cannot conclude as a matter of law that The misleading character of a statement is
On July 17, 1972, Robert Cummings (analyst of Loeb comments such as “we expect another good year not changed by its vagueness or ambiguity.
Rhodes & Co.) questioned Ralph Moore (CFO of Liggert) in 1972” were likely to confirm the optimistic Liability may follow where management
about its financial condition. Moore grudgingly affirmed projections then in circulation or to lead the intentionally fosters a mistaken belief
that there was a possibility that earnings would go sophisticated and experienced listeners astray or concerning a material fact, such as its
down. Moore added that the information was that they misrepresented the views of evaluation of the company's progress and
confidential. Nonetheless, Cummings relayed this management at the time. earnings prospects in the current year.
information to his firm and another stockholder who
immediately sold 1,800 shares of Liggert stock. Is Liggert liable for trading based on tipped
On July 18, 1972, the Board issued a press release at information?
2:15 PM and disclosed their preliminary earnings data
showing that the June earnings was $.20 per share ONLY for its JULY 17 TIP.
compared to the $.44 per share in June of 1971. The corporate officer dealing with financial
Liggert attributed the decline to short comings in all of analysts inevitably finds himself in a precarious
Liggert’s product lines. position, which we have analogized to “a fencing
Elkind brought a securities fraud class suit against match conducted on a tightrope.” A skilled
Liggert on the ground that analyst with knowledge of the company and the
(1) Liggert violated the Securities Act by issuing industry may piece seemingly inconsequential
misleading statements, nondisclosure of material data together with public information into a
information, and failure to correct the projections; and mosaic which reveals material non-public
(2) Liggert unlawfully traded on the basis of tipped information. Whenever managers and analysts
inside information during the period of July 10 until its meet elsewhere than in public, there is a risk
press release in July 18, 1972.
Ross v. A.H. Plaintiffs were alleging that A.H. Robins Co. defrauded In this case, Plaintiffs allege that Robins'
Robins Co. Inc. the country. The gravamen of the complaint is that misleading statements in reports filed with the
Robins manipulated and artificially inflated the market SEC artificially affected the market price of
price of its common stock by disseminating false and Robins' stock. They do not allege, however, that
misleading information about the effectiveness and they directly relied on those statements when
safety of the Dalkon Shield, an interuterine birth control they purchased the stock. Thus, while their
device which it manufactured, and by failing to reveal allegations arguable state a claim under Section
information which indicated that the shield was less 10(b) and Rule 10b-5, they omit one of the
effective and more dangerous than the company's essential elements of a Section 18 claim.
earlier public statements had indicated. Specifically, Accordingly, even if Plaintiffs were able to prove
Robins knew and recklessly disregarded to disclose the the Robins' wrongdoing, Section 18 provides the
facts that “the pregnancy rate from use of the shield exclusive basis of liability for misstatements
was significantly higher than the low pregnancy rate contained in filed reports, they would be left
that it had indicated in its 1970 Annual Report” and without a remedy.
“the rate of medical removals of the shield required by
manifestations of pain, bleeding and infection was
significantly higher than indicated in the 1970 Annual
Report.”
The complaint further stated that Robins knew or

39
recklessly disregarded the fact that: their conclusions
about the shield's safety and effectiveness were based
on insufficient data; that in 1972 and 1973 there was
an "alarming increase" in the rate of septic abortions
and deaths resulting from the shield; and that other
"significant health hazards" existed.
Robins allegedly concealed the effect of these facts
upon its operating and financial condition.

Time Warner Time started a negotiation process with Warner for a Is Time Warner liable for anonymous statements
Inc. v. Securities merger. Subsequently, Paramount made a surprise made by supposed insiders?
Litigation tender offer to Time. The Directors of Time refused to
submit the offer to the shareholders and pushed NO. Rule 9(b) requires that " [i]n all averments of
through with the merger resulting to the creation of fraud or mistake, the circumstances constituting
Time Warner Inc. fraud or malice shall be stated with particularity."
The merger resulted in over $10B in debt for Time At a minimum, the plaintiff must identify the
Warner. To reduce its indebtedness the company speaker of the allegedly fraudulent statements.
embarked on a highly publicized campaign to find
international "strategic partners" who would infuse Did Time Warner make affirmative
billions of dollars of capital into the company and who misrepresentations when they viewed the merger
would help the company realize its dream of becoming optimistically?
a dominant worldwide entertainment conglomerate.
Ultimately, Time Warner formed only two strategic NO. Most of the statements reflect merely that
partnerships, each on a much smaller scale than had talks are ongoing, and that Time Warner hopes
been hoped for. Faced with a multi-billion dollar balloon that the talks will be successful. There is no
payment on the debt, the company was forced to seek suggestion that the factual assertions contained
an alternative method of raising capital--a new stock in any of these statements were false when the
offering that substantially diluted the rights of the statements were made. The complaint contains
existing shareholders. no allegations to support the inference that the
Plaintiffs' complaint alleged that defendant Time defendants either did not have these favorable
Warner, Inc. and four of its officers had misled the opinions on future prospects when they made
investing public by statements and omissions made in the statements or that the favorable opinions
the course of Time Warner's efforts to reduce its debt. were without a basis in fact.

Did Time Warner err when it failed to disclose


problems in the strategic partnerships?

NO. As a general rule, there is a duty to update


opinions and projections if the original opinions
or projections have become misleading as the
result of intervening events. But in this case, the
attributed public statements lack the sort of
definite positive projections that might require
later correction. The statements suggest only the
hope of any company, embarking on talks with
multiple partners, that the talks would go well.
No identified defendant stated that he thought
deals would be struck by a certain date, or even
that it was likely that deals would be struck at all.

40
Did Time Warner have a duty to disclose all the
alternative options available for raising profits?

NOT SURE; this will still have to be developed.


What is clear though is that this allegation will
survive a motion to dismiss. A company that has
not discharged its disclosure obligations and has
permitted prior statements (concerning strategic
alliances) to become misleading by a material
nondisclosure (of the active consideration of a
dilutive rights offering) may be found to have
violated Rule 10b-5.
Blackie v. Ampex Corporation’s annual report for fiscal 1970, Do the many stockholders have legal personality Under such circumstances involving
Barrack reported a profit of $12 million. By January 1972, the to file a class action suit? primarily a failure to disclose, positive
company was predicting an estimated $40 million loss proof of reliance is not a prerequisite to
for fiscal 1972. Two months later the company YES. The overwhelming weight of authority holds recovery. All that is necessary is that the
disclosed the loss would be much larger, in the $80 to that repeated misrepresentations of the sort facts withheld be material in the sense that
$90 million range; finally, in the annual report for fiscal alleged here satisfy the "common question" a reasonable investor might have
1972, the company reported a loss of $90 million. requirement. Confronted with a class of considered them important in the making
The gravamen of all the claims is the misrepresentation purchasers allegedly defrauded over a period of of this decision.
by reason of annual and interim reports, press releases time by similar misrepresentations, courts have
and SEC filings of the financial condition of Ampex from taken the common sense approach that the Requiring direct proof from each purchaser
the date of the 1970 report until 1972. 
Plaintiffs' class is united by a common interest in that he relied on a particular
complaint alleges that the price of the company's stock determining whether a defendant's course of representation when purchasing would
was artificially inflated. conduct is in its broad outlines actionable, which defeat recovery by those whose reliance
is not defeated by slight differences in class was indirect, despite the fact that the
members' positions, and that the issue may causational chain is broken only if the
profitably be tried in one suit. 
 purchaser would have purchased Proof of
reliance is adduced to demonstrate the
causal connection between the
defendant's wrongdoing and the plaintiff's
loss. We think causation is adequately
established in the impersonal stock
exchange context by proof of purchase and
of the materiality of misrepresentations,
without direct proof of reliance. Materiality
circumstantially establishes the reliance of
some market traders and hence the
inflation in the stock price when the
purchase is made the causational chain
between defendant's conduct and
plaintiff's loss is sufficiently established to
make out a prima facie case.
The standards of proof of causation we
have set out apply to all fraud on the
market cases, individual as well as class
actions.
Kohn v. In 1969, the President of Zambia announced that the The Court ruled that there was material
American Metal Government planned to acquire controlling equity representation in the proxy materials and the
Climax interests in copper properties within Zambia. RST, a stockholder’s meeting, and a violation of violated
copper production company, entered into a deal with the disclosure provisions of § 10(b) of the

41
the Zambian government and another Zambian Securities and Exchange Act of 1934 and Rule
company (INDECO) it was agreed that RST and INDECO 10b-5.
and “another American company” would control a new The misrepresentations are material when they
corporation, RCM, and all non-nationalized assets are related to subject matter which might have
would be transferred out to the then unnamed been considered important by a reasonable
American company. Later, RST then entered into a deal shareholder who was in the process of deciding
with AMAX, a New York company interested in how to vote. (Mills v. Electric Auto-Lite). In this
externalizing the non-nationalized assets referred to in case, there was no proper disclosure of the
the first agreement. The deal between RST and AMAX independence of the nationalization of the
basically stated that RST’s operating assets would be Zambian assets from the amalgamation of RST
consolidated into RCM, with the remaining 49% to be and AMAX.
acquired by AMAX. Furthermore, it found that it is not a defense to a
When the shareholders of RST were made to vote on finding of material violations of 10b-5 to say that
the deal, both the amalgamation and the some stockholders “discovered” the
nationalization were placed in only one resolution, misrepresentations before the vote and thus
creating the impression it was not possible to vote for were not misled, and therefore, since they were
only the nationalization, and not the amalgamation. the class representatives, the entire class is
The proxy materials given to them also seemed to precluded from obtaining any remedy. This is in
indicate the same, or at least made no explicit reference to Kohn’s letter, attached to the proxy
statements as to the independence or materials and listing certain misrepresentations.
interdependence of the two deals. Kohn, a disgruntled
stockholder, managed to get a statement attached to
the proxy materials about the disadvantages of
approving the deal. Still, the stockholders voted for the
deal.
*People v. Tan Tan was accused of failing to report to the SEC that he Were the lower courts correct to dismiss the To prosecute for failure to report, all facts
was the beneficial owner of 84,030,000 Best World case? must be proven through official corporate
Resources Corporation shares, a registered security documents, such as the Articles of
sold pursuant to Sections 4 and 8 of the Revised YES. To secure conviction for the violations of Incorporation.
Securities Act. His beneficial ownership constituted RSA Secs. 32 (a-1) and 36 (a), it is necessary to
18.6% of the outstanding shares of the company, way prove the ff.:
above the 10% required by law to be reported. The trial (1) That the BW Resources Corporation
court dismissed the case following a demurrer to (“BW”) has equity securities registered
evidence filed by Tan, who stated that the Government under the Revised Securities Act;
failed to prove his guilt after the presentation of its (2) That the equity securities of BW Resources
evidence. 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
became the beneficial owner of 10% of a
particular class of BW shares; and
(6) The fact, the accused failed to disclose his
10% ownership within 10 days from
becoming such owner.

42
It is clear from the evidence 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
prosecution’s evidence renders impossible the
determination of the 10% 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 10%.
U.S. v. Simon Simon, Kaiser and Fishman (defendants) were Is it enough that the accounting firm followed the The mere fact that the statements were
members of Lybrand – a leading international public generally accepted principles of accounting when made in compliance with generally
accounting firm. They were convicted for drawing up, reporting this series of transactions? accepted accounting principles cannot be
certifying and mailing a false and misleading financial a complete defense. The true test is
statement of Continental Vending Machine Corporation NO. The main defense of Simon, Kaiser and whether or not the financial statements as
as of Sept. 30, 1962. One of the statutes they allegedly Fishman was that they merely followed generally a whole fairly presented the financial
violated was the Securities and Exchange Act of 1934. accepted accounting principles in making the position of the company during the
The center of the controversy is the “Valley Receivable” financial statements. Having followed such pertinent period.
which represents Continental’s advances to Valley (a standards, they cannot be held liable for any
finance company) and the accounting treatment made “false or misleading statements” made therein.
thereto by the defendants. The Court agreed with the judge that the mere
Basically, Continental would regularly make advances fact that the statements were made in
to Valley while the latter periodically made payments to compliance with generally accepted accounting
the former. Simultaneously, however, Valley would loan principles cannot be a complete defense. The
money to Roth (president of Continental and true test is whether or not the financial
supervised the daily operations of Valley). Later on it statements as a whole fairly presented the
was found out that Valley could not repay its debt to financial position of Continental during the
Continental because Roth was personally indebted to pertinent period. Moreover, it simply cannot be
Valley for the same amount. Roth then offered to post true that an accountant is under no duty to
his equity in certain marketable securities and a disclose what he knows when he has reason to
mortgage on his home and furnishings to secure believe that, to a material extent, a corporation is
Valley’s debt to Continental. This was accepted by being operated not to carry out its business in
Simon saying that with this, there would be satisfactory the interest of all the stockholders but for the
evidence of the receivable’s collectibility. Harris (new private benefit of its president (pertaining to
character, a supervisor from Lybrand) was given the financing Roth’s transactions in the stock
task of verifying the existence of the assigned market).
securities. Harris confirmed approximately $3M of the
securities through listening to Roth’s calls with the
various banks and brokers holding the assigned
securities. About 80% of the securities confirmed were
stock and convertible debentures of Continental.

43
Also involved in this case is the “Valley Payable” which
is comprised by Valley’s advancements to Continental
but could not be offset against the Valley Receivable
because the notes were negotiable.
Although Continental’s balance sheet showed the
payable and receivable separately, the note indicated
that the collateral secured the net receivable. The
financial statements were dismal. Compared to an
after-tax profit of more than $1M in 1961, Continental
reported an operating loss of almost $900K in 1962.
The mailing of the statements as part of Continental’s
annual report had quite an effect on the value of that
part of the collateral consisting of Continental stock
and debentures. The value of the collateral plummeted.
Eventually, the American Stock Exchange suspended
the trading in Continental’s stocks.
*Dura Dura Pharmaceuticals made representations in the Do respondents still have to prove the causal What are the elements for cause of action?
Pharmaceuticals market that its medicine, particularly Ceclor D (CCD), relation between the misrepresentations and the 1. Material mispresentation or omission
v. Broudo would get FDA approval & sales would go up. As a subsequent loss that they suffered? 2. Economic loss
result, Broudo & others invested in Dura stocks. 3. Scienter (intent to defraud)
On February 1998, Dura reported slower sales of CCD YES. The CA’s view is incorrect. 4. Reliance
which made its stock price drop 47% in 1 day. The
business continued to decline throughout 1998. In Firstly, the moment that the transaction (in this An inflated purchase price does not by
November of that year, Dura disclosed that the FDA did case the buying of the stocks of Dura) takes itself prove loss causation. It is not enough
not approve the AS. After the latter announcement, the place the plaintiff suffers no loss because the to just allege that the securities were
stock price of Dura further dropped. The falling stock inflated purchase price is offset by ownership of purchased at an artificially inflated price to
prices led Broudo & co. to believe that the stock prices a share that possesses equivalent value at that show loss-causation. The plaintiff needs to
were artificially inflated. As such, they filed several instant. Also, other factors, aside from the show a causal relation between the
securities-fraud class actions against petitioners which alleged misrepresentation, may affect the price misrepresentation and the economic loss
were then consolidated. These were dismissed by the of stocks. Thus, the link between the inflated suffered.
district court. The district court held that Broudo & co. purchase price and any later economic loss is
failed to establish a causal connection between the not sufficient to say that the misrepresentation
money they lost & the misrepresentation of Dura caused the loss. (Basically, an inflated purchase
Pharmaceuticals. price does not by itself prove loss causation).
CA, however, reversed. Under the CA’s view of loss The securities laws make clear Congress’ intent
causation, an investor’s loss in a fraud-on-the-market to permit private securities fraud actions only
case “occurs at the time of the transaction,” when he is where plaintiffs adequately allege and prove the
harmed by paying too much for the security, and a traditional elements of cause and loss, but the
causal link automatically exists because the 9th Circuit’s approach would allow recovery where
defendant’s misrepresentation inflated the price. a misrepresentation leads to an inflated
purchase price, but does not proximately cause
any economic loss.
Here, the respondents’ complaint was legally
insufficient with regards to the allegation of loss
causation. This is because they only alleged that
they bought securities at an inflated purchase
price and that this caused them loss. However,
nowhere in the complaint did they indicate what
the causal connection between the loss and the
misrepresentation was. Allowing a plaintiff to
forgo giving any indication of the economic loss

44
and its proximate cause would bring about the
very sort of harm the securities statutes seek to
avoid, namely the abusive practice of filing
lawsuits with only a faint hope that discovery
might lead to some plausible cause of action.
SEC v. National There was a merger deal being closed. The two Are the lawyers liable under Securities law? Defendants’ participation in the merger
Student companies were exchanging comfort letters, among despite their knowledge of the fraudulent
Marketing Co. others, to one another regarding their businesses. The YES. They were made liable for their silence reports amounts to aiding and abetting in
(NSMC) law firm, however, became aware of certain fraudulent despite their knowledge of the flaws in the fraud.
aspects of the transaction, but kept silent and reports during the foreclosure proceedings.
proceeded to close the deal.
2. PROXY SOLICITATION

Section 20, Securities Regulation Code


Proxy Solicitations.
20.1. Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by the Commission;
20.2. Proxies must be –
(1) In writing,
(2) Signed by the stockholder or his duly authorized representative &
(3) Filed before the scheduled meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended.
• No proxy shall be valid and effective for a period longer than 5 years at one time.
20.4. No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for the account of a customer, to a person other than the customer,
without the express written authorization of such customer.
20.5. A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the SEC may prescribe of the outstanding share of the issuer, shall submit a
report identifying the beneficial owner within 10 days after such acquisition, for its own account or customer, to the issuer of the security, to the Exchange where the security is
traded and to the SEC.

Section 21, Securities Regulation Code


Fees for Tender Offers and Certain Proxy Solicitations.
At the time of filing with the Commission of any statement required under Section 19 for any tender offer or Section 72.2 for issuer repurchases, or Section 20 for proxy or
consent solicitation, the Commission may require that the person making such filing pay a fee of not more than one-tenth (1/10) of one percentum (1%) of:
(1) The proposed aggregate purchase price in the case of a transaction under Secs. 20 or 72.2;
(2) The proposed payment in cash, and the value of any securities or property to be transferred in the acquisition, merger or consolidation, or the cash and value of any
securities proposed to be received upon the sale or disposition of such assets in the case of a solicitation under Sec. 20.
The SEC shall prescribe by rule diminishing fees in inverse proportion to the value of the aggregate price of the offering.

Section 57, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

Section 62, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

Section 63, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

SRC IRR 2015, Rule 23


See above

i. Causation
*Mills v. Electric The board of directors of Electric recommended the Is the material misrepresentation in the proxy No causal relationship must be shown

45
Autolite merger of Electric and MLC. Prior to the shareholders’ solicitation sufficient to establish the cause of between the proxy statement and the
meeting, Electric sent proxy statements to its action? merger to show a violation of the law. It is
shareholders. The statements stated that the board of enough that the proxy statements failed to
directors recommended the merger of the 2 YES. A material misrepresentation or omission is disclose material information which a
companies, but it failed to disclose the fact that MLC enough to establish a cause of action. The reasonable shareholder might deem
controlled majority of the directors of Electric. Mills United States Supreme Court declined to follow important in deciding how to vote.
questioned the actuations of Electric in sending the Appellate court’s “fairness of the merger”
misleading solicitations to its shareholders. They filed a test because it basically removed the Section 14 (a) declares it "unlawful" to
suit against Electric, MLC, and American seeking to set shareholders from the voting process. A solicit proxies in contravention of
aside the merger. company could release an extremely false proxy Commission rules, and SEC Rule 14a-9
The District court concluded that the misleading proxy statement and justify it as long as they could prohibits solicitations "containing any
solicitation was material and had a causal connection demonstrate that the merger was fair. The Court statement which is false or misleading with
to the vote. CA reversed; it said that Mills would not be noted that misleading material in a solicitation is respect to any material fact, or which omits
entitled to a relief if Electric can show that the merger in itself a violation of Section 14(a).2 In this case, to state any material fact necessary in
would have received enough votes even without the Petitioner has established facts, namely that order to make the statements therein not
deficiency proxy statements (a.k.a. the proof of fairness shareholders may have been materially affected false or misleading."
of the merger). According to the CA, this test by the recommendation of an interested board of Where the misrepresentation in a proxy
corresponded to the common-law fraud test of whether directors, which would allow for a cause of statement is material, that fact itself shows
the injured party relied on the misrepresentation. action. that the defect was of such a character
that it might have been considered
important by a reasonable shareholder
who was in the process of deciding how to
vote. The requirement that the defect has a
significant propensity to affect the voting
process is expressly stated in Rule 14a-9.
It serves the purpose of ensuring that a
cause of action cannot be established by a
proof of defect so unrelated to the
transaction that correction of the defect
would not further the interests protected by
Section 14(a).
Virginia First American Bankshares, Inc. (FABI) began a “freeze- Whether a statement couched in conclusory
Bankshares v. out” merger in which First American Bank of Virginia terms explaining the directors’ reasons for
Sandberg (Bank) would be merged into Virginia Bankshares, Inc., approving a corporate action can be materially
(VBI). The Bank approved a price of $42 for the shares misleading

of minority stockholders who would lose their interests
in case of merger. The directors likewise solicited YES. A fact is considered to be material if there is
proxies for voting and urged that the proposal be a substantial likelihood that a reasonable
adopted as they had approved the plan for it would give shareholder would consider it important in
the minority shareholders to achieve a high value. deciding how to vote. Since directors usually
While most minority stochholders gave the proxies, have knowledge and expertness exceeding that
Sandberg did not and sued for damages alleging that of a normal investor, a shareowner faced with a
soliciting proxies was done in violation of §14(a) and proxy request would naturally think it important
Rule 14a-9. Both the District Court and the Court of to know the directors’ beliefs about the course
Appeals ruled in her favor. Hence the case at bar. they recommend. Reasons for directors’
recommendation or statements of belief are
matters or corporate record subject to
documentation to be supported or attacked by

2Rule 14a-9, promulgated under § 14(a) of the Securities Exchange Act of 1934, provides that no proxy solicitation shall be made "which . . . is false or misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements therein not false
 or misleading."


46
evidence. Conclusory terms in a commercial
context are also understood to rest on factual
basis. Provable facts either furnish good reasons
to make the conclusory judgment or count
against it. In the case at bar, Sandberg
presented evidence based on facts to show that
the directors’ statement was misleading about
the stock’s value and the directors’ belief. While
the proxy statement described the $42 price as
above the book value and market price of the
share; the evidence showed the appreciated
value of the Bank’s real estate holdings.
Likewise, the market was dominated by FABI,
which valued its share in excess of $60, a fact
which was never disclosed. They also failed to
disclose that if they did not support the proposal,
they would have no expectation to keep their
seats as directors.

Whether causation of damages compensable


under Rule 14 can be shown by a member of
minority stockholders whose votes are not
required to authorize the corporate action

NO. To allow shareholders whose votes are not


required by law to bring an implied private right
would be to expand the scope of plaintiffs
authorized to bring actions. In recognizing a
private right, it is necessary to determine
whether Congress really intended to provide a
private remedy. The breadth of right once
recognized, should not, as a general matter, be
allowed to grow beyond the scope
congressionally intended.
ii. Materiality
*TSC v. National Industries Inc. purchased 34% of TSC’s voting Was the failure to disclose the officer’s position General Standard of Materiality Test: an
Northway securities from TSC’s founder, Charles Schmidt, and or the opinion material? omitted fact is material if there is a
principal holder and his family. substantial likelihood that a reasonable
Charles Schmidt and his son resigned from TSC’s board NO. These omissions were of questionable shareholder would consider it important in
of directors, and 5 National nominees were placed on materiality and inappropriate for summary deciding how to vote
 - A substantial
the board, including National’s president and executive judgment because other disclosures within the likelihood that, under all the
VP, who became chairman of the board and chairman proxy materials could have led shareholders to circumstances, the omitted fact would
of TSC’s executive committee, respectively. similar conclusions about the degree of control have assumed actual significance in the
TSC board approved a proposal to liquidate and sell all National exercised over TSC. Furthermore, there reasonable shareholder's deliberations.
of TSC’s assets to National by exchanging TSC common was already a genuine issue of fact as to This is a question of fact & law.
and preferred stock for National preferred stock and whether National was really in control of TSC at
warrants to purchase National common stock. the time of the proxy solicitation anyway.
TSC and National then issued a joint proxy statement to The two facts which National omitted with
their shareholders recommending approval of the respect to the fairness of the transaction were
proposal. the statements of an investment banking firm
The proxy solicitation was successful, TSC was placed involved in the deal and the purchase of

47
in liquidation and dissolution, and the exchange of National’s stock by a mutual fund. The
shares was effected investment bank rendered an opinion that the
Northway Inc., a TSC shareholder, brought this action high redemption price of National’s stock was a
for damages, restitution, and other relief against TSC substantial premium over the current market
and National, claiming that their joint proxy statement value of TSC’s shares. The bank later revised its
was incomplete and materially misleading in violation opinion when it discovered that the warrants for
of § 14(a) and Rule 14a-91 in that it omitted material National stock were being offered at a lower
facts relating to the degree of National's control over price than expected. But since the bank still felt
TSC: the transaction was fair and that TSC
1. It failed to disclose the positions in TSC held by shareholders were still receiving a premium. This
National's president and VP and to file a report with omission is immaterial.
SEC by National and TSC indicating that National "may Northway accused National of collusion to
be deemed a parent of TSC" manipulate market prices by engaging in a series
2. It failed to disclose certain unfavorable information of transactions with Madison Fund, Inc., a
about the proposal contained in a letter from an mutual fund. One of National’s directors also had
investment banking firm whose earlier favorable a seat on Madison’s board, and in the period
opinion of the proposal was reported in the proxy prior to National’s acquisition of TSC, Madison’s
statement, and also recent substantial purchases of purchases of National’s common stock
National's common stock, suggestive of accounted for 8.5% of all reported transactions
manipulation, by National and a mutual fund for the company’s securities. But Northway failed
to demonstrate evidence of any unlawful
manipulation at trial. National had no duty to
disclose all information which might suggest
market manipulation, but rather only to be
honest in its disclosures.
iii. Culpability
Gerstle v. GOA had been the largest company in the outdoor The issues are (1) whether or not the inadequacy Special Case: We thus hold that in a case
Gamble-Skogmo advertising business. Gamble-Skogmo acquired in the Proxy Statement is material; and (2) like this, where the plaintiffs represent the
50.12% of GOA’s common stock. In 1961, the business (important issue) what is the standard of very class who were asked to approve a
began to encounter serious difficulties. A report was culpability in suits for damages for violation of merger on the basis of a misleading proxy
made stating that the advertising plants of GOA could Rule 14a-9? statement and are seeking compensation
not be operated profitably and recommending that they from the beneficiary who is responsible for
should be sold accordingly. The sales program was (1) The Court held that the inadequacy was the preparation of the statement, they are
slowed down when SEC instituted an investigation to material. not required to establish any evil motive or
determine whether Skogmo was an investment Where the misstatement or omission in a proxy even reckless disregard of the facts.
company. Despite this, Skogmo began discussing with statement has been shown to be "material," that
Becker, an investing banking firm, the desirability of determination itself indubitably embodies a
some of a consolidation of GOA and Skogmo. conclusion that the defect was of such a
Skogmo decided in May 1963 that the transaction character that it might have been considered
should take the form of a statutory merger in which important by a reasonable shareholder who was
GOA stockholders would receive for each share of GOA in the process of deciding how to vote.
stock a share of $40 par value preferred Skogmo stock At the time of the merger, the minority
paying dividends of $1.75 per annum and convertible shareholders of GOA were required to make an
into common on a share-for-share basis. Because of investment choice between retaining their
this, a Proxy Statement was sent to each stockholder, shares in GOA, a firm with poor earnings
seeking approval of the merger. prospects if it remained in the outdoor
The pertinent provisions of the Statement provide: “If advertising field but also with the possibility of
the merger becomes effective, it is the intention of substantial extraordinary profits from liquidation
Gamble-Skogmo, as the surviving corporation, to of that business, or exchanging them for a small
continue the business of General Outdoor, including premium for the Skogmo convertible preferred, a
the policy of considering offers for the sale to security involving much less risk but with a

48
acceptable prospective purchasers xxx being used to correspondingly reduced interest in the profits
further expand and diversify operations now being potentially available through sales of advertising
conducted or which might be acquired and conducted plants.
by Gamble-Skogmo or its new, wholly- owned In reality though, Skogmo’s true intention—which
subsidiary, GOA, Inc.” should have been adequately disclosed in the
The merger was approved and subsequently became Proxy Statement—was to dispose of all the
effective. remaining outdoor advertising plants as soon as
A complaint was instituted against the companies for possible. With this disclosure, the stockholder
failing to disclose material facts in the Proxy Statement would have realized that there was substantially
in accordance with SEC’s Rule 14a-9(a), prohibiting less risk involved in retaining his GOA stock and
solicitation by means of a proxy statement "containing would have been more likely to focus on the
any statement which, at the time and in light of the profits available from the sales of plants.
circumstances under which it is made, is false or
misleading with respect to any material fact, or which (2) A broad standard of culpability will serve to
omits to state any material fact necessary in order to reinforce the high duty of care owed by a
make the statements therein not false or misleading or controlling corporation to minority stockholders
necessary to correct any statement in any earlier in the preparation of a proxy statement seeking
communication which has become false or misleading." their acquiescence in this sort of transaction, a
The Proxy Statement allegedly failed to effectively consideration which is particularly relevant since
provide adequate information regarding the profits liability in this case is limited to the stockholders
obtained through previous plant sales and the fair whose proxies were solicited. Hence, plaintiffs
market value of the remaining assets or projections of need not prove scienter.
the anticipated profits on sales if there were to be Where the plaintiffs represent the very class who
sales. were asked to approve a merger on the basis of
On the other hand, the defendant wanted the plaintiffs a misleading proxy statement and are seeking
to prove the scienter or the fact that defendant compensation from the beneficiary who is
knowingly misrepresented or omitted relevant facts responsible for the preparation of the statement,
from the Proxy Statement. they are not required to establish any evil motive
or even reckless disregard of the facts.
Berkman v. Rust This case arises out of an intra-corporate dispute Do the plaintiffs have cause of action? THE ELEMENTS OF A PRIVATE CAUSE OF
Craft among the members of the board of directors of Rust ACTION FOR A VIOLATION OF RULE 14A-
Craft, a Delaware corporation engaged in the YES. As to the first requirement, the court ruled 9(A) ARE WELL ESTABLISHED.
manufacture and sale of greeting cards and allied that the plaintiffs showed possible success on 1. That the proxy materials contain a
products. Rust Craft's shares are publicly held and the merits of their case. In this case, it was ruled false or misleading statement of a
traded on the American Stock Exchange. The complaint that the elements of a private cause of action for material fact or omit to state a
challenges the sufficiency of proxy materials sent to the a violation of rule 14a-9(a) are well established. material fact necessary in order to
Rust Craft shareholders in connection with the (1) that the proxy materials contain a false or make the statement made not false
reelection of directors to the Rust Craft board. Plaintiffs misleading statement of a material fact or omit or misleading;

then brought this action for violation of Section 14(a) of to state a material fact necessary in order to 2. That the misstatement or omission
the Securities Exchange Act of 1934 and Rule 14a-9(a) make the statement made not false or of a material fact was the result of
thereunder, alleging that the election proxy materials misleading;
 knowing, reckless or negligent
are false and misleading in omitting to state: • Kidder's conflict of interest affected Kidder's conduct; and

(1) That the slate of nominees was approved over the "credibility" and was highly relevant in assessing 3. That the proxy solicitation was an
dissent of two directors; the firm's per share price recommendation. Every essential link in effecting the
(2) That the stated reason for the dissent was that four board member was entitled to have this relevant proposed corporate action.
of Rust Craft's directors had withheld from their fellow information available to him before evaluating
directors material information relating to Kidder's Kidder's recommendation and acting upon the
debenture purchase and resultant conflict of interest; Ziff proposal in light of it. When the four
and individual defendants failed to disclose the
(3) That the Kidder conflict led the board to engage a existence of the conflict, they deprived their
new and unquestionably independent investment brethren of this relevant knowledge and ran the

49
banking firm to render a further opinion concerning a risk that the corporation would suffer as a result.
fair cash price for Rust Craft stock. This failure to disclose a known conflict of
They seek to enjoin (1) further solicitation of proxies interest borders upon a breach of fiduciary duty.
pursuant to the current proxy materials, and (2) the (2) that the misstatement or omission of a
holding of the annual meeting until further proxy material fact was the result of knowing, reckless
materials which are not misleading can be sent to the or negligent conduct; and

shareholders. • Undeniably, the director defendants
deliberately withheld from the shareholders the
facts concerning the concealment of the Kidder
conflict of interest and the resultant dissension
within the board. They did so despite plaintiffs
repeated efforts to have this information
included in the proxy materials and despite the
likelihood that such information would influence
the shareholders' judgment in deciding how to
vote. Moreover, the director defendants stood
directly to gain by withholding the facts, since, in
the absence of the facts, the shareholders would
have no reason to vote against the unopposed
and unsullied defendants
(3) that the proxy solicitation was an essential
link in effecting the proposed corporate action.

• There can be no doubt that the proxy
solicitation was an "essential link" in electing the
slate of directors. The stock holdings of board
members and officers, taken together, are
insufficient to constitute a quorum to elect the
board. Thus, the solicitation was necessary if the
proposed corporate action is to be effected.
Moreover, the plaintiffs have sufficiently shown
the possibility of irreparable injury and a balance
of hardships on their favor. The Rust Craft
shareholders are being asked to reelect directors
who may well be found to have betrayed their
trust and to have violated certain fiduciary
duties. The injury which may accrue to the
plaintiffs and all the shareholders from the
reelection of such directors is patent. Men who
are likely to be proven unfit would be entrusted
with important business of the company. Indeed,
in view of the impending Ziff merger, these men,
whom the shareholders may not wish to reelect
after full disclosure, will have a hand in altering
the very fiber of the company. Thus, were the
election to go forward, plaintiffs and all the other
shareholders would be denied their fundamental
right to have their investment managed by
faithful directors, duly elected after full
disclosure of all the facts.
Clearly, the plaintiffs have demonstrated a
likelihood of success on the merits and, a fortiori,

50
have shown the existence of serious questions
going to the merits. They have also
demonstrated a possibility of irreparable injury
and a balance of hardships in their favor. Thus, a
preliminary injunction is appropriate under either
leg of the Sonesta test.
Gladwin v. The Gladwins own voting stock in Medfield, a publicly- Were there violations? While a proxy is not normally required to
Medfield held corporation engaged in operating hospitals and contain matter contained in other
other health facilities. In preparation for its annual YES. materials which are furnished and which
shareholder meeting at which directors would be (i) The footnote that Medfield provided in the are clearly referred to in the proxy, a
elected, Medfield sent to shareholders a 1973 annual financial statement did not sufficiently describe company soliciting proxies may not obviate
report, a notice of annual meeting, and a proxy the overpayment controversy as it then existed. It violation of the disclosure requirements by
statement. Medfield sent additional proxy solicitation did not reveal the amount of the claim as referring to materials furnished by its
material, while a group known as the Medfield asserted, the cessation of HEW payments, or the opponents in a proxy contest
Shareholders Committee nominated a rival slate of subsequent arrangements agreed to between
candidates and also solicited proxies. At the annual Blue Cross and Medfield.
meeting the slate nominated by the existing directors (ii) While a proxy is not normally required to
received 56% of the votes cast, against 44% for the contain matter contained in other materials
candidates nominated by the rival group. The Gladwins which are furnished and which are clearly
sued, alleging multiple instances of misstatements or referred to in the proxy, a company soliciting
material omissions in Medfield's proxy material. proxies may not obviate violation of the
disclosure requirements by referring to materials
furnished by its opponents in a proxy contest;
(iii) Materiality does not depend on which way
the information is likely to influence the
shareholders to vote; rather it depends on
whether the information is likely to influence the
decision to vote;
(iv) Neither the true extent of the economic
benefit conferred on Dr. Willey nor its
concomitant cost to the corporation was fully
disclosed;
(v) The issue is not stockholder consent to a sale
but disclosure of matters important to
stockholders in voting at the annual meeting.

3. TENDER OFFERS

Section 19, Securities Regulation Code


19.1. (a) Tender Offers:
1. Any person or group of persons acting in concert
2. Who intends to acquire
a. At least 15% of –
i. Any class of any equity security of a listed corporation OR
ii. Any class of any equity security of a corporation with assets of at least P50,000,000 & having 200 or more stockholders with at least 100 shares each
b. At least 30% of such equity as listed in a. over a period of 12 months

19.1. (a) How Tender Offer is Made


• File with the SEC a declaration to that effect
• Furnish the issuer with a statement containing the information required in Sec. 17 (i.e., Periodic & Other Reports of Issuers)
• Publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security

51
19.1. (a) Offers Subsequent to Initial Tender Offer
• Copies of any additional material soliciting or requesting tender offers subsequent to the initial solicitation must contain such information as the SEC may prescribe
• The above materials shall be filed not later than the time copies of such materials are first published or sent or given to security holders

19.1 (b) Any solicitation or recommendation to holders to accept or reject a tender offer, request or invitation must be made in accordance with SEC IRRs

19.1 (c) Withdrawal of Securities Deposited for Tender Offers


• These may be withdrawn at any time throughout the period that the tender offer remains open
• If the securities deposited have not been accepted for payment, they may be withdrawn at any time after 60 days from the date of the original tender offer or
request for invitation
• EXCEPT as SEC may prescribe

19.1 (d) When the Securities Offered Exceed That Which a Person or Group of Persons is Bound or Willing to Take Up & Pay For
• The securities will be taken up as nearly as may be pro rata, disregarding fractions, according to the number of securities deposited by each depositor
• Also applies to securities deposited within 10 days after notice of an increase in consideration offered to security holders, as described in 19.1 (e), is first published,
sent or given to security holders

19.1 (e) Varying the Terms of a Tender Offer by Increasing the Consideration Offered to Security Holders
• The person varying the terms shall pay the increased consideration to each security holder whose securities are taken up & paid for
• Whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation

19.2. Unlawful Acts


• To make any untrue statement of a material fact or omit to state any material fact necessary to make the statements made, in light of the circumstances, under
which they are made, not misleading, or
• To engage in any fraudulent, deceptive, or manipulative acts or practices
• BOTH in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer,
request or invitation
• SEC will describe the means by which this is violated

Section 57, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

Section 62, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

Section 63, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

SRC IRR 2015, Rule 19

19.1. Definitions
• Issuer Tender Offer – a publicly announced intention by an Issuer to reacquire any of its own class of equity securities, or by an associate of such Issuer to acquire
such securities.
• Security Holder - holders of record and beneficial owners of securities that are the subject of a tender offer.
• Target Company - any Issuer whose equity securities are sought by an Offeror pursuant to a tender offer.
• Tender Offer Materials:
1. The Offeror's formal offer, including all the material terms & conditions of the tender offer & all their amendments;
2. The related transmittal letter (whereby equity securities of the target company that are sought in the tender offer may be transmitted to the Offeror or its
depository) and all their amendments; &

52
3. Press releases, advertisements, letters & other documents published by the Offeror or sent or given by the Offeror to security holders which, directly or
indirectly, solicit, invite or request tenders of the equity securities being sought in the tender offer.
• Termination - the date after which equity securities may not be tendered pursuant to the tender offer.

19.2. Mandatory Tender Offers


Type of Tender Offer Requirements
15% of equity securities in a public company in 1 or more transactions within a File a declaration with the SEC
period of 12 months
35% of the outstanding voting shares or such outstanding voting shares that are 1. Disclose such intention
sufficient to gain control of the board in a public company in one or more 2. Contemporaneously make a tender offer for the percentage sought to all holders
transactions within a period of 12 months of such securities within the said period
3. If the tender offer is oversubscribed, the aggregate amount of securities to be
*If this 35% is made through the Exchange trading system & the persons fail to acquired at the close of such tender offer shall be proportionately distributed across
acquire 35%, they will not be required to make a tender offer if, after acquisition selling shareholders with whom the acquirer may have been in private negotiations
through the Exchange, they fail to acquire their target of 35% or such outstanding and other shareholders.
voting shares sufficient to gain control of the board. 4. The last sale that meets the threshold shall not be consummated until the closing
and completion of the tender offer
35% of the outstanding voting shares or such outstanding voting shares that are 1. Make a tender offer for all the outstanding voting shares
sufficient to gain control of the board in a public company directly from one or 2. The sale of shares pursuant to the private transaction or block sale shall not be
more stockholders completed prior to the closing & completion of the tender offer.

Over 50% of the total outstanding equity securities of a public company 1. The acquirer is required to make a tender offer under for all the outstanding
equity securities to all remaining stockholders of the company at a price supported
by a fairness opinion provided by an independent financial advisor or equivalent
third party
2. The acquirer in such a tender offer shall be required to accept all securities
tendered

19.2.6. Guidelines on the Conduct of Valuation & Fairness Opinion


• Only firms that comply with the IRR may issue a fairness opinion
• "Independence" shall mean absence of any business interest or family relationship with any party to the transaction or of any of its directors, officers, or major
stockholders, that could, or could reasonably be perceived to, materially interfere with the exercise of the professional judgment of the firm, its representative or any
member of the engagement team, in carrying out their responsibilities in assessing the fairness of the issuer's securities
• Requirements in the conduct of the fairness opinion:
1. The individual who acts on behalf of the accredited firm shall be a licensed professional who has at least 10 years experience in the field of accounting,
finance or economics & holds a relevant advance degree
2. The firm shall use in its assessment relevant & current data or those that are not more than 3 months from date of valuation
3. The firm shall adopt more than 1 valuation methodology and compare the values derived from using different methodologies to minimize the risk that the
opinion is unreliable. In addition to referencing the quoted price of the subject equity securities, valuation methodologies shall include balance sheet
valuation or book value, dividend discount model, price/earnings ratio, & free cash flow approach
4. If the firm's valuation of a company materially differs from the market price of the company's securities prior to the announcement of a proposed
transaction, the firm shall comment on the difference and the factors underlying it
5. The firm shall not include prospective financial information (including forecasts and projections) unless it has made sufficient inquiries to satisfy itself
that the information on which it relied was prepared on a reasonable basis
o It shall also disclose how & why it finds such inquiries sufficient & utilize several of the methodologies in 3. above.
o Discounted cash flow methodology which invariably uses forward-looking information may only be used if the firm has reasonable grounds for
doing so.
o If the firm considered the use of prospective information, the reasons shall be indicated in the report
6. The firm shall notify the party commissioning the report within 2 days from date of its knowledge of a significant change which may affect the contents of
the report or from the date of its conclusion that a material statement in the report is misleading or deceptive. A copy of such a report shall be furnished

53
to the SEC within the same period
• Information to be Placed in Fairness Opinion Report:
1. All material assumptions & reasons for the opinion
2. Justification of the choice of methodologies & description of the methods used by the firm
3. Whether or not the opinion was approved by a committee created within the firm
4. Whether or not the opinion expresses a judgment about the fairness of the transaction's compensation to any of the company's directors, officers or
employees to the company's shareholders
5. Whether or not the firm acted as a financial advisor to any party to the transaction, & whether or not it will receive compensation &/or other significant
payments that is contingent on the successful completion of the transaction, for rendering the fairness opinion &/or serving as advisor
6. Material relationships during the prior 2 years or those contemplated between the firm and any party to the transaction in which any compensation was
received or intended to be received. A relationship shall be considered material if it would affect the independence of the firm,
7. Whether or not the firm independently verified any information that formed a substantial basis for the opinion, & whether or not such information was
supplied to the firm by the company requesting the opinion. The information or the categories of information that were verified and not verified must be
discussed and described;
8. The firm's discussion on any material difference between the valuation set and the market price of the company's securities prior to the announcement of
the proposed transaction;
9. A written declaration of compliance by the firm's representative with the Code of Ethics applicable to his or her profession;
10. A brief description of the firm and the education and professional qualifications of its representative who conducted the valuation.
11. The Fairness Opinion Report shall be signed by the firm's representative of a rank not lower than a partner or a Vice-President or their equivalent
respectively. He shall indicate his complete name, Professional License Number, Tax Identification Number, firm name and address, PSE Accreditation
Number of the firm (if any) and other technical information.
19.3. Exemptions to Tender Offer. Unless the acquisition of equity securities is intended to circumvent Tender Offer Rules, the ff. are the exemptions to mandatory tender offer:
[MUFORA]
1. Merger or consolidation
2. Purchase of securities from Unissued capital stock
• EXCEPT if the acquisition:
o Will result in 50% or more ownership of securities by the purchaser or
o Such percentage sufficient to gain control of the company
3. Purchases in connection with Foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the dealer or
creditor
4. Purchases in the Open market at the prevailing market price
5. Purchases in connection with corporate Rehabilitation under court supervision
6. Any purchase of securities from an increase in the Authorized capital stock
*NOTE: Purchases here MUST still comply with disclosure requirements under Rules 18 & 23
• GR of Rule 18: Any person who acquires beneficial ownership of 5% of any class of equity of a company must file SEC Form 18-A with SEC, the PSE & the
Issuer company
• GR of Rule 23: Any person who acquires beneficial ownership of 10% of any class of equity of a company which satisfies the requirements of Subsec. 17.2
OR is a director or officer of the said company, must, within 10 days after he becomes such director, beneficial owner or officer, file Form 23-A with the SEC. If
there are changes in the ownership during a month, he must file Form 23-B.

19.4. Tender Offer by an Issuer or Buy Back. Allowed ONLY IF (1) issuer has unrestricted retained earnings in its books to cover the shares purchased, & (2) for the ff.
purposes:
(OPSDO)
1. To implement a stock Option or stock Purchase plan
2. To meet Short-term obligations which can be settled by the re-issuance of purchased shares
3. To pay Dissenting or withdrawing stockholders entitled to payment for their securities under the Corp. Code
4. Other legitimate corporate purposes

19.9.3. Tender Offer Other than Issuer. In case of tender offer other than by an Issuer, the target company cannot engage in any of the ff. transactions during the course of the
tender offer, or before its commencement if the Board has reason to believe that a tender offer is imminent, except if the transaction is pursuant to a contract entered into

54
earlier, or with the approval of the shareholders in a general meeting or, where special circumstances exist, the SEC's approval has been obtained:
1. Issue any authorized but unissued shares;
2. Issue or grant options in respect to any unissued shares;
3. Create or issue, or permit the creation or issuance of, any securities carrying rights of conversion into, or subscription to, shares;
4. Sell, dispose of or acquire, or agree to acquire, any asset whose value amounts to 5% or more of the total value of the assets prior to acquisition;
5. Enter into contracts that are not in the ordinary course of business

19.9.8. Requisites for Tender Offer. No tender offer shall be made unless:
1. It is open to all security holders of the class of securities subject to the tender offer; &
2. The consideration paid to any security holder pursuant to the tender offer shall be the highest consideration paid to any other security holder during such tender
offer.

19.10. Transactions Based on Material, Non-Public Information.


If a person shall become aware of a potential tender offer before the tender offer has been publicly announced, such person shall not buy or sell, directly or indirectly, the
securities of the target company until the tender offer shall have been publicly announced.
• Such buying or selling shall constitute insider trading under Section 27.4 of the Code.

19.12. Prohibited Practices.


1. To employ any device, scheme or artifice to defraud any person;
2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; or
3. To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.

19.13. Violations.
If equity securities of a public company are purchased at threshold amounts provided for in this Rule without complying with the tender offer requirements under this Rule, the
SEC may, upon complaint, nullify such purchase and order the conduct of a tender offer, without prejudice to the imposition of other sanctions under the Code.
*Cemco Union Cement, a listed company, is owned by UCHC Must CEMCO initiate a mandatory tender offer A tender offer is an offer by the acquiring
Holdings v. (60%) & Cemco (17%). Meanwhile, UCHC, a non-listed after acquiring BCI & ACC’s shares? person to stockholders of a public
National Life company, is owned by BCI (21.31%), ACC (29.96%) & company for them to tender their shares
Insurance Co. Cecmco (9%). BCI & ACC decided to sell their UCHC YES. It was ruled that the indirect acquisition by therein on the terms specified in the offer.
shares to Cemco. This would, in effect, make Cemco Cemco of 36% of UCC shares through the Tender offer is in place to protect minority
53% owner of Union Cement. acquisition of the non-listed UCHC shares is shareholders against any scheme that
Initially, SEC held that the sale of BCI & ACC’s shares to covered by the mandatory tender offer rule. dilutes the share value of their
Cemco did not constitute a tender offer situation. They investments. It gives the minority
reversed in a later appeal by an angry stockholder shareholders the chance to exit the
(National Life Insurance Co.), & thereafter held that the company under reasonable terms, giving
acquisition by CEMCO of BCI & ACC’s shares, would them the opportunity to sell their shares at
need to be subject to mandatory offer as well. the same price as those of the majority
shareholders.

Ownership acquisition means both direct


and indirect. What is decisive is the
determination of the power of control.

A 35% acquisition within a span of 12


months is referred to as a creeping
acquisition.
Osmeña v. SSS owns 180 million common shares of Equitable As a necessary consequence of the BDO-EPCIB A buyer of the shares of a company cannot
Social Security bank. However, the bank’s decreasing value in the merger which saw EPCIB being absorbed by the use the Swiss Challenge as a replacement
System stock market became an issue; SSS wanted to sell surviving BDO, have been transferred to BDO of the tender offer, as the former is unfair
these shares off. BDO offered to buy them via Swiss and converted into BDO common shares under and gives the buyer too much of an

55
Challenge – this would mean that SSS would bid the the exchange ratio set forth in the BDO-EPCIB advantage, since he can “match” any
shares, but BDO would have the right to match the Plan of Merger. As thus converted, the subject prospective bidder.
price of the highest bidder & ultimately buy the shares. Shares are no longer equity security issuances of
the now defunct EPCIB, but those of BDOEPCI,
which, needless to stress, is a totally separate
and distinct entity from what used to be EPCIB.
In net effect, therefore, the 187.84 Million EPCIB
common shares are now lost or inexistent. And in
this regard, the Court takes judicial notice of the
disappearance of EPCIB stocks from the local
bourse listing. Instead, BDO-EPCI Stocks are
presently listed and being traded in the PSE.

Piper v. Chris- Chris-Craft wanted voting control of Piper, which Chris- Does Chris-Craft have standing to sue? The intent of Section 14(e) was the
Craft Craft was trying to accomplish by slowly buying out protection of the investors who are
percentages of Piper’s shares via tender offers & cash NO. Section 14(e) makes unlawful “any confronted with tender offer. Congress
exchanges for Piper’s common stock. Piper didn’t really fraudulent, deceptive or manipulative acts or intended to regulate takeover bidders, who
like Chris-Craft, however, & instead negotiated with practices, in connection with any tender offer.... had previously operated covertly, in order
another company, Bangor Punta, for the latter to Or any solicitation of security holders in to protect shareholders of target
attempt to buy out Piper’s shares. A contest ensued. opposition to or in favor of any such offer.” Rule companies; tender offerors, the class
In order to obtain the additional 17% of Piper stock 10b-6 also prohibits issuers whose stock is in regulated by the statute, were not the
needed for control, Chris decided to make an exchange the process of distribution from market intended beneficiaries of the legislation.
offer of Chris’s securities for Piper Stock. Chris filed a tampering by purchasing stock or stock rights
registration statement & preliminary prospectus with until the distribution has been completed.
the SEC. Pending the approval, Chris made cash However, Chris has no standing to sue for
purchases on the open market until Chris was expressly damages on account of the asserted Rule 10b-6
warned by SEC officials that such purchases when violations by Piper/Bangor, since Chris’s
made during the pendency of an exchange offer, complaint is not the price paid for the target
violated SEC Rule 10-b6. Chris complied with the company’s shares, but that the opportunity to
directive of SEC & cancelled all outstanding orders for gain control of the target company was lost by
purchase of Piper’s stock. virtue of Bangor’s violations. Thus, Chris’s
Meanwhile, Piper entered into agreement with Bangor complaint does not implicate the concerns of
Punta (Bangor) to exchange Piper’s 31% stockholdings Rule 10b-6, which is aimed at maintaining an
in Piper for Bangor’s securities. Pending effective date orderly market for the distribution of securities
of the exchange, Bangor purchased 120k shares of from manipulative influences.
Piper stock in privately negotiated, off-exchange
transactions from three large institutional investors.
This was despite the fact that Rule 10b-13 expressly
prohibits an ender offeror from making purchases of
the target company’s stock during the pendency of an
exchange offer. Bangor officials, although aware of the
release at the time of the three off-exchange
purchases, made no attempt to secure an exemption
for the transactions from the SEC, as provided by Rule
10b-6(f).
Peeved, Chris-Craft sued.
Rondeau v. Rondeau made large purchases of Mosinee Paper Co.'s Is a showing of irreparable harm necessary for a A showing of irreparable harm, in
Mosinee common stock. He had acquired 40,413 shares of it, private litigant to obtain injunctive relief in a suit accordance with traditional principles of
which constituted more than 5% of those outstanding. under § 13(d) of the Securities Exchange Act of equity, is necessary before a private litigant
He was therefore required to comply with the disclosure 1934 as added by § 2 of the Williams Act? can obtain injunctive relief based upon §
provisions of the Williams Act, by filing a Schedule 13D 13(d) of the Securities Exchange Act.

56
with Mosinee & the SEC within 10 days. That form YES. A showing of irreparable harm, in Persons who allegedly sold their stock to
would have disclosed, among other things, the number accordance with traditional principles of equity, petitioner at unfairly depressed
of shares beneficially owned by petitioner, the source of is necessary before a private litigant can obtain pre-disclosure prices have adequate
the funds used to purchase them, & petitioner's injunctive relief based on the Securities remedies by an action for damages, &
purpose in making the purchases. Three months after Exchange Act. those who would not have invested, had
the statutory filing time, petitioner filed his disclosure The purpose of the Williams Act is to insure they thought a takeover bid was imminent,
schedule. informed decision making by shareholders, and are not threatened with injury.
Mosinee filed suit in court to obtain injunctive relief not to "provide a weapon for management to
against Rondeau, focusing on the latter’s failure to file discourage takeover bids or prevent large
his disclosure schedule on time in accordance with the accumulation of stock." None of the evils to
Securities Exchange Act. Rondeau’s defense is that his which the Williams Act was directed has occurred
delay was in good faith, as he was not familiar with or is threatened in this case. Rondeau has not
securities laws, & also that no irreparable harm was attempted to obtain control of respondent, either
caused. by a cash tender offer or any other device.
Moreover, he has now filed a proper Schedule
13D, showing his good faith, and there has been
no suggestion that he will fail to comply with the
Act's requirement of reporting any material
changes in the information contained therein.
The bare fact that the defendant had violated
Section 13(d) would not support the injunction
unless the plaintiff could demonstrate the
potential for irreparable harm.
Smallwood v. A merger agreement between Pearl & Southdown was Can Smallwood properly raise before this Court Under Williams Act Sec. 14(e), a plaintiff
Pearl approved. The basic terms of the merger proposal his allegations of violations of Sec. 14(e) of the may gain standing if he has been injured
states: “It is a condition to Pearl's obligation to Securities Exchange Act of 1934? by fraudulent activities of others
consummate the merger that, on the effective date of perpetrated in connection with a tender
the merger, Southdown shall have obtained an YES. To charge violations of Sec. 14(e) in federal offer, whether or not he has tendered his
underwriting commitment affording the former Pearl court a private plaintiff need not be a purchaser shares. One need not be a purchaser or
stockholders the opportunity to sell, at $45.00/share, or a seller of any securities. seller of securities to claim a violation
up to 45% of the Southdown preferred stock received The Nov. 18 letter was a tender offer, thus under Sec. 14(e).
by them in the merger.” The power of the Pearl Board to Smallwood may allege violations of Sec. 14(e) in
waive the underwriting commitment was not connection with it. A bid to purchase securities is Tender offer – a public invitation to a
mentioned. no less a 'tender offer' within the meaning of Sec. corporation’s stockholders to purchase
On Nov. 18, 1969, to implement the sell-out provision 14(e) when it is unopposed by management of their stock for a specific consideration; it
of the merger agreement, Southdown mailed to the the target company than when it is opposed. need NOT be a hostile bid by incumbent
Pearl shareholders a cover letter restating Southdown's At the same time, however, a corporation does management
obligation to obtain an underwriting commitment, but not become a tender offeror simply by proposing
did not refer to the10-day period following the merger a paper exchange of securities. Lastly, whether The court contrasted this case with Dyer v.
during which the underwriters would purchase the the tender offeror purchases the securities or Eastern Trust & Banking Co. In that case,
stock. The shareholders were informed that to sell their simply invites a tender for another is of no shares were exchanged for other shares as
shares of Southdown preferred stock to the account to the investor for whose protection Sec. a result of a merger. The court held that
underwriters upon consummation of the merger they 14(e) was enacted. A 'tender' offer within the that situation was merely a paper
must tender their Pearl stock certificates, with the meaning of the Williams Act may be made by exchange transfer not falling within the
appropriate deposit forms, to be in the hands of those acting in concert with others as well as ambit of Sec. 14(e). For the latter, there
designated exchange agents “prior to 3:30 p.m. on those acting alone. must be contemplated some change of
Dec. 2, 1969.” Smallwood owned 200 shares of Pearl control. If actual control does not shift, it is
stock & acted as custodian for 600 shares owned by difficult to see why the shareholder needs
his daughters. He attempted to tender these 800 the protection of Sec. 14(e). Southdown's
shares pursuant to the Nov. 18 letter, but he missed letter of Nov. 18, 1969, required Pearl's
the deadline of 3 P.M., Dec. 2, 1969, & his tender was shareholders to make an important &

57
rejected prompting him to file the instant case. irrevocable investment decision: to sell or
not to sell for $45 each the shares of
Southdown preferred due them upon
consummation of the merger.
6. Electronic ICC wanted to merge with Electronic. Smith, Barney & Was there a violation of laws regarding proxy Test to determine materiality of
Specialty Co. v. Co. advised ICC to purchase less than 10% of statements? misstatements in tender offer reports:
International Electronic’s stock first prior to initiating merger whether the stockholders who tendered
Controls Co. negotiations. Vesco, president of ICC, authorized the NO. their shares would probably not have
(ICC) purchase of 100,000 shares at less than $40 per tendered their shares if the alleged
share; eventually, ICC was able to acquire 43,500 • Statements with respect to merger 
 violations had not occurred.
shares. ICC’s Board opposed the merger, but
nevertheless authorized Vesco to begin talks with The regulations issued by the SEC require the Like participants in proxy statements,
Electronic. Post-negotiations, ICC intended to sell its maker of a tender offer to "describe any plans or participants in tender offers act in act
43,500 shares to Electronic. 3 days later, however, proposals which such persons may have to under the stresses of the market place.
news broke out via Dow Jones tape that Electronic was merge it with any other persons." SEC Rule 14d- Congress intended to assure basic honesty
merging with Carpenter Steel & had broken off merger 1(c) & Schedule 13D. Nothing in the facts and fair dealing, not to impose an
discussions with ICC. Wall Street Journal also came out suggested that if ICC acquired control as a result unrealistic requirement of laboratory
with an article stating that ICC overstated its shares of a tender offer, then it would pursue a merger conditions that management could use to
(100,000 v. 43,500) & the price of the tender offer. with ELS. This fact is unaffected by the protect its interests against the
The value of Electronic’s shares dropped as a result. statements contained in ICC’s advertisements. stockholders’ interests. These
Further, ICC was not obliged to correct the considerations must be kept in mind in
statements published in the Wall Street Journal. testing conduct and materiality. The SC in
This is not required by the securities laws. 
 this case reaffirmed the test announced in
Symington, whether any of the
• ICC’s release on the Dow Jones broad tapes “stockholders who tendered their shares
and its sale of 5,400 ELS shares 
 would probably not have tendered their
shares” if the alleged violations had not
ICC bowed out of its merger offer when it found occurred.
out about the merger talks between ELS and
Carpenter. If this contributed to the decline
market price, it was probably because the market
found the merger as less attractive than a tender
offer. Also, ICC could not simply ignore the
problem of ICC’s investment of over $1.5M in
43,500 ELS shares, to the detriment of its
stockholders. The BOD told Vesco to get rid of the
stocks if he is unable to negotiate a merger or a
tender offer with ELS. 


• Vesco’s statements with respect to the


tender offer and Dorfman’s article 


When Vesco spoke to Dorfman about the tender


offer, ICC, its BOD, and Vesco were not yet in
agreement as to whether they should proceed
with the tender offer. It should be noted that at
the time Vesco was interviewed, he was
instructed by BOD not to push through with the
tender offer. To be sure, prices would doubtless
have taken a different course if Vesco had
insisted on a statement to the effect that since

58
the interview he had asked his board to give
further consideration to a tender offer and that it
had reserved decision, but the law did not
require that.
7. Plaine v. Natomas acquired defendant Magma, a geothermal Does Plaine have standing to sue? Those who do not sell their shares
McCabe company, in a two- step transaction. The first step was following a tender offer may sue for
a tender offer, after which Natomas held 83% of YES. Though she did not accept the tender offer, misstatements or false material
Magma's outstanding shares. The second step was a she has standing, since public shareholders information in an Offer to Purchase.
freeze-out merger of the remaining Magma confronted with a cash tender offer are NOT
shareholders; essentially, there was a shareholder’s required to respond without adequate When a seller is induced to sell his
meeting held where the majority shareholders (the 83% information. Although she did not tender her property pursuant to a statement which he
now owned by Natomas) voted in favor of the merger. shares, she alleged injury occurring as a result of subsequently learns is false, the fact that
The SEC found that the price offered during the tender fraudulent activity in connection with a tender the sales price was fair at the time is
offer stage was “fair.” offer. irrelevant. While the issue of fairness is
Plaintiff Plaine filed an action against defendant relevant to the issue of damages, it does
companies. She alleged that Natomas & Magma not necessarily defeat a plaintiff’s claim of
violated Sec. 14(e) of the Securities Act in omitting and injury.
misstating certain material information in the Offer to
Purchase (i.e., proxy materials) sent with the initial
tender offer & in the Supplement issued in connection
with the amended offer. SEC contended that Plaine no
longer had standing to sue as she did sell her shares at
the tender offer stage.
8. Panter v. Field's has been engaged in the operation of retail Did the defendants (directors of Fields) violate § Because Sec. 14 (e) is intended to protect
Marshall Field department stores since 1852, and on Dec. 12, 1977, 14(e) of the Securities Exchange Act of 1934 stockholders from making a tender offer
it was the eighth largest department store chain in the both by depriving them of their opportunity to decision based on inaccurate or
US, with 31 stores. CHH is a California corporation tender their shares to CHH, the tender offeror, inadequate information,
engaged in the operation of retail department, and by deceiving them as to the attractiveness of
specialty, & book stores. On various occasions, CHH disposing of their shares in the rising market?
tried to persuade Fields (the directors of such) to enter
into a merger agreement with the former. On Feb. 1, NO, there was no lost tender offer opportunity
CHH announced its intention to make an exchange hence, no violation of the law.
offer of $42 in a combination of cash and CHH stock According to the William’s Act, upon the
for each share of Field's stock tendered. However, announcement of a tender offer proposal a
Fields’ directors continually refused such offer. After target company shareholder is
many attempts to persuade Fields, CHH finally presented with three options: he may retain his
announced that it was withdrawing its proposed tender shares; he may tender them to the tender offeror
offer before it became effective, because "the if the offer becomes effective; or he may dispose
expansion program announced by Marshall Field since of them in the securities market for his shares,
Feb. 1st has created sufficient doubt about Marshall which generally rises on the announcement of a
Field's earning potential to make the offer no longer in tender offer.
the best interests of Carter Hawley Hale's By denying the plaintiffs the opportunity to
shareholders." Following the announcement, the tender their shares to CHH, the plaintiffs claim
market price of Field's shares dropped to $19.00, lower the defendants deprived them of the difference
than it had been on Dec. 9, the last trading day prior to between $42, the amount of the CHH offer, and
CHH's first proposed offer. $19.76, the amount at which Field's shares
The plaintiffs, shareholders of Field's sought to prove traded in the market after withdrawal of the CHH
that the defendants, the company and its directors, had proposal. Total damages under this theory would
wrongfully deprived the plaintiffs of an opportunity to exceed $200,000,000.00.
dispose of their shares at a substantial premium over Because § 14(e) is intended to protect
market when the defendants successfully fended off a shareholders from making a tender offer

59
takeover attempt by CHH. The plaintiffs claimed relief decision on inaccurate or inadequate
under federal securities law and state corporation and information, among the elements of § 14(e)
tort law. plaintiff must establish is "that there was a
misrepresentation upon which the target
corporation shareholders relied.” Because the
CHH tender offer was withdrawn before the
plaintiffs had the opportunity to decide whether
or not to tender their shares, it was impossible
for the plaintiffs to rely on any alleged deception
in making the decision to tender or not. Because
the plaintiffs were never presented with that
critical decision and therefore never relied on the
defendants' alleged misrepresentations, they fail
to establish a vital element of a § 14(e) claim as
regards the CHH $42.00 offer.
9. U.S. v. Ira Waldbaum was the controlling shareholder of Did there exist a fiduciary or a similar Tender Offer Aspect
Chestman Waldbaum, Inc. In 1968, Ira decided to sell the relationship of trust and confidence between One violates Rule 14e-3(a) if he trades on
corporation to A & P. He told his sister, Shirley Witkin, Keith and the Waldbaum family or his wife, the basis of material nonpublic information
three of his children, and his nephew. He asked them Susan, to make Keith criminally liable as a concerning a pending tender offer that he
to keep the news quiet and offered to tender their “misappropriator” under Rule 10b-5, thus knows or has reason to know has been
shares in Waldbaum. Shirley told her daughter, Susan, making Chestman liable for aiding and abetting? acquired "directly or indirectly" from an
who told her husband, Keith. Keith told Chestman, who insider of the offeror or issuer, or someone
executed purchases of Waldbaum stock for himself and NO. To find liability under 10b-5 for aiding and working on their behalf. Rule 14e-3(a) is a
several customers including Keith. Subsequently, the abetting, there must be evidence to show that (1) disclosure provision. It creates a duty in
SEC launched an investigation. Keith agreed to Keith breached a duty owed to the Waldbaum those traders who fall within its ambit to
cooperate with the government, disgorged a $25,000 family or his wife, based on a fiduciary or similar abstain or disclose, without regard to
profit and paid a $25,000 fine. With respect to the relationship of trust and confidence, and (2) whether the trader owes a preexisting
shares Chestman bought on behalf of Keith, he was Chestman knew that Keith had breached this fiduciary duty to respect the confidentiality
convicted of aiding & abetting Keith’s misappropriation duty. of the information.
under Rule 10b-5. The trial court convicted Chestman
on 31 counts of violation of Rule 10-5, violation of Rule Is Chestman liable under Rule 14e-3(a)? Insider Trading Aspect
14e-3(a), mail fraud, and one count of perjury. The A fiduciary relationship does not arise
panel of the Second Circuit set aside his entire YES. If any person has taken a substantial step simply by entrusting a person with
conviction. or steps to commence, or has commenced, a confidential information, nor does marriage
tender offer (the "offering person"), it shall or family automatically create a fiduciary
constitute a fraudulent, deceptive or relationship. However, the frequent
manipulative act or practice within the meaning discussion of business affairs amongst
of section 14(e) of the Act for any other person family members is sufficient to amount to a
who is in possession of material information relationship of trust and confidence to
relating to such tender offer which information impose Rule 10b-5 criminal liability. Here,
he knows or has reason to know is nonpublic and there was no indication that Keith’s
which he knows or has reason to know has been relationship with the Waldbaum family or
acquired directly or indirectly from: his wife involved frequent business
(1) The offering person,
 disclosures or reliance on confidentiality.
(2) The issuer of the securities sought or to be
sought by such tender offer, or

(3) Any officer, director, partner or employee or
any other person acting on behalf of the offering
person or such issuer, to purchase or sell or
cause to be purchased or sold any of such
securities or any securities convertible into or

60
exchangeable for any such securities or any
option or right to obtain or to dispose of any of
the foregoing securities, unless within a
reasonable time prior to any purchase or sale
such information and its source are publicly
disclosed by press release or otherwise.

One violates Rule 14e-3(a) if he trades on the
basis of material nonpublic information
concerning a pending tender offer that he knows
or has reason to know has been acquired
"directly or indirectly" from an insider of the
offeror or issuer, or someone working on their
behalf. Rule 14e-3(a) is a disclosure provision. It
creates a duty in those traders who fall within its
ambit to abstain or disclose, without regard to
whether the trader owes a preexisting fiduciary
duty to respect the confidentiality of the
information.
10. Epstein v. During a buyout, an MCA insider, Wasserman, promised WoN a stock that is a vital portion of a tender If a stock contract is a vital part of a tender
MCA Corp. his stock to Matsushita (Defendant) however, the offer, whose consideration paid is higher than offer and the consideration paid for the
promise was dependent on a fruitful tender offer and that of the offer price, violate Rule 14d-10? stock varies from that in the tender offer
the consideration paid to Matsushita being higher than then the contract violates Rule 14d-10.
the tender offer price. Yes. When the consideration paid for a stock
varies from that in the tender offer, if the stock
transaction is a vital portion of that tender offer,
then the transaction violates Rule 14d-10.
Tender offers not open to all shareholders or
offered at varying prices are prohibited by Rule
14d-10. Although Matsushita contends that the
Rule is only applicable during a set timeframe,
and that in this case the time frame expired, the
Rule’s antidiscrimination goals would be easily
evaded by individuals if the aforementioned were
true. No detriment would have befallen
Matsushita or Wasserman if the offer was
unsuccessful, they could have just backed out,
and therefore, without the assumption of extra
burden, the offer extended to Wasserman
established a special premium over the tender
offer. Reversed and remanded.
11. SEC v. When making a bid for control of Carter Hawley Hale, W/N CHH's repurchase of shares during a third- Under the Wellman test, the existence of a
Carter Hawley Inc. (CHH), The Limited, Inc., formed a tender offer to party tender offer itself constituted a tender tender offer is determined by examining
Hale Stores, Inc. the shareholders of CHH.
 In reply, CHH management offer. the following factors: (1) extensive and
prepared a stock repurchase offer to its shareholders in aggressive petition; (2) petition for a large
addition to an offer of a large number of shares in itself NO, under the Wellman eight factor test, CHH's portion of the issuer’s stock; (3) a premium
to General Cinema Corporation. During the repurchase repurchase program did not constitute a tender price offered; (4) non-negotiable terms; (5)
period, the market price of the shares slowly but offer. In this case, none of the conditions were the tender of a set least quantity to be
consistently increased. When over half the outstanding met except the broadcasting of the offer to the bought, which the offer is dependent upon;
stock was repurchased, the repurchase program public. CHH's purchases were made in the open (6) time restrictions; (7) burden applied on
concluded. A suit for injunctive relief was brought by market, at market and not premium prices, the offeree and (8) the offer must be
the SEC stating that the repurchase program was without fixed terms and were not contingent broadcast to the public.

61
indeed a tender offer, therefore, disclosure conditions upon the tender of a fixed minimum number of
needed to be satisfied and they were not. The district shares. CHH's repurchase program had none of
court held that the repurchase program was not a the traditional indicia of a tender offer. Also, the
tender offer. S-G Securities Test should be rejected since the
test is vague and difficult to apply; it offers little
guidance to the issuer as to when his conduct
will come within the ambit of Rule 13e-4 as
opposed to Rule 13e-1; a determination of the
existence of a tender offer under S-G Securities
is largely subjective and made in hindsight based
on an ex post facto evaluation of the response in
the marketplace to the repurchase program
UNIT 3 – ANTIFRAUD PROVISIONS
1. MANIPULATIVE & FRAUDULENT PRACTICES

Section 24, Securities Regulation Code


Manipulation of Security Prices; Devices and Practices.

24.1. Unlawful Acts.


It shall be unlawful for any person acting for himself or through a broker, directly or indirectly –
a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market (Exchange);
i. By effecting any transaction in such security which involves no change in the beneficial ownership thereof;
ii. By entering order/s for the purchase or sale of such security
• With the knowledge that simultaneous order/s
• Of substantially the same size, time & price,
• For the sale or purchase of any such security,
has or will be entered by or for the same or different parties; or
iii. By performing similar act where there is no change in beneficial ownership.
b) To effect, alone or with others, a series of transactions in securities that:
i. Raises their price to induce the purchase of a security,
• Whether of the same or a different class of the same issuer or
• Of a controlling, controlled, or commonly controlled company by others;
ii. Depresses their price to induce the sale of a security
• Whether of the same or a different class of the same issuer or
• Of a controlling, controlled, or commonly controlled company by others;
iii. Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype
and dump, boiler room operations and such other similar devices (See 24.1.5. of the IRR)
c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such
security.
d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the
purpose of inducing the purchase or sale of any security listed or traded in an Exchange.
e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or
stabilizing the price of such security, unless otherwise allowed by this Code or by SEC IRR.

24.2. Use or Employment of Unlawful Acts in Sales or Purchases.


what's short sale and
No person shall use or employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or contrivance.
stop-loss order
• Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security
• except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of
investors.

62
24.3. SEC May Alter Prohibited Acts via IRR.
The foregoing provisions notwithstanding, the SEC, having due regard to the public interest and the protection of investors, may, by rules and regulations, allow certain acts or
transactions that may otherwise be prohibited under this Section.

Section 25, Securities Regulation Code


Regulation of Option Trading.
• No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security
registered on a securities exchange.
• The terms “put”, “call”, “straddle”, “option”, or “privilege” shall not include any registered warrant, right or convertible security.

Section 26, Securities Regulation Code


Fraudulent Transactions.
It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to:
1. Employ any device, scheme, or artifice to defraud;
2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made, not misleading; or
3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person.

Section 59, Securities Regulation Code


Civil Liability For Manipulation of Security Prices.
Any person who willfully participates in any act or transaction in violation of Sec. 24 shall be liable to any person who shall purchase or sell any security at a price which was
affected by such act or transaction, and the person so injured may sue to recover the damages sustained as a result of such act or transaction.

Section 62, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

Section 63, Securities Regulation Code


Also applicable here (see Disclosure Requirements)

SRC IRR 2015, Rule 24

24.1. (a & b) Manipulative Practices (from Sec. 24.1; only distinctive parts featured here)

24.1.3. Unlawful Acts of Broker Dealers, Associated Persons or Salesmen of a Broker Dealer.
It shall be unlawful for any Broker Dealer, Associated Person or salesman of a Broker Dealer (collectively, "registered person") to make a bid or offer for, or deal in securities,
on account of any other person, where the registered person creates, or is aware that the other person creates, or taking into account the circumstances of the order,
reasonably suspects that the order creates or will create, a false or misleading appearance of active trading in any security or with respect to the market for, or the price of, any
security.

24.1.4. What Brokers or Dealers Should Consider.


1. WON the order or execution of the order, would materially alter the market for, and/or the price of, the securities;
2. The date and time the order is entered or any instructions concerning the date and time of entry of the order;
3. WON the person on whose behalf the order is placed, or another person who the Broker Dealer knows to be a related party of that person, may have an interest in
creating a false or misleading appearance of active trading in any security or with respect to the market for, or the price of, any security;
4. WON the order is accompanied by settlement, delivery or security arrangements which are unusual;
5. WON the order appears to be part of a series of orders, which when put together with the other orders which appear to make up the series, the order or the series is
unusual having regard to the matters referred to in SRC Rule 24.1.3; &
6. Whether there appears to be a legitimate commercial reason or basis in placing the order, unrelated to an intention to create a false or misleading appearance of
active trading in or with respect to the market for, or price of, any security.
Failure to consider these factors shall raise a presumption that the transactions is/are manipulative.

63
24.1.5. Examples of Manipulative Conduct
1. Painting the tape - engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in the security
2. Marking the close - buying & selling securities at the close of the market in an effort to alter the closing price of the security
3. Improper matched orders - engaging in transactions where both the buy & sell orders are entered at the same time with the same price & quantity by different but
colluding parties
4. Hype & dump - engaging in buying activity at increasingly higher prices & then selling securities in the market at the higher prices (hype and dump) or vice versa (i.e.,
selling activity at lower prices and then buying at such lower prices)
5. Wash sales - engaging in transactions in which there is no change in beneficial ownership of a security
6. Squeezing the float - taking advantage of a shortage of securities in the market by controlling the demand side & exploiting market congestion during such shortages
in a way as to create artificial prices
7. Disseminating false or misleading market information through media, including the internet, or any other means to move the price of a security in a direction that is
favorable to a position held or a transaction
8. Other types of prohibited conduct and/or manipulative practices which include, among others, the creation of temporary funds for the purpose of engaging in other
manipulative practices
i. “Fraud” & “Deceit”
*SEC v. CA PHILEX stock certificates were stolen from the Was it proper for the SEC to impose a fine of -The Revised Securities Act (Batas
premises of FIDELITY. Later, the stolen stock P50,000 against CUALOPING and FIDELITY? Pambansa Blg. 178) is designed, in main,
certificates ended in the hands of Lopez and brought to protect public investors from fraudulent
such certificates to CUALOPING for trading and sale NO. The Supreme Court held that both FIDELITY schemes by regulating the sale and
with the stock exchange. CUALOPING, believing that the and CUALOPING cannot be fined under Sec. 29 disposition of securities, creating, for this
certificates were indorsed validly (as the certificates (a)(3)3 of the RSA since there was no fraud nor purpose, a SEC to ensure proper
supposedly bore the blank indorsements of the original deceit. Both FIDELITY and CUALOPING have been compliance with the law.
PHILEX stockholders), traded the same with the stock guilty of negligence in the conduct of their affairs
exchange. Eventually, the buyers of the stock involving the questioned certificates of stock. To Sec. 29 (3): fraud or deceit needs to be
certificates delivered the latter to FIDELITY for the constitute, however, a violation of the Revised proven. Absent this, the provision cannot
issuance of new stock certificates. FIDELITY discovered Securities Act that can warrant an imposition of a be used to fine the defendants.
that two of its employees were involved and signed the fine under Section 29(3), in relation to Section
certificates and, thus, rejected the issuance of new 46 of the Act, fraud or deceit, not mere
certificates in favor of the buyers because the signature negligence, on the part of the offender must be 26.3 = SEC v. CA = the law provides that
were allegedly FORGED. established. scienter is necessary; other sections are
SEC ordered FIDELITY to replace all the subject shares Fraud here is akin to bad faith which implies a not discussed
and ordered CUALOPING to pay a fine of P50,000 for conscious and intentional design to do a
violating Sec. 29 a(3) of the RSA. wrongful act for a dishonest purpose or moral
SEC En Banc ruled that both FIDELITY and CUALOPING obliquity; it is unlike that of the negative idea of
are equally negligent, hence, both liable for a fine of negligence in that fraud or bad faith
P50,000 each. contemplates a state of mind affirmatively
CA reversed the SEC En Banc setting aside the operating with furtive objectives.
imposition of fines. However, FIDELITY is still fined due to violation of
the memorandum circular for failing to promptly
notify CUALOPING and the clearing house of the
pilferage of the certificates of stock.
*Aaron v. SEC Aaron was a managerial employee at E. L. Aaron & Co., Is the SEC is required to establish a scienter to Violations under Sec 17(a)(1) and Sec
a registered broker-dealer. He was charged with enjoin violations of Sec 17(a) and 10(b) of the 10(b) of the Securities Act requires the

3 Sec. 29. Fraudulent transactions. — (a) It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities —

xxx xxx xxx


(3) To engage in any act, transaction practice, or course of business which operates or would operate as a fraud or deceit upon any person.

64
supervising the sales made by its registered Securities Act? element of scienter or intent to defraud to
representatives and maintaining the so-called "due be granted an injunctive relief.
diligence" files for those securities. One such security Yes.
was the common stock of Lawn-A-Mat, a company In cases where the SEC is seeking to enjoin
engaged in the business of selling lawn-care franchises Section 10(b): "unlawful for any person . . . [t]o a person "about to engage in any acts or
and products. use or employ, in connection with the purchase practices which . . . will constitute" a
Two registered representatives of the firm, Norman or sale of any security . . . any manipulative or violation of those provisions, the SEC must
Schreiber & Donald Jacobson, conducted a sales deceptive device or contrivance in contravention establish a sufficient evidentiary predicate
campaign in which they repeatedly made false and of such rules and regulations as the Commission to show that such future violation may
misleading statements in an effort to solicit orders for may prescribe as necessary or appropriate in the occur.
the purchase of Lawn-A-Mat common stock: public interest or for the protection of investors."
a) They informed prospective investors that Lawn-A-Mat CA affirmed the issuance of the injunction
was in the process of manufacturing a new type of For Sec 10(b) - The most important is the plain in this case in the misapprehension that it
small car and tractor. Lawn-A-Mat had no such plans. meaning of the language and legislative history. was not necessary to find scienter in order
b) They also made projections of substantial increases The terms "manipulative," "device," and to support an injunction under any of the
in the price of Lawn-A-Mat common stock which were "contrivance" quite clearly evinced a provisions in question.
without basis because it was losing money. congressional intent to proscribe only "knowing
Thereafter, an attorney representing Lawn-A-Mat, or intentional misconduct."
informed Aaron that Schreiber and Jacobson were
making false and misleading statements. He said Section 17(a): "It shall be unlawful for any person
Aaron had reason to know that the statements were in the offer or sale of any securities by the use of
false, since he knew that the reports in Lawn-A-Mat's any means or instruments of transportation or
due diligence file indicated a deteriorating financial communication in interstate commerce or by the
condition and revealed no plans for manufacturing a use of the mails, directly or indirectly –
new car and tractor. Although assuring the lawyer that "(1) to employ any device, scheme, or artifice to
the misrepresentations would cease, Aaron took no defraud, or"
affirmative steps to prevent their recurrence. "(2) to obtain money or property by means of any
SEC filed an injunction against AARON and 7 others. untrue statement of a material fact or any
The gravamen was that he knew or had reason to know omission to state a material fact necessary in
that the employees under his supervision were order to make the statements made, in the light
engaged in fraudulent practices, but failed to take of the circumstances under which they were
adequate steps to prevent those practices from made, not misleading, or"
continuing. "(3) to engage in any transaction, practice, or
course of business which operates or would
operate as a fraud or deceit upon the purchaser."

For Sec 17(a) - The language of § 17(a) strongly


suggests that Congress contemplated a scienter
requirement. It evinces intent on Congress to
proscribe only knowing or intentional
misconduct. Even if it be assumed that the term
"defraud" is ambiguous, the terms "device,"
"scheme," and "artifice" all connote knowing or
intentional practices.

*Ernst & Ernst v. Ernst was retained to audit periodically a brokerage Will the action against Ernst & Ernst prosper? When the theory of liability proceeded is
Hockfelder firm's (First Securities) books & records. Hockfelder, premised on negligence, it in fact disclaims
among others, who were customers of the brokerage NO. SC held that any action for damages under § that petitioner had engaged in fraud or
firm, invested in a securities scheme ultimately 10(b) and SEC Rule 10b-5 will not lie absent any intentional misconduct.
revealed as fraudulent. Ernst failed to expose an allegation of “scienter” or intent to manipulate,
escrow account fraud plan committed by the president or defraud on the part of the accounting firm. No scienter = no liability

65
& principal stockholders of the brokerage firm. After the Hockfelder sued on the theory of liability
fraud came to light, respondents filed an action for premised on negligence and even specifically
damages against petitioner under § 10(b) (negligence) disclaimed that petitioner had engaged in fraud
of the Securities Exchange Act of 1934, which makes it or intentional misconduct.
unlawful to use or employ "any manipulative or
deceptive device or contrivance" in contravention of
SEC rules. It was alleged that the brokerage firm
president's scheme violated § 10(b) and SEC Rule 10b-
5, and that petitioner had "aided and abetted" the
violations by its "failure" to conduct proper audits of the
firm, thereby failing to discover internal practices that
prevented an effective audit.”
O’Brien v. Plaintiffs (60 people) are a class of individuals who Did plaintiffs plead fraud with the requisite Essentially, while Rule 9(b) permits
National invested in 4 limited partnerships designed to offer particularity to make Price Waterhouse liable? scienter to be demonstrated by inference,
investors legitimate tax benefits through the purchase this "must not be mistaken for license to
and operation of shopping malls. The four partnerships NO. Plaintiffs claim that Price Waterhouse knew base claims of fraud on speculation and
operated according to a scheme created by National of the impossibility of the venture succeeding conclusory allegations."
Property Analysts (NPA) Partners. commercially. Price Waterhouse plainly asserted
NPA hired Price Waterhouse (appraiser) to render and reiterated in its report that its conclusions Rule 9(b) requires that in all averments of
opinions on the proposed. Price Waterhouse said it were based on market assumptions, and that the fraud or mistake, the circumstances
found that the projections in reports "contain all projections on which the report was based could constituting fraud or mistake shall be
significant disclosures." It qualified such statements by easily fail to come to fruition. While we recognize stated with particularity. Pleadings of fraud
recognizing that "some assumptions inevitably will not that doubt might have existed as to whether the must thus specify the time, place, speaker,
materialize and unanticipated events and substantial increase in sales was likely to occur, and sometimes even the content of the
circumstances may occur." the unpredictability of future economic alleged misrepresentation.
Plaintiff-investors sued NPA, as well as NPA’s conditions, including the wide variation of the
professional appraiser (Howard Jackson Associates, rate of inflation over recent years, rendered that Requirements of Rule 9(b). Plaintiffs are
Inc.) and an accounting firm (Price Waterhouse) for increase a possibility. required to include a statement of facts
alleged fraudulent misrepresentations under Section upon which the allegations of fraud are
10(b). Plaintiffs ALSO pleaded that Price Waterhouse, based. The ff. must be satisfied:
as NPA's financial auditor, knew of the 1) Precisely what statements were
partnerships' impending financial difficulties, but made in what documents or oral
nevertheless continued to aver that financial representations or what omissions
projections in subsequent partnership offerings were made, and
were reasonable. However, plaintiffs fail to allege 2) The time and place of each such
particulars regarding Price Waterhouse's statement and the person
purported discovery that NPA's net worth was responsible for making (or, in the
declining. case of omissions, not making
same),
Did plaintiffs plead fraud with the requisite 3) The content of such statements
particularity to make Howard Jackson Associates and the manner in which they
liable? misled the plaintiff, and
4) What the defendants "obtained as a
NO. Complaint also fails to meet the consequence of the fraud."
requirements of Rule 9(b). Plaintiffs contend that
the value of the property was less than the GR. it is unnecessary to allege a specific
appraised value stated in the Memoranda. connection between fraudulent
Nowhere in the Complaint is it alleged that representations in an offering
Jackson knew at the time that these appraisals memorandum and particular defendants
were made that they were inflated. where such defendants are insiders or
In their brief, plaintiffs contend that Jackson affiliates participating in the offer of the

66
should have recognized that "there was securities in question.
something wrong with a transaction where the Exception. Mere conclusory allegations of
purchase price of a property increased insider status, without accompanying facts
substantially in a very short period of time which tie a defendant to the offering
through the mechanism of a series of transfers materials in a specific way, will not suffice
of related parties." to obviate the need to specify each
defendant's connection with the alleged
fraudulent acts.
*Wharf Holdings The Wharf (Holdings) Limited, through Ng, a Was Wharf's secret intent not to honor the option Sec. 10 (b) of the Securities Exchange Act
Ltd. v. United management director, orally granted respondent United it sold United through oral contract violates § applies both to oral & written contracts.
International International Holdings, Inc., an option to buy 10% of the 1O(b)?
Holdings Ltd. stock in Wharf if United rendered certain services in It must be noted that in this case, proof of
order to help Wharf with its application for exclusive YES. Wharf's claim that § 10(b) does not cover fraudulent misrepresentation was shown
license to run the Hong Kong cable system. As a result oral contracts of sale is rejected. The Act itself by internal documents such as minutes of
of this agreement, United actively aided Wharf, sending says that it applies to "any contract" for the the meetings, memoranda, etc. where
employees to help Wharf with the entire process. purchase or sale of a security. Oral contracts for various Wharf executives scribbled words
the sale of securities are sufficiently common like, “How do we get out of this?”
However, internal Wharf documents suggested that that the Uniform Commercial Code and statutes “NONONO” “Let’s backpedal,” evidencing
Wharf never intended to carry out its promise. United of frauds in every State now consider them their lack of actual intent to enter into the
fulfilled its obligation, but Wharf refused to permit it to enforceable. Any exception for oral sales of deal with United.
exercise the option. United sued in Federal District securities would significantly limit the Act's
Court, claiming that Wharf's conduct violated, inter alia, coverage, thereby undermining its basic
§ 10(b) of the Securities Exchange Act of 1934, which purposes.
prohibits using "any manipulative or deceptive device or
contrivance" "in connection with the purchase or sale of Is this oral promise covered as a “purchase” or
any security." 15 U. S. C. § 78j(b) “sale”?

YES. There was already exchange for the


payment of the securities. An option in itself is a
security.
Basic v. See “Disclosure Requirements” Section
Levinson
Itoba Ltd. v. LEP A London-based holding company, Lep Group PLC, WON US courts have subject matter jurisdiction.
Group wanted to expand in America. Thus, it deposited 136
million shares in an American depository; in turn, the YES. The Court used the “conduct” test and the
latter issued a receipt (known as an ADR) for the “effects” test. Under the conduct test, a federal
shares. Seeing as the shares traded on NASDAQ, Lep court has subject matter jurisdiction if (1) the
was subject to disclosure and reporting requirements of defendant's activities in the US were “more than
US securities law. ADT, with initial partner, Canadian merely preparatory” to a securities fraud
Pacific, decided to investigate a potential joint conducted elsewhere, and (2) these activities or
acquisition of Lep. Both conducted assessments of culpable failures to act within the US “directly
Lep’s business operations using SEC Form 20-F as filed caused” the claimed losses. For the first
by Lep in the US SEC and the Warburg Report, a report requisite, Lep filed its SEC Form 20-F with the
by firm S.G. Warburg. Canadian Pacific withdrew from SEC of the US, which turned out to have omitted
the joint venture after learning of the important high risk investments of the company
investigations. ADT, however, decided to obtain Lep which were never disclosed. This Form was what
shares in the London stock exchange through one of Itoba & Itoba’s Board relied on in approving the
ADT’s offshore companies, Itoba Limited. It based this sale. This is true even if the Lep shares were
choice on the Warburg report, which in turn was based eventually purchased in the London exchange,
on Lep’s SEC Forms. The plan was approved by Itoba’s not the US exchange. The effects test is based
Board & soon after, Itoba bought over 37 million shares on fraud which takes place abroad which

67
of Lep. Lep’s recent information disclosure decreased impacts on stock registered and listed on an
the value of its stock by 97% and so Itoba’s holdings American national securities exchange and is
value also dramatically decreased. Based on a violation detrimental to the interests of American
of the Securities Exchange Act of 1934 §§ 10(b) & 20, investors. It is also applicable in this case, for
& Rule 10-b5, Itoba filed suit against Lep in the District here there is fraud occurring on an American
of Connecticut. Itoba also sued Berkley, a Lep director, exchange and persisting abroad that has
who supposedly bought substantial shares in the NY impacted detrimentally thousands of US
Stock Exchange the same day ADT bought Lep shares shareholders in the defrauded company, i.e.,
in the London Stock Exchange. Lep moved to dismiss over $100 million lost in the shareholders'
the case based on lack of subject matter jurisdiction, corporate equity. Although Itoba (which is not a
since it was a UK-based company, not American. The U.S. company), ADT's wholly-owned subsidiary,
trial court dismissed. Itoba appealed. was the nominal purchaser and owner of the Lep
stock, it was ADT which financed the deal and
which, with its shareholders, ultimately must
bear the loss.
As for Berkeley, the court also has jurisdiction.
Berkley sold 7,300,000 ordinary shares of Lep to
his U.S.-based broker, which in turn sold these
shares for its own account on the London
Exchange. Berkley received almost $24 million
for his shares. That same day, Itoba purchased
7,500,000 shares on the London Exchange
through its London-based broker. Whether the
close temporal relationship of these two
transactions is or is not coincidental presents an
interesting question. An insider who fails to
comply with his duty to disclose or abstain can
be held liable not only to the purchasers of the
actual shares sold by the insider, but to all
persons who during the same period purchased
the corporation's stock in the open market
without knowledge of the material inside
information. While the court did not ultimately
rule on whether this was justiciable, they
remanded the case and asked the lower court to
decide.
Jordan v. Duff & An employee of Duff & Phelps named James Jordan Was the fact that Duff & Phelps was searching The Michaels Ruling applies to this case. It
Phelps, Inc. was purchasing & accumulating stocks of the company for a merger partner material information which holds that the special "price and structure"
while Duff & Phelps was discretely searching for a should have been disclosed to Jordan as a rule, under which public corporations need
merger partner. Duff & Phelps is a securities firm with stockholder? not disclose impending negotiations for
only 40 stockholders. His family lived in Chicago but, their merger, does not apply to close
because his wife and mother couldn’t get along, he YES. In ruling in favor of Jordan, the Court made corporations. The test is the “materiality”
decided to leave his job & move to Houston. Pursuant a distinction between public corporations and of the information.
to an agreement with the company, he had to sell his closely-held corporations. In public corporations, The rationale for the price-and-structure
stocks back to Duff & Phelps. Just a few days after he the merger is required to be disclosed only if the rule, which we adopted in the Flamm case,
received the value of the stocks, Duff & Phelps parties reach agreement in principle on the price is that firms may need secrecy to obtain
announced its planned merger with a subsidiary of and structure of the deal. However, in closely- the best price.
Security Pacific. The merger increased the value of the held corporations, the test is the “materiality” of To tell one stockholder of a publicly traded
stocks of Duff & Phelps. the facts. Since Duff & Phelps is a closely-held firm is to tell all, letting the cat out of the
corporation and the value of the stocks is an bag. Security Pacific therefore was entitled
important factor in the stockholder’s decision- to be mum about its plans and to insist

68
making process, the fact that it is already that Duff & Phelps also keep matters
searching for a merger partner is a material secret.
information required to be disclosed to But a whisper in Jordan's ear would not
stockholders such as Jordan. have revealed anything to the public.
Because it is possible to inform
shareholders of closely held firms about
ongoing negotiations without informing the
public--because indeed the firm need tell
only the few investors from whom it buys
stock during the negotiations.

*Affiliated Ute In order to manage the shared resources of the Ute Did Gale & Haslem violate Rule 10b—5? The reliance element requires a causal
Citizens v. U.S. tribe, Congress created the Ute Distribution Corporation connection between a defendant’s
(UDC). Shares of stock were given to the tribe YES Gale and Haslem violated Rule 10b-5 by misrepresentation & a plaintiff’s injury.
members. The First Security Bank of Utah was tasked making misstatements of material fact, namely, Reliance is traditionally established by
to hold the stock certificates and issue receipts to the that the prevailing market price of the UDC proof that the defendant’s
stockholders. Eventually, some tribe members sold shares was the figure at which their purchases misrepresentation or omission induced the
their stocks to Gale and Haslem (bank employees) were made. The lower court erred in holding that plaintiff to make an investment decision he
which the two in turn sold to other non-tribal members there was no violation of the Rule unless the otherwise would not have made.
at higher prices. record disclosed evidence of reliance on the
The mixed-bloods sold shares at $300 to $700 per misrepresentations. All that is necessary is that Proof of actual reliance is not always
share to First Security Bank of Utah, while the price the facts withheld be material in the sense that a necessary to establish a Section 10(b)
range on transfer between whites was $500 to $700 reasonable investor might have considered them claim. Rather, given the difficulty of proving
(meaning the shares were being traded by non-tribe important in the making of his decision. actual reliance, particularly in securities
members for much higher prices). Thus, Gale & Haslem Evidence of reliance is not necessary. fraud cases brought as class actions, the
made a profit off the mixed-blood Indians. SC has recognized two principal
Is the bank liable alongside the two officers? circumstances in which a plaintiff is
entitled to a rebuttable presumption of
YES. The bank claimed that it should not be reliance.
liable, because it was the two officers which
committed the fraud. But the Court held that First, as articulated in Affiliated Ute
there was a trust relationship between the UDC Citizens of Utah v. United States, a
& the bank which cannot be set aside. . The presumption of reliance arises in cases
Court recognized that no duty of disclosure would involving an omission of a material fact by
exist if the bank merely had acted as a transfer a party with a duty to disclose. In such
agent. But the bank also had assumed a duty to cases, all that is necessary is that the facts
act on behalf of the shareholders, and the Indian withheld be material in the sense that a
sellers had relied upon its personnel when they reasonable investor might have considered
sold their stock. Because these officers of the them important to his or her investment
bank were charged with a responsibility to the decision.
shareholders, they could not act as market
makers inducing the Indians to sell their stock Second, a plaintiff may establish a
without disclosing the existence of the more presumption of reliance under the “fraud
favorable non-Indian market. on the market” doctrine established in
Basic Inc. v. Levinson. This doctrine is
based on the principle that, in an open and
developed securities market, the price of a
company’s stock is determined by the
available material information regarding
the company and its business. In such an
established & efficient market, public

69
information pertaining to a particular
security is reflected in its price.
Accordingly, misleading statements will
defraud purchasers of stock even if the
purchasers do not actually rely on the
misstatements. Although to benefit from
the presumption, an investor’s reliance
must be justified or reasonable, an
investor’s reliance is reasonable if the
investor simply does not ignore known or
obvious risks.

The Affiliated Ute presumption is


unavailable when claims are based on
misstatements rather than omissions, or
are directed against auditors or others
without a duty to the plaintiff. And the
fraud-on-the-market presumption requires
proof of an efficient primary market.
Plaintiffs in these types of Section 10(b)
cases have therefore argued for a third
presumption: the fraud created the market
theory of reliance.
Elkind v. Liggert See “Regulation of Listed Companies” Section
& Myers, Inc.
Weiner v. In 1994, Quaker Oats bought Snapple for $1.7 billion. Was the District Court correct in dismissing the An omitted fact is material if there is a
Quaker Oats, Soon before the announcement, Quaker had stated shareholder’s claim based on the statements of substantial likelihood that a reasonable
Inc. that its earnings growth should be 7% and that its debt Quaker about the debt-equity ratio? shareholder would consider it important in
ratio was favorable and would be kept at the 60% deciding how to proceed.
range. However, inside Quaker Oats, there was NO. An omitted fact is material if there is a
discussion on raising the debt of the company in order substantial likelihood that a reasonable To establish a valid claim of securities
to avoid unwanted takeovers. The takeover of Snapple, shareholder would consider it important in fraud under Rule 10b-5, plaintiffs must
financed by debt, however, kicked up Quaker's debt deciding how to proceed. prove that the defendants: (MSSRP)
ratio to 80% and its stock fell about 10%. Certain When Quaker made the debt ratio and earnings 1. made misstatements or omissions
shareholders sued, claiming the earnings projects were projection statements, it knew the takeover of of material fact;  
inflated given that management knew of the coming Snapple was likely, which would make the 2. with scienter;  
acquisition. Trial court dismissed the suit. Quaker's statements "illusory." The statements could be 3. in connection with the purchase or
defense was that the statements about the company's material to investors' decisions under the sale of securities;  
debt-equity ratio and its earnings projections were materiality standard that applies under Rule 10b- 4. upon which plaintiffs relied;  
immaterial because, at the time, the statements were 5. If the company expected the debt ratio to 5. that plaintiffs' reliance was the
reasonable. Plaintiffs appealed. change, it had a duty to note that possibility. proximate cause of their injury.
The Court found that the ratio guideline (the
60%) was listed numerous times in numerous In Basic vs. Levinson, the court held that
documents. This ratio guideline could have for cases involving undisclosed merger
induced a reasonable investor to expect that the plans, “an omitted fact is material if there
ratio would remain the same, or that the is a substantial likelihood that a
company would announce any anticipated reasonable shareholder would consider it
significant change. Since the company had a important in deciding how to proceed.”
duty to update such statements when they Under this standard, there must be “a
became unreliable, dismissal by the DC was substantial likelihood that the disclosure of
inappropriate. the omitted fact would have been viewed

70
by the reasonable investor as having
Was the District Court was correct in dismissing significantly altered the ‘total mix’ of
the shareholder’s claim based on defendants' information made available.”
projections of earnings growth (7%)?
The “bespeaks caution” doctrine, provides
YES. Although Quaker’s Chairman, Smithburg, that when “forecasts, opinions or
initially made a statement that “we are confident projections are accompanied by
of achieving at least 7% real earnings growth,” meaningful cautionary statements, the
this was rendered immaterial by the subsequent forward-looking statements will not form
Quaker Annual Report in Sep. 1994 which the basis for a securities fraud claim if
contained the statement that “we are committed those statements did not affect the ‘total
to achieving a real earnings growth of at least 7% mix’ of information provided investors.
over time.” The phrase “over time” inoculates In other words, cautionary language, if
Quaker from liability. No reasonably careful sufficient, renders the alleged omissions or
investor would find material a prediction of 7% misrepresentations immaterial as a matter
growth followed by the qualifier “over time.” of law.
Therefore, we hold that no reasonable finder of • BUT: No reasonably careful investor
fact could conclude that the projection would find material a prediction of
influenced prudent investors. 7% growth followed by the qualifier
“over time.”
In re Time Time started a negotiation process with Warner for a Is Time Warner liable for anonymous statements Undisclosed information that makes public
Warner merger. Subsequently, Paramount made a surprise made by supposed insiders? statements substantially deceiving, not
Securities tender offer to Time. The Directors of Time refused to only when that information totally
Litigation submit the offer to the shareholders and pushed NO. Rule 9(b) requires that " [i]n all averments of contradicts the public statements, create a
through with the merger resulting to the creation of fraud or mistake, the circumstances constituting duty to reveal. In this case, when a
Time Warner Inc. fraud or malice shall be stated with particularity." corporation chasing a particular business
The merger resulted in over $10B in debt for Time At a minimum, the plaintiff must identify the goal declares a proposed tactic for
Warner. To reduce its indebtedness the company speaker of the allegedly fraudulent statements. achieving it, the corporation may be
embarked on a highly publicized campaign to find compelled to reveal other methods which
international "strategic partners" who would infuse Did Time Warner make affirmative are under aggressive and severe
billions of dollars of capital into the company and who misrepresentations when they viewed the merger deliberation.
would help the company realize its dream of becoming optimistically?
a dominant worldwide entertainment conglomerate.
Ultimately, Time Warner formed only two strategic NO. Most of the statements reflect merely that
partnerships, each on a much smaller scale than had talks are ongoing, and that Time Warner hopes
been hoped for. Faced with a multi-billion dollar balloon that the talks will be successful. There is no
payment on the debt, the company was forced to seek suggestion that the factual assertions contained
an alternative method of raising capital--a new stock in any of these statements were false when the
offering that substantially diluted the rights of the statements were made. The complaint contains
existing shareholders. no allegations to support the inference that the
The plaintiff class are made up of Time Warner defendants either did not have these favorable
stockholders. Their complaint, containing causes of opinions on future prospects when they made
action under Secs. 10(b) and 20(a) of the Securities the statements or that the favorable opinions
Exchange Act (1988), and state law, alleges that a were without a basis in fact.
series of statements from Time Warner officials during
the class period were materially misleading in that they Did Time Warner err when it failed to disclose
misrepresented the status of the ongoing strategic problems in the strategic partnerships?
partnership discussions and failed to disclose
consideration of the stock offering alternative. The NO. As a general rule, there is a duty to update
parties have classified the challenged statements into opinions and projections if the original opinions
two categories: (1) press releases and public or projections have become misleading as the

71
statements from the individual defendants, and (2) result of intervening events. But in this case, the
statements to reporters and security analysts attributed public statements lack the sort of
emanating from sources within the company but not definite positive projections that might require
attributed to any identified individual. The statements later correction. The statements suggest only the
consist of generally positive messages concerning the hope of any company, embarking on talks with
progress of the search for strategic partners, and imply multiple partners, that the talks would go well.
to varying degrees that significant partnerships will be No identified defendant stated that he thought
consummated and announced in the near future. None deals would be struck by a certain date, or even
of the statements acknowledged that negotiations with that it was likely that deals would be struck at all.
prospective partners were going less well than
expected or that an alternative method of raising Did Time Warner have a duty to disclose all the
capital was under consideration. alternative options available for raising profits?

Plaintiffs used Rule 10b-5 for their claim. NOT SURE; this will still have to be developed.
Rule 10b-5: Employment of Manipulative and What is clear though is that this allegation will
Deceptive Practices": survive a motion to dismiss. A company that has
It shall be unlawful for any person, directly or indirectly, not discharged its disclosure obligations and has
by the use of any means or instrumentality of interstate permitted prior statements (concerning strategic
commerce, or of the mails or of any facility of any alliances) to become misleading by a material
national securities exchange, nondisclosure (of the active consideration of a
(a) To employ any device, scheme, or artifice to dilutive rights offering) may be found to have
defraud, violated Rule 10b-5.
(b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any person,
in connection with the purchase or sale of any security."
ii. “Upon Any Person”
Hooper v. BenJack Cage had controlled Consolidated American Can a private right of action be had under the Although the term "investor" is not defined
Mountain States Industries, Inc. and had been an officer and director statute and regulation? in the Act, in its normal use it refers to one
thereof. 
 In October 1956, he resigned in favor of new who lays out money or capital with a view
management. Shortly thereafter, he conspired with the YES. Although not an investor, the issuing to obtaining income or profit. The mere
other defendants to obtain 700,000 of Consolidated's corporation could predicate a private right under issuance of stock, qua issuance, for the
unissued stock in exchange for certain assets of X-10B-5. The issuance was a "sale" within the purpose of increasing assets, is not in any
another corporation, Mid-Atlantic Development meaning of the Act. This case presents the first sense an investment. As a general rule
Company, which was owned by Cage and the other important consideration of a defrauded (and as was held in this case), a
defendants. 
 corporate issuer's right to bring an action under corporation issuing its own shares is not an
The assets to be exchanged, consisting in certain Rule X-10B-5. 
 Rule X-10B-5 can give rise to a investor. This is not to say a corporation
purported rights to purchase stock of a Cuban private right of action only in the event the could not be an investor in appropriate
insurance company and to acquire certain oil "seller" or "purchaser" is an "investor." The circumstances, for example, (i) where it
concessions in Honduras, were presumably without conclusion is that, whatever it may be, such sells stock of other corporations from its
value. To obtain for Mid-Atlantic the right to purchase corporate issuer as is here involved is not an portfolio, (ii) where it buys securities of
the Cuban insurance company stock, Cage, through "investor." another corporation," or, perhaps, (iii)
interstate communications to the new management of Having granted that Consolidated was not an where a corporation either purchases its
Consolidated, made false representations whereby investor, the court held that nonetheless the own stock to hold as treasury stock or sells
Consolidated was induced to send $10,000 to Cuba. 
 words "in the public interest" gave rise to a from its treasury stock. 

Thereafter the defendants' scheme was consummated private right of action. This is the crucial holding But for the sake of “public interest,” the

72
through the preparation and presentation to of the case; it is by no means an inevitable one litigation still prospered.
Consolidated's 
 transfer agent of certain spurious on the facts. Defendants' contention that "in the
documents purporting to show authorization for the public interest" shows only an intent to protect
issuance of 700,000 of Consolidated's shares in the public generally, therefore giving rise to no
exchange for the "rights" owned by Mid-Atlantic. At the private rights, is a strong one particularly in light
time par value of Consolidated's shares was 1¢; market of the alternative language "or for the protection
value varied from $1.00 to $2.75 per share. of 
 investors."
When sued under Rule X-10B-5, Cage and his co-
defendants argued that (i) An issuer was not an
investor within the meaning of Section 10(b) and Rule
X-10B-5 and therefore could not predicate a private
right of action thereunder; and
(ii) There was no "sale" of securities by Consolidated.
The District Court accepted defendants' contentions
and dismissed the complaint. 

iii. “In Connection With”
SEC v. Texas Texas Gulf detected an anomaly in a plot of land called Was the discovery of vast resources during the Insiders, as directors or management
Gulf Sulphur “Kidd 55” in Canada. Turns out, it was teeming with drilling material? officers are, of course, by this Rule,
copper. Texas Gulf tried to hide it and every time it was precluded from so unfairly dealing, but the
asked, it said it could not yet conclude the existence of YES. Here, notwithstanding the trial court's Rule is also applicable to one possessing
ore (though it already knew). A journalist came & conclusion that the results of the first drill core, the information who may not be strictly
released an article about the abundance of copper. K-55-1, were "too ‘remote’ to have had any termed an "insider" within the meaning of
Texas Gulf, however, denied the discovery, made vague significant impact on the market, i.e., to be Sec. 16(b) of the Act. Thus, anyone in
statements all the way up to April 12, only officially deemed material," knowledge of the possibility, possession of material inside information
announced the news that they had found a huge mine which surely was more than marginal, of the must either disclose it to the investing
to the public on April 16. Following this, 3 stockholders existence of a mine of the vast magnitude public, or, if he is disabled from disclosing
sued Texas, alleging violations of Rule 10b-5 due to its indicated by the remarkably rich drill core located it in order to protect a corporate
misrepresentations in its press release statements. rather close to the surface (suggesting confidence, or he chooses not to do so,
They also sued certain individuals for insider trading. mineability by the less expensive open-pit must abstain from trading in or
method) within the confines of a large anomaly recommending the securities concerned
(suggesting an extensive region of while such inside information remains
mineralization) might well have affected the price undisclosed.
of TGS stock and would certainly have been an
important fact to a reasonable, if speculative, An insider is not, of course, always
investor in deciding whether he should buy, sell, foreclosed from investing in his own
or hold. After all, this first drill core was company merely because he may be more
"unusually good and excited the interest and familiar with company operations than are
speculation of those who knew about it." outside investors. An insider's duty to
Knowledge of the results of the discovery hole, K- disclose information or his duty to abstain
55-1, would have been important to a from dealing in his company's securities
reasonable investor and might have affected the arises only in "those situations which are
price of the stock. essentially extraordinary in nature and
This means that all transactions of insiders who which are reasonably certain to have a
knew about the discovery, prior to public substantial effect on the market price of
knowledge on the matter, violated Rule 10b-5. the security if [the extraordinary situation
is] disclosed."
May insiders accept stock options without
disclosing material information to the issuer? Test for materiality: Whether a reasonable
man would find the information important
NO. In this case the officers were given stock
option plans after their discovery of the vast Whether facts are material within Rule

73
resources but prior to knowledge of the Board’s 10b-5 when the facts relate to a particular
Stock Option Committee (the body which granted event and are undisclosed by those
them the stocks). persons who are knowledgeable thereof
will depend at any given time upon a
Was the press statement denying the discovery balancing of both the indicated probability
material? that the event will occur and the
anticipated magnitude of the event in light
YES. TGS relies on the holding of the court below of the totality of the company activity.
that "the issuance of the release produced no
unusual market action" and "In the absence of a Just as artificial manipulation tends to
showing that the purpose of the April 12 press upset the true function of an open market,
release was to affect the market price of TGS so the hiding and secreting of important
stock to the advantage of TGS or its insiders, the information obstructs the operation of the
issuance of the press release did not constitute a markets as indices of real value. There
violation of Rule 10b-5 since it was not issued in cannot be honest markets without honest
connection with the purchase or sale of any publicity.
security" and, alternatively, "even if it had been
established that the April 12 release was issued The Court rejected the idea that Congress
in connection with the purchase or sale of any intended that the proscriptions of the Act
security, the Commission has failed to would not be violated unless the makers of
demonstrate that it was false, misleading or a misleading statement also participated in
deceptive." But the Court held that Congress pertinent securities transactions in
meant for the Rule 10b-5 rules to have a catchall connection therewith, or unless it could be
provision, one that offers a broad interpretation shown that the issuance of the statement
of the phrase “in connection with.” Therefore it was motivated by a plan to benefit the
seems clear from the legislative purpose corporation or themselves at the expense
Congress expressed in the Act, and the of a duped investing public. Rather,
legislative history of Section 10(b) that Congress Congress intended to protect the investing
when it used the phrase "in connection with the public in connection with their purchases
purchase or sale of any security" intended only or sales on Exchanges from being misled
that the device employed, whatever it might be, by misleading statements promulgated for
be of a sort that would cause reasonable or on behalf of corporations irrespective of
investors to rely thereon, and, in connection whether the insiders contemporaneously
therewith, so relying, cause them to purchase or trade in the securities of that corporation
sell a corporation's securities. There is no and irrespective of whether the corporation
indication that Congress intended that the or its management have an ulterior
corporations or persons responsible for the purpose or purposes in making an official
issuance of a misleading statement would not public release.
violate the section unless they engaged in
related securities transactions or otherwise Rule 10b-5 is violated whenever assertions
acted with wrongful motives; indeed, the obvious are made, as here, in a manner reasonably
purposes of the Act to protect the investing calculated to influence the investing public,
public and to secure fair dealing in the securities e. g., by means of the financial media, if
markets would be seriously undermined by such assertions are false or misleading or
applying such a gloss onto the legislative are so incomplete as to mislead
language. irrespective of whether the issuance of the
release was motivated by corporate
officials for ulterior purposes. It seems
clear, however, that if corporate
management demonstrates that it was
diligent in ascertaining that the information

74
it published was the whole truth and that
such diligently obtained information was
disseminated in good faith, Rule 10b-5
would not have been violated.
Carter-Wallace Carter-Wallace ran ads in a medical journal for a drug Cause & effect test
Inc. v. Securities named “Felbatol.” The claim was that it was a “perfect Market professionals take into consideration
Litigation drug.” People bought the shares. Suddenly, people died professional issuances of companies.
(10 people died as a result of Felbatol). Carter-Wallace
and the FDA issued a “Dear Doctor” letter.
The investors of the company sued Carter-Wallace as a
result of the ads in the medical journal.
Superintendent William Wood, an elderly man with a disabled daughter, hired Zandford (defendant) to manage his investments so that his daughter would be taken care of after his passing.
v. Bankers Life
Unfortunately, prior to his passing, all of Wood’s savings were gone. The Securities and Exchange Commission (SEC) (plaintiff) brought suit against Zandford, alleging that he
In re Investors
committed securities fraud by taking Wood’s savings and investing it for himself. Zandford alleged that his actions did not constitute securities fraud, as the taking of the funds
Funding
was not connected to securities. The district court ruled in favor of the SEC. Zandford then appealed, with the court of appeals ruling in his favor. The SEC petitioned for
Ketchum v.
certiorari to the United States Supreme Court
Green
*SEC v.
Zandford issue: Once a stockbroker participates in a deceitful scheme in which he yields sales of his client’s securities for his own benefit, is such deceitful behavior “in connection
Landreth Timber withLandreth
Ivan the purchase
& sons, orwhosale
ownedof any security”Ł
all of the common as definedArebythe§ stocks
10(b) of in the Securities
question Exchangewithin
are “securities” Act of 1934 and Rule
Contrary 10b-5
to respondents’ implication, the
v. Timber stock of a lumber business that they operated, offered the ambit of the 1933 & 1934 Act? Court never foreclosed the possibility that
ruling:
their Yes.
stock for Once a stockbroker
sale through brokers.participates
The company's in a deceitful scheme in which he yields sales of his client’s securities stock could forbehis owntobenefit,
found such deceitful behavior is “in connection with
be a “security”
the purchase
sawmill or sale of any
was subsequently security”Ł
damaged asbut
by fire, defined by § 10(b) of the
YES. The SCSecurities
held that itExchange Act ofwith
could not agree 1934 and Rule 10b-5.
simply because it is what it purports to be.
potential
Presuming purchasers
that the were told thataccusations
complaint’s the mill would arebeaccurate,respondents that the 1933
Zandford’sbehavior was&“in1934 Acts werewith the
connection What is more, or
purchase stocks
saleare different
of any from The SEC constantly employed a
security.”Ł
rebuilt and modernized.
vast interpretation Dennis
of “in expressed
connection withinterest, &
the purchase intended
or saletoofcover only "passive investors," and
any security,”Ł other categories of securities. A stock
eventually, purchased all the stocks of Landreth not privately negotiated transactions involving “represents to many people, both trained
through
upholdinga stock
thatpurchase
a broker agreement;
who receives Landreth Timber
money the transfer
for securities thatofhe control
doestonot"entrepreneurs." The
intend to distribute, orand
who untrained in business
sells securities withmatters, the
an objective to misuse the profits, is in
Co. was formed
violation of § by Dennis
10(b) and&Rule his co-purchaser,
10b-5. Bolten, 1934 Act contains several provisions specifically paradigm of a security.” Thus, persons
to hold the stock. Ivan Landreth agreed to stay on as a governing tender offers, disclosure of trading in traditional stock likely have a
consultant for some time
This understanding to help
of the with vague
statutes the daily transactions
text in the framework by corporate
of formal officers
adjudication and principal
is permitted respect.high
Theexpectation
need for anthat their activities
inaccuracy are a specific security’s worth for a
regarding
operations.
violation ofAfter the acquisition
the Act to occur has was
beencompleted,
never held the by thestockholders,
Court or the SEC. and the recovery of short-swing governed by the Acts. “Stock" is relatively
mill did not live up to the purchasers' expectations. profits gained by such persons. Eliminating from easy to identify because it lends itself to
Eventually,
Zandford’spetitioner
claim that Landreth
although Timber
misuse Co.ofsold
thethe mill wasthe
profits definition
deceitful of "security"
it fails to make instruments
the connection involved consistent
with the totally legaldefinition. Unlike some
sales, is denied because the securities sales and Zandford’s
atroutines
a loss and went
were notinto receivership.
sovereign actions.Petitioner
Acceptingthenthe accusations
in transactions where control
as accurate, passedwas
his scheme to thefurthered byinstruments,
each sale, therefore,
and wastraditional
deceitfulstock is
because none of the sales were
filed suit for rescission of the sale of stock and purchaser would contravene the purposes of more susceptible of a plain meaning
approved by, or revealed to, the Woods. Combined, the sales are property regarded as a course of business that functioned as a deception or dishonesty on a stockbroker’s client.
damages, alleging that the Landreths had violated the these provisions. Furthermore, although § 4(2) of approach.
Like in similar cases where the Court found a § 10(b) violation, here, the SEC complaintdefines a deceitful scheme in which the securities transactions and violations of fiduciary
registration provisions of the Securities Act of 1933 the 1933 Act, 15 U.S.C. § 77d(2), exempts Thus, SC held that “stocks” may be viewed
duty overlap. Those violations were
(1933 Act) and the antifraud provisions of the consequently “in connection
transactionswith”Ł securities
not involving anysales
publicasoffering
defined by § 10(b).
as beingReversed and remanded.
in a category by themselves for
Securities Exchange Act of 1934 (1934 Act). The court from the Act's registration provisions, there is no purposes of interpreting the scope of the
Yes. Insummary
granted a unanimous opinion
judgment delivered by Justice
for respondents, holding John comparable
Paul Stevens, the Court
exemption held
from thethat assuming that the
antifraud complaint's
Acts' definition allegations
of "security."were true, the securities broker's conduct was in
connection
that, under thewith theofpurchase
"sale business"ordoctrine,
sale of any security. Noting
the stock that Zandford's
provisions. practicesand
Thus, the structure were not independent
language of events, the Court found that each sale was made to further his fraudulent
could
schemenot be
andconsidered
that each awas "security" for purposes
deceptive becauseofit the the Acts
was neither refute respondents'
authorized position.to,Factually
by, nor disclosed Stocks soldJustice
the Woods. Therefore, privatelyStevens
still fall concluded,
within the the stockbroker's breaches of
Acts because
fiduciary dutymanagerial control of the
were in connection withbusiness had sales,
the securities as well, thethe
within “sale of business”
meaning of the doctrine
Securities cannot
Exchange ambit
Act ofof1934,
the antifraud
becauseprovisions of thetransactions and breaches of fiduciary
the securities
passed into the hands of the purchasers, who bought
duty coincided apply because the business was never fully Securities Exchange Act.
100% of the stock. It concluded that the transaction relinquished to Dennis & Bolten; Ivan stayed on
was a commercial venture, rather than a typical to manage corporate affairs.
investment.
iv. “Purchase or Sale”
Hooper v. BenJack Cage had controlled Consolidated American Is the transaction a “sale” within the meaning of The controlling factor is the substantial
Mountain States Industries, Inc. and had been an officer and director the Securities Exchange Act? effect of the transaction in light of the
thereof. 
 In October 1956, he resigned in favor of new Congressional purpose to curb fraudulent

75
management. Shortly thereafter, he conspired with the YES. Defendants' objection to holding the stock transactions, rather than a semantic
other defendants to obtain 700,000 of Consolidated's transaction a sale appears to have been the interpretation of "sale." The case indicates
unissued stock in exchange for certain assets of contention that the corporation gave up nothing the unwillingness of the court to accept a
another corporation, Mid-Atlantic Development of value. This is founded on the accounting confining view of Section 10(b) and Rule X-
Company, which was owned by Cage and the other theory that issuance of stock is not a reduction 10B-5.
defendants. 
 of assets and thus issuance without
The assets to be exchanged, consisting in certain compensation does not cause any loss to the
purported rights to purchase stock of a Cuban corporation but only results in a reduction of the
insurance company and to acquire certain oil value of the shares of the other stockholders.
concessions in Honduras, were presumably without But the court held that if the transaction were
value. To obtain for Mid-Atlantic the right to purchase not a sale in the common law traditional sense, it
the Cuban insurance company stock, Cage, through certainly was an arrangement coming within the
interstate communications to the new management of definition of "sale" in the Act, i.e., "any contract to
Consolidated, made false representations whereby buy, purchase, or otherwise dispose of."
Consolidated was induced to send $10,000 to Cuba. 
 Defendants' contention disregards too far the
Thereafter the defendants' scheme was consummated corporate entity. It fails to take into account the
through the preparation and presentation to substantial effect of the transaction. The
Consolidated's 
 transfer agent of certain spurious corporation has suffered a loss in the sense that
documents purporting to show authorization for the it has given up something which it could have
issuance of 700,000 of Consolidated's shares in sold or traded elsewhere, thereby acquiring
exchange for the "rights" owned by Mid-Atlantic. At the assets. Further, the corporation has acquired a
time par value of Consolidated's shares was 1¢; market liability, not in the technical sense, but in the
value varied from $1.00 to $2.75 per share. sense that it has obliged itself to pay a
When sued under Rule X-10B-5, Cage and his co- percentage of its assets to the holders of the
defendants argued that (i) An issuer was not an issued stock upon liquidation (assuming a
investor within the meaning of Section 10(b) and Rule liquidation with assets).
X-10B-5 and therefore could not predicate a private
right of action thereunder; and
(ii) There was no "sale" of securities by Consolidated.
The District Court accepted defendants' contentions
and dismissed the complaint. 

SEC v. National SEC accused National Securities of misrepresentations Were the exchanges by Producers' shareholders Respondents' alternative argument that
Securities and omissions of material facts in communications of their old stock for shares in the new company Rule 10b-5 does not cover
sent to shareholders of Producers Life Insurance Co., in "purchases" within the meaning of § 10(b) of the misrepresentations which occur in
an attempt to secure approval of a merger. SEC's Securities Exchange Act and SEC Rule 10b-5? 
 connection with proxy solicitations can be
request for temporary relief was denied, and dismissed rather quickly. Section 14 of the

 thereafter Producers' stockholders approved the YES. The deception alleged here has affected 1934 Act, 48 Stat. 895, 15 U.S.C. § 78n,
merger and the Arizona Director of Insurance found the stockholders' decisions in a way not unlike that and the rules adopted pursuant to that
merger not "[i]nequitable to the stockholders of any involved in a typical cash sale or share exchange, section, set up a complex regulatory
domestic insurer," and not otherwise "contrary to law," and, in light of the broad anti-fraud purposes of § scheme covering proxy solicitations. At the
as he was required to do under the state insurance 10(b) of the Securities Exchange Act and SEC time of the conduct charged in the
laws. 
 Rule 10b-5, which apply "in connection with the complaint, these provisions did not apply to
purchase or sale of any security," exchanges by respondents; the 1964 amendments to the
The parties didn’t have the option to get appraisal Producers' shareholders of their old stock for Securities Exchange Act would have made
rights in case they deny the merger. shares in the new company are "purchases" them applicable later if certain
within the meaning of that statutory language. 
 conditions relating to state regulation had
not been met. But the existence or
Does the fact that nonexistence of regulation under § 14
NO. There is no bar to the application of Rule would not affect the scope of § 10(b) and
10b-5 to respondents' misstatements in their Rule 10b-5. The two sections of the Act
proxy materials. apply to different sets of situations. Section

76
10(b) applies to all proscribed conduct in
connection with a purchase or sale of any
security; § 14 applies to all proxy
solicitations, whether or not in connection
with a purchase or sale. The fact that there
may well be some overlap is neither
unusual nor unfortunate. Nor does it help
respondents that insurance companies
may often be exempt from federal proxy
regulation under the 1964 amendments.
The securities laws' exemptions for
insurance companies and insurance
activities are carefully limited. None is
applicable to the Rule 10b-5 situation with
which we are confronted, and we do not
have the power to create one. Congress
may well have concluded that the
Commission's general anti-fraud powers
over purchases and sales of securities
should continue to apply to insurance
securities, even though the more detailed
regulation of proxy solicitations -- which
may often be conducted in connection with
the managerial activities of insurance
companies -- was left to the States.
International SEC charged that Robert Vesco masterminded and, WOB that "fraud" was perpetrated on ICC "in
Control v. Vesco with his cohorts, implemented a plan involving the connection with the purchase or sale of any
manipulation of the assets and securities of a number security.
of corporations controlled by Vesco including ICC. Vesco
and his group were alleged to have defrauded the YES. It is a transaction involving, as it
public investors in ICC, as well as investors in four unquestionably does, the disposition of
mutual funds through the creation of a number of securities and, therefore, one for which the
corporate entities and the subsequent transfer to these corporation is well deserving of and entitled to
corporations of the assets of ICC and the mutual funds. the protection of § 10(b). ICC must be deemed to
The SEC asserted that as a result of this elaborate shell be a "seller" of its Fairfield General stock at the
game, clothed in the garb of securities transactions, time it disposed of its Fairfield General portfolio
Vesco and others had secured control of over $200 securities by way of a dividend in kind to its
million deposited in banks located in countries ranging shareholders. The possible asset drain must be
geographically from Luxembourg to Costa Rica. weighed against such considerations as the
desirability of removing the blight of an
unprofitable subsidiary from the consolidated
income statistics reported to the public.

In re Penn SECTION 10(B) WON this is under “purchase or sale”? - Reorganizations are not necessarily
Central NYC Railroad Company merged with Pennsylvania purchases or sales!
Railroad Company = Penn Central Company (Penn). The formation of the holding company, as in this
Penn shareholders received proxy materials from the case, was neither a typical merger covered by - Read this case with the SEC v National
company, which sought approval of the formation of a Section 10(b) nor a typical internal management Securities case!
holding company. REORGANIZATION ENSUED. decision excluded from the coverage of that
section. The Court must determine, therefore,
The district court dismissed the complaint, explaining whether the 1969 reorganization was an internal

77
that the exchange of shares that had taken place was corporate management decision which
neither a purchase nor a sale and thus the plaintiffs did incidentally involved an exchange of shares or a
not allege fraud in connection with the purchase or sale major corporate restructuring requiring the same
of any security. Plaintiffs seek to extend the coverage of kind of investment decision by the shareholders
Section 10(b) to the present case, since the as would a proposed merger with a separate
reorganization affected important basic rights of the existing corporation.
shareholders and had serious economic consequences
to the corporation. THREE POINTS PLAINTIFFS ALLEGED:
1. Loss of Appraisal Right – BUT in this case
they only lost their appraisal right because
the law elected by the board to govern the
new corporation did not allow appraisals.
2. Inability to Participate in Bankruptcy
Proceedings – BUT we believe this loss of
rights deserves minimal weight. In view of
the inherently limited range of vision of the
voting shareholders at that point in time,
the bankruptcy of Railroad, while not
entirely inconceivable, was a highly remote
and speculative contingency.
Added Potential for Diversification – BUT we
agree with the district court that the added
possibility of diversification was nevertheless in
the nature of internal corporate restructuring. In
the typical corporation, if the articles of
incorporation, in the light of changing economic
or competitive conditions, are unduly restrictive
and limit diversification, a solution is an
amendment to the articles with shareholder
approval.
Wharf Holdings The Wharf (Holdings) Limited, through Ng, a Was Wharf's secret intent not to honor the option Sec. 10 (b) of the Securities Exchange Act
Ltd. v. United management director, orally granted respondent United it sold United through oral contract violates § applies both to oral & written contracts.
International International Holdings, Inc., an option to buy 10% of the 1O(b)?
stock in Wharf if United rendered certain services in It must be noted that in this case, proof of
order to help Wharf with its application for exclusive YES. Wharf's claim that § 10(b) does not cover fraudulent misrepresentation was shown
license to run the Hong Kong cable system. As a result oral contracts of sale is rejected. The Act itself by internal documents such as minutes of
of this agreement, United actively aided Wharf, sending says that it applies to "any contract" for the the meetings, memoranda, etc. where
employees to help Wharf with the entire process. purchase or sale of a security. Oral contracts for various Wharf executives scribbled words
the sale of securities are sufficiently common like, “How do we get out of this?”
However, internal Wharf documents suggested that that the Uniform Commercial Code and statutes “NONONO” “Let’s backpedal,” evidencing
Wharf never intended to carry out its promise. United of frauds in every State now consider them their lack of actual intent to enter into the
fulfilled its obligation, but Wharf refused to permit it to enforceable. Any exception for oral sales of deal with United.
exercise the option. United sued in Federal District securities would significantly limit the Act's
Court, claiming that Wharf's conduct violated, inter alia, coverage, thereby undermining its basic
§ 10(b) of the Securities Exchange Act of 1934, which purposes.
prohibits using "any manipulative or deceptive device or
contrivance" "in connection with the purchase or sale of
any security." 15 U. S. C. § 78j(b)
*Rubin v. US Tri-State, through petitioner, obtained loans from W/N a pledge of stock to a bank as collateral for Obtaining a loan secured by a pledge of
Bankers Trust. Bankers Trust required collateral for a loan is an "offer or sale" of a security under § stock unmistakably involves a "disposition
each new loan; Tri-State pledged stock in six 17(a) of the Securities Act of 1933 of an interest in a security, for value" within

78
companies. The stocks were represented as being the statutory definition. Although pledges
good, marketable, and unrestricted and valued at a YES, it is. The pledge of stock to a bank as transfer less than absolute title, the
total of approximately $1.7 million; in fact, they were collateral for a loan is an "offer or sale" of a interest thus transferred nonetheless is an
practically worthless. Petitioner was indicted on three security under § 17(a).
 The terms "offer" and "interest in a security," and it is not
counts of violating and conspiring to violate various "sale" in § 17(a) are defined in §2(3) of the Act: essential under the terms of the Act that
federal antifraud statutes, including § 17(a) of the "The term 'sale' or 'sell' shall include every full title pass to a transferee for the
Securities Act of 1933. Petitioner does not deny that he contract of sale or disposition of a security or transaction to be an "offer" or "sale."
engaged in a conspiracy to commit fraud through false interest in a security, for value. The term . . .
representations to Bankers Trust concerning the stocks 'offer' shall include every attempt or offer to
pledged; he does not deny that the shares were dispose of, or solicitation of an offer to buy, a
"securities" under the Act. Rather, he contends narrowly security or interest in a security, for value."
that these pledges did not constitute "offers" or "sales"
under § 17(a) of the Act.
v. Purchaser-Seller Requirement
*Birnbaum v. Defendant Feldmann owned approximate 40% of the The issue in this case whether or not fraud exists
Newport common stock of Newport, enough for voting control. in this case, such that, a cause of action under
He was also the president and chairman of the board. Rule 10b-5 would prosper.
Newport’s remaining stocks were owned and publicly
held. NO. The Court said that Rule 10b-5 was directed
Newport and another company, Follansbee, had been solely at that type of misrepresentation or
in talks to go into a merger, which would have been fraudulent practice usually associated with the
highly profitable to all stockholders of Newport. sale or purchase of securities rather than at
However, Feldmann, acting as president of Newport, fraudulent mismanagement of corporate affairs,
rejected the offer and sold all his stocks to defendant and that it extended protection only to the
Wilport at a price which was twice the market value of defrauded purchaser or seller. Since the
the stock at that time. After the sale, Feldmann and complaint failed to allege that any of the
several other directors resigned, and let the directors of plaintiffs fell within either class, the case of the
Wilport take over Newport. plaintiffs must be dismissed.
The complaint alleged that, aside from betraying their
fiduciary obligations, Feldmann and the other directors
made certain misrepresentations to the stockholders of
Newport in letters sent to them during the negotiations
with Follansbee: the letters failed to disclose the selling
price of Feldmann’s stocks and the fact that Wilport
would make Newport as its “captive” subsidiary. The
complaint alleged that the misrepresentations operated
as fraud in connection with the sale of Feldmann’s
stock, and that SEC Rule 10b-5 was violated.
*Bluechip v. Blue Chip Stamps (Defendant) was obligated, pursuant Can an offeree who is a member of the limited Consent decree –
Manor to U.S. antitrust laws, to offer its shares to vendors who class, who chooses not to buy stock but claims
utilized the stamp service under an antitrust consent that he would have bought stock had he been Securities regulation law – applies to
decree. The consent decree provided that Blue Chip provided an honest prospectus, bring a 10b-5 private companies (non-public companies
owned 90% of its own stocks; pursuant to antitrust law, action? as defined by law). Does Section 23 or 26,
it must sell 55% of its stocks. Pursuant to this, it issued etc. apply to a private company?
a prospectus. No. A plaintiff must be either a seller or a buyer
A member of said class of vendors, Manor Drug Stores to seek a remedy under 10b-5. Adopting the
(Plaintiff) claimed that Blue Chip’s prospectus was doctrine in the Birnbaum case, SC held that
deceptive, trying to paint the transaction in an Manor did not purchase the shares, thus it could
unappealing manner, and as a result did not purchase not sue. The SEC had attempted to get Congress
the stock. The deceptive statements were basically to amend 10b-5 to contain “any attempt to
pessimistic overviews of the financial portfolios of the purchase or sell a security”, but Congress had

79
new company formed to house the shares that had to declined to do this. Congress desired to restrict
be sold. 10b-5 to cases of “actual damage”, and without
Birnbaum, evidence of damage would be too
theoretical. Regarding policy considerations, the
Birnbaum rule may incite the offerees, knowing
that they would not be subject to summary
judgment would sue to push the corporate
defendant to settle out of court, would lead to
“strike suits”. The evidence presented by an
offeree at trial would be too subjective, seeing as
no objective criteria could assist in measuring
plaintiff’s dependence on the prospectus. In
conclusion, Manor Drugs has no contractual right
to a Birnbaum rule. Manor Drugs was a member
of a limited class, but permitting them to utilize
the rule would lead to a breakdown of the
Birnbaum rule.
*Vine v. • When Beneficial Finance, a major small-loan Whether or not the plaintiff qualified as a seller Although the Birnbaum test has yet to be
Beneficial company, became interested in acquiring Crown in order to bring a 1Ob-5 action. rejected expressly, its seemingly rigid
Finance Finance, Beneficial arranged with the officers and classifications have been expanded to
directors of Crown to buy at a premium their Class B YES. Although Section 10 (b) of the Securities accommodate varied transactions. Hence,
stock which held voting control. Exchange Act and its implementing rule lOb-5 both the initial issuance of securities and
• Beneficial then made a public tender to Class A broadly proscribe fraud "in connection with the the exchange of stock for stock in a
holders, whose stock had sizable dividend and purchase or sale" of securities, the private corporate merger' have been recognized
liquidation advantages. Having thereby acquired 95% actions subsequently allowed under those as involving a purchase or sale under 1Ob-
of all shares, Beneficial executed a short-form merger. provisions have been subject to some 5. An underwriter's unexecuted agreement
This purchase scheme resulted in an 800,000 dollar limitations. For example, the plaintiff must prove to distribute an issue'" and an investor's
saving for Beneficial and a 900,000 dollar gain for the a causal connection between the fraud and the unfilled promise to purchase stock from a
B shareholders, all at the expense of the A harm which he suffered as well as some degree broker have also been deemed to satisfy
holders.
 However, Vine, one of the A holders, refused of reliance upon the deceptive statements of his the Birnbaum rule. Likewise, one who
the tender. Thus, when he sued, the district court defendant. Moreover, while courts have secures a stock purchase loan with a
dismissed, reasoning that the plaintiff had to qualify as abandoned the “any privity requirement” and portion of the acquired shares is given
a seller in order to bring a 1Ob-5 action. given an expansive interpretation to the "in "buyer" status in an action against a
In reversing, the Second Circuit attributed the requisite connection with" clause of section 10 (b), a collateral holder who unlawfully disposes
status to Vine since the short-form merger gave him no restrictive "buyer/seller" test, first enunciated in of the securities.
alternative but sale. Moreover, it held that a plaintiff's Birnbaum v. Newport Steel Corp., still remains. In
reliance on the fraud need not be shown in the case of that action, the court reasoned that rule 1Ob-5
a forced sale. was promulgated only to perfect the securities
law which had not previously proscribed
fraudulent buying of securities and that,
therefore, persons who were neither sellers nor
buyers were not to be included in the protected
class.
In reversing the district court's dismissal of Vine's
complaint, the Second Circuit noted the
expansive construction the cases have given the
"sale" concept and accordingly held that Vine
was a seller for 1Ob-5 purposes since the short-
form merger and consequent freezing of his
assets left him no alternative but sale. Moreover,
even though reliance may be necessary in some

80
cases, the court regarded it as "unnecessary . . .
when no volitional act is required and the result
of a forced sale is exactly that intended by the
wrongdoer." Similarly, the court-refused to regard
the possible existence of a state remedy as
relevant to the availability of a federal right. The
SEC, as amicus, had requested the court to go
further and to determine that in merger cases
such as the instant one, a plaintiff-shareholder
may sue under rule 1Ob-5 irrespective of
whether he relinquished his holding "so long as
the Rule has been violated and plaintiff's stock
lost value as a result," but the court merely noted
that the contention was "interesting."
vi. Scienter
Ernst & Ernst v. See “Fraud & Deceit” under this Section
Hochfelder
Greebel v. FTP This case discusses the enactment of Private Securities The Court ruled that the enactment of PSLRA did
Software Litigation Reform Act (PSLRA) and whether it changed not change the standard of particularity required
or provided a different standard on the degree of in averring fraud and scienter cases. The strict
particularity required in an allegation of fraud and in application of the previous rule, Rule 9 (b), is
cases of seeking to prove scienter (a mental state consistent with PSLRA.
embracing intent to deceive, manipulate, or defraud).
Before the PSLRA, a securities fraud claim had to
meet the standards set by Rule 9(b) 

The text of the Act requires now that any
complaint alleging that a statement or omission
is misleading must: 
 1. specify each statement
alleged to have been misleading, 
 2. [specify]
the reason or reasons why the statement is
misleading, 
 3. and, if an allegation regarding
the statement or omission is made on
information and belief, . . . state with particularity
all facts on which that belief is formed. 

• which provides that "[i]n all averments of
fraud or mistake, the circumstances
constituting fraud or mistake shall be
stated with particularity. Malice, intent,
knowledge, and other condition of mind of
a person may be averred generally."
• This circuit has interpreted Rule 9(b) to
require "specification of the time, place,
and content of an alleged false
representation."

The PSLRA's pleading standard is congruent and


consistent with the pre-existing standards of this
circuit. This circuit has been notably strict and
rigorous in applying the Rule 9(b) standard in
securities fraud actions.

81
Under the new rule,

• First, this court had already required a
fraud plaintiff to specify each allegedly
misleading statement or omission.

• Second, this court has required a
securities fraud plaintiff to explain why the
challenged statement or omission is
misleading by requiring that "the complaint
. . . provide some factual support for the
allegations of fraud. This means that the
plaintiff must not only allege the time,
place, and content of the alleged
misrepresentations with specificity, but
also the "factual allegations that would
support a reasonable inference that
adverse circumstances existed at the time
of the offering, and were known and
deliberately or recklessly disregarded by
defendants.
• Finally, this court has required plaintiffs
who bring their claims on information and
belief to "set forth the source of the
information and the reasons for the belief.
vii. Reliance
Affiliated Ute See “Fraud & Deceit” under this Section
Citizens v. US
Abell v. Potomac [Read digest]
Insurance
*Basic v. See “Disclosure Requirements” Section
Levinson
Sharp v. WMC used a tax opinion letter issued by Coopers & W/N the trial court erred in creating a
Coopers & Lybrand. The letter stated that "based solely on the presumption that the class representative relied
Lybrand facts contained (in the WMC Limited Partnership on the misrepresentations and omissions of the
Agreement) and without verification by us," a limited second opinion letter.
partner who contributed $65,000 in cash could deduct No, the district court correctly allowed a
approximately $128,000 on his 1971 tax return. presumption of reliance. Reliance is an element
Higgins, tax supervisor who drafted the letter, told of a plaintiff's action for damages under rule
David Wright, a partner at Coopers & Lybrand, that 10b-5. Reliance is therefore one aspect of the
WMC was showing copies of the letter to investors as ubiquitous requirement that losses be causally
part of its sales program. Wright sent to WMC a revised related to the defendant's wrongful acts. Both
letter, which he signed in the name of Coopers & parties in this case cite decisions indicating that
Lybrand. The scheme began to unravel when WMC was the presumption of reliance is proper in cases of
indicted for securities violations. The IRS began denying alleged omissions, whereas no presumption
the deductions taken by the investors, the wells were arises in cases of alleged misrepresentations. A
frequently dry, and WMC collapsed. Stanley Sharp filed strict application of the omissions-
this suit alleging violations of § 10(b) of the Securities misrepresentations dichotomy would require the
Exchange Act of 1934, 15 U.S.C. § 78j(b), and trial judge to instruct the jury to presume reliance
Securities Exchange Commission rule 10b-5, 17 C.F.R. with regard to the omitted facts, and not to
§ 240.10b-5. presume reliance with regard to the
misrepresented facts. Although this resolution

82
would have great appeal to graduate logicians in
a classroom, we are not persuaded to adopt it for
use in a courtroom. The proper approach to the
problem of reliance is to analyze the plaintiff's
allegations, in light of the likely proof at trial, and
determine the most reasonable placement of the
burden of proof of reliance. The burden in this
case should fall on Coopers & Lybrand. The
opinion letter issued by Coopers & Lybrand was
intended to influence the investment decisions
of persons interested in WMC partnerships. The
appellant undoubtedly foresaw that it would have
that effect. Coopers & Lybrand, by its action,
facilitated the transactions at issue but failed to
disclose certain facts. Its misrepresentation of
other facts should not alleviate its burden of
proving nonreliance. Considering the likelihood
that investors would rely on the opinion letter, we
conclude that the trial judge properly placed the
burden of refuting a presumption of reliance on
the appellant.
viii. Causation
Schlick v. Penn- Penn-Dixie acquired voting control over Continental. It The issue is whether or not the plaintiff was
Dixie is alleged that such acquisition was actually done in defrauded, and thus, can claim damages on the
order to defraud Continental stockholders. Under Penn- ground that Penn-Dixie violated Rule 10b-5.
Dixie’s management, Continental entered into a merger The Court held that the plaintiff was able prove
agreement which provided for an unfair exchange the allegations against Penn-Dixie.
against the stockholders based on manipulated and For the case to prosper, the plaintiff must show
artificial stock values of the merging parties. The the existence of loss causation
merger was approved. The plaintiff said that Penn-Dixie (misrepresentations or omissions caused the
issued a materially defective proxy statement which economic harm) and transaction causation
failed to disclose the manner in which Penn-Dixie had (violations or misrepresentations caused the
inflated the value of its shares at the expense of plaintiff to engage in the transaction in question).
Continental. Hence, this case under Rule 10b-5. The plaintiff, in this case, was able to prove that,
had he known the misrepresentations in the
proxy statement (specifically, the undisclosed
fact that Penn-Dixie manipulated the market
value of Continental shares), he would not have
sold his Continental shares to Penn-Dixie.
In fine, the complaint completes the showing
necessary to state a claim under Rule 10b-5. It
alleges a specific scheme to defraud (a scheme
which includes the proxy solicitation as a part,
but which included substantial collateral conduct
as well); the fraud was accomplished in
connection with a securities transaction; the
plaintiff was a seller in that transaction; and as a
result of the sale, plaintiff alleges a loss was
sustained.
Bastian v. This case arises out of the sales of limited partnership With regard to the alleged violation of § 10(b) of
Petern interests in two Illinois oil and gas limited partnerships, the securities and exchange act of 1934, 15

83
Petren 1981A and Petren 1981B. Each plaintiff is a u.s.c. § 78j(b) ("§ 10(b)") and securities and
limited partner of one or both of these partnerships. exchange commission rule 10b-5 ("rule 10b-5),
The complaint alleges that defendants—the general plaintiffs failed to prove loss causation. Plaintiffs
partners of the partnerships along with their attorneys here must allege "loss causation" if they are to
— violated federal securities laws as well as state survive a motion to dismiss.
statutes and common law, and engaged in a pattern of However, in this case, plaintiffs here have not
racketeering activity, through various material non- even attempted to plead that the information
disclosures they made prior to the sales of the defendants allegedly omitted from the Offering
partnership interests. Defendants have moved to Memoranda caused the decline in their Petren A
dismiss all seven counts of the complaint on the and Petren B partnerships interest. Perhaps the
grounds that plaintiffs have failed to state a claim upon ventures became worthless because defendants
which relief may be granted in any of the counts. In the were incompetent or irresponsible; if so,
case at bar, all the seven counts of the complaint were plaintiffs may be able to plead, in an amended
dismissed. complaint, a causal nexus between the non-
disclosures and their economic loss. On the
other hand, the investments may be worthless
for reasons completely unrelated to the non-
disclosures; in that case, an amended complaint
would not only fail, but might be subject to
sanctions. Thus, this contention was dismissed
by the court.
AUSA Life [Read digest]
Insurance Co. v.
Ernst & Young
ix. Other Cases
Central Bank of Central Bank served as an indenture trustee for two May a private plaintiff uphold a § 10(b) aiding A plaintiff must show dependence on the
Denver v. First bond issues made by the Colorado Building Authority and abetting suit under the federal securities defendant’s fabrication or omission to
Interstate Bank with the bond covenants necessitating that the land law? recover under Rule 10b-5.
of Denver value be 160% of the bonds outstanding principal and
interest, minimum. Once the underwriter voiced No. A private plaintiff may not uphold a § 10(b)
concern that the 160% test was not being fulfilled, aiding and abetting suit under the federal
Central Bank’s in- house appraiser recommended securities law. Had Congress wanted to enforce
maintaining an outside appraiser. At the request of the aiding and abetting liability, it would have clearly
provider of the last appraisal, AmWest, Central Bank stated that in legislative text. A plaintiff must
agreed to suspend the independent review. Prior to the show dependence on the defendant’s fabrication
independent review finished, the Authority defaulted on or omission to recover under Rule 10b-5. Had
the bonds. Buyer of substantial bulk of the second the aiding and abetting action offered here were
bond issue, First Interstate, brought suit, claiming permitted, Central Bank could be liable lacking
principal violations of § 10(b) of the Securities demonstration that First Interstate depended
Exchange Act of 1934 and that Central Bank was upon Central Bank’s activities or statements. The
vicariously liable for aiding and abetting the deception. lacking of § 10(b) aiding and abetting liability
The district court granted summary judgment to Central does not indicate that vicarious actors in the
Bank. The court of appeals reversed. Central Bank securities markets are never liable, there is a
appealed. chance they will be found so as primary violators
under Rule 10b-5, presuming all obligations for
that type of liability are met. First Bank admits
that Central Bank failed to execute a
manipulative or misleading act as defined by §
10(b). The judgment of the court of appeals is
reversed.
2. INSIDER TRADING

84
SECURITIES REGULATION CODE

SEC. 3.8. The Meaning of Insider.


“Insider” means:
(a) The issuer;
(b) A director or officer (or person performing similar functions) of, or a person controlling the issuer;
(c) A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally
available to the public;
(d) A government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an
issuer or a security that is not generally available to the public; or
(e) A person who learns such information by a communication from any of the foregoing insiders.

SEC. 27. Insider’s Duty to Disclose When Trading


27.1. Defining Insider Trading; Exceptions.
It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally
available to the public, unless –
(a) The insider proves that the information was not gained from such relationship; or
(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves:
i. That he disclosed the information to the other party, or
ii. That he had reason to believe that the other party otherwise is also in possession of the information.
A purchase or sale of a security of the issuer made by an insider defined in Subsec. 3.8, or such insider’s spouse or relatives by affinity or consanguinity within the 2nd degree,
legitimate or common law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into
existence but prior to dissemination of such information to the public & the lapse of a reasonable time for the market to absorb such information:
• Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material non-public information at
the time of the purchase or sale.

27.2. What is Material, Non-Public Information.


For purposes of this Section, information is “material non­public” if:
(a) It has not been generally disclosed to the public & would likely affect the market price of the security
• After being disseminated to the public &
• The lapse of a reasonable time for the market to absorb the information; or
(b) It would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.
so even if you only share
27.3. Communication to a Non-Insider who Becomes an Insider. the info , and it is not you
It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person who, by virtue of the communication, who will be transacting
becomes an insider as defined in Subsec. 3.8, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a using this material
security of the issuer while in possession of such information. nonpublic info, it is still
not allowed
27.4. Tender Offer Related Violations of Insider Trading Law.
(a) It shall be unlawful where a tender offer has commenced or is about to commence for:
(i) Any person (other than the tender offeror) who is in possession of material non-public information relating to such tender offer, to buy, or sell the securities of the
issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that –
a. The information is non-public &
b. Has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender
offer, or any insider of such issuer; &
(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate
material non-public information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsec. 27.4 (a)(i).
(b) For purposes of this subsection the term “securities of the issuer sought or to be sought by such tender offer” shall include any securities convertible or exchangeable into
such securities or any options or rights in any of the foregoing securities.

85
PSE DISCLOSURE RULES

SECTION 4.2. Selective Disclosure of Material Information.


An Issuer is prohibited to communicate material non-public information about the Issuer to any person,
• UNLESS the Issuer is ready to simultaneously disclose the material non-public information to the Exchange.
This Section shall not apply if the disclosure is made to:
a. A person who is bound by duty to maintain trust & confidence to the Issuer such as but not limited to its auditors, legal counsels, investment bankers, financial
advisers; &
b. A person who agrees in writing to maintain in strict confidence the disclosed material information & will not take advantage of it for his personal gain.
The Issuer shall establish and implement internal controls that will ensure that its officers, staff and any other person who is privy to the material non-public information shall
comply with the requirement of this section.
Note: Disclosure of material information must be made to the Exchange within the period stated in Section 4.1. & prior to its release to the media or any third party.
Except for disclosures to persons under Sec. 4.2. (a) and (b), all directors, officers, employees, agents, and/or representatives of the Issuer must refrain from making
statements especially if these are not yet disclosed to the Exchange.
For forward-looking statements or soft information, the Issuer must emphasize the nature of such information and that the information is subject to change.

SECTION 13. Disclosure on Transactions of Directors and Principal Officers in the Issuer’s Securities.
SECTION 13.1. Notwithstanding Sec. 17.5 of these Rules, Issuers must disclose to the Exchange the direct and indirect ownership of its directors and principal officers in its
securities within 5 Trading Days after:
Note: The above provision was amended to change the deadline for submission from 2 Trading Days to 5 Trading Days. (See Supplemental Rule 10 – PSE Memo for Brokers
No. 066-2004 dated 2 April 2004 re: Revision to Section 13.1. of the Revised Disclosure Rules)
• The Issuer’s securities is first admitted in the Official Registry of the Exchange; 

• A Director is first elected or an Officer is appointed; or 

o Note: The Issuer is required to disclose even if such director or officer has no beneficial ownership in the Issuer.
• Any acquisition, disposal, or change in the shareholdings of the Directors and Officers. 

o Note: This requirement is separate and distinct from the reportorial requirements under SRC Rule 23. In addition to the submission of SEC Forms 23-A and
23-B, an Issuer must also submit the disclosure required in Section 13.1 to the Exchange 


SECTION 13.2. A Director or a Principal Officer of an Issuer must not deal in the Issuer’s securities during the period within which a material non-public information is obtained
& up to 2 full Trading Days after the price sensitive information is disclosed.
Strong v. Repide Mrs. Strong, as the owner of 800 shares of the capital Is Repide guilty of fraud? Where a sale made through an agent of
stock of the Philippine Sugar Estates Development the vendor has been effected by the fraud
Company (PSEDC), brought suit to recover such shares YES. The whole transaction gives conclusive & deceit of the vendee, the sale cannot
from Repide (who was a director & manager of the evidence of the overwhelming influence stand whether or not the vendor's agent
company & already the owner of 30,400 of its 42,030 defendant had in the course of the negotiations had power to sell.
shares) on the ground that the shares had been sold & as owner of a majority of the stock and as agent
delivered by her agent to Repide without authority from for the other owners, and it is clear that the final A director upon whose action the value of
Mrs. Strong, and also on the ground that defendant consummation was in his hands at all times. If, the shares depends cannot avail of his
fraudulently concealed from Mrs. Strong's agent facts under all these facts, he purchased the stock knowledge of what his own action will be to
affecting the value of the stock so sold and delivered. from the plaintiff, the law would indeed be acquire shares from those whom he
Essentially, Repide was aware & was directly in impotent if the sale could not be set aside or the intentionally keeps in ignorance of his
negotiations with government to purchase the friar defendant cast in damages for his fraud. expected action & the resulting value of
lands owned by PSEDC. These were the only properties the shares.
of value of the company. Repide continuously held out
in negotiations with government, demanding higher The Phil. Civil Code, after providing by Art.
prices. At the same time, while negotiations were 1261 for the requisites of a contract,
undergoing, Repide took steps to purchase the 800 among which is the "consent of the
shares of stock in his company owned by Mrs. Strong, contracting parties," says in Art. 1265 as
which he knew were in the possession of her agent follows: "Consent given by error, under
(Jones). Repide, having decided to obtain these shares, violence, by intimidation or deceit, shall be
instead of seeing Jones, who had an office next door, void."

86
employed one Kauffman, a connection of his by Art. 1269 thereafter provides, “there is
marriage, and Kauffman employed Sloan, a broker, deceit when, by words or insidious
who had an office some distance away, to purchase the machinations on the part of one of the
stock for him, and told Sloan that the stock was for a contracting parties, the other is induced to
member of his wife's family. Sloan communicated with execute a contract which, without them, he
the husband of Mrs. Strong, and asked if she desired to would not have made.”
sell her stock. The husband referred him to Jones for The meaning of the words "insidious
consultation, who had the stock in his possession. machinations" may be said to be a
Sloan did not know who wanted to buy the shares, nor deceitful scheme or plot with an evil
did Jones when he was spoken to. Jones would not design, or, in other words, with a fraudulent
have sold at the price he did had he known it was the purpose. Thus, the deceit which avoids the
Repide who was purchasing, because, as he said, it contract need not be by means of
would show increased value, as Repide would not be misrepresentations in words. It exists
likely to purchase more stock unless the price was where the party who obtains the consent
going up. As the articles of incorporation required a does so by means of concealing or omitting
resolution of the general meeting of stockholders for to state material facts, with intent to
the purpose of selling more than one hacienda, and as deceive, by reason of which omission or
no such general meeting had been called at the time of concealment the other party was induced
the sale of the stock, Jones might well have supposed to give a consent which he would not
there was no immediate prospect of a sale of the lands otherwise have given. This is the rule of the
being made, while at the same time Repide had common law also; but, in both cases, it is
knowledge of the probabilities thereof which he had based upon the proposition that, under all
acquired by his conduct of the negotiations for their the circumstances of the case, it was the
sale, as agent of all the shareholders, and while acting duty of the party who obtained the consent,
specially for them and himself. acting in good faith, to have disclosed the
2-3 months after this deal, the lands were sold to the facts which he concealed.
government & Repide’s purchased stocks rose 10
times in value.
The case in the Philippines went all the way up to the
Philippine SC, but was dismissed by that court.
Philippine SC held that the responsibility of the
directors of a corporation to the individual stockholders
did not extend beyond the corporate property actually
under the control of the directors; that they did not owe
any duty to the members in respect to their individual
stock, which would prevent them from purchasing the
same in the usual manner.
*SEC v. What was involved was the acquisition by Interport SC reversed CA & ordered the resumption of the Insider trading is now regulated under
Interport Resources Corporation (IRC) from Ganda Holdings investigation, noting that the mere absence of Sections 23 and 27 of the SRC. The SRC
Berhad (GHB) of the latter's entire shareholding in implementing rules cannot invalidate a statute, retains the traditional division between: (i)
Ganda Energy Holdings Inc. (GEHI). Furthermore, IRC for otherwise an administrative body (such as the insiders in the strict sense (those that are
was to acquire 67% of the entire capital stock of SEC) could defeat the legislative will by refusing connected with or related to the issuer);
Philippine Racing Club Inc., which owned some 26 to issue such rules or delaying their issuance. and (ii) tippees, but adds another category
hectares of real estate in Makati, the financial center of It was observed by the Supreme Court that Sec. that covers government employees, as well
the country. According to the SEC, IRC failed to make 30 of the Revised Securities Act (now Sec. 27, as directors or officers of exchanges,
timely public disclosures of its negotiations with GHB, SRC) was sufficiently clear to leave no doubt that clearing agencies or self-regulatory
and some of IRC's directors "heavily traded IRC shares "the insider's misuse of nonpublic and organizations who are in possession of
utilizing material inside information." However, IRC and undisclosed information is the gravamen of material nonpublic information.
these directors were able to
 obtain a permanent illegal conduct". Insiders are obliged to "disclose Furthermore, an insider's spouse and
injunction from CA prohibiting the SEC material information to the other party or abstain relatives by affinity or consanguinity within
from
 proceeding with the investigation. The injunction from trading the shares of his corporation." the second degree, legitimate or common-

87
was issued by CA because, among other things, the As the Revised Securities Act was already law, are treated as insiders.
SEC failed to promulgate the rules implementing Sec. superseded by the Securities Regulation Code
30 of the Securities Exchange Act, which was then in (SRC) at the time the case was decided, the Under the law, what is required to be
force. Supreme Court ruled that the investigation disclosed is a fact of “special significance”
against the respondents for insider trading which may be (a) a material fact which
should be undertaken by the proper authorities would be likely, on being made generally
in accordance with the SRC. available, to affect the market price of a
security to a significant extent, or (b) one
which a reasonable person would consider
especially important in determining his
course of action with regard to the shares
of stock. Section 30 of the Revised
Securities Act provides that if a fact affects
the sale or purchase of securities, as well
as its price, then the insider would be
required to disclose such information to
the other party to the transaction involving
the securities. This is the first definition
given to a “fact of special significance.”

Among the factors to be considered in


determining whether information is
material under this test are the degree of
its specificity, the extent to which it differs
from information previously publicly
disseminated, and its reliability in light of
its nature and source and the
circumstances under which it was
received.

Materiality Concept - A discussion of the


“materiality concept” would be relevant to
both a material fact which would affect the
market price of a security to a significant
extent and/or a fact which a reasonable
person would consider in determining his
cause of action with regard to the shares of
stock. Significantly, what is referred to in
our laws as a fact of special significance is
referred to in the U.S. as the “materiality
concept” and the latter is similarly not
provided with a precise definition. In Basic
v. Levinson, the U.S. Supreme Court
cautioned against confining materiality to a
rigid formula.
SEC v. Texas See “in connection with” case.
Gulf Sulphur
Chiarella v. US Chiarella is a printer by trade. In 1975 & 1976, he Can Chiarella be prosecuted under Rule 10b-5 Duty to Disclose Insider Information Arises
worked as a "markup man" in the New York composing for violating fiduciary duties to corporate from –
room of Pandick Press, a financial printer. Among stockholders? (i) the existence of a relationship affording
documents he handled were 5 announcements of access to inside information intended to be

88
corporate takeover bids. When these documents were NO. The lower courts failed to identify a available only for a corporate purpose, &
delivered to the printer, the identities of the acquiring relationship between Chiarella & the sellers of (ii) the unfairness of allowing a corporate
and target corporations were concealed by blank the securities that could give rise to a duty. Its insider to take advantage of that
spaces or false names. The true names were sent to decision thus rested solely upon its belief that information by trading without disclosure.
the printer on the night of the final printing. the federal securities laws have "created a But one who fails to disclose material
Chiarella, however, was able to deduce the names of system providing equal access to information information prior to the consummation of a
the target companies before the final printing from necessary for reasoned and intelligent transaction commits fraud only when he is
other information contained in the documents. Without investment decisions." The use by anyone of under a duty to do so. And the duty to
disclosing his knowledge, he purchased stock in the material information not generally available is disclose arises when one party has
target companies and sold the shares immediately fraudulent, this theory suggests, because such information "that the other party is entitled
after the takeover attempts were made public. By this information gives certain buyers or sellers an to know because of a fiduciary or other
method, petitioner realized a gain of slightly more than unfair advantage over less informed buyers and similar relation of trust and confidence
$30,000 in the course of 14 months. Subsequently, sellers. between them."
the SEC began an investigation of his trading activities. This reasoning suffers from two defects. First, SEC recognizes a relationship of trust and
Eventually, Chiarella was indicted on 17 counts of not every instance of financial unfairness confidence between the shareholders of a
violating § 10(b) of the Securities Exchange Act of constitutes fraudulent activity. Second, the corporation and those insiders who have
1934 (1934 Act) and SEC Rule 10b-5. After petitioner element required to make silence fraudulent -- a obtained confidential information by
unsuccessfully moved to dismiss the indictment, he duty to disclose -- is absent in this case. No duty reason of their position with that
was brought to trial and convicted on all counts. could arise from petitioner's relationship with the corporation. This relationship gives rise to
sellers of the target company's securities, for a duty to disclose because of the
petitioner had no prior dealings with them. He "necessity of preventing a corporate insider
was not their agent, he was not a fiduciary, he from tak[ing] unfair advantage of the
was not a person in whom the sellers had placed uninformed minority stockholders."
their trust and confidence. He was, in fact, a
complete stranger who dealt with the sellers only A purchaser of stock who has no duty to a
through impersonal market transactions. prospective seller because he is neither an
When an allegation of fraud is based upon insider nor a fiduciary has been held to
nondisclosure, there can be no fraud absent a have no obligation to reveal material facts.
duty to speak. A duty to disclose under § 10(b)
does not arise from the mere possession of
nonpublic market information. The contrary
result is without support in the legislative history
of § 10(b), and would be inconsistent with the
careful plan that Congress has enacted for
regulation of the securities markets.

Did Chiarella violate § 10(b) by violating his


fiduciary duty owed to his “employer” or
“principal,” the corporation?

UNCLEAR. In its brief, U.S. offers an alternative


theory to support petitioner's conviction. It
argues that petitioner breached a duty to the
acquiring corporation when he acted upon
information that he obtained by virtue of his
position as an employee of a printer employed by
the corporation. The breach of this duty is said to
support a conviction under § 10(b) for fraud
perpetrated upon both the acquiring corporation
and the sellers.
We need not decide whether this theory has

89
merit, for it was not submitted to the jury.
US v. O’Hagan O'Hagan was a partner in the law firm of Dorsey & (1) Is a person who trades in securities for Under the "traditional'' or "classical theory''
Whitney (D&W) in Minneapolis, Minnesota. In July personal profit, using confidential information of insider trading liability, §10(b) and Rule
1988, Grand Met, a company based in London, misappropriated in breach of a fiduciary duty to 10b-5 are violated when a corporate
England, retained D&W as local counsel to represent the source of the information, guilty of violating insider trades in the securities of his
Grand Met regarding a potential tender offer for the §10(b) and Rule 10b-5? corporation on the basis of material,
common stock of the Pillsbury Company. Both Grand nonpublic information. Trading on such
Met & D&W took precautions to protect the Yes. Misappropriation (under the information qualifies as a "deceptive
confidentiality of Grand Met's tender offer plans. misappropriation theory) satisfies §10(b)'s device'' under §10(b), we have affirmed,
O'Hagan did no work on the Grand Met representation. requirement that chargeable conduct involve a because "a relationship of trust and
Dorsey & Whitney withdrew from representing Grand "deceptive device or contrivance'' used "in confidence exists between the
Met on Sep. 9, 1988. Less than a month later, on Oct. connection with'' the purchase or sale of shareholders of a corporation and those
4, 1988, Grand Met publicly announced its tender offer securities.” Misappropriators deal in deception. A insiders who have obtained confidential
for Pillsbury stock. fiduciary who "pretends loyalty to the principal information by reason of their position with
On Aug. 18, 1988, while D&W was still representing while secretly converting the principal's that corporation.'' The classical theory
Grand Met, O'Hagan began purchasing call options for information for personal gain, dupes or defrauds applies not only to officers, directors, and
Pillsbury stock. Each option gave him the right to the principal.” other permanent insiders of a corporation,
purchase 100 shares of Pillsbury stock by a specified As to the §10(b) requirement that the but also to attorneys, accountants,
date in Sep. 1988. By the end of Sep., he owned 2,500 misappropriator's deceptive use of information consultants, and others who temporarily
unexpired Pillsbury options, more than any other be "in connection with the purchase or sale of a become fiduciaries of a corporation.
individual investor. O'Hagan also purchased some security,'' this element is satisfied because the
5,000 shares of Pillsbury common stock, at a price just fiduciary's fraud is consummated, not when the The "misappropriation theory'' holds that a
under $39 per share. When Grand Met announced its fiduciary gains the confidential information, but person commits fraud "in connection with''
tender offer in October, the price of Pillsbury stock rose when, without disclosure to his principal, he uses a securities transaction, and thereby
to nearly $60 per share. O'Hagan then sold his Pillsbury the information to purchase or sell securities. violates §10(b) and Rule 10b-5, when he
call options and common stock, making a profit of more The securities transaction and the breach of duty misappropriates confidential information
than $4.3 million. thus coincide. This is so even though the person for securities trading purposes, in breach
or entity defrauded is not the other party to the of a duty owed to the source of the
Section 14(e) prohibits "fraudulent acts in connection trade, but is, instead, the source of the nonpublic information. Under this theory, a fiduciary's
with any tender offer,'' and authorizes the SEC to information. A misappropriator who trades on the undisclosed, self-serving use of a
"define, and prescribe means reasonably designed to basis of material, nonpublic information, in short, principal's information to purchase or sell
prevent, such acts.'' Adopted under that statutory gains his advantageous market position through securities, in breach of a duty of loyalty and
authorization, Rule 14e-3(a) forbids any person to trade deception; he deceives the source of the confidentiality, defrauds the principal of
on the basis of material, nonpublic information that information & simultaneously harms members of the exclusive use of that information. In
concerns a tender offer and that the person knows or the investing public. lieu of premising liability on a fiduciary
should know has been acquired from an insider of the relationship between company insider and
offeror or issuer, or someone working on their behalf, (2) Did the Commission exceed its rulemaking purchaser or seller of the company's stock,
unless within a reasonable time before any purchase or authority by adopting Rule 14e-3(a), which the misappropriation theory premises
sale such information and its source are publicly proscribes trading on undisclosed information in liability on a fiduciary-turned-trader's
disclosed. Rule 14e-3(a) imposes a duty to disclose or the tender offer setting, even in the absence of a deception of those who entrusted him with
abstain from trading whether or not the trader owes a duty to disclose? access to confidential information.
fiduciary duty to respect the confidentiality of the The two theories are complementary, each
information. No. It is a fair assumption that trading on the addressing efforts to capitalize on
basis of material, nonpublic information will nonpublic information through the
often involve a breach of a duty of confidentiality purchase or sale of securities. The
to the bidder or target company or their classical theory targets a corporate
representatives. The SEC, cognizant of proof insider's breach of duty to shareholders
problems that could enable sophisticated traders with whom the insider transacts; the
to escape responsibility for such trading, placed misappropriation theory outlaws trading on
in Rule 14e-3(a) a "disclose or abstain from the basis of nonpublic information by a
trading'' command that does not require specific corporate "outsider'' in breach of a duty

90
proof of a breach of fiduciary duty. Insofar as it owed not to a trading party, but to the
serves to prevent the type of misappropriation source of the information. The
charged against O'Hagan, the Rule is therefore a misappropriation theory is thus designed to
proper exercise of the SEC's prophylactic power "protect the integrity of the securities
under §14(e). markets against abuses by ‘outsiders’ to a
corporation who have access to
confidential information that will affect the
corporation's security price when revealed,
but who owe no fiduciary or other duty to
that corporation's shareholders.'

Similarly, full disclosure forecloses liability


under the misappropriation theory:
Because the deception essential to the
misappropriation theory involves feigning
fidelity to the source of information, if the
fiduciary discloses to the source that he
plans to trade on the nonpublic
information, there is no "deceptive device''
and thus no §10(b) violation-although the
fiduciary-turned-trader may remain liable
under state law for breach of a duty of
loyalty.

To be criminally liable under the provisions,


there must be –
(1) Willful intent
(2) Knowledge of the rule
SEC v. Adler The SEC brought civil action against 4 individuals: Do § 10(b), Rule 10b-5, & § 17(a) require a The Knowing Possession Test. There is a
Pergram, Adler, Choy, and Ishler for insider trading causal connection between the material violation as long as trading was done while
(violations of § 10(b), SEC Rule 10). nonpublic information and the insider's trading in possession of a non-public material
Pergram is a stockholder & member of the Board of or whether knowing possession of material information regardless of whether or not
Comptronix Corp. In a meeting attended to by Pergram nonpublic information while trading is sufficient such information was the reason behind
in 1989, it was disclosed that the Company expects to for liability? the purchase/sale transaction.
suffer losses because its largest customer substantially
reduced its orders. When this information was released YES. The use test is the appropriate test. The Use Test. Mere possession of a non-
to the public a month after, the price of the Company’s However, if the trading was done while in public material information does not
shares significantly declined. However, it appears that possession of the material nonpublic constitute insider trading as long as such
just 5 days after the meeting, Pegram sold 20,000 information, a presumption arises that such information was not the reason (i.e., was
shares of Comptronix stock. The SEC maintains that by information was used. Nevertheless, such not used) for the purchase/sale
selling 20,000 shares of Comptronix stock before the presumption can be rebutted. transaction. Causal connection between
October 6 press release, Pegram avoided $17,625 in Applying the test to the case, the Court held that the possession of the information & the
losses. due to the circumstances surrounding the phone transaction must be established.
In 1992, the Company’s board held another meeting calls, it was established that defendants traded Defendants in this case argued that they
attended to by Adler, an outside director of Comptronix. on the stocks while in possession of the non- had predetermined plans to sell the shares
In the meeting, it was disclosed that some of the public material information. Hence, there is a even prior to their knowledge of the non-
company’s top officials are engaged in a fraudulent presumption that they used such information. public material information.
scheme by manipulating accounting entries. After it However, since all of them contended that had
was disclosed to the public later on, the company’s pre-determined plans to sell the shares prior to The use test is the appropriate test.
stock price declined. However it was discovered that the acquisition of the information, the Court However, if the trading was done while in
just 1 day after the meeting, Adler made phone calls to remanded the case for the jury to determine possession of the material nonpublic

91
Pergram, Choy, & Ishler, disclosing to them the genuine issues of material fact (e.g., whether the information, a presumption arises that
information discussed in the meeting. Minutes after the information hastened the timing of Pegram's such information was used. Nevertheless,
call, the 3 immediately called their brokers to sell their decision to sell or affected the price at which he such presumption can be rebutted.
shares. was willing to sell).
SEC’s ARGUMENT: The Knowing Possession Test.
There is a violation as long as trading was done while in
possession of a non-public material information
regardless of whether or not such information was the
reason behind the purchase/sale transaction.
PERGRAM’s ARGUMENT: The Use Test. Mere
possession of a non-public material information does
not constitute insider trading as long as such
information was not the reason (i.e., was not used) for
the purchase/sale transaction. Causal connection
between the possession of the information & the
transaction must be established. Defendants in this
case argued that they had predetermined plans to sell
the shares even prior to their knowledge of the non-
public material information.
Dirks v. SEC Dirks received material information from insiders of Is Dirks guilty of violating securities laws in A tippee owes a fiduciary duty to
Equity Funding of America of fraudulent practices relation to disclosure? shareholders if the tippee received
occurring within the company; these insiders wanted material nonpublic information from an
Dirks to investigate & to report fraudulent practices in NO. Section 10(b) should not be read so broadly insider that breached his fiduciary duty by
their company & to disclose this publicly. Dirks’s acts & as to hold tippees liable when they use inside disclosing the information, and the tippee
the results of his investigation (in which he discovered information received by insiders who were not knows of the breach.
massive fraud by the company’s officers) spread breaching their fiduciary duties in their
around in the investing community, leading to a disclosure. The Court held that the insider must
substantial drop in the prices of the stocks of the first breach a fiduciary duty and then the tippee’s
company & an eventual investigation into Equity conduct will be examined to see if they breached
Funding of America by the insurance commission of a duty.
California. Furthermore, SEC also investigated Dirks’s
exact role in the scheme. SEC found that Dirks had
aided and abetted violations of § 17(a) of the
Securities Act of 1933 by repeating the allegations of
fraud to members of the investment community who
later sold their Equity Funding stock, though he was
only censured.
Elkind v. Liggett See “Regulation of Listed Companies” Section
& Myers
Joseph v. The defendants, directors of the Farnsworth Company, Does the complaint fail to state a claim upon May A, who purchased stock of the F
Farnsworth published false statements of material facts concerning which relief can be granted? Corporation on November 12th and B, who
the financial condition of the company to induce likewise purchased stock of the same
purchases of shares of stock in that company owned by YES, the case should be dismissed. The instant corporation on December 13th, each on a
them. Soon after defendants had sold all their shares complaint fails to state a claim upon which relief national stock exchange and each at a
of stock, the plaintiff's, misled by the false statements, can be granted. This complaint asserts the right price higher than he would have paid
purchased some Farnsworth shares on the stock to a private recovery by Joseph and Felshin from therefor had he known the true financial
exchange where Farnsworth stock was listed. When, the defendants, of the difference between that condition of F, recover from C, D and E, the
later, the true facts about the company's financial which the former paid for their stock in the directors and officers of the corporation,
condition were disclosed, the price of the stock fell. corporate defendant and that which they would the difference between that paid and that
Plaintiffs sold at the lower price, with resultant damage. have paid had the latter not remained mute which would have been paid had C, D and
On motion by the defendants, the trial judge dismissed between Mar. 19th and Oct. 30th, 1948 when E disclosed, between the previous March

92
the complaint. His basic reason was the absence of any the individual defendants were unloading their 19th and October 30th when they were
'semblance of privity' between plaintiffs and own holdings in the company because they knew unloading their own stock in F, that F was
defendants. of its precarious plight. Assuming both of these in a straitened financial condition?
acquisitions to have occurred after the issuance This case says, no.
by the defendants of the fraudulent financial
statement of the corporate defendant on Nov. As to the remaining five individual
12th, 1948 (as of Oct. 31st, 1948) the complaint defendant- movants, they, admittedly for
avoids any assertion that Felshin and Joseph the purpose of these motions, sold on the
relied on that statement. A semblance of privity exchange between March 19th and
between the vendor and purchaser of the October 30th, 1948 stock in the corporate
security in connection with which the improper defendant and by their concealment
act, practice or course of business was invoked realized bloated prices. Their silence
seems to be requisite and it is entirely lacking cannot be deemed to be the employment
here. of "any device, scheme or artifice"
The complaint avoids any assertion that Felshin contemplated by the interdiction of Rule X-
and Joseph relied on that statement. 10(b) (5) (a) of the Commission.
The most that is ventured is the allegation that
the financial statement was issued by A semblance of privity between the vendor
defendants with the full knowledge that "persons and purchaser of the security in connection
such as the plaintiffs and others similarly with which the improper act, practice or
situated would rely upon such information in course of business was invoked seems to
purchasing shares of stock of defendant be requisite and it is entirely lacking here.
Farnsworth." Thus, the fraudulent statement and
its ultimate correction on January 12th, 1949
become merely probative of the scienter of the
individual defendants.
Shapiro v. Merrill Lynch and some of its officers were advised by Did Merrill Lynch violate Section 10b and Rule There’s not only a duty to disclose, but
Merrill Lynch Douglas Aircraft of certain material adverse inside 10b-5 when it divulged the information to its also, to those who learn of the information,
information regarding the latter’s earnings. Douglas clients? a duty to abstain from trading.
expected to have little to no profit, but it did not
disclose such information in its report to the public. The YES. With respect to Merrill Lynch and the
insider information was given to Merrill Lynch on individual defendants (the non-trading 'tippers'),
account of it being the prospective underwriter for their divulging of confidential material inside
Douglas’ debenture issue. Subsequently, Merrill Lynch information to their customers who sold Douglas
informed its clients of the insider information. In both stock on the basis of such information clearly
cases, the information was not yet announced to the violated Section 10(b) and Rule 10b-5. In SEC v.
public. Texas Gulf Sulphur Co., the Court held that two
Merrill Lynch’s clients sold their shares in Douglas prior 'tippers' violated the antifraud provisions of the
to Douglas’ public disclosure of its revised earnings securities laws by disclosing material inside
information, and without them having disclosed this information to individuals who subsequently
information to the investing public. entered into transactions on the basis of that
Plaintiffs, on the other hand, bought Douglas’ shares information.
without knowledge of the material adverse earnings
information released by Douglas. Did Merrill Lynch’s clients violate the anti-fraud
provisions of the Securities Exchange Act when
they traded Douglas’ stocks without disclosing
the material inside information which have been
disclosed to them by Merrill Lynch?

YES. The other defendants, labeled as “trading


tippees,” are also covered by the duty to disclose

93
such material information to the public. The
Court is not persuaded by the selling defendants'
argument that as tippees they were not able to
make effective public disclosure of information
about a company with which they were not
associated; for the duty imposed is not a naked
one to disclose, but a duty to abstain from
trading unless they do disclose.
Bateman Bateman Eichler, Hill Richards, Inc. (the "Petitioner"), is Can the pari delicto doctrine be applied to Because a tippee's duty to disclose
Eichler, Hill alleged to have provided the Respondents, Carl F. exonerate Bateman from giving materially material nonpublic information typically is
Richards, Inc. v. Berner and others (the "Respondents"), "false and incomplete information? derived from the insider-tipper's duty, the
Berner materially incomplete information about the tippee in these circumstances cannot be
corporation on the pretext that it was accurate inside No. The in pari delicto defense means "in a case said to be as culpable as the tipper whose
information." Essentially, Petitioner told Respondents of equal or mutual fault, the position of the breach of duty gave rise to the tippee's
some insider information which turned out to be false, defending party is the better one." There are two liability in the first place. Moreover, insiders
so that they would be induced to purchase stocks. main purposes for the defense. and broker-dealers who selectively disclose
Respondents took the bait, bought stocks based on the First, courts should not "mediate disputes among material nonpublic information about the
false information, & suffered losses. They now sue wrongdoers." Second, denying wrongdoers issuer commit a potentially broader range
Petitioner. The District Court dismissed the access to the courts plays an important deterrent of violations than do tippees who trade on
Respondents’ action because "trading on insider role. In the past, this defense has been narrowly the basis of that information. Absent other
information is itself a violation of rule 10b-5." construed, but in Perma Life Mufflers, Inc. v. culpable actions by a tippee that can fairly
Additionally, the Respondents’ complaint made clear International Parts Corp., the court observed "the be said to outweigh these violations by
that they themselves "violated the particular statutory inappropriateness of invoking broad common-law insiders and broker-dealers, the tippee
provision under which recovery is sought." The Ninth barriers to relief where a private suit serves cannot properly be characterized as being
Circuit reversed the district court and reasoning important public purposes." In Perma Life, the of substantially equal culpability as his
"securities professionals and corporate officers who court observed the antitrust laws "are best tippers.
have allegedly engaged in fraud should not be served by insuring that the private action will be
permitted to invoke the in pari delicto doctrine to shield an ever-present threat to deter anyone Pari delicto is generally not available as a
themselves from the consequences of their fraudulent contemplating [illegal] business behavior." The defense in the tipee-tipper trading context.
misrepresentation." court concluded that the "views expressed in
[Perma Life] apply with full force to implied
causes of action under the federal securities
laws. Accordingly, a private action for damages in
these circumstances may be barred on the
grounds of the plaintiff"s own culpability only
where (1) as a direct result of his own actions,
the plaintiff bears at least substantially equal
responsibility for the violations he seeks to
redress, and (2) preclusion of suit would not
significantly interfere with the effective
enforcement of the securities laws and
protection of the investing public." Furthermore,
the court observed that disallowing the in pari
delicto defense will "best promote the primary
objective of the federal securities laws–
protection of the investing public and the
national economy through the promotion of "a
high standard of business ethics ... in every facet
of the securities industry." " If the outcome were
otherwise, the court stressed the problems the
SEC would have policing false tipping and the

94
importance of deterring insider trading by
corporate insiders and broker-dealers.

US v. Chestman See “Tender Offer” Section A fiduciary relationship to the insider is


necessary to make one liable as an insider.
3. SHORT SWING PROFITS

SECURITIES REGULATION CODE

Section 23, Securities Regulation Code


Transactions of Directors, Officers and Principal Stockholders.
23.1. Every person who is –
iii. Directly or indirectly the beneficial owner of more than 10% of any class of any equity security which satisfies the requirements of Subsec. 17.2, or
iv. A director or an officer of the issuer of such security,
shall file, at the time either such requirement is first satisfied or within 10 days after he becomes such a beneficial owner, director, or officer,
(4) A statement with the SEC and,
(5) If such security is listed for trading on an Exchange, also with the Exchange, of the amount of all equity securities of such issuer of which he is the beneficial owner, &
(6) Within 10 days after the close of each calendar month thereafter, if there has been a change in such ownership during such month, shall file with the SEC & if such
security is listed for trading on an Exchange, shall also file with the Exchange, a statement indicating his ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month.

23.2. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to
the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of less than 6 months,
unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of
holding the security purchased or of not repurchasing the security sold for a period exceeding 6 months.
• Suit to recover such profit may be instituted before the RTC by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the
issuer shall fail or refuse to bring such suit within 60 days after request or shall fail diligently to prosecute the same thereafter, but no such suit shall be brought more
than 2 years after the date such profit was realized.
• This subsection shall not be construed to cover any transaction where such beneficial owner was not such BOTH at the time of the purchase and sale, or the sale and
purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the
purpose of this subsection.

23.3. It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer if the person selling the security or his
principal:
(a) Does not own the security sold; or
(b) If owning the security, does not deliver it against such sale within 20 days thereafter, or does not within 5 days after such sale deposit it in the mails or other usual
channels of transportation;
• BUT no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to make such delivery or
deposit within such time, or that to do so would cause undue inconvenience or expense.

23.4. The provisions of Subsec. 23.2 shall not apply to any purchase and sale, or sale and purchase, and the provisions of Subsec. 23.3 shall not apply to any sale, of an
equity security not then or thereafter held by him in an investment account, by a dealer in the ordinary course of his business and incident to the establishment or
maintenance by him of a primary or secondary market, otherwise than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems
necessary or appropriate in the public interest, define and prescribe terms and conditions with respect to securities held in an investment account and transactions made in
the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market.
i. Profit Realized
Smolowe v. Seskis was President & Kaplan was VP of Delendo Is the provision on short swing profits Subdivision (b) provides that any purchase
Delendo Corp. They were both owners of common stock in the constitutional? And can Kaplan & Seskis be and sale, or sale and purchase, within the
company since April 7, 1933 (with 12% shares each). liable? period of six months, by either a beneficial
Seskis purchased 14,920 shares of the corporation's owner or officer or director, if profitable,
stock on Jan. 19, 1940, from the Distillers & Brewers The provision is constitutional; it refers to those shall be for the benefit of the issuer,

95
Corporation of America, paying $24,245. On Feb. 28, who hold a fiduciary office & may not profit by regardless of any showing of unfair use of
1940, he purchased 584 shares on the New York Curb reason of the trust given to them. inside information. Congress did not
Exchange, paying $905.20, the total purchase price of prohibit such transactions. It merely sought
the two lots being $25,150.20. He had previously, and Seskis & Kaplan were held liable (for Kaplan, I to remove the selfish incentive. It defined
in 1936, borrowed from the Inwood Corporation (wholly don’t know why). what is commonly called a "short swing" as
owned by the defendant Kaplan), $54,536.03. He one occurring within a period of 6 months.
reduced that obligation by payments from time to time, The defendant Seskis contends that there was
and completely paid it off on April 4, 1940, by no sale when he paid off his debt to Kaplan by It is contended by defendants that sales
transferring to Kaplan 15,800 shares of the stock of transferring 15,800 shares to him. The and purchases and purchases and sales
the corporation at $2.25 a share, a total of $35,550. provisions in subdivision (b) cannot be given must be of identical certificates in order to
The stock certificates actually delivered by Seskis to such a restricted meaning. The definition of sale bring them within the subdivision. Were
Kaplan were not the same as those acquired by Seskis in section 3(a), clearly contemplates a sale "or such a construction to be adopted, the
during the period sued for, but were certificates of other disposition" of the security. intention of Congress would clearly be
stock which had been acquired by the latter, some on destroyed. Persons engaging in the
Aug. 3, 1934, & the balance on May 4, 1937. The He further contends that such purchase and sale particular transaction could thus easily
plaintiffs, angry stockholders of Delendo Corp., claim and sale and purchase must be made upon a evade the subdivision by drawing upon a
that having purchased 15,504 shares at $25,150.20, national exchange, and that but 584 shares of reserve of stock which he might have
Seskis sold 15,800 shares to Kaplan, making a profit his were so transacted. Subdivision (b), however, owned for some period of time, and which
upon the 15,504 shares of $9,733.80. does not so limit the transaction; and subdivision makes Section 16(a) and (b) applicable to
(a) obviously makes the section applicable to an him. If, after a sale, he repurchased, the
equity security "which is registered on a national possibility of his receiving the identical
securities exchange", as it is admitted the stock certificates would be so remote that again
in question here was. the section would have no application.

And, finally, he contends that his transfer of


15,800 shares to Kaplan comes within the
exemption — "unless such security was acquired
in good faith in connection with a debt previously
contracted". The exemption clearly relates to
equity securities "acquired" and not to equity
securities sold or otherwise disposed of. It does
benefit the defendant Kaplan.
Chemical Fund Since 1954, Chemical Fund (an investment company) Did the purchase of debentures in exchange for Owners of Debentures are not
v. Xerox held an investment in Xerox common stock 2.36% of common shares in 1962 amount to short swing contemplated under the provisions on
the company’s shares outstanding. It also acquired profits for Chemical Fund? short swing profits. The Section is
4.5% Xerox Convertible Subordinated Debentures due specifically concerned with "directors,
May 1, 1981 after they were issued in 1961. Each NO. To hold that the beneficial owner of 10% or officers and principal stockholders," and
$1,000 Debenture was convertible into approximately more of the Debentures is liable under Sec. has adopted a rule that any stockholder
9.5 shares of common stock and was protected against 16(b) would here impose a liability on an owner owning more than 10% of an equity
dilution of the conversion right, but carried no voting who by conversion of all his Debentures would security is presumed to be an insider who
rights or participation in the equity of Xerox. obtain less than ½ of one percent of Xerox will receive information regarding the
In Dec. 1962, Chemical Fund, pursuant to a program common stock. At the same time a holder of as company before it is made public. The
designed to improve its yield from its Xerox investment much as 9% of Xerox common stock would not reason that officers, directors and 10%
without sacrificing its ability to take advantage of the be liable. Thus Chemical Fund, able to command stockholders have been held to account for
continuing appreciation of Xerox common stock, only 2.72% of Xerox common, would be liable for profits on short-swing transactions is
commenced to sell some of its Xerox common stock short-swing profits, although the holder of 9% of because they are the people who run the
and to purchase Xerox Debentures convertible into the the common, more than 3 times Chemical Fund's corporation, and who are familiar with its
same number of shares of common. Thus, by the end total potential holding, would not be liable. We day to day workings. This is necessarily so
of 1962, it had 10% worth of debentures in Xerox do not believe that Congress could have meant of officers and directors, and there was
(which had a total of $15M debentures out in the to apply the provisions of the Act to any holder of ample basis for concluding that
market). When Xerox redeemed the debentures, Convertible Debentures whose possible equity stockholders owning more than 10% of the

96
Chemical Fund was given shares the equivalent shares position following full conversion of its voting stock of the company, if not in
to the 10% debentures it owned. This resulted in a Debentures would be less than 10% of the class control, would be closely advised, as their
profit for Chemical Fund, since the price of the shares of equity stock then outstanding. votes usually elected the directors who in
had kept rising all the way until 1963, when Xerox had turn elected the officers, where these were
the redemption. not elected directly by the stockholders.
But there is no reason whatever to believe
that any holder of any Convertible
Debentures would, by reason of such
holding, normally have any standing or
position with the officers, directors or large
stockholders of a company so that such
holder of Debentures would be the
recipient of any inside information.
ii. “Officer” or “Director”
CRA v. Cotty Crotty was an “officer” of United Artists Corp., a film Is Crotty, corporate VP, considered an officer The functions of an employee determine
distribution company. Crotty was accused of engaging within the ambit of the short swing profit whether or not he is an officer of the
in short swing profit transactions. He headed the provisions? corporation, NOT his job title.
department which bought films, with a staff of 30
people. The district court held him not liable because NO. It is immaterial how an employee's functions Since the statute on short swing profits
he was deemed not an "officer" within the meaning of are labeled or how defined in the by-laws, or that imposes strict liability, it is to be applied
Sec. 16(b) — despite his position as a corporate VP — he does or does not act under the supervision of only when doing so "best serves the
as he was "a middle management employee of United some other corporate representative. congressional purpose of curbing short-
Artists whose duties did not provide access to any The evidence indicated that Crotty's appointment swing speculation by corporate insiders."
confidential information about the company's financial as a VP, two years after he became a head film Thus, a plaintiff must establish that it is
plans or future operations." buyer, was essentially honorary. The more likely than not that the employee's
Appellant asserts that the district court erred in holding appointment was accompanied by no raise in duties gave him access to inside
that Crotty was not an officer because (1) Crotty's lack pay or change in responsibilities. Viewing his information (based on the case of Colby,
of access to confidential or inside information is responsibilities both before and after the where an employee with executive
irrelevant since Sec. 16(b) imposes strict liability on any appointment, Crotty had no access to inside functions was deemed by the court to be
officer engaging in short-swing trading regardless of information such as the financial or operational an officer). A plaintiff need not show that
whether he has access to inside information, and (2) in plans. He was not a director of the company, the employee actually obtained inside
the alternative, appellant demonstrated in the district never attended a directors’ meeting, and never information or used it to his advantage.
court that Crotty had access to inside information. received any information from the Board of
Directors that was not available to the general Dissent: Statute says officer; it should be
public. officer.
The only information that Crotty had that
arguably might be said to be inside information
was that concerning daily revenue receipts or
"film grosses" from the company's movie
exhibition. Indeed, since appellees originally had
failed to show that this information could not be
used by Crotty to his advantage, the district court
denied appellees' motion for summary judgment.
The trial testimony, however, established that
this was not inside information. Entertainment
Data, Inc., an independent contractor, collected
the daily film grosses from the western division
theaters & gave them to Crotty on an overnight
basis. Entertainment Data, however, also gave
daily film gross information to most of the major
movie exhibitors and distributors in Los Angeles

97
and San Francisco. This information also was
distributed by Entertainment Data to daily trade
publications such as Daily Variety and The
Hollywood Reporter. Accordingly, there was
substantial evidence to support the district
court's finding that film gross information was
not inside information and gave Crotty no
advantage over other investors. This is not the
sort of information that would "aid [one] if he
engaged in personal market transactions".
Feder v. Martin Bunker served as a director of Sperry from April 29, Can Martin Marietta be held liable for short The liability imposed for short swing profits
1963 to August 1, 1963, when he resigned. During the swing profits on Sperry’s stocks, made when one may extend to ex-directors given the
period Dec. 14, 1962 through July 24, 1963 (i.e., prior of its directors sat on the Board of Sperry? circumstances.
to and slightly overlapping with Bunker’s directorship),
Martin Marietta accumulated 801,300 shares of Sperry YES. In the case of a director who resigns his Deputization theory – if the director was
stock of which 101,300 shares were purchased during directorship before the sale, it is possible for self-serving or served the interest of the
Bunker's directorship. Between August 29, 1963 & both the purchase and sale to have been unfairly corporation; makes corporations liable for
September 6, 1963 (after Bunker resigned), Martin motivated by insider knowledge; whereas, if the short swing profits as if they are directors,
Marietta sold all of its Sperry stock. Plaintiff seeks to purchase were made prior to the directorship officer or principal stockholders when their
reach, on behalf of the Sperry Rand Corporation, the only the sale could be motivated by inside directors, officers, or principal stockholder
profits made by Martin Marietta from the 101,300 information. Clearly, therefore, a 'short swing' serve on the Board of the corporation
shares of stock acquired between April 29 and August sale or purchase by a resigning director must be whose shares are bought & sold, on behalf
1, all of which, of course, were sold within 6 months a transaction which may be considered a short of and representing their corporations.
after purchase. swing profit transaction.
Factually, the court found that Bunker sat on the Board
of Perry to represent the interests of Martin Marietta.
Levy v. Seaton Levy was VP of
The undisputed General
facts are that Motors
Seaton was(GM) from
a Vice Jan. 1,of 1957
President Where both the purchase and sale within 6 Based on reportorial requirements under
to Aug. Motors
General 31, 1970.
in chargeGMofhad given Levy
its personnel options
staff from to 1, 1957
January months of each other occur after the officer has securities law, where a director purchase
through August 31, 1970. His resignation as Vice President became
purchase 2,151 of its shares in 1962, which he did not
effective at the close of business on August 31, 1970 (Affd. of Pltf.
left the corporation, is he still liable for short securities, resigns, and then sells
exercise
Counsel in even
Opp. p.after
2). he resigned. In Nov. 24, 1970, swing profits? securities within 6 months, he must still
Seaton
On Marchsold 2,000
19, 1962, shares
General at $76
Motors granted & an
in option
Nov. to
27,
the1970, report. But where both purchase & sale
acquired shares
defendant Seaton forat
the$75. Meanwhile,
purchase of its commontheshares
priceatwhen
$56.82the NO. Levy cannot be made liable since he was not occur after resignation, the officer is not
per share. On August 31, 1970, the date when his resignation became
option was exercisable was $78.
effective, Seaton still had not exercised his option for 2,151 shares
a director when both the purchase and the sale required to report, & will also not be liable
(Affd. of Pltf. Counsel in Opp. p. 2). The option by its terms would occurred. for short swing profits.
expire three months after the resignation became effective, or on
November 30, 1970. What share price is the basis for computation of
On November 24, 1970, Seaton sold 2,000 shares of General Motors
stock at $75.50 per share. On November 27, 1970 Seaton acquired
liabilities (i.e., the profits of the director, officer or
2,151 shares at $56.82 per share by exercise of the option which had stockholder) arising from short swing profits?
been granted in 1962 (Affd. of Pltf. Counsel in Opp. p. 2). The plaintiff
claims a "short-swing" profit of $37,400 the difference between the An option is only a purchase when exercised, not
price paid by Seaton under his option and the price he received for an
equivalent number of shares
granted. Levy did not profit in this case; when the
option was exercisable, the share was worth
$78, but he sold it at $75.
iii. “10% Shareholder”
Foremost- Provident, a personal holding company contemplating Is Provident liable for short swing profits resulting By virtue of the exemptive provision, a
McKesson v. liquidation, sold assets to Foremost. Provident received from this transaction? beneficial owner is accountable under §
Provident from Foremost as part of the purchase price convertible 16(b) in a purchase-sale sequence such as
debentures which, if converted into Foremost's NO. Congress recognized a distinction between was involved here only if he was such an
common stock, would make Provident a holder of more short-term trading by mere stockholders and owner "before the purchase." Thus, the fact
than 10% of Foremost's outstanding common stock. A such trading by directors and officers. The that respondent was not a beneficial owner
few days later, pursuant to an underwriting agreement, legislative discourse revealed that Congress before the purchase removed the

98
one of the debentures was sold to a group of thought that all short-swing trading by directors transaction from the operation of § 16(b).
underwriters for cash in an amount exceeding its face and officers was vulnerable to abuse because of
value. After making debenture and cash distributions to their intimate involvement in corporate affairs. *Note that in U.S. law, the rule exempting
its stockholders, Provident dissolved. But trading by mere stockholders was viewed as those who were not a director, officer or
being subject to abuse only when the size of their principal stockholder at the time of both
holdings afforded the potential for access to (1) purchase & (2) sale applies explicitly
corporate information. only to beneficial owners (10%).
Reliance v. Emerson Electric Co. was unsuccessful in an attempt to Is Emerson liable for short swing profits? Beneficial owners of 10% of the stock have
Emerson take over Dodge Manufacturing Co. holdings to less to be such both at time of purchase & sale
than ten percent of Dodge's outstanding shares. NO. Under the terms of § 16(b), respondent is to be liable for short swing profits. Liability
Emerson Electric acquired 13.2% of the Dodge's not liable to petitioner (Dodge's successor) for cannot be imposed simply because the
outstanding stock on June 16, 1967, at the price of profits derived from the sale of the 9.96% to investor structured his transaction with the
$63 per share. Dodge later approved a merger with the Dodge within six months of purchase. A company intent of avoiding liability under § 16 (b).
Reliance Electric Company. In an attempt to immunize can deliberately split its sale of shares into more The question is, rather, whether the
its shares from liability under § 16(b), Emerson than one part to reduce their holdings under the method used to "avoid" liability is one
planned to reduce its Dodge statutory minimum percentage of shares (10%) permitted by the statute.
On August 28, 1967, Emerson sold 37,000 Dodge to reduce their liability under Section 16(b).
shares to a brokerage house for $68 per share,
reducing Emerson's holdings to 9.96%. Emerson then
sold the remaining shares to Dodge for $69 per share
on September 11, 1967. Reliance demanded the
profits that were realized on both sales, and Emerson
brought this suit seeking a declaratory judgment as to
its liability under § 16(b).
iv. “Purchase” & “Sale”
Newmark v. RKO The managements of Frontier Airlines and Central Was the purchase and subsequent exchange of For there to be liability under Sec. 16(b),
Airlines agreed to merge by an exchange of stock. RKO Central shares lent itself to the type of there must be:

controlled Frontier through its ownership of 56% of the speculative abuse which section 16(b) was 1. A purchase

outstanding stock of Frontier. RKO then made a designed to prevent? 2. Sale of security

purchase, through several Central shareholders, of 3. By one who owns more than 10% of any
49% of Central’s stock. The merger was later pushed YES. RKO’s contract to purchase Central shares class of the issuer’s securities

through with a proviso on the merger agreement that is a classic example of trading while in the 4. Within 6 months
both airlines are to manage their corporations in a possession of information unavailable to the All of the requisites were fulfilled in this
manner as not to prejudice the interests of RKO. public. It happens that RKO secured a case.
Consummation of the merger was conditioned on the contractual right to purchase Central shares at
approval by the Civil Aeronautics Board to which the $8.50/share, which was also conditioned on the With 10% beneficial ownership, RKO was
RKO accomplished. It appears that through these CAB approval of the merger. Having full presumed to have access to inside
series of transactions, RKO was able to realize a hefty knowledge of the proposal to merge, RKO information. Such inside information
profit through stock ownership. Newmark now expected that such information would create a provides him with an opportunity, not
questions the propriety of the events that transpired. rise in the value of the shares when released to available to the investing public, to sell his
the public. They were then in the position to take shares at the moment most advantageous
a contract for the sale of stock to RKO General in connection with the merger of Frontier Airlines
advantage of speculative increase by purchasing to him.
and Central Airlines. 50 RKO General owned 56 percent of Frontier's shares and contracted
with several Central shareholders to acquire their shares. This transaction made RKO General Central shares at the agreed price of $8.50. it
a ten percent owner of Central securities. Within six months of this purchase, RKO General also appears that RKO had the right to forego the
exchanged its Central shares for Frontier shares according to the merger agreement purchase of Central shares in the event that the
The court reasoned that the reference to ten percent owners in the statute rested on the
CAB approval would not be granted or the
presumption that subsidy of the CAB would not be to the liking of
these individuals have access to inside information. The court recognized RKO. It is thus clear that RKO had the power to
that while this presumption of access to inside information escape liability for any possible loss of Central
could not be applied to the purchase in question, this purchase did
place the individual in a position of access to inside information
security value. RKO’s success in fixing the
allowing a subsequent sale based on newly acquired knowledge. purchase price before the proposed merger
Therefore the initial purchase "creates an opportunity for the kind
of speculative abuse the statute was enacted to prevent." 53 It would
appear, however, that this reasoning fails to account for the fact
that the language of section 16(b) applies a conclusive presumption
99
of use of inside information only to a pair of transactions completed
within six months. The court in Newmark recognized that such a
presumption could be applied rationally to only one transaction in
this situation and yet extended section 16(b) coverage to the initial
purchase," thus apparently extending the statute beyond the reach
of its express language
became public knowledge opened the door to
possible speculative gains. It also had the ability
to determine whether the merger would be
consummated which enabled it to maximize the
gains or avoid the loss.

Whether the subsequent exchange of Central


shares for Frontier shares pursuant to the
merger agreement constituted a 'sale' of the
Central securities for purposes of section 16(b)
poses a somewhat more difficult problem. RKO
contends that the exchange did not
fundamentally alter the nature of its holdings
and therefore that it cannot fairly be
characterized as a sale. Before the exchange,
RKO urges, it owned a block of shares in each of
the two separate companies; later, it was the
owner of an equivalent block in the company
remaining after the merger. This argument, in
essence, urges us to invoke the 'economic
equivalence' test of Blau v. Lamb, where we held
that the conversion of preferred stock to
common stock was not a sale under 16(b) since
'that which the insider (surrendered) and that
which he (received were) simply different forms
of the same participation in his issuer.' 363 F.2d
at 523. RKO's reliance on Blau v. Lamb,
however, is misplaced. The doctrine of economic
equivalence is applicable only to exchanges
involving the securities of a single issuer; we
stated clearly that 'sales or purchases by an
insider of his issuer's securities for cash, the
securities of a different company, or other
property are within the reach of Section 16(b) *
* *.' 363 F.2d at 523. When RKO exchanged its
Central shares for Frontier securities it received
'the securities of a different issuer,' which
represented ownership rights in the new merged
airline. The 'economic equivalence' exemption
established by Blau v. Lamb is, thus, inapplicable
to this case.
The connection between the purchase of Central
shares and the merger of Central and Frontier
provides additional support for the view that the
exchange of securities was a sufficiently
meaningful event, in view of the circumstances
present here, to be considered a sale. We note
that RKO concedes, indeed argues strenuously,
that the purchase and merger were
interdependent, that the completion of each
transaction was conditioned upon the

100
consummation of the other. Given the
interdependence of the purchase and the
merger, it cannot be urged that RKO could simply
have purchased Central securities at the contract
price and sold them at a price inflated by the
announcement of the impending merger. It is
clear in this case, that only through the exchange
provided for in the merger agreement could RKO
have realized a speculative profit in Central
shares.

On May 3 or 4, 1967, RKO entered into an


agreement which granted it a conditional right to
purchase more than 50% Of Central's common
stock at a fixed price, ensured that Central would
be managed in accordance with its interests, and
required a majority of Central shares to be voted
in support of a merger it favored. This contract,
we conclude, granted rights of ownership,
particularly those rights most important to the
speculative purchaser, so substantial as to make
RKO a ten percent beneficial owner of Central at
that time. Contrary to the assertions of RKO, this
conclusion is in no way inconsistent with our
decision in Stella v. Graham-Paige Motors Corp.,
supra, that the holder of an option is not an
insider until he has made a commitment to
exercise the option.
Heminway’s At the core of our nation’s insider trading prohibitions is
Article the notion that public issuers of securities and their
insiders cannot trade in the issuer’s securities while in
possession of material nonpublic information.
Accordingly, when a public issuer or one of its insiders
is in possession of undisclosed material information,
the issuer or insider must either disclose the material
information before trading in the issuer’s securities or
abstain from trading in the issuer’s securities.15 This
notion, referred to as the “disclose or abstain” rule, is
based in decisional law under Section 10(b) of the
1934 Act, and Rule 10b-5, which interprets Section
10(b). Most insider trading cases are brought under
Section 10(b) and Rule 10b-5.
UNIT 4 – MISCELLANEOUS ITEMS
1. Securities Market Professionals

Sec. 28
Sec. 29
Sec. 30
Sec. 31

SRC Rules

101
28.1
32.2

Broker – can trade for others


Dealer – trades for himself

Q: Can a Broker also be a Dealer?


A:

Q: What is the broker-dealer rule?


A: A broker-dealer must first register with the SEC before they may buy or sell securities.

Q: Does a broker have to be a trading participant of the PSE?


A: Not necessarily. They may trade through Alternative Trading Systems approved with the SEC.

Over-the-Counter Markets – those transactions done through Exchanges or SROs that are not registered.

Q: What is the minimum paid-in capital for brokers?


A: P100,000,000.

Q: What is the difference between P100M and P30M?


A: Those who pay P30M are those not seeking authorization to engage in money making transactions.

Q: Are brokers and trading participants different?


A: Trading participants are allowed only if there is a supervising broker; trading participants are looked over, not compensated, etc. (a trading participant is a broker who can
trade through the PSE)
If you are a mere broker and not a trading participant, then you cannot trade in the PSE.
Check PSE rules for the difference between the two.

cannot BE

Must also read RULE 24 (lots of questions there)

Q: Must a salesman be an employee of a broker, or may he be an independent salesman engaged by the broker?
A:

Q: Can a broker guarantee against loss?


A: No, a broker cannot guarantee against loss.

An associated person is the one who is the regulator in charge of ensuring compliance of the broker.

One of the violations for an associated person is a failure to supervise the salesman. This is the unique disqualification for associated persons vis-à-vis salesmen.

KNOW HOW TO DIFFERENTIATE between associated persons and sales representatives.

Who regulates brokers at the PSE?


Capital Market Integrity Corporation. This is the frontline regulator.

Enumerate the Ethical Standards Rules for brokers.

What is the Best Execution Rule governing brokers?

102
A broker, when looking for the securities to be purchased by a client, should take into account the best market that the broker will invest in on behalf of the client, exercising
reasonable diligence in determining what would be the best market. The broker should thus take into account the price, stability of the market.

What is the Customer First Policy?


In a conflict-of-interest situation, the broker should prioritize the customer.

The broker buys for his own account. At the same time, the client also orders. Under the Customer First Policy, the customer should be given priority.

There is no such thing as the Board of Exchange Controller. It is now the BOARD OF DIRECTORS. It is a listed company that functions as a stock exchange with its own Board of
Directors.

There is an ownership limit. No one person may own or control more than 5% of the ownership of an exchange.
No single industry may own or control more than 3% of an Exchange.

Can the brokerage industry own more than 20% of an Exchange?


NO.

Can the PLDT own more than 5% of an Exchange?


NO.

“Demodulization” requirement – no longer includes member-organizations; instead, PSE is registered as its own organization

PSE has 15 directors.

Sec. 30 is SUPER IMPORTANT!!!!!

Can the husband of the corporate secretary of PLDT become the president or officer of the PSE?
NO, because of Sec. 32 (h)

SRO = an organization that can regulate its members; can discipline members, create its own rules, or enforce its own rules

Q: Must an Exchange first apply to be a SRO?


A: It is not necessarily an SRO, but an Exchange CAN be an SRO when approved by the SEC.

Q: What is a SRO?
A:

Trust Fund = like the Investor’s Protection Fund

If a broker becomes bankrupt, what is the remedy of those who invested with that broker?
We go to the Investor’s Protection Fund. This is also why the SEC establishes Trust Funds. In the event that these are mismanaged or goes bankrupt, these are something that
investors can go to for partial recovery of their investments.

How many directors for an Exchange v. for a corporation listed in an Exchange?


For the Exchange, it’s 3 independent directors out of the 15-member Board.
For the corporations listed in the Exchange, it’s either 2 or 20% of the Board, whichever is lower.

Can an association of brokers be accredited as an SRO?


YES.

Can an association of investment bankers be accredited as an SRO?

103
YES. ANY CAPITAL MARKET PLAYER, be it brokers or players, may get a license to function as a SRO from the SEC.

I am a partner of Accra Law. San Miguel corporation is a publicly listed corporation. Can I be an independent director of SMC?
NO. I should not be retained as a professional adviser.
Independent directors must not have ANY of the disqualifications.

If I own 5% of the stock of PLDT, although I am not part of management, may I be an independent director?
NO.

Ayala Land is a publicly listed company. It is owned 30% by Ayala Co. I am a director of Ayala Co. Can I be an independent director of Ayala Land?
NO, because Ayala Co. and Ayala Land are related companies.

What if Ayala Co., a listed company, banks with BDO; can an officer of BDO be an independent director of Ayala Co.?
NO.

Pay attention to the 2% ownership qualification in relation to independent directors.

2.5% owner – NOT ALLOWED STILL to be an independent director

Abacus Abacus is a broker & dealer of securities of listed (1) WON the pari delicto rule applies in this case. Since brokerage relationship is necessary a
Securities Co. v. companies with the PSE. Ampil opened a cash account contract for the employment of an agent,
Ampil with Abacus for his transactions, and started trading in Only to trades subsequent to April 10 & 11. principles of contract law also govern the
the account, & began trading on April 10 & 11. As a Abacus still has a right to claim those due on the broker-principal relationship.
result of trading activities, Ampil accumulated an two first dates of trading; as of that time, it was
outstanding obligation in favor of the corporation in the not yet in pari delicto. A broker does not owe fiduciary duties, but
sum of P6M as of April 30, 1997. After, though, Abacus is already liable for not must exercise due diligence; if his
Despite this, though, Abacus did not demand payment following SRC Rules 23 & 25. negligence causes damage to a client, his
from Ampil until May 6, 1997. Furthermore, Ampil was liability is based on quasi-delict, not the
still able to trade using his account despite being (2) WON the trial court had jurisdiction over the breach of the duty of diligence.
delinquent. case. BUT if he has assumed the duties of the
When Abacus sought to claim against Ampil in the RTC agent, including duties of loyalty &
to enforce the balance of the trading amounts, the RTC YES. Based on the complaint, the issue here was diligence, he is also bound by the latter like
ruled against it, claiming that Abacus was in pari the contract between Abacus & Ampil. This does an agent.
delicto, as it violated provisions of the RSA (Sec. 23 & not remove the power of SEC to enforce
25) sanctions against Abacus for allowing Ampil to
trade. Mandatory close-out rule – A dealer or
Sec. 23 (on margin requirements) – as a general rule, broker must cancel or otherwise liquidate a
members of an exchange or any broker or dealer customer’s order if payment is not received
cannot maintain a credit or arrange from the extension within 3 days from the date of purchase
or maintenance of a credit without collateral, on any Subsequent to an unpaid order, the broker
security other than an exempt security should require the customer to deposit
funds in the account sufficient to cover
Sec. 25 – brokers or dealers must require customers to each purchase, prior to the execution of
pay the price of securities within 3 days from the the transaction
trading day; otherwise, the broker has to sell the
security purchased on the next trading day but not
beyond 10 trading days following the last day for the
customer to pay such purchase price, unless the sale
cannot be effected within said period for justifiable
reasons

104
Nicolas v. CA Nicolas & Buan entered into a portfolio management Will Nicolas’ case prosper? While stock brokers are entitled to
agreement where Nicolas would manage Buan’s stock commercial fees & compensation, such
transactions for 3 months, with an automatic renewal NO. He wasn’t able to prove profit or loss. Also, must be reasonable given the
clause. However, Buan terminated the contract & never he never registered with the SEC to obtain a circumstances and not unfairly
paid the fine, stating that Nicolas never even made a license. His action thus cannot prosper. discriminatory towards the taxpayer.
profit in handling Buan’s securities. Nicolas filed suit to
collect the sum of money due over the contract in court.
People v. Petralba, together with her co-accused Houscht, The investment contract was a security, but the
Petralba Gonzales, & Alcantara, were charged with violations of prosecution was not able to prove beyond
the Revised Securities Act. According to complainant reasonable doubt that Petralba was guilty.
Dr. Bailey, accused introduced herself as a While it is established by the prosecution that
representative of Lansdale Enterprises Limited. During Lansdale was not duly registered and appellant
the course of their meetings, accused allegedly induced was not licensed as a broker, the manner by
Dr. Bailey to invest in foreign exchange trading, by which appellant connived with her co-accused
claiming that the business was protected by a foreign and induced her to invest her $6,000.00 are too
company to the extent of US$4M. Convinced that her sketchy, devoid of any certainty as to the actual
investment is protected, Dr. Bailey issued a check participation of appellant in the commission of
worth $6,000 as starting capital. Bailey signed several the offenses charged against her. 

documents like receipts, instruction purchase, and
form letter. However, when Bailey demanded partial
return of her investment from accused Petralba, the
latter failed to do so. Dr. Bailey also contacted the
office of Lansdale, its officers including the manager
and Petralba several times but they were always out.
Thus, she went to the SEC and filed a complaint. RTC,
as affirmed by the CA found the accused guilty of
violating Sections 4, 19 and 29 of the Revised
Securities Act. In this petition, Petralba contends that
the transaction that transpired between Dr. Bailey and
Lansdale was just foreign exchange trading which is not
covered by the term securities.
PASTRA v. CA
SEC v. Santos An employee of an issuer, who provides
information on unregistered securities
offered by the latter, may be deemed a
“salesman” of securities if such giving of
information brings about the sale of
unregistered securities.
2. Exchanges & Self-Regulatory Organizations

Sec. 32-40
SRC Rule
33.1
33.2
39.1
40.3
40.4
40.5
Lopez, Locsin, Delivery four months after purchase Mere non-delivery will not allow the buying
Ledesma & Co. member the right to rescind the contract. If the
v. CA Makati SE has a rule that the sale must be within 10- selling contract refuses to deliver, the arbitration

105
20 days. committee will

SGV was making an audit compelling delivery. Delivery may be the Chairman to purchase the
Lopez said, let’s just rescind, anyway you never gave it same for the selling member’s account. Thus,
to us. the Chairman of the Floor Trading and Arbitration
Commitee will advance to the seller.

The right of rescission under the Civil Code is


inapplicable.

Carolina
Industries v.
CMS Stock
Exchanges
PSE v. CA The Puerto Azul Land, Inc. (PALI), a domestic real estate 1. Did SEC correctly reverse the PSE’s decision? 1. The SEC is the government agency,
corporation, wanted to offer its shares to the public to under the direct general supervision of the
raise funds to develop its properties and pay its loans No. SEC can only reverse the PSE BOG’s Office of the President.
with several banking institutions. PALI was issued a decisions when made with bad faith; questions
Permit to Sell its shares to the public by the SEC. To of policy are necessarily left to the Board of PSE. 2. SEC’s power to look into rulings of the
facilitate the trading of its shares, PALI sought to The decision was based on the following facts: PSE, may be implied from or be considered
course the trading of its shares through the PSE; thus, (a) the PCGG confirmed the claim of the as necessary or incidental to the carrying
it filed with the said stock exchange an application to Marcoses; (b) an order of sequestration was out of the SEC’s express power to insure
list its shares. The Listing Committee of the PSE issued covering the properties of PALI, and suit fair dealing in securities traded upon a
recommended the approval of the listing to the PSE for reconveyance to the state was filed in the stock exchange.
Board of Governors (BOG). However, the BOG received Sandiganbayan; (c) how the properties were
a letter from the Marcoses stating that the late effectively transferred, despite the sequestration 3.BUT: Notwithstanding the regulatory
President Marcos was the legal and beneficial owner of order to PALI in only a short span of time, also power of the SEC over the PSE, and its
certain properties of the Puerto Azul Beach Hotel and give rise to serious doubt as to the integrity of authority to reverse the PSE’s decision in
Resort Complex which PALI claimed to be among its PALI as a stock issuer. Thus, PSE was in the right matters of application for listing in the
assets & that the Ternate Development Corporation, a when it refused application of PALI, for a contrary market, the SEC may exercise such power
stockholder of PALI, was also held in trust by one ruling was not to the best interest of the general only if the PSE’s judgment is attended by
Panlilio for Marcos. The PSE thus denied PALI’s public. 
 bad faith.
application because of the serious doubts raised on the
ownership of its assets. PALI wrote the SEC for the 2. Can SEC require a full disclosure policy in
latter to exercise its regulatory power over stock approving the registration and sale of securities?
exchanges. Accordingly, the SEC reversed PSE’s
decision and ordered the immediate listing of PALI’s Yes. The question as to what policy is, or should
shares. be relied upon in approving the registration and
sale of securities in the SEC is not for the Court
to determine, but is left to the sound discretion
of the SEC. However, possible Grounds for the
Rejection of the registration of a security under
the Revised Securities Act must also be followed.
The intention of the lawmakers to make the
registration and issuance of securities
dependent, to a certain extent, on the merits of
the securities themselves, & of the issuer, to be
determined by the SEC. Hence, absolute reliance
on the full disclosure method in the registration
of securities is untenable.
Fiero v. Finra is an SRO registered in the US SEC. Fiero May Finra enforce a fine they impose through SROs can only enforce powers expressly

106
Financial Brothers, a broker-dealer, was a member of Finra. John judicial action? provided by law (Francis Lim’s PDI Article)
Industry FIero was the Fiero Brothers’ registered representative.
Regulatory Finra expelled the Fiero Brothers & barred Mr. Fiero NO. This power is not expressly granted to them
Authority from associating with Finra-member firms, fining them by law. While SROs may impose fines and
$1M. However, they refused to pay the fine. discipline members, the penalty is that if the fine
Finra filed a civil case to collect the fine with the state is not paid, the broker may not be a member-firm
court in NYC. of the SRO. Aside from that, if there is a SEC
violation, they’ll also face regulatory problems
there. All of this is sanction enough for a
member-firm without the fine to be paid to the
SRO being imposable in court.

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