Cases in Securities Regulation Code

Abacus Securities Corp. vs. Ruben U. Ampil, G.R. No. Abacus Securities Corporation is engaged in business : Petitioner can still collect from respondent to the
160016, February 27, 2006 as a broker and dealer of securities of listed companies extent of the difference between the latter’s
(Bea Yu) at the Philippine Stock Exchange Center. Sometime in outstanding obligation as of April 11, 1997 less the
April 1997, Ampil opened a cash or regular account proceeds from the mandatory sell out of the shares
RSA Rule 25-1 prescribes in detail the regulations with Abacus for the purpose of buying and selling pursuant to the RSA Rules. Petitioner’s right to collect
governing cash accounts. This purpose is to regulate securities as evidenced by the Account Application is justified under the general law on obligations and
the volume of credit flow, by way of speculative Form. The parties’ business relationship was governed contracts. The right to collect cannot be denied to
transactions, into the securities market and redirect by the terms and conditions. Since April 10, 1997, petitioner as the initial transactions were entered
resources into more productive uses. Specifically, the Ampil actively traded his account, and as a result of pursuant to the instructions of respondent. The
main objective of the law on margins is explained in such trading activities, he accumulated an outstanding obligation of respondent for stock transactions made
this wise: “The main purpose of these margin obligation in favor of Abacus in the principal sum of and entered into on April 10 and 11, 1997 remains
provisions is not to increase the safety of security loans P6,617,036.22 as of April 30, 1997. Despite the lapse outstanding. These transactions were valid and the
for lenders. Banks and brokers normally require of the period within which to pay his account as well obligations incurred by respondent concerning his
sufficient collateral to make themselves safe without as sufficient time given by Abacus for Ampil to comply stock purchases on these dates subsist. At that time,
the help of law. Nor is the main purpose even with his proposal to settle his account, the latter failed there was no violation of the RSA yet. Petitioner’s fault
protection of the small speculator by making it to do so. Such that Abacus thereafter sold Ampil’s arose only when it failed to: 1) liquidate the
impossible for him to spread himself too thinly— securities to set off against his unsettled obligations. transactions on the fourth day following the stock
although such a result will be achieved as a byproduct After the sale of respondent’s securities and purchases, or on April 14 and 15, 1997; and 2)
of the main purpose. The main purpose is to give a application of the proceeds thereof against his complete its liquidation no later than ten days
[g]overnment credit agency an effective method of account, respondent’s remaining unsettled obligation thereafter, applying the proceeds thereof as payment
reducing the aggregate amount of the nation’s credit to petitioner was P3,364,313.56. for respondent’s outstanding obligation. Since the
resources which can be directed by speculation into the In a letter dated August 26, 1997, respondent buyer was not able to pay for the transactions that
stock market and out of other more desirable uses of acknowledged receipt of petitioner’s demand letter took place on April 10 and 11, that is at T+4, the
commerce and industry. and admitted his unpaid obligation and at the same broker was duty-bound to advance the payment to the
time requested for 60 days to raise funds to pay the settlement banks without prejudice to the right of the
In a margin account, the securities company extends same, which was granted by petitioner. Despite said broker to collect later from the client.
credit. A margin account is covered by a margin demand and the lapse of said requested extension, The provisions governing the above transactions are
agreement which stipulates the terms and conditions respondent failed and/or refused to pay his Sections 23 and 25 of the RSA and Rule 25-1 of the
for maintaining such an account. Under the present accountabilities to petitioner. RSA Rules. Section 23(b) —the alleged violation of
law, the amount of credit that may be initially Respondent claims that he was induced to trade in a petitioner which provides the basis for respondent’s
extended is limited to 50 percent of the current market stock security with petitioner because the latter defense—makes it unlawful for a broker to extend or
price of the security. allowed offset settlements wherein he is not obliged maintain credit on any securities other than in
Trading on credit (or “margin trading”) allows to pay the purchase price. Rather, it waits for the conformity with the rules and regulations issued by
investors to buy more securities than their cash customer to sell. And if there is a loss, petitioner only Securities and Exchange Commission (SEC). Section 25
position would normally allow. Investors pay only a requires the payment of the deficiency. However, if lays down the rules to prevent indirect violations of
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portion of the purchase price of the securities; their the customer sells and there is a profit, petitioner Section 23 by brokers or dealers. RSA Rule 25-1
broker advances for them the balance of the purchase deducts the purchase price and delivers only the prescribes in detail the regulations governing cash
price and keeps the securities as collateral for the surplus – after charging its commission. Respondent accounts.
advance or loan. Brokers take these securities/stocks further claims that all his trades with petitioner were The law places the burden of compliance with margin
to their bank and borrow the “balance” on it, since not paid in full in cash at anytime after purchase or requirements primarily upon the brokers and dealers.
they have to pay in full for the traded stock. Hence, within the T+4 [4 days subsequent to trading] and Sections 23 and 25 and Rule 25-1, otherwise known as
increasing margins i.e., decreasing the amounts which none of these trades was cancelled by petitioner. the “mandatory close-out rule,” clearly vest upon
brokers may lend for the speculative purchase and Neither did petitioner apply with either the Philippine petitioner the obligation, not just the right, to cancel
carrying of stocks is the most direct and effective Stock Exchange or the SEC for an extension of time for or otherwise liquidate a customer’s order, if payment
method of discouraging an abnormal attraction of the payment or settlement of his cash purchases. This is not received within three days from the date of
funds into the stock market and achieving a more was not brought to his attention by his broker and so purchase. The word “shall” as opposed to the word
balanced use of such resources. with the requirement of collaterals in margin account. “may,” is imperative and operates to impose a duty,
Thus, his trade under an offset transaction with which may be legally enforced. For transactions
petitioner is unlimited subject only to the discretion of subsequent to an unpaid order, the broker should
the broker. ot require him to put up a deposit before it require its customer to deposit funds into the account
executed its subsequent orders. sufficient to cover each purchase transaction prior to
The Regional Trial Court held that petitioner violated its execution.
Sections 23 and 25 of the Revised Securities Act (RSA) It will be noted that trading on credit (or “margin
and Rule 25-1 of the Rules Implementing the Act (RSA trading”) allows investors to buy more securities than
Rules) when it failed to: 1) require the respondent to their cash position would normally allow. Investors
pay for his stock purchases within three (T+3) or four pay only a portion of the purchase price of the
days (T+4) from trading; and 2) request from the securities; their broker advances for them the balance
appropriate authority an extension of time for the of the purchase price and keeps the securities as
payment of respondent’s cash purchases. The trial collateral for the advance or loan. Brokers take these
court also found respondent to be equally at fault, by securities/stocks to their bank and borrow the
incurring excessive credits and waiting to see how his “balance” on it, since they have to pay in full for the
investments turned out before deciding to invoke the traded stock. Hence, increasing margins decreasing
RSA. Thus, the RTC concluded that petitioner and the amounts which brokers may lend for the
respondent were in pari delicto. speculative purchase and carrying of stocks is the most
The CA upheld the lower court’s finding that the direct and effective method of discouraging an
parties were in pari delicto. It castigated petitioner for abnormal attraction of funds into the stock market
allowing respondent to keep on trading despite the and achieving a more balanced use of such resources.
latter’s failure to pay his outstanding obligations. Pursuant to RSA Rule 25-1, petitioner should have
liquidated the transaction (sold the stocks) on the
Were the lower courts incorrect in holding that the fourth day following the transaction (T+4) and
petitioner may not collect from the respondent? completed its liquidation not later than ten days

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 following the last day for the customer to pay
(effectively T+14). Respondent’s outstanding
obligation is therefore to be determined by using the
closing prices of the stocks purchased at T+14 as basis.

PSE vs. Court of Appeals, 281 SCRA 232 (1997) The respondent Puerto Azul Land, Inc. (PALI), a The SEC is the entity with the primary say as to
(Irish Boon Parrocha) domestic real estate corporation, had sought to offer whether or not securities, including shares of stock of
its shares to the public in order to raise funds allegedly a corporation, may be traded or not in the stock
to develop its properties and pay its loans with several exchange. This is in line with the SEC's mission to
banking institutions. They were subsequently issued a ensure proper compliance with the laws, such as the
Permit to Sell by the Securities and Exchange Revised Securities Act and to regulate the sale and
Commission (SEC). To facilitate the trading of its disposition of securities in the country. Being a stock
shares among investors, PALI sought to course the exchange, the SEC performs a function that is vital to
trading of its shares through the petitioner Philippine the national economy, as the business is affected with
Stock Exchange, Inc. (PSE), for which purpose it filed public interest. It has often been said that the
with the said stock exchange an application to list its economy moves on the basis of the rise and fall of
shares. stocks being traded. By its economic power, the SEC
The PALI’s application was previously recommended certainly can dictate which and how many users are
for approval however, the PSE Board of Governors allowed to sell securities thru the facilities of a stock
reached a decision to reject PALI’s application, citing exchange, if allowed to interpret its own rules liberally
the existence of serious claims, issues and as it may please. SEC can either allow or deny the
circumstances surrounding PALI's ownership over its entry to the market of securities. To repeat, the
assets that adversely affect the suitability of listing monopoly, unless accompanied by control, becomes
PALI's shares in the stock exchange. Subsequently, subject to abuse; hence, considering public interest,
PALI brought the PSE decision before the SEC for then it should be subject to government regulation.
review, in the exercise of its supervisory and HOWEVER, the PSE's management prerogatives are
regulatory powers over stock exchanges, and not under the absolute control of the SEC. The PSE is a
requested that it institute such measures as are just corporation authorized by its corporate franchise to
and proper under the circumstances. engage in its proposed and duly approved business.
The SEC then rendered its order, reversing the PSE’s The PSE has all the rights pertaining to corporations,
decision. PSE filed a motion for reconsideration of the including the right to sue and be sued, to hold
said order but was denied. Dissatisfied, the PSE then property in its own name, to enter (or not to enter)
filed a petition for review before the Court of Appeals, into contracts with third persons, and to perform all
citing that SEC has acted without power, jurisdiction,

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 or authority when it issued the assailed order, but it other legal acts within its allocated express or implied
was dismissed. Hence, this petition. powers.
As to its corporate and management decisions, the
WON the regulatory authority of the SEC extends to state will generally not interfere with the same.
the Philippine Stock Exchange. (YES) Questions of policy and of management are left to the
honest decision of the officers and directors of a
corporation, and the courts are without authority to
substitute their judgment for the judgment of the
board of directors. The board is the business manager
of the corporation, and so long as it acts in good faith,
its orders are not reviewable by the courts. Thus,
notwithstanding the regulatory power of the SEC over
the PSE, and the resultant authority to reverse the
PSE's decision in matters of application for listing in
the market, the SEC may exercise such power only if
the PSE's judgment is attended by bad faith.
In this case, the SEC had acted arbitrarily in arrogating
unto itself the discretion of approving the application
for listing in the PSE of the private respondent PALI,
since this is a matter addressed to the sound
discretion of the PSE, a corporation entity, whose
business judgments are respected in the absence of
bad faith. The Supreme Court finds that the PSE has
acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and
whimsical animation on its part. Its action in refusing
to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances
attendant to this case.

SEC vs. Interport Resources Corp. G.R. No. 135808, On 6 August 1994, the Board of Directors of IRC 1.) Sections 8, 30, and 36 of the Revised Securities Act
October 6, 2008 approved a Memorandum of Agreement with Ganda (RSA) do not require the enactment of implementing
(Raphael Patajo) Holdings Berhad (GHB). Under the Memorandum of rules to make them binding and effective.
Agreement, IRC acquired 100% or the entire capital
The intent of the law is the protection of investors stock of Ganda Energy Holdings, Inc. (GEHI), which The mere absence of implementing rules cannot
against fraud committed when an insider, using secret would own and operate a 102 megawatt gas turbine effectively invalidate provisions of law, where a

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information, takes advantage of an uninformed power-generating barge. The agreement also reasonable construction that will support the law may
investor. Insiders are obligated to disclose material stipulates that GEHI would assume a five-year power be given. Absence of any constitutional or statutory
information to the other party or abstain from trading purchase contract with NAPOCOR. At that time, GEHI's infirmity, which may concern Secs 30 and 36 of RSA,
the shares of his corporation. power-generating barge was 97% complete and would the provisions are legal and binding.
The duty to disclose is based on two factors: first, go on-line by mid-September of 1994. In exchange, IRC
existence of a relationship giving access, directly or will issue to GHB 55% of the expanded capital stock of Every law has in its favour the presumption of validity.
indirectly to information intended to be available only IRC amounting to 40.88 billion shares which had a Unless and until a specific provision of the law is
for a corporate purposes and not for the personal total par value of P488.44 million. declared invalid and unconstitutional, the same is valid
benefit of anyone and second, the inherent unfairness and binding for all intents and purposes.
involved when a party takes advantage of such IRC alleged that a press release announcing the
information knowing it is unavailable to those with approval of the agreement was sent through facsimile The Court does not discern any vagueness or
whom he is dealing. transmission to the Philippine Stock Exchange and the ambiguity in Sec 30 and 36 of RSA.
SEC, but that the facsimile machine of the SEC could
not receive it. Upon the advice of the SEC, the IRC sent Sec 30 – Insider’s duty to disclose when trading.
the press release on the morning of 9 August 1994. Insiders are obligated to disclose material information
to the other party or abstain from trading the shares
The SEC averred that it received reports that IRC failed of his corporation. This duty to disclose or abstain is
to make timely public disclosures of its negotiations based on two factors:
with GHB and that some of its directors, respondents
herein, heavily traded IRC shares utilizing this material a) The existence of a relationship giving access,
insider information. directly or indirectly, to information intended to be
available only for a corporate purpose and not for the
The SEC Chairman further directed all principal officers personal benefit of anyone
of IRC to appear at a hearing before the Brokers and
Exchanges Department (BED) of the SEC to explain b) the inherent unfairness involved when a party takes
IRC's failure to immediately disclose the information advantage of such information knowing it is
as required by the Rules on Disclosure of Material unavailable to those with whom he is dealing.
Facts.
The intent of the law is the protection of investors
The SEC Chairman issued an Order finding that IRC against fraud, committed when an insider, using secret
violated the Rules on Disclosure of Material Facts, in information, takes advantage of an uninformed
connection with the Old Securities Act of 1936, when investor. In some cases, however, there may be valid
it failed to make timely disclosure of its negotiations corporate reasons for nondisclosure of material
with GHB. In addition, the SEC pronounced that some information. Where such reasons exist, an issuer’s
of the officers and directors of IRC entered into decision not to make any public disclosures is not
transactions involving IRC shares in violation of Section ordinarily considered as a violation of insider trading.

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30, in relation to Section 36, of the Revised Securities At the same time, the undisclosed information should
Act. not be improperly used for non-corporate purposes,
particularly to disadvantage other persons with whom
The Court of Appeals ruled that there were no an insider might transact, and therefore the insider
implementing rules and regulations regarding must abstain from entering into transactions involving
disclosure, insider trading, or any of the provisions of such securities.
the Revised Securities Acts, which the respondents
allegedly violated. The Court of Appeals likewise Sec 36 – Directors, officers and principal stockholders.
noted that it found no statutory authority for the SEC This is a straightforward provision that imposes upon:
to initiate and file any suit for civil liability under (1) A beneficial owner of more than 10 percent of any
Sections 8, 30 and 36 of the Revised Securities class of any equity security; or (2) A director or any
Act. Thus, it ruled that no civil, criminal or officer of the issuer of such security, the obligation to
administrative proceedings may possibly be held submit a statement indicating his or her ownership of
against the respondents without violating their rights the issuer’s securities and such changes in his or her
to due process and equal protection. ownership.

ISSUE/S: Sections 30 and 36 of the RSA were enacted to

promote full disclosure in the securities market and
1. Whether sections 8, 30, and 36 of the Revised prevent unscrupulous individuals, who by their
Securities Act require the enactment of implementing positions obtain non-public information, from taking
rules to make them binding and effective. (No) advantage of an uninformed public.

2. Whether a criminal case may still be filed against Sec 30 prevented the unfair use of non-public
the respondents despite the repeal of Sections 8, 30, information in securities transactions, while Sec 36
and 36 of the Revised Securities Act. (Yes) allowed the Sec to monitor the transactions entered
into by corporate officers and directors as regards the
3. Whether SEC retains the jurisdiction to investigate securities of their companies.
violations of the Revised Securities Act, re-enacted in
the Securities Regulations Code, despite the abolition The lack of implementing rules cannot suspend the
of the PED. (Yes) effectivity of these provisions.

2.) The Securities Regulation Code (SRC) did not repeal

Sections 8, 30, and 36 of the Revised Securities Act
since said provisions were re-enacted in the new law.

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When the repealing law punishes the act previously
penalized under the old law, the act committed before
the re-enactment continues to be an offense and
pending cases are not affected.

Sec 8 of RSA, which previously provided for the

registration of securities and the information that
needs to be included in the registration statements,
was expanded under Sec 12 of the Securities
Regulations Code. Further details of the information
required to be disclosed by the registrant are
explained.

Sec 30 of RSA has been re-enacted as Sec 27 of SRC,

still penalizing an insider’s misuse of material and non-
public information about the issuer, for the purpose of
protecting public investors.

Sec 23 of SRC was practically lifted from Sec 36 of RSA.

The legislature had not intended to deprive the courts

of their authority to punish a person charged with
violation of the old law that was repealed

3.) The SEC retained the jurisdiction to investigate

violations of the Revised Securities Act, re-enacted in
the Securities Regulations Code, despite the abolition
of the PED.

Sec 53 of SRC clearly provides that criminal complaints

for violations of rules and regulations enforced or
administered by SEC shall be referred to the DOJ for
preliminary investigation, while the SEC nevertheless
retains limited investigatory powers. SEC may still
impose the appropriate administrative sanctions
under Sec 54.

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 In all, the SC rules that no implementing rules were
needed to render effective Sections 8, 30, and 36 of
the Revised Securities Act; nor was the PED Rules of
Practice and Procedure invalid, prior to the enactment
of the Securities Regulations Code, for failure to
provide parties with the right to cross-examine the
witnesses presented against them. Thus, the
respondents maybe investigated by the appropriate
authority under the proper rules of procedure of the
Securities Regulations Code for violations of Secs 8, 30,
and 36 of the Revised Securities Act.

Petition is GRANTED. This Court hereby REVERSES the

assailed Decision of the Court of Appeals and LIFTS the
permanent injunction issued pursuant thereto. This
Court further DECLARES that the investigation of the
respondents for violations of Sections 8, 30 and 36 of
the Revised Securities Act may be undertaken by the
proper authorities in accordance with the Securities
Regulations Code.
SEC vs. CA, 246 SCRA 738 (1995) Cualoping Securities Corporation (CUALOPING for Yes. The Revised Securities Act (Batas Pambansa Blg.
(Inna Protacio- Ladislao) brevity) is a stockbroker, Fidelity Stock Transfer, Inc. 178) is designed, in main, to protect public investors
The Revised Securities Act is designed to protect public (FIDELITY for brevity), on the other hand, is the stock from fraudulent schemes by regulating the sale and
investors from fraudulent schemes by regulating the transfer agent of Philex Mining Corporation (PHILEX disposition of securities, creating, for this purpose, a
sale and disposition of securities, creating for this for brevity). Securities and Exchange Commission to ensure proper
purpose a Securities and Exchange Commission to compliance with the law. Here, the SEC has aptly
ensure proper compliance with law. On or about the first half of 1988, certificates of stock invoked the provisions of Section 29, in relation to
of PHILEX representing one million four hundred Section 46, of the Revised Securities Act.
To constitute a violation of the Revised Securities Act [thousand] (1,400,000) shares were stolen from the
that can warrant an imposition of a fine under Section premises of FIDELITY. These stock certificates There is no question that both FIDELITY and
29 (3) in relation to Section 46 of the Act, fraud or consisting of stock dividends of certain PHILEX CUALOPING have been guilty of negligence in the
deceit, not mere negligence, on the part of the shareholders had been returned to FIDELITY for lack of conduct of their affairs involving the questioned
offender must be established. forwarding addresses of the shareholders concerned. certificates of stock. To constitute, however, a
violation of the Revised Securities Act that can warrant
an imposition of a fine under Section 29(3), in relation

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Later, the stolen stock certificates ended in the hands to Section 46 of the Act, fraud or deceit, not mere
of a certain Agustin Lopez, a messenger of New World negligence, on the part of the offender must be
Security, Inc ., an entirely different stock brokerage established. Fraud here is akin to bad faith which
firm. In the first half of 1989, Agustin Lopez brought implies a conscious and intentional design to do a
the stolen stock certificates to CUALOPING for trading wrongful act for a dishonest purpose or moral
and sale with the stock exchange. When the said obliquity; it is unlike that of the negative idea of
stocks were brought to CUALOPING, all of the said negligence in that fraud or bad faith contemplates a
stock certificates bore the ‘apparent’ indorsement state of mind affirmatively operating with furtive
(signature) in blank of the owners (the stockholders to objectives. Given the factual circumstances found by
whom the stocks were issued by PHILEX) thereof. At the appellate court, neither FIDELITY nor CUALOPING,
the side of these indorsements (signatures), the words albeit indeed remiss in the observance of due
‘Signature Verified’ apparently of FIDELITY were diligence, can be held liable under the above
stamped on each and every certificate. Further, on the provisions of the Revised Securities Act. We do not
words ‘Signature Verified’ showed the usual initials of imply, however, that the negligence committed by
the officers of FIDELITY. private respondents would not at all be actionable;
upon the other hand, as we have earlier intimated,
Upon receipt of the said certificates from Agustin such an action belongs not to the SEC but to those
Lopez, CUALOPING stamped each and every certificate whose rights have been injured.
with the words ‘Indorsement Guaranteed,’ and
thereafter traded the same with the stock exchange.

After the stock exchange awarded and confirmed the

sale of the stocks represented by said certificates to
different buyers, the same were delivered to FIDELITY
for the cancellation of the stocks certificates and for
issuance of new certificates in the name of the new
buyers. Agustin Lopez on the other hand was paid by
CUALOPING with several checks for Four Hundred
Thousand (P400,000.00) Pesos for the value of the
stocks.

After acquiring knowledge of the pilferage, FIDELITY

conducted an investigation with assistance of the
National Bureau of Investigation (NBI) and found that
two of its employees were involved and signed the
certificates.

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 After two (2) months from receipt of said stock
certificates, FIDELITY rejected the issuance of new
certificates in favor of the buyers for reasons that the
signatures of the owners of the certificates were
allegedly forged and thus the cancellation and new
issuance thereof cannot be effected.

The Brokers and Exchange Department ("BED") of the

SEC disposed of the matter in this manner and rules
that Fidelity Stock Transfers, Inc., is ordered to replace
all the subject shares and to cause the transfer thereof
in the names of the buyers within ten days from actual
receipt hereof.

Cualoping Securities, INC., for having violated Section

29 a (3) of the Revised Securities Act is hereby ordered
to pay a fine of P50,000.00 within five (5) days from
actual receipt hereof. The decision was appealed to
the Court of Appeals. The appellate court reversed the
SEC and set aside SEC's order "without prejudice to
the right of persons injured to file the proper action
for damages."

The Commission has brought the case to this Court in

the instant petition for review on certiorari,
contending that the appellate court erred in setting
aside the decision of the SEC.

Does the SEC ha regulatory power to impose fines?

Pineda vs. Court of Appeals, 6 SCRA 757 Minority stockholders of Bacolod Murcia Milling filed a The Supreme Court stated that Appellate jurisdiction is
(Prime Ruiz) complaint with the SEC against the said company and lodged entirely with the SC, effectively making the SEC
A court of first instance has no jurisdiction to grant an its president, Araneta. The SEC Commissioner Pineda a court on the same level as the CFI.
injunctive relief against the Securities and Exchange ordered the investigation of the case. In a letter This Tribunal holds the view that under the Rules of
addressed to the SEC, Tersa Cuaycong and Apeles Court and the law applicable to the case at bar, a

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Commission. That power is lodged exclusively with the Lopez, stockholders of Bacolod-Murcia, complained of Court of First Instance has no jurisdiction to grant
Supreme Court. various actions of the said corporation that were in injunctive reliefs against the Securities and Exchange
violation of its articles of incorporation, the Commission. That power is lodged exclusively with this
A party who is aggrieved by or disagrees with an order Corporation Code, and the SEC rules, all prejudicial to Court, pursuant to Section 1 of Rule 43 and Section 35
or ruling of the Securities and Exchange Commission, its minor stockholders. of Commonwealth Act No. 83 as amended by RA 635,
may file a petition for review with the Supreme Court; Petitioner Pineda, the SEC Commissioner, ordered the creating as setting forth the powers and function of
he cannot seek relief from courts of general investigation of the company, with the other the SEC.
jurisdiction. petitioners assigned as part of his investigation team. Beyond doubt, therefore, whenever a party is
The issue here began when the petitioners addressed aggrieved by or disagrees with an order or ruling of
a subpoena duces tecum to respondent Araneta and the Securities and Exchange Commission, his remedy
the treasurer and secretary of B-M. is to come to this Court on a petition for review. He is
The respondents questioned the subpoena in a not permitted to seek relief from courts of general
Petition to Reconsider Order and to Set Aside jurisdiction.
Subpoena Duces Tecum, saying that the subpoena has The role of the Securities and Exchange Commission in
to be issued in accordance with the rules adopted by our national economy cannot be minimized. The
the SEC, but it had no rules yet that could guide the legislature has entrusted to it the serious responsibility
subpoena. SEC DENIED the petition. They then filed a of enforcing all laws affecting corporations and other
Motion to Quash and Discontinue Entire Proceedings, forms of associations not otherwise vested in some
reiterating the same arguments as their previous other government offices. Being charged, therefore,
petition. They also imputed conspiracy and oppressive with overseeing the operations of those various
behavior on the part of the stockholders. SEC DENIED corporate enterprises from which our government
the petition. derives great revenues and income, it cannot afford to
Aggrieved, the respondents filed a special civil action be impeded or restrained in the performance of its
for prohibition with respondent Judge Lantin of the functions by writs of injunction emanating from
Manila CFI. The petitioners then filed a motion to tribunals subordinate to this Court. If every Court of
dismiss, arguing that the CFI does not have jurisdiction First Instance can enjoin the Commission from
over the subject matter of appeal from/review of an pursuing its objectives, and, in the premises,
SEC decision-- such lies with the Supreme Court under substitute its judgment for that of the Commission on
Rule 43 and CA 83 as amended. CFI DENIED the what should or should not be done, then, no one will
motion to dismiss. They filed an MR, which was also suffer thereby but the economy of our body politic
denied. Though an answer was submitted at this point, and, eventually, this country's citizenry. Certainly, the
the petitioners filed this present petition for certiorari legislature could never have intended that.
and prohibition.

May the CFI issue injunctive reliefs against the SEC?

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Cemco Holdings, Inc. vs. Nat'l Life Ins. Co., 529 SCRA Union Cement Corporation (UCC) is a publicly-listed Yes, both SEC and CA accurately pointed out that the
355 (2007) company and it has two principal stockholders- UCHC, coverage of the Mandatory tender offer rule covers
(Ahmed Sangcopan) a non-listed company with a shares amounting to not only direct acquisition but also indirect acquisition.
60.51% and the petitioner with 17.03%. Majority of The legislative intent of Section 19 of the Code is to
Tender offer UCHC’s stocks were owned by BCI 21.31% and ACC regulate activities relating to acquisition of control of
-is a publicly announced intention by a person 29.69%. Petitioner owned only 9% of UCHC stocks. BCI the listed company and for the purpose of protecting
acting alone or in concert with other persons to and its subsidiary informed PSE through passing a the minority stockholders of a listed corporation.
acquire equity securities of a public company. resolutions its intention to sell its shares to petitioner. Whatever may be the method by which control of a
- stated differently, it is an offer by the acquiring In the PSE circular, petitioner’s acquisition of BCI and public company is obtained either through the direct
person to stockholders of a public company for them to ACC’s shares in UCHC results in beneficial ownership purchase of its stocks or through an indirect means,
tender their shares therein on the terms specified in increased by 36% and amounted to at least 53%. Of Mandatory Tender offer applies.
the offer. It is in place to protect minority shareholders this disclosure, PSE in its letter to SEC inquired The petitioner posits that what it acquired
against any scheme that dilutes the share value of whether the Tender Offer Rule under Rule 19 of the were stocks of UCHC and not UCC. As a result of the
their investments. implementing rules of SRC is not applicable to the transaction, it became an indirect owner of UCC. What
- it gives the minority shareholders the chance to purchased made by petitioner of the majority of is decisive is the determination of the power to
exit the company under reasonable terms, giving them shares of UCC. control. The legislative intent behind the tender offer
the opportunity to sell their shares at the same price as rule makes clear that the type of activity intended to
those of the majority. The SEC thru its director said that tender offer be regulated is the acquisition of control of the listed
rule does not apply to the shares purchased by the company through the purchase of shares. Control may
 Public Company is defined as a corporation petitioner but the SEC En Banc still need to confirmed be effected through a direct and indirect acquisition of
which is listed on an exchange, or a such. On the other, respondent being a minority stock, and when this takes place irrespective of the
corporation with assets exceeding 50,000.00 stockholder of UCC sent a letter to the petitioner means, a tender offer must occur. The bottomline of
and with 200 or more stockholders, at least demanding the latter to comply with the mandatory the law is to give the shareholder of the listed
200 of them holding not less than 100 shares tender offer rule but petitioner refused. Now, company the opportunity to decide whether to sell in
of such company. respondent filed a complaint before the SEC praying to connection with a transfer of control.
declare the purchased agreement void and that the
Mandatory Offer Rule be applied to its UCC shares.
Impleaded in the complaint were petitioner, UCC,
UCHC, BCI and ACC which were required by the SEC to
file their respective comment in the complaint. In their
comments, the tender offer rule applied only to a
direct acquisition of the shares of the listed company
and not to an indirect acquisition arising from the
purchase of the holding company of the listed firm.
The SEC ruled in favor of the respondent and directed
the petitioner to make a tender offer for UCC Shares

12 | P a g e
 to respondent and other holders of the UCC shares in
accordance with SEC. 9 (E), Rule 19 of the Securities
Regulation Code. The said decision was then affirmed
by the Court of Appeals.

Does the Mandatory Tender Offer Rule apply to

indirect acquisition of shares in a listed company as
illustrated in this case?

Power Homes Unlimited Corp. SEC, 546 SCRA 567 Petitioner is a domestic corporation duly registered The business operation or the scheme of petitioner
(2008) with public respondent SEC. Its primary purpose is: “To constitutes an investment contract that is a security
(Ryan Suaverdez) engage in the transaction of promoting, acquiring, under R.A. No. 8799 (See Section 8).
managing, leasing, obtaining options on, development,
An investment contract is defined as a “contract, and improvement of real estate properties for Public respondent SEC found the petitioner “as a
transaction or scheme (collectively ‘contract’) whereby subdivision and allied purposes, and in the purchase, marketing company that promotes and facilitates sales
a person invests his money in a common enterprise sale and/or exchange of said subdivision and of real properties and other related products of real
and is led to expect profits primarily from the efforts of properties through network marketing.” estate developers through effective leverage
others.” marketing.”
Respondent Noel Manero requested public
An investment contract that is a security under R.A. respondent SEC to investigate petitioner’s business. An investment contract is defined in the Amended
No. 8799 must be registered with the Securities and He claimed that he attended a seminar conducted by Implementing Rules and Regulations of R.A. No. 8799
Exchange Commission before its sale or offer for sale petitioner where the latter claimed to sell properties as a “contract, transaction or scheme (collectively
or distribution to the public; The strict regulation of that were inexistent and without any broker’s license. ‘contract’) whereby a person invests his money in a
securities is founded on the premise that the capital common enterprise and is led to expect profits
markets depend on the investing public’s level of One Romulo E. Munsayac, Jr. inquired from public primarily from the efforts of others.”
confidence in the system. respondent SEC whether petitioner’s business involves
“legitimate network marketing.” Our definition of an investment contract traces its
roots from the 1946 United States (US) case of SEC v.
On the bases of the letters of respondent Manero and W.J. Howey Co. In this case, the US Supreme Court
Munsayac, public respondent SEC held a conference was confronted with the issue of whether the Howey
on December 13, 2000 that was attended by transaction constituted an “investment contract”
petitioner’s incorporators John Lim, Paul Nicolas and under the Securities Act’s definition of “security.” The
Leonito Nicolas. The attendees were requested to US Supreme Court, recognizing that the term
submit copies of petitioner’s marketing scheme and “investment contract” was not defined by the Act or
list of its members with addresses. illumined by any legislative report, held that “Congress
was using a term whose meaning had been

13 | P a g e
The following day or on December 14, 2000, petitioner crystallized” under the state’s “blue sky” laws in
submitted to public respondent SEC copies of its existence prior to the adoption of the Securities Act.
marketing course module and letters of Thus, it ruled that the use of the catch-all term
accreditation/authority or confirmation from Crown “investment contract” indicated a congressional intent
Asia, Fil-Estate Network and Pioneer 29 Realty to cover a wide range of investment transactions. It
Corporation. established a test to determine whether a transaction
falls within the scope of an “investment contract.”
On the same day, after finding petitioner to be Known as the Howey Test, it requires a transaction,
engaged in the sale or offer for sale or distribution of contract, or scheme whereby a person (1) makes an
investment contracts, which are considered securities investment of money, (2) in a common enterprise, (3)
under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The with the expectation of profits, (4) to be derived solely
Securities Regulation Code), but failed to register them from the efforts of others. Although the proponents
in violation of Sec. 8.1 of the same Act, public must establish all four elements, the US Supreme
respondent SEC issued a CDO. Court stressed that the Howey Test “embodies a
flexible rather than a static principle, one that is
Petitioner moved for the lifting of the CDO, which capable of adaptation to meet the countless and
public respondent SEC denied for lack of merit. variable schemes devised by those who seek the use
of the money of others on the promise of profits.”
Aggrieved, petitioner went to the Court of Appeals Needless to state, any investment contract covered by
imputing grave abuse of discretion amounting to lack the Howey Test must be registered under the
or excess of jurisdiction on public respondent SEC for Securities Act, regardless of whether its issuer was
issuing the order. It also applied for a temporary engaged in fraudulent practices.
restraining order, which the appellate court granted.
From these premises, the Court affirmed the ruling of
On May 23, 2001, the Court of Appeals consolidated the public respondent SEC and the Court of Appeals
petitioner’s case with entitled Prosperity.Com, that the petitioner was engaged in the sale or
Incorporated v. Securities and Exchange Commission. distribution of an investment contract.

Petitioner filed in the Court of Appeals a Motion for In SEC vs. Turner, the SEC brought a suit to enjoin the
the Issuance of a Writ of Preliminary Injunction. The violation of federal securities laws by a company
motion was heard. Public respondent SEC filed its offering to sell to the public contracts characterized as
opposition. The appellate court granted petitioner’s self-improvement courses. On appeal from a grant of
motion. preliminary injunction, the US Court of Appeals of the
9th Circuit held that self-improvement contracts which
Public respondent SEC moved for reconsideration, primarily offered the buyer the opportunity of earning
which was not resolved by the Court of Appeals. commissions on the sale of contracts to others were

14 | P a g e
 “investment contracts” and thus were “securities”
The Court of Appeals issued its Consolidated Decision within the meaning of the federal securities laws. This
which stated, “the petition for certiorari and is regardless of the fact that buyers, in addition to
prohibition filed by the other petitioner Powerhomes investing money needed to purchase the contract,
Unlimited Corporation is hereby DENIED for lack of were obliged to contribute their own efforts in finding
merit and the questioned Cease and Desist Order prospects and bringing them to sales meetings.
issued by public respondent against it is accordingly
AFFIRMED IN TOTO.” The business scheme of petitioner in the case at bar is
essentially similar. An investor enrolls in petitioner’s
The Court of Appeals denied petitioner’s motion for program by paying US$234. This entitles him to recruit
reconsideration two (2) investors who pay US$234 each and out of
which amount he receives US$92. A minimum
Does petitioner’s business constitute an investment recruitment of four (4) investors by these two (2)
contract which should be registered with public recruits, who then recruit at least two (2) each,
respondent SEC before its sale or offer for sale or entitles the principal investor to US$184 and the
distribution to the public? pyramid goes on.

The Court therefore ruled that the business operation

or the scheme of petitioner constitutes an investment
contract that is a security under R.A. No. 8799. Thus, it
must be registered with public respondent SEC before
its sale or offer for sale or distribution to the public. As
petitioner failed to register the same, its offering to
the public was rightfully enjoined by public
respondent SEC. The CDO was proper even without a
finding of fraud. As an investment contract that is
security under R.A. No. 8799, it must be registered
with public respondent SEC, otherwise the SEC cannot
protect the investing public from fraudulent securities.
The strict regulation of securities is founded on the
premise that the capital markets depend on the
investing public’s level of confidence in the system.

Union Bank of the Philippines vs. SEC, G.R. No. On April 4, 1997, petitioner, through its General Because its securities are exempt from the registration
138949, June 6, 2001* Counsel and Corporate Secretary, sought the opinion requirements under Section 5(a)(3) of the Revised

15 | P a g e
(https://vbdiaz.wordpress.com/2016/12/21/union- of Chairman Perfecto Yasay, Jr. of respondent SEC as Securities Act, petitioner argues that it is not covered
bank-vs-sec-digest/) to the applicability and coverage of the “Full Material by RSA Implementing Rule 11(a)-1, which requires the
Disclosure Rule” on banks, contending that said rules, filing of annual, quarterly, current predecessor and
Petitioner’s securities are exempt from the registration in effect, amend Section 5 (a) (3) of the Revised successor reports; Rule 34(a)-1, which mandates the
requirements under Section 5(a)(3) of the Revised Securities Act which exempts securities issued or filing of proxy statements and forms of proxy; and
Securities Act. However, the exemption from the guaranteed by banking institutions from the Rule 34(c)-1, which obligates the submission of
registration requirement enjoyed by petitioner does registration requirement provided by Section 4 of the information statements.
not necessarily connote that it is exempted from the same Act. We do not agree. Section 5(a)(3) of the said Act reads:
other reportorial requirements. Having confined the Chairman Yasay, in a letter dated April 8, 1997, “Sec 5. Exempt Securities. (a) Except as expressly
exemption enjoyed by petitioner merely to the initial informed petitioner that while the requirements of provided, the requirement of registration under
requirement of registration of securities for public registration do not apply to securities of banks which subsection (a) of Section four of this Act shall not apply
offering, and not to the subsequent filing of various are exempt under Section 5(a) (3) of the Revised to any of the following classes of securities: x x x x
periodic reports, respondent Commission, as the Securities Act, however, banks with a class of xx xxx
regulatory agency, is able to exercise its power of securities listed for trading on the Philippine Stock (3) Any security issued or guaranteed by any banking
supervision and control over corporations and over the Exchange, Inc. are covered by certain Revised institution authorized to do business in the Philippines,
securities market as a whole. Otherwise, the Securities Act Rules governing the filing of various the business of which is substantially confined to
objectives of the `Full Material Disclosure’ policy would reports with respondent Commission, i.e., (1) Rule banking, or a financial institution licensed to engage in
be defeated since petitioner corporation and its 11(a)-1 requiring the filing of Annual, Quarterly, quasi-banking, and is supervised by the Central Bank.”
dealings would be totally beyond the reach of Current, Predecessor and Successor Reports; (2) Rule This provision exempts from registration
respondent Commission and the investing public.” 34-(a)-1 requiring submission of Proxy Statements; the securities issued by banking or financial
Petitioner is a commercial banking corporation listed in and (3) Rule 34-(c)-1 requiring submission of institutions mentioned in the law. Nowhere does it
the stock exchange. Thus, it must adhere not only to Information Statements, among others. state or even imply that petitioner, as a
banking and other allied special laws, but also to the Petitioner informed Chairman Yasay that they will listed corporation, is exempt from complying with the
rules promulgated by Respondent SEC, the government refer the matter to the Philippine Stock Exchange for reports required by the assailed RSA Implementing
entity tasked not only with the enforcement of the clarification. Respondent SEC, through its Money Rules. Worth repeating is the CA’s disquisition on the
Revised Securities Act, but also with the supervision of Market Operations Department Director, wrote matter, which we quote:
all corporations, partnerships or associations which are petitioner, reiterating its previous position that “However, the exemption from the registration
grantees of government-issued primary franchises petitioner is not exempt from the filing of certain requirement enjoyed by petitioner does not
and/or licenses or permits to operate in the reports. The letter further stated that the Revised necessarily connote that it is exempted from the other
Philippines. Securities Act Rule 11(a) requires the submission of reportorial requirements. Having confined the
reports necessary for full, fair and accurate disclosure exemption enjoyed by petitioner merely to the initial
to the investing public, and not the registration of its requirement of registration of securities for public
shares. offering, and not to the subsequent filing of various
SEC wrote petitioner, enjoining the latter to show periodic reports, respondent Commission, as the
cause why it should not be penalized for its failure to regulatory agency, is able to exercise its power of
submit a Proxy/Information Statement in connection supervision and control over corporations and over

16 | P a g e
with its annual meeting held on May 23, 1997, in the securities market as a whole. Otherwise, the
violation of respondent Commission’s ‘Full Material objectives of the `Full Material Disclosure’ policy
Disclosure Rule.’ would be defeated since petitioner corporation and its
Petitioner was assessed a fine of P50,000.00 dealings would be totally beyond the reach of
plus P500.00 for every day that the report was not respondent Commission and the investing public.”
filed, or a total of P91, 000.00 as of July 21, Petitioner is a commercial banking corporation listed
1997. Petitioner wrote respondent Commission in the stock exchange. Thus, it must adhere not only
disputing the assessment. Respondent issued the to banking and other allied special laws, but also to
assailed Order. Petitioner filed MR. It was denied by the rules promulgated by Respondent SEC, the
SEC. CA also denied the appeal. Hence, this Petition. government entity tasked not only with the
enforcement of the Revised Securities Act, but also
Is petitioner required to comply with the respondent with the supervision of all corporations, partnerships
SEC’s full disclosure rules? or associations which are grantees of government-
issued primary franchises and/or licenses or permits to
operate in the Philippines.
RSA Rules 11(a)-1, 34(a)-1 and 34(c)-1 require the
submission of certain reports to ensure full, fair and
accurate disclosure of information for the protection
of the investing public. These Rules were issued by
respondent pursuant to the authority conferred upon
it by Section 3 of the RSA. The said Rules do not
amend Section 5(a)(3) of the Revised Securities Act,
because they do not revoke or amend the exemption
from registration of the securities enumerated
thereunder. They are reasonable regulations imposed
upon petitioner as a banking corporation trading its
securities in the stock market.
That petitioner is under the supervision of the BSP and
the Philippine Stock Exchange does not exempt it from
complying with the continuing disclosure
requirements embodied in the assailed
Rules. Petitioner, as a bank, is primarily subject to the
control of the BSP; and as a corporation trading its
securities in the stock market, it is under the
supervision of the SEC. It must be pointed out that
even the PSE is under the control and supervision of

17 | P a g e
 respondent. There is no over-supervision here. Each
regulating authority operates within the sphere of its
powers. That stringent requirements are imposed is
understandable, considering the paramount
importance given to the interests of the investing
public.
These regulations are meant to assure full, fair and
accurate disclosure of information for the protection
of investors in the stock market. Imposing such
regulations is a function within the jurisdiction of the
SEC. Since petitioner opted to trade its shares in the
exchange, then it must abide by the reasonable rules
imposed by the SEC.
WHEREFORE, the Petition is hereby DENIED.

Nestle Phils. Vs. Court of Appeals, 203 SCRA504 Nestle’s Authorized Capital Stock (ACS) was increased No. Under Section 38 of the Corporation Code, a
(1991) from P300M divided into 3 million shares with a par corporation engaged in increasing its authorized
(John Rodson Tagle) value of P100 per share, to 600 million divided into 6 capital stock, with the required vote of its Board of
million shares with a par value of P100 per share. Directors and of its stockholders, must file a sworn
When capital stock is issued in the course of and in Nestle issued 344,500 shares out of its previously statement of the treasurer of the corporation showing
compliance with the requirements of increasing its authorized but unissued capital stock exclusively to its at least 25% of the amount subscribed has been paid
authorized capital stock under Section 38 of the principal stockholders San Miguel Corporation and to either in actual cash or in property transferred to the
Corporation Code, the SEC examines the financial Nestle S.A. San Miguel Corporation subscribed to and corporation. The corporation must issue at least 25%
condition of the corporation, and hence there is no real completely paid up 168, 800 shares, while nestle S.A. of the newly or contemporaneously authorized capital
need for the exercise of SEC authority under the subscribed to and paid up the balance of 175,700 stock in the course of complying with the
Revised Securities Act. shares of stock. Nestle filed a letter to SEC to seek requirements of the Corporation Code for increasing
exemption of its proposed issuance of additional its authorized capital stock. After approval by the SEC
shares to its existing principal shareholders, from of the increase of its authorized capital stock, and
registration requirement of Section 4 of the Revised from time to time thereafter, the corporation, by a
Securities Act and from payment of the fee referred to vote of its Board of Directors and without need of
in Section 6 ( c ) of the same act which states of “the either stockholder or SEC approval, may issue and sell
issuance of additional capital stock of a corporation shares of its already authorized but still unissued
sold or distributed by it among its own stockholders capital stock to existing shareholders or to members of
exclusively, where no commission or other the general public. In the present case, since the
renumeration is paid or given directly or indirectly in 344,500 shares of Nestle capital stock are proposed to
connection with the sale or distribution of such be issued from already authorized but still unissued

18 | P a g e
 increased capital stock.” Nestle argued that Section 6 capital stock and since the present authorized stock of
(a) (4) of the Revised Securities Act embraces not only 6, 000, 000 shares with a par value of P100.00 per
an increase in the authorized capital stock but also the share is not proposed to be further increased, Nestle’s
issuance of additional shares to existing stockholders petition should be rejected.
of the unissued portion of the unissued capital stock.

Nestle’s request was denied by SEC, ruling that the

proposed issuance of shares did not fall under Section
6 (a) (4) of the Revised Securities Act because said
Section is applicable only where there is an increase in
the authorized capital stock of a corporation. Both
motion for reconsideration and appeal to the Court of
Appeals were denied. Nestle, therefore, filed a
Petition for Review.

Should Nestle’s application for exemptions be

granted?

Nicolas vs. Court of Appeals, 288 SCRA 307 (1998) Roy Nicolas and private respondent Blesito Buan No. Under the Portfolio Management Agreement, it
(Iris Valeriano) entered into a Portfolio Management Agreement, was agreed that private respondent would pay the
No broker shall sell any securities unless he is wherein the former was to manage the stock petitioner 20% of all realized profits every end of the
registered with the Securities and Exchange transactions of the latter for a period of three months month as his management fees.
Commission. with an automatic renewal clause. However, upon the Unfortunately, the profit and loss statements
An unlicensed person may not recover compensation initiative of the private respondent the agreement was presented by the petitioner are nothing but bare
for services as a broker where a statute or ordinance terminated and thereafter he requested for an assertions, devoid of any concrete basis or specifics as
requiring a license is applicable and such statute or accounting of all transactions made by the petitioner. to the method of arriving at the amounts indicated in
ordinance is of a regulatory nature; Stock market Three weeks after the termination of the agreement, the documents. In fact, it did not even state when the
trading, a technical and highly specialized institution in Nicolas demanded from Buan the amount of stocks were purchased, the type of stocks (whether
the Philippines, must be entrusted to individuals with P68,263.67 representing his alleged management fees Class “A” or “B” or common or preferred) bought,
proven integrity, competence and knowledge, who covering the periods of June 30, July 31 and August 19, when the stocks were sold, the acquisition and selling
have due regard to the requirements of the law. 1987 has provided for in the Portfolio Management price of each stock, when the profits, if any, were
Agreement. The demands went unheeded. delivered to the private respondent, the cost of
Thus, petitioner filed a complaint for collection of sum safekeeping or custody of the stocks, as well as the
of money against the private respondent. However, taxes paid for each transaction. With respect to the
private respondent contended that petitioner alleged losses, it has been held that where a profit or
loss statement shows a loss, the statement must show

19 | P a g e
mismanaged his transactions resulting in losses, thus, income and items of expense to explain the method of
he was not entitled to any management fees. determining such loss. However, in the instant
The trial court rendered its decision in favor of petition, petitioner hardly elucidated the reasons and
plaintiff. the factors behind the losses incurred in the course of
The Court of Appeals reversed. the transactions. Thus, no evidentiary value can be
attributed to the profit and loss statements submitted
Can a broker sell securities absence of registration or by the petitioner.
license from the SEC? Further, the futility of petitioner’s action became more
pronounced by the fact that he traded securities for
the account of others without the necessary license
from the Securities and Exchange Commission (SEC).
Clearly, such omission was in violation of Section 19 of
the Revised Securities Act which provides that no
broker shall sell any securities unless he is registered
with the SEC. The purpose of the statute requiring the
registration of brokers selling securities and the filing
of data regarding securities which they propose to sell,
is to protect the public and strengthen the securities
mechanism.
American jurisprudence emphasizes that: “x x x, an
unlicensed person may not recover compensation for
services as a broker where a statute or ordinance
requiring a license is applicable and such statute or
ordinance is of a regulatory nature, was enacted in the
exercise of the police power for the purpose of
protecting the public, requires a license as evidence of
qualification and fitness, and expressly precludes an
unlicensed person from recovering compensation by
suit, or at least manifests an intent to prohibit and
render unlawful the transaction of business by an
unlicensed person.” We see no reason not to apply the
same rule in our jurisdiction. Stock market trading, a
technical and highly specialized institution in the
Philippines, must be entrusted to individuals with
proven integrity, competence and knowledge, who
have due regard to the requirements of the law.

20 | P a g e
Carolina Industries Inc. vs. CMS Stock Brokerage, Inc., Defendant CMS Stock Brokerage, Inc. (formerly Sison, Yes. The Supreme Court generally follow American
et. al., G.R. No. L-46908, May 17, 1980 Luz & Jalbuena, Inc.), for the calendar year 1969, was a interpretations of laws adopted from the United
(Jodi Anne Amoyo) licensed securities broker and dealer engaged, for States like the Securities. They have previously stated
compensation, in the business of buying and selling that in case of laws patterned after or adopted from
Generally speaking, when a statute has been adopted stocks and securities for and in behalf of investors, those of the United States, decisions of United States
from another State and such statute has previously such as the plaintiff. The CMS Stock Brokerage, Inc. is courts construing similar laws are entitled to great
been construed by the courts of such State or country, a member firm of the Makati Stock Exchange. weight. Generally speaking, when a statute has been
this statute is deemed to have been adopted with the Defendant Carlos Moran Sison is the president and at adopted from another State and such statute has
construction so given it. It has been uniformly held that the same time the major and controlling stockholder previously been construed by the courts of such State
if a broker extends credit to a customer in violation of of defendant corporation. Defendants, in admitting or country, this statute is deemed to have been
the Securities Act or the regulations promulgated the foregoing facts, made the qualification that during adopted with the construction so given it. It has been
pursuant thereto, all to induce a customer to purchase the period from January 10 to August 29, 1969, uniformly held that if a broker extends credit to a
securities, then the broker has violated the law and the Arsenio N. Luz III was the president of defendant customer in violation of the Securities Act or the
customer may recover from him any loss proximately corporation. regulations promulgated pursuant thereto, all to
resulting therefrom. The customer’s right of action is induce a customer to purchase securities, then the
not affected by his participation in the transaction On or about June 17, 1969, plaintiff opened a margin broker has violated the law and the customer may
“Since the legislation regarded him as incapable of account with defendants for purchasing, carrying and recover from him any loss proximately resulting
protecting himself.” It has been held that such selling stocks and securities listed in the Makati Stock therefrom. The customer’s right of action is not
protection was intended to apply only to innocent Exchange, as evidenced by a 'Margin Account affected by his participation in the transaction “Since
investors as distinguished from those who lose their Agreement' executed on that date by plaintiff through the legislation regarded him as incapable of protecting
innocence and wait to see how their investments turn its treasurer and controlling stockholder, Mariano T. himself.” It has been held that such protection was
out before deciding to invoke the act. The acts of Lim, and approved by defendant corporation, acting intended to apply only to innocent investors as
protecting of investors extends to corporations as well through its vice-president and general manager, distinguished from those who lose their innocence and
as to individuals. defendant Luis F. Sison wait to see how their investments turn out before
deciding to invoke the act. The acts of protecting of
The plaintiff Carolina Industries Inc. filed a case against investors extends to corporations as well as to
the defendant CMS Stock brokerage, Inc.,. The individuals.
defendant made a stock purchases in favor of plaintiff
nothwithstanding that the plaintiff’s account was
undermargin or above the 50% ceiling required under
Section 18 (a) (1) of the Securities Act.

Does defendant’s excessive extension of credit in favor

of plaintiff violate the Security Act?

21 | P a g e
Baviera v. Paglinawan G.R. No. 168380, 8 February Manuel Baviera, petitioner, was the former head of YES.
2007, 515 SCRA 515 the HR Service Delivery and Industrial Relations of
(Myla Valle) Standard Chartered Bank-Philippines (SCB). Pursuant Section 53.1 of the Securities Regulation Code
to Resolution No. 1142 of the Monetary Board of the provides:
A criminal charge for violation of the SRC is a BSP, the conduct of SCB’s business in this jurisdiction is “
specialized dispute. Hence, it must first be referred to subject to the following conditions: SEC. 53. Investigations, Injunctions and Prosecution of
an administrative agency of special competence, i.e., Offenses. —
the SEC At the end of a one-year period from the date the SCB
starts its trust functions, at least 25% of its trust 53. 1. The Commission may, in its discretion, make
accounts must be for the account of nonresidents of such investigation as it deems necessary to determine
the Philippines and that actual foreign exchange had whether any person has violated or is about to violate
been remitted into the Philippines to fund such any provision of this Code, any rule, regulation or
accounts or that the establishment of such accounts order thereunder, or any rule of an Exchange,
had reduced the indebtedness of residents (individuals registered securities association, clearing agency,
or corporations or government agencies) of the other self-regulatory organization, and may require or
Philippines to nonresidents. At the end of the second permit any person to file with it a statement in writing,
year, the above ratio shall be 50%, which ratio must be under oath or otherwise, as the Commission shall
observed continuously thereafter; determine, as to all facts and circumstances
concerning the matter to be investigated. The
SCB did not comply with the above conditions. Commission may publish information concerning any
Instead, as early as 1996, it acted as a stock broker, such violations and to investigate any fact, condition,
soliciting from local residents foreign securities called practice or matter which it may deem necessary or
“GLOBAL THIRD PARTY MUTUAL FUNDS” (GTPMF), proper to aid in the enforcement of the provisions of
denominated in US dollars. These securities were not this Code, in the prescribing of rules and regulations
registered with the SEC. These were then remitted thereunder, or in securing information to serve as a
outwardly to SCB-Hong Kong and SCB-Singapore. basis for recommending further legislation concerning
the matters to which this Code relates: Provided,
SCB’s counsel, advised the bank to proceed with the however, That any person requested or subpoenaed
selling of the foreign securities although unregistered to produce documents or testify in any investigation
with the SEC, under the guise of a “custodianship shall simultaneously be notified in writing of the
agreement”; and should it be questioned, it shall purpose of such investigation: Provided, further, That
invoke Section 72 of the General Banking Act (Republic all criminal complaints for violations of this Code and
Act No. 337). In sum, SCB was able to sell GTPMF the implementing rules and regulations enforced or
securities worth around P6 billion to some 645 administered by the Commission shall be referred to
investors. the Department of Justice for preliminary investigation
and prosecution before the proper court: Provided,

22 | P a g e
Investment Capital Association of the Philippines furthermore, That in instances where the law allows
(ICAP) filed with the SEC a complaint alleging that SCB independent civil or criminal proceedings of violations
violated the Revised Securities Act, particularly the arising from the act, the Commission shall take
provision prohibiting the selling of securities without appropriate action to implement the same: Provided,
prior registration with the SEC; and that its actions are finally, That the investigation, prosecution, and trial of
potentially damaging to the local mutual fund such cases shall be given priority.”
industry.
The CA held that under the above provision, a criminal
SCB denied offering and selling securities, contending complaint for violation of any law or rule administered
that it has been performing a “purely informational by the SEC must first be filed with the latter. If the
function” without solicitations for any of its Commission finds that there is probable cause, then it
investment outlets abroad; that it has a trust license should refer the case to the DOJ. Since petitioner
and the services it renders under the “Custodianship failed to comply with the foregoing procedural
Agreement” for offshore investments are authorized requirement, the DOJ did not gravely abuse its
by Section 72 of the General Banking Act; that its discretion in dismissing his complaint in I.S. No. 2004-
clients were the ones who took the initiative to invest 229.
in securities; and it has been acting merely as an agent
or “passive order taker” for them. A criminal charge for violation of the SRC is a
specialized dispute. Hence, it must first be referred to
BSP directed SCB not to include investments in global an administrative agency of special competence, i.e.,
mutual funds issued abroad in its trust investments the SEC. Under the doctrine of primary jurisdiction,
portfolio without prior registration with the SEC. courts will not determine a controversy involving a
However, notwithstanding its commitment and the question within the jurisdiction of the administrative
BSP directive, SCB continued to offer and sell GTPMF tribunal, where the question demands the exercise of
securities in this country. This prompted petitioner to sound administrative discretion requiring the
enter into an Investment Trust Agreement with SCB specialized knowledge and expertise of said
wherein he purchased US$8,000.00 worth of securities administrative tribunal to determine technical and
upon the bank’s promise of 40% return on his intricate matters of fact. The SRC is a special law. Its
investment and a guarantee that his money is safe. enforcement is particularly vested in the SEC. Hence,
After six (6) months, however, petitioner learned that all complaints for any violation of the Code and its IRR
the value of his investment went down to should be filed with the SEC. Where the complaint is
US$7,000.00. He tried to withdraw his investment but criminal in nature, the SEC shall indorse the complaint
was persuaded by Antonette de los Reyes of SCB to to the DOJ for preliminary investigation and
hold on to it for another six (6) months in view of the prosecution as provided in Section 53.1 earlier quoted.
possibility that the market would pick up.

23 | P a g e
 BSP found that SCB failed to comply with its directive.

Petitioner learned from Marivel Gonzales, head of the

SCB Legal and Compliance Department, that the latter
had been prohibited by the BSP to sell GPTMF
securities.

SEC issued a CDO against SCB restraining it from

further offering, soliciting, or otherwise selling its
securities to the public until these have been
registered with the SEC but SEC subsequently lifted its
CDO and approved the P7 million settlement offered
by SCB. Thereupon, SCB made a commitment not to
offer or sell securities without prior compliance with
the requirements of the SEC.

Petitioner filed with the DOJ a complaint for violation

of Section 8.1 of the SRC against private respondents.
DOJ dismissed petitioner’s complaint for violation of
Section 8.1 of SRC holding that it should have been
filed with the SEC. CA sustained the ruling of the DOJ
that the case should have been filed initially with the
SEC.

Should the SRC violation complaint filed by petitioner

be filed with SEC?

Lopez, Locsin, Ledesma & Co. vs. Court of Appeals, Respondent CMS Stock Brokerage, Inc. ( CMS) and YES.
168 SCRA 276 (1998) petitioner LLL are members of the Makati Stock As members of the MSE, CMS and LLL are
(Tristan Zapata) Exchange (MSE). CMS sold to LLL, as buyer for and on bound by the rules and by-laws of the exchange. The
orders of third parties, 2,650 Benguet Consolidated contention that rules and regulations of the exchange
An exchange has the power to adopt its own shares on a 10-20 days delayed deliver basis. The should not apply to or affect contracts which may
constitution, bylaws, rules and regulations so far as transaction was evidenced by exchange contracts. involve third persons is without merit. Rules and
they are not contrary to law or public policy and which After about 4 months, however, CMS still has not regulations of the Stock Exchange form part of the
will secure to the members exclusive rights and delivered to LLL the said shares which remained contract. Because of the peculiarity of the business

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privileges which the courts have fully recognized. unpaid. LLL refused to accept the belated delivery involved in a stock exchange, rules were adopted to
Anyone who becomes a member of the exchange since its clients for whom the purchases were made govern not only the members but the transactions
voluntarily submits himself to the operation of these had cancelled their orders. CMS sued LLL. CFI ruled in between the members as well. Under the applicable
rules and is expected to be bound by and to respect favor of CMS, compelling LLL to accept delivery, rule, case at bar, if the selling member fails or refuses
them. among others. CA affirmed. LLL avers the law on to deliver, it may be compelled to purchase the same
Nature and purposes of an exchange . “An exchange is contracts is controlling in this case (and not the MSE for the selling member’s account. There being a
a voluntary association or corporation organized for Rules which CA ruled LLL to have violated). Hence special remedy agreed upon by the members, the
the purpose of furnishing to its members a convenient CMS’ failure to deliver within the stipulated time right to rescission under the New Civil Code is
and suitable place to transact their business of warrants rescission of the exchange contracts, and inapplicable . Exchange contracts are peculiar in
promoting uniformity in the customs and usages of thus LLL cannot be compelled to accept the belated certain ways . Firstly, they are affected with public
merchants, of inculcating principles of justice and delivery. Under the Rule at issue, if the selling member interest and therefore should be clothed with greater
equity in trade, of facilitating the speedy adjustment of fails or refuses to deliver, it may be compelled through sanctity than ordinary contracts. Consequently, unless
business disputes, of acquiring and disseminating the Chairman of the Floor Trading and Arbitration there are clear and insuperable obstacles to their
valuable commercial and economic information and Committee to purchase the same for the selling enforcement, they should be enforced. Secondly,
generally of securing to its members the benefits of co- member’s account. It does not give the buying exchange contracts are entered into with speed (in
operation in the furtherance of their legitimate member the right to rescind the contract. seconds) even if they involve thousands of pesos.
pursuits Therefore, the Exchange Rules must be interpreted to
Are the Exchange Rules controlling as to the subject assure enforcement. Thirdly, the stockbrokers usually
exchange contracts? do not invest their own money but their clients’. Thus,
the investor is practically dealing with people who are
complete strangers to him. The inviolability of
exchange contracts and their enforcement must,
therefore, be guaranteed or else no stock exchange is
possible. Public policy demands that LLL must be
compelled to accept the delivery of the shares and to
pay for them. Any other interpretation of the
Exchange Rules would destroy the Exchange itself.

SEC vs. Performance Foreign Exchange Corp., G.R. The respondent received a letter from the SEC YES.
No. 154131, July 20, 2006 (Petitioner) requiring the respondent to appear before Under Section 64 of R.A. No. 8799, there are
(Tristan Zapata) the Compliance and Enforcement Department (CED) two essential requirements that must be complied
on December 14, 2000 for a clarificatory conference with by the SEC before it may issue a cease and desist
Under Section 64 of R.A. No. 8799, there are two regarding its business operations. Respondent’s order: First, it must conduct proper investigation or
essential requirements that must be complied with by officers complied and explained before the CED the verification; and Second, there must be a finding that
the SEC before it may issue a cease and desist nature of their business. the act or practice, unless restrained, will operate as a

25 | P a g e
order: First, it must conduct proper investigation or The CED issued a Cease and Desist Order fraud on investors or is otherwise likely to cause grave
verification; and Second, there must be a finding that stating that his department conducted an inquiry on or irreparable injury or prejudice to the investing
the act or practice, unless restrained, will operate as a respondent’s business operations for possible public.
fraud on investors or is otherwise likely to cause grave violation of Republic Act (R.A.) No. 8799 (otherwise Here, the first requirement is not present.
or irreparable injury or prejudice to the investing known as The Securities Regulation Code); that the Petitioner did not conduct proper investigation or
public. outcome of the inquiry shows that respondent is verification before it issued the challenged orders. The
Before a cease and desist order may be issued by the engaged in the trading of foreign currency clarificatory conference undertaken by petitioner
SEC, there must be a showing that the act or practice futures contracts in behalf of its clients without the regarding respondent’s business operations cannot be
sought to be restrained will operate as a fraud on necessary license; that such transaction can be considered a proper investigation or verification
investors or is likely to cause grave, irreparable injury deemed as a direct violation of Section 11 of R.A. No. process to justify the issuance of the Cease and Desist
or prejudice to the investing public. Such requirement 8799 and the related provisions of its Implementing Order. It was merely an initial stage of such process,
implies that the act to be restrained has been Rules and Regulations; and that it is imperative to considering that after it issued the said order following
determined after conducting the proper enjoin respondent from further operating as such to the clarificatory conference, petitioner
investigation/verification. protect the interest of the public. still sought verification from the BSP on the nature of
Respondent filed with petitioner SEC a motion respondent’s business activity.
praying for the lifting of the Cease and Desist Order, On the second requirement, before a cease
alleging that: (a) it has not violated any law or and desist order may be issued by the SEC, there must
regulation in the conduct of its business; (b) it has be a showing that the act or practice sought to be
been operating in accordance with the purposes for restrained will operate as a fraud on investors or is
which it was organized, which purposes were duly likely to cause grave, irreparable injury or prejudice to
approved by petitioner; (c) it has not engaged the investing public. Such requirement implies that the
in currency futures contracts trading; and (d) its act to be restrained has been
business involves "spot currency trading which is not a determined after conducting the proper
form of currency futures transaction." investigation/verification. In this case, the nature of
The SEC desires to know with certainty the the act to be restrained can only be
nature of respondent’s business and sent a letter to determined after the BSP shall have submitted its
the BSP requesting a definitive statement that findings to petitioner. However, there is nothing in the
respondent’s business transactions are a form questioned Orders that shows how the public is
of financial derivatives and, therefore, can only be greatly prejudiced or damaged by respondent’s
undertaken by banks or non-bank financial business operation.
intermediaries performing quasi-banking functions.
Without waiting for BSP’s determination of the
matter, the SEC issued an order which denies the
respondent's motion and directing that the same stays
until respondent shall have submitted the

26 | P a g e
 appropriate "endorsement" from the BSP that it can
engage in financial derivative transactions.
Later, the BSP stated that respondent’s business
activity "does not fall under the category of futures
trading" and" cannot be classified as financial
derivatives transactions."
The Court of Appeals ruled that petitioner acted with
grave abuse of discretion when it issued its challenged
Orders without a positive factual finding that
respondent violated the Securities Regulation Code.

Did the SEC acted with grave abuse of discretion in

issuing the Cease and Desist Order and its subsequent
Order making it permanent?

SEC vs. Prosperity Com, Inc., G.R. No. 164197, January Prosperity.Com, Inc. (PCI) sold computer software and The Securities Regulation Code treats investment
25, 2012 (Scribd) hosted websites without providing internet service. To contracts as "securities" that have to be registered
make a profit, PCI devised a scheme in which, for the with the SEC before they can be distributed and sold.
Securities Regulation Code treats investment contracts price of US$234.00 (subsequently increased to An investment contract is a contract, transaction, or
as "securities" that have to be registered with the SEC US$294), a buyer could acquire from it an internet scheme where a person invests his money in a
before they can be distributed and sold. An investment website of a 15MB capacity. At the same time, by common enterprise and is led to expect profits
contract is a contract, transaction, or scheme where a referring to PCI his own down-line buyers, a first-time primarily from the efforts of others.
person invests his money in a common enterprise and buyer could earn commissions, interest in real estate The United States Supreme Court held in Securities
is led to expect profits primarily from the efforts of in the Philippines and in the United States, and and Exchange Commission v. W.J. Howey Co. that, for
others. insurance coverage worth P50,000.00. an investment contract to exist, the following
To benefit from this scheme, a PCI buyer must enlist elements, referred to as the Howey test must concur:
For an investment contract to exist, the following and sponsor at least two other buyers as his own (1) a contract, transaction, or scheme; (2) an
elements, referred to as the Howey test must concur: down-lines. These second tier of buyers could in turn investment of money; (3) investment is made in a
(1) a contract, transaction, or scheme; (2) an build up their own down-lines. For each pair of down- common enterprise; (4) expectation of profits; and (5)
investment of money; (3) investment is made in a lines, the buyer-sponsor received a US$92.00 profits arising primarily from the efforts of others.
common enterprise; (4) expectation of profits; and (5) commission. But referrals in a day by the buyer- Here, PCI's clients do not make such investments. They
profits arising primarily from the efforts of others. sponsor should not exceed 16 since the commissions buy a product of some value to them: an Internet
due from excess referrals inure to PCI, not to the website of a 15-MB capacity. The client can use this
buyer-sponsor. website to enable people to have internet access to
PCI patterned its scheme from that of Golconda what he has to offer to them, say, some skin cream.
Ventures, Inc. (GVI), which company stopped The buyers of the website do not invest money in PCI

27 | P a g e
operations after the SEC issued a cease and desist that it could use for running some business that would
order (CDO) against it. As it later on turned out, the generate profits for the investors. The price of
same persons who ran the affairs of GVI directed PCI's US$234.00 is what the buyer pays for the use of the
actual operations. website, a tangible asset that PCI creates, using its
GVI then filed a complaint with the SEC against PCI, computer facilities and technical skills.
alleging that the latter had taken over GVI's Actually, PCI appears to be engaged in network
operations. The SEC ruled that PCI's scheme marketing, a scheme adopted by companies for
constitutes an Investment contract and, following getting people to buy their products outside the usual
the Securities Regulations Code, it should have first retail system where products are bought from the
registered such contract or securities with the SEC. store's shelf. Under this scheme, adopted by most
Instead of asking the SEC to lift its CDO in accordance health product distributors, the buyer can become a
with Section 64.3 of RA 8799, PCI filed with the CA a down-line seller. The latter earns commissions from
petition for certiorari against the SEC with an purchases made by new buyers whom he refers to the
application for a TRO and preliminary injunction. person who sold the product to him. The network goes
Because the CA did not act promptly on this down the line where the orders to buy come.
application for TRO, on January 31, 2001 PCI returned The commissions, interest in real estate, and insurance
to the SEC and filed with it before the lapse of the five- coverage worth P50,000.00 are incentives to down-
day period a request to lift the CDO. On the following line sellers to bring in other customers. These can
day, February 1, 2001, PCI moved to withdraw its hardly be regarded as profits from investment of
petition before the CA to avoid possible forum money under the Howey test.
shopping violation. The CA is right in ruling that the last requisite in
During the pendency of PCI's action before the SEC, the Howey test is lacking in the marketing scheme that
however, the CA issued a TRO, enjoining the PCI has adopted. Evidently, it is PCI that expects profit
enforcement of the CDO. In response, the SEC filed from the network marketing of its products. PCI is
with the CA a motion to dismiss the petition on ground correct in saying that the US$234 it gets from its
of forum shopping. In a Resolution, the CA initially clients is merely a consideration for the sale of the
dismissed the petition, finding PCI guilty of forum websites that it provides.
shopping. But on PCI's motion, the CA reversed itself
and reinstated the petition.
CA rendered a decision, granting PCI's petition and
setting aside the SEC-issued CDO. It ruled that
following the Howey test, PCI's scheme did not
constitute an investment contract that needs
registration pursuant to R.A. 8799.

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 Does PCI's scheme constitute an investment contract
that requires registration under R.A. 8799?

Sales vs. SEC, G.R. No. 54330, January 13, 1989, 169 Respondent State Investment House, Inc. (formerly The Court finds that the order of the SEC creating the
SCRA 109 (scribd) State Financing Center, Inc.) entered into a sales committee is fully supported by P.D. No. 902-A, as
agreement with Sipalay Mining whereby the latter amended by P.D. No. 1653 (1979), provides:
SEC has the power to compel the officers of a sold to the former 200,000,000 common shares of its
corporation to call meetings of stockholders under its capital stock in the amount of P2,600,000.00.The sales Sec. 3.The Commission shall have absolute jurisdiction,
supervision. agreement between Sipalay Mining and State supervision and control over all corporations,
Investment contained the following terms and partnerships or associations, who are the grantees of
conditions:1. That we shall dispose, sell or assign these primary franchise and/or a license or permit issued by
shares to the general public through a duly licensed the government to operate in the Philippines; and in
stockbroker after the approval of the registration the exercise of its authority, it shall have the power to
and/or licensing of shares of the Corporation under enlist the aid and support of any and all enforcement
terms and conditions and at the price determined by agencies of the government, civil or military.x x x
us; 2. That the stockbroker shall not sell more than
1,000,000 shares per buyer, to the extent practicable; Sec. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission
The 200,000,000 shares of stock of Sipalay Mining, over corporations, partnerships and other forms of
covered by ten certificates of stock, were delivered to associations registered with it as expressly granted
State Investment. Subsequently, the restriction on the under existing laws and decrees, its shall have original
sale of the shares was modified. On October 19, 1974, and exclusive jurisdiction to hear and decide cases
the Board of Directors of Sipalay Mining approved the involving.x x xb) Controversies arising out of intra-
amendment of the sales agreement by allowing sale in corporate or partnership relations, between and
blocks of 5,000,000 shares per buyer. among stockholders members, or associates; between
On December 22, 1975, State Investment addressed a any or all of them and the corporation, partnership or
letter to Sipalay Mining requesting that the latter association of which they are stockholders members
transfer the 200,000,000 shares to Anselmo Trinidad & or associates, respectively; and between such
Co., Inc. (hereinafter referred to as ATCO), to which it corporation, partnership or association and the state
had sold the shares. Sipalay Mining complied with this insofar as it concerns their individual franchise or right
request.During the time that ATCO held the shares, it to exist as such entity:c) Controversies in the election
voted them in the stockholders' meetings of Sipalay or appointments of directors, trustees, officers or
Mining. managers of such corporations, partnerships or
associations.
On July 17, 1978, or some two and a half years later,
ATCO in turn sold 198,500,000 of the shares to

29 | P a g e
respondent VULCAN. Sipalay Mining was requested by As correctly pointed out by the Solicitor General, the
ATCO to transfer the 198,500,000 shares to the name case before the SEC involves a controversy regarding
of VULCAN. the election of directors of a corporation:

Eight days prior to the scheduled annual stockholders' Respondent Commission had to address itself to the
meeting of Sipalay Mining on July 18,1979, petitioners controversy by issuing its questioned order dated June
filed before the SEC a petition to nullify the sale of 13, 1980, directing the holding of the annual
the shares to VULCAN, with a prayer for the issuance stockholders' meeting of Sipalay Mining for the year
of a writ of preliminary injunction to enjoin VULCAN 1980 as mandated in its by-laws, and creating a
from voting the shares. committee to supervise and control the conduct of the
proceedings to insure an orderly stockholders meeting
SEC temporarily restrained VULCAN from voting its and forestall possible controversy in the sending of
198,500,000 shares at the 1979 annual stockholders' notices, processing and validation of proxies and
meeting pending resolution of petitioners' petition for closing of the stock and transfer book. Certainly, the
the issuance of a writ of preliminary injunction. The Commission cannot be faulted, much less can it be
annual stockholders' meeting of Sipalay Mining said that it exceeded its jurisdiction, for having taken
proceeded on July 18, 1979 without the participation all proper measures to insure that an orderly meeting
of VULCAN's 198,500,000 shares and the members of and election are held in Sipalay Mining in the light of
the Board of Directors were elected. the issues raised in SEC Case No. 1751 pending before
the Commission.
The SEC denied the petitioners' application for the
issuance of the writ of preliminary injunction and Sec. 5(c) of P.D. No. 902-A would, therefore, clothe the
respondents' motion to dismiss to be both without SEC with jurisdiction over the matter.
merit. As the appeal of the assailed orders to the
SEC en banc was not allowed under the rules of the The court likewise finds that it was within the powers
Commission,** petitioners on July 23, 1980 filed the of the SEC to compel the officers of Sipalay Mining to
instant petition before this Court. call a stockholders' meeting under its supervision.
On August 1, 1980, the Court issued a temporary
restraining order enjoining the SEC from enforcing its As discussed above, under Section 5 of P.D. No. 902-A,
orders dated June 13, 1980 and July 17, 1980, the SEC had original and exclusive jurisdiction over the
particularly from enforcing its order to create the controversy. It was "in order to effectively exercise
committee (composed of one representative of the such jurisdiction", to borrow the language of P.D. No.
Securities and Exchange Commission, as Chairman, 902-A, that the SEC ordered the creation of the
and one representatives each from the respondents committee, in the exercise of its broad powers of
and the petitioners, as members) to supervise and control and supervision over corporations and its
control the conduct of the proceeding in the annual more specific power to compel the officers of a

30 | P a g e
 stockholders meeting of Sipalay Mining and from corporation to call meetings of stockholders under its
stopping the Board of Directors and officers of Sipalay supervision.
Mining from calling and conducting said meeting; and
respondent VULCAN from voting the questioned
198,500,000 shares of capital stock of Sipalay Mining
at the forthcoming regular annual stockholders'
meeting.

Petitioners claim that the SEC acted arbitrarily and

with grave abuse of discretion when its ordered the
creation of the committee, on the grounds: (1) that
the controversy is not one of those mentioned in
Presidential Decree No. 902-A; and (2) that P.D. No.
902-A specifies that only in appropriate cases may the
SEC compel officers of any corporation or association
registered by it to call meetings of stockholders or
members thereof under its supervision.

Did the SEC acted arbitrarily and with grave abuse of

discretion, tantamount to lack of jurisdiction, when it
ordered the creation of the committee to supervise
and control the conduct of the proceedings and
perform the functions of the Corporate Secretary, in
relation to the regular annual stockholders' meeting of
Sipalay Mining?

Philippine Veterans Bank vs. Justina Callangan, et. al., On March 17, 2004, respondent Justina F. Callangan, YES. To determine whether the Bank is a "public
G.R. No. 191995, August 3, 2011 the Director of the Corporation Finance Department of company" burdened with the reportorial requirements
(Ilham Batugan) the Securities and Exchange Commission (SEC), sent ordered by the SEC, we look to Subsections 17.1 and
the Bank a letter, informing it that it qualifies as a 17.2 of the SRC, which provide:
A "public company," as contemplated by the SRC, is "public company" under Section 17.2 of the Securities Section 17. Periodic and Other Reports of Issuers. –
not limited to a company whose shares of stock are Regulation Code (SRC) in relation with Rule 3(1)(m) of 17.1. Every issuer satisfying the requirements in
publicly listed; even companies like the Bank, whose the Amended Implementing Rules and Regulations of Subsection 17.2 hereof shall file with the Commission:
shares are offered only to a specific group of people, the SRC. The Bank is thus required to comply with the a) Within one hundred thirty-five (135) days, after the
end of the issuer’s fiscal year, or such other time as

31 | P a g e
are considered a public company, provided they meet reportorial requirements set forth in Section 17.1 of the Commission may prescribe, an annual report
the requirements enumerated by law. the SRC. which shall include, among others, a balance sheet,
The Bank responded by explaining that it should not profit and loss statement and statement of cash flows,
be considered a "public company" because it is a for such last fiscal year, certified by an independent
private company whose shares of stock are available certified public accountant, and a management
only to a limited class or sector, i.e., to World War II discussion and analysis of results of operations; and
veterans, and not to the general public. b) Such other periodical reports for interim fiscal
In a letter dated April 20, 2004, Director Callangan periods and current reports on significant
rejected the Bank’s explanation and assessed it a total developments of the issuer as the Commission may
penalty of One Million Nine Hundred Thirty-Seven prescribe as necessary to keep current information on
Thousand Two Hundred Sixty-Two and 80/100 Pesos the operation of the business and financial condition
(₱1,937,262.80) for failing to comply with the SRC of the issuer.
reportorial requirements from 2001 to 2003. The Bank 17.2. The reportorial requirements of Subsection 17.1
moved for the reconsideration of the assessment, but shall apply to the following:
Director Callangan denied the motion in SEC-CFD xxxx
Order No. 085, Series of 2005 dated July 26, c) An issuer with assets of at least Fifty million pesos
2005. When the SEC En Banc also dismissed the Bank’s (₱50,000,000.00) or such other amount as the
appeal for lack of merit in its Order dated August 31, Commission shall prescribe, and having two hundred
2006, prompting the Bank to file a petition for review (200) or more holders each holding at least one
with the Court of Appeals (CA). hundred (100) shares of a class of its equity securities:
The CA dismissed the petition and affirmed the Provided, however, That the obligation of such issuer
assailed SEC ruling, with the modification that the to file reports shall be terminated ninety (90) days
assessment of the penalty be recomputed from May after notification to the Commission by the issuer that
31, 2004. the number of its holders holding at least one hundred
(100) shares is reduced to less than one hundred
Is PVB a public company? (100). (emphases supplied)
We also cite Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the SRC, which
defines a "public company" as "any corporation with a
class of equity securities listed on an
Exchange or with assets in excess of Fifty Million
Pesos (₱50,000,000.00) and having two hundred (200)
or more holders, at least two hundred (200) of which
are holding at least one hundred (100) shares of a
class of its equity securities."

32 | P a g e
From these provisions, it is clear that a "public
company," as contemplated by the SRC, is not limited
to a company whose shares of stock are publicly listed;
even companies like the Bank, whose shares are
offered only to a specific group of people, are
considered a public company, provided they meet the
requirements enumerated by law.
The records establish, and the Bank does not dispute,
that the Bank has assets exceeding ₱50,000,000.00
and has 395,998 shareholders. It is thus considered a
public company that must comply with the reportorial
requirements set forth in Section 17.1 of the SRC.

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