Hall v. Geiger Jones Co. - 242 U.S.

539 (1917)


Syllabus
Case
U.S. Supreme Court
Hall v. Geiger Jones Co., 242 U.S. 539 (1917)
Hall v. Geiger Jones Company*
Nos. 438-440
Argued October 16, 17, 1916
Decided January 22, 1917
242 U.S. 539
Syllabus
The Ohio "Blue Sky Law," Supplement to Page & Adams' Ann.Gen.Code of Ohio, 1916, vol.
2, 6373-1 to 6373-24, examined as to its constitutionality and upheld.
In the exercise of the power to prevent fraud and imposition, Hutchinson Ice Cream Co. v.
Iowa, ante, 242 U. S. 153, a state may forbid dealing in stocks and other securities within
its borders without a license, and subject the business to executive supervision.
The liability of a business to regulation is not necessarily dependent upon its liability to be
abolished under the police power.
Under the so-called "Blue Sky Law" of Ohio, dealers within its provisions (including
companies floating their own issues) are not licensed to sell stocks and other securities
unless an executive officer designated is satisfied of the good business repute of the
applicants and their agents, and licenses, when issued, may be revoked by him upon
ascertaining that the licensees are of bad business repute, have violated any provision of
the act, or have engaged, or are about to engage, under favor of their licenses, in
illegitimate business or fraudulent
Page 242 U. S. 540
transactions; his findings, however, are made subject to judicial review. Held that the
powers thus conferred are not arbitrary, but consistent with due process under the
Fourteenth Amendment. Gundling v. Chicago, 177 U. S. 183.
The fact that the statute designates a particular court to review the executive findings does
not affect its validity.
It is to be presumed that the executive officer will act properly in the public interest, and
not wantonly or arbitrarily.
Whether there is a constitutional liberty to buy securities on one's own judgment of value
without governmental interposition to protect from bad bargains will not be determined at
the suit of parties whose rights are involved only from the standpoint of sellers, but
Quaere whether the state power does not extend to such guardianship over buyers.
The equal protection clause of the Fourteenth Amendment leaves the states at liberty to
regulate those activities which they deem conspicuous sources of existing evils without
embracing others which, but for this distinction, would fall in the same class.
A state law designed to prevent fraud in the selling of securities, which affects securities
coming from other states only in requiring that persons dealing in them within the state
shall be first licensed, shall file information concerning them and be subject in such dealing
to executive supervision, is not invalid as a direct burden on interstate commerce.
Quaere as to when and under what circumstances securities transported into a state may be
held to have lost their interstate character?
230 F. 233 reversed.
These cases were heard together in the district court and there disposed of in one opinion.
They were argued and submitted together here. The bills of complaint attacked from
different angles the so-called Blue Sky Law of the State of Ohio, which provides:
"Sec. 6373-1. Except as otherwise provided in this act, no dealer shall, within this state,
dispose or offer to dispose of any stock, stock certificates, bonds, debentures, collateral
trust certificates, or other similar instruments (all hereinafter termed 'securities') evidencing
title to or interest in property, issued or executed by any private or quasi public corporation,
copartnership, or association
Page 242 U. S. 541
(except corporations not for profit) or by any taxing subdivision of any other state, territory,
province, or foreign government, without first being licensed so to do as hereinafter
provided."
"Sec. 6373-2. . . . The term 'dealer,' as used in this act shall be deemed to include any
person or company, except national banks, disposing or offering to dispose, of any such
security, through agents or otherwise, and any company engaged in the marketing or
flotation of its own securities either directly or through agents or underwriters or any stock
promotion scheme whatsoever, except:"
"(a) An owner, not the issuer of the security, who disposes of his own property, for his own
account; when such disposal is not made in the course of repeated and successive
transactions of a similar character by such owner, or a natural person, other than the
underwriter of the security, who is a bona fide owner of the security and disposes of his own
property for his own account . . ."
"As used in this act, the term 'company' shall include any corporation, copartnership, or
association, incorporated or unincorporated, and whenever and wherever organized; . . ."
The Geiger-Jones Company is an Ohio corporation, licensed to do the business of buying
and selling investment securities, and of buying and selling the stocks and bonds of
industrial corporations. It has a regularly established clientage, it alleges, of about 11,000
persons residing in the State of Ohio and other states, and has sold and there are now
outstanding in the hands of persons to whom it has sold, securities of about twenty to
twenty-five million dollars par value, and has stockholders in Ohio and other states. That
the securities above referred to consist of securities of over twenty corporations of Ohio and
other states and foreign countries. That it is still selling such
Page 242 U. S. 542
securities and is and has been engaged in intrastate, interstate, and foreign commerce.
The appellee, Don C. Coultrap, in No. 439, repeats the allegations made by Geiger-Jones
Company, with enumeration of some of the companies in whose stocks and securities that
corporation is engaged in dealing, and alleges that he is the owner and holder of its stocks
and of the stocks of other companies, and is engaged in buying and selling and offering to
sell such stocks in the State of Ohio and in the State of Pennsylvania, and in the course of
such transactions travels back and forth between those states and conducts a
correspondence from Pennsylvania to Ohio, and receives certificates evidencing the
ownership of stock from the State of Ohio, and sends them from Pennsylvania to Ohio.
William R. Rose, one of the appellees in No. 440, alleges himself to be a citizen of Ohio and
engaged in that state in the business of buying and selling investment securities, and
particularly the stocks and bonds of industrial corporations, and that he has built up and
maintained a large and profitable business and an enviable reputation.
The RiChard Auto Manufacturing Company, the other appellee, is a corporation of West
Virginia, but has its principal place of business in Cleveland, Ohio, and has a contract to
manufacture and is ready to manufacture automobiles under certain patents obtained by
Francois RiChard as soon as and not until the stock of the company can be put upon the
market and a sufficient amount realized therefrom for such purposes.
That on September 25, 1914, and prior thereto, Rose was actively engaged in buying and
selling stocks and bonds of industrial corporations and investment securities in general, and
particularly the stock of the RiChard Auto Manufacturing Company, of which company he
was the secretary, and for which business he had unusual aptitude and was able to
prosecute more successfully "than any
Page 242 U. S. 543
other man whose services were available to said corporation."
That, on September 25th, he was arrested upon an affidavit filed by one H.R. Young, a
subordinate and deputy of the state Superintendent of Banks and Banking for the State of
Ohio, under whose immediate direction and control he was then acting. Rose, upon being
taken before a magistrate, waived examination and was "bound over to the grand jury" of
Cuyahoga County, which jury subsequently returned an indictment against him for violation
of the law.
The grievance alleged in Nos. 438 and 439 is that, under the laws of the state, the Attorney
General is threatening to give an opinion to Hall, the superintendent of Banks and Banking,
that the law is valid and that it is the duty of Hall to cancel appellees' license, and that this
will result in irreparable injury to appellees and to their security holders from the publicity
they will obtain. And it is apprehended that Hall will act on such advice, believing that he is
bound by the opinion of the Attorney General.
The statute is attached to the bills, and is asserted to be unconstitutional, invalid, and void,
and the particulars are enumerated to be that it will deprive appellees of their property
without due process of law, deny them the equal protection of the laws, impose burdens on
interstate commerce, confer executive powers, delegate such powers and legislative
powers, in violation of the Constitution of Ohio. Appellees consider themselves remediless
except in equity, and pray injunctions interlocutory and permanent.
The complaint of Rose and the Auto Company is that Hall, Superintendent of Banks and
Banking, is actively engaged in the prosecution of the proceedings against Rose, and has,
together with the prosecuting attorney, interfered with, interrupted, and completely
prevented Rose from carrying on his business in the State of Ohio, and especially in
attempting upon his part to dispose of and
Page 242 U. S. 544
sell the stock of the Auto Company, and that the Prosecuting Attorney and the Sheriff of
Cuyahoga County, unless restrained, will assist and actively cooperate with Hall, to the
great and irreparable injury of both Rose and the Auto Company.
The charge is amplified by details which it is unnecessary to give, and the law is charged to
be unconstitutional in the same particulars as those enumerated by the Geiger-Jones
Company.
Injunctions temporary and perpetual are prayed.
The district court in the Geiger-Jones case considered that it was without power to enjoin
the Attorney General, but decided that it could and should, under the charges of the bill,
restrain Hall from further action under the law, the restraint to continue until the hearing
and determination of the applications of the respective complainants for interlocutory
injunctions.
The applications subsequently came to be heard before three judges, and Hall and all of his
employees and subordinates were enjoined from attempting to enforce the provisions of the
law. There was an exception in No. 440, as follows:
". . . except such proceedings as may be deemed proper in any criminal action pending
against said complainants or either of them when the complaint in this cause was filed."
The injunctions in all the cases were to continue until final decision of further order of the
court. The court declared the law to be obnoxious to all of the charges made by the
respective complainants against it. 230 F. 233.
Page 242 U. S. 548

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G.R. Nos. L-46076 and L-46077 June 12, 1939
THE PEOPLE OF THE PHILIPPINES, plaintifff-appellee,
vs.
JACOB ROSENTHAL and NICASIO OSMEA, defendants-appellants.
Claro M. Recto and Hilado, Lorenzo and Hilado for appellant Rosenthal.
Jose M. Casal for appellant Osmea.
Office of the Solicitor-General Tuason for appellee.
LAUREL, J .:
Appellants, Jacob Rosenthal and Nicasio Osmea, were charged in the Court of First Instance of Manila
with having violated Act No. 2581, commonly known as the Blue Sky Law, under the following
informations:
CASE NO. 52365
That in or about and during the period comprised between October 1, 1935 and January 22,
1936, both dates inclusive, in the City of Manila, Philippine Islands, and within the jurisdiction of
this court, the said Nicasio Osmea and Jacob Rosenthal, two of ten promoters, organizers,
founders and incorporators of, the former being, in addition, one of the members of the board of
directors of, the O.R.O. Oil Co., Inc., a domestic corporation organized under the laws of the
Philippines and registered in the mercantile registry of the Bureau of Commerce, with central
office in the said city, the main objects and purposes of which were "to mine, dig for, or otherwise
obtain from earth, petroleum, rock and carbon oils, natural gas, other volatile mineral substances
and salt, and to manufacture, refine, prepare for market, buy, sell and transport the same in crude
or refined condition", and the capital thereof in their articles of incorporation, the accused herein
included, consisting of 3,000 shares without par value, 400 shares of which having been
subscribed by the said accused at 200 shares each and paid partly by them at the price of only
P5 per share, according to the said agreement which shares were speculative securities,
because the value thereof materially depended upon proposed promise for future promotion and
development of the oil business above mentioned rather than on actual tangible assets and
conditions thereof, did then and there, with deliberate intent of evading the provisions of sections
2 and 5 of the said Act No. 2581, and conspiring and confederating together and helping each
other, willfully, unlawfully and feloniously trade in, negotiate and speculate with, their shares
aforesaid, by making personally or through brokers or agents repeated and successive sales of
the said shares at a price ranging from P100 to P300 per share, as follows:
The accused Nicasio Osmea sold 163 shares to nine different parties, and the accused Jacob
Rosenthal sold 21 shares to seven others, without first obtaining the corresponding written permit
or license from the Insular Treasurer of the Commonwealth of the Philippines, as by law required.
CASE NO. 52366
That in or about and during the period comprised between October 1, 1935, and January 22,
1936, both dates inclusive, in the City of Manila, Philippine Islands, and within the jurisdiction of
this court, the said Nicasio Osmea and Jacob Rosenthal, two of the ten promoters, organizers,
founders and incorporators of, the former being, in addition, one of the members of the board of
directors of, the South Cebu Oil Co., Inc., a domestic corporation organized under the laws of the
Philippines and registered in the mercantile registry of the Bureau of Commerce, with central
office in the said city, the main objects and purposes of which were "to mine, dig for, or otherwise
obtain from earth, petroleum, rock or carbon oils, natural gas, other volatile mineral substances
and salt, and to manufacture, refine, prepare for market, buy, sell and transport the same in crude
and refined condition", and the capital stock of which, as per agreement of all the incorporators
thereof in their articles of incorporation, the accused herein included, consisting of 2,800 shares
without par value, 200 shares of which having been subscribed by the accused Nicasio Osmea,
and 100 shares of which having been subscribed by the accused Jacob Rosenthal and paid by
both at the price of only P5 per share, according to the said agreement, which shares were
speculative securities, because the value thereof materially depended upon proposed promise of
future promotion and development of the oil business above mentioned rather than on actual
tangible assets and conditions thereof, did then and there, with deliberate intent of evading the
provisions of sections 2 and 5 of Act No. 2581, and conspiring and confederating together and
helping one another, willfully, unlawfully and feloniously trade in, negotiate and speculate with,
their shares aforesaid, by making personally or through brokers or agents repeated and
successive sales of the said shares at a price ranging from P100 to P300 per share, as follows:
The accused Nicasio Osmea sold 185 shares to nine different parties, and the accused Jacob
Rosenthal sold 12 shares to seven others, without first obtaining the corresponding written permit
or license form the Insular Treasurer of the Commonwealth of the Philippines, as by law provided.
Upon motion of Jacob Rosenthal, the Court of First Instance of Manila granted him separate trial
although, when the cases were called for hearing, the court acceded to the motion of the prosecution that
the two cases be tried jointly inasmuch as the evidence to be adduced by the government therein was the
same, without prejudice to allowing the defendants to present their proof separately. After trial, the lower
court, on March 22, 1937, in separate decisions, found the defendants guilty as charged in the
informations. In case No. 52365 Jacob Rosenthal was sentenced to pay a fine of P500, with subsidiary
imprisonment in case of insolvency, and to pay one-half of the costs; Nicasio Osmea was sentenced to
pay a fine of P1,000, with subsidiary imprisonment in case of insolvency, and to pay one-half of the costs.
In case No. 52366 Jacob Rosenthal was sentenced to pay a fine of P500, with subsidiary imprisonment in
case of insolvency, and to pay one-half of the costs; Nicasio Osmea was sentenced to pay a fine of
P2,000, with subsidiary imprisonment in case of insolvency, and to pay one-half of the costs. The
defendants duly perfected their appeal from these judgments and the cases were originally elevated to
the Court of Appeals but, upon motion of the Solicitor-General, the same were forwarded to this court in
view of the fact that the constitutionality of Act No. 2581 has been put in issue by appellants. Two
separate briefs have been filed by Rosenthal and Osmea. In the brief for appellant Rosenthal the
following "joint assignment of errors" is made:
1. In declaring that according to the report of the geologist contracted by the O.R. Oil Co. and the
South Cebu Oil Co. to explore the properties leased to said companies, "no habia ninguna
indicacion de que hubiese petroleo en aquellos terrenos", when in truth what the report stated
was that in so far as the O.R.O. Oil Co. land was concerned, the territory covered by the lease if
full of possibilities; and with respect to the South Cebu Oil Co. lease, that no further investigations
and expenses be made "unless favorable test results are obtained on the northern lease."
2. In declaring that the exploration leases were, subsequent to the findings of the geologist,
cancelled by the government, implying thereby that as no oil was found in said lands, the leases
were cancelled; when in truth the cancellation was based on supposed violation of those
provisions of the corporation law prohibiting the setting up of interlocking directorates.
3. In declaring that the defendant, of his 200 shares of stock in the O.R.O. Oil Co., sold twenty-
one shares to different persons and on different dates, one share having been sold directly to one
E.F. Pimley; five, thru a firm of brokers known as Mackay & McCormick, to Arthur Hoyer, Wm.
Scheunig, and Modesto Bautista, in the proportion of two, two and one, respectively; and fifteen
shares directly to Henry J. Belden, R.T. Fitzimmons and D.P. O'Brien, in the proportion of five
shares to each of them when in truth only that to E.F. Pimley was sold to the latter by the
defendant, while those eventually transferred to Hoyer, Scheunig and Bautista were sold directly
to the said firm Mackay & McCormick, which bought them on its own risk and account, and the
remaining fifteen transferred to Belden, O'Brien, and Fitzimmons were loaned by Rosenthal to
Nicasio Osmea, who was not until now either returned those shares or paid their value.
4. In also declaring that of his 100 shares of stock in the South Cebu Oil Co., the defendant sold
twelve to various persons and on different dates, when in truth only one of these shares was sold
by the defendant to E.F. Pimley, and the remaining eleven, two of which were transferred to
Arthur Hoyer, two to William Scheunig, one to Jose de la Fuente, one to Crispin Llamado, one to
A.M. Opisso, and four to Ines Galano, were sold and transferred, in one single transaction, to the
said firm of brokers directly, which firm bought said shares on its own risk and account.
5. In declaring that the shares sold to Mackay & McCormick were brought by the latter on credit at
P250 each, to be resold by it at P300 each, and that out of the proceeds of the sale of these
shares the defendant received the price agreed upon between him and the said brokerage firm,
or P250 per share, when in truth and in fact there was no agreement between the parties as to
whether the said firm was to sell said shares to others or whether those shares were to be kept
and retained by it on its own risk and account.
6. In declaring that the corporations had not begun exploration work on the territory covered by
their leases, and that they had no tangible properties.
7. In declaring that while the defendant needed no permit to sell his own stock, the corporations
as issuer being the ones bound to obtain the permit required by the Blue Sky Law, nevertheless
he (the defendant) was guilty of a violation of said law because the possession of the shares held
and sold by him was not in good faith, in that his acquisition thereof was not made in the ordinary
and normal course of the business of the corporations, but that said shares were purchased to
indirectly promote the enterprise for which the corporations were formed; the said defendant
having paid in full to the corporations the value of said shares of stock.
8. In holding as proven that the possession of the defendant of his own stock, which he paid for in
full, was not a possession in good faith, because he, as an incorporator (fundador), should have
known that no permit in writing had been issued the corporations by the Insular Treasurer for the
sale of said stock.
9. In overruling the objection to the admission of Exhibit 1-b, and in holding that a permit had not
been issued by the Insular Treasurer for the sale of the stocks of the corporations.
10. In holding that there were repeated and successive sales made by the defendant Rosenthal
of his own shares of stock.
11. In holding that although the defendant was the absolute owner of the stock he sold, his
repeated and successive sales of such stock prove that this claim of ownership (esta pretension
de propriedad) was but a means employed by him to sell said stock at prices very much higher
than those he paid for them.
12. In holding that said stock was sold by the defendant without the required permit having been
first issued by the Insular Treasurer, and that the sale was effected as if such permit had been
actually issued (como si en realidad pudieran venderse por haberse expedido tal permiso).
13. In holding that as a result of an investigation conducted by the City Fiscal, the defendant
refunded to Belden, O'Brien and Fitzimmons and others the amount they paid for the stock they
purchased.
14. In holding that the opinion given by the Chief of the Insurance Division of the Office of the
Insular Treasurer to the effect that the defendant could sell the said stock without a permit as long
as no false representations were made by the said defendant, can not and does not exempt the
latter from criminal responsibility even though no false representations whatsoever were made by
the aforesaid defendant.
15. In holding that the prima facie presumption in section 8 of the law to the effect that the claim
of ownership is not bona fide when repeated and successive sales of such stock are effected, has
been totally destroyed by the fact that said stock absolutely belongs to the defendant, and in not
further holding that because of such absolute ownership the defendant could have legally
disposed of such stock in as many sales as he saw fit without any permit from the Insular
Treasurer.
16. In not holding that the Blue Sky Law contravenes the constitutional provisions of the Jones
Act in so far as such law constitutes an undue delegation of legislative powers to the Insular
Treasurer, and in so far as it does not afford equal protection before the law.
17. In not absolving the defendant.
In the brief for appellant Osmea the following "relacion conjunta de errores" is in turn submitted:
1. Al no sobreseer esta causa despues de promulgada la Ley No. 83 del Commonwealth, no
obstante haberse llamado su atencion al hecho de que esta Ley derogaba la Ley No. 2581 de la
Legislatura Filipina, bajo cuyas disposiciones ha sido procesado el acusado.
2. Al condenar al acusado por infraccion de la "Blue Sky Law", no obstante reconocerse en la
decision que consta en las pruebas que el acusado Osmea no ha of recido en venta ninguna de
aquellas acciones, ni ha hecho manifestaciones falsas a nadie para poder venderlas, y que la
mayor parte, si no todos los que las compraron, estaban satisfechos de la inversion de su dinero
en la adquisicion de tales acciones.
3. Al condenar al acusado por haber vendido acciones especulativas sin licencia, cuando no se
probo: (a) que las acciones de la O.R.O. Oil Co., Inc., y de la South Cebu Oil Co., Inc., eran
especulativas por su naturaleza, y (b) que el acusado Osmea carecia de licencia para
venderlas.
4. Al declarar que la posesion por el acusado Osmea de sus acciones de la O.R.O. Oil Co., Inc.,
y de la South Cebu Oil Co., Inc., no era de buena fe y que no las habia adquirido por su propia
cuenta sino para la promocion indirecta de un provecto de negocio o empresa especulativa.
5. Al no declarar que la "Blue Sky Law" es contraria a las normas constitucionales que gozaba al
tiempo de su promulgacion : (1) porque contiene en sus disposiciones una delegacion indebida
de facultades legislativas; (2) porque es vaga e incierte en sus disposiciones y, por tanto, nula; y
(3) porque infringe el derecho de igual proteccion ante la ley, viola la libertad de contratacion y
contraviene el derecho de adquirir, gozar y disponer libremente de la propriedad privada, siendo
su promulgacion, por tanto, un acto de opresion y de verdadera tirania.
6. Al no absolveral acusado Nicasio Osmea..
To meet the foregoing errors assigned by the appellants, plaintiff-appellee contends:
(a) That the enactment of Commonwealth Act No. 83 did not have the effect of relieving
appellants from criminal liability.
(b) That the appellants acted as promoters of the O.R.O. Oil Co. and the South Cebu Oil Co.
(c) That the shares of the two corporations are speculative in nature.
(d) That the appellants sold their shares in said corporations without permit or knowing that the
latter did not have the permit required by law.
(e) That the appellants are not entitled to the exemption provided in section 8 of the Blue Sky Law
(Act No. 2581).
(f) That the Blue Sky Law is valid and constitutional.
Most of the errors assigned by the appellants deal with questions of fact. This is particularly true with
reference to errors one, two, three, four, five, six, seven, eight, nine, ten, eleven, twelve and thirteen of
appellant Jacob Rosenthal, and error four of appellant Nicasio Osmea. There is no material discrepancy
regarding the facts, and we shall proceed to consider the legal questions propounded, which are in the
main set forth by the Solicitor-General in his brief.
It is contended by the appellants that Act No. 2581 is unconstitutional on three grounds. (1) That it
constitutes an undue delegation of legislative authority to the Insular Treasurer: (2) that it does not afford
equal protection before the law; and (3) that it is vague and ambiguous.
Under section 2 of Act No. 2581, every person, partnership, association, or corporation attempting to offer
to sell in the Philippines speculative securities of any kind or character whatsoever, is under obligation to
file previously with the Insular Treasurer the various documents and papers enumerated therein and to
pay the required tax of twenty pesos. Certain securities listed in section 3 are exempted from the
operation of the Act. Section 5 imposes upon the Insular Treasurer the mandatory duty to examine the
statements and documents thus filed and the additional duty to make or cause to be made, if deemed
advisable by him, a detailed examination of the affairs of the applicant. Section 5 also provides that
"whatever the said Treasurer of the Philippine Islands is satisfied, either with or without the examination
herein provided, that any person, partnership, association or corporation is entitled to the right to offer its
securities as above defined and provided for sale in the Philippine Islands, he shall issue to such person,
partnership, association or corporation a certificate or permit reciting that such person, partnership,
association or corporation has complied with the provisions of this Act, and that such person, partnership,
association or corporation, its brokers or agents are entitled to offer the securities named in said
certificate or permit for sale"; that "said Treasurer shall furthermore have authority, whenever in his
judgment it is in the public interest, to cancel said certificate or permit", and that "an appeal from the
decision of the Insular Treasurer may be had within the period of thirty days to the Secretary of Finance."
Appellants argue that, while Act No. 2581 empowers the Insular Treasurer to issue and cancel certificates
or permits for the sale of speculative securities, no standard or rule is fixed in the Act which can guide
said official in determining the cases in which a certificate or permit ought to be issued, thereby making
his opinion the sole criterion in the matter of its issuance, with the result that, legislative powers being
unduly delegated to the Insular Treasurer, Act No. 2581 is unconstitutional. We are of the opinion that the
Act furnishes a sufficient standard for the Insular Treasurer to follow in reaching a decision regarding the
issuance or cancellation of a certificate or permit. The certificate or permit to be issued under the Act must
recite that the person, partnership, association or corporation applying therefor "has complied with the
provisions of this Act", and this requirement, construed in relation to the other provisions of the law,
means that a certificate or permit shall be issued by the Insular Treasurer when the provisions of Act No.
2581 have been complied with. Upon the other hand, the authority of the Insular Treasurer to cancel a
certificate or permit is expressly conditioned upon a finding that such cancellation "is in the public
interest." In view of the intention and purpose of Act No. 2581 to protect the public against "speculative
schemes which have no more basis than so many feet of blue sky" and against the "sale of stock in fly-
by-night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations", we
incline to hold that "public interest" in this case is a sufficient standard to guide the Insular Treasurer in
reaching a decision on a matter pertaining to the issuance or cancellation of certificates or permits. As we
observed in the case of People vs. Fernandez and Trinidad (G.R. No. 45655, June 15, 1938), "siendo el
objecto de la ley el evitar especulaciones ruinosas, es claro que el interes publico, es, y debe ser la razon
en que el Tesorero Insular deba basar sus resoluciones." And the term "public interest" is not without a
settled meaning.
Appellant insists that the delegation of authority to the Commission is invalid because the stated
criterion is uncertain. That criterion is the public interest. It is a mistaken assumption that this is a
mere general reference to public welfare without any standard to guide determinations. The
purpose of the Act, the requirement it imposes, and the context of the provision in question show
the contrary. . . . (New York Central Securities Corporation vs. U.S.A., 287 U.S., 12, 24, 25; 77
Law. ed., 138, 145, 146.) (See alsoSchenchter Poultry Corporation vs. U.S., 295 U.S., 495; 540;
79 Law. ed., 1570, 1585; Ferrazzini vs. Gsell, 34 Phil., 697, 711, 712.)
In this connection, we cannot overlook the fact that the Act No. 2581 allows an appeal from the decision
of the Insular Treasurer to the Secretary of Finance. Hence, it cannot be contended that the Insular
Treasurer can act and decide without any restraining influence.
The theory of the separation of powers is designed by its originators to secure action and at the same
time to forestall over action which necessarily results from undue concentration of powers, and thereby
obtain efficiency and prevent despotism. Thereby, the "rule of law" was established which narrows the
range of governmental action and makes it subject to control by certain legal devices. As a corollary, we
find the rule prohibiting delegation of legislative authority, and from the earliest time American legal
authorities have proceeded on the theory that legislative power must be exercised by the legislative
alone. It is frankness, however, to confess that as one delves into the mass of judicial pronouncements,
he finds a great deal of confusion. One thing, however, is apparent in the development of the principle of
separation of powers and that is that the maximum of delegatus non potest delegare or delegata potestas
non potest delegare, attributed to Bracton (De Legibus et Consuetudinious Angliae, edited by G.E.
Woodbine, Yale University Press [1922], vol. 2, p.167) but which is also recognized in principle in the
Roman Law (D.17.18.3), has been made to adapt itself to the complexities of modern governments,
giving rise to the adoption, within certain limits, of the principle of "subordinate legislation", not only in the
United States and England but in practically all modern governments. The difficulty lies in the fixing of the
limit and extent of the authority. While courts have undertaken to lay down general principles, the safest is
to decide each case according to its peculiar environment, having in mind the wholesome legislative
purpose intended to be achieved.
Counsel for appellant Jacob Rosenthal also argues that the Insular Treasurer possesses "the
discretionary power to determine when a security is a speculative security and when it is not" because "he
is given the power to compel any corporation, association or partnership already functioning, to surrender
to him for examination its books and accounts enumerated in section 2, 'whenever he has reasonable
ground to believe that the securities being sold or offered for sale are of a speculative character.'" It
should be observed, however, that section 1 of Act No. 2581 defines and enumerates what are
"speculative securities" and all the other provisions of the Act must be read and construed in conjunction
and harmony with said section.
Laws of the different states of the American Union similar in nature to Act No. 2581 were assailed on
constitutional grounds somewhat analogous to those involved in the case at bar, but the decisions of both
the state courts and the Supreme Court of the United States have upheld their constitutionality. In the
case of Hall vs. Geiger-Jones Co. (242 U.S., 539), the contention was made that the Blue Sky Law of
Ohio, which requires the commissioner before granting a license to "be satisfied of the good repute in
business of such applicant and named agents", and which empowers said commissioner to revoke the
license or refuse to renew it upon ascertaining that the licensee "is of bad business repute; has violated
any provisions of this act or has engaged, or is about to engage, under favor of such license, in
illegitimate business or in fraudulent transactions", is unconstitutional because the law has failed to give a
standard to guide or determine the decision of the commissioner leaves "room for the play and action of
purely personal and arbitrary power", but the Supreme Court of the United States overruled the
contention and held:
Besides it is certainly apparent that if the conditions are within the power of the State to impose,
they can only be ascertained by an executive officer. Reputation and character are quite tangible
attributes, but there can be no legislative definition of them that can automatically attach to or
identify individuals possessing them, and necessarily the aid of some executive agency must be
invoked. The contention of appellees would take from government one of its most essential
instrumentalities, of which the various national and state commissions are instances. But the
contention may be answered by authority. In Gundling vs. Chicago (177 U.S., 183), an ordinance
of the City of Chicago was passed on which required a license of dealers in cigarettes and as a
condition of the license that the applicant, if a single individual, all of the members of the firm, if a
co-partnership, and any person or persons in charge of the business, if a corporation, should be
of good character and reputation, and the duty was delegated to the mayor of the city to
determine the existence of the conditions. The ordinance was sustained. To this case may be
added Red "C" Oil Manufacturing Co. vs. North Carolina (222 U.S., 380, 394, and cases cited);
Mutual Film Corporation vs.Industrial Commission of Ohio (236 U.S., 230); Brazee vs. Michigan
(241 U.S., 340, 341). See also Reetz vs.Michigan, (188 U.S., 505); Lieberman vs. Van de Carr
(199 U. S., 552). (Pp. 553, 554.)
In the case of Leach vs. Daugherty (238 P., 160), where the contention was advanced that section 6 of
the Corporate Securities Act of California which authorized the corporation commissioner to refuse to
grant a broker's certificate, if he is not satisfied of the "good business reputation of the applicant", is
unconstitutional because "no rules, regulations, or specifications are set forth in the said Corporate
Securities Act defining what shall constitute 'good business reputation,'" it was ruled that "Considering
such objection, it would appear that the leading case of Hall vs. Geiger-Jones Co. (242 U.S., 539; 37 Sup.
Ct., 217; 61 Law. ed., 480; L.R.A., 1917F, 514; Ann. Cas. 1917C, 643), is so conclusively against the
petitioner's contention that little room is left for argument", and that "it is well-settled principle of law in this
state that by legislative act a commission or board may be empowered to ascertain the existence of facts,
upon the finding of which may depend the right to continue in the practice of a profession or a regulated
business."
In the case of G.F. Redmond & Co. vs. Michigan Securities Commission (222 Mich., 1; 192 N.W., 688), in
which it was argued that the provision in section 11955 of the Compiled Laws of 1915 (Michigan Blue Sky
Law), authorizing the commission to revoke a license for "good cause" upon notice to the dealer and a
hearing duly had, is unconstitutional because the term "good cause" is so vague and indefinite that the
law practically vested upon the commission arbitrary powers, the court said:
The term "good cause" for revocation, as employed in the statute, relates so clearly to the
conduct of the licensed business, within the limits fixed by law, as to negative any arbitrary official
action, and is so comprehensive of unlawful, irregular, fraudulent, unauthorized, and forbidden
business management and transactions conducted as to demand no more particular specification
of its meaning and its application.
Must the law map out , for the guidance of the licensee, a code of ethics and post danger signals
against inhibited and dishonest practices? The defendant had no right to have the conduct of its
business charted by specifications of forbidden practices involving revocation of the license. The
general scope and expressed purpose of the law, together with open and fair dealing, entered the
license, and transgression thereof constituted good cause for revocation thereof. (P. 689.)
In the case of State ex rel. Central Steam Heat & Power Co. vs. Gettle (Wis. [1928], 220 N.W., 201),
where it was argued that the requirement of the Wisconsin Blue Sky Law (St. 1925, sec. 184.09 [3]; Law
1927, c. 444) that the Railroad Commission shall find that the "financial condition, plan of operation, and
the proposed undertakings of the corporation are such as to afford reasonable protection to the
purchasers of the securities to be issued", is unconstitutional for the reason that (1) the Legislature has no
power to regulate the issuance of securities in order to protect the investing public; (2) the Legislature
does not provide a standard to control the commission; (3) the statute is so indefinite and uncertain in its
meaning as to be incapable of administration; and (4) the statute delegates to the railroad commission
legislative power, the court said:
This is but a usual provision found in the many so-called Blue Sy Laws, the constitutionality of
which has been upheld by the courts generally. The constitutionality of similar provisions has
been so thoroughly considered by this court that further discussion thereof is unnecessary. The
following cases abundantly establish the constitutionality of this provision. (State ex
rel. Minneapolis, St. Paul & Sault Ste. Marie Railway Company vs. Railroad Commission of
Wisconsin, 137 Wis., 80; 117 N.W., 846; Appleton Water Works Co.vs. Railroad Commission of
Wisconsin, 154 Wis., 121; 142 N.E., 476; 47 L.R.A. [N.S.], 770; Ann. Cas. 1915B, 1160; State ex
rel. City of Milwaukee vs. Milwaukee Electric Railway & Light Co., 169 Wis., 183; 172 N.W., 230;
City of Milwaukee vs. Railroad Commission of Wisconsin, 183 Wis., 498; 196 N.W., 853;
Wisconsin Southern Ry. Co. vs. Railroad Commission of Wisconsin, 185 Wis., 313; 201 N.W.,
244; Kretuzervs. Westfahl, 187 Wis., 463; 204 N.W., 595.)
Another ground relied upon by appellants in contending that Act No. 2581 is unconstitutional is that it
denies equal protection of the laws because the law discriminates between an owner who sells his
securities in a single transaction and one who disposes of them in repeated and successive transactions.
In disposing of this contention we need only refer to the case of Hall vs. Geiger-Jones Co., supra, wherein
the Supreme Court of the United States held:
"Discriminations are asserted against the statute which extend, it is contended, to denying
appellees the equal protection of the laws. Counsel enumerates them as follows:
"Prominent among such discriminations are . . . between an owner who sells his securities in a
single transaction and one who disposes of them in successive transactions; . . . "
We cannot give separate attention to the asserted discriminations. It is enough to say that they
are within the power of classification which a state has. A state "ay direct its law against what it
deems the evil as it actually exists without covering the whole field of possible abuses, and it may
do so none the less that the forbidden act does not differ in kind from those that are allowed . . ..
If a class is deemed to present a conspicuous example of what the legislature seeks to prevent,
the 14th Amendment allows it to be dealt with although otherwise and merely logically not
distinguishable from others not embraced in the law.
Counsel for appellant Nicasio Osmea further alleges that Act No. 2581 is unconstitutional on the ground
that it is vague and uncertain. A similar contention has already been overruled by this court in the case
of People vs. Fernandez and Trinidad, supra. An Act will be declared void and inoperative on the ground
of vagueness and uncertainty only upon a showing that the defect is such that the courts are unable to
determine, with any reasonable degree of certainty, what the legislature intended. The circumstance that
this court has no more than one occasion given effect and application to Act. No. 2581 (Valhalla Hotel
Construction Co. vs. Carmona, 44 Phil., 233; People vs. Nimrod McKinney, 47 Phil., 792;
People vs. Fernandez and Trinidad, supra) decisively argues against the position taken by appellant
Osmea. In this connection we cannot pretermit reference to the rule that "legislation should not be held
invalid on the ground of uncertainty if susceptible of any reasonable construction that will support and
give it effect. An Act will not be declared inoperative and ineffectual on the ground that it furnishes no
adequate means to secure the purpose for which it is passed, if men of common sense and reason can
devise and provide the means, and all the instrumentalities necessary for its execution are within the
reach of those intrusted therewith." (25 R.C.L., pp. 810, 811.)
Reaffirming our view in People vs. Fernandez and Trinidad, supra, we hold that Act No. 2581 is valid and
constitutional.
Taking up now the question raised with reference to the speculative nature of the shares of the ). O.R.O.
Oil Co. and the South Cebu Oil Co., we find that section 1, paragraph (b) of Act No. 2581, in defining
speculative securities, provides:
. . . The term "speculative securities" as used in this Act shall be deemed to mean and include:
x x x x x x x x x
(b) All securities the value of which materially depend upon proposed or promised future
promotion or development rather than on present tangible assets and conditions.
At the beginning, and at the time of the issuance of the shares of the O.R.O. Oil Co. and the South Cebu
Oil Co., all that these companies had were their exploration leases. Beyond this, there was nothing
tangible. The value of those shares depended upon future development and the uncertainty of "striking"
oil. The shares issued under these circumstances are clearly speculative because they depended upon
proposed or promised future promotion or development rather than on present tangible assets and
conditions.
Appellants next contend that in view of the repeal of Act No. 2581 by Commonwealth Act. No. 83, they
have been relieved of criminal responsibility. Assuming that the former Act has been entirely and
completely abrogated by the latter Act a point we do not have to decide this fact does not relieve
appellants from criminal responsibility. "It has been the holding, and it must again be the holding, that
where an Act of the Legislature which penalizes an offense repeals a former Act which penalized the
same offense, such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try,
convict and sentence offenders charged with violations of the old law." (People vs. Concepcion, 44 Phil.,
126, 132; Ong Chang Wing and Kwong Fok vs. U.S., 218 U.S., 272; 40 Phil., 1046; U.S. vs. Cuna, 12
Phil., 241; U.S. vs. Aron, 12 Phil., 778; U.S. vs. Tonga, 15 Phil., 43; U.S. vs. Molina, 17 Phil., 582.)
Appellants further contend that they come under the exception provided in section 8 of Act No. 2581. This
section provides:
This Act shall not apply to the holder of any speculative security who is not the issuer thereof, nor
to the person who has acquired the same for his own account in the usual and ordinary course of
business and not for the direct or indirect promotion of any enterprise or scheme within the
purview of this Act, unless such possession is in good faith. Repeated and successive sales of
any speculative securities shall beprima facie evidence that the claim of ownership is not bona
fide, but is a mere shift, device or plot to evade the provisions of this Act. Such speculators shall
incur the penalty provided for in section seven of this Act.
Under this section, there are clearly two classes of persons to whom the law is not applicable: (1) Persons
who hold speculative securities but who are not the issuers thereof; and (2) persons who have acquired
the same for their own account in the usual and ordinary course of business and not for the direct or
indirect promotion of any enterprise or scheme within the purview of this Act, provided (the law uses the
term "unless") such possession is in good faith.
Passing upon the questions of fact necessarily involved in the application of section 8 of Act No. 2581,
the trial court in case No. 52365 makes the following findings with reference to Nicasio Osmea:
. . . El acusado Osmea no ha adquirido por su propia cuenta en el curso ordinario y corriente de
los negocios en la O.R.O. Oil Co. Las acciones por el vendidas, pues las adquirio mediante
suscripcion como uno de los fundadores de dicha corporacion, pero si para la promocion
indirecta de un proyecto de negocio o empresa para el cual se habia organizado le corporacion,
habiendo pagado totalmente el importe de dichas acciones a la misma corporacion; ni tampoco
las poseia de buena fe, puesto que como fundador y miembro de la junta directiva de dicha
corporacion debia saber que no se habia expedido por el Tesorero Insular ningun permiso por
escrito a al corporacion para la venta de dichas acciones. Y las ventas sucesivas y repetidas de
esas acciones que tenia en la misma corporacion, aunque tales acciones eran suyas por
haberlas el obtenido de la corporacion mediante suscripcion y pago del importe correspondiente
prueban que esta pretension de propiedad ha sido solamente un medio de que se ha valido para
vender tales acciones a precios mucho mayores que el importe por por haberse expedido tal
permiso.
The same findings, mutatis mutandis, are made in case No. 52366 against the same appellant, and
against Jacob Rosenthal in the two cases. Even if we could, we do not feel justified in disturbing the
findings of the trial court. The good faith set up by appellant Rosenthal for having acted on the advice of
one Garcia, an officer in the Insular Treasury, and the subsequent devolution by him of amounts collected
from some of the purchasers of the shares may be considered as a circumstance in his favor in the
imposition of the penalty prescribed by law but does not exempt him from criminal responsibility.
(People vs. McCalla, 63 Cal. App., 783; 220 Pac., 436; 367 U.S., 585; 69 Law. ed., 799; 45 Sup. Ct., 461;
People vs. Fernandez and Trinidad, supra.)
The judgments of the lower court are affirmed, with the modification that the fines are reduced as to
accused Jacob Rosenthal from P500 to P200 in each case, and as to accused Nicasio Osmea, from
P1,000 to P500 in case No. 52365 and from P2,000 to P1,000 in case No. 52366, with subsidiary
imprisonment for both in case of insolvency, and costs. So ordered.
Avancea, C.J., Villa-Real, Imperial, Diaz, Concepcion, and Moran, JJ., concur.













PEOPLE OF THE PHILIPPINES,
Petitioner,




-versus-




DANTE TAN,
Respondent.
G.R. No. 167526

Present:

CARPIO, J., Chairperson,
PERALTA,
BERSAMIN,
*

ABAD, and
MENDOZA, JJ.

Promulgated:

July 26, 2010
x-----------------------------------------------------------------------------------------x


D E C I S I O N


PERALTA, J .:


Before this Court is a petition for review on certiorari,
[1]
under Rule 45 of the Rules of Court, seeking to set
aside the June 14, 2004 Resolution
[2]
and February 24, 2005 Resolution
[3]
of the Court of Appeals (CA), in CA-G.R.
SP No. 83433.

The facts of the case are as follows:

On December 21, 2000, two Informations for violation of Rule 36 (a)-1,
[4]
in relation to Sections 32 (a)-
1
[5]
and 56
[6]
of the Revised Securities Act, were filed by petitioner People of the Philippines against respondent
Dante Tan in the Regional Trial Court (RTC) of Pasig City, Branch 153. They were docketed as Criminal Cases
Nos. 119831 and 119832.

The Information
[7]
in Criminal Case No. 119831 reads:

That on December 10, 1998, or thereabout, in the City of Pasig, Metro Manila, Philippines,
and within the jurisdiction of this Honorable Court, the above-named accused being the beneficial
owner of 84,030,000 Best World Resources Corporation shares, a registered security sold pursuant
to Sections 4 and 8 of the Revised Securities Act, which beneficial ownership constitutes 18.6% of
the outstanding shares of the company, way above the 10% required by law to be reported, and
covered by Certificate Nos. DT-UK 55485704 and DT-UR 55485776, did then and there willfully,
unlawfully and criminally fail to file with the Securities and Exchange Commission and with the
Philippine Stock Exchange a sworn statement of the amount of all BWRC shares of which he is
the beneficial owner, within ten (10) days after he became such beneficial owner, in violation of
the Revised Securities Act and/or the rules and regulations prescribed and pursuant thereto.

CONTRARY TO LAW.
[8]


The Information
[9]
in Criminal Case No. 119832 reads:

That on June 18, 1999, or thereabout, in the City of Pasig, Metro Manila, Philippines, and
within the jurisdiction of this Honorable Court, the above-named accused being the beneficial
owner of 75,000,000 Best World Resources Corporation shares, a registered security which has
been sold pursuant to Sections 4 and 8 of the Revised Securities Act, which beneficial ownership
constitutes 18.6% of the outstanding shares of the company, way above the 10% required by law
to be reported, did then and there willfully, unlawfully and criminally fail to file with the
Securities and Exchange Commission and with the Philippine Stock Exchange a sworn statement
of the amount of all BWRC shares of which he is the beneficial owner, within ten (10) days after
he became such beneficial owner, in violation of the Revised Securities Act and/or the rules and
regulations prescribed pursuant thereto.

CONTRARY TO LAW.
[10]



After arraignment, respondent pleaded not guilty
[11]
to both charges and the trial ensued.

On November 24, 2003, petitioner made its formal offer of evidence,
[12]
consisting of Exhibits A to E
with sub-exhibits, Exhibits K-1, K-10 and K-11, Q, R, S, T and W with sub-exhibits, and Exhibit
X.

On December 11, 2003, the RTC issued an Order
[13]
admitting Exhibits A, B, W and X, but denied
admission of all the other exhibits on the grounds stated therein.

Aggrieved, petitioner filed a Motion for Reconsideration, but it was denied by the RTC in an
Order
[14]
dated January 27, 2004.

In the meantime, on December 18, 2003, respondent filed an Omnibus Motion for Leave to File Demurrer
to Evidence
[15]
and to admit the attached Demurrer to Evidence.

On January 29, 2004, the RTC issued another Order
[16]
granting respondents Motion for Leave to File the
Demurrer and forthwith admitted respondents attached Demurrer. The RTC also ordered petitioner to file an
opposition.

On February 18, 2004, petitioner filed its Opposition
[17]
to the Demurrer to Evidence. Respondent then filed a
Reply.
[18]


On March 16, 2004, the RTC issued an Order
[19]
granting respondents Demurrer to Evidence, the dispositive
portion of which reads:

WHEREFORE, finding the Demurrer to Evidence filed by accused Dante Tan to be
meritorious, the same is GRANTED.

SO ORDERED.
[20]



On April 12, 2004,
[21]
petitioner filed a Petition for Certiorari
[22]
before the CA assailing the December 11,
2003, January 27, 2004, and March 16, 2004 Orders of the RTC.

On June 14, 2004, the CA issued a Resolution denying the petition, the dispositive portion of which reads:

WHEREFORE, in the context of all the foregoing considerations, it would be futile to
take further action on the herein petition, which is therefore DISMISSED outright for evident want
of merit.

SO ORDERED.
[23]



In denying the petition, the CA ruled that the dismissal of a criminal action by the grant of a Demurrer to
Evidence is one on the merits and operates as an acquittal, for which reason, the prosecution cannot appeal
therefrom as it would place the accused in double jeopardy.
[24]


Aggrieved, petitioner filed a Motion for Reconsideration, which was, however, denied by the CA in a
Resolution dated February 24, 2005.

Hence, herein petition, with petitioner raising the lone assignment of error, to wit:

RESPONDENT COURT GRAVELY ERRED IN PRECLUDING THE PEOPLE FROM
PROSECUTING ITS CASES AGAINST DANTE TAN.
[25]



The petition has no merit.

Notwithstanding the RTCs grant of respondents Demurrer to Evidence, petitioner contends that the CA
erred in applying the rules on double jeopardy. Specifically, petitioner argues that double jeopardy does not apply in
cases decided by the trial court without jurisdiction and in violations of petitioners right to due process.
[26]


In People v. Sandiganbayan,
[27]
this Court explained the general rule that the grant of a demurrer to evidence
operates as an acquittal and is, thus, final and unappealable, to wit:

The demurrer to evidence in criminal cases, such as the one at bar, is "filed after the
prosecution had rested its case," and when the same is granted, it calls "for an appreciation of the
evidence adduced by the prosecution and its sufficiency to warrant conviction beyond reasonable
doubt, resulting in a dismissal of the case on the merits,tantamount to an acquittal of the
accused."

Such dismissal of a criminal case by the grant of demurrer to evidence may not be
appealed, for to do so would be to place the accused in double jeopardy. The verdict being one of
acquittal, the case ends there.
[28]



The elements of double jeopardy are (1) the complaint or information was sufficient in form and substance to
sustain a conviction; (2) the court had jurisdiction; (3) the accused had been arraigned and had pleaded; and (4) the
accused was convicted or acquitted, or the case was dismissed without his express consent.
[29]


These elements are present here: (1) the Informations filed in Criminal Cases
Nos. 119831 and119832 against respondent were sufficient in form and substance to sustain a conviction; (2) the
RTC had jurisdiction over Criminal Cases Nos. 119831 and 119832; (3) respondent was arraigned and entered a
plea of not guilty; and (4) the RTC dismissed Criminal Cases Nos. 119831 and 119832 on a demurrer to evidence on
the ground of insufficiency of evidence which amounts to an acquittal from which no appeal can be had.

The rule on double jeopardy, however, is not without exceptions. In People v. Laguio, Jr.,
[30]
this Court stated
that the only instance when double jeopardy will not attach is when the RTC acted with grave abuse of discretion,
thus:

x x x The only instance when double jeopardy will not attach is when the trial court
acted with grave abuse of discretion amounting to lack or excess of jurisdiction, such as where
the prosecution was denied the opportunity to present its case or where the trial was a sham.
However, while certiorari may be availed of to correct an erroneous acquittal, the petitioner in such
an extraordinary proceeding must clearly demonstrate that the trial court blatantly abused its
authority to a point so grave as to deprive it of its very power to dispense justice.
[31]



After an extensive review of previous Court decisions relevant to herein petition, this Court finds that the
abovementioned exception is inapplicable to the factual milieu herein. This Court finds that the RTC did not abuse
its discretion in the manner it conducted the proceedings of the trial, as well as its grant of respondents demurrer to
evidence.

Grave abuse of discretion defies exact definition, but it generally refers to "capricious or whimsical
exercise of judgment as is equivalent to lack of jurisdiction." The abuse of discretion must be patent and gross as to
amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion and
hostility.
[32]


In Galman v. Sandiganbayan,
[33]
this Court ruled that the prosecution was denied due process of law when
the trial was but a mock trial, to wit:

More so does the rule against the invoking of double jeopardy hold in the cases at bar
where as we have held, the sham trial was but a mock trial where the authoritarian president
ordered respondents Sandiganbayan and Tanodbayan to rig the trial and closely monitored the
entire proceedings to assure the predetermined final outcome of acquittal and total absolution as
innocent of all the respondents-accused.
[34]



In addition, in People v. Bocar,
[35]
this Court ruled that there is no double jeopardy when the prosecution
was not allowed to complete its presentation of evidence by the trial court, to wit:

It is evident from the brief transcript of the proceedings held on July 7, 1967 that the parties
were not placed under oath before they answered the queries of the respondent Judge (pp. 11-17,
rec.). Verily, no evidence in law had as yet been entered into the records of the case before
respondent Court. Respondent Court's issuance of the questioned dismissal order was arbitrary,
whimsical and capricious, a veritable abuse of discretion which this Court cannot permit.
Moreover, it is clear from the same transcript that the prosecution never had a chance to
introduce and offer its evidence formally in accordance with the Rules of Court (pp. 11-17, rec.).
Verily, the prosecution was denied due process.
Where the prosecution is deprived of a fair opportunity to prosecute and prove its case, its
right to due process is thereby violated. x x x
[36]


Likewise, in People v. Judge Albano,
[37]
this Court held that there is no double jeopardy when the trial court
preemptively dismissed the case, thus:

The trial court exceeded its jurisdiction when it practically held that the prosecution failed
to establish the culpability of the accused in a proceeding which does not even require the
prosecution to do so. It acted with grave abuse of discretion, tantamount to lack of jurisdiction, when
it preemptively dismissed the cases and, as a consequence thereof, deprived the prosecution of its
right to prosecute and prove its case, thereby violating its fundamental right to due process." With
this violation, its Orders, dated 28 October 1976 and 20 December 1976, are therefore null and void.
Likewise, for being null and void, said orders cannot constitute a proper basis for a claim of double
jeopardy.
[38]



In Saldana v. Court of Appeals,
[39]
this Court ruled that the prosecutions right to due process is violated
when the trial court aborted its right to complete its presentation of evidence, thus:

The order of the Court of Appeals reinstating the criminal case for further hearing by the
trial court does not violate the rule on double jeopardy. One of the elements of double jeopardy is a
competent court. The trial court in this case was ousted from its jurisdiction when it violated the
right of the prosecution to due process by aborting its right to complete the presentation of its
evidence. Hence, the first jeopardy had not been terminated. The remand of the case for further
hearing or trial is merely a continuation of the first jeopardy. It does not expose the accused to a
second jeopardy. x x x
[40]



Thus, the question to be resolved, given the factual molding of herein petition, is did the RTC violate
petitioners right to due process? On this note, this Court rules that petitioner was given more than ample
opportunity to present its case as gleaned from the factual antecedents which led to the grant of respondents
demurrer.

On September 18, 2001, petitioner completed its presentation of evidence and, on the day after, filed its
formal offer of evidence. On January 21, 2002, respondent filed an opposition to petitioners formal offer. Instead of
filing a reply as directed by the RTC, petitioner filed a Motion to Withdraw Prosecutions Formal Offer of
Evidence and to Re-open Presentation of Evidence.
[41]
Said motion was granted by the RTC and petitioner thus
continued its presentation of evidence.

On January 28, 2003, petitioner ended its presentation of additional witnesses and was then ordered by the
RTC to formally offer its exhibits. On February 26, 2003, petitioner filed a request for marking of certain documents
and motion to admit attached formal offer of evidence.
[42]
The motion was initially denied by the RTC, but on
motion for reconsideration the same was granted by the RTC. The RTC, thus, ordered petitioner to file anew its
formal offer of evidence. Finally, on November 24, 2003, petitioner filed its Formal Offer of Evidence.
[43]


After respondent filed its Demurer to Evidence, the RTC, in an Order dated January 29, 2004, directed
petitioner to file its opposition thereto. On February 18, 2004, petitioner filed its Opposition
[44]
to the demurrer.

Based on the foregoing, it is clear that the RTC never prevented petitioner from presenting its case. Unlike
in Bocar and Saldana where the prosecution was prevented from completing its presentation of evidence, petitioner
was given the opportunity to present its case, formally offer its evidence and oppose respondents demurrer. It even
bears to point out that the RTC even allowed petitioner to withdraw its formal offer of evidence after having initially
rested its case and then continue its presentation by introducing additional witnesses. Thus, no grave abuse can be
attributed to the RTC as petitioners right to due process was not violated. Even Galman finds no application to the
case at bar as clearly such trial cannot be considered a sham based on the abovementioned considerations.

Petitioner argues that the RTC displayed resolute bias when it chose to grant respondents demurrer to
evidence notwithstanding that it had filed a Motion to Hold in Abeyance the Resolution of Accused Dante Tans
Demurrer to Evidence and The Prosecutions Opposition Thereto.
[45]
Petitioner contends that instead of acting on
the motion, the RTC peremptorily granted respondents demurrer to evidence which prevented petitioner from
its intention to file a petition for certiorari to question the December 11, 2003 and January 27, 2004 Orders of the
RTC.

While it would have been ideal for the RTC to hold in abeyance the resolution of the demurrer to evidence,
nowhere in the rules, however, is it mandated to do so. Furthermore, even if this Court were to consider the same as
an error on the part of the RTC, the same would merely constitute an error of procedure or of judgment and not an
error of jurisdiction as persistently argued by petitioner. Errors or irregularities, which do not render the proceedings
a nullity, will not defeat a plea of antrefois acquit.
[46]
We are bound by the dictum that whatever error may have been
committed effecting the dismissal of the case cannot now be corrected because of the timely plea of double
jeopardy.
[47]
To reiterate, the only instance when double jeopardy will not attach is when the trial court acted with
grave abuse of discretion amounting to lack or excess of jurisdiction which cannot be attributed to the RTC simply
because it chose not to hold in abeyance the resolution of the demurrer to evidence. Consequently, petitioners
attempt to put in issue the December 11, 2003 and January 27, 2004 Orders of the RTC which denied admission of
certain documentary exhibits in evidence must fail. As correctly manifested by the CA, the said Orders have already
been overtaken by the March 16, 2004 Order, which already granted respondents demurrer to evidence. Hence, this
Court would be violating the rules on double jeopardy if the twin orders were to be reviewed after a finding that the
CA did not commit any grave abuse of discretion in granting the demurrer to evidence.

Lastly, even if this Court were to review the action taken by the RTC in granting the demurrer to evidence, no
grave abuse can be attributed to it as it appears that the 29-page Order granting the demurrer was arrived at after due
consideration of the merits thereto. As correctly observed by the CA, the RTC extensively discussed its position on
the various issues brought to contention by petitioner. One of the main reasons for the RTCs decision to grant the
demurrer was the absence of evidence to prove the classes of shares that the Best World Resources Corporation
stocks were divided into, whether there are preferred shares as well as common shares, or even which type of shares
respondent had acquired, thus:

To secure conviction for the violations of RSA Secs. 32 (a-1) and 36 (a), it is necessary
to prove the following: (1) the BW Resources Corporation (BW) has equity securities registered
under the Revised Securities Act; [2] that the equity securities of BW Resources Corporation are
divided into classes, and that these classes are registered pursuant to the Revised Securities Act; (3)
the number of shares of BW Resources Corporation (authorized the number of shares of BW
Resources (authorized capital stock) and the total number of shares per class of stock; (4) the
number of shares of a particular class of BW stock acquired by the accused; (5) the fact of the exact
date, the accused [becomes] the beneficial owner of ten (10%) percent of a particular class of BW
shares; and (6) the fact, the accused failed to disclose his ten (10%) percent ownership within ten
days from becoming such owner.

It is very clear from the evidence formally offered, that the foregoing facts were
not proven or established. These cases were for Violations of RSA Rule 32 (a)-1 and Section 56
of Revised Securities Act, however, it is very surprising that the prosecution never presented in
evidence the Article of Incorporation of BW Resources Corporation. This document is very
vital and is the key to everything, including the conviction of the accused. Without the Article
of Incorporation, the Court has no way of knowing the capitalization authorized capital stock
of the BW Resources Corporation, the classes of shares into which its stock is divided and the
exact holdings of Dante Tan in the said corporation. Its not being a prosecutions evidence
renders impossible the determination of the ten (10%) percent beneficial ownership of accused
Dante Tan, as there is no focal point to base the computation of his holdings, and the exact
date of his becoming an owner of ten (10%) percent.
[48]



There is no showing that the conclusions made by the RTC on the sufficiency of the evidence of the
prosecution at the time the prosecution rested its case, is manifestly mistaken. Assuming, however, that there is an
error of judgment on the denial of admission of certain exhibits of the prosecution and the appreciation of the
prosecutions case, there is to this Courts mind, no capricious exercise of judgment that would overcome the
defense of double jeopardy.

Withal, it bears to stress that the fundamental philosophy behind the constitutional proscription against
double jeopardy is to afford the defendant, who has been acquitted, final repose and safeguard him from government
oppression through the abuse of criminal processes.
[49]
While petitioner insists that the RTC acted with grave abuse
of discretion, this Court finds that none can be attributed to the RTC. Consequently, the CA did not err when it
affirmed the assailed Orders of the RTC.

On a final note, this Court is aware of this Courts Third Division Decision dated April 21, 2009
entitled Dante Tan v. People of the Philippines
[50]
wherein respondent argued that his right to a speedy trial was
violated by the prosecution. This Court denied the petition and ruled for the remand of the case to the RTC for
further proceedings. It must be pointed out that said decision involves Criminal Case No. 119830,
[51]
which is
distinct and separate from Criminal Case No. 119831 and Criminal Case No. 119832 which are the subject matter of
herein petition. Thus, the resolution of the case at bar is without prejudice to the proceedings that are being
conducted in Criminal Case No. 119830 at whatever stage it may be.

WHEREFORE, premises considered, the petition is DENIED. The June 14, 2004 Resolution and February
24, 2005 Resolution of the Court of Appeals, in CA-G.R. SP No. 83433 are AFFIRMED.

SO ORDERED.








Reves v. Ernst & Young - 494 U.S. 56 (1990)


Syllabus
Case
U.S. Supreme Court
Reves v. Ernst & Young, 494 U.S. 56 (1990)
Reves v. Ernst & Young
No. 88-1480
Argued Nov. 27, 1989
Decided Feb. 21, 1990
494 U.S. 56
Syllabus
In order to raise money to support its general business operations, the Farmer's
Cooperative of Arkansas and Oklahoma sold uncollateralized and uninsured promissory
notes payable on demand by the holder. Offered to both Co-Op members and nonmembers
and marketed as an "Investment Program," the notes paid a variable interest rate higher
than that of local financial institutions. After the Co-Op filed for bankruptcy, petitioners,
holders of the notes, filed suit in the District Court against the Co-Op's auditor, respondent's
predecessor, alleging, inter alia, that it had violated the antifraud provisions of the
Securities Exchange Act of 1934 -- which regulates certain specified instruments, including
"any note[s]" -- and Arkansas' securities laws by intentionally failing to follow generally
accepted accounting principles that would have made the Co-Op's insolvency apparent to
potential note purchasers. Petitioners prevailed at trial, but the Court of Appeals reversed.
Applying the test created in SEC v. W.J. Howey Co., 328 U. S. 293, to determine whether an
instrument is an "investment contract" to the determination whether the Co-Op's
instruments were "notes," the court held that the notes were not securities under the 1934
Act or Arkansas law, and that the statutes' antifraud provisions therefore did not apply.
Held: The demand notes issued by the Co-Op fall under the "note" category of instruments
that are "securities." Pp. 494 U. S. 60-76.
(a) Congress' purpose in enacting the securities laws was to regulate investments, in
whatever form they are made and by whatever name they are called. However, notes are
used in a variety of settings, not all of which involve investments. Thus, they are not
securities per se, but must be defined using the "family resemblance" test. Under that test,
a note is presumed to be a security unless it bears a strong resemblance, determined by
examining four specified factors, to one of a judicially crafted list of categories of instrument
that are not securities. If the instrument is not sufficiently similar to a listed item, a court
must decide whether another category should be added by examining the same factors. The
application of the Howey test to notes is rejected, since to hold that a "note" is not a
"security" unless it meets a test designed for
Page 494 U. S. 57
an entirely different variety of instrument would make the 1933 and 1934 Acts' enumeration
of many types of instruments superfluous and would be inconsistent with Congress' intent in
enacting the laws. Pp. 494 U. S. 60-67.
(b) Applying the family resemblance approach, the notes at issue are "securities." They do
not resemble any of the enumerated categories of nonsecurities. Nor does an examination
of the four relevant factors suggest that they should be treated as nonsecurities: (1) the
Co-Op sold them to raise capital, and purchasers bought them to earn a profit in the form of
interest, so that they are most naturally conceived as investments in a business enterprise;
(2) there was "common trading" of the notes, which were offered and sold to a broad
segment of the public; (3) the public reasonably perceived from advertisements for the
notes that they were investments, and there were no countervailing factors that would have
led a reasonable person to question this characterization; and (4) there was no risk-
reducing factor that would make the application of the Securities Acts unnecessary, since
the notes were uncollateralized and uninsured and would escape federal regulation entirely
if the Acts were held not to apply. The lower court's argument that the demand nature of
the notes is very uncharacteristic of a security is unpersuasive, since an instrument's
liquidity does not eliminate the risk associated with securities. Pp. 494 U. S. 67-70.
(c) Respondent's contention that the notes fall within the statutory exception for "any note .
. . which has a maturity at the time of issuance of not less than nine months" is rejected,
since it rests entirely on the premise that Arkansas' statute of limitations for suits to collect
demand notes -- which are due immediately -- is determinative of the notes' "maturity," as
that term is used in the federal Securities Acts. The "maturity" of notes is a question of
federal law, and Congress could not have intended that the Acts be applied differently to the
same transactions depending on the accident of which State's law happens to apply. Pp. 494
U. S. 70-72.
(d) Since, as a matter of federal law, the words of the statutory exception are far from plain
with regard to demand notes, the exclusion must be interpreted in accordance with the
exception's purpose. Even assuming that Congress intended to create a bright-line rule
exempting from coverage all notes of less than nine months' duration on the ground that
short-term notes are sufficiently safe that the Securities Acts need not apply, that
exemption would not cover the notes at issue here, which do not necessarily have short
terms, since demand could just as easily be made years or decades into the future. Pp. 494
U. S. 72-73.
856 F.2d 52 (CA8 1988), reversed and remanded.
Page 494 U. S. 58
MARSHALL, J., delivered the opinion of the Court, in which BRENNAN, BLACKMUN,
STEVENS, and KENNEDY, JJ., joined. STEVENS, J., filed a concurring opinion, post, p.494 U.
S. 73. REHNQUIST, C.J., filed an opinion concurring in part and dissenting in part, in which
WHITE, O'CONNOR, and SCALIA, JJ., joined, post, p. 494 U. S. 76.

Official Supreme Court caselaw is only found in the print version of the United States
Reports. Justia caselaw is provided for general informational purposes only, and may not
reflect current legal developments, verdicts or settlements. We make no warranties or
guarantees about the accuracy, completeness, or adequacy of the information contained on
this site or information linked to from this site. Please check official sources.








SEC v. Howey Co. - 328 U.S. 293 (1946)


Syllabus
Case
U.S. Supreme Court
SEC v. Howey Co., 328 U.S. 293 (1946)
Securities and Exchange Commission v. Howey Co.
No. 843
Argued May 2, 1946
Decided May 27, 1946
328 U.S. 293
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Syllabus
1. Upon the facts of this case, an offering of units of a citrus grove development, coupled
with a contract for cultivating, marketing, and remitting the net proceeds to the investor,
was an offering of an "investment contract" within the meaning of that term as used in the
provision of 2(1) of the Securities Act of 1933 defining "security" as including any
"investment contract," and was therefore subject to the registration requirements of the
Act. Pp. 328 U. S. 294-297, 328 U. S. 299.
2. For purposes of the Securities Act, an investment contract (undefined by the Act) means
a contract, transaction, or scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts of the promoter or a third
party, it being immaterial whether the shares in the enterprise are evidenced by formal
certificates or by nominal interests in the physical assets employed in the enterprise.
Pp. 328 U. S. 298-299.
3. The fact that some purchasers, by declining to enter into the service contract, chose not
to accept the offer of the investment contract in its entirety does not require a different
result, since the Securities Act prohibits the offer, as well as the sale, of unregistered
nonexempt securities. P. 328 U. S. 300.
4. The test of whether there is an "investment contract" under the Securities Act is whether
the scheme involves an investment of money in a common enterprise with profits to come
solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the
enterprise is speculative or nonspeculative, or whether there is a sale of property with or
without intrinsic value. P. 328 U. S. 301.
5. The policy of the Securities Act of affording broad protection to investors is not to be
thwarted by unrealistic and irrelevant formulae. P. 328 U. S. 301.
151 F.2d 714 reversed.
The Securities & Exchange Commission sued in the District Court to enjoin respondents
from using the mails and instrumentalities of interstate commerce in the offer
Page 328 U. S. 294
and sale of unregistered and nonexempt securities in violation of the Securities Act of 1933.
The District Court denied the injunction. 60 F.Supp. 440. The Circuit Court of Appeals
affirmed. 151 F.2d 714. This Court granted certiorari. 327 U.S. 773. Reversed,p. 328 U. S.
301.
MR. JUSTICE MURPHY delivered the opinion of the Court.
This case involves the application of 2(1) of the Securities Act of 1933 [Footnote 1] to an
offering of units of a citrus grove development, coupled with a contract for cultivating,
marketing and remitting the net proceeds to the investor.
The Securities and Exchange Commission instituted this action to restrain the respondents
from using the mails and instrumentalities of interstate commerce in the offer and sale of
unregistered and nonexempt securities in violation of 5(a) of the Act. The District Court
denied the injunction, 60 F.Supp. 440, and the Fifth Circuit Court of Appeals affirmed the
judgment, 151 F.2d 714. We granted certiorari, 327 U.S. 773, on a petition alleging that the
ruling of the Circuit Court of Appeals conflicted with other federal and state decisions, and
that it introduced a novel and unwarranted test under the statute which the Commission
regarded as administratively impractical.
Most of the facts are stipulated. The respondents, W. J. Howey Company and Howey-in-the-
Hills Service,
Page 328 U. S. 295
Inc., are Florida corporations under direct common control and management. The Howey
Company owns large tracts of citrus acreage in Lake County, Florida. During the past
several years, it has planted about 500 acres annually, keeping half of the groves itself and
offering the other half to the public "to help us finance additional development." Howey-in-
the-Hills Service, Inc., is a service company engaged in cultivating and developing many of
these groves, including the harvesting and marketing of the crops.
Each prospective customer is offered both a land sales contract and a service contract, after
having been told that it is not feasible to invest in a grove unless service arrangements are
made. While the purchaser is free to make arrangements with other service companies, the
superiority of Howey-in-the-Hills Service, Inc., is stressed. Indeed, 85% of the acreage sold
during the 3-year period ending May 31, 1943, was covered by service contracts with
Howey-in-the-Hills Service, Inc.
The land sales contract with the Howey Company provides for a uniform purchase price per
acre or fraction thereof, varying in amount only in accordance with the number of years the
particular plot has been planted with citrus trees. Upon full payment of the purchase price,
the land is conveyed to the purchaser by warranty deed. Purchases are usually made in
narrow strips of land arranged so that an acre consists of a row of 48 trees. During the
period between February 1, 1941, and May 31, 1943, 31 of the 42 persons making
purchases bought less than 5 acres each. The average holding of these 31 persons was 1.33
acres, and sales of as little as O.65, O.7 and O.73 of an acre were made. These tracts are
not separately fenced, and the sole indication of several ownership is found in small land
marks intelligible only through a plat book record.
Page 328 U. S. 296
The service contract, generally of a 10-year duration without option of cancellation, gives
Howey-in-the-Hills Service, Inc., a leasehold interest and "full and complete" possession of
the acreage. For a specified fee plus the cost of labor and materials, the company is given
full discretion and authority over the cultivation of the groves and the harvest and
marketing of the crops. The company is well established in the citrus business, and
maintains a large force of skilled personnel and a great deal of equipment, including 75
tractors, sprayer wagons, fertilizer trucks, and the like. Without the consent of the
company, the landowner or purchaser has no right of entry to market the crop; [Footnote 2]
thus, there is ordinarily no right to specific fruit. The company is accountable only for an
allocation of the net profits based upon a check made at the time of picking. All the produce
is pooled by the respondent companies, which do business under their own names.
The purchasers, for the most part, are nonresidents of Florida. They are predominantly
business and professional people who lack the knowledge, skill, and equipment necessary
for the care and cultivation of citrus trees. They are attracted by the expectation of
substantial profits. It was represented, for example, that profits during the 1943-1944
season amounted to 20%, and that even greater profits might be expected during the
1944-1945 season, although only a 10% annual return was to be expected over a 10-year
period. Many of these purchasers are patrons of a resort hotel owned and operated by the
Howey Company in a scenic section adjacent to the groves. The hotel's advertising mentions
the fine groves in the vicinity, and the attention of the patrons is drawn to the
Page 328 U. S. 297
groves as they are being escorted about the surrounding countryside. They are told that the
groves are for sale; if they indicate an interest in the matter, they are then given a sales
talk.
It is admitted that the mails and instrumentalities of interstate commerce are used in the
sale of the land and service contracts, and that no registration statement or letter of
notification has ever been filed with the Commission in accordance with the Securities Act of
1933 and the rules and regulations thereunder.
Section 2(1) of the Act defines the term "security" to include the commonly known
documents traded for speculation or investment. [Footnote 3] This definition also includes
"securities" of a more variable character, designated by such descriptive terms as
"certificate of interest or participation in any profit-sharing agreement," "investment
contract," and, "in general, any interest or instrument commonly known as a security.'" The
legal issue in this case turns upon a determination of whether, under the circumstances, the
land sales contract, the warranty deed and the service contract together constitute an
"investment contract" within the meaning of 2(1). An affirmative answer brings into
operation the registration requirements of 5(a), unless the security is granted an
exemption under 3(b). The lower courts, in reaching a negative answer to this problem,
treated the contracts and deeds
Page 328 U. S. 298
as separate transactions involving no more than an ordinary real estate sale and an
agreement by the seller to manage the property for the buyer.
The term "investment contract" is undefined by the Securities Act or by relevant legislative
reports. But the term was common in many state "blue sky" laws in existence prior to the
adoption of the federal statute, and, although the term was also undefined by the state
laws, it had been broadly construed by state courts so as to afford the investing public a full
measure of protection. Form was disregarded for substance, and emphasis was placed upon
economic reality. An investment contract thus came to mean a contract or scheme for "the
placing of capital or laying out of money in a way intended to secure income or profit from
its employment." State v. Gopher Tire & Rubber Co.,146 Minn. 52, 56, 177 N.W. 937, 938.
This definition was uniformly applied by state courts to a variety of situations where
individuals were led to invest money in a common enterprise with the expectation that they
would earn a profit solely through the efforts of the promoter or of some one other than
themselves. [Footnote 4]
By including an investment contract within the scope of 2(1) of the Securities Act,
Congress was using a term the meaning of which had been crystalized by this prior judicial
interpretation. It is therefore reasonable to attach that meaning to the term as used by
Congress, especially since such a definition is consistent with the statutory aims. In other
words, an investment contract, for purposes of the Securities Act, means a contract,
transaction
Page 328 U. S. 299
or scheme whereby a person invests his money in a common enterprise and is led to expect
profits solely from the efforts of the promoter or a third party, it being immaterial whether
the shares in the enterprise are evidenced by formal certificates or by nominal interests in
the physical assets employed in the enterprise. Such a definition necessarily underlies this
Court's decision in SEC v. Joiner Corp., 320 U. S. 344, and has been enunciated and applied
many times by lower federal courts. [Footnote 5] It permits the fulfillment of the statutory
purpose of compelling full and fair disclosure relative to the issuance of "the many types of
instruments that, in our commercial world, fall within the ordinary concept of a security."
H.Rep. No.85, 73rd Cong., 1st Sess., p. 11. It embodies a flexible, rather than a static,
principle, one that is capable of adaptation to meet the countless and variable schemes
devised by those who seek the use of the money of others on the promise of profits.
The transactions in this case clearly involve investment contracts, as so defined. The
respondent companies are offering something more than fee simple interests in land,
something different from a farm or orchard coupled with management services. They are
offering an opportunity to contribute money and to share in the profits of a large citrus fruit
enterprise managed and partly owned by respondents. They are offering this opportunity to
persons who reside in distant localities and who lack the equipment
Page 328 U. S. 300
and experience requisite to the cultivation, harvesting, and marketing of the citrus products.
Such persons have no desire to occupy the land, or to develop it themselves; they are
attracted solely by the prospects of a return on their investment. Indeed, individual
development of the plots of land that are offered and sold would seldom be economically
feasible, due to their small size. Such tracts gain utility as citrus groves only when
cultivated and developed as component parts of a larger area. A common enterprise
managed by respondents or third parties with adequate personnel and equipment is
therefore essential if the investors are to achieve their paramount aim of a return on their
investments. Their respective shares in this enterprise are evidenced by land sales contracts
and warranty deeds, which serve as a convenient method of determining the investors'
allocable shares of the profits. The resulting transfer of rights in land is purely incidental.
Thus, all the elements of a profit-seeking business venture are present here. The investors
provide the capital and share in the earnings and profits; the promoters manage, control,
and operate the enterprise. It follows that the arrangements whereby the investors'
interests are made manifest involve investment contracts, regardless of the legal
terminology in which such contracts are clothed. The investment contracts in this instance
take the form of land sales contracts, warranty deeds, and service contracts which
respondents offer to prospective investors. And respondents' failure to abide by the
statutory and administrative rules in making such offerings, even though the failure result
from a bona fide mistake as to the law, cannot be sanctioned under the Act.
This conclusion is unaffected by the fact that some purchasers choose not to accept the full
offer of an investment contract by declining to enter into a service contract with
Page 328 U. S. 301
the respondents. The Securities Act prohibits the offer, as well as the sale, of unregistered,
nonexempt securities. [Footnote 6] Hence, it is enough that the respondents merely offer
the essential ingredients of an investment contract.
We reject the suggestion of the Circuit Court of Appeals, 151 F.2d at 717, that an
investment contract is necessarily missing where the enterprise is not speculative or
promotional in character and where the tangible interest which is sold has intrinsic value
independent of the success of the enterprise as a whole. The test is whether the scheme
involves an investment of money in a common enterprise with profits to come solely from
the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is
speculative or nonspeculative, or whether there is a sale of property with or without intrinsic
value. See SEC v. Joiner Corp., supra, 320 U. S. 352. The statutory policy of affording broad
protection to investors is not to be thwarted by unrealistic and irrelevant formulae.
Reversed.
MR. JUSTICE JACKSON took no part in the consideration or decision of this case.
[Footnote 1]
48 Stat. 74, 15 U.S.C. 77b(1).
[Footnote 2]
Some investors visited their particular plots annually, making suggestions as to care and
cultivation, but without any legal rights in the matters.
[Footnote 3]
"The term 'security' means any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing agreement,
collateral trust certificate, pre-organization certificate or subscription, transferable share,
investment contract, voting trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, or, in general, any interest or
instrument commonly known as a 'security,' or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing."
[Footnote 4]
State v. Evans, 154 Minn. 95, 191 N.W. 425; Klatt v. Guaranteed Bond Co., 213 Wis. 12,
250 N.W. 825; State v. Health, 199 N.C. 135, 153 S.E. 855; Prohaska v. Hemmer-Miller
Development Co., 256 Ill.App. 331; People v. White, 124 Cal.App. 548, 12 P.2d
1078; Stevens v. Liberty Packing Corp., 111 N.J.Eq. 61, 161 A.193. See also Moore v.
Stella, 52 Cal.App.2d 766, 127 P.2d 300.
[Footnote 5]
Atherton v. United States, 128 F.2d 463; Penfield Co. v. SEC, 143 F.2d 746; SEC v.
Universal Service Assn., 106 F.2d 232; SEC v. Crude Oil Corp., 93 F.2d 844; SEC v.
Bailey, 41 F.Supp. 647; SEC v. Payne, 35 F.Supp. 873; SEC v. Bourbon Sales Corp., 47
F.Supp. 70; SEC v. Wickham, 12 F.Supp. 245; SEC v. Timetrust, Inc., 28 F.Supp. 34;SEC v.
Pyne, 33 F.Supp. 988. The Commission has followed the same definition in its own
administrative proceedings. In re Natural Resources Corporation, 8 S.E.C. 635.
[Footnote 6]
The registration requirements of 5 refer to sales of securities. Section 2(3) defines "sale"
to include every "attempt or offer to dispose of, or solicitation of an offer to buy," a security
for value.
MR. JUSTICE FRANKFURTER dissenting.
"Investment contract" is not a term of art; it is conception dependent upon the
circumstances of a particular situation. If this case came before us on a finding authorized
by Congress that the facts disclosed an "investment contract" within the general scope of
2(1) of the Securities Act, 48 Stat. 74, 15 U.S.C. 77b(1), the Securities and Exchange
Commission's finding would govern unless, on the record, it was wholly unsupported. But
Page 328 U. S. 302
that is not the case before us. Here, the ascertainment of the existence of an "investment
contract" had to be made independently by the District Court, and it found against its
existence. 60 F.Supp. 440. The Circuit Court of Appeals for the Fifth Circuit sustained that
finding. 151 F.2d 714. If respect is to be paid to the wise rule of judicial administration
under which this Court does not upset concurrent findings of two lower courts in the
ascertainment of facts and the relevant inferences to be drawn from them, this case clearly
calls for its application. See Allen v. Trust Co. of Georgia, 326 U. S. 630. For the crucial
issue in this case turns on whether the contracts for the land and the contracts for the
management of the property were, in reality, separate agreements, or merely parts of a
single transaction. It is clear from its opinion that the District Court was warranted in its
conclusion that the record does not establish the existence of an investment contract:
". . . the record in this case shows that not a single sale of citrus grove property was made
by the Howey Company during the period involved in this suit, except to purchasers who
actually inspected the property before purchasing the same. The record further discloses
that no purchaser is required to engage the Service Company to care for his property, and
that, of the fifty-one purchasers acquiring property during this period, only forty-two
entered into contract with the Service Company for the care of the property."
60 F.Supp. at 442.
Simply because other arrangements may have the appearances of this transaction, but are
employed as an evasion of the Securities Act, does not mean that the present contracts
were evasive. I find nothing in the Securities Act to indicate that Congress meant to bring
every innocent transaction within the scope of the Act simply because a perversion of them
is covered by the Act.

Official Supreme Court caselaw is only found in the print version of the United States
Reports. Justia caselaw is provided for general informational purposes only, and may not
reflect current legal developments, verdicts or settlements. We make no warranties or
guarantees about the accuracy, completeness, or adequacy of the information contained on
this site or information linked to from this site. Please check official sources.


















POWER HOMES UNLIMITED G.R. No. 164182
CORPORATION,
Petitioner,
Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus - CORONA,
AZCUNA, and
LEONARDO-DE
CASTRO, JJ.




SECURITIES AND EXCHANGE
COMMISSION AND NOEL Promulgated:
MANERO,
Respondents. February 26, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

PUNO, C.J.:

This petition for review seeks the reversal and setting aside of the July 31, 2003 Decision
[1]
of the Court of
Appeals that affirmed the January 26, 2001 Cease and Desist Order (CDO)
[2]
of public respondent Securities and
Exchange Commission (SEC) enjoining petitioner Power Homes Unlimited Corporations (petitioner) officers,
directors, agents, representatives and any and all persons claiming and acting under their authority, from further
engaging in the sale, offer for sale or distribution of securities; and its June 18, 2004 Resolution
[3]
which denied
petitioners motion for reconsideration.
The facts: Petitioner is a domestic corporation duly registered with public respondent SEC onOctober 13,
2000 under SEC Reg. No. A200016113. Its primary purpose is:

To engage in the transaction of promoting, acquiring, managing, leasing, obtaining
options on, development, and improvement of real estate properties for subdivision and allied
purposes, and in the purchase, sale and/or exchange of said subdivision and properties through
network marketing.
[4]


On October 27, 2000, respondent Noel Manero requested public respondent SEC to investigate petitioners
business. He claimed that he attended a seminar conducted by petitioner where the latter claimed to sell
properties that were inexistent and without any brokers license.

On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public respondent SEC whether
petitioners business involves legitimate network marketing.

On the bases of the letters of respondent Manero and Munsayac, public respondent SEC held a
conference on December 13, 2000 that was attended by petitioners incorporators John Lim, Paul Nicolas and
Leonito Nicolas. The attendees were requested to submit copies of petitioners marketing scheme and list of its
members with addresses.
The following day or on December 14, 2000, petitioner submitted to public respondent SEC copies of its
marketing course module and letters of accreditation/authority or confirmation from Crown Asia, Fil-Estate
Network and Pioneer 29 Realty Corporation.

On January 26, 2001, public respondent SEC visited the business premises of petitioner wherein it
gathered documents such as certificates of accreditation to several real estate companies, list of members with
web sites, sample of member mail box, webpages of two (2) members, and lists of Business Center Owners who
are qualified to acquire real estate properties and materials on computer tutorials.
On the same day, after finding petitioner to be engaged in the sale or offer for sale or distribution of
investment contracts, which are considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The
Securities Regulation Code),
[5]
but failed to register them in violation of Sec. 8.1 of the same Act,
[6]
public
respondent SEC issued a CDO that reads:

WHEREFORE, pursuant to the authority vested in the Commission, POWER HOMES
UNLIMITED, CORP., its officers, directors, agents, representatives and any and all persons
claiming and acting under their authority, are hereby ordered to immediately CEASE AND DESIST
from further engaging in the sale, offer or distribution of the securities upon the receipt of this
order.

In accordance with the provisions of Section 64.3 of Republic Act No. 8799, otherwise
known as the Securities Regulation Code, the parties subject of this Cease and Desist Order may
file a request for the lifting thereof within five (5) days from receipt.
[7]


On February 5, 2001, petitioner moved for the lifting of the CDO, which public respondent SEC denied for lack
of merit on February 22, 2001.

Aggrieved, petitioner went to the Court of Appeals imputing grave abuse of discretion amounting to lack
or excess of jurisdiction on public respondent SEC for issuing the order. It also applied for a temporary restraining
order, which the appellate court granted.

On May 23, 2001, the Court of Appeals consolidated petitioners case with CA-G.R. [SP] No. 62890
entitled Prosperity.Com, Incorporated v. Securities and Exchange Commission (Compliance and Enforcement
Department), Cristina T. De La Cruz, et al.

On June 19, 2001, petitioner filed in the Court of Appeals a Motion for the Issuance of a Writ of
Preliminary Injunction. On July 6, 2001, the motion was heard. On July 12, 2001, public respondent SEC filed its
opposition. On July 13, 2001, the appellate court granted petitioners motion, thus:
Considering that the Temporary Restraining Order will expire tomorrow or on July 14,
2001, and it appearing that this Court cannot resolve the petition immediately because of the
issues involved which require a further study on the matter, and considering further that with
the continuous implementation of the CDO by the SEC would eventually result to the sudden
demise of the petitioners business to their prejudice and an irreparable damage that may
possibly arise, we hereby resolve to grant the preliminary injunction.

WHEREFORE, let a writ of preliminary injunction be issued in favor of petitioner, after
posting a bond in the amount of P500,000.00 to answer whatever damages the respondents may
suffer should petitioner be adjudged not entitled to the injunctive relief herein granted.
[8]


On August 8, 2001, public respondent SEC moved for reconsideration, which was not resolved by the
Court of Appeals.

On July 31, 2003, the Court of Appeals issued its Consolidated Decision. The disposition pertinent to
petitioner reads:
[9]


WHEREFORE, x x x x the petition for certiorari and prohibition filed by the other
petitioner Powerhomes Unlimited Corporation is hereby DENIED for lack of merit and the
questioned Cease and Desist Order issued by public respondent against it is accordingly
AFFIRMED IN TOTO.

On June 18, 2004, the Court of Appeals denied petitioners motion for reconsideration;
[10]
hence, this
petition for review.
The issues for determination are: (1) whether public respondent SEC followed due process in the issuance
of the assailed CDO; and (2) whether petitioners business constitutes an investment contract which should be
registered with public respondent SEC before its sale or offer for sale or distribution to the public.

On the first issue, Sec. 64 of R.A. No. 8799 provides:
Sec. 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or
verification, motu proprio or upon verified complaint by any aggrieved party, may issue a cease
and desist order without the necessity of a prior hearing if in its judgment the act or practice,
unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or
irreparable injury or prejudice to the investing public.

We hold that petitioner was not denied due process. The records reveal that public respondent SEC
properly examined petitioners business operations when it (1) called into conference three of petitioners
incorporators, (2) requested information from the incorporators regarding the nature of petitioners business
operations, (3) asked them to submit documents pertinent thereto, and (4) visited petitioners business premises
and gathered information thereat. All these were done before the CDO was issued by the public respondent
SEC. Trite to state, a formal trial or hearing is not necessary to comply with the requirements of due process. Its
essence is simply the opportunity to explain ones position. Public respondent SEC abundantly allowed petitioner
to prove its side.

The second issue is whether the business of petitioner involves an investment contract that is considered
security
[11]
and thus, must be registered prior to sale or offer for sale or distribution to the public pursuant to
Section 8.1 of R.A. No. 8799, viz:

Section 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or
offered for sale or distribution within the Philippines, without a registration statement duly filed
with and approved by the Commission. Prior to such sale, information on the securities, in such
form and with such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.

Public respondent SEC found the petitioner as a marketing company that promotes and facilitates sales of
real properties and other related products of real estate developers through effective leverage marketing. It also
described the conduct of petitioners business as follows:

The scheme of the [petitioner] corporation requires an investor to become a Business
Center Owner (BCO) who must fill-up and sign its application form. The Terms and Conditions
printed at the back of the application form indicate that the BCO shall mean an independent
representative of Power Homes, who is enrolled in the companys referral program and who will
ultimately purchase real property from any accredited real estate developers and as such he is
entitled to a referral bonus/commission. Paragraph 5 of the same indicates that there exists no
employer/employee relationship between the BCO and the Power Homes Unlimited, Corp.

The BCO is required to pay US$234 as his enrollment fee. His enrollment entitles him
to recruit two investors who should pay US$234 each and out of which amount he shall receive
US$92. In case the two referrals/enrollees would recruit a minimum of four (4) persons each
recruiting two (2) persons who become his/her own down lines, the BCO will receive a total
amount of US$147.20 after deducting the amount of US$36.80 as property fund from the gross
amount of US$184. After recruiting 128 persons in a period of eight (8) months for each Left and
Right business groups or a total of 256 enrollees whether directly referred by the BCO or through
his down lines, the BCO who receives a total amount of US$11,412.80 after deducting the
amount of US$363.20 as property fund from the gross amount of US$11,776, has now an
accumulated amount of US$2,700 constituting as his Property Fund placed in a Property Fund
account with the Chinabank. This accumulated amount of US$2,700 is used as partial/full down
payment for the real property chosen by the BCO from any of [petitioners] accredited real estate
developers.
[12]


An investment contract is defined in the Amended Implementing Rules and Regulations of R.A. No. 8799
as a contract, transaction or scheme (collectively contract) whereby a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts of others.
[13]

It behooves us to trace the history of the concept of an investment contract under R.A. No. 8799. Our
definition of an investment contract traces its roots from the 1946 United States (US) case of SEC v. W.J. Howey
Co.
[14]
In this case, the US Supreme Court was confronted with the issue of whether theHowey transaction
constituted an investment contract under the Securities Acts definition of security.
[15]
The US Supreme Court,
recognizing that the term investment contract was not defined by the Act or illumined by any legislative
report,
[16]
held that Congress was using a term whose meaning had been crystallized
[17]
under the states blue
sky laws
[18]
in existence prior to the adoption of the Securities Act.
[19]
Thus, it ruled that the use of the catch-all
term investment contract indicated a congressional intent to cover a wide range of investment
transactions.
[20]
It established a test to determine whether a transaction falls within the scope of an investment
contract.
[21]
Known as theHowey Test, it requires a transaction, contract, or scheme whereby a person (1) makes
an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be
derived solely from the efforts of others.
[22]
Although the proponents must establish all four elements, the US
Supreme Court stressed that the Howey Test embodies a flexible rather than a static principle, one that is capable
of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of
others on the promise of profits.
[23]
Needless to state, any investment contract covered by the Howey Test must
be registered under the Securities Act, regardless of whether its issuer was engaged in fraudulent practices.
After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al.
[24]
In this case, the
9
th
Circuit of the US Court of Appeals ruled that the element that profits must come solely from the efforts of
others should not be given a strict interpretation. It held that a literal reading of the requirement solely would
lead to unrealistic results. It reasoned out that its flexible reading is in accord with the statutory policy of affording
broad protection to the public. Our R.A. No. 8799 appears to follow this flexible concept for it defines an
investment contract as a contract, transaction or scheme (collectively contract) whereby a
person invests his money in a common enterprise and is led to expect profits not solely but primarily from
the efforts of others. Thus, to be a security subject to regulation by the SEC, an investment contract in our
jurisdiction must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation
of profits, (4) primarily from efforts of others.

Prescinding from these premises, we affirm the ruling of the public respondent SEC and the Court of
Appeals that the petitioner was engaged in the sale or distribution of an investment contract. Interestingly, the
facts of SEC v. Turner
[25]
are similar to the case at bar. In Turner, the SEC brought a suit to enjoin the violation of
federal securities laws by a company offering to sell to the public contracts characterized as self-improvement
courses. On appeal from a grant of preliminary injunction, the US Court of Appeals of the 9
th
Circuit held that self-
improvement contracts which primarily offered the buyer the opportunity of earning commissions on the sale of
contracts to others were investment contracts and thus were securities within the meaning of the federal
securities laws. This is regardless of the fact that buyers, in addition to investing money needed to purchase the
contract, were obliged to contribute their own efforts in finding prospects and bringing them to sales
meetings. The appellate court held:

It is apparent from the record that what is sold is not of the usual business motivation
type of courses. Rather, the purchaser is really buying the possibility of deriving money from
the sale of the plans by Dare to individuals whom the purchaser has brought to Dare. The
promotional aspects of the plan, such as seminars, films, and records, are aimed at interesting
others in the Plans. Their value for any other purpose is, to put it mildly, minimal.

Once an individual has purchased a Plan, he turns his efforts toward bringing others
into the organization, for which he will receive a part of what they pay. His task is to bring
prospective purchasers to Adventure Meetings.

The business scheme of petitioner in the case at bar is essentially similar. An investor enrolls in petitioners
program by paying US$234. This entitles him to recruit two (2) investors who pay US$234 each and out of which
amount he receives US$92. A minimum recruitment of four (4) investors by these two (2) recruits, who then
recruit at least two (2) each, entitles the principal investor to US$184 and the pyramid goes on.

We reject petitioners claim that the payment of US$234 is for the seminars on leverage marketing and
not for any product. Clearly, the trainings or seminars are merely designed to enhance petitioners business of
teaching its investors the know-how of its multi-level marketing business. An investor enrolls under the scheme of
petitioner to be entitled to recruit other investors and to receive commissions from the investments of those
directly recruited by him. Under the scheme, the accumulated amount received by the investor comes primarily
from the efforts of his recruits.

We therefore rule that the business operation or the scheme of petitioner constitutes an investment
contract that is a security under R.A. No. 8799. Thus, it must be registered with public respondent SEC before its
sale or offer for sale or distribution to the public. As petitioner failed to register the same, its offering to the public
was rightfully enjoined by 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 publics level of confidence in the
system.

IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003 Decision of the Court of Appeals, affirming
the January 26, 2001 Cease and Desist Order issued by public respondent Securities and Exchange Commission
against petitioner Power Homes Unlimited Corporation, and its June 18, 2004 Resolution denying petitioners
Motion for Reconsideration are AFFIRMED. No costs.

SO ORDERED.





SECURITIES & EXCH. COM'N v. GLENN W. TURNER ENTER., INC.CIV. NO. 72-390.
348 F.Supp. 766 (1972)
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
GLENN W. TURNER ENTERPRISES, INC., a Florida corporation, et al., Defendants.
United States District Court, D. Oregon.
August 30, 1972.
J ames E. Newton, J ack H. Bookey, Francis N. Mithoug, J erry King, Securities and Exchange
Commn., Seattle, Wash., Richard E. Nathan, Asst. Gen. Counsel, Securities and Exchange
Commn., Washington, D. C., Sidney I. Lezak, U. S. Atty., J ack G. Collins, First Asst. U. S. Atty.,
Portland, Or., for plaintiff.
Charles R. Mowry, Dardano, Mowry & Hanson, Portland, Or., for defendants Glenn W. Turner
Enterprises, Inc., Dare to be Great, Inc., Donald Ray (Pete) Monroe, Gene Earl Arthur, William C.
Sant, Harry Bryant Atkinson, J ack E. O'Brien, Alfred W. (Al) Smith, Le Roy Beale, and Harry D.
Everard.
J effrey Allen Tew, Tew, Tew, Rozen & Murray, Miami, Fla., for defendants Glenn W. Turner
Enterprises, Inc., Donald Ray (Pete) Monroe, Gene Earl Arthur and William C. Sant.
Clarke C. Brown, Salem, Or., and Theodore I. Koskoff, Bridgeport, Conn., for defendant Glenn
Wesley Turner.
Bruce E. J arman, Salem, Or., J ohn A. Burgess, Montpelier, Vt., for defendant Hobart Wilder.
OPINION WITH FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER
SKOPIL, District Judge:
On May 17, 1972, the Securities and Exchange Commission filed the complaint against defendants,
seeking an injunction against violation of the federal securities laws, and other relief. The SEC contended
that what defendants were selling were securities within the meaning of the statutes. The defendants
denied that they were securities and, consequently, moved to dismiss on the grounds that the Court had
no jurisdiction over this action. Various memoranda were filed, numerous affidavits and exhibits were
presented, and the Court held hearings on the application for a preliminary injunction, appointment of a
receiver and an accounting on July 11, 12, 13 and 14, 1972. After the hearings were concluded, the Court
heard oral argument on August 14, 1972. Before that hearing, the Court had indicated to the parties that
all reserved rulings on the admissibility of evidence would be decided in favor of admissibility and the
parties were instructed to argue with that understanding. Both sides rested with respect to the request for
a preliminary injunction at the conclusion of oral argument. Accordingly, this matter is now ripe for
decision.
[348 F.Supp. 769]
I
FINDINGS OF FACT
A. THE DEFENDANTS.
1) Glenn W. Turner Enterprises, Inc. is a Florida corporation.
2) Dare to be Great, Inc., also a Florida corporation, is a wholly-owned subsidiary of Glenn W. Turner
Enterprises, Inc.
3) The individual defendants, Turner, Wilder, Atkinson, O'Brien, Smith, Monroe, Everard, and Arthur are,
or were, officers, directors or employees of the defendant corporations.
4) The defendant Sant has not been linked to these proceedings.
B. THE ADVENTURES.
5) Dare to be Great, Inc. offers to sell to the public a series of contracts which it calls "Adventures" and
classifies as motivational or self-improvement courses.
The purchaser of Adventure 1 receives a portable tape recorder, 12 lessons contained in 12 tape
recordings, and certain written material in notebooks. He is entitled to attend a 12 to 16-hour group
session. The cost of Adventure 1 is $300.
Adventure 2 contains, in addition to the materials offered in Adventure 1, twelve additional lessons with
tape recordings. It offers approximately 80 additional hours of group sessions. Adventure 2, which
necessarily includes Adventure 1, costs $700. In other words, a purchaser of Adventure 1 must pay an
additional $400 for Adventure 2. Adventure 2 is not sold without Adventure 1.
The purchaser of Adventure 3 receives, in addition to the material from Adventures 1 and 2, six additional
tape recordings, one notebook of written material called "The Fun of Selling," and a limited amount of
written instructions and material. The purchaser of Adventure 3 is also entitled to 30 additional hours of
group sessions. This Adventure costs $2,000, or $1,300 in addition to the cost of Adventures 1 and 2,
which are necessarily included in Adventure 3. The purchaser of Adventure 3, however, receives an
additional benefit different in kind from those available in Adventures 1 and 2. After fulfilling relatively
nominal requirements, he becomes an "Independent Sales Trainee" and is empowered to "sell" the
Adventures. He receives $100 for each Adventure 1, $300 for each Adventure 2, and $900 for each
Adventure 3 which he "sells."
The purchaser of Adventure 4 receives six additional tapes, may or may not receive a movie projector
with six cartridge-type films, and has the opportunity for 30 additional hours of group sessions. He is also
entitled to attend two other week-long courses at his own expense in Florida. For this he pays an
additional $3,000, or a total of $5,000 for Adventure 4, which includes the preceding Adventures. He also
becomes designated as an "Independent Sales Agent," entitled to "sell" all of the Adventures to others.
He receives the same return as does the purchaser of Adventure 3. However, in addition, he is entitled to
"sell" Adventure 4, for each of which he receives $2,500, or half the purchase price.
Defendants offer a variation on the Adventures which was referred to in testimony as the "$1,000 Plan."
The purchaser of this plan receives the tape cassettes sold in Adventure 2 but without the written material
which accompanies them. In addition, a purchaser of this plan receives some additional sales instruction
and may be entitled to a 24-hour group session. Unlike a purchaser of Adventure 2, however, he has an
opportunity to make money from this plan if he brings two additional individuals to the one who sold him
his plan. If those additional individuals purchase the plan, he then becomes entitled thereafter to receive
$400 out of each $1,000 paid for the purchase of the plan by any further additional purchasers of the plan
who purchase through him. Each additional purchaser, of course, must in turn
[348 F.Supp. 770]
bring him yet three more in order for that additional investor to become entitled to income from this plan.
It is possible to enter this plan without making an investment by bringing in one extra person, i. e., three
rather than two.
C. THE SYSTEM IN OPERATION.
6) Salesmen of these Adventures seek new customers anywhere. They accost strangers in stores, streets
and elsewhere and make no attempt to search out persons with sales ability, financial acumen or other
skills. Those who eventually do make purchases appear to have fairly limited resources and education.
7) Salesmen must not explain to prospects anything about what they are selling. Their duty is strictly
limited to arousing curiosity in the prospect and persuading him to attend an "Adventure Meeting,"
organized by defendants. One of the principal methods of arousing curiosity which is demanded by
defendants is that the salesmen make a display of great wealth. A salesman should drive an expensive
car, wear expensive clothing and display large amounts of currency in high denominations, while
intimating that the prospect also can have an opportunity for great wealth. Despite the display, the
salesman may, in fact, be nearly destitute.
8) The principal selling effort occurs at meetings and other functions organized by defendants. The
salesman has no control over these meetings. The atmosphere is one of potential overwhelming financial
return, dramatized by the appearance of large numbers of expensive cars, expensively-dressed
individuals, and stories of great riches achieved through defendants' operations.
9) Meetings are conducted with an appearance of great spontaneity. Speakers talk loudly and rapidly with
great emotional fervor. There are cheers and chants from the audience. The speakers, however, follow a
strict script written by defendants' central organization, and they are not permitted to depart from it. The
cheers and chants are prearranged. The speakers make somewhat passing reference to the motivational
courses and what they will do for individuals. The major emphasis, however, is on the opportunities for
earning money by purchasing Adventure 4. The script followed by defendants' speakers carefully avoids
actually guaranteeing a return and does contain a statement that the prospect must expect to work. The
impression which is fostered, however, by emphasis and psychological technique, is on the near
inevitability of success achieved by anyone who follows defendants' directions. For example, it is said that
one individual earns $50,000 per month, which is described as an unusual achievement, although the
salesman was an ordinary person. A housewife's earnings of $16,000 per month are called "good." Some
people earn nothing, which is described as "very poor," and is attributed to their failure to "believe in the
philosophy of millionaires."
10) At no time do defendants' agents make any effort to explain potential difficulties of saturation and
pyramiding. It is not revealed that those who make the pitch are far from earning the amounts which they
say are ordinary results.
11) After the speakers have finished, salesmen attempt to persuade the prospect to buy one of the
Adventures, with emphasis on Adventure 4. Sometimes the individual salesman makes this offer, but at
other times, agents of defendants who are specialists at the required techniques of psychological hard-
sell take over and accomplish the sale. On occasion the sale has been accomplished in the name of the
individual who gets credit for it, without the latter even having been present. Sales tactics which are
employed are calculated to ignore and bypass rational objections and analysis. The emphasis is, again,
on large amounts of easy money. The technique is so strictly prearranged that it contains, for example,
instructions how to write $130,000 and other sums on the paper, and to avoid asking the prospect
[348 F.Supp. 771]
to sign a contract because that sometimes triggers the response of wanting to read it. On at least some
occasions, potential customers who object that they do not have the money required are told how they
may get bank loans by deceiving the banks as to the purpose of the loan, and by making simultaneous
applications at a number of different banks without informing any of them that the other applications have
been made.
12) The prospects are also encouraged with great emphasis on the possibility that by "getting in on the
ground floor," they will have opportunities for future lucrative investments and employment in defendants'
forthcoming ventures.
13) Prospects who have not succumbed at the Adventure Meetings may be taken on a "go-tour" to one of
defendants' regional centers by airplane or bus. They are brought to an environment where they are
isolated from other contact and are surrounded by defendants' agents and employees. The same
psychological techniques and the same kinds of representations as they use at the meetings are
employed on these tours.
14) Few, if any, purchasers of these Adventures have achieved any success remotely approaching that
described by defendants' agents, to their financial and emotional distress.
15) Saturation of the market has, in fact, occurred at least in some localities. Purchasers have found
themselves unable to resell the Adventures to others because those whom they approach either have
already purchased or else have been made wary by having been approached by other salesmen.
II
CONCLUSIONS OF LAW
A.
It is apparent from this Court's findings of fact that the defendants are promoting a type of scheme
commonly known as a pyramid operation. Pyramid schemes are inherently unstable and eventually must
collapse. As the SEC has pointed out, there is inevitably a limit to the number of investors who can get
their money back. Investors get a return only so long as increasing numbers of others like them invest
their own money. Consequently, it is certain that the source of funds must eventually dry up leaving a
large proportion of the investors stranded with their losses. In this respect, the scheme is closely
analagous to so-called chain letters which are unmailable under the provisions of the Mail Fraud Statute,
18 U.S.C. 1341. The question for this Court is whether what defendants offer their investors is a
security within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.
B.
The Supreme Court has insisted that the Securities Acts must be interpreted liberally and broadly. It has
rejected narrow and strict construction in order to carry out the remedial purposes of the legislation.
Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244
(1946). In the same opinion the court approved a certain interpretation of the Securities Act of 1933
because it embodied
. . . a flexible rather than a static principle, one that is capable of adaptation to meet the countless and
variable schemes devised by those who seek the use of the money of others on the promise of profits.
328 U.S. at 299, 66 S.Ct. at 1103.
The very purpose of the statutes would be violated if they were construed to apply only to familiar and
conventional transactions and were not capable of adaptation to novel and irregular schemes fairly
covered by the intent and text of the statutes. Thus, the Supreme Court has said that in interpreting these
acts, "form should be disregarded for substance and the emphasis should be on economic reality."
Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). Years before, the
Supreme Court had stated that the test
[348 F.Supp. 772]
of the applicability of these acts was "what character the instrument is given in commerce by the terms of
the offer, the plan of distribution, and the economic inducements held out to the prospect." Securities and
Exchange Commission v. C. M. Joiner Leasing Corp., 320 U.S. 344, 352-353, 64 S.Ct. 120, 124, 88 L.Ed.
88 (1943).
It is apparent that defendants' pyramid promotion contains the same evils which the Securities Acts are
intended to suppress. Defendants have devised a novel scheme to seek the use of money of others on
the promise of profit to them. Defendants stated to the Court, and the Court agrees, that compliance by
defendants with the provisions of the Securities Acts would mean the death of this enterprise. In the
opinion of the Court, this is so because the disclosure and anti-deception provisions of the statutes would
be totally inimical to the success of the promotion, for it is based upon blinding potential prospects to the
realities of the scheme.
Defendants argue that what they offer their prospects are not securities nor investments but in reality
products and services. It is true that in each of the various "Adventures" there are tape recordings, printed
materials and various devices which are made available to the adventurers. Without passing judgment on
the quality or value of these materials, it is nevertheless obvious that defendants are involved in much
more than the mere sale of a product. There are distinct promises made to potential customers and,
consequently, it is the duty of the Court to consider them separately. Securities and Exchange
Commission v. United Benefit Life Ins. Co., 387 U.S. 202, 207-209, 87 S.Ct. 1557, 1559-1561, 18 L.Ed.2d
673 (1967). The evidence presented by the SEC indicates that defendants have promoted their scheme
as an investment and have so represented it to the objects of their sales efforts. In this context the
Supreme Court's remark in Joiner is apropos:
[I]t is not inappropriate that promoters' offerings be judged as being what they were represented to be.
320 U.S. at 353, 64 S.Ct. at 124.
It is equally clear from the evidence that the purchasers of the higher-priced Adventures thought they
were paying for something more than the materials. That something was the promise and expectation of
a return on their investment. It is primarily for these reasons that under the laws of three different states
the offerings of defendants have been construed to be investments in securities, and consequently, in
violation of state laws governing the sale and promotion of such schemes.
There is little doubt, then, that defendants are soliciting investments on a grand scale from individuals of
relatively limited resources and education. As defendants tirelessly emphasized, it is nevertheless true
that in order to subject them to the provisions of the securities acts, it must be determined that they are
offering and selling securities as that term is used in the statutes.
Throughout these proceedings, defendants have taken the unjustified position that the opportunities
offered in their contracts to potential customers are securities only if they are "investment contracts."
Statutory definitions, however, are considerably more inclusive. In the Securities Act of 1933, 15 U.S.C.
77b(1),
[348 F.Supp. 773]
The term "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate,
preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in
general, any interest or instrument commonly known as a "security", or any certificate of interest or
participation in, temporary or interim certificatefor, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.
In the Securities Exchange Act of 1934, 15 U.S.C. 78c(10),
The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or
participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any
collateral-trust certificate, preorganization certificate or subcription, transferable share, investment
contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument
commonly known as a "security"; or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall
not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at
the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the
maturity of which is likewise limited.
It is obvious that whether or not this promotion offers investment contracts, it offers securities for sale so
long as any one or more of the terms used in the statutes are satisfied.
C.
The SEC suggested that defendants' offering satisfied the general categories of the statutes, i. e., "in
general, any interest or instrument commonly known as a `security'." As far as can be determined, these
general phrases have not been applied by any court, and there are no precedents directly in point for the
guidance of this Court. However, as a principle of statutory construction, these general categories cannot
be disregarded or construed as devoid of meaning. Considering the nature of these statutes, the inclusion
of these general phrases is yet another indication of the strength of the congressional desire that the
statute be interpreted broadly, flexibly and liberally. Congress wanted to provide no loopholes for
promotions in conflict with the purposes of the securities laws.
The Court doubts that Congress intended that in order to qualify under these general categories, a
transaction must be commonly known to the man in the street as a security. Most securities are rather
technical in nature and not likely to be understood except by the legal or financial community. It is
sufficient that an offering be considered as a legal matter to be a security, regardless of the popular
perception of it. Since the Supreme Court has indicated that it is appropriate to look to state law to give
content to the terms used in the definition, Howey supra, state decisions may be a most trustworthy
authority on what is commonly known as a security.
State courts have made admirable efforts to interpret the securities laws consistent with their purposes.
Over ten years ago, the California Supreme Court articulated a test which simply recognized that the
subjection of the investor's money to the risk of an enterprise over which he exercises no managerial
control is the basic economic reality of a security transaction. Silver Hills Country Club v. Sobieski, 55
Cal.2d 811, 13 Cal.Rptr. 186, 361 P.2d 906 (1961). The California test, called the "risk capital" test, has
since been substantially adopted by courts in a number of states; State of Hawaii by Commissioner of
Securities v. Hawaii Market Center, Inc., 485 P.2d 105 (1971); Hurst v. Dare to be Great, Inc., Civ. No.
71-160, (D. Or., January 12, 1972); State ex rel. Healy v. Consumer Business System, Inc., 92 Or. Adv.
Sh. 287, 482 P.2d 549 (Ct. of Appeals, 1971); Venture Investment Co., Inc. v. Schaefer, Civ. No. C-2732
(D. Colo., June 16, 1972); Mr. Steak, Inc. v. River City Steak, Inc., 324 F.Supp. 640 (D. Colo. 1970),
aff'd., 460 F.2d 666 (10th Cir. 1972); State of Idaho v. Glenn Turner Enterprises, Inc., Civ. No. 47773
(Dist.
[348 F.Supp. 774]
Ct., 4th Jud. Dist., March 28, 1972). By applying the risk capital test, defendants' promotions have been
held to be securities under the laws of Oregon and Idaho; Hurst, State of Idaho, supra. They have also
been held to be securities as well as a lottery under the laws of the state of Florida, Frye v. Taylor, 263
So.2d 835 (Fla.Dist.Ct. of Appeal, 4th Dist., 1972). Although not entirely clear, it appears that the Florida
court adopted the risk capital approach because it cited Healy as the basis for its determination.
The spread of the risk capital theory from the state in which it was first applied to other states and the
favorable comment with which it has been received make it an appropriate test to look to for determining
what is "commonly known as a security." There probably have been few schemes devised that more
closely meet the test than does the defendants' promotion. In the opinion of the Court, both the letter and
the purposes of the statutes are satisfied by holding, therefore, that defendants are offering and selling
contracts which are commonly known as securities within the meaning of the federal statutes.
D.
The issue which was most thoroughly litigated was whether these contracts are "investment contracts"
within the meaning of the statutes. The Supreme Court first defined the term "investment contract"
inHowey, wherein it said:
[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme
whereby a person invests his money in a common enterprise and is led to expect profits solely from the
efforts of the promoter or a third party. . . . 328 U.S. at 298-299, 66 S.Ct. at 1103.
What defendants offer their prospects easily meets the first two criteria of this three-part test. As noted
previously, the contracts were regarded as investments both by sellers and purchasers. Similarly, this
promotion embodied a common enterprise, for any return to the investors depended upon the defendants'
success in inducing yet more people to invest their money.
The real sticking point in the definition of an investment contract is the requirement that investors expect
profit solely from the efforts of others. Defendants stress that investors are told they must do sales work in
order to get any return at all. The "work" required of investors is to persuade additional individuals to
come to meetings organized by defendants where they may be subjected to the full force of defendants'
hard sell. Furthermore, they are encouraged to make ostentatious displays of wealth to deceive
prospective customers. Defendants, therefore, conclude that the profits in this enterprise do not come
solely from defendants' own efforts but rather are dependent in whole or in part upon the efforts of the
investors themselves. It follows, they argue, that these transactions are not investment contracts within
the Supreme Court's definition and that, consequently, they are not securities within the meaning of the
statutes.
It is by no means clear that the Supreme Court intended its three-pronged definition of an investment
contract to be a litmus test which must be applied literally and strictly. A narrow focus on this particular
locution seems anomalous for the court has already said, in interpreting the statutes themselves, that
liberal and broad interpretations are required in order to carry out the intent of Congress. From this flows
the court's stress on the economic realities behind transactions, on substance rather than form.
Furthermore, in this particular area of the law, to insist upon a strict application of a definition would
inevitably lead to the exploitation of loopholes created by that definition. For example, if the "solely from
the efforts of others" test were to be applied
[348 F.Supp. 775]
strictly as defendants urge, any number of devices can be invented to avoid that test. Promoters could
require some nominal effort of their would-be investors along with the contribution of their money, such as
solving a puzzle or writing an essay. This Court has doubts that either the Supreme Court or the Courts of
Appeals would sanction such efforts to evade the securities laws.
In cases which have construed the "solely from the efforts of others" test, the emphasis has been on the
economic realities in each case. Although the Court of Appeals underscored the test in Chapman v. Rudd
Paint and Varnish Co., 409 F.2d 635 (9th Cir. 1969), the franchise agreement in that case which was
unsuccessfully alleged to be a security contemplated a major and controlling role for the plaintiff-
franchisee. The extensive efforts of the franschisor were devoted mainly to equipping and stocking that
franchise after which point it was turned over to the franchisee and became dependent upon his efforts. In
another case in which the franchise agreement was alleged to be a security, the emphasis on the role
played by the franchisee was even more apparent. Mr. Steak, supra. The court there found it necessary
to weigh the relative participation in the control of the franchised restaurant before determining that the
substantial degree of authority held by the franchisee was inconsistent with a securities transaction. See
also Romney v. Richard Prows, Inc., 289 F.Supp. 313 (D. Utah 1968), in which the plaintiff was
unsuccessful in attempting to have the transaction declared an investment contract because he had an
important role in the success or failure of the enterprise.
The most essential consistency in the cases which have considered the meaning of "investment contract"
is the emphasis on whether or not the investor has substantial power to affect the success of the
enterprise. When his success requires professional or managerial skill on his part, and he has authority
corresponding with his responsibility, his investment is not a security within the meaning of the securities
acts. When he is relatively uninformed and unskilled and then turns over his money to others, essentially
depending upon their representations and their honesty and skill in managing it, the transaction is an
investment contract.
In applying the Supreme Court's definition of an investment contract, therefore, the efforts of others which
are relevant for purposes of the definition are those essential managerial efforts which affect the failure or
success of the enterprise. In this context, there are several significant aspects to defendants' promotion.
First, they seek to entice anyone who can pay the cost of the "Adventures," without regard to their
education, sales and managerial skills. In fact, defendants are apparently most successful with individuals
of limited ability and resources who have no particularly appropriate skills. It is irrelevant that some of the
investors may have been adroit at this kind of sales tactics because defendants have offered the
promotion to all, and the securities acts prohibit the offer as well as the sale of unregistered, nonexempt
securities. Securities and Exchange Commission v. Howey Co., 328 U.S. at 300-301, 66 S.Ct. 1100.
Second, the "efforts" of these investors are in practice limited to approaching other people and soliciting
them to come to meetings organized by defendants. Their role is so limited that they are not even
permitted to tell their quarry the nature or purpose of the meeting. The significant efforts in this promotion
are the specialized, professional, high-powered tactics used at these meetings by defendants, and the
ordinary investors by themselves would be unsuccessful at persuading anyone else of parting with $2,000
to $5,000. The SEC aptly paraphrased the Supreme Court opinion in Joiner by characterizing defendants'
revival-type sales methods as the common thread upon which everybody's beads were strung. Third,
[348 F.Supp. 776]
the success of any investor depends on a factor of which he is not made aware, i. e., saturation of the
market as the pyramid expands. Saturation is important at every stage, but eventually it, along with
general awareness of it, must become the only important factor, at which time efforts of the investor are
simply irrelevant, even if he spends all his time in futile efforts to sell the unsellable. Since what
defendants offer and sell is the right to sell the right to sell ad infinitum, this ultimate irrelevance of
investors' efforts is inherent in any offer to sell. In contrast to an investor's ineffectual efforts, the degree of
saturation is defendants' responsibility. Accordingly, the Court concludes that the efforts which are
significant to the success or failure of this enterprise are those of defendants and that, consequently, their
promotion constitutes an offer of an investment contract within the meaning of the Securities Act and the
Securities Exchange Act.
This Court's conclusions are buttressed by the historical antecedents of the Supreme Court definition of
an investment contract. In Howey that term was given the meaning that it had under state law at the time
of the enactment of the Securities Act. The case which apparently was the principal source of that
definition was State v. Gopher Tire and Rubber Co., 146 Minn. 52, 177 N.W. 937 (1920). In that case,
decided before the enactment of the federal statutes, the state court held that a scheme analogous to that
in question here which required investors to solicit additional customers was an investment contract and,
consequently, a security within the meaning of the state laws.
E.
Initially, the SEC's prinicpal legal theory apparently was that the contracts offered by defendants were
certificates of interest or participation in profit-sharing agreements, as that term is used in the statute.
Defendants hardly replied to this theory, however, and consequently there was little discussion of it.
Although this category of security has been subjected to considerably less judicial interpretation than the
term investment contract, it would seem that its plain meaning encompasses these transactions. What the
investors receive, after all, is a right to a cut of the profits from other investors. In the opinion of this Court,
it is immaterial that the entire profits in Dare to be Great are not divided up among all the investors and
that they are only entitled to the profit from a particular designated source. In other words, an agreement
to share some profits is within the meaning of the statutes as well as an agreement to share all profits.
It should be recalled that the "solely from the efforts of others" test is part of the definition of investment
contract, not of the definition of security. More specifically, the Supreme Court has not said that in order
for a transaction to constitute a certificate of interest or participation in a profit-sharing agreement it must
contemplate no effort on the part of the investor. Even if the "solely" test should be applied to this type of
security as well, the Court concludes for the reasons set forth above that that test is met here and that
these contracts also are certificates of interest and participation in profit-sharing agreements as well.
III
RELIEF
Defendants deny that they are violating any securities laws and insist that they are entitled to continue
what they contend are legitimate business activities. They have given no indication that they will
voluntarily cease violations of the statutes. Accordingly, the injunctive relief requested by the SEC is
appropriate to prevent further violations and to protect the public. Defendants will be enjoined from
selling, or offering
[348 F.Supp. 777]
to sell, the so-called Adventure 3 and Adventure 4 in violation of law. Adventures 1 and 2 do not appear
to involve any security inasmuch as the purchasers of them are not given to expect any return from them.
The so-called "$1,000 Plan" is no less a pyramid promotion and a security than Adventures 3 and 4, and,
consequently, will also be enjoined.
The injunction will be directed against the corporate defendants, Glenn W. Turner Enterprises, Inc. and
Dare to be Great, Inc. Of course, the order will include all officers, agents and employees of the corporate
defendants, and by the terms of the order they must be informed of it. The role of the individual named
defendants is not sufficiently developed in these proceedings to warrant injunctive relief specifically
against them now, particularly in light of the evidentiary objections raised on their behalf. However, should
the relief granted herein prove to be insufficient, the SEC may, of course, present a motion to broaden the
injunction and will be afforded an opportunity to make a proper showing that it is necessary.
The Court recognizes that this order may have a drastic effect upon defendants' business. Since the
decision rests in part on relatively untried legal theories, the order against selling or offering for sale
securities will be stayed for ten days in order to afford time to seek further relief from another forum.
However, effective immediately, defendants are prohibited from withdrawing any funds or assets from the
corporate defendants other than in the regular and ordinary course of business. Los Angeles Trust Deed
& Mortgage Exchange v. Securities and Exchange Commission, 264 F.2d 199, 213 (9th Cir. 1959).
The SEC has not shown that the corporate defendants are insolvent or that the appointment of a receiver
is otherwise appropriate.
The request for an accounting will similarly be denied since the SEC has not made a showing that this
relief is either proper or necessary.























BETTY GABIONZA and G.R. No. 161057
ISABELITA TAN,
Petitioners,
Present:

QUISUMBING, J.
Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
COURT OF APPEALS, LUKE BRION, JJ.
ROXAS and EVELYN NOLASCO,
Respondents. Promulgated:

September 12, 2008

x ---------------------------------------------------------------------------------x


D E C I S I O N

TINGA, J.:


On 21 August 2000, petitioners Betty Go Gabionza (Gabionza) and Isabelita Tan (Tan) filed their respective
Complaints-affidavit
[1]
charging private respondents Luke Roxas (Roxas) and Evelyn Nolasco (Nolasco) with
several criminal acts. Roxas was the president of ASB Holdings, Inc. (ASBHI) while Nolasco was the senior vice
president and treasurer of the same corporation.

According to petitioners, ASBHI was incorporated in 1996 with its declared primary purpose to invest in
any and all real and personal properties of every kind or otherwise acquire the stocks, bonds, and other securities or
evidence of indebtedness of any other corporation, and to hold or own, use, sell, deal in, dispose of, and turn to
account any such stocks.
[2]
ASBHI was organized with an authorized capital stock of P500,000.00, a fact reflected in
the corporations articles of incorporation, copies of which were appended as annexes to the complaint.
[3]


Both petitioners had previously placed monetary investment with the Bank of Southeast Asia (BSA). They
alleged that between 1996 and 1997, they were convinced by the officers of ASBHI to lend or deposit money with
the corporation. They and other investors were urged to lend, invest or deposit money with ASBHI, and in return
they would receive checks from ASBHI for the amount so lent, invested or deposited. At first, they were issued
receipts reflecting the name ASB Realty Development which they were told was the same entity as BSA or was
connected therewith, but beginning in March 1998, the receipts were issued in the name of ASBHI. They claimed
that they were told that ASBHI was exactly the same institution that they had previously dealt with.
[4]


ASBHI would issue two (2) postdated checks to its lenders, one representing the principal amount and the
other covering the interest thereon. The checks were drawn against DBS Bank and would mature in 30 to 45 days.
On the maturity of the checks, the individual lenders would renew the loans, either collecting only the interest
earnings or rolling over the same with the principal amounts.
[5]


In the first quarter of 2000, DBS Bank started to refuse to pay for the checks purportedly by virtue of stop
payment orders from ASBHI. In May of 2000, ASBHI filed a petition for rehabilitation and receivership with the
Securities and Exchange Commission (SEC), and it was able to obtain an order enjoining it from paying its
outstanding liabilities.
[6]
This series of events led to the filing of the complaints by petitioners, together with
Christine Chua, Elizabeth Chan, Ando Sy and Antonio Villareal, against ASBHI.
[7]
The complaints were for estafa
under Article 315(2)(a) and (2)(d) of the Revised Penal Code, estafa under Presidential Decree No. 1689, violation
of the Revised Securities Act and violation of the General Banking Act.

A special task force, the Task Force on Financial Fraud (Task Force), was created by the Department of
Justice (DOJ) to investigate the several complaints that were lodged in relation to ASBHI.
[8]
The Task Force,
dismissed the complaint on 19 October 2000, and the dismissal was concurred in by the assistant chief state
prosecutor and approved by the chief state prosecutor.
[9]
Petitioners filed a motion for reconsideration but this was
denied in February 2001.
[10]
With respect to the charges of estafa under Article 315(2) of the Revised Penal Code
and of violation of the Revised Securities Act (which form the crux of the issues before this Court), the Task Force
concluded that the subject transactions were loans which gave rise only to civil liability; that petitioners were
satisfied with the arrangement from 1996 to 2000; that petitioners never directly dealt with Nolasco and Roxas; and
that a check was not a security as contemplated by the Revised Securities Act.

Petitioners then filed a joint petition for review with the Secretary of Justice. On 15 October 2001, then
Secretary Hernando Perez issued a resolution which partially reversed the Task Force and instead directed the filing
of five (5) Informations for estafa under Article 315(2)(a) of the Revised Penal Code on the complaints of Chan and
petitioners Gabionza and Tan, and an Information for violation of Section 4 in relation to Section 56 of the Revised
Securities Act.
[11]
Motions for reconsideration to this Resolution were denied by the Department of Justice in a
Resolution dated 3 July 2002.
[12]


Even as the Informations were filed before the Regional Trial Court of Makati City, private respondents
assailed the DOJ Resolution by way of a certiorari petition with the Court of Appeals. In its assailed
Decision
[13]
dated 18 July 2003, the Court of Appeals reversed the DOJ and ordered the dismissal of the criminal
cases. The dismissal was sustained by the appellate court when it denied petitioners motion for reconsideration in a
Resolution dated 28 November 2003.
[14]
Hence this petition filed by Gabionza and Tan.

The Court of Appeals deviated from the general rule that accords respect to the discretion of the DOJ in the
determination of probable cause. This Court consistently adheres to its policy of non-interference in the conduct of
preliminary investigations, and to leave to the investigating prosecutor sufficient latitude of discretion in the
determination of what constitutes sufficient evidence to establish probable cause for the filing of an information
against a supposed offender.
[15]


At the outset, it is critical to set forth the key factual findings of the DOJ which led to the conclusion that
probable cause existed against the respondents. The DOJ Resolution states, to wit:

The transactions in question appear to be mere renewals of the loans the complainant-
petitioners earlier granted to BSA. However, just after they agreed to renew the loans, the ASB
agents who dealt with them issued to them receipts indicating that the borrower was ASB Realty,
with the representation that it was the same entity as BSA or connected therewith. On the
strength of this representation, along with other claims relating to the status of ASB and its
supposed financial capacity to meet obligations, the complainant-petitioners acceded to lend the
funds to ASB Realty instead. As it turned out, however, ASB had in fact no financial capacity to
repay the loans as it had an authorized capital stock of only P500,000.00 and paid up capital of
only P125,000.00. Clearly, the representations regarding its supposed financial capacity to meet its
obligations to the complainant-petitioners were simply false. Had they known that ASB had in fact
no such financial capacity, they would not have invested millions of pesos. Indeed, no person in
his proper frame of mind would venture to lend millions of pesos to a business entity having such
a meager capitalization. The fact that the complainant-petitioners might have benefited from its
earlier dealings with ASB, through interest earnings on their previous loans, is of no moment, it
appearing that they were not aware of the fraud at those times they renewed the loans.

The false representations made by the ASB agents who dealt with the complainant-
petitioners and who inveigled them into investing their funds in ASB are properly imputable to
respondents Roxas and Nolasco, because they, as ASBs president and senior vice
president/treasurer, respectively, in charge of its operations, directed its agents to make the false
representations to the public, including the complainant-petitioners, in order to convince them to
invest their moneys in ASB. It is difficult to make a different conclusion, judging from the fact
that respondents Roxas and Nolasco authorized and accepted for ASB the fraud-induced loans.
This makes them liable for estafa under Article 315 (paragraph 2 [a]) of the Revised Penal Code.
They cannot escape criminal liability on the ground that they did not personally deal with the
complainant-petitioners in regard to the transactions in question. Suffice it to state that to commit
a crime, inducement is as sufficient and effective as direct participation.
[16]



Notably, neither the Court of Appeals decision nor the dissent raises any serious disputation as to the
occurrence of the facts as narrated in the above passage. They take issue instead with the proposition that such facts
should result in a prima facie case against either Roxas or Nolasco, especially given that neither of them engaged in
any face-to-face dealings with petitioners. Leaving aside for the moment whether this assumed remoteness of private
respondents sufficiently insulates them from criminal liability, let us first discern whether the above-stated findings
do establish a prima facie case that petitioners were indeed the victims of the crimes of estafa under Article
315(2)(a) of the Revised Penal Code and of violation of the Revised Securities Act.

Article 315(2)(a) of the Revised Penal Code states:

ART. 315. Swindling (estafa). Any person who shall defraud another by any of the
means mentioned herein below shall be punished by:
xxx xxx xxx

(2) By means of any of the following false pretenses or fraudulent acts executed prior
to or simultaneous with the commission of the fraud:

(a) By using a fictitious name, or falsely pretending to possess power,
influence, qualifications, property, credit, agency, business or imaginary transactions, or
by means of other similar deceits;

xxx xxx xxx



The elements of estafa by means of deceit as defined under Article 315(2)(a) of the Revised Penal Code are
as follows: (1) that there must be a false pretense, fraudulent act or fraudulent means; (2) that such false pretense,
fraudulent act or fraudulent means must be made or executed prior to or simultaneously with the commission of the
fraud; (3) that the offended party must have relied on the false pretense, fraudulent act or fraudulent means, that is,
he was induced to part with his money or property because of the false pretense, fraudulent act or fraudulent means;
and (4) that as a result thereof, the offended party suffered damage.
[17]


Do the findings embodied in the DOJ Resolution align with the foregoing elements of estafa by means of
deceit?

First. The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means
perpetrated upon the petitioners. It narrated that petitioners were made to believe that ASBHI had the financial
capacity to repay the loans it enticed petitioners to extend, despite the fact that it had an authorized capital stock of
only P500,000.00 and paid up capital of only P125,000.00.
[18]
The deficient capitalization of ASBHI is evinced by
its articles of incorporation, the treasurers affidavit executed by Nolasco, the audited financial statements of the
corporation for 1998 and the general information sheets for 1998 and 1999, all of which petitioners attached to their
respective affidavits.
[19]


The Court of Appeals conceded the fact of insufficient capitalization, yet discounted its impact by noting
that ASBHI was able to make good its loans or borrowings from 1998 until the first quarter of 2000.
[20]
The short-
lived ability of ASBHI, to repay its loans does not negate the fraudulent misrepresentation or inducement it has
undertaken to obtain the loans in the first place. The material question is not whether ASBHI inspired exculpatory
confidence in its investors by making good on its loans for a while, but whether such investors would have extended
the loans in the first place had they known its true financial setup. The DOJ reasonably noted that no person in his
proper frame of mind would venture to lend millions of pesos to a business entity having such a meager
capitalization. In estafa under Article 315(2)(a), it is essential that such false statement or false representation
constitute the very cause or the only motive which induces the complainant to part with the thing.
[21]


Private respondents argue before this Court that the true capitalization of ASBHI has always been a matter
of public record, reflected as it is in several documents which could be obtained by the petitioners from the
SEC.
[22]
We are not convinced. The material misrepresentations have been made by the agents or employees of
ASBHI to petitioners, to the effect that the corporation was structurally sound and financially able to undertake the
series of loan transactions that it induced petitioners to enter into. Even if ASBHIs lack of financial and structural
integrity is verifiable from the articles of incorporation or other publicly available SEC records, it does not follow
that the crime of estafa through deceit would be beyond commission when precisely there are bending
representations that the company would be able to meet its obligations. Moreover, respondents argument assumes
that there is legal obligation on the part of petitioners to undertake an investigation of ASBHI before agreeing to
provide the loans. There is no such obligation. It is unfair to expect a person to procure every available public
record concerning an applicant for credit to satisfy himself of the latters financial standing. At least, that is not the
way an average person takes care of his concerns.

Second. The DOJ Resolution also made it clear that the false representations have been made to petitioners
prior to or simultaneously with the commission of the fraud. The assurance given to them by ASBHI that it is a
worthy credit partner occurred before they parted with their money. Relevantly, ASBHI is not the entity with whom
petitioners initially transacted with, and they averred that they had to be convinced with such representations that
Roxas and the same group behind BSA were also involved with ASBHI.



Third. As earlier stated, there was an explicit and reasonable conclusion drawn by the DOJ that it was the
representation of ASBHI to petitioners that it was creditworthy and financially capable to pay that induced
petitioners to extend the loans. Petitioners, in their respective complaint-affidavits, alleged that they were enticed to
extend the loans upon the following representations: that ASBHI was into the very same activities of ASB Realty
Corp., ASB Development Corp. and ASB Land, Inc., or otherwise held controlling interest therein; that ASB could
legitimately solicit funds from the public for investment/borrowing purposes; that ASB, by itself, or through the
corporations aforestated, owned real and personal properties which would support and justify its borrowing
program; that ASB was connected with and firmly backed by DBS Bank in which Roxas held a substantial stake;
and ASB would, upon maturity of the checks it issued to its lenders, pay the same and that it had the necessary
resources to do so.
[23]


Fourth. The DOJ Resolution established that petitioners sustained damage as a result of the acts perpetrated
against them. The damage is considerable as to petitioners. Gabionza lost P12,160,583.32 whereas Tan lost
16,411,238.57.
[24]
In addition, the DOJ Resolution noted that neither Roxas nor Nolasco disputed that ASBHI had
borrowed funds from about 700 individual investors amounting to close to P4B.
[25]



To the benefit of private respondents, the Court of Appeals ruled, citing Sesbreno v. Court of
Appeals,
[26]
that the subject transactions are akin to money market placements which partake the nature of a loan,
the non-payment of which does not give rise to criminal liability for estafa. The citation is woefully
misplaced. Sesbreno affirmed that a money market transaction partakes the nature of a loan and therefore
nonpayment thereof would not give rise to criminal liability for estafa through misappropriation or
conversion.
[27]
Estafa through misappropriation or conversion is punishable under Article 315(1)(b), while
the case at bar involves Article 315 (2)(a), a mode of estafa by means of deceit.Indeed, Sesbreno explains: In
money market placement, the investor is a lender who loans his money to a borrower through a middleman or
dealer. Petitioner here loaned his money to a borrower through Philfinance. When the latter failed to deliver back
petitioner's placement with the corresponding interest earned at the maturity date, the liability incurred by
Philfinance was a civil one.
[28]
That rationale is wholly irrelevant to the complaint at bar, which centers not on the
inability of ASBHI to repay petitioners but on the fraud and misrepresentation committed by ASBHI to induce
petitioners to part with their money.

To be clear, it is possible to hold the borrower in a money market placement liable for estafa if the creditor
was induced to extend a loan upon the false or fraudulent misrepresentations of the borrower. Such estafa is one by
means of deceit. The borrower would not be generally liable for estafa through misappropriation if he or she fails to
repay the loan, since the liability in such instance is ordinarily civil in nature.

We can thus conclude that the DOJ Resolution clearly supports a prima facie finding that the crime of
estafa under Article 315 (2)(a) has been committed against petitioners. Does it also establish a prima facie finding
that there has been a violation of the then-Revised Securities Act, specifically Section 4 in relation to Section 56
thereof?

Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act, generally requires the registration of
securities and prohibits the sale or distribution of unregistered securities.
[29]
The DOJ extensively concluded that
private respondents are liable for violating such prohibition against the sale of unregistered securities:

Respondents Roxas and Nolasco do not dispute that in 1998, ASB borrowed funds about
700 individual investors amounting to close to P4 billion, on recurring, short-term basis, usually 30
or 45 days, promising high interest yields, issuing therefore mere postdate checks. Under the
circumstances, the checks assumed the character of evidences of indebtedness, which are among
the securities mentioned under the Revised Securities Act. The term securities embodies a
flexible rather than static principle, one that is capable of adaptation to meet the countless and
variable schemes devised by those who seek to use the money of others on the promise of profits
(69 Am Jur 2d, p. 604). Thus, it has been held that checks of a debtor received and held by the
lender also are evidences of indebtedness and therefore securities under the Act, where the debtor
agreed to pay interest on a monthly basis so long as the principal checks remained uncashed, it
being said that such principal extent as would have promissory notes payable on demand (Id., p.
606, citing Untied States v. Attaway (DC La) 211 F Supp 682). In the instant case, the checks were
issued by ASB in lieu of the securities enumerated under the Revised Securities Act in a clever
attempt, or so they thought, to take the case out of the purview of the law, which requires prior
license to sell or deal in securities and registration thereof. The scheme was to designed to
circumvent the law. Checks constitute mere substitutes for cash if so issued in payment of
obligations in the ordinary course of business transactions. But when they are issued in exchange
for a big number of individual non-personalized loans solicited from the public, numbering about
700 in this case, the checks cease to be such. In such a circumstance, the checks assume the
character of evidences of indebtedness. This is especially so where the individual loans were not
evidenced by appropriate debt instruments, such as promissory notes, loan agreements, etc., as in
this case. Purportedly, the postdated checks themselves serve as the evidences of the
indebtedness. A different rule would open the floodgates for a similar scheme, whereby companies
without prior license or authority from the SEC. This cannot be countenanced. The subsequent
repeal of the Revised Securities Act does not spare respondents Roxas and Nolasco from
prosecution thereunder, since the repealing law, Republic Act No. 8799 known as the Securities
Regulation Code, continues to punish the same offense (see Section 8 in relation to Section 73,
R.A. No. 8799).
[30]



The Court of Appeals however ruled that the postdated checks issued by ASBHI did not constitute a
security under the Revised Securities Act. To support this conclusion, it cited the general definition of a check as a
bill of exchange drawn on a bank and payable on demand, and took cognizance of the fact that the issuance of
checks for the purpose of securing a loan to finance the activities of the corporation is well within the ambit of a
valid corporate act to note that a corporation does not need prior registration with the SEC in order to be able to
issue a check, which is a corporate prerogative.

This analysis is highly myopic and ignorant of the bigger picture. It is one thing for a corporation to issue
checks to satisfy isolated individual obligations, and another for a corporation to execute an elaborate scheme where
it would comport itself to the public as a pseudo-investment house and issue postdated checks instead of stocks or
traditional securities to evidence the investments of its patrons. The Revised Securities Act was geared towards
maintaining the stability of the national investment market against activities such as those apparently engaged in by
ASBHI. As the DOJ Resolution noted, ASBHI adopted this scheme in an attempt to circumvent the Revised
Securities Act, which requires a prior license to sell or deal in securities. After all, if ASBHIs activities were
actually regulated by the SEC, it is hardly likely that the design it chose to employ would have been permitted at all.


But was ASBHI able to successfully evade the requirements under the Revised Securities Act? As found by
the DOJ, there is ultimately a prima facie case that can at the very least sustain prosecution of private respondents
under that law. The DOJ Resolution is persuasive in citing American authorities which countenance a flexible
definition of securities. Moreover, it bears pointing out that the definition of securities set forth in Section 2 of the
Revised Securities Act includes commercial papers evidencing indebtedness of any person, financial or non-
financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to
another.
[31]
A check is a commercial paper evidencing indebtedness of any person, financial or non-financial entity.
Since the checks in this case were generally rolled over to augment the creditors existing investment with ASBHI,
they most definitely take on the attributes of traditional stocks.


We should be clear that the question of whether the subject checks fall within the classification of securities
under the Revised Securities Act may still be the subject of debate, but at the very least, the DOJ Resolution has
established a prima facie case for prosecuting private respondents for such offense. The thorough determination of
such issue is best left to a full-blown trial of the merits, where private respondents are free to dispute the theories set
forth in the DOJ Resolution. It is clear error on the part of the Court of Appeals to dismiss such finding so
perfunctorily and on such flimsy grounds that do not consider the grave consequences. After all, as the DOJ
Resolution correctly pointed out: [T]he postdated checks themselves serve as the evidences of the indebtedness. A
different rule would open the floodgates for a similar scheme, whereby companies without prior license or authority
from the SEC. This cannot be countenanced.
[32]



This conclusion quells the stance of the Court of Appeals that the unfortunate events befalling petitioners
were ultimately benign, not malevolent, a consequence of the economic crisis that beset thePhilippines during that
era.
[33]
That conclusion would be agreeable only if it were undisputed that the activities of ASBHI are legal in the
first place, but the DOJ puts forth a legitimate theory that the entiremodus operandi of ASBHI is illegal under the
Revised Securities Act and if that were so, the impact of the Asian economic crisis would not obviate the criminal
liability of private respondents.

Private respondents cannot make capital of the fact that when the DOJ Resolution was issued, the Revised
Securities Act had already been repealed by the Securities Regulation Code of 2000.
[34]
As noted by the DOJ, the
new Code does punish the same offense alleged of petitioners, particularly Section 8 in relation to Section 73
thereof. The complained acts occurred during the effectivity of the Revised Securities Act. Certainly, the enactment
of the new Code in lieu of the Revised Securities Act could not have extinguished all criminal acts committed under
the old law.

In 1909-1910, the Philippine and United States Supreme Courts affirmed the principle that when the
repealing act reenacts substantially the former law, and does not increase the punishment of the accused, the
right still exists to punish the accused for an offense of which they were
convicted and sentenced before the passage of the later act.
[35]
This doctrine was reaffirmed as recently as 2001,
where the Court, through Justice Quisumbing, held in Benedicto v. Court of Appeals
[36]
that an exception to the rule
that the absolute repeal of a penal law deprives the court of authority to punish a person charged with violating the
old law prior to its repeal is where the repealing act reenacts the former statute and punishes the act previously
penalized under the old law.
[37]
It is worth noting that both the Revised Securities Act and the Securities Regulation
Code of 2000 provide for exactly the same penalty: a fine of not less than five thousand (P5,000.00) pesos nor
more than five hundred thousand (P500,000.00) pesos or imprisonment of not less than seven (7) years nor more
than twenty one (21) years, or both, in the discretion of the court.
[38]


It is ineluctable that the DOJ Resolution established a prima facie case for violation of Article 315 (2)(a) of
the Revised Penal Code and Sections 4 in relation to 56 of the Revised Securities Act. We now turn to the critical
question of whether the same charges can be pinned against Roxas and Nolasco likewise.

The DOJ Resolution did not consider it exculpatory that Roxas and Nolasco had not themselves dealt
directly with petitioners, observing that to commit a crime, inducement is as sufficient and effective as direct
participation.
[39]
This conclusion finds textual support in Article 17
[40]
of the Revised Penal Code. The Court of
Appeals was unable to point to any definitive evidence that Roxas or Nolasco did not instruct or induce the agents of
ASBHI to make the false or misleading representations to the investors, including petitioners. Instead, it sought to
acquit Roxas and Nolasco of any liability on the ground that the traders or employees of ASBHI who directly made
the dubious representations to petitioners were never identified or impleaded as respondents.

It appears that the Court of Appeals was, without saying so, applying the rule in civil cases that all
indispensable parties must be impleaded in a civil action.
[41]
There is no equivalent rule in criminal procedure, and
certainly the Court of Appeals decision failed to cite any statute, procedural rule or jurisprudence to support its
position that the failure to implead the traders who directly dealt with petitioners is indeed fatal to the complaint.
[42]


Assuming that the traders could be tagged as principals by direct participation in tandem with Roxas and
Nolasco the principals by inducement does it make sense to compel that they be jointly charged in the same
complaint to the extent that the exclusion of one leads to the dismissal of the complaint? It does not. Unlike in civil
cases, where indispensable parties are required to be impleaded in order to allow for complete relief once the case is
adjudicated, the determination of criminal liability is individual to each of the defendants. Even if the criminal court
fails to acquire jurisdiction over one or some participants to a crime, it still is able to try those accused over whom it
acquired jurisdiction. The criminal court will still be able to ascertain the individual liability of those accused whom
it could try, and hand down penalties based on the degree of their participation in the crime.
The absence of one or some of the accused may bear impact on the available evidence for the prosecution or
defense, but it does not deprive the trial court to accordingly try the case based on the evidence that is actually
available.

At bar, if it is established after trial that Roxas and Nolasco instructed all the employees, agents and traders
of ASBHI to represent the corporation as financially able to engage in the challenged transactions and repay its
investors, despite their knowledge that ASBHI was not established to be in a position to do so, and that
representatives of ASBHI accordingly made such representations to petitioners, then private respondents could be
held liable for estafa. The failure to implead or try the employees, agents or traders will not negate such potential
criminal liability of Roxas and Nolasco. It is possible that the non-participation of such traders or agents in the trial
will affect the ability of both petitioners and private respondents to adduce evidence during the trial, but it cannot
quell the existence of the crime even before trial is had. At the very least, the non-identification or non-impleading
of such traders or agents cannot negatively impact the finding of probable cause.

The assailed ruling unfortunately creates a wide loophole, especially in this age of call centers, that would
create a nearly fool-proof scheme whereby well-organized criminally-minded enterprises can evade prosecution for
criminal fraud. Behind the veil of the anonymous call center agent, such enterprises could induce the investing
public to invest in fictional or incapacitated corporations with fraudulent impossible promises of definite returns on
investment. The rule, as set forth by the Court of Appeals ruling, will allow the masterminds and profiteers from the
scheme to take the money and run without fear of the law simply because the defrauded investor would be hard-
pressed to identify the anonymous call center agents who, reading aloud the script prepared for them in mellifluous
tones, directly enticed the investor to part with his or her money.

Is there sufficient basis then to establish probable cause against Roxas and Nolasco? Taking into account
the relative remoteness of private respondents to petitioners, the DOJ still concluded that there was. To repeat:

The false representations made by the ASB agents who dealt with the complainant-
petitioners and who inveigled them into investing their funds in ASB are properly imputable to
respondents Roxas and Nolasco, because they, as ASBs president and senior vice
president/treasurer, respectively, respectively, in charge of its operations, directed its agents to
make the false representations to the public, including the complainant-petitioners, in order to
convince them to invest their moneys in ASB. It is difficult to make a different conclusion,
judging from the fact that respondents Roxas and Nolasco authorized and accepted for ASB the
fraud-induced loans.
[43]



Indeed, the facts as thus established cannot lead to a definite, exculpatory conclusion that Roxas and
Nolasco did not instruct, much less forbid, their agents from making the misrepresentations to petitioners. They
could of course pose that defense, but such claim can only be established following a trial on the merits considering
that nothing in the record proves without doubt such law-abiding prudence
on their part. There is also the fact that ABSHI, their corporation, actually received the alleged amounts of
money from petitioners. It is especially curious that according to the ASBHI balance sheets dated 31 December
1999, which petitioners attached to their affidavit-complaints,
[44]
over five billion pesos were booked as advances
to stockholder when, according to the general information sheet for 1999, Roxas owned 124,996 of the 125,000
subscribed shares of ASBHI.
[45]
Considering thatASBHI had an authorized capital stock of only P500,000 and
a subscribed capital of P125,000, it can be reasonably deduced that such large amounts booked as advances
to stockholder could have only come from the loans extended by over 700 investors to ASBHI.

It is true that there are exceptions that may warrant departure from the general rule of non-interference
with the determination of probable cause by the DOJ, yet such exceptions do not lie in this case, and the
justifications actually cited in the Court of Appeals decision are exceptionally weak and ultimately erroneous.
Worse, it too hastily condoned the apparent evasion of liability by persons who seemingly profited at the expense of
investors who lost millions of pesos. The Courts conclusion is that the DOJS decision to prosecute private
respondents is founded on sufficient probable cause, and the ultimate determination of guilt or acquittal is best made
through a full trial on the merits. Indeed, many of the points raised by private respondents before this Court, related
as they are to the factual context surrounding the subject transactions, deserve the full assessment and verification
only a trial on the merits can accord.



WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals
dated 18 July 2003 and 28 November 2003 are REVERSED and SET ASIDE. The Resolutions of the Department of
Justice in I.S. Nos. 2000-1418 to 1422 dated 15 October 2001 and 3 July 2002 are REINSTATED. Costs against
private respondents.




















SECURITIES AND EXCHANGE COMMISSION
v.
KOSCOT INTERPLANETARY, INC., a Florida corporation, et al.
Civ. A. No. 17134.
United States District Court,
N.D. Georgia,
Atlanta Division.
April 19, 1973.
SIDNEY O. SMITH, Jr., Chief Judge.
The Securities and Exchange Commission seeks an injunction against violation of the federal securities laws and
other relief. More specifically, the SEC wishes to bar defendants from marketing their products through a program
which the SEC characterizes as a pyramid-selling scheme. The Commission urges that the sale of an opportunity to
participate in such a pyramiding operation amounts to selling a security within the meaning of the Securities Act of
1933 and Securities Exchange Act of 1934 and that as securities they are unregistered and sold in misleading
circumstances so as to violate these laws. Denying any sale or offer to sell securities, defendants have moved to
dismiss for failure to state a claim.
*590 In reviewing the record in this case, it is plain that defendants' program is a get-rich-quick scheme in the
worst sense. Poor, unwary persons have been induced by high-pressure sales tactics to part with their money, and
very few have harvested the large returns they were led to believe were common for those participating in the
program. Gross, intentional fraud may well be involved. Nonetheless, the court is not entirely convinced that
defendants' operation, outrageous as it may be, actually involves the sale or offer of sale of securities within the
meaning of the federal Acts.
[1] Not every get-rich-quick scheme is a "security" within the meaning of federal law, and neither the number or
nature of the participants nor possible fraud will transmute the sale of an opportunity to participate actively in a
distributorship recruiting program into a sale of a "security" if, in its legal and economic effect, the thing sold is not
a "security." Cf. Bruner v. State, 463 S.W.2d 205, 215 (Tex.Cr.App.1970) (Onion, J.). If fraud is involved, under
present laws redress must normally be found elsewhere, e. g., in state court, rather than in a federal court which
most strain and overreach to justify its jurisdiction. Accordingly, the motion to dismiss will be granted.
The Program
Under well-publicized techniques, Koscot seeks to market a line of cosmetics through a multi-level network of
independent distributors. Persons pay Koscot a fee to become distributors. A distributor may earn money by
marketing cosmetics or-and this is the gravamen-by finding and recruiting other distributors for Koscot. When a
distributor does recruit another person as a Koscot distributor, the recruiter is paid a finder's fee or commission.
Many if not all of the persons, seeking to become Koscot distributors are attracted by the lure of money to be
earned by high-pressure recruiting of other persons into the Koscot program, rather than the sale of the cosmetics
themselves.
Conclusions
[2] This is a case of statutory construction since the Commission's case rests entirely on the 1933 and 1934 federal
securities Acts. The definitions of "security" contained in these Acts are basically the same. Compare 15 U.S.C.
77b(1) with 15 U.S.C. 78c(a)(10). The Commission contends that the sale of a right to participate in Koscot as a
distributor capable of making money from the finding and recruiting of other distributors is a "security" within the
meaning of the Acts because it is the sale of (1) a right to participate in a "profit-sharing agreement", (2) an
"investment contract", and (3) an "interest or instrument commonly known as a 'security'." Each of these
emphasized terms is expressly included in the definition of "security" used in the federal Acts.
[3][4] Generally, the federal securities laws are to be construed broadly so that form is disregarded for substance
and that economic realities are emphasized. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564
(1967). Thus, these laws reach not only obvious or commonplace securities, but also novel factual situations and
devices, if their basic nature is cognizable as a security. See Securities & Exch. Comm'n v. Howey Corp., 328 U.S.
293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). With these guidelines in mind, it is necessary to review each of the three
categories relied upon by the SEC.
[5] (1) The Koscot program is not a "profit-sharing" arrangement. It is true that when a new distributor joins the
Koscot program he pays Koscot a fee and Koscot, itself, pays a fee to the distributor responsible for finding the
new distributor. Nevertheless, this does not amount to "profit-sharing". The recruiting distributor is not promised,
nor does he receive, a share of Koscot's profit; instead, he is given a fixed fee, regardless *591 of Koscot's profits,
for his efforts in recruiting a new distributor.
The SEC reminds the court of the need for liberal construction. But to construe the term "profit-sharing" to cover
the situation presented here goes in this court's judgment, beyond broad reading, and becomes plain, judicial
over-reach. The term "profit-sharing" has an ordinary significance which would be ignored if it were read to treat
simple commissions and finder's fees as shares of profits. In view of the economic-reality of this arrangement and
the ordinary significance of the term itself, this court cannot say there is any "profit-sharing" involved in
defendant's scheme.
[6] (2) The distributorship agreements involved in this case are not "investment contracts." For the purpose of the
federal securities laws, "an investment contract for purposes of the Securities Act means a contract, transaction or
scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the
efforts of a third-party." Securities & Exch. Comm'n v. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 1103, 90 L.Ed.
1244 (1946); Lynn v. Caraway, 379 F.2d 943, 945 (5th Cir. 1967); Roe v. United States, 287 F.2d 435, 438 (5th Cir.
1961). Persons who become Koscot distributors are told at the outset that they must work if they are to make
money from the Koscot program, and this is true. Unless a distributor expends effort in finding other potential
distributors, he will realize no return on the fee he paid Koscot to become a distributor. He must find prospects
and persuade them to attend meetings at which the prospects are told more about Koscot. Moreover, his work is
not finished by simply getting the prospect to the recruiting meeting. The current distributors take an active part in
the meetings and actually attempt to convince their prospects to join Koscot. Since distributors cannot expect any
money from Koscot without considerable effort on their part, the sale of distributorships is not the sale of an
"investment contract." [FN1]
FN1. In concluding that an arrangement similar to Koscot's was an "investment contract," one court has relied on
the similarity between Koscot's program and the program in State v. Gopher Tire & Rubber Co., 146 Minn. 52, 177
N.W. 937 (1920). Gopher Tire, which was relied on by the Supreme Court in Howey, is materially different from
this case. The program in Gopher Tire in reality would permit a person to receive a return on the money he
invested with minimal or no effort, because each person's return was not directly linked to his own effort. In the
Koscot program, if a person does not work, he will receive no return whatsoever.
[7] The SEC contends that "the solely from the efforts of a third-party" standard for an "investment contract" must
not be read literally and further argues that the distributor's efforts in the Koscot program are merely token.
Although the Supreme Court and the Court of Appeals for this Circuit have repeatedly included the word "solely" in
the definition of an investment contract, a mere token effort from the investor might not be fatal to the existence
of an "investment contract." But, even so this court sees the distributor's efforts in the Koscot program as
fundamental and substantial, not token. Accordingly, broad reading will not help the Commission in this respect.
The Court of Appeals for the Ninth Circuit recently departed from its previous "solely from the efforts of a third-
party" test for an "investment contract." In Securities & Exch. Comm'n. v. Glenn W. Turner Enterprises, Inc., 474
F.2d 476 (9th Cir. 1973), it was held that, as long as someone other than the investor must make the essential
managerial efforts which will determine the failure or success of the enterprise, an "investment contract" may
exist even if the investor is himself active in the enterprise and, thus, cannot be said to be depending solely on the
efforts of others for profit. The Commission would have this court follow this approach.
*592 However, the Court of Appeals for this Circuit, as well as the Supreme Court, has repeatedly stated the
"solely" test as the standard for an investment contract. This district court sees no freedom to coin a new, different
and more expansive standard in light of these binding higher court decisions.
[8] (3) The Commission's final argument-and in this court's judgment its best-is that the sale of distributorships is
the sale of an interest "commonly known as a security." As the court understands the Commission's argument, it
relies on either of two separate propositions. First, as contended at trial, the Commission contends that several
state courts have held programs similar to defendant's to be securities within the meaning of their "Blue Sky" laws
and, thus, this type of program has come to be "commonly known" as a security. Second, the Commission argues
that, in light of the recognition of the "risk capital" approach by several state courts, a security is "commonly
known" to exist wherever an investor subjects his money to the risk of an enterprise over which he exercises no
managerial control and the distributors here exercise no such control.
(a) Some courts have indeed found the Koscot program or a similar program to involve the sale of securities. See
State v. Hawaii Mkt. Center, Inc., 52 Haw. 642, 485 P.2d 105 (1971); Frye v. Taylor, 263 So.2d 835 (Fla.App.1972)
(program involved profit-sharing within meaning of state security law); Hurst v. Dare to Be Great, Inc., No. 71-160
(D.Or. Jan. 12, 1972) (finding program to be security within meaning of Oregon security law); State v. Glenn Turner
Enterprises, Inc., No. 47773 (4th Dist.Ct.Idaho 28 March 1972) (trial court holding that program was security under
Idaho law.) But several others have reached the opposite conclusion, although presented with substantially the
same facts and statutory language. See Bruner v. State, 463 S.W.2d 205 (Tex.Cr.App.1970); Koscot Interplanetary,
Inc. v. King, 452 S.W.2d 531 (Tex.Civ.App.1970); Georgia Mkt. Centers v. Fortson, 225 Ga. 854, 171 S.E.2d 620
(1969); Fidelity Credit Co. v. Bradford, 177 So.2d 635 (La.App.1965); Emery v. So-Soft of Ohio, Inc., 199 N.E.2d 120
(Ohio App.1964); Commonwealth v. Consumers Research Consultants, 414 Pa. 253, 199 A.2d 428 (1964); Gallion v.
Alabama Mkt. Centers, 282 Ala. 679, 213 So.2d 841 (1968).
In light of this almost-even split in authority, the mere existence of a few opinions holding that pyramid-selling
arrangements, such as Koscot's, are securities within the meaning of some state securities laws, particularly where
all those opinions are not from the highest court in their respective jurisdictions, seems insufficient to establish
that pyramiding arrangements are actually "commonly known" in the commercial and legal circles of the United
States as securities. The standard should be one commonly recognized in the financial community. In view of the
diverse authority, the court cannot conclude absent a Supreme Court holding that a recognizable national standard
exists on this basis. The alternative is chaos and confusion from jurisdiction to jurisdiction.
[9] (b) Looking beyond the specific device of pyramiding, the Commission asks this court to hold that a security is
"commonly known" to exist wherever a person invests his money in an enterprise over which he exercises no
managerial control. Assuming without deciding that the efforts of a Koscot investor are not "managerial", even
though obviously necessary to realize any profit, the theory bears serious consideration. This approach, sometimes
called the "risk capital" approach to securities, [FN2] *593 has gained considerable judicial acceptance since it was
first enunciated in Silver Hills Country Club v. Sobieski, 55 Cal.2d 811, 13 Cal.Rptr. 186, 361 P.2d 906 (1961). See
State v. Hawaii Mkt. Center, Inc., 52 Haw. 642, 485 P.2d 105 (1971); State ex rel. Healy v. Consumer Business
System, Inc., 5 Or.App. 19, 482 P.2d 549 (1971); State v. Glenn Turner Enterprises, Inc., No. 47773 (Dist.Ct.4th
Jud.Dist., Idaho, March 28, 1972). One federal district has directly held that this "risk capital" approach is widely
enough known to make it an appropriate test to look to for determining what is "commonly known as a security"
within the meaning of the federal securities Acts. See Securities & Exch. Comm'n. v. Glenn W. Turner Enterprises,
Inc., 348 F.Supp. 766 (D.Or.1972), aff'd on other grounds as an "investment contract" 474 F.2d 476 (9th Cir. 1973).
But see Chapman v. Rudd Paint & Varnish Company, 409 F.2d 635 (9th Cir. 1969). But this court cannot agree this
simply. The number of cases invoking the risk capital theory is really not large; only a few jurisdictions have
adopted the theory. Moreover, most of the cases applying the "risk capital" theory are quite recent. It might be fair
to say that there is emerging a philosophical trend in the law to incorporate the "risk capital" theory into the body
of security law generally in this country. But an emerging trend and "commonly known" appear to be different.
Except for the recent Oregon case, this approach is traditionally reserved to the states. The recent emphasis in
state security legislations has been on the merits of the offering, while federal regulation has thus far been limited
to the aim of honest disclosure at the time of sale irrespective of the fairness of the proposal. [FN3] Congress,
however, did not say that any interest known anywhere as a security was to be a "security" within the meaning of
the federal Acts. Congress expressly required that if an interest did not fall within the scope of one of the more
specific descriptive terms constituting a "security," e. g., an "investment contract," the interest must, if it is to be
covered by federal statute, be "commonly known" nationally as a "security." For now at least, this court does not
regard the "risk capital" theory to be so well-established as to support the conclusion that in commercial and legal
circles in this nation arrangements which are not "profit- sharing" agreements or "investment contracts" are
nevertheless "commonly" thought to be securities, if they would fit within the scope of the "risk capital" theory.
FN2. The term "risk capital" is used somewhat advisedly here. The risk capital standard has been articulated in
more than one form. Thus, its precise meaning is unsettled. Although, as this court understands it, the standard
encompasses almost any situation where a person invests his money, with the hope of some return, in an
enterprise over which he has no significant control, some courts have limited its applicability to those instances
where the investor is providing initial capitalization to an enterprise or some other similar high risk operation.
FN3. Heretofore, this court has expressed the view that, in light of the wrongs being perpetrated thereunder, the
Congress may well wish to broaden the scope of federal control into the franchise-distributorship area. See Cobb v.
Network Cinema Corp., 339 F.Supp. 95 at 98 n. 1 (N.D.Ga.1972). One view seems to hold that federal adoption of
the "risk capital" theory might well be limited to initial capitalization only. See Mr. Steak, Inc. v. River City Steak,
Inc., 324 F.Supp. 640 (D.Colo.1970).
The motion to dismiss is granted. However, judgment thereon is stayed until further order of the court. [FN4]
FN4. After hearing and while this memorandum decision was under preparation, the court was notified by the
Judicial Panel on Multi-District Litigation that transfer of this case along with certain private litigation to the
Western District of Pennsylvania was to be considered on March 23, 1973. The results of that hearing are
unknown.
It is so ordered.






S.E.C. v. LIFE PARTNERS, INC.CIV. A. NO. 94-1861.
898 F.Supp. 14 (1995)
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
LIFE PARTNERS, INC. and Brian D. Pardo, Defendants.
United States District Court, District of Columbia.
August 30, 1995.
Leo Orenstein, J ohn Gannon, Washington, DC, for Plaintiff.
Ida Wurczinger Draim, Thomas Kirby, Wiley, Rein & Fielding, Washington, DC, Patrick Roach, Bell,
Boyd & Lloyd, Washington, DC, for Defendant.
[898 F.Supp. 17]
MEMORANDUM OPINION
LAMBERTH, District Judge.
This matter comes before the Court on plaintiff Securities and Exchange Commission's (hereafter "the
Commission" or "SEC") motion for a preliminary injunction and other provisional relief. The Commission's
complaint alleges violations of the securities and broker/dealer registration requirements and the antifraud
statutes. The Commission's motion was fully briefed and orally argued to the Honorable John H. Pratt, but
was reassigned to the undersigned upon Judge Pratt's death. I have carefully considered the transcript of
the oral argument, the briefs of counsel, and the record herein. I conclude, as a preliminary matter, that
defendants sold unregistered securities and were not registered as brokers or dealers, and grant a
preliminary injunction to the Commission. I also conclude that the Commission also makes a strong prima
facie showing that defendants made untrue or misleading statements. Preliminary relief is therefore
granted to the Commission on this issue as well.
I. BACKGROUND
At issue is an unusual investment medium that rests within the grey area of securities law. Defendants
Life Partners, Inc. ("LPI") and its president, Brian Pardo, "facilitate" the sale of life insurance policies from
AIDS victims to investors at a discount. The investors then recover the face value of the policy after the
policy holder's death. Meanwhile, the terminally ill sellers secure much needed income in the final years
of life when employment is unlikely and medical bills are often staggering. This process is known as
"viatical settlements" after the ecclesiastical term "viaticum" (the communion given to a dying
person).
1
The Court must decide whether defendants simply act as agents for the investors or whether
defendants are repackaging policies as investment contracts and promissory notes in violation of
securities laws.
2

LPI is the largest viatical settlement organizer in the country, accounting for approximately one half of the
total settlement volume in 1994. For acceptance into the standard LPI program, an insured
3
must meet
the following criteria: (1) be diagnosed with "Full Blown AIDS"; (2) have a life expectancy of twenty-four
months or less
4
as determined by LPI's "independent reviewing physician"; and (3) be certified as
mentally competent. LPI also represents that a policy qualifies for purchase only if it is issued by an
insurance company rated "A-" or higher by a national insurance rating service. In addition, the policy
allegedly must be in good standing and be noncontestable, transferable or eligible for irrevocable transfer
of beneficiary.
LPI and Pardo attend to all aspects of finding and evaluating the policies. Typically, the policies are
assigned to LPI, not to investors. After the insured's death, the benefits are also paid directly to LPI which
then pays the investors. Investors have no direct contractual rights against the insurance companies that
issue the policies.
[898 F.Supp. 18]
Whether they receive a return on their investments or even recover their principal depends upon LPI's
ability to honor its contractual obligations to them.
5
The Commission is also concerned that ninety percent
of LPI is owned by offshore corporations whose owners the SEC has been unable to identify.
The Commission alleges that defendants are violating sections 5(a), 5(c), and 17(a) of the Securities Act
of 1933 ("Securities Act") [15 U.S.C. 77e(a), 77e(c), 77q(a)], and sections 10(b), 15(a), and 15(c) of
the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78j(b), 78o(a), 78o(c)]. The SEC
does not contend that all viatical settlements are securities, but limits its focus to three LPI offerings. The
first is the standard policy of an insured with a life expectancy of twenty-four months or less. The second
involves the standard policy structured as an Individual Retirement Account ("IRA") investment.
6
The third
offering permits investors to select the policies of viators expected to live longer than two years. Because
the return on this longer term investment is more speculative, LPI promises to facilitate the resale of these
investments to other LPI investors. In the Commission's view, LPI is illegally creating a secondary market
in these longer term policies. In addition, the Commission claims that LPI's solicitation and promotional
materials contain materially false and misleading statements and omissions. Defendants vigorously deny
these allegations.
II. ANALYSIS
The Commission is entitled to seek provisional relief on a "proper showing" of violative conduct. 15 U.S.C.
77t(b), 78u(d)(1). Unlike a private litigant, the SEC is not required to show irreparable injury or a
balance of equities in its favor. Instead, it must make out a "strong prima facie case of previous violations"
and show that there is "a reasonable likelihood that the wrong will be repeated." S.E.C. v. Int'l Loan
Network, 770 F.Supp. 678, 688 (D.D.C.1991).
A. WHETHER VIATICAL SETTLEMENTS ARE EXEMPT FROM SECURITIES LAWS.
The initial question before the Court is whether a viatical settlement is an insurance policy exempt from
securities laws. 3(a)(8) of the Securities Act, 15 U.S.C. 77c(a)(8). This exemption is based on the long
tradition of vesting regulation of the "business of insurance" in the states. See McCarran-Ferguson Act,
15 U.S.C. 1012(b). It is not dispositive what form the assets underlying the investment are in as
substance and not form is the guide. SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120,
123-24, 88 L.Ed. 88 (1943). The hallmark of "insurance" is the spreading and underwriting of a
policyholder's risk. SEC v. Variable Annuity Life Insurance Co., ("VALIC"), 359 U.S. 65, 73, 79 S.Ct. 618,
623, 3 L.Ed.2d 640 (1959). By contrast, in a securities "investment" the basic risk is borne by the
purchaser of the investment not by the issuer. Associates in Adolescent Psychiatry, S.C. v. Home Life Ins.
Co., 941 F.2d 561, 566-68 (7th Cir.1991), cert. denied, 502 U.S. 1099, 112 S.Ct. 1182, 117 L.Ed.2d 426
(1993). Securities, unlike insurance policies, do not transfer or spread risk.
The Court has no difficulty concluding that viatical settlements do not qualify under the section 3(a)
exemption. Viatical settlements do not transfer or distribute risk. The investor (buyer) does not assume
any risk from the seller. The buyer does undertake an investment risk that the seller will live longer than
expected, thereby reducing the buyer's return on investment. Such a
[898 F.Supp. 19]
risk, however, is inherent in any investment and does not serve the central purpose of insurance: to
transfer risk from the insured to the insurer. This has already been done by the insurance company which
issued the policy. It is equally clear that LPI and Pardo are not in the "business of insurance" so as to be
covered by the McCarran-Ferguson Act. "The relationship between the insurer and insured, the type of
policy which could be issued, its reliability, interpretation, and enforcementthese were the core of the
`business of insurance'." SEC v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 568, 21
L.Ed.2d 668 (1969). LPI does not issue insurance policies or underwrite risk or undertake the normal
activities of an insurance company.
Defendants are also concerned about the effects of securities disclosure rules on the privacy of viators by
requiring terminally ill sellers to comply with the securities disclosure requirements. This is a false
concern. The disclosure obligations fall only on those selling or offering securities, not on those selling
assets which are then repackaged by others as securities. The Commission readily agrees that a straight
viatical settlement is not a security.
7
It is the methods employed by defendants which are challenged.
B. LPI'S STANDARD VIATICAL SETTLEMENT AS A SECURITY.
The Court must decide whether the products offered by defendants qualify as investment contracts under
section 2(1) of the Securities Act. An investment contract is a
contract, transaction or scheme whereby a person invests his money [1] in a common enterprise and [2]
is led to expect profits [3] solely from the efforts of the promoter or a third party.
SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244 (1946). Under
recent refinements, the requirement that the profits be secured "solely" from the efforts of others has been
diluted to include profits secured "predominantly" from the efforts of others. SEC v. Int'l Loan Network,
Inc.,968 F.2d 1304, 1308 (D.C.Cir. 1992); SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482
(9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). The substance of an
investment contract is a security-like interest in a "common enterprise" that is expected to generate profits
through the efforts of others. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564
(1967);Rodriguez v. Banco Central Corp., 990 F.2d 7, 10 (1st Cir.1993). The parties to the instant case
do not contest that the buyers of viatical settlements are investing money. Therefore, the Court will
concentrate on the three prongs of the Howey test.
1. COMMON ENTERPRISE.
Courts have identified three types of commonality in a quest to bring meaning and uniformity to this prong
of the Howey test. The first is "horizontal commonality" which demands that the fortunes of two or more
investors be joined in a pooling of interests. Wals v. Fox Hills Development Corp., 24 F.3d 1016, 1018
(7th Cir.1994). The fortunes of investors are tied by pooling of assets, usually combined with a pro-rata
distribution of profits. Id.; Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir.1994). The second type of
commonality is "broad vertical" which considers whether the fortunes of investors are tied to the efforts of
the promoter. SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 479 (5th Cir.1974). The final type of
commonality is "strict vertical" which centers on whether fortunes of investors are tied to the fortunes of
the promoter. Brodt v. Bache & Co., 595 F.2d 459, 461 (9th Cir.1978). The Court need not decide which
measure of commonality is appropriate because each type is present in the instant case.
8

[898 F.Supp. 20]
Horizontal commonality exists through LPI's sale of fractional interests in the death benefit due under a
single policy. The fortunes of each investor are tied to that of the other investors in that policy, with
proceeds to be divided on a pro rata basis as contemplated in Revak and Wals. The scenario facing us is
similar to that recently considered by the Sixth Circuit in Resolution Trust Corp. v. Stone, 998 F.2d
1534(10th Cir.1993). In that case, the promoter (called the "venture agent") created several joint ventures
with each venture to sell leases in a particular musical master recording. Three or more investors were
included in each venture. Stone v. Kirk, 8 F.3d 1079, 1082, 1085. (6th Cir.1993). The success of each
joint venture was independent of the other ventures, but its success or failure would affect each investor
in that venture. The Court of Appeals concluded that horizontal commonality existed because the money
pooled from each joint venture was used in each instance for the benefit of all members of that
venture. Id. at 1085.
A similar situation is before the Court. Defendants line up several investors for each settlement. The
funds from all investors in a viatical settlement are pooled together, but segregated from the funds of
investors in other settlements. Similarly, the returns on each settlement are divided solely among the
investors in that settlement. Contrary to defendants' assertions, it is not dispositive that the success of
one settlement has no effect on other viatical settlements. It is sufficient that the fortunes of the investors
in each viatical settlement rise and fall together.
Both types of vertical commonality are also present in this case. The investors' fortunes are tied to those
of the promoter since LPI takes title to the policies. From the perspective of both the insurance company
and the insured, LPI is the new owner and beneficiary of the life insurance policies. Investors are
dependent upon LPI to protect their interests, and their interests would be greatly affected by LPI's
dissolution or insolvency. Such risks are sufficient to meet the test for vertical commonality. S.E.C. v.
Eurobond Exch. Ltd., 13 F.3d 1334, 1340 (9th Cir.1994). LPI investments constitute a "common
enterprise" under Howey.
2. EXPECTATION OF PROFITS.
The Supreme Court has defined "expected profits" for purposes of securities law as an investor's
anticipation of profits either through capital appreciation resulting from development of the initial
investment, or participation in earnings resulting from use of investors' funds. United Housing Foundation
v. Forman,421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975). The economic reality of the
transaction must be scrutinized. T. Hazen, Law of Securities Regulation 17. An instrument is likely to
meet this prong of the Howey test when the purchaser's motivation is to receive a return on the
investment rather than to use or consume the item. Forman, 421 U.S. at 858, 95 S.Ct. at
2063; International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 562, 99 S.Ct. 790, 797-98, 58
L.Ed.2d 808 (1979) (pension fund not security in part because profit from fund incidental motivation for
taking job).
The undisputed evidence in this case indicates that investors in viatical settlements are concerned with
gaining a return on their investment. "[R]ates of return on viatical settlements consistently out perform
market rates by a wide margin." Plaintiff's Ex. 17 ("Life Partners Newsgram"). Indeed, the material
strongly emphasizes the superior return to be expected. "The discount for the longer term commitments is
higher and, therefore, the potential annual yield more attractive." Plaintiff's Ex. 39 ("Life Partners
Newsgram", dated January, 1994).
Defendants argue that there is no capital appreciation in this case because the investor knows in advance
the amount he will receive when the policy matures. They cite to several cases holding that fixed interest
rates or interest rates tied to a market rate do not yield Howey profits. See e.g. Stone, 998 F.2d at
1540;First State Bank v. American Nat.
[898 F.Supp. 21]
Bank, 690 F.Supp. 967, 970 (D.Wy.1988) (Howey "profits" do not include situations where the return on
investment is fixed or contractually agreed to). The instant case is different. Although the face value of the
insurance policy is fixed, the return on investment varies based on the ability, or inability, of the terminally
ill to outlast LPI's life expectancy estimates. The return is also based on LPI's ability to translate that
estimate into a valuation of the policy. What results is the prospect of a fluctuating return tied to the
performance of an entity rather than a fixed or market based return. Guidry v. Bank of LaPlace, 954 F.2d
278, 284 (5th Cir.1992); Stone, 998 F.2d at 1540. Investors' return qualifies as profit under Howey.
3. DERIVED FROM THE EFFORTS OF OTHERS.
It is clear from LPI's promotional materials that it offers diligence and expertise in discovering and
evaluating the legal status of an insurance policy and the insured's medical condition before offering it for
investment. After the investment is made, LPI offers continued services of a more ministerial nature: it
periodically checks on whether the insured is alive; submits claims for death benefits to the insurance
companies; accepts this payment; and computes and distributes pro -rata shares of benefits to investors.
At issue is whether the Court can consider all LPI's efforts or only those occurring after the investment.
Although courts have not had much occasion to address this point, the Court concludes that existing
caselaw supports but one conclusion.
As a general rule, the Court considers only managerial or entrepreneurial efforts which take place
concurrently with or after the sale of the security. 5B Arnold S. Jacobs Litigation Under Rule 10b-5
38.03[b][v] esp. n. 87-88 (citing Emisco Industries, Inc. v. Pro's Inc., 543 F.2d 38, 41 (7th Cir.1976)
(investment present only if reliance is on present or future efforts of another to produce profit)). The Court
remains free to consider the promoter's efforts immediately surrounding the sale when such efforts are
based on the promoter's expertise. Jacobs, 38.03[b][ii] and [b][v] esp. n. 87. With respect to such
efforts, the District Court for the Southern District of New York concluded that investment contracts were
found
[in] cases where tangible or intangible property was purchased by the investor in the expectation that it
would appreciate in value, either [from] the promoter's expertise in selecting the property or [from] the
promoter's managerial or entrepreneurial efforts subsequent to the purchase of the property.
S.E.C. v. Energy Group of America, Inc., 459 F.Supp. 1234, 1241 (S.D.N.Y.1978); Gary Plastic
Packaging v. Merrill Lynch, 756 F.2d 230, 234-35, 240 (2d Cir.1985) (court considered defendant's
expertise in selecting certificates of deposit and investigating the issuers). The Court may consider the
LPI's particular expertise in selecting and evaluating the policies prior to sale; expertise which the investor
is dependent upon. C.f. GlenArden Commodities, Inc. v. Costantino, 493 F.2d 1027, 1035 (2d Cir.1974)
(investment contract when whiskey investment scheme promised promoter's expertise in selecting
whiskey); Eurobond,13 F.3d at 1341 (efforts of promoter essential when he determined when, in what
denominations, and from where to purchase investments). While the date of the insured's death is beyond
defendants' control, the investor's return is very much dependent on defendants' evaluation of when that
event is likely to occur.
9
It would be improper in this era of increasingly complex investment tools for the
Court not to consider the particular efforts of the promoter simply because the efforts occurred in the
immediate context of the sale and not later.
10

[898 F.Supp. 22]
Defendants argue that the efforts of the promoter must continue after the investment for the instrument to
qualify as an investment contract. This standard is satisfied here assuming arguendo that continued
efforts after the investment are required. While the Court agrees with defendants that these post-
investment activities are often ministerial in nature, two factors tip the balance in the SEC's favor. The first
is the pre-investment work by LPI which is undeniably essential to the overall success of the investment.
The efforts surrounding an investment should be considered in their entirety.
11
More importantly,
defendants' postinvestment efforts are critical since LPI, not the investor, has the contractual relationship
with the insurance company. The investors are dependent on LPI because they lack any contractual
rights vis-a-visthe insurance company and are strangers to both the insurance company and the other
investors who bought interests in the same policy. As things now stand, LPI and Pardo could designate
themselves or their nominees as beneficiaries, and there is the danger that defendants' creditors might
attempt to reach the policies. See Jenson v. Continental Financial Corp., 404 F.Supp. 792, 805 (D.Minn.
1975) (court concerned by limited investor control when funds invested in account in broker's name
alone).
Finally, defendants argue that investors in viatical settlements have such an active and controlling role
that the expectation of profit is not derived solelyor even primarily from the efforts of others. The
Court disagrees. While investors may be asked for input such as "the amount they would like to spend, ...
T-cell counts, insured's age, insurance company rating, life expectancy and the like",
12
they are in fact
limited to LPI's evaluation of the patient. Moreover, this investor input is of little practical significance as
LPI claims to accept only policies in insurance companies rated "A-" or better where the insured has a life
expectancy, as determined by LPI, of less than two years. The mere retention of theoretical rights of
control are of no consequence where the investor's role is essentially a passive one. SEC v. Aqua-Sonic
Products Corp.,687 F.2d 577 (2d Cir.1982). The Court concludes that investors who purchase viatical
settlements through LPI anticipate their profits to be derived principally from the efforts of others.
4. CONCLUSION.
The Court concludes that LPI's basic policy is an investment contract that is subject to federal securities
law.
13
This holding applies with additional force to defendants' new plan offering policies where the
insured does not yet have full blown AIDS and is expected to live longer than two years. Investors in such
policies are told that in addition to holding the policy to maturity, they will have certain investment options
including reselling the policy back through LPI to other investors after one year for a 15% rate of return or
reselling the policy back through LPI to other investors after two years for a promised 30% annual return.
Plaintiff's Ex. 39. The possibility of resale depends on LPI's continued existence and its ability to organize
a secondary market and find buyers. Gary Plastic, 756 F.2d at 240 (investor must rely on promoter's
promise to maintain marketing efforts and create secondary market).
C. LPI'S PURPORTED MISREPRESENTATIONS.
Among the Commission's allegations of material misrepresentations, some of which are of minor or
questionable relevance,
[898 F.Supp. 23]
are the following: (1) defendants' failure to inform investors that the SEC previously accused Pardo of
engaging in securities fraudan accusation which led to the voluntary issuance of an injunction; (2) a
similar failure to inform investors that Pardo is subject to a $900,000 judgment obtained by the Resolution
Trust Corporation; (3) LPI's acceptance, contrary to statements in its promotional material, of policies that
are not transferable or prohibit assignment for consideration;
14
(4) defendants' failure to disclose that state
viatical settlement laws may apply and often give the insured an absolute right to rescind within a
specified time; and (5) defendants' failure to disclose that the "independent reviewing physician" is in fact
a director of LPI. These allegations are less than overwhelming. However, it is for the trier of fact to
determine whether the above allegations amount to omissions and misrepresentations, and if so, whether
a reasonable investor would consider them important. Basic, Inc. v. Levinson, 485 U.S. 224, 231, 108
S.Ct. 978, 983, 99 L.Ed.2d 194 (1988). Their disposition will await further action on the merits. The
Commission has made out a strong prima facie case for preliminary relief, particularly with regard to
defendant Pardo's prior legal problems and outstanding judgments. The importance of these omissions
are magnified by LPI's at least theoretical ownership of the policies.
D. REMEDY FOR VIOLATIONS.
The Court is not free to ignore violations of federal securities law or grant exceptions from these laws in
worthy cases. This case is unusual, although not unique, in that there have been no allegations that any
investor, terminally ill patient, or insurance company has been defrauded, misled, or is in any way
dissatisfied with an LPI viatical settlement. This is despite an apparently exhaustive two year investigation
by the Commission. While this does not diminish the need to restrain continued unlawful conduct, the
Court is entitled to consider the apparent lack of injury in fashioning an equitable remedy. SEC v. Manor
Nursing Ctrs., Inc., 458 F.2d 1082, 1106 (2d Cir.1972) (disadvantages and possible deleterious effect of
remedy must be balanced against need for relief). The SEC must "make a more persuasive showing of its
entitlement to a preliminary injunction the more onerous are the burdens of the injunction it seeks." SEC
v. Unifund SAL, 910 F.2d 1028, 1039 (2d Cir. 1990). The Court must consider the effects of the
Commission's request for relief on a business that helps so many terminally ill patients. It is "the
standards of the public interest, not the requirements of private litigation, [that] measure the propriety and
need for injunctive relief."Id. at 1035-36 (quoting Hecht Co. v. Bowles, 321 U.S. 321, 331, 64 S.Ct. 587,
592, 88 L.Ed. 754 (1944)).
The Court must consider the valuable funds provided AIDS patients in their final illness. The availability of
such funds provides through the private sector what the already depleted public sector would otherwise
have to supply. The Court cannot ignore these beneficial results, results which caused the National
Association of People with AIDS to side with defendants. That organization is motivated by a fear that a
major disruption in LPI's business will adversely affect terminally ill patients who cannot wait while the
viatical settlement market is reconstituted.
15

The Court concludes that the Commission is entitled to more limited preliminary relief than it seeks.
Although the Court finds that defendants are selling unregistered securities, the Court noted at the outset
that this case rested in the grey area of securities law. Defendants have also indicated a willingness to
comply with any decision of the Court. Defendants' reply brief, p. 22. The Court cannot, of course, take
this promise at face
[898 F.Supp. 24]
value. Defendants must prove this by forthwith complying with securities law. Defendants shall also
execute all documents necessary to effect transfer of ownership of all polices that underlie the
investments offered and sold by the defendants to a neutral and independent agent agreeable to both
defendants and the Commission. In thirty days the Commission shall file a report with the Court on
defendants' efforts to bring themselves into compliance with securities law and the Court's preliminary
injunction. At that time the Commission may also move the Court for any further relief, including summary
judgment, a permanent injunction, appointment of a receiver, an accounting of assets, and disgorgement
of profits. In addition, the Court will preliminarily enjoin defendants from violating sections 15(c) of the
Exchange Act [15 U.S.C. 78o(c)] and Rule 15cl-2 thereunder [17 C.F.R. 240.15cl-2]. Defendants shall
refrain from engaging in any act or making any statement which is made with knowledge or reasonable
grounds to believe is untrue or misleading.
III. CONCLUSION
For the foregoing reasons, the Court grants a preliminary injunction to the Commission on the allegations
that defendants sold unregistered securities, and on the allegations that defendants made material
misstatements and omissions.
A separate order shall issue this date.
ORDER
For the reasons set forth in the accompanying memorandum opinion, it is hereby
ORDERED that defendants' motion to dismiss is denied; and it is
ORDERED that plaintiff's motion for a preliminary injunction is granted on the issue of defendants' sale of
unregistered securities in violation of sections 5 [15 U.S.C. 77e(a) and (c)], and 17(a) [15 U.S.C.
77q(a)] of the Securities Act of 1933 ("Securities Act") and violations of the broker registration
requirements of section 15(a) [15 U.S.C. 78o(a)] of the Securities Exchange Act of 1934 ("Exchange
Act"); and it is
ORDERED that defendants shall forthwith bring their operations into compliance with the applicable
securities laws; and it is
ORDERED that as soon as practicable and in no event later than ten (10) days of this order, defendants
shall execute all documents necessary to effect transfer of ownership of all policies to a neutral third-party
mutually agreeable to defendants and the Securities and Exchange Commission. Said third-party shall
hold all insurance policies transferred to him for the benefit of those investors who have purchased
interests in them; and it is
ORDERED that until such time as the transfer is effected, defendants shall not dispose of such policies in
any other way or designate a new beneficiary under any of such policies; and it is
ORDERED that in thirty (30) days the Commission shall file a report with the Court detailing defendants'
compliance with securities law and this order; and it is
ORDERED that defendants LPI and Pardo and their officers, agents, servants, employees, attorneys, and
those persons in active concert or participation with them who receive actual notice of this order by
personal service or otherwise, shall be preliminarily enjoined from, directly or indirectly, by use of any
means or instrumentality of interstate commerce, or of the mails, or of any facility of any national
securities exchange,
(a.) employing any device, scheme, or artifice to defraud;(b.) making any untrue statement of a material
fact, or omitting to state a material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading; or(c.) engaging in any act, practice, or
course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security, in violation of section 10(b) of the Exchange Act
(15 U.S.C. 78j(b)) and
[898 F.Supp. 25]
Rule 10b-5 thereunder (17 C.F.R. 240.10b-5).
So Ordered.
FOOTNOTES

1. The viatical settlement industry emerged during the late 1980s as a result of the AIDS crisis and has
grown rapidly, from $5 million in life insurance policies in 1989, to perhaps $200 million in 1995. While a
number of firms are in the field, they do not all operate the same way. Some represent the sellers, while
others buy the policies for their own accounts. Other organizations, such as LPI, claim to represent the
viatical purchasers, i.e., investors. This case concerns this type of activity.
2. Viatical settlements stretch existing laws that protect the interests of buyers and sellers. To address
this, several states have passed viatical settlement legislation that is often codified in the insurance
sections of the state codes. See e.g. Cal.Ins.Code 10113.1 et seq.; N.Y.Ins. Ch. 28, Art. 78, 7801 et
seq.; Vermont St.T. 8 Pt 3, Ch 103, Sub ch. 5A, 3826; N.M.Stat.Ann. 59A-20-34; KanStat.Ann. 40-2,
141 et seq. A review of the existing statutes show that these laws are geared to protect the patient
seeking to sell an insurance policy, and not the investor seeking to buy policies through an organization
like LPI. The Commission is concerned with this gap in regulation.
3. The Model Viatical Settlement Acts refer to the insured as a "viator." See e.g. N.Y. Ins. 7801. This
opinion will refer to the terminally ill policy holder as the "seller", "insured", or "viator."
4. Policies of viators with longer life expectancies are accepted under a special program discussed infra.
5. Regardless of whether defendants see themselves as owners of the policies or merely as agents, the
insurance companies have every reason to assume defendants own the policies. "Before the death of the
insured, the Owner of this policy alone shall be entitled to all rights granted by this policy." Plaintiff's Ex.
49 (assignment to transfer policy ownership). Defendant Pardo is listed as the beneficiary of the policy
and is given authority to assign his tax rights or change the beneficiary at any time.
6. Tax laws prevent funds from an IRA being used to purchase an insurance policy. Under LPI's scheme,
the investor instructs the IRA custodian to purchase a non-recourse note from a trust of which LPI is the
trustee. The note is collateralized by a life insurance policy which is held by the trust. After the insured
dies, the trust forwards the proceeds to the investor's IRA in exchange for the retirement of the note.
7. Defendants argue that even if viators are not the issuer of a security, they might have to expend
precious resources fighting discovery requests since their life expectancy determines the "offering price"
of the viatical settlement. Viators, however, could face similar expenses fighting dubious discovery
requests even now if, for example, a present investor sued LPI under a breach of fiduciary duty theory.
8. Although the D.C.Circuit has not indicated which test to apply, a judge of this Court previously held that
broad vertical commonality does not satisfy the first prong of Howey. Meredith v. Conticommodity
Services, Inc., Fed.Sec.L.Rep. 97,701 at 98,671 (D.D.C.1980) (Gasch, J.) (broad vertical commonality
renders common enterprise element a mere redundancy); accord Revak, 18 F.3d at 88.
9. In addition, LPI must value each policy based on individual considerations and in the absence of
market prices. This situation is readily distinguishable from those involving simple commodities contracts
which promise interchangeable products that can be procured from any number of sources. Id.; Noa v.
Key Futures, Inc., 638 F.2d 77, 80 (9th Cir.1980) (national market for silver that was not dependent upon
promoter).
10. The Court's conclusion is bolstered by LPI's own promotional material which reads: "DO I NEED TO
DO ANYTHING FURTHER? No, but Life Partners does". Plaintiff's Ex. 5, p. 3-4 (listing LPI's continuing
services). This evidences the continuing nature of the LPI/investor relationship through a package of
services. Teague v. Bakker, 35 F.3d 978, 988-89 (4th Cir. 1994) (focus is on marketing approach adopted
by seller); SEC v. Brigadoon Scotch Dist. Ltd., 388 F.Supp. 1288, 1292 (S.D.N.Y.1975) (courts consider
investment-oriented advertising in finding the presence of an investment contract).
11. It is not dispositive that some of the activities are carried out by an escrow agent acting on LPI's
instructions. Nothing in Howey requires the efforts of others to be exclusively those of the issuer or
promoter.
12. Plaintiff's Ex. 1 (Pardo Affidavit), 8.
13. Based on this holding, the Court need not consider in detail whether the promissory note issued to
avoid IRA related tax problems constitutes a security per se under the "family resemblance test." See
Reves v. Ernst & Young, 494 U.S. 56, 65, 110 S.Ct. 945, 951, 108 L.Ed.2d 47 (1990).
14. In such cases, Pardo is listed as transferee to create the false impression that the transfer is a gift.
Plaintiff's Ex. 19 (Pardo testimony at 171, 292). It is not clear to what extent investors would suffer if an
insurance company discovered this rouse.
15. The SEC argues that other companies undertake viatical settlements. While that may be true, the
undisputed evidence indicates that the two organizations the Commission cites by name are no longer
accepting policies. The Court has no doubt that other companies would spring to fill any void left by LPI
over time, however, that is of little consolation to those presently in need.

















RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 24
ELECTRONIC CITATION: 1996 FED App. 0076P (6th Cir.)
File Name: 96a0076p.06
No. 95-4078
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
THE PROCTER & GAMBLE
COMPANY,
Plaintiff-Appellee,
v.
BANKERS TRUST COMPANY, BT
SECURITIES CORPORATION,
Defendants-Appellees,
THE MCGRAW-HILL COMPANIES, INC.,
Appellant .
>
ON APPEAL from the United States District Court for the Southern District of Ohio
__________________
Decided and Filed March 5, 1996
__________________
Before: MERRITT, Chief Judge; BROWN and MARTIN, Circuit Judges.
MERRITT, C.J., delivered the opinion of the court, in which MARTIN, J., joined, with MARTIN, J. (pp. 15-
17),
also delivering a separate concurring opinion. BROWN, J. (pp. 18-25), delivered a separate dissenting
opinion.
MERRITT, Chief Judge. In a case of widespread interest to the press, the District Court issued an
injunction prohibiting Business Week magazine from publishing an article disclosing the contents of
documents placed under the seal of secrecy by the parties to a lawsuit. This appeal raises the issue of
whether the bedrock First Amendment principle that the press shall not be subjected to prior restraints
can be set aside when a federal court perceives a threat to the secrecy of material placed under seal by
stipulation of the parties. We are guided by the holding of the First Circuit in In the Matter of Providence
Journal Company that even a temporary restraint on pure speech is improper "absent the most
compelling circumstances." 820 F.2d 1342, 1351, modified on reh'g by 820 F.2d 1354 (1st Cir.
1986), cert. granted and dismissed on other grounds . Such circumstances are not present in the case at
bar, and we therefore hold that the District Court erred in granting the orders challenged here.
The District Court maintained its prior restraint on publication for three weeks by successive injunctive
orders. It then sought to avoid review under the mootness doctrine by entering a permanent injunction
against publishing the original secret documents while simultaneously making photocopies public. The
case is not moot because the permanent injunction against publication of the original documents remains
in effect and because temporary restraints on speech fall within the well-recognized exception to
mootness for wrongs that are "capable of repetition, yet evading review." See Southern Pacific Terminal
Co. v. ICC , 219 U.S. 498, 515 (1911).
I. Facts
On October 27, 1994, Procter & Gamble ("P&G") filed a complaint against Bankers Trust [1] ("Bankers")
claiming a loss of over $100 million due to alleged fraud by Bankers in the sale of derivatives to P&G. The
case has received widespread coverage, especially in the business press.
In January of 1995, Bankers and P&G agreed to a broad stipulated protective order as part of the
discovery process. The order provided that parties and non-parties to the litigation -- without court
approval for "good cause" as required by Rule 26(e) of the Civil Rules -- could, in their discretion,
designate discovery material as "confidential" and could have such material filed under seal if the parties
agreed that it reflected "trade secrets or other confidential research, development or commercial
information . . . ." J.A. at 14. The parties and not the court would determine whether particular documents
met the requirements of Rule 26. The protective order further provided that the parties could modify its
terms without approval of the court. J.A. at 21. The presiding judge, the late Judge Carl Rubin during his
terminal illness, signed the stipulated order allowing the parties to conduct the discovery process in
secret. Judge John Feikens, the former Chief Judge of the Eastern District of Michigan, was assigned the
case after Judge Rubin's death, and he therefore inherited this unusual protective order and the
voluminous set of documents already filed under the seal of secrecy.
Without notice to Business Week or a request for a hearing, on Wednesday, September 13, 1995,
Bankers and P&G alerted Judge Feikens that Business Week , a magazine owned by McGraw-Hill, had
obtained documents from the Bankers/P&G litigation that the parties wanted to remain secret. The
documents in question were materials supporting a motion by P&G for leave to amend its
complaint. Although the motion itself was not sealed, the accompanying documents, which contained a
supporting memorandum of law, a proposed Second Amended Complaint containing RICO allegations,
and a RICO case statement, were filed in secret pursuant to the protective order. Neither Bankers nor
P&G could say at that time howBusiness Week had obtained the documents.
Shortly before six o'clock, again without notice or a hearing, Judge Feikens--at the urgent request of both
parties--transmitted by facsimile an order to McGraw-Hill enjoining and prohibiting them from publishing
the documents without consent of the court. It stated that the parties would "suffer irreparable harm" if the
documents were disclosed, but it did not state a reason. The order was open-ended in duration and did
not set a date for a hearing.Business Week obeyed the order, pulling its story before its nine p.m.
publication deadline.
The following day, September 14, McGraw-Hill filed for a stay of the District Court order and an expedited
appeal with the Sixth Circuit. A Sixth Circuit panel heard oral argument and on Tuesday, September 19,
dismissed the appeal on the grounds that the order could "best be characterized as a temporary
restraining order" and was therefore not a final order and not appealable. The panel did not treat the order
as a request for mandamus or exercise its discretion by mandamus to set aside the prior restraint. Later
that day, McGraw-Hill sought an emergency stay from Justice Stevens of the United States Supreme
Court.
On September 21, Justice Stevens denied the stay, stating that the wiser course would be to return to the
District Court for a fact-finding hearing on the matter. That same day, the District Court commenced what
would be a two-day hearing to determine how the documents had been obtained and whether the
injunction should remain in place. On September 22, ten days after the original injunctive order, the
District Court entered another order extending
the September 13th order for another ten days and conducted more hearings.
The hearings revealed that the documents had found their way to Business Week through an unusual
chain of people and events. Business Week's editor on the story, Zachary Schiller, testified on the basis
of his reporter's notes to a tantalizing, off-the-record phone call from an employee in the public relations
department of P&G who suggested that some documents that would be of interest to Business
Week were about to be filed at the courthouse. (It seems that the tactics of P&G's public relations office
were a little different from those of its lawyers.) Schiller notified several Business Week journalists that he
was seeking information about the mysterious filing.
While Schiller was away from his office, a New York-based journalist for Business Week contacted an
acquaintance who was a partner at the New York law firm representing Bankers Trust. Neither the partner
(who was not working on the P&G case) nor the journalist (who had not previously been covering the
story), appeared to know that the material was under seal. The journalist simply asked for the documents,
and the partner obtained copies and gave them to her. The circle of irony became complete. Banker's
New York lawyers unwittingly also followed tactics different from those of its litigators. It appears
that Business Week found out about the sealed material because of a P&G leak and got the documents
through a leak from Banker's Trust.
With this information before it, the District Court entered two orders on October 3rd, three weeks after its
initial order restraining publication. In one order, the District Court concluded that Business
Week "knowingly violated the protective order" by obtaining the documents and was therefore prohibited
and permanently enjoined from using "the confidential materials that it obtained unlawfully." J.A. at 49. ("I
conclude as a matter of law that Business Weekcannot be permitted to use the confidential materials it
obtained to publish its story." J.A. at 47.) This
injunction remains in effect. In the other order, the District Court determined that, because the parties
could not provide a "substantial government interest" in keeping the documents confidential, "the sealed
documents should no longer be protected" and should be released into the public domain. J.A. at 33-34.
II. Analysis
A. Mootness
The first issue requiring analysis is whether Judge Feikens' order unsealing the documents and releasing
them into the public domain renders the present case moot. Although it might at first appear so, the
Supreme Court has long recognized an exception to the mootness doctrine for wrongs "capable of
repetition, yet evading review." Southern Pacific Terminal Co. v. ICC , 219 U.S. 498, 515 (1911); see
also Nebraska Press Assn. v. Stuart , 427 U.S. 539, 546 (1976). The initial restraining orders meet both
criteria and therefore fall within the exception.
The "capable of repetition" requirement is satisfied by the "reasonable expectation" that the same
complainant will be subject to similar action in the future. Globe Newspaper v. Superior Court , 457 U.S.
596, 603 (1982) (newspaper serving Boston metropolitan area would "someday be subjected to another
order" based on the same contested rule); Gannett Co. v. DePasquale , 443 U.S. 368, 377-78 (1979)
("capable of repetition" requirement satisfied by reasonable expectation that publisher of New York
newspapers would be subject to similar orders by New York courts). Here, the underlying case between
Bankers and P&G continues and the protective order remains in place. The parties will probably want to
continue to keep the details of the case undisclosed. This creates a reasonable and ongoing expectation
that another conflict may arise between the desire of the private litigants to keep their dispute out of the
public eye and McGraw-Hill's interest in reporting on matters of public concern. The increasing, routine
use of protective orders in the courts only assures that challenges of this type will continue to
occur. See Hendricks & Moch, Protective Orders: The Industry's Silencer on the Smoking Gun , 73 Mich.
B.J. 424 (May, 1994) ("Corporate defendants now seek protective orders as a matter of routine.").
With respect to the "evading review" prong, the initial restraining orders satisfy the requirement. The
temporary restraining orders are inherently of a "duration too short to be fully litigated." See, e.g.,
Gannett , 433 U.S. at 377("evading review" test met where "the challenged action [is] in its duration too
short to be fully litigated prior to its cessation or expiration."). See also, Carroll v. President and Comm'r of
Princess Anne , 393 U.S. 175, 177-179(1968) (issues raised by expired ten-day restraining order not
moot). Consequently, important procedural issues raised by the unusual circumstances of a prior
restraint, including how quickly the judge must act, whether ex parteaction is permitted, and whether there
must be a hearing in which a court addresses a TRO petition, would always evade review absent this
exception to mootness. To say that a prior restraint for three weeks by TRO is moot after dissolution
would mean that a district court may create an unreasonable three-week exception to the prior restraint
rule. Ex parte prior retraints without a hearing are equally unreviewable. Because "each passing day may
constitute a separate and cognizable infringement of the First Amendment," Nebraska Press Assn ., 423
U.S. 1327, 1329(1975) (Blackmun, J., in chambers) our ability to review even a temporary restraint on
pure speech is obviously critical. Mandamus does not provide adequate review. It is a prerogative writ
discretionary in nature and does not guarantee a remedy. The earlier panel of this Court in this case
denied review and declined to provide any relief against the prior restraint. It did not use mandamus to
ensure a hearing on the order not to publish. Mandamus is a slender reed on which to hang one's hopes
to reverse a wrong. It requires an obvious error in which officials or judges grossly exceed their authority,
and it is a discretionary writ.
In contrast, permanent injunctions are immediately appealable. The permanent injunction against
publication entered on October 3, 1995, fits in this category. The injunction still remains in effect even
though another order was entered at the same time making copies of the document available to the
public. This is our first experience with such a strange combination of orders. Why enter an injunction
against publication of original documents and then allow publication of copies of the documents? Such
orders serve no purpose other than to make a statement or declaration of wrongdoing while seeking to
prevent review under the mootness doctrine. It is a clever strategem: Now you see it, now you don't. But
appellate courts cannot allow themselves to be done out of their jurisdiction so cleverly. We would
abdicate our responsibility of judicial review. So long as the permanent injunction remains technically in
effect, we will review it as an injunction just as technically.
Review must be kept alive when a judge issues a prior restraint that he can cease when challenged and
then take up again at a later time, only to cease again just in time to prevent appellate review. The
doctrine of mootness is not to be used as a spoof on appellate courts. We therefore find that the case is
not moot and proceed to consideration of the merits.
B. Prior restraint
(1) The permanent injunction
It has long been established that a prior restraint comes to a court "with a heavy presumption against its
constitutional validity." Bantam Books v. Sullivan , 372 U.S. 58, 70 (1963). In this case, the news
magazineBusiness Week obtained information from a confidential source and prepared a story on a
matter of public concern. Following standard journalistic protocol, Business Week sought comment from
the parties and proceeded to take the story to print. Instead, the magazine received a facsimile
transmission from a Federal District Court prohibiting
publication of the information and citing "irreparable harm" as the reason. J.A. at 23.
The critical starting point for our analysis, therefore, is that we face the classic case of a prior restraint.
Indeed, "[p]rohibiting the publication of a news story . . . is the essence of censorship," and is allowed only
under exceptional circumstances. Providence Journal , 820 F.2d at 1345. Justice Blackmun recently
summarized the state of prior restraint doctrine as follows:
Although the prohibition against prior restraints is by no means absolute, the gagging of publication has
been considered acceptable only in "exceptional cases." Even where questions of allegedly urgent
national security, or competing constitutional interests, are concerned, we have imposed this "most
extraordinary remedy" only where the evil that would result from the reportage is both great and certain
and cannot be militated by less intrusive measures.
CBS v. Davis , 114 S.Ct. 912, 914 (1994) (Blackmun, J., in chambers) (citations omitted). Thus, we ask
whetherBusiness Week 's planned publication of these particular documents posed such a grave threat to
a critical government interest or to a constitutional right as to justify the District Court's three injunctive
orders.
Before proceeding to this constitutional inquiry, however, we must clear up the considerable confusion
generated by the proceedings below. Not only did the District Court fail to conduct any First Amendment
inquiry before granting the two TROs, but it compounded the harm by holding hearings on issues that
bore no relation to the right ofBusiness Week to disseminate the information in its possession. Weeks
passed with the "gag order" in effect, while the court inquired painstakingly into how Business
Week obtained the documents and whether or not its personnel had been aware that they were sealed.
While these might be appropriate lines of inquiry for a contempt proceeding or a criminal prosecution,
they are not appropriate bases for issuing a prior restraint.
Furthermore, when the District Court did finally identify the potential for a First Amendment problem, it
dismissed the question with misplaced reliance on Seattle Times v. Rhinehart , 467 U.S.
20 (1984). Seattle Times holds thatparties to civil litigation do not have a right to disseminate information
they have gained through participation in the discovery process. That case, however, does not govern the
situation where an independent news agency, having gained access to sealed documents, decides to
publish them.
In short, at no time--even to the point of entering a permanent injunction after two temporary restraining
orders--did the District Court appear to realize that it was engaging in a practice that, under all but the
most exceptional circumstances, violates the Constitution: preventing a news organization from
publishing information in its possession on a matter of public concern.
We can only conclude that, had the District Court not been rushed to judgment by both parties and had it
engaged in the proper constitutional inquiry, the injunction would never have been issued. Far from falling
into that "single, extremely narrow class of cases" where publication would be so dangerous to
fundamental government interests as to justify a prior restraint, New York Times Co. v. United
States , 403 U.S. 713, 726 (1971) (Brennan, J. concurring), the documents in question are standard
litigation filings that have now been widely publicized. The private litigants' interest in protecting their
vanity or their commercial self-interest simply does not qualify as grounds for imposing a prior restraint. It
is not even grounds for keeping the information under seal, as the District Court ultimately and correctly
decided. Opinion and Order Granting Plaintiff's Motion for Leave to Amend its Complaint , J.A. at 33. The
permanent injunction, therefore, was patently invalid and should never have been entered.
(2) The Temporary Restraining Orders
For the same reason, we find that the District Court erred in granting the two temporary restraining orders,
but
we recognize an added layer of complexity with regard to this issue. The temporary orders raise the
question of whether a district court, faced with an emergency petition to enjoin publication of certain
information, may grant a TRO simply in order to give the problem due consideration. In other words, can
the court preserve the status quo long enough to study the question without offending the First
Amendment?
In answering this question, we are guided by the First Circuit's holding in In the Matter of Providence
Journal Company . 820 F.2d 1342, modified on reh'g by 820 F.2d 1354 (1st Cir. 1986), cert. granted and
dismissed on other grounds . In Providence Journal , the district court had issued a temporary restraining
order prohibiting a newspaper from publishing certain information in its possession and had scheduled a
hearing for several days later. The First Circuit found that the TRO constituted a "transparently invalid
prior restraint on pure speech." [2] Id. at 1344. The court recognized that the matter had come before the
district court "on an emergency basis" and that "[t]he court was forced to drop its other duties and
immediately address this issue." Id. at 1351. The court further noted that the "district court's natural
instinct was to delay the matter temporarily so that a careful, thoughtful answer could be crafted." Id. The
court concluded:
This approach is proper in most instances, and indeed to follow any other course of action would often be
irresponsible. But, absent the most compelling circumstances, when that approach results in a prior
restraint on pure speech by the press it is not allowed.
Id.
The Providence Journal court's approach to the question reveals a fundamental difference between a
standard TRO issued under Rule 65 of the Federal Rules of Civil Procedure in a non-speech context and
a special injunctive order granting a prior restraint. Although we may refer to the latter as a TRO, it is a
different beast in the First Amendment context.
First, as the Providence Journal court noted, the purpose of a TRO under Rule 65 is to preserve the
status quo so that a reasoned resolution of a dispute may be had. Where the freedom of the press is
concerned, however, the status quo is to "publish news promptly that editors decide to publish. A
restraining order disturbs the status quo and impinges on the exercise of editorial discretion." Providence
Journal , 820 F.2d at 1351. Rather than having no effect, "a prior restraint, by . . . definition, has an
immediate and irreversible sanction." In re King World Productions, 898 F.2d 56, 60 (6th Cir. 1990)
(quoting Nebraska Press , 427 U.S. at 559 ).
Second, while a TRO may be granted ex parte under certain circumstances laid out in Rule 65, those
circumstances are severely limited in the First Amendment context. While "[t]here is a place for ex
parte issuance, without notice, of temporary restraining orders of short duration," there is no place for
such orders in the First Amendment realm "where no showing is made that it is impossible to serve or to
notify the opposing parties and give them an opportunity to participate." Carroll , 393 U.S. at 180 . See
Providence Journal , 820 F.2d at 1351 (a prior restraint "issued prior to a full and fair hearing . . . faces an
even heavier presumption of invalidity."). In addition to guaranteeing the due process rights of the third-
party news organization, giving notice and a hearing increases the likelihood that any impingement on
First Amendment rights that might follow will be well-founded.
Third, the inquiry that the court must conduct is different. In issuing a TRO, a district court is to review
factors such as the party's likelihood of success on the
merits and the threat of irreparable injury. Mason County Medical Ass'n v. Knebel , 563 F.2d 256, 261
(6th Cir. 1977). In the case of a prior restraint on pure speech, the hurdle is substantially higher:
publication must threaten an interest more fundamental than the First Amendment itself. Indeed, the
Supreme Court has never upheld a prior restraint, even faced with the competing interest of national
security or the Sixth Amendment right to a fair trial.
For similar reasons, the standard of review is different. The decision to grant or deny an injunction is
reviewed for abuse of discretion. Id. We review First Amendment questions de novo. [3] Bose Corp. v.
Consumers Union of United States , 466 U.S. 485 (1984).
Thus, the prerequisites for emergency, temporary injunctive relief in the First Amendment realm differ
dramatically, and appropriately, from the realm of everyday resolution of civil disputes governed by the
Federal Rules. And while compliance with the former is required, mere compliance with the latter might
have averted the protracted damage to the First Amendment that occurred in this case. Unfortunately,
neither were met here. Neither the parties nor the District Court attempted to contact McGraw-Hill before
the order was transmitted. The court did not even "define the injury and state why it is irreparable and why
the order was granted without notice" as it would be required to do under Rule 65.
C. The Protective Order
Finally, the underlying protective order signed by Judge Rubin bears comment. While District Courts have
the discretion to issue protective orders, that discretion is limited by the careful dictates of Fed. R. Civ. P.
26 and "is circumscribed by a long-established legal tradition" which values public access to court
proceedings. Brown & Williamson Tobacco Corp. v. FTC , 710 F.2d 1165, 1177 (6th Cir. 1983), cert.
denied , 465 U.S. 1100 (1984). Rule 26(c) allows the sealing of court papers only "for good cause shown"
to the court that the particular documents justify court-imposed secrecy. In this case, the parties were
allowed to adjudicate their own case based upon their own self-interest. This is a violation not only of
Rule 26(c) but of the principles so painstakingly discussed in Brown & Williamson .
The District Court cannot abdicate its responsibility to oversee the discovery process and to determine
whether filings should be made available to the public. It certainly should not turn this function over to the
parties, as it did here, allowing them to modify the terms of a court order without even seeking the
consent of the court. The protective order in this case allows the parties to control public access to court
papers, and it should be vacated or substantially changed.
III. Conclusion
For the foregoing reasons, we REVERSE and VACATE the challenged orders.
BOYCE F. MARTIN, JR., Circuit Judge, concurring. While I concur in Chief Judge Merritt's opinion, I write
separately to express my views on a few issues. With regard to whether this case was barred by the
mootness doctrine, I note that it regrettably fell to my lot to choose between the two very logical and well-
reasoned views of Chief Judge Merritt and Judge Brown on the issue. After careful consideration, I agree
that this case continued to present a live controversy enabling our review of its merits. Despite the fact
that, on October 3, 1995, the district court unsealed the documents at issue, it entered a second order
that same day permanently enjoining Business Week from publishing the confidential materials it
obtained unlawfully. Because that injunction is a permanent one, it is a final and appealable order.
Moreover, because I believe it is an unlawful prior restraint that remains in effect, the present case was
not rendered moot, and we properly could reach the merits of the claim presented.
I note more generally that this appeal is the culmination of a series of missteps at every stage of the case.
To begin with, Bankers Trust and Procter & Gamble never should have been allowed, in January 1995, to
stipulate to a broad protective order as part of their discovery process. By its terms, the protective order
could be amended by the parties without prior court approval and would be effective against non-parties.
This is ludicrous. In allowing the parties to stipulate to a protective order, the district court abdicated its
responsibility for supervising the discovery proceedings.
The district court's initial order of September 13, 1995, that was faxed to McGraw-Hill prohibiting
publication, was equally problematic. The district court had absolutely no jurisdiction over Business
Week at that time, and the magazine did not receive notice or a hearing prior to the court's enjoining it
from publishing the documents at issue. Any court order, to be valid, needs jurisdiction, and the lack of it
in this case essentially subjected Business Weekto the modern day equivalent of a star chamber.
After McGraw-Hill filed for a stay of the district court order and an expedited appeal with this Court the
following day, a panel dismissed the appeal on the ground that the order was only temporary and
therefore not final and appealable. At that stage, the nature of the appeal should have been converted to
a mandamus action under In re King World Productions, Inc. , 898 F.2d 56 (6th Cir. 1990), and the panel
should have exercised its discretion to set the prior restraint aside. Given the situation, I cannot
understand why sophisticated and hopefully qualified counsel failed to research the law of this circuit. To
top it off, even our own Court seemed unaware of its prior precedent.
Finally, on October 3, the district court filed its two contradictory orders, simultaneously entering a
permanent injunction against publication of the confidential materials Business Week obtained unlawfully
and releasing the sealed documents into the public domain. In entering the permanent injunction, I do not
believe the district court even came close to justifying its action in light of Justice Stewart's statement that
a prior restraint upon publication is improper absent proof that publication "will surely result in direct,
immediate, and irreparable damage to our Nation or its people." New York Times Co. v. United
States , 403 U.S. 713, 730 (1971). It is thus clear to me that the permanent injunction that remains in
effect is a prior restraint that logically falls within that group of cases capable of repetition yet evading
review. I therefore join Chief Judge Merritt in holding that the injunction violates the First Amendment and
must be set aside.
I note as well that this appeal is a stark example of the ways in which financial and economic powers
drive our society. Business Week is certainly a respected financial publication, but I would not hold it out
as the torch-bearer for freedom of the press in light of the fact that this case dealt more with economic
power than with the effect of a free and unfettered press on our society. Having read the entire record in
this case, I am at a loss as to whyBusiness Week felt this information was so newsworthy. Ironically,
the district judge's faxed order of prior restraint engendered more media coverage than the original
information passed along by an unthinking lawyer. This is an example to me of highly-paid counsel
wanting to try a case in the media, which unfortunately does nothing for the judiciary's poor public
relations as a whole. This case should serve as a reminder that the First Amendment cuts both ways. It
protects the speech here from prior restraint, but the media has an ethical duty to report fairly and without
distortion. Moreover, the media ought to refrain from blaming the judiciary when a situation like this,
caused in large part by the parties' conduct, arises.
Finally, what causes the greatest concern in my mind is that a reading of our decision in this case could
be an additional chapter in Philip K. Howard's book, The Death of Common Sense: How Law is
Suffocating America . (Random House, New York, 1994).
BAILEY BROWN, Circuit Judge, dissenting. While I have no quarrel with the majority's analysis of the law
generally prohibiting prior restraints, I must respectfully dissent because I would hold this case effectively
moot, and thus I would not reach the First Amendment issue. [4]
While Rule 26(c) does require that a motion be made for a protective order to issue, it is common practice
for parties to stipulate to such orders. "Good cause" must, however, still be shown for the court to issue a
stipulated order.See Patrick S. Kim, Note, Third Party Modification of Protective Orders Under Rule
26(c) , 94 Mich. L. Rev. 854, 854 n.4 (1995) (citing Arthur R. Miller, Confidentiality, Protective Orders, and
Public Access to the Courts , 105 Harv. L. Rev. 427 (1991) and Jepson, Inc. v. Makita Elec. Works , 30
F.3d 854, 858 (7th Cir. 1994)). Business Week has its documents, and it has published its story. Indeed,
the magazine has long since printed excerpts from the once-sealed material on its cover. Moreover, I do
not believe the case presents issues that are "capable of repetition, yet evading review."
A. Factual Background
Two American corporate giants, Procter & Gamble (P & G) and Bankers Trust (BT), are involved in high-
stakes, high-profile litigation about the sale of derivatives, which are a particularly newsworthy investment
these days. As part of this litigation, plaintiff P & G sought documents from defendant BT about its
derivatives sales practices, and BT eventually parted with those documents. [5] Reserve during an
investigation of BT were subject to discovery). BT did so,
however, under seal, pursuant to an existing court order entered by Judge Rubin. Although aware of that
order,Business Week reporters managed to get the documents, and the magazine was about to print a
story concerning their contents as part of its ongoing coverage of the lawsuit. The district court, at the
urging of both P & G and BT, faxed what amounted to a temporary restraining order to Business Week ,
forbidding the publishing of the story about the documents.
Rather than present its prior restraint case to the district judge, Business Week initially, and
unsuccessfully, sought relief from one judge of this court, then from another panel of this court, and then
from our Circuit Justice on the Supreme Court. While before the prior panel of this court, the magazine
did not petition for a writ of mandamus. Rather, it sought a stay of the order and an expedited
appeal. Joint Appendix at 55-56. The prior panel viewed the matter as an appeal of a temporary
restraining order, and thus dismissed the appeal for lack of jurisdiction. Id.Circuit Justice Stevens denied
the magazine's application for an emergency stay of that order, and recommended that the parties return
to the district court. McGraw-Hill Cos. v. Procter & Gamble Co. , 116 S. Ct. 6, 6-7 (Stevens, Circuit Justice
1995).
The parties returned to the district court the very day Justice Stevens handed down his opinion. After
holding a two-day hearing on the matter, the district court extended its original restraining order for ten
days while it held more hearings. Eventually, on October 3, 1995, the district court simultaneously issued
two orders. One order permanently enjoined Business Week from publishing the documents which its
reporters had obtained. The second order, however, rendered the first a virtual nullity, because it
concurrently unsealed the filed documents, thereby
enabling Business Week to publish its story. As previously noted, the magazine has done so. [6]
B. Mootness
A case is moot when no live controversy remains, and no live controversy remains when a court cannot
provide effective relief. See , e.g. , Deakins v. Monaghan , 484 U.S. 193, 199 (1988). Mootness is a
matter of subject matter jurisdiction with its roots in the Constitution, which limits our jurisdiction to
"Cases" and "Controversies." U.S. Const. art. III, 2. This case elegantly demonstrates why the framers
so limited our jurisdiction.
Given the district court's unsealing of the documents at issue, we cannot provide any effective relief; thus,
no live controversy remains. Business Week has received the relief it wanted, albeit not in the manner it
expected. At this point, we need only provide the established two-part remedy for moot cases: (1) vacate,
as moot, the district court's order permanently enjoining Business Week 's publication of the documents it
obtained, and (2) remand with instructions to dismiss the case. Deakins , 484 U.S. at 200 ; WJW-TV, Inc.
v. City of Cleveland , 878 F.2d 906, 911-12 (6th Cir.) (per curiam), cert. denied , 493 U.S. 819 (1989).
The majority, however, would review this case for two reasons. First, the majority determines that the
propriety of issuing the temporary restraining orders falls within the mootness doctrine exception for
matters "capable of repetition, yet evading review." E.g. , Southern Pac. Terminal Co. v. Interstate
Commerce Comm'n , 219 U.S. 498, 515 (1911). Second, as the majority notes, the permanent injunction
issued by the district court with
respect to the copies of the documents obtained by Business Week technically remains in effect. Thus,
the majority contends, the question of whether the district court erred in issuing the injunction is not moot.
I disagree on both points.
1. The temporary restraining orders.
As the Southern Pacific Terminal Co. case demonstrates, courts created the "capable of repetition, yet
evading review" exception to the mootness doctrine "because of the necessity or propriety of deciding
some question of law presented which might serve to guide [a decision-maker] when again called upon to
act in the matter." Id. at 516 (quoting Boise City Irr. & Land Co. v. Clark , 131 F. 415, 419 (9th Cir. 1904)).
This exception has since evolved into a pair of particularized inquiries, and only if we have affirmative
answers to both questions may we apply the exception. Weinstein v. Bradford , 423 U.S. 147, 149 (1975)
(per curiam). First, we ask whether there is a "reasonable expectation" or a "demonstrable probability"
that the same complaining party will confront this same situation again. Murphy v. Hunt , 455 U.S. 478,
482 (1982) (per curiam); Weinstein , 423 U.S. at 149 . If the answer is yes, we have a situation "capable
of repetition." Second, we ask whether the lifespan of the particular debate has a predetermined limit,
such that it could never be fully litigated before its cessation. Murphy , 455 U.S. at 482 ;Weinstein , 423
U.S. at 149 . If it does, we have a situation "evading review."
Assuming, without deciding, that what happened in this case is capable of repetition, [7] I do not believe
that it will evade review. First, if a district court confronted a similar situation and issued similar orders
to Business Weekagain,
I believe that the district court would (as the court was prepared to do in this case) review the matter
immediately.See Nebraska Press Ass'n v. Stuart , 427 U.S. 539, 559 (1976) (stating that even minimal
interference with First Amendment freedoms is an irreparable injury). That sort of immediate review would
almost certainly have happened here, had Business Week chosen to make its application in the district
court before it moved up the appellate ladder. Instead of seeking an immediate hearing before the district
judge on the temporary order (and the order's prompt dissolution), however, Business Week chose to
come to one judge, and then a panel, of this court, and then it appealed to our Circuit Justice. [8] Only
then did it return to the district court, where the hearings were held.
Second, and more importantly, if Business Week finds itself in this situation again and again chooses to
seek immediate appellate review, the matter would not evade review, even given the short life of
temporary orders. This is so because an established body of Sixth Circuit precedent provides for prompt
review of--and, almost certainly, relief from--such orders with a petition for a writ of mandamus. Business
Week , however, framed its emergency appeal simply as a request for a stay of the district court's order
and a request for an expedited appeal. Had Business Week presented a petition for a writ of mandamus,
we could have turned to that body of law and rapidly dealt with the prior restraint question.
The pellucid opinion in In re King World Productions , 898 F.2d 56 (6th Cir. 1990) (Martin, J.), is precisely
on point.King World involved a temporary restraining order
which enjoined the television broadcast of footage which, according to the plaintiff, was obtained in
violation of federal and state law. This court entertained a petition for a writ of mandamus only eight days
after the district court entered its order, and this court issued its opinion within three days after that
hearing. We stated that "mandamus is the only vehicle for obtaining appellate review of an improperly
issued temporary restraining order when the first amendment runs afoul of a conflicting right and prior
restraint may result." King World , 898 F.2d at 59. We proceeded to issue the writ because the plaintiff
below in that case could not show that he would "suffer an irreparable harm great enough to justify a prior
restraint." Id. at 60.
The majority argues that mandamus is an inadequate vehicle for review of prior restraints because "[i]t
requires an obvious error in which officials or judges grossly exceed their authority, and it is a
discretionary writ." Majority Op. at 8. While the majority recites the correct standard for determining when
this court should use its discretion to issue a writ of mandamus, it errs in its implicit determination that the
situation presented by this case (or any other alleged prior restraint by a district judge) might not warrant
review and remediation through a writ of mandamus. In King World , this court painstakingly considered
facts strikingly similar to those in this case within the framework for determining whether a writ of
mandamus should issue, and we concluded that it should. King World , 898 F.2d at 58-59.
In fact, for the reasons ably set forth in the substantive portion of the majority opinion, I cannot imagine a
case more appropriate for mandamus review than this one. Thus, I find most curious the majority's
statement that "important issues raised by the unusual circumstances of a prior restraint, including the
time and manner in which a court must address a TRO petition, would always evade review absent this
exception to mootness." Majority Op. at 6. This court has already addressed such prior restraints issued
by district courts and struck them down as such.
King World , 898 F.2d at 60; see also United States v. Ford , 830 F.2d 596, 598-600 (6th Cir. 1987)
(Merritt, J.) (holding that a broad, interlocutory "gag" order in a mail and bank fraud case involving a
congressman which prohibited the congressman from discussing his case, even with other members of
Congress or on the floor of the House of Representatives was (1) "appealable as [a 28 U.S.C.] 1291
final order[] under the collateral order' doctrine . . . as well as in mandamus," and (2) an impermissible
prior restraint); CBS Inc. v. Young , 522 F.2d 234, 237 (6th Cir. 1975) (per curiam) (holding that
mandamus permitted appellate review of a district court order restraining public comment by the parties,
as well as their friends and relatives, in the civil litigation arising from the tragic shootings at Kent State
University).
These important cases evidently eluded Business Week , for under the clear holdings of these
cases, Business Week could have obtained prompt review of its contention that the district court's order
was an unconstitutional prior restraint. Attorneys should be aware that these cases are available authority
for obtaining proper and prompt review of the propriety of any future prior restraints similar to the one in
the instant case. Thus, if a situation such as the one before us arises again in this circuit, it most certainly
would not evade review, because the harmed party could immediately petition for a writ of mandamus.
2. The permanent injunction.
As for the permanent injunction, the mere fact that it is "technically" still in effect does not create a basis
for review of this case. To hold otherwise, as the majority does, shakes the mootness doctrine to its very
foundations. Every time an appellate court holds that a case has become moot after the lower court
disposed of it, some judgment or order of the lower court "remains technically in effect," as the majority
states. Majority Op. at 9. The appropriate question is, can we provide effective relief given the case
before us? Deakins , 484 U.S. at 199 -200. In this case, we cannot. As previously explained, Business
Week has
already published excerpts from the documents affected by the injunction. Presumably, it could bind the
documents into a special edition and publish them in their entirety, if it so chose.
Moreover, this "technical" argument completely ignores our established procedure for handling moot
cases: we vacate the order or judgment at issue and remand with directions to dismiss the
case. E.g. , Deakins , 484 U.S. at 200 . In fact, what appears to disturb the majority, Business Week , and
the many amici who have filed briefs is an unrealistic fear that someone, someday, could employ the text
of the district court's mooted permanent injunction to delay someone else's publication of sealed court
documents--especially since, as the majority notes, litigants routinely seek protective
orders. [9] Thus, Business Week and the friends of the court want us to hold that this case either is not
moot at all, or is "capable of repetition, yet evading review."
What the majority, Business Week, and the amici fail to grasp, however, is that the mootness doctrine
gives them the remedy they want, albeit without the visceral satisfaction of a First Amendment casebook
entry. We would prevent any damage that the continued existence of the permanent injunction could
cause by vacating it and remanding the case with directions to dismiss. Such action, as the Supreme
Court put it, "strips" the mooted orders of any precedential value. Deakins , 484 U.S. at 200 ; see
also , e.g. , WJW-TV, Inc. , 878 F.2d at 911-12. Thus, the concerns of the majority, Business Week , and
the amici are not well founded.
For the foregoing reasons, I respectfully dissent.












Teamsters v. Daniel - 439 U.S. 551 (1979)


Syllabus
Case
U.S. Supreme Court
Teamsters v. Daniel, 439 U.S. 551 (1979)
International Brotherhood of Teamsters, Chauffeurs,
Warehousemen & Helpers of America v. Daniel
No. 77-753
Argued October 31, 1978
Decided January 16, 1979*
439 U.S. 551
Syllabus
A pension plan entered into under a collective bargaining agreement between petitioner
local labor union and employer trucking firms required all employees to participate in the
plan, but not to pay anything into it. All contributions to the plan were to be made by the
employers at a specified amount per week for each man-week of covered employment. To
be eligible for a pension, an employee was required to have 20 years of continuous service.
Respondent employee, who had over 20 years' service, was denied a pension upon
retirement because of a break in service. He then brought suit in Federal District Court,
alleging, inter alia, that the union and petitioner trustee of the pension fund had
misrepresented and omitted to state material facts with respect to the value of a covered
employee's interest in the pension plan, and that such misstatements and omissions
constituted a fraud in connection with the sale of a security in violation of 10(b) of the
Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5,
and also violated 17(a) of the Securities Act of 1933. Denying petitioners' motion to
dismiss, the District Court held that respondent's interest in the pension fund constituted a
"security" within the meaning of 2(1) of the Securities Act and 3(a)(10) of the Securities
Exchange Act because the plan created an "investment contract," and also that there had
been a "sale" of this interest to respondent within the meaning of 2(3) of the Securities
Act and 3(a)(14) of the Securities Exchange Act. The Court of Appeals affirmed.
Held: The Securities Act and the Securities Exchange Act do not apply to a noncontributory,
compulsory pension plan. Pp. 439 U. S. 558-570.
(a) To determine whether a particular financial relationship constitutes an investment
contract, "[t]he test is whether the scheme involves
Page 439 U. S. 552
an investment of money in a common enterprise with profits to come solely from the efforts
of others." SEC v. W. J. Howey Co., 328 U. S. 293, 328 U. S. 301. Looking separately at
each element of this test, it is apparent that an employee's participation in a
noncontributory, compulsory pension plan such as the one in question here does not
comport with the commonly held understanding of an investment contract. With respect to
the "investment of money" element, in such a pension plan, the purported investment is a
relatively insignificant part of the total and indivisible compensation package of an
employee, who, from the standpoint of the economic realities, is selling his labor to obtain a
livelihood, not making an investment for the future. And with respect to the "expectation of
profits" element, while the pension fund depends to some extent on earnings from its
assets, the possibility of participating in asset earnings is too insubstantial to bring the
entire transaction within the Securities Acts. Pp. 439 U. S. 558-562.
(b) There is no evidence that Congress at any time thought noncontributory plans were
subject to federal regulation as securities. Nor until the instant litigation arose is there any
evidence that the SEC had ever considered the Securities Act and Securities Exchange Act
to be applicable to such plans. Accordingly, there is no justification for deference to the
SEC's present interpretation. Pp. 439 U. S. 563-569.
(c) The Employee Retirement Income Security Act of 1974, which comprehensively governs
the use and terms of employee pension plans, severely undercuts all argument for
extending the Securities Act and Securities Exchange Act to noncontributory, compulsory
pension plans, and whatever benefits employees might derive from the effect of these latter
Acts are now provided in more definite form through ERISA. Pp.439 U. S. 569-570.
561 F.2d 1223, reversed.
POWELL, J., delivered the opinion of the Court, in which BRENNAN, STEWART, WHITE,
MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined, and in all but the last paragraph of
Part III-A of which, BURGER, C.J., joined. BURGER, C.J., filed a concurring
opinion,post, p. 439 U. S. 570. STEVENS, J., took no part in the consideration or decision of
the cases.
Page 439 U. S. 553

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G.R. No. 106357 September 3, 1998
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
PRISCILLA BALASA, NORMITA VISAYA, GUILLERMO FRANCISCO, NORMA FRANCISCO and
ANALINA FRANCISCO, accused, NORMA FRANCISCO, GUILLERMO FRANCISCO and ANALINA
FRANCISCO, accused-appellants.
G.R. No. 108601-02 September 3, 1998
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
PRISCILLA BALASA, NORMITA VISAYA, GUILLERMO FRANCISCO, NORMA FRANCISCO and
ANALINA FRANCISCO, accused, NORMA FRANCISCO, GUILLERMO FRANCISCO and ANALINA
FRANCISCO, accused-appellants.

ROMERO, J .:
Avarice, mother of crimes, greedy for more the more she possesses, eversearching
open-mouthed for gold.
1

Greed has always been one of man's failings. The hope of greater gain has lured many a man to throw
caution, and his common sense, to the wind. This human foible, known to many, has been exploited
throughout the ages by con men, charlatans and cheats to bilk the gullible public of their hard-earned
money. History has thus seen the unraveling of various disingenuous stratagems which are at bottom
nothing but seams. The case at hand once again proves that "a sucker is born every minute."
Totoong walang pagkaubos sa ating daigdig ang mga taong nanlilinlang. Hindi magkakagayon naman
kung walang nagpapalinlang. Dahil sa kanilang malaking hangarin na magkamal ng kimpal kimpal na
kayamanan, pinapasukan nila ang mga kaduda-dudang alok ng mga mapagsamantala na kung sila ay
mamuhunan ng kaunting salapi, ito ay tutubo ng malaki sa ilang araw lamang. Kaya't napakaraming mga
tao ang nagagantso. Hindi masasabing mga hangal o dili kaya'y mga maralita na walang gaanong pinag-
aralan ang mga nabibiktima. Kahit ang mga maykaya at matataas sa ating lipunan ay napaglalaruan din.
Milyun-milyong salapi ang nahuhuthot sa kanila, hindi ng mga masakim na magnanakaw, kundi ng kanila
na ring mga kasamahan sa tinatawag na "alta sociedad." Mismong mga kaibigan at kapanatag ng loob
ang naguudyok sa kanilang sumali sa mga pakana na magpapayaman sa kanila. Higit namang
nakakaawa kapag ang naloloko ay iyong nangungutang lamang at nagbabakasakali na ang ilang daan
nila ay magiging libo.
Itong kapasiyahang ito ng Mataas na Hukuman ay nagbababalang muli. Magpakaingat-ingat ang lahat.
Ang naghahangad ng kagitna, isang salop ang nawawala.
Iyon namang nanlilinlang. Walang gawaing masama na hindi nabubunyag rin. Totoong mahigpit ang ating
batas na pumaparusa sa mga ganyang hindi na natututo, lalo't higit kung ang mga salarin ay mga
sindikato.
Tunghayan natin kung papaano naganap ang gawang panloloko sa mga taga Palawan ng mga dayo
lamang.
On July 6, 1989, the Panata Foundation of the Philippines, Inc., a non-stock, non-profit corporation with
principal address at San Miguel, Puerto Princesa, Palawan, was registered with the securities and
Exchange Commission, under S.E.C. Reg. No. 165565. Its ten incoporators were Priscilla Balasa,
Normita Visaya, Analina Francisco, Lolita Gelilang, Cynthia Ang, Norma Francisco, Purabel Espidol,
Melinda Mercado, Rodolfo Ang, Jr. and Teresa G. Carandang. Five incorporators, namely, Priscilla
Balasa, Normita Visaya, Analina Francisco, Lolita Gelilang and Cynthia Ang were named first trustees.
In addition, the management of the foundation was entrusted to Priscilla Balasa, as president and general
manager; Normita Visaya as corporate secretary and head comptroller; Norma Francisco as cashier;
Guillermo Francisco as the disbursing officer; and Analina Francisco as treasurer. The latter also doubled
as a typist of the Foundation.
On the other hand, the employees of the foundation were the tellers Rosemarie Balasa, Sylvia Magnaye,
Judith Ponciano, Jessica Buaya, Rosario Arciaga, Paul Francisco, Enriquita Gabayan and Anita Macmac.
The comptrollers, Ruth Jalover, Amarino Agayo, and Avelina Yan were under the supervision of Normita
Visaya. Nelia Daco, one of the clerks assigned outside, was the one in direct contact with the depositors.
The Foundation's purposes, as stated in its by-laws, were as follows:
1. Uplift members' economic condition by way of financial or consultative
basis (sic);
2. To encourage members in a self-help program;
3. To grant educational assistance;
4. To implement the program on the Anti-Drug campaign;
5. To acquire facilities either by or through purchase, lease, bequest of
donations, equipments (sic), machineries (sic) and supplies for purposes
of carrying out its business operation or hold such real or personal
properties as may be convenient and proper in order to achieve the
purpose of this corporation;
6. To cooperate with other organizations, institutions with similar
activities for purposes of carrying out its business; and
7. To organize seminars or conferences specially in the rural areas and
other selected cities.
2

After obtaining its SEC registration, the foundation immediately swung into operation. It sent out
brochures soliciting deposits from the public, assuring would-be depositors that their money would either
be doubled after 21 days or trebled after 30 days. Priscilla Balasa also went around convincing people to
make deposits with the foundation at their office at the Diaz Apartment, Puerto Princesa.
The modus operandi for investing with the foundation was as follows:
When a person would deposit an amount, the amount would be taken by a clerk to be given to the teller.
The teller would then fill up a printed form called a "slot." These "slots" were part of a booklet, with one
booklet containing one hundred "slots." A "slot," which resembled a check, contained the following data:
PANATA FOUNDATION Control No. 33
(Logo) OF THE PHILIPPINES INC. Date 12-5-87 / Dec. 26, 1987
PFOPI Puerto Princesa, Palawan Amount P 500.00
Sec. Reg. No. 165565
M CHESTER MONREAL
Address RPC
Share FIVE
Amount in words FIVE HUNDRED PESOS Only
(Sgd.)
(Sgd.) PRICILLA BALASA

Signature of Member President / Manager
No. 30333
3

The control number indicated the number of the "slot" in a booklet, while the space after "date" would
contain the date when the slot was acquired, as well as the date of its maturity. The amount deposited
determined the number of shares, one share being equivalent to one hundred pesos. The depositor had
the discretion when to affix his signature on the space provided therefor. Some would sign their slot only
after payment on maturity, while others would sign as soon as they were given the slot. However, without
the control number and the stamp of the teller, duly signed or initialed, no depositor could claim the
proceeds of his deposit upon maturity.
4

After the slot had been filled up by the teller, he would give it to the clerk assigned outside. The clerk
would then give the slot to the depositor. Hence, while it was the teller who prepared and issued the slot,
he had no direct contact with the depositor. The slots handed to a depositor were signed beforehand by
the president of the foundation.
Every afternoon, the comptrollers would take the list of depositors made by the tellers with the amounts
deposited by each, and have these typed. Norma Francisco would then receive from the tellers the
amounts deposited by the public. It was also her job to pay the salaries of the foundation's employees.
For his part, Guillermo Francisco would release money whenever a deposit would mature as indicated in
the slots.
According to the foundations rules, an investor could deposit up to P5,000.00 only, getting a slot
corresponding thereto. Anyone who deposited more than that amount would, however, be given a slot but
the slot had to be in he name of another person or several other persons, depending upon the amount
invested.
5
According to Sylvia Magnaye, a foundation teller, all deposits maturing in August 1989 were to
be tripled. For such deposits, the slots issued were colored yellow to signify that the depositor would have
his deposit tripled. Deposits that would mature subsequent to August were only given double the amount
deposited.
6
However, there were times when it was the depositor who would choose that his deposit be
tripled, in which case, the deposit would mature later
7
.
The amounts received by the foundation were deposited in banks. Thus, a foundation teller would, from
time to time, go to PNB, PCI Bank, DBP and the Rural Bank of Coron to deposit the collections in a joint
account in the names of Priscilla Balasa and Norma Francisco.
Initially, the operation started with a few depositors, with most depositors investing small amounts to see
whether the foundation would make good on its promise. When the foundation paid double or triple the
amounts of their investment at maturity, most not only reinvested their earnings but even added to their
initial investments. As word got around that deposits could be doubled within 21 days, or tripled if the
period lasted for more than 30 days, more depositors were attracted. Blinded by the prospect of gaining
substantial profits for nothing more than a minuscule investment, these investors, like previous ones,
were lured to reinvest their earnings, if not to invest more.
Most would invest more than P5,000.00, the investment limit set by the foundation. Priscilla Balasa would,
however, encourage depositors to invest more than P5,000.00, provided that the excess was deposited
under the name of others. She assured the depositors that this was safe because as long as the
depositor was holding the slots, he was the "owner" of the amount deposited. Most investors then
deposited amounts in the names of their relatives.
At the outset, the foundation's operations proceeded smoothly, as satisfied investors collected their
investments upon maturity. On November 29, 1989, however, the foundation did not open. Depositors
whose investments were to mature on said date demanded payments but none was forthcoming. On
December 2, 1989, Priscilla Balasa announced that since the foundation's money had been invested in
the stock market, it would resume operations on December 4, 1989. On that date, the foundation
remained closed. Depositors began to demand reimbursement of their deposits, but the foundation was
unable to deliver.
Consequently, sixty-four informations, all charging the offense of estafa, as defined in Presidential Decree
No. 1689, were filed against Priscilla Balasa, Normita Visaya, Norma Francisco, Guillermo Francisco,
Analina Francisco and eight other persons, mostly incorporators and employees of the Panata
Foundation, before the Regional Trial Court of Palawan. Fourteen cases, including Criminal Case Nos.
8429 and 8751, were raffled off to Branch 52. Two more cases, Criminal Case Nos. 8704 and 8749, were
similarly assigned to it. Of the sixteen casts assigned to Branch 52, eight were, with the consent of the
accused, provisionally dismissed for lack of evidence.
In Criminal Case No. 8429, the information charging the accused with the crime of estafa "as amended by
PD 1689" was filed on December 12, 1989. The accused in this case were: Priscilla Balasa, Almarino
Agayo, Norma Francisco, Normita Visaya, Paul Francisco, Nelia Daco, Ruth Jalover,
8
Guillermo
Francisco, Candido Tolentino, Jr., Rosemarie Balasa,
9
Ricardo del Rosario, Emelita Gabayan, Rosario
Arciaga, Jessica Buaya, Avelina Yan, Anita Macmac, Gina Gabaldon, Ronaldo Belo, Fernando Cadauan,
Lolita Gelilang, Cynthia Ang, Judith Ponciano, Sylvia Magnaye,
10
Analina Francisco and Sulpicio
Nabayan. As Amended on February 16, 1990, the information in this case reads as follows:
That sometime on (sic) December, 1989, the above-named accused being the Manager
and employees of the PANATA Foundation of the Philippines, Inc., with office at No. 20
Diaz Apartment, Manalo Extension, Puerto Princesa City, Philippines, and within the
jurisdiction of this Honorable Court, the said accused conspiring and confederating with
one another and operating as a syndicate, did then and there wilfully, unlawfully and
feloniously defraud one Estrella San Gabriel y Lacao by means of false representation
and fraudulent means which they made to said Estrella San Gabriel to the effect that as
an investor/subscriber to the PANATA Foundation, Inc. which is a non-stock corporation
allegedly registered with the SEC under Registration No. 165565 and by means of other
similar deceit induce the said Estrella San Gabriel to give and deliver to the said accused
the amount of P5,500.00 as her investment in said foundation, and by manifestation and
misrepresentation by the said accused that the said invested amount will be doubled or
tripled within a certain period of days said accused knowing fully well that their
manifestation and representations were false and fraudulent as they are made only for
the purpose of obtaining as in fact they obtained the amount with intent to defraud
misapply, misappropriate and convert the said amount for their own personal use and
benefit, to the damage and prejudice of said Estrella San Gabriel in the amount of
P5,500.00, Philippine Currency.
CONTRARY TO LAW and penalized under Presidential Decree No. 1689.
Likewise, in Criminal Case No. 8704, the information, filed on May 23, 1990, charged Priscilla Balasa,
Norma Francisco, Guillermo Francisco, Normita Visaya, Analina Francisco, Lolita Gelilang, Cynthia Ang,
Rodolfo Ang, Jr., Purable Espidol, Melinda Mercado, Almarino Agayo, Candido Tolentino, Jr., Ricardo del
Rosario, Fernando Caduan, Paul Francisco and Teresita Carandang with the crime of estafa "as
amended by Presidential Decree No. 1689" as follows:
That sometime in July, 1989 to December 1989, the above-named accused being then
the Manager incorporators, members of the board of trustees, officers and employees of
the PANATA FOUNDATION OF THE PHIL., INC. with Office No. 20 Diaz Apartment,
Manalo Extension, Puerto Princess City, Philippines and within the jurisdiction of this
Honorable Court, the said accused conspiring, confederating together and mutually
helping one another, and operating as a syndicate, did then and there wilfully, unlawfully
and feloniously defraud, the complainant Conchita Bigornia, by means of false
pretenses/representation and fraudulent means which they made to said Conchita
Bigornia to the effect that as depositor/subscriber to the PANATA FOUNDATION OF
THE PHIL., INC., which is a non-stock corporation allegedly registered with the SEC
under Registration No. 165565 and by means of other similar deceit induce the said
Conchita Bigornia, to give and deliver to the said accused the amount of TWENTY FOUR
THOUSAND ONE HUNDRED (P24,100.00) PESOS, Philippine Currency, as his/her
deposit/subscription in said Foundation, and by manifestation and misrepresentation by
the said accused that the said deposited/subscription amount will be doubled or tripled
within a certain period of days said accused knowing fully well that this manifestation
were (sic) false and fraudulent as they are made only for the purpose of obtaining as in
fact they obtained the amount of TWENTY FOUR THOUSAND ONE HUNDRED PESOS
(P24,100.00) from the said (Conchita Bigornia) and the said accused once in possession
of the said amount with intent to defraud, misapply, misappropriate and convert the said
amount for their own personal use and benefit, to the damage and prejudice of the
said Conchita Bigornia in the amount aforestated.
CONTRARY TO LAW and penalized under P.D. No. 1689.
Similar informations were filed against the same persons in Criminal Cases Nos. 8749 and 8751. The
complainant in Criminal Case No. 8749, complainant Shiela San Juan, was allegedly defrauded of
P25,800.00 while in Criminal Case No. 8751, the amount of P6,800.00 was allegedly defrauded from
Benjamin Yangco.
In like manner, similarly worded informations in Criminal Case Nos. 8734 and 8428, raffled off to Branch
50, alleged that Elisia Mensias was defrauded in the amount of P4,500.00 and Alfonso and Prescilla
Lacao defrauded in the amount of P58,850.00, respectively.
After the filing of the informations, warrants for the arrest of the defendants in the corresponding criminal
cases were issued. However, only Priscilla Balasa, Normita Visaya, Guillermo Francisco, Norma
Francisco and Analina Francisco were arrested, the rest of the defendants having gone into hiding.
On arraignment, the arrested defendants all pleaded not guilty to the crimes charged but before the
presentation of prosecution evidence, Priscilla Balasa and Normita Visaya escaped from police custody.
With their escape, only the spouses Guillermo and Norma Francisco were called to present evidence on
behalf of the defense. Analina Francisco, being a deaf-mute, was not called to the witness stand due to
the lack of a competent interpreter. The spouses, in denying criminal liability, presented the following
facts:
Priscilla Balasa, Normita Visaya, and Analina Francisco, full-blooded sisters, are the common children of
appellant spouses Guillermo and Norma Francisco. Before the Panata Foundation started operations in
July 1989, Priscilla had been living with her parents in San Mateo, Isabela. Analina, on the other hand,
was living with their elder sister, Normita, in Manila. Priscilla, however, left for Palawan in June 1989.
Sometime thereafter, Guillermo Francisco received a letter from Priscilla asking him to come to Palawan
to provide her company, the latter's husband having left for abroad as a seaman. Consequently,
Francisco came to Palawan sometime in August 1989 to live with Priscilla at the Diaz Apartment in Puerto
Princesa. Norma Francisco also came to Palawan in August, purportedly to visit Priscilla's daughter,
whom she missed. Analina likewise came to Palawan from Manila in August.
Guillermo denies participation in the commission of the crime charged. In his testimony, he limits his
participation in the foundation's activities to paying the holders of matured slots. It was the comptroller,
Ruth Jalover, who would give him the record on which to base the remittances he would make.
11
The
money he disbursed was not always in his possession, as it would have to come from the bank. It was
Sylvia Magnaye who would withdraw the money from the bank while it was Nelia Daco who would directly
receive money from the people. Thus, not even once did he participate in the process of receiving money.
His daughters Priscilla Balasa and Normita Visaya performed other jobs in the operation of the foundation
while his other daughter, Analina Francisco, only typed documents. He knew that the foundation helped
people who received money from it.
12
Although the primary purpose of the foundation was to help the
needy, Guillermo testified having knowledge of only one recipient thereof, the church of Aborlan.
In her testimony, Norma Francisco also denied complicity in the crime charged, claiming that she only did
household chores in Puerto Princesa. She alleged that sometimes, she would "help the tellers." However,
because Ruth Jalover was educated and she was not, the former would sometimes become the "acting
manager of her daughter." Sylvia Magnaye, her daughter's sister-in-law and a permanent employee of the
foundation, was one of the tellers who would deposit and withdraw from the bank. The eight tellers of the
foundation all applied for their jobs with Priscilla but it was Normita who interviewed them. However,
Normita was only a clerk in the foundation while Analina would type whatever work Ruth Jalover would
give her. While Norma had no official position in the foundation, her husband, Guillermo, was the
paymaster. During her stay in Puerto Princesa, she knew of no other business that her daughter Priscilla
was engaged in except the foundation and a paluwagan, which she ran together with a certain Manny
Diaz. Norma knew that the foundation was a charitable institution that had helped a lot of people. She did
not help Ruth Jalover in the same way that she helped Sylvia Magnaye with her job as teller, but she had
nothing to do with the keeping of records. She knew that money came from the tellers, who got the
money from Nelia Daco, the one receiving money from prospective investors.
13

On March 31, 1992, Branch 50 of the Regional Trial Court of Palawan issued a joint decision in Criminal
Case Nos. 8734 and 8428 finding the accused guilty of the crime charged and of having acted in
conspiracy in committing the same. Finding no aggravating or mitigating circumstances in the commission
of the crime, the trial court decreed thus:
WHEREFORE AND IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is
hereby rendered finding all the accused in the 2 above-entitled cases guilty as principals
of the crime of estafa as the same is defined and penalized under the Revised Penal
Code.
a. In Criminal Case No. 8428 accused Priscilla Balasa, Normita Visaya,
Analina Francisco, Guillermo Francisco and Norma Francisco are hereby
sentenced to suffer the penalty of reclusion perpetua as well as to pay
the costs. The accused are jointly and severally ordered to pay the
offended party Alfonso Lacao the sum of Fifty Eight Thousand Eight
Hundred Fifty (P58,850.00) Pesos and to pay the further sum of Thirty
Thousand Pesos (P30,000.00) as and for moral damages;
b. In Criminal Case No. 8734, accused Normita Visaya, Analina
Francisco, Norma Francisco and Guillermo Francisco are hereby
sentenced to suffer the penalty ofreclusion perpetua as well as to pay the
costs. They are furthermore ordered jointly and severally to indemnify the
offended party Elisea Mensias the sum of Four Thousand Five Hundred
(P4,500.00) Pesos as well as to pay the additional sum of Fifteen
Thousand (P15,000.00) Pesos as and for moral damages.
The cases against the accused Almarino Agayo, Paul Francisco, Candido Tolentino, Jr.,
Ricardo del Rosario, Jessica Buaya, Fernando Cadauan, Lolita Gelilang Cynthia Ang,
Rodolfo Ang Jr., Purable Espidol, Melinda Mercado, and Teresit Carandang who
remained at large up to the present time are hereby ordered archived to be reinstated in
the docket of this Court as soon they shall have been arrested or surrendered voluntarily
to the jurisdiction of this Court.
SO ORDERED.
On the other hand, Branch 52 rendered separate decisions in the cases assigned to it. Thus, on October
14, 1991, the trial court in Criminal Case No. 8429 rendered a decision, the dispositive portion of which
reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered finding co-accused
PRISCILLA BALASA, NORMITA VISAYA, GULLLERMO FRANCISCO, and NORMA
FRANCISCO guilty beyond reasonable doubt as co-principals of the crime of estafa
committed by a syndicate in violation of Section 1 of Presidential Decree No. 1689, and
each of the aforenamed accused is sentenced toreclusion perpetua; to pay to Estrella
Lacao San Gabriel, jointly and severally, by way of restitution, the sum of P5,500.00.00,
with interest thereon of 12% per annum from December, 1989, until fully paid; and to pay
the costs.
On grounds of reasonable doubt engendered by lack of sufficiently clear and convincing
evidence as against her, co-accused Analina Francisco is acquitted of the offense
charged.
SO ORDERED.
Although Branch 52 rendered separate decisions in the cases assigned to it, all had essentially the same
disposition imposing the penalty of reclusion perpetua upon each of the convicted accused only the
name of the offended party and the amount to be restituted varied. Thus, in Criminal Case No.
8704,
14
the trial court ordered the accused to pay Conchita Bigornia by way of restitution, the amount of
P24,200.00 with interest thereon of 12% per annum from December 1989. In Criminal Case No.
8749,
15
the same convicted accused were ordered to restitute Shiela San Juan the amount of
P25,800.00 plus 12% per annum from December 1989. In Criminal Case No. 8751,
16
the convicted
accused were ordered to restitute Benjamin Yangco the amount of P6,800.00 with 12% interest per
annum from December 1989.
Guillermo and Norma Francisco filed notices of appeal in Criminal Case Nos. 8429, 8704, 8749 and
8751. Their appeal was docketed as G.R. No. 106357. Likewise, the joint decision in Criminal Case Nos.
8734 and 8428 was appealed to this Court by Guillermo Francisco, Norma Francisco, Analina Francisco,
and Normita Visaya, docketed herein as G.R. Nos. 108601-02. Noting Normita Visaya's escape from
police custody after arraignment, the Court, on August 15, 1994, and pursuant to Section 8, Rule 124 of
the Revised Rules of Court, ordered the dismissal of her appeal on the ground of abandonment. The
Court also considered Priscilla Balasa's conviction to be final and executory, in light of her escape from
police custody. It also ordered the issuance of a warrant for the arrest of Normita Visaya and
an alias warrant of arrest against Priscilla Balasa.
On October 16, 1993, appellants' counsel, Atty. Agustin Rocamora, filed an appellants' brief in G.R. No.
106357. Thereafter, appellants appointed the Maramba and Mamauag Law Office as new counsel in
substitution of Atty. Rocamora. On November 2, 1994, new counsel filed a motion to consolidate G.R. No.
106357 and G.R. Nos. 108601-02. On December 7, 1994, the Court granted the motion and ordered the
consolidation of the two cases. On the same day, counsel for appellants submitted a consolidated
appellants' brief.
In G.R. No. 106357, counsel for appellants raise the following errors:
1. The trial court erred in convicting the appellants despite the total absence of
evidence against them;
2. The trial court erred in ruling that conspiracy existed on the basis of the
relationship of the appellants to the principal accused; and
3. The trial court erred in convicting appellants despite their prior conviction for
the same offense in Criminal Case No. 8429.
On the other hand, the brief filed by appellants in the consolidated cases mainly argues that they cannot
be convicted of the defined in Presidential Decree No. 1689 because the informations filed against them
alleged prejudice against the complaining witnesses, not against the national, provincial, or city economy
nor was evidence presented therefor.
Appellants' conviction must, however, be sustained, the issues raised being devoid of merit. The number
and diversity of issues raised by appellants impel us to discuss the points raised seriatim.
For the first assignment of error, we hold that the elements of the crime defined and penalized by P.D.
No. 1689 have been proven beyond reasonable doubt in these appealed cases. The informations filed
against appellants alleged that by means of false representation or false pretenses and through
fraudulent means, complainants were defrauded of various amounts of money by the accused. Article
315, paragraph 2 (a) of the Revised Penal Code provides that swindling or estafa by false pretenses or
fraudulent acts executed prior to or simultaneously with the commission of the fraud is committed by
"using fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit,
agency, business or imaginary transactions, or by other similar deceits." The elements of estafa under
this penal provision are: (1) the accused defrauded another by means of deceit and (2) damage or
prejudice capable of pecuniary estimation is caused to the offended party or third party.
17
It is
indisputable that the foundation failed to return the investments of the complaining witnesses, hence it is
undeniable that the complainants suffered damage in the amount of their unrecouped investments. What
needs elucidation is whether or not the element of defraudation by means of deceit has been established
beyond reasonable doubt.
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust, or confidence justly
reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken
of another.
18
It is a generic term embracing all multifarious means which human ingenuity can device,
and which are resorted to by one individual to secure an advantage over another by false suggestions or
by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which
another is cheated.
19
On the other hand, deceit is the false representation of a matter of fact whether by
words or conduct, by false or misleading allegations, or by concealment of that which should have been
disclosed which deceives or is intended to deceive another so that he shall act upon it to his legal
injury.
20

In pursuit of their agenda, appellants established a foundation which, by its articles of incorporation, was
established, allegedly to "uplift members' economic condition by way of financial or consultative basis."
Organized as a non-stock, non-profit charitable institution, its funds were to be obtained through
membership dues and such other assessments as may be agreed upon by its board of
directors.
21
Furthermore, the modus operandi
22
of the foundation, duly signed by Priscilla Balasa,
provided that:
Funding
Any funding requirements to finance the operation of the association shall be done
through the collection of membership fees, dues, donations, bequests and other
assessments. The amount of which shall be subject to the approval of the general
membership of the association.
Likewise, all funds in-flows would be used exclusively to carry out the purposes for which
the FOUNDATION is established and would not inure to the benefit of any single member
of the FOUNDATION.
The operations personnel shall come from volunteers among its members and should the
need arise, hiring of additional personnel be resorted to.
In contravention of these by-laws and modus operandi, the people behind the foundation enticed people
to "deposit or invest" funds in the foundation under a "double or treble your deposit" scheme. These
investment activities were clearly ultra vires acts or acts beyond the foundation's authority. Evidently, SEC
registration was obtained only for the purpose of giving a semblance of legitimacy to the foundation; that
the foundation's business was sanctioned by the government; and that it was allowed by law to accept
deposits. This pretension was carried out even on the slots it issued, the foundations' S.E.C. registry
number being indicated thereon.
In carrying out the charade, the manager went to the extent of delivering a speech and personally
encouraging people to deposit or invest in the foundation. Alfonso Lacao, a complainant and prosecution
witness, testified:
Q: Have you heard of this so called Panata Foundation?
A: Yes, ma'm I heard it from my friends who are talking about this Panata
Foundation they even informed me that the manager of this Panata
Foundation is calling for a meeting for all depositors and prospective
depositors on Saturday afternoon.
Q: With that information did you get interested in the proposed meeting
being called by this Panata Foundation?
A: I was curious and came Saturday I went to the office of the Panata
Foundation to attend the meeting.
Q: And at that time where was this office located?
A: At Diaz Apartment, Manalo Extension, Puerto Princesa City.
Q: Did you attend that meeting?
A: Yes ma'am.
Q: Whom did you see sponsoring that meeting on that particular day?
A: Upon arrival I saw a woman delivering her message to the depositors
and to the prospective depositors. I asked a friend of me (sic) who is that
woman and he informed me that she is the manager of the Panata
Foundation Priscilla Balasa.
xxx xxx xxx
Q: What was Priscilla Balasa doing if any in that particular meeting?
A: In her message she was convincing all the people there to make their
deposit to the Panata Foundation because according to her they were
sent here to help the people of Puerto Princesa City and the people of
Palawan.
Q: Aside from that what did Priscilla Balasa tell those people who
attended the meeting?
A: She was assuring the people that they must not be afraid to deposit
their money because they will not be fooling around with them.
xxx xxx xxx
Q: And did Priscilla Balasa tell those persons attending the meeting what
would happen with the money they will deposit with the Panata
Foundation?
A: She was telling the people that you could deposit the money and it will
be doubled within 21 days. I was further informed that the maximum
amount to be deposited is P5,000,00.
Q: You stated a while ago that the amount deposited will be doubled
after 21 days?
A: Yes ma'am.
Q: Aside from that what else if any did Priscilla Balasa tell the public who
attended that meeting?
A: She was telling the public to make ease with their deposit because
they were sent here to help the people of Puerto Princesa City and
Palawan.
Q: Did she tell the public as to where the money would be coming from?
A: Right that moment she was not able to tell the public.
23

On cross-examination, Mr. Lacao testified:
Q: But did it not occur to your mind considering your past experience to
investigate or cause the investigation of this Panata Foundation
considering your connection as to whether they are in a position to make
double your money investment specially so they are not engage (sic) in
business, so to speak?
A: Once I overheard the manager say when she was there telling the
people around the depositors that their money is being invested in a
world bank.
24

Priscilla Balasa, thus, promised the credulous public quick financial gains on their investments. The
foundation even printed brochures proclaiming the merits of the foundation's investment
scheme.
25
Likewise, to bolster the illusion that indeed, the foundation was legitimate, the claim was made
that deposits would be invested abroad in a world bank, with said transactions allegedly enabling the
foundation to double or treble depositors' investments. The evidence, however, proves the contrary.
Sylvia Magnaye, one of the tellers, testified:
Q: Other than to issue slots, do you know what other phase of operation
in running the Panata Foundation during the time that you were
employed?
A: No sir, I can only observe that issuing of slots.
Q: Madam Witness, aside from issuing slots, there is only the activity of
the foundation that you are well aware of?
A: Sometimes they also sent me to deposit.
Q: The deposit of the amount collected in the bank, is that correct?
A: I do not know but they just send me to deposit amounts.
Q: But you do not know in what other business activity other than the
matter of collecting money and issuance of slots you do not know if the
Panata Foundation is involved in any business activity?
A: Yes, sir.
Q: You do not know whether the foundation receives money regularly
from any other source?
A: I do not know sir.
26

On cross-examination, she testified:
Q: You mentioned Madam Witness, that on several occasions you were
asked to deposit certain amounts in the bank, do you remember having
told the Court that?
A: Right, sir.
Q: Do you remember how many banks these deposited amounts were if
you remember?
A: I deposited at PNB, PCIBank, and DBP and Rural Bank of Coron.
Q: Do you remember in whose names you deposited these amounts you
deposited?
A: In the name of the joint account of Priscilla Balasa and Norma
Francisco.
27

The testimonial evidence presented by the prosecution proves that appellants employed fraud and deceit
upon gullible people to convince them to invest in the foundation. It has been held that where one states
that the future profits or income of an enterprise shall be a certain sum, but he actually knows that there
will be none, or that they will be substantially less than he represents, the statement constitutes
actionable fraud where the hearer believes him and relies on the statement to his injury.
28
That there was
no profit forthcoming can be clearly deduced from the fact that the foundation was not engaged nor
authorized to engage in any lucrative business to finance its operation. It was not shown that it was the
recipient of donations or bequest with which to finance its "double or triple your money" scheme, nor did it
have any operating capital to speak of when it started operations.
Parenthetically, what appellants offered the public was a "Ponzi scheme," an investment program that
offers impossibly high returns and pays these returns to early investors out of the capital contributed by
later investors.
29
Named after Charles Ponzi who promoted the scheme in the 1920s, the original scheme
involved the issuance of bonds which offered 50% interest in 45 days or a 100% profit if held for 90 days.
Basically, Ponzi used the money he received from later investors to pay extravagant rates of return to
early investors, thereby inducing more investors to place their money with him in the false hope of
realizing this same extravagant rate of return themselves. This was the very same scheme practiced by
the Panata Foundation.
However, the Ponzi scheme works only as long as there is an ever-increasing number of new investors
joining the scheme. To pay off the 50% bonds Ponzi had to come up with a one-and-a-half times increase
with each round. To pay 100% profit he had to double the number of investors at each stage, and this is
the reason why a Ponzi scheme is a scheme and not an investment strategy. The progression it depends
upon is unsustainable. The pattern of increase in the number of participants in the system explains how it
is able to succeed in the short run and, at the same time, why it must fail in the long run. This game is
difficult to sustain over a long period of time because to continue paying the promised profits to early
investors, the operator needs an ever larger pool of later investors.
30
The idea behind this type of swindle
is that the "con-man" collects his money from his second or third round of investors and then absconds
before anyone else shows up to collect. Necessarily, these schemes only last weeks, or months at
most.
31

Note should also be taken of the fact that appellants used "slots" in their operation. These slots are
actually securities,
32
the issuance of which needs the approval of the Securities and Exchange
Commission. Knowing fully well that the S.E.C. would not approve the issuance of securities by a non-
stock, non-profit organization, the operators of the Ponzi scheme, nevertheless, applied for registration as
a foundation, an entity not allowed to engage in securities.
Finally, if the foundation were indeed legitimate, the incorporators, outside of the members of the
Francisco family, would not have escaped from the clutches of the law. If the foundation and its
investment scheme were legal, then it behooved them to come out and testify for their own exoneration.
The wicked flee when no man pursueth: but the righteous are bold as a lion.
33

In their defense, appellants would shift the blame on the investors. Invoking the legal principle of caveat
emptor, they maintain that it was the investors' own greed that did them in, implying that the depositors
should have known that no sensible business could afford to pay such extravagant returns. Having
investigated the foundation and its activities, the investors should fault themselves, not the appellants, for
investing in the foundation despite the patent impossibility of its claims.
The contention is untenable. The fact that the buyer makes an independent investigation or inspection
has been held not to preclude him from relying on the representation made by the seller where the seller
has superior knowledge and the falsity of such representation would not be apparent from such
examination or inspection, and,a fortiori, where the efforts of a buyer to learn the true profits or income of
a business or property are thwarted by some device of the seller, such efforts have been held not to
preclude a recovery.
34
It has often been held that the buyer of a business or property is entitled to rely on
the seller's statements concerning its profits, income or rents. The rule that where a speaker has
knowingly and deliberately made a statement concerning a fact the falsity of which is not apparent to the
hearer, and has thus accomplished a fraudulent result, he cannot defend against the fraud by proving that
the victim was negligent in failing to discover the falsity of the statement is said to be peculiarly
applicable where the owner of the property or a business intentionally makes a false statement
concerning its rents, profits or income. The doctrine ofcaveat emptor has been held not to apply to such a
case.
35

The second assignment of error is likewise devoid of merit. Appellants deny the existence of a conspiracy
in the perpetration of the fraudulent scheme, charging that mere relationship does not prove conspiracy.
Guillermo Francisco further maintains that he was not even an incorporator of the foundation.
The evidence adduced by the prosecution confirms the existence of a conspiracy among the appellants in
committing the crime charged. The fact that Guillermo Francisco was not an incorporator of the
foundation does not make him any less liable for the crime charged. By his own admission, he
participated in the foundation's activities by serving as its paymaster. Because he is father and husband
to three of the organizers of the foundation, it is not farfetched to presume that he was aware of its
operations. By his active cooperation, he showed a community of design with the incorporators of the
foundation, thereby making him a co-conspirator and equally liable for the crime charged. His voluntary
and indispensable cooperation was a concatenation of the criminal acts performed by his co-
accused.
36
In this regard, appellant Guillermo Francisco is not being implicated as a co-conspirator solely
because he is the father of the principal proponent of the Ponzi scheme. He is held liable as a conspirator
because of his indispensable act of being the paymaster of the foundation.
Likewise, Norma Francisco's bare denial cannot exempt her from complicity. Denials of an accused
cannot be accorded greater evidentiary weight than the positive declarations of credible witnesses who
testify on affirmative matters.
37
Moreover, her efforts to show that she was a mere housewife who simply
helped in her daughter's "business" is refuted by the prosecution witnesses. Ruth Jalover testified:
Q: Madam Witness, do you know a person by the name of Norma
Francisco?
A: Yes sir.
Q: And how did you come to Know her Madam Witness?
A: She is my co-employee at the Panata Foundation sir.
Q: What was her job in the Panata Foundation?
A: She was the one who received the money from our tellers every
afternoon. 38
Sylvia Magnaye, on the other hand, testified:
Q: Madam Witness, do you know a person by the name of Norma
Francisco?
A: Yes sir.
Q: How did you come to know her Madam Witness?
A: She is our former cashier sir.
Q: In the Panata Foundation?
A: Yes sir. 39
On cross-examination, she further testified:
Q: Now, I would like to direct your attention also to the other accused,
Norma Francisco. You stated that she is your cashier, do you remember
having done that?
A: Yes sir.
Q: When you say she is the cashier, do you mean to say that she is the
one who pays out money or amounts to the employees Madam Witness?
A: Yes sir.
40

Aside from being the cashier, Norma Francisco was also an incorporator of the foundation. Likewise, the
money invested in the foundation was deposited in joint bank accounts in Priscilla Balasa's name and
hers. Norma Francisco's activities would thus show a community of design with the other accused making
her a co-conspirator and equally liable for the crime charged. Her voluntary and indispensable
cooperation concurred with the criminal acts performed by her co-accused.
As for Analina Francisco, however, the evidence adduced as to her complicity in the nefarious scheme is
far from conclusive. While she was an incorporator and treasurer of the foundation, there is no denying
the fact that she is a deaf-mute. As such, she is incapable of communicating and conveying her thoughts
to the complaining witnesses and other depositors. This casts serious doubt on whether she could be
deemed to have similarly conspired and confederated with the other accused. As Branch 52 pointed
out, on paper she might have been in the thick of the foundation's operation being an incorporator and
treasurer. We are not, however, convinced that she was actually involved in the sinister scheme. In fact,
she was given the manual task of typing papers, despite her being the treasurer of the foundation. Her
disability might have been the principal reason for giving her that job she was literally deaf and mute to
the nefarious activities going on in the foundation that she did not pose a danger to it. Furthermore, it is
well settled that where the acts of an accused are capable of two interpretations, that which is in
consonance with innocence should prevail.
With respect to the third assignment of error, appellants cannot raise the defense of double jeopardy for
which the following requisites must concur: (1) a first jeopardy must have attached prior to the second; (2)
the first jeopardy must have been validly terminated; (3) the second jeopardy must be for the same
offense, or the second offense includes or is necessarily included in the offense charged in the first
information, or is an attempt to commit the same or a frustration thereof.
41
In the instant case, the offense
charged in Criminal Case No. 8429 is different from the offense charged in the other cases. While these
cases arose out of the same scheme, the fraudulent acts charged were committed against different
persons, hence they do not constitute the same offense.
Lastly, appellants assert that they cannot be convicted under P.D. No. 1689. They contend that the
following requisites must concur for conviction under P.D. No. 1689: (1) that estafa is committed under
Articles 315 or 316 of the Revised Penal Code; (2) by a syndication of five or more persons; (3) against a)
stockholders or members of rural banks, cooperatives, or samahang nayon; b) corporations or
associations the funds of which are solicited from the general public; and (4) such defraudation erodes
the confidence of the public in the banking and cooperative systems, contravenes public interest, and (5)
constitutes economic sabotage that threatens the stability of the nation.
42

In support of their argument, appellants point out that there could not have been economic
sabotage under the facts of the case because the total amount of P125,400.00 allegedly embezzled "by
the other accused (not herein appellants)," did not weaken or threaten national economic stability. To
emphasize that point, appellants enumerate the revenue collections of Palawan and Puerto Princesa City,
"for dearth of a better reference," from 1987 to 1992 showing that the revenue collections for 1989 alone
amounted to P75,002,499,19. Appellants assert that as compared to such revenue collection in 1989, the
amount allegedly embezzled was negligible. As such, the crime committed in this case was not of the
same genre as the "Agrix" and "Dewey Dee" scams that "spurred the birth of P.D. No. 1689.
43

Appellants, in a desperate attempt to avoid conviction, grasp at straws. The law upon which appellants
have been charged and convicted reads as follows:
PRESIDENTIAL DECREE NO. 1689
INCREASING THE PENALTY FOR CERTAIN FORMS OF
SWINDLING OR ESTAFA.
WHEREAS, there is an upsurge in the commission of swindling and other forms of frauds
in rural banks, cooperatives, "samahang nayon(s)", and farmers' associations or
corporations/associations operating on funds solicited from the general public;
WHEREAS, such defraudation or misappropriation of funds contributed by stockholders
or members of such rural banks, cooperatives, "samahang nayon(s)", or farmers'
associations, or of funds solicited by corporations/associations from the general public,
erodes the confidence of the public in the banking and cooperative system, contravenes
the public interest, and constitutes economic sabotage that threatens the stability of the
nation;
WHEREAS, it is imperative that the resurgence of said crimes be checked, or at least
minimized, by imposing capital punishment on certain forms of swindling and other frauds
involving rural banks, cooperatives, "samahang nayon(s)", farmers' associations or
corporations/associations operating on funds solicited from the general public;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue
of the powers vested in me by the Constitution, do hereby decree and order as follows:
Sec. 1. Any person or persons who shall commit estafa or other forms of swindling as
defined in Article 315 and 316 of the Revised penal Code, as amended, shall be
punished by life imprisonment to death if the swindling (estafa) is committed by a
syndicate consisting of five or more persons formed with the intention of carrying out the
unlawful or illegal act, transaction, enterprise or scheme, and the defraudation results in
the misappropriation of moneys contributed by stockholders, or members of rural banks,
cooperatives, "samahang nayon(s)", or farmers associations, or of funds solicited by
corporations/associations from the general public.
When not committed by a syndicate as above defined, the penalty imposable shall
be reclusion temporal to reclusion perpetua if the amount of the fraud exceeds 100,000
pesos.
Sec. 2. This decree shall take effect immediately.
DONE in Manila, Philippines, this 6th day of April, in the year of Our Lord, nineteen
hundred and eighty.
Under this law, the elements of the crime are: (a) estafa or other forms of swindling as defined in Articles
315 and 316 of the Revised Penal Code is committed; (b) the estafa or swindling is committed by a
syndicate, and (c) defraudation results in the misappropriation of moneys contributed by stockholders, or
members of rural banks, cooperatives, "samahang nayon(s)," or farmers associations, or of funds
solicited by corporations/associations from the general public. These are the only elements of the crime
under Section 1 of the decree. The two other "ingredients" added by appellants to constitute the crime of
economic sabotage under P.D. No. 1689 have been taken from the "whereas" clause or preamble of the
law. A preamble is not exactly an essential part of an act as it is an introductory or preparatory clause that
explains the reasons for the enactment, usually introduced by the word "whereas."
44
In People v.
Purisima,
45
we explained that the preamble serves as the key to the intent and spirit of the decree. It
enumerates the facts or events justifying the promulgation of the decree. It enumerate the fact or events
justifying the promulgation of the decree and the sanctions for the acts prohibited therein. As such,
although it is an aid in interpretation, the preamble of an act or decree is not the law subject thereof.
Appellants' novel theory must, therefore, be given short shrift by this Court.
Assuming arguendo that the preamble was part of the statute, appellants' contention that they should not
be held criminally liable because it was not proven that their acts constituted economic sabotage
threatening the stability of the nation remains too flimsy for extensive discussion. As the preamble of P.D.
No. 1689 shows, the act prohibited therein need not necessarily threaten the stability of the nation. It is
sufficient that it "contravenes public interest." Public interest was affected by the solicitation of deposits
under a promise of substantial profits, as it was people coming from the lower income brackets who were
victimized by the illegal scheme.
Similarly, the fact that the entity involved was not a rural bank, cooperative, samahang nayon or farmers'
association does not take the case out of the coverage of P.D. No. 1689. Its third "whereas clause" states
that it also applies to other "corporations/associations operating on funds solicited from the general
public." The foundation fits into these category as it "operated on funds solicited from the general public."
To construe the law otherwise would sanction the proliferation of minor-league schemers who operate in
the countryside. To allow these crimes to go unabated could spell disaster for people from the lower
income bracket, the primary target of swindlers.
Again, P.D. No. 1689 penalizes offenders with life imprisonment to death regardless of the amount
involved, provided that a syndicate committed the crime. A syndicate is defined in the same law as
"consisting of five or more persons formed with the intention of carrying out the unlawful or illegal act,
transaction, enterprise or scheme." If the offenders are not members of a syndicate, they shall
nevertheless be held liable for the acts prohibited by the law but they shall be penalized by reclusion
temporal to reclusion perpetua if the amount of the fraud is more than one hundred thousand pesos
(P100,000.00).
In the instant case, a syndicate perpetrated the Ponzi scheme. The evidence shows that at least five
persons Priscilla Balasa, Normita Visaya, Norma Francisco, Guillermo Francisco, and the other
incorporators of the foundation collaborated, confederated and mutually helped one another in
directing the foundation's activities.
In its decision in Criminal Case Nos. 8428 and 8734, Branch 50 found that the "accused numbering 5 who
composed the Francisco Family together with others acted and operated as a syndicate as defined under
P.D. No. 1689 and should be held liable therefor."
46
However, it imposed the penalty of reclusion
perpetua, the penalty imposable under the second paragraph of Section 1 of P.D. No. 1689 where the
offenders are not members of a syndicate and the amount involved is more than P100,000.00. The
existence of a syndicate having been proved, the crime falls under the first paragraph of Section 1 of P.D.
No. 1689, with an imposable penalty of life imprisonment to death. Hence, the imposition of reclusion
perpetua is incorrect. Given the absence of aggravating or mitigating circumstances, the lesser penalty,
or life imprisonment, should have been meted out.
47

Branch 52, likewise, ruled that the accused committed the offense of estafa by a syndicate under P.D.
No. 1689. Therefore appellants, due to the absence of mitigating or aggravating circumstances, should
have been punished with life imprisonment. However, in the dispositive portion of its decision in the four
cases assigned to it, Branch 52 imposed the penalty of reclusion perpetua instead.
The Court finds this an opportune time to restate that the penalties of life imprisonment and reclusion
perpetuaare not the same. Thus:
While "life imprisonment" may appear to be the English translation of reclusion perperua,
in reality, it goes deeper than that. First, "life imprisonment" is invariably imposed for
serious offenses penalized by special laws, while reclusion perpetua is prescribed under
The Revised Penal Code. Second, "life imprisonment," unlike reclusion perpetua, does
not carry with it any accessory penalty. Third, "life imprisonment" does not appear to
have any definite extent or duration, while reclusion perpetuaentails imprisonment for at
least thirty (30) years after which the convict becomes eligible for pardon, although the
maximum period thereof shall in no case exceed forty (40) years.
48

WHEREFORE, premises considered, the decisions appealed from are hereby AFFIRMED in so far as
appellants GUILLERMO and NORMA FRANCISCO are convicted for violation of the first paragraph of
Section 1 of Presidential Decree No. 1689 and ordered to restitute to complainants the amounts they
have been defrauded, subject to the MODIFICATION that appellants GUILLERMO and NORMA
FRANCISCO shall each suffer the penalty of life imprisonment for each violation of the same law under
the corresponding criminal cases. Appellant ANALINA FRANCISCO is hereby ACQUITTED of the crimes
charged under Criminal Case Nos. 8428 and 8734 on ground of reasonable doubt and her immediate
release from custody is ordered unless she is being held on other legal grounds.
Let a copy of this Decision be furnished the Department of Justice and the Philippine National Police in
order that the arrest of Priscilla Balasa, Normita Visaya and the others who have so far eluded the law
shall be effected with dispatch.
SO ORDERED.