Securities Regulations Code

Nicolas v. CA
The futility of petitioner's action became more
pronounced by the fact that he traded securities
for the account of others without the necessary
license from the Securities and Exchange
Commission (SEC). Clearly, such omission was in
violation of Section 19 of the Revised Securities
Act which provides that no broker shall sell any
securities unless he is registered with the SEC.
The purpose of the statute requiring the
registration of brokers selling securities and the
filing of data regarding securities which they
propose to sell, is to protect the public and
strengthen the securities mechanism. 19
American jurisprudence emphasizes the principle
that:
. . . , an unlicensed person may not
recover compensation for services as a
broker where a statute or ordinance
requiring a license is applicable and such
statute or ordinance is of a regulatory
nature, was enacted in the exercise of the
police power for the purpose of protecting
the public, requires a license as evidence
of qualification and fitness, and expressly
precludes an unlicensed person from
recovering compensation by suit, or at
least manifests an intent to prohibit and
render unlawful the transaction of
business by an unlicensed person. 20
We see no reason not to apply the same rule in
our jurisdiction. Stock market trading, a technical
and highly specialized institution in the
Philippines, must been trusted to individuals with
proven integrity, competence and knowledge,
who have due regard to the requirements of the
law.
Abacus Securities Corp. v. Ampil
Stock market transactions affect the general
public and the national economy. The rise and fall
of stock market indices reflect to a considerable
degree the state of the economy. Trends in stock
prices tend to herald changes in business
conditions. Consequently, securities transactions
are impressed with public interest, and are thus
subject to public regulation. In particular, the laws
and regulations requiring payment of traded
shares within specified periods are meant to

protect the economy from excessive stock market

speculations, and are thus mandatory.
In the present case, respondent cannot escape
payment of stocks validly traded by petitioner on
his behalf. These transactions took place before
both parties violated the trading law and rules.
Hence, they fall outside the purview of the pari
delicto rule.
The following pertinent facts are undisputed:
(1) on April 8, 1997, respondent opened a cash
account with petitioner for his transactions in
securities;10
(2) respondents purchases were consistently
unpaid from April 10 to 30, 1997;11
(3) respondent failed to pay in full, or even just
his deficiency,12 for the transactions on April 10
and 11, 1997;13
(4) despite respondents failure to cover his initial
deficiency, petitioner subsequently purchased
and sold securities for respondents account on
April 25 and 29;14
(5) petitioner did not cancel or liquidate a
substantial amount of respondents stock
transactions until May 6, 1997.
The provisions governing the above transactions
are Sections 23 and 25 of the RSA16 and Rule 25-1
of the RSA Rules, which state as follows:
"SEC. 23. Margin Requirements.
xxxxxxxxx
(b) It shall be unlawful for any member of an
exchange or any broker or dealer, directly or
indirectly, to extend or maintain credit or arrange
for the extension or maintenance of credit to or
for any customer
"SEC. 25. Enforcement of margin requirements
and restrictions on borrowings. To prevent
indirect violations of the margin requirements
under Section 23 hereof, the broker or dealer
shall require the customer in nonmargin
transactions to pay the price of the security
purchased for his account within such period as
the Commission may prescribe, which shall in no

case exceed three trading days; otherwise, the

broker shall sell the security purchased starting
on the next trading day but not beyond ten
trading days following the last day for the
customer to pay such purchase price, unless such
sale cannot be effected within said period for
justifiable reasons. The sale shall be without
prejudice to the right of the broker or dealer to
recover any deficiency from the customer.
Section 23(b) above -- the alleged violation of
petitioner
which
provides
the
basis
for
respondents defense -- makes it unlawful for a
broker to extend or maintain credit on any
securities other than in conformity with the rules
and regulations issued by Securities and
Exchange Commission (SEC). Section 25 lays
down the rules to prevent indirect violations of
Section 23 by brokers or dealers. RSA Rule 25-1
prescribes in detail the regulations governing
cash accounts

discouraging an abnormal attraction of funds into

the stock market and achieving a more balanced
use of such resources.
"x x x [T]he x x x primary concern is the efficacy
of security credit controls in preventing
speculative excesses that produce dangerously
large and rapid securities price rises and
accelerated declines in the prices of given
securities issues and in the general price level of
securities. Losses to a given investor resulting
from price declines in thinly margined securities
are not of serious significance from a regulatory
point of view. When forced sales occur and put
pressures on securities prices, however, they may
cause other forced sales and the resultant
snowballing effect may in turn have a general
adverse effect upon the entire market."27

The law places the burden of compliance with

margin requirements primarily upon the brokers
and dealers.22Sections 23 and 25 and Rule 25-1,
otherwise known as the "mandatory close-out
rule,"23 clearly vest upon petitioner the obligation,
not just the right, to cancel or otherwise liquidate
a customers order, if payment is not received
within three days from the date of purchase. The
word "shall" as opposed to the word "may," is
imperative and operates to impose a duty, which
may be legally enforced. For transactions
subsequent to an unpaid order, the broker should
require its customer to deposit funds into the
account sufficient to cover each purchase
transaction prior to its execution. These duties
are imposed upon the broker to ensure faithful
compliance with the margin requirements of the
law, which forbids a broker from extending undue
credit to a customer.

The nature of the stock brokerage business

enables brokers, not the clients, to verify, at any
time, the status of the clients account.28 Brokers,
therefore, are in the superior position to prevent
the unlawful extension of credit. 29Because of this
awareness, the law imposes upon them the
primary obligation to enforce the margin
requirements.

It will be noted that trading on credit (or "margin

trading") allows investors to buy more securities
than their cash position would normally
allow.24 Investors pay only a portion of the
purchase price of the securities; their broker
advances for them the balance of the purchase
price and keeps the securities as collateral for the
advance
or
loan.25 Brokers
take
these
securities/stocks to their bank and borrow the
"balance" on it, since they have to pay in full for
the traded stock. Hence, increasing margins26 i.e.,
decreasing the amounts which brokers may lend
for the speculative purchase and carrying of
stocks is the most direct and effective method of

Nonetheless, these margin requirements are

applicable only to transactions entered into by
the present parties subsequent to the initial
trades of April 10 and 11, 1997. Thus, we hold
that petitioner can still collect from respondent to
the extent of the difference between the latters
outstanding obligation as of April 11, 1997 less
the proceeds from the mandatory sell out of the
shares pursuant to the RSA Rules. Petitioners
right to collect is justified under the general law
on obligations and contracts.31

Right is one thing; obligation is quite another. A

right may not be exercised; it may even be
waived. An obligation, however, must be
performed; those who do not discharge it
prudently must necessarily face the consequence
of their dereliction or omission.30
Respondent Liable for the First,
But Not for the Subsequent Trades

Article 1236 (second paragraph) of the Civil Code,

provides:

"Whoever pays for another may demand from the

debtor what he has paid, except that if he paid
without the knowledge or against the will of the
debtor, he can recover only insofar as the
payment has been beneficial to the debtor."
(Emphasis supplied)
Since a brokerage relationship is essentially a
contract for the employment of an agent,
principles of contract law also govern the brokerprincipal relationship.32
The right to collect cannot be denied to petitioner
as the initial transactions were entered pursuant
to the instructions of respondent. The obligation
of respondent for stock transactions made and
entered into on April 10 and 11, 1997 remains
outstanding. These transactions were valid and
the
obligations
incurred
by
respondent
concerning his stock purchases on these dates
subsist. At that time, there was no violation of the
RSA yet. Petitioners fault arose only when it
failed to: 1) liquidate the transactions on the
fourth day following the stock purchases, or on
April 14 and 15, 1997; and 2) complete its
liquidation no later than ten days thereafter,
applying the proceeds thereof as payment for
respondents outstanding obligation.33
Elucidating further, since the buyer was not able
to pay for the transactions that took place on
April 10 and 11, that is at T+4, the broker was
duty-bound to advance the payment to the
settlement banks without prejudice to the right of
the broker to collect later from the client.34
In securities trading, the brokers are essentially
the counterparties to the stock transactions at
the Exchange.35Since the principals of the broker
are generally undisclosed, the broker is
personally liable for the contracts thus
made.36 Hence, petitioner had to advance the
payments for respondents trades. Brokers have a
right to be reimbursed for sums advanced by
them with the express or implied authorization of
the principal,37 in this case, respondent.
It should be clear that Congress imposed the
margin requirements to protect the general
economy, not to give the customer a free ride at
the expense of the broker. 38 Not to require
respondent to pay for his April 10 and 11 trades
would put a premium on his circumvention of the

laws and would enable him to enrich himself

unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to
enforce the terms and conditions of its
Agreement
with
respondent,
specifically
paragraph 8 thereof, purportedly acting on the
plea39 of respondent to give him time to raise
funds therefor. These stipulations, in relation to
paragraph 4,40 constituted faithful compliance
with the RSA. By failing to ensure respondents
payment of his first purchase transaction within
the period prescribed by law, thereby allowing
him to make subsequent purchases, petitioner
effectively converted respondents cash account
into a credit account. However, extension or
maintenance
of
credits
on
nonmargin
transactions, are specifically prohibited under
Section 23(b). Thus, petitioner was remiss in its
duty and cannot be said to have come to court
with "clean hands" insofar as it intended to
collect on transactions subsequent to the initial
trades of April 10 and 11, 1997.
Respondent Equally Guilty
for Subsequent Trades
On the other hand, we find respondent equally
guilty in entering into the transactions in violation
of the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an
"innocent victim" in all the transactions. Clearly,
he is not an unsophisticated, small investor
merely prodded by petitioner to speculate on the
market with the possibility of large profits with
low -- or no -- capital outlay, as he pictures
himself to be. Rather, he is an experienced and
knowledgeable trader who is well versed in the
securities market and who made his own
investment decisions. In fact, in the Account
Opening Form (AOF), he indicated that he had
excellent knowledge of stock investments; had
experience in stocks trading, considering that he
had similar accounts with other firms.41Obviously,
he knowingly speculated on the market, by taking
advantage of the "no-cash-out" arrangement
extended to him by petitioner.
We note that it was respondent who repeatedly
asked for some time to pay his obligations for his
stock transactions. Petitioner acceded to his
requests. It is only when sued upon his

indebtedness that respondent raised as a defense

the invalidity of the transactions due to alleged
violations of the RSA. It was respondents
privilege to gamble or speculate, as he
apparently did so by asking for extensions of time
and refraining from giving orders to his broker to
sell, in the hope that the prices would rise.
Sustaining his argument now would amount to
relieving him of the risk and consequences of his
own speculation and saddling them on the
petitioner after the result was known to be
unfavorable.42 Such contention finds no legal or
even moral justification and must necessarily be
overruled. Respondents conduct is precisely the
behavior of an investor deplored by the law.
In the final analysis, both parties acted in
violation of the law and did not come to court
with clean hands with regard to transactions
subsequent to the initial trades made on April 10
and 11, 1997. Thus, the peculiar facts of the
present case bar the application of the pari
delicto rule -- expressed in the maxims "Ex dolo
malo non oritur action" and "In pari delicto potior
est conditio defendentis" -- to all the transactions
entered into by the parties. The pari delecto rule
refuses legal remedy to either party to an illegal
agreement and leaves them where they were. 43In
this case, the pari delicto rule applies only to
transactions entered into after the initial trades
made on April 10 and 11, 1997.
Since the initial trades are valid and subsisting
obligations, respondent is liable for them. Justice
and good conscience require all persons to satisfy
their debts. Ours are courts of both law and
equity; they compel fair dealing; they do not abet
clever attempts to escape just obligations.
Ineludibly, this Court would not hesitate to grant
relief in accordance with good faith and
conscience.
Pursuant to RSA Rule 25-1, petitioner should have
liquidated the transaction (sold the stocks) on the
fourth day following the transaction (T+4) and
completed its liquidation not later than ten days
following the last day for the customer to pay
(effectively T+14). Respondents outstanding
obligation is therefore to be determined by using
the closing prices of the stocks purchased at
T+14 as basis.

We consider the foregoing formula to be just and

fair under the circumstances. When petitioner
tolerated
the
subsequent
purchases
of
respondent without performing its obligation to
liquidate the first failed transaction, and without
requiring respondent to deposit cash before
embarking on trading stocks any further,
petitioner, as the broker, violated the law at its
own peril. Hence, it cannot now complain for
failing to obtain the full amount of its claim for
these latter transactions.
On the other hand, with respect to respondents
counterclaim for damages for having been
allegedly induced by petitioner to generate
additional purchases despite his outstanding
obligations, we hold that he deserves no legal or
equitable relief consistent with our foregoing
finding that he was not an innocent investor as
he presented himself to be.
Baviera v. Paglinawan
Petitioner filed with the DOJ a complaint for
violation of Section 8.1 of the SRC against private
respondents
SC held that the complaint for violation of the
Securities Regulation Code, should have been
filed with the SEC, not the DOJ. Again, there is no
indication here that in dismissing petitioners
complaint, the DOJ acted capriciously or
arbitrarily.
Cemco Holdings, Inc. Natl Life Insurance
Co.
petitioner asserts that the mandatory tender
offer rule applies only to direct acquisition of
shares in the public company.
This contention is not meritorious.
Tender offer is a publicly announced intention by
a person acting alone or in concert with other
persons to acquire equity securities of a public
company.12 A public company is defined as a
corporation which is listed on an exchange, or a
corporation
with
assets
exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not
less than 100 shares of such company. 13 Stated
differently, a tender offer is an offer by the
acquiring person to stockholders of a public
company for them to tender their shares therein
on the terms specified in the offer.14 Tender offer
is in place to protect minority shareholders

against any scheme that dilutes the share value

of their investments. It gives the minority
shareholders the chance to exit the company
under reasonable terms, giving them the
opportunity to sell their shares at the same price
as those of the majority shareholders.
Under existing SEC Rules,16 the 15% and 30%
threshold acquisition of shares under the
foregoing provision was increased to thirty-five
percent (35%). It is further provided therein that
mandatory tender offer is still applicable even if
the acquisition is less than 35% when the
purchase would result in ownership of over 51%
of the total outstanding equity securities of the
public company.
The legislative intent of Section 19 of the Code is
to regulate activities relating to acquisition of
control of the listed company and for the purpose
of protecting the minority stockholders of a listed
corporation. Whatever may be the method by
which control of a public company is obtained,
either through the direct purchase of its stocks or
through an indirect means, mandatory tender
offer applies.
Timeshare Realty v. Lao

The provisions of B.P. Blg. 178 do not support the

contention of petitioner that its mere registration
as a corporation already authorizes it to deal with
unregistered timeshares. Corporate registration is
just one of several requirements before it may
deal with timeshares:
Section 8. Procedure for registration. - (a)
All securities required to be registered
under subsection (a) of Section four of this
Act shall be registered through the filing
by the issuer or by any dealer or
underwriter interested in the sale thereof,
in the office of the Commission, of a sworn
registration statement with respect to
such securities, containing or having
attached thereto, the following:
xxxx
(36) Unless previously filed and registered
with the Commission and brought up to
date:
(a) A copy of its articles of incorporation
with all amendments thereof and its
existing
by-laws
or
instruments
corresponding thereto, whatever the
name, if the issuer be a corporation.

Prior to fulfillment of all the other requirements of

Section 8, petitioner is absolutely proscribed
under Section 4 from dealing with unregistered
timeshares, thus:
Section 4. Requirement of registration of
securities. - (a) No securities, except of a
class exempt under any of the provisions
of Section five hereof or unless sold in any
transaction exempt under any of the
provisions of Section six hereof, shall be
sold or offered for sale or distribution to
the public within the Philippinesunless
such securities shall have been
registered and permitted to be sold
as hereinafter provided
Power Homes Unlimited Corp. v. SEC
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.
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 the Howey 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"
laws18 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
the Howey 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."23Needless 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 9thCircuit 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.
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.
Gabionza v. CA
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 nonfinancial 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."
SEC v. Interport Resources Corporation
The provision explains in simple terms that the
insider's misuse of nonpublic and undisclosed
information is the gravamen of illegal conduct.
The intent of the law is the protection of investors
against fraud, committed when an insider, using
secret information, takes advantage of an
uninformed investor. Insiders are obligated to
disclose material information to the other party or
abstain from trading the shares of his
corporation. This duty to disclose or abstain is
based on two factors: first, the existence of a
relationship giving access, directly or indirectly,
to information intended to be available only for a

corporate purpose and not for the personal

benefit of anyone; and second, the inherent
unfairness involved when a party takes
advantage of such information knowing it is
unavailable to those with whom he is dealing.34
In the United States (U.S.), the obligation to
disclose or abstain has been traditionally imposed
on corporate "insiders," particularly officers,
directors, or controlling stockholders, but that
definition has since been expanded. 35 The term
"insiders"
now
includes
persons
whose
relationship or former relationship to the issuer
gives or gave them access to a fact of special
significance about the issuer or the security that
is not generally available, and one who learns
such a fact from an insider knowing that the
person from whom he learns the fact is such an
insider. Insiders have the duty to disclose
material facts which are known to them by virtue
of their position but which are not known to
persons with whom they deal and which, if
known, would affect their investment judgment.
In some cases, however, there may be valid
corporate reasons for the nondisclosure of
material information. Where such reasons exist,
an issuer's decision not to make any public
disclosures is not ordinarily considered as a
violation of insider trading. At the same time, the
undisclosed information should not be improperly
used for non-corporate purposes, particularly to
disadvantage other persons with whom an insider
might transact, and therefore the insider must
abstain from entering into transactions involving
such securities.36
Respondents further aver that under Section 30
of the Revised Securities Act, the SEC still needed
to define the following terms: "material fact,"
"reasonable
person,"
"nature
and
reliability" and "generally
available." 37 In
determining whether or not these terms are
vague, these terms must be evaluated in the
context of Section 30 of the Revised Securties
Act. To fully understand how the terms were used
in the aforementioned provision, a discussion of
what the law recognizes as a fact of special
significance is required, since the duty to disclose
such fact or to abstain from any transaction is
imposed on the insider only in connection with a
fact of special significance.

Under the law, what is required to be disclosed is

a fact of "special significance" which may be
(a) a material fact which would be likely, on being
made generally available, to affect the market
price of a security to a significant extent, or (b)
one which a reasonable person would consider
especially important in determining his course of
action with regard to the shares of stock.
(a) Material Fact - The concept of a "material
fact" is not a new one. As early as 1973, the Rules
Requiring Disclosure of Material Facts by
Corporations Whose Securities Are Listed In Any
Stock Exchange or Registered/Licensed Under the
Securities Act, issued by the SEC on 29 January
1973, explained that "[a] fact is material if it
induces or tends to induce or otherwise affect the
sale or purchase of its securities." Thus, Section
30 of the Revised Securities Act provides that if a
fact affects the sale or purchase of securities, as
well as its price, then the insider would be
required to disclose such information to the other
party to the transaction involving the securities.
This is the first definition given to a "fact of
special significance."
(b.1) Reasonable Person - The second definition
given to a fact of special significance involves the
judgment of a "reasonable person." Contrary to
the allegations of the respondents, a "reasonable
person" is not a problematic legal concept that
needs to be clarified for the purpose of giving
effect to a statute; rather, it is the standard on
which most of our legal doctrines stand. The
doctrine on negligence uses the discretion of the
"reasonable man" as the standard.38 A purchaser
in good faith must also take into account facts
which put a "reasonable man" on his guard. 39 In
addition, it is the belief of the reasonable and
prudent man that an offense was committed that
sets the criteria for probable cause for a warrant
of
arrest.40 This
Court,
in
such
cases,
differentiated the reasonable and prudent man
from "a person with training in the law such as a
prosecutor or a judge," and identified him as "the
average man on the street," who weighs facts
and circumstances without resorting to the
calibrations of our technical rules of evidence of
which his knowledge is nil. Rather, he relies on
the calculus of common sense of which all
reasonable men have in abundance. 41 In the
same vein, the U.S. Supreme Court similarly
determined its standards by the actual

significance in the deliberations of a "reasonable

investor," when it ruled in TSC Industries, Inc. v.
Northway, Inc.,42 that the determination of
materiality "requires delicate assessments of the
inferences a reasonable shareholder' would draw
from a given set of facts and the significance of
those inferences to him."
(b.2) Nature and Reliability - The factors
affecting the second definition of a "fact of
special significance," which is of such importance
that it is expected to affect the judgment of a
reasonable man, were substantially lifted from a
test of materiality pronounced in the case In the
Matter of Investors Management Co., Inc.43:
Among the factors to be considered in
determining
whether
information
is
material under this test are the degree of
its specificity, the extent to which it differs
from information previously publicly
disseminated, and its reliability in light of
its
nature
and
source
and
the
circumstances under which it was
received.
It can be deduced from the foregoing that the
"nature and reliability" of a significant fact in
determining the course of action a reasonable
person takes regarding securities must be clearly
viewed in connection with the particular
circumstances of a case. To enumerate all
circumstances that would render the "nature and
reliability" of a fact to be of special significance is
close to impossible. Nevertheless, the proper
adjudicative body would undoubtedly be able to
determine if facts of a certain "nature and
reliability" can influence a reasonable person's
decision to retain, sell or buy securities, and
thereafter explain and justify its factual findings
in its decision.
(c) Materiality Concept - A discussion of the
"materiality concept" would be relevant to both a
material fact which would affect the market price
of a security to a significant extent and/or a fact
which a reasonable person would consider in
determining his or her cause of action with regard
to the shares of stock. Significantly, what is
referred to in our laws as a fact of special
significance is referred to in the U.S. as the
"materiality concept" and the latter is similarly
not provided with a precise definition. In Basic v.

Levinson,44 the U.S. Supreme Court cautioned

against confining materiality to a rigid formula,
stating thus:
A bright-line rule indeed is easier to follow
than a standard that requires the exercise
of judgment in the light of all the
circumstances. But ease of application
alone is not an excuse for ignoring the
purposes of the Securities Act and
Congress' policy decisions. Any approach
that designates a single fact or occurrence
as always determinative of an inherently
fact-specific finding such as materiality,
must necessarily be overinclusive or
underinclusive.

found in a newspaper, a specialized magazine, or

any cyberspace media be sufficient for the term
"generally available" is a matter which may be
adjudged given the particular circumstances of
the case. The standards cannot remain at a
standstill. A medium, which is widely used today
was, at some previous point in time, inaccessible
to most. Furthermore, it would be difficult to
approximate how the rules may be applied to the
instant case, where investigation has not even
been started. Respondents failed to allege that
the negotiations of their agreement with GHB
were made known to the public through any form
of media for there to be a proper appreciation of
the issue presented.
Section 36(a) of the Revised Securities Act

Moreover, materiality "will depend at any given

time upon a balancing of both the indicated
probability that the event will occur and the
anticipated magnitude of the event in light of the
totality of the company activity." 45 In drafting the
Securities Act of 1934, the U.S. Congress put
emphasis on the limitations to the definition of
materiality:
Although the Committee believes that
ideally it would be desirable to have
absolute certainty in the application of the
materiality concept, it is its view that such
a goal is illusory and unrealistic. The
materiality concept is judgmental in
nature and it is not possible to
translate this into a numerical
formula. The Committee's advice to
the [SEC] is to avoid this quest for
certainty
and
to
continue
consideration of materiality on a
case-by-case basis as disclosure
problems
are
identified."House
Committee on Interstate and Foreign
Commerce, Report of the Advisory
Committee on Corporate Disclosure to the
Securities and Exchange Commission,
95th Cong., 1st Sess., 327 (Comm.Print
1977). (Emphasis provided.)46
(d) Generally Available - Section 30 of the
Revised Securities Act allows the insider the
defense that in a transaction of securities, where
the insider is in possession of facts of special
significance, such information is "generally
available" to the public. Whether information

As regards Section 36(a) of the Revised Securities

Act, respondents claim that the term "beneficial
ownership" is vague and that it requires
implementing rules to give effect to the law.
Section 36(a) of the Revised Securities Act is a
straightforward provision that imposes upon (1) a
beneficial owner of more than ten percent of any
class of any equity security or (2) a director or
any officer of the issuer of such security, the
obligation to submit a statement indicating his or
her ownership of the issuer's securities and such
changes in his or her ownership thereof. The said
provision reads:
Sec.
36. Directors,
officers
and
principal stockholders. - (a) Every
person who is directly or indirectly the
beneficial owner of more than ten per
centum of any [class] of any equity
security which is registered pursuant to
this Act, or who is [a] director or an officer
of the issuer of such security, shall file, at
the time of the registration of such
security on a securities exchange or by
the effective date of a registration
statement or within ten days after he
becomes such a beneficial owner, director
or
officer,
a
statement
with
the
Commission and, if such security is
registered on a securities exchange, also
with the exchange, of the amount of all
equity securities of such issuer of which he
is the beneficial owner, and within ten
days after the close of each calendar
month thereafter, if there has been a

change in such ownership during such

month, shall file with the Commission, and
if such security is registered on a
securities exchange, shall also file with the
exchange, a statement indicating his
ownership at the close of the calendar
month and such changes in his ownership
as have occurred during such calendar
month. (Emphasis provided.)
Section
36(a)
refers
to
the
"beneficial
owner." Beneficial owner has been defined in the
following manner:
[F]irst, to indicate the interest of a
beneficiary in trust property (also called
"equitable ownership"); and second, to
refer to the power of a corporate
shareholder to buy or sell the shares,
though the shareholder is not registered in
the corporation's books as the owner.
Usually,
beneficial
ownership
is
distinguished from naked ownership,
which is the enjoyment of all the benefits
and privileges of ownership, as against
possession of the bare title to property.47
Even assuming that the term "beneficial
ownership" was vague, it would not affect
respondents' case, where the respondents are
directors and/or officers of the corporation, who
are specifically required to comply with the
reportorial requirements under Section 36(a) of
the Revised Securities Act. The validity of a
statute may be contested only by one who will
sustain a direct injury as a result of its
enforcement.48
Sections 30 and 36 of the Revised Securities Act
were enacted to promote full disclosure in the
securities market and prevent unscrupulous
individuals, who by their positions obtain nonpublic information, from taking advantage of an
uninformed public. No individual would invest in a
market which can be manipulated by a limited
number of corporate insiders. Such reaction
would stifle, if not stunt, the growth of the
securities market. To avert the occurrence of such
an event, Section 30 of the Revised Securities Act
prevented
the
unfair
use
of
non-public
information in securities transactions, while
Section 36 allowed the SEC to monitor the
transactions entered into by corporate officers

and directors as regards the securities of their

companies.
In the case In the Matter of Investor's
Management Co.,49 it was cautioned that "the
broad language of the anti-fraud provisions,"
which include the provisions on insider trading,
should not be "circumscribed by fine distinctions
and rigid classifications." The ambit of anti-fraud
provisions is necessarily broad so as to embrace
the infinite variety of deceptive conduct.50
In Tatad v. Secretary of Department of
Energy,51 this Court brushed aside a contention,
similar to that made by the respondents in this
case, that certain words or phrases used in a
statute do not set determinate standards,
declaring that:
Petitioners contend that the words "as far
as practicable," "declining" and "stable"
should have been defined in R.A. No. 8180
as they do not set determinate and
determinable standards. This stubborn
submission deserves scant consideration.
The dictionary meanings of these words
are well settled and cannot confuse men
of reasonable intelligence. x x x. The fear
of petitioners that these words will result
in the exercise of executive discretion that
will run riot is thus groundless. To be sure,
the Court has sustained the validity of
similar, if not more general standards in
other cases.
Among the words or phrases that this Court
upheld as valid standards were "simplicity and
dignity,"52 "public interest,"53 and "interests of law
and order."54
The Revised Securities Act was approved on 23
February 1982. The fact that the Full Disclosure
Rules were promulgated by the SEC only on 24
July 1996 does not render ineffective in the
meantime Section 36 of the Revised Securities
Act. It is already unequivocal that the Revised
Securities Act requires full disclosure and the Full
Disclosure Rules were issued to make the
enforcement of the law more consistent, efficient
and effective. It is equally reasonable to state
that the disclosure forms later provided by the
SEC, do not, in any way imply that no compliance
was required before the forms were provided. The

effectivity of a statute which imposes reportorial

requirements cannot be suspended by the
issuance of specified forms, especially where
compliance therewith may be made even without
such forms. The forms merely made more
efficient the processing of requirements already
identified by the statute.
For the same reason, the Court of Appeals made
an evident mistake when it ruled that no civil,
criminal or administrative actions can possibly be
had against the respondents in connection with
Sections 8, 30 and 36 of the Revised Securities
Act due to the absence of implementing rules.
These provisions are sufficiently clear and
complete by themselves. Their requirements are
specifically set out, and the acts which are
enjoined are determinable. In particular, Section
855 of
the
Revised
Securities
Act
is
a
straightforward enumeration of the procedure for
the registration of securities and the particular
matters which need to be reported in the
registration statement thereof. The Decision,
dated 20 August 1998, provides no valid reason
to exempt the respondent IRC from such
requirements. The lack of implementing rules
cannot suspend the effectivity of these
provisions. Thus, this Court cannot find any
cogent reason to prevent the SEC from exercising
its authority to investigate respondents for
violation of Section 8 of the Revised Securities
Act.
Queensland Tokyo Commodities v. George
We sustain the finding of the SEC Hearing Officer
and the CA that petitioners allowed unlicensed
individuals to engage in, solicit or accept orders
in futures contracts, and thus, transgressed the
Revised Rules and Regulations on Commodity
Futures Trading.17
We are not persuaded by petitioners assertion
that they had no hand in Mendozas designation
as respondents attorney-in-fact. As pointed out
by the CA, the Special Power of Attorney formed
part of respondents agreement with QTCI, and
under the Customers Agreement,18 only a
licensed or registered dealer or investment
consultant may be appointed as attorney-in-fact.
Thus:
2. If I so desire, I shall appoint you as my agent
pursuant to a Special Power of Attorney which I

shall execute for this purpose and which form

part of this Agreement.
xxxx
18. I hereby confer, pursuant to the Special Power
of Attorney herewith attached, full authority to
your licensed/registered dealer/investment in
charge of my account/s and your Senior Officer,
who must also be a licensed/registered
dealer/investment consultant, to sign all order
slips on futures trading. 19
Inexplicably, petitioners did not object to, and in
fact recognized, Mendozas appointment as
respondents attorney-in-fact. Collado, in behalf
of QTCI, concluded the Customers Agreement
despite the fact that the appointed attorney-infact was not a licensed dealer. Worse, petitioners
permitted Mendoza to handle respondents
account.
Indubitably, petitioners violated the Revised Rules
and Regulations on Commodity Futures Trading
prohibiting any unlicensed person to engage in,
solicit or accept orders in futures contract.
Consequently, the SEC Hearing Officer and the CA
cannot be faulted for declaring the contract
between QTCI and respondent void.
Batas Pambansa Bilang (B.P. Blg.) 178 or the
Revised Securities Act explicitly provided:
SEC. 53. Validity of Contracts. x x x.
(b) Every contract executed in violation of any
provision of this Act, or any rule or regulation
thereunder, and every contract, including any
contract for listing a security on an exchange
heretofore or hereafter made, the performance of
which involves the violation of, or the
continuance of any relationship or practice in
violation of, any provision of this Act, or any rule
and regulation thereunder, shall be void.
Phil Veterans Bank v. Callanga
To determine whether the Bank is a "public
company"
burdened
with
the
reportorial
requirements ordered by the SEC, we look to
Subsections 17.1 and 17.2 of the SRC, which
provide:

Section 17. Periodic and Other Reports of Issuers.

17.1. Every issuer satisfying the requirements in

Subsection 17.2 hereof shall file with the
Commission:
a) Within one hundred thirty-five (135)
days, after the end of the issuers fiscal
year, or such other time as the
Commission may prescribe, an annual
report which shall include, among others,
a balance sheet, profit and loss statement
and statement of cash flows, for such last
fiscal year, certified by an independent
certified
public accountant,
and
a
management discussion and analysis of
results of operations; and
b) Such other periodical reports for interim
fiscal periods and current reports on
significant developments of the issuer as
the Commission may prescribe as
necessary to keep current information on
the operation of the business and financial
condition of the issuer.
17.2. The reportorial requirements of Subsection
17.1 shall apply to the following:
xxxx
c) An issuer with assets of at least Fifty
million pesos (P50,000,000.00) or such other
amount as the Commission shall prescribe, and
having two hundred (200) or more holders
each holding at least one hundred (100)
shares of a class of its equity securities:
Provided, however, That the obligation of such
issuer to file reports shall be terminated ninety
(90) days after notification to the Commission by
the issuer that the number of its holders holding
at least one hundred (100) shares is reduced to
less than one hundred (100). (emphases
supplied)
We also cite Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the SRC,
which defines a "public company" as "any
corporation with a class of equity securities listed
on an Exchange or with assets in excess of
Fifty
Million
Pesos (P50,000,000.00) and
having two
hundred
(200)
or
more

holders, at least two hundred (200) of which

are holding at least one hundred (100)
shares of a class of its equity securities."
From these provisions, it is clear that a "public
company," as contemplated by the SRC, is not
limited to a company whose shares of stock are
publicly listed; even companies like the Bank,
whose shares are offered only to a specific group
of people, are considered a public company,
provided
they
meet
the
requirements
enumerated above.
The records establish, and the Bank does not
dispute,
that
the
Bank
has
assets
exceeding P50,000,000.00 and has 395,998
shareholders.10 It is thus considered a public
company that must comply with the reportorial
requirements set forth in Section 17.1 of the SRC.
SEC v. Prosperity.com, Inc
This
case
involves
the
application
of
the Howey test in order to determine if a
particular transaction is an investment contract.
The
United States Supreme Court held
in Securities and Exchange Commission v. W.J.
Howey Co.10 that, for an investment contract to
exist, the following elements, referred to as the
Howey test must concur: (1) a contract,
transaction, or scheme; (2) an investment of
money; (3) investment is made in a common
enterprise; (4) expectation of profits; and (5)
profits arising primarily from the efforts of
others. 11 Thus, to sustain the SEC position in this
case, PCIs scheme or contract with its buyers
must have all these elements.
An example that comes to mind would be the
long-term
commercial
papers
that
large
companies, like San Miguel Corporation (SMC),
offer to the public for raising funds that it needs
for expansion. When an investor buys these
papers or securities, he invests his money,
together with others, in SMC with an expectation
of profits arising from the efforts of those who
manage and operate that company. SMC has to
register these commercial papers with the SEC
before offering them to investors.1wphi1
Here, PCIs clients do not make such investments.
They buy a product of some value to them: an
Internet website of a 15-MB capacity. The client
can use this website to enable people to have

internet access to what he has to offer to them,

say, some skin cream. The buyers of the website
do not invest money in PCI that it could use for
running some business that would generate
profits for the investors. The price of US$234.00
is what the buyer pays for the use of the website,
a tangible asset that PCI creates, using its
computer facilities and technical skills.
Actually, PCI appears to be engaged in network
marketing, a scheme adopted by companies for
getting people to buy their products outside the
usual retail system where products are bought
from the stores shelf. Under this scheme,
adopted by most health product distributors, the
buyer can become a down-line seller. The latter
earns commissions from purchases made by new
buyers whom he refers to the person who sold
the product to him. The network goes down the
line where the orders to buy come.
The commissions, interest in real estate, and
insurance
coverage
worth P50,000.00
are
incentives to down-line sellers to bring in other
customers. These can hardly be regarded as
profits from investment of money under the
Howey test.
Banko Sentral Ng Pilipinas
First Phil. Intl Bank v. CA
The Fourth Issue: May the Conservator Revoke
the Perfected and Enforceable Contract.
It is not disputed that the petitioner Bank was
under a conservator placed by the Central Bank
of the Philippines during the time that the
negotiation and perfection of the contract of sale
took place. Petitioners energetically contended
that the conservator has the power to revoke or
overrule actions of the management or the board
of directors of a bank, under Section 28-A of
Republic Act No. 265 (otherwise known as the
Central Bank Act) as follows:
Whenever, on the basis of a report
submitted by the appropriate supervising
or examining department, the Monetary
Board finds that a bank or a non-bank
financial intermediary performing quasibanking functions is in a state of
continuing inability or unwillingness to
maintain a state of liquidity deemed
adequate to protect the interest of

depositors and creditors, the Monetary

Board may appoint a conservator to take
charge of the assets, liabilities, and the
management of that institution, collect all
monies and debts due said institution and
exercise all powers necessary to preserve
the assets of the institution, reorganize
the management thereof, and restore its
viability. He shall have the power to
overrule or revoke the actions of the
previous management and board of
directors of the bank or non-bank financial
intermediary performing quasi-banking
functions, any provision of law to the
contrary notwithstanding, and such other
powers as the Monetary Board shall deem
necessary.
There is absolutely no evidence that the
Conservator, at the time the contract was
perfected, actually repudiated or overruled said
contract of sale. The Bank's acting conservator at
the time, Rodolfo Romey, never objected to the
sale of the property to Demetria and Janolo. What
petitioners are really referring to is the letter of
Conservator Encarnacion, who took over from
Romey after the sale was perfected on
September 30, 1987 (Annex V, petition) which
unilaterally repudiated not the contract but
the authority of Rivera to make a binding offer
and which unarguably came months after the
perfection of the contract.
While admittedly, the Central Bank law gives vast
and far-reaching powers to the conservator of a
bank, it must be pointed out that such powers
must be related to the "(preservation of) the
assets of the bank, (the reorganization of) the
management thereof and (the restoration of) its
viability." Such powers, enormous and extensive
as they are, cannot extend to the postfacto repudiation of perfected transactions,
otherwise they would infringe against the nonimpairment clause of the Constitution 44. If the
legislature itself cannot revoke an existing valid
contract, how can it delegate such non-existent
powers to the conservator under Section 28-A of
said law?
Obviously, therefore, Section 28-A merely gives
the conservator power to revoke contracts that
are, under existing law, deemed to be defective
i.e., void, voidable, unenforceable or

rescissible. Hence, the conservator merely takes

the place of a bank's board of directors. What the
said board cannot do such as repudiating a
contract validly entered into under the doctrine of
implied authority the conservator cannot do
either. Ineluctably, his power is not unilateral and
he cannot simply repudiate valid obligations of
the Bank. His authority would be only to bring
court actions to assail such contracts as he has
already done so in the instant case. A contrary
understanding of the law would simply not be
permitted by the Constitution. Neither by
common sense. To rule otherwise would be to
enable a failing bank to become solvent, at the
expense of third parties, by simply getting the
conservator to unilaterally revoke all previous
dealings which had one way or another or come
to be considered unfavorable to the Bank,
yielding nothing to perfected contractual rights
nor vested interests of the third parties who had
dealt with the Bank.
Rural Bank of Buhi v. CA
There is no requirement whether express or
implied, that a hearing be first conducted before
a banking institution may be placed under
receivership. On the contrary, the law is explicit
as to the conditions prerequisite to the action of
the Monetary Board to forbid the institution to do
business in the Philippines and to appoint a
receiver to immediately take charge of the bank's
assets and liabilities. They are: (a) an
examination made by the examining department
of the Central Bank; (b) report by said
department to the Monetary Board; and (c) prima
facie showing that the bank is in a condition of
insolvency or so situated that its continuance in
business would involve probable loss to its
depositors or creditors.
Supportive of this theory is the ruling of this
Court, which established the authority of the
Central Bank under the foregoing circumstances,
which reads:
As will be noted, whenever it shall appear prima
facie that a banking institution is in "a condition
of insolvency" or so situated "that its continuance
in business would involved probable loss to its
depositors or creditors," the Monetary Board has
authority:

First, to forbid the institution to do business and

appoint a receiver therefor; and
Second, to determine, within 60 days, whether or
not:1) the institution may be reorganized and
rehabilitated to such an extent as to be permitted
to resume business with safety to depositors,
creditors and the general public; or
2) it is indeed insolvent or cannot resume
business with safety to depositors, creditors and
the general public, and public interest requires
that it be liquidated.
In this latter case (i.e., the bank can no longer
resume business with safety to depositors,
creditors and the public, etc.) its liquidation will
be ordered and a liquidator appointed by the
Monetary Board. The Central Bank shall
thereafter file a petition in the Regional Trial Court
praying for the Court's assistance in the
liquidation of the bank." ... (Salud vs. Central
Bank, 143 SCRA 590 [1986]).
Rural Bank of San Miguel v. Monetary Board
Petitioners argue that Resolution No. 105 was
bereft of any basis considering that no complete
examination had been conducted before it was
issued. This case essentially boils down to one
core issue: whether Section 30 of RA 7653 (also
known as the New Central Bank Act) and
applicable jurisprudence require a current and
complete examination of the bank before it can
be closed and placed under receivership.
Petitioners contention has no merit. Banco
Filipino and other cases petitioners cited 22 were
decided using Section 29 of the old law (RA 265):
Thus in Banco Filipino, we ruled that an
"examination [conducted] by the head of the
appropriate supervising or examining department
or his examiners or agents into the condition of
the bank"23 is necessary before the MB can order
its closure.
However, RA 265, including Section 29 thereof,
was expressly repealed by RA 7653 which took
effect in 1993. Resolution No. 105 was issued on
January 21, 2000. Hence, petitioners reliance
on Banco Filipino which was decided under RA
265 was misplaced.

In RA 7653, only a "report of the head of the

supervising
or examining
department"
is
necessary.

its continued operation would cause prejudice to

its depositors, creditors and the general public as
well.23

Koruga v. Arsenas

The law vests in the BSP the supervision over

operations and activities of banks. The New
Central Bank Act provides:

Which body has jurisdiction over the Koruga

Complaint, the RTC or the BSP?
We hold that it is the BSP that has jurisdiction
over the case.
A reexamination of the Complaint is in order.
Korugas Complaint charged defendants with
violation of Sections 31 to 34 of the Corporation
Code, prohibiting self-dealing and conflict of
interest of directors and officers; invoked her
right to inspect the corporations records under
Sections 74 and 75 of the Corporation Code; and
prayed for Receivership and Creation of a
Management Committee, pursuant to Rule 59 of
the Rules of Civil Procedure, the Securities
Regulation Code, the Interim Rules of Procedure
Governing Intra-Corporate Controversies, the
General Banking Law of 2000, and the New
Central Bank Act. She accused the directors and
officers of Banco Filipino of engaging in unsafe,
unsound, and fraudulent banking practices, more
particularly, acts that violate the prohibition on
self-dealing.
It is clear that the acts complained of pertain to
the conduct of Banco Filipinos banking business.
A bank, as defined in the General Banking
Law,21 refers to an entity engaged in the lending
of funds obtained in the form of deposits. 22 The
banking business is properly subject to
reasonable regulation under the police power of
the state because of its nature and relation to the
fiscal affairs of the people and the revenues of
the state. Banks are affected with public interest
because they receive funds from the general
public in the form of deposits. It is the
Governments responsibility to see to it that the
financial interests of those who deal with banks
and banking institutions, as depositors or
otherwise, are protected. In this country, that
task is delegated to the BSP, which pursuant to
its Charter, is authorized to administer the
monetary, banking, and credit system of the
Philippines. It is further authorized to take the
necessary steps against any banking institution if

Section 25. Supervision and Examination. - The

Bangko Sentral shall have supervision over, and
conduct periodic or special examinations of,
banking institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied
activities.24
Specifically, the BSPs supervisory and regulatory
powers include:
4.1 The issuance of rules of conduct or the
establishment of standards of operation
for uniform application to all institutions or
functions
covered,
taking
into
consideration the distinctive character of
the operations of institutions and the
substantive
similarities
of
specific
functions to which such rules, modes or
standards are to be applied;
4.2 The conduct of examination to
determine compliance with laws and
regulations if the circumstances so
warrant
as
determined
by
the
Monetary Board;
4.3 Overseeing to ascertain that laws
and Regulations are complied with;
4.4 Regular investigation which shall
not be oftener than once a year from
the last date of examination to
determine whether an institution is
conducting its business on a safe or
sound
basis: Provided, That
the
deficiencies/irregularities found by or
discovered
by
an
audit
shall
be
immediately addressed;
4.5 Inquiring into the solvency and
liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action.25

Koruga alleges that "the dispute in the trial court

involves the manner with which the Directors
(sic) have handled the Banks affairs, specifically
the fraudulent loans and dacion en pago
authorized by the Directors in favor of several
dummy corporations known to have close ties
and
are
indirectly
controlled
by
the
Directors."26 Her allegations, then, call for the
examination of the allegedly questionable loans.
Whether these loans are covered by the
prohibition on self-dealing is a matter for the BSP
to determine. These are not ordinary intracorporate matters; rather, they involve banking
activities which are, by law, regulated and
supervised by the BSP. As the Court has
previously held:
It is well-settled in both law and jurisprudence
that the Central Monetary Authority, through the
Monetary Board, is vested with exclusive
authority to assess, evaluate and determine the
condition of any bank, and finding such condition
to be one of insolvency, or that its continuance in
business would involve a probable loss to its
depositors or creditors, forbid bank or non-bank
financial institution to do business in the
Philippines; and shall designate an official of the
BSP or other competent person as receiver to
immediately take charge of its assets and
liabilities.27
Correlatively, the General Banking Law of 2000
specifically deals with loans contracted by bank
directors or officers, thus:
SECTION 36. Restriction on Bank Exposure
to Directors, Officers, Stockholders and
Their Related Interests. No director or
officer of any bank shall, directly or indirectly, for
himself or as the representative or agent of
others, borrow from such bank nor shall he
become a guarantor, indorser or surety for loans
from such bank to others, or in any manner be an
obligor or incur any contractual liability to the
bank except with the written approval of the
majority of all the directors of the bank, excluding
the director concerned: Provided, That such
written approval shall not be required for loans,
other credit accommodations and advances
granted to officers under a fringe benefit plan
approved by the Bangko Sentral. The required
approval shall be entered upon the records of the
bank and a copy of such entry shall be

transmitted
forthwith
to
the
appropriate
supervising and examining department of the
Bangko Sentral.
Dealings of a bank with any of its directors,
officers or stockholders and their related interests
shall be upon terms not less favorable to the
bank than those offered to others.
After due notice to the board of directors of the
bank, the office of any bank director or officer
who violates the provisions of this Section may be
declared vacant and the director or officer shall
be subject to the penal provisions of the New
Central Bank Act.
The Monetary Board may regulate the amount of
loans, credit accommodations and guarantees
that may be extended, directly or indirectly, by a
bank to its directors, officers, stockholders and
their related interests, as well as investments of
such bank in enterprises owned or controlled by
said directors, officers, stockholders and their
related interests. However, the outstanding loans,
credit accommodations and guarantees which a
bank may extend to each of its stockholders,
directors, or officers and their related interests,
shall be limited to an amount equivalent to their
respective unencumbered deposits and book
value of their paid-in capital contribution in the
bank: Provided, however, That loans, credit
accommodations and guarantees secured by
assets considered as non-risk by the Monetary
Board shall be excluded from such limit: Provided,
further, That loans, credit accommodations and
advances to officers in the form of fringe benefits
granted in accordance with rules as may be
prescribed by the Monetary Board shall not be
subject to the individual limit.
The Monetary Board
"related interests."

shall

define

the

term

The limit on loans, credit accommodations and

guarantees prescribed herein shall not apply to
loans, credit accommodations and guarantees
extended by a cooperative bank to its
cooperative shareholders.28
Furthermore, the authority to determine whether
a bank is conducting business in an unsafe or
unsound manner is also vested in the Monetary

Board. The
provides:

General

Banking

Law

of

2000

SECTION 56. Conducting Business in an

Unsafe or Unsound Manner. In determining
whether a particular act or omission, which is not
otherwise prohibited by any law, rule or
regulation affecting banks, quasi-banks or trust
entities, may be deemed as conducting business
in an unsafe or unsound manner for purposes of
this Section, the Monetary Board shall consider
any of the following circumstances:
56.1. The act or omission has resulted or may
result in material loss or damage, or abnormal
risk or danger to the safety, stability, liquidity or
solvency of the institution;
56.2. The act or omission has resulted or may
result in material loss or damage or abnormal risk
to
the
institution's
depositors,
creditors,
investors, stockholders or to the Bangko Sentral
or to the public in general;
56.3. The act or omission has caused any undue
injury, or has given any unwarranted benefits,
advantage or preference to the bank or any party
in the discharge by the director or officer of his
duties and responsibilities through manifest
partiality, evident bad faith or gross inexcusable
negligence; or
56.4. The act or omission involves entering into
any contract or transaction manifestly and
grossly disadvantageous to the bank, quasi-bank
or trust entity, whether or not the director or
officer profited or will profit thereby.

Section 37. Administrative Sanctions on Banks

and Quasi-banks. - Without prejudice to the
criminal sanctions against the culpable persons
provided in Sections 34, 35, and 36 of this Act,
the Monetary Board may, at its discretion, impose
upon any bank or quasi-bank, their directors
and/or officers, for any willful violation of its
charter or by-laws, willful delay in the submission
of reports or publications thereof as required by
law, rules and regulations; any refusal to permit
examination into the affairs of the institution; any
willful making of a false or misleading statement
to the Board or the appropriate supervising and
examining department or its examiners; any
willful failure or refusal to comply with, or
violation of, any banking law or any order,
instruction or regulation issued by the Monetary
Board, or any order, instruction or ruling by the
Governor; or any commission of irregularities,
and/or conducting business in an unsafe or
unsound manner as may be determined by the
Monetary Board, the following administrative
sanctions, whenever applicable:
(a) fines in amounts as may be
determined by the Monetary Board to be
appropriate, but in no case to exceed
Thirty thousand pesos (P30,000) a day for
each violation, taking into consideration
the attendant circumstances, such as the
nature and gravity of the violation or
irregularity and the size of the bank or
quasi-bank;
(b) suspension of rediscounting privileges
or access to Bangko Sentral credit
facilities;

Whenever a bank, quasi-bank or trust entity

persists in conducting its business in an unsafe or
unsound manner, the Monetary Board may,
without prejudice to the administrative sanctions
provided in Section 37 of the New Central Bank
Act, take action under Section 30 of the same Act
and/or immediately exclude the erring bank from
clearing, the provisions of law to the contrary
notwithstanding.

(c) suspension of lending or foreign

exchange operations or authority to
accept new deposits or make new
investments;

Finally, the New Central Bank Act grants the

Monetary
Board
the
power
to
impose
administrative sanctions on the erring bank:

Resignation or termination from office shall not

exempt
such
director
or
officer
from
administrative or criminal sanctions.

(d) suspension of
privileges; and/or

interbank

clearing

(e) revocation of quasi-banking license.

The Monetary Board may, whenever warranted

by circumstances, preventively suspend any
director or officer of a bank or quasi-bank
pending an investigation: Provided, That should
the case be not finally decided by the Bangko
Sentral within a period of one hundred twenty
(120) days after the date of suspension, said
director or officer shall be reinstated in his
position: Provided, further, That when the delay in
the disposition of the case is due to the fault,
negligence or petition of the director or officer,
the period of delay shall not be counted in
computing the period of suspension herein
provided.
The above administrative sanctions need not be
applied in the order of their severity.
Whether or not there is an administrative
proceeding, if the institution and/or the directors
and/or officers concerned continue with or
otherwise persist in the commission of the
indicated practice or violation, the Monetary
Board may issue an order requiring the institution
and/or the directors and/or officers concerned to
cease and desist from the indicated practice or
violation, and may further order that immediate
action be taken to correct the conditions resulting
from such practice or violation. The cease and
desist order shall be immediately effective upon
service on the respondents.
The respondents shall be afforded an opportunity
to defend their action in a hearing before the
Monetary Board or any committee chaired by any
Monetary Board member created for the purpose,
upon request made by the respondents within
five (5) days from their receipt of the order. If no
such hearing is requested within said period, the
order shall be final. If a hearing is conducted, all
issues shall be determined on the basis of
records, after which the Monetary Board may
either reconsider or make final its order.

The Governor is hereby authorized, at his

discretion, to impose upon banking institutions,
for any failure to comply with the requirements of
law, Monetary Board regulations and policies,
and/or instructions issued by the Monetary Board
or by the Governor, fines not in excess of Ten
thousand pesos (P10,000) a day for each
violation, the imposition of which shall be final
and executory until reversed, modified or lifted by
the Monetary Board on appeal.29
Koruga also accused Arcenas, et al. of violation of
the Corporation Codes provisions on self-dealing
and conflict of interest. She invoked Section 31 of
the Corporation Code, which defines the liability
of directors, trustees, or officers of a corporation
for, among others, acquiring any personal or
pecuniary interest in conflict with their duty as
directors or trustees, and Section 32, which
prescribes the conditions under which a contract
of the corporation with one or more of its
directors or trustees the so-called "self-dealing
directors"30 would be valid. She also alleged that
Banco Filipinos directors violated Sections 33 and
34 in approving the loans of corporations with
interlocking ownerships, i.e., owned, directed, or
managed by close associates of Albert C. Aguirre.
Sections 31 to 34 of the Corporation Code
provide:
Section 31. Liability of directors, trustees or
officers. - Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of
the corporation or acquire any personal or
pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and
must account for the profits which otherwise
would have accrued to the corporation.

Section 32. Dealings of directors, trustees or

officers with the corporation. - A contract of the
corporation with one or more of its directors or
trustees or officers is voidable, at the option of
such corporation, unless all the following
conditions are present:
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
2. That the vote of such director or trustee
was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable
under the circumstances; and
4. That in case of an officer, the contract has
been previously authorized by the board of
directors.
Where any of the first two conditions set forth in
the preceding paragraph is absent, in the case of
a contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least twothirds (2/3) of the members in a meeting called
for the purpose: Provided, That full disclosure of
the adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
Section 33. Contracts between corporations
with interlocking directors. - Except in cases of
fraud, and provided the contract is fair and
reasonable under the circumstances, a contract
between two or more corporations having
interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of
the interlocking director in one corporation is
substantial and his interest in the other
corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of
the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.

Section 34. Disloyalty of a director. - Where a

director, by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he
must account to the latter for all such profits by
refunding the same, unless his act has been
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the
director risked his own funds in the venture.
Korugas invocation of the provisions of the
Corporation Code is misplaced. In an earlier case
with similar antecedents, we ruled that:
The Corporation Code, however, is a general law
applying to all types of corporations, while the
New Central Bank Act regulates specifically banks
and other financial institutions, including the
dissolution and liquidation thereof. As between a
general and special law, the latter shall prevail
generalia specialibus non derogant.31
Consequently, it is not the Interim Rules of
Procedure on Intra-Corporate Controversies,32 or
Rule 59 of the Rules of Civil Procedure on
Receivership, that would apply to this case.
Instead, Sections 29 and 30 of the New Central
Bank Act should be followed, viz.:
Section 29. Appointment of Conservator. Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary
Board may appoint a conservator with such
powers as the Monetary Board shall deem
necessary to take charge of the assets, liabilities,
and the management thereof, reorganize the
management, collect all monies and debts due
said institution, and exercise all powers necessary
to restore its viability. The conservator shall
report and be responsible to the Monetary Board
and shall have the power to overrule or revoke
the actions of the previous management and
board of directors of the bank or quasi-bank.
xxxx

The Monetary Board shall terminate the

conservatorship when it is satisfied that the
institution can continue to operate on its own and
the conservatorship is no longer necessary. The
conservatorship shall likewise be terminated
should the Monetary Board, on the basis of the
report of the conservator or of its own findings,
determine that the continuance in business of the
institution would involve probable loss to its
depositors or creditors, in which case the
provisions of Section 30 shall apply.
Section 30. Proceedings in Receivership and
Liquidation. - Whenever, upon report of the head
of the supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they
become due in the ordinary course of
business: Provided, That this shall not
include inability to pay caused by
extraordinary
demands
induced
by
financial panic in the banking community;
(b) has insufficient realizable assets, as
determined by the Bangko Sentral, to
meet its liabilities; or
(c) cannot continue in business without
involving probable losses to its depositors
or creditors; or
(d) has willfully violated a cease and desist
order under Section 37 that has become
final, involving acts or transactions which
amount to fraud or a dissipation of the
assets of the institution; in which cases,
the Monetary Board may summarily and
without need for prior hearing forbid the
institution from doing business in the
Philippines and designate the Philippine
Deposit Insurance Corporation as receiver
of the banking institution.
xxxx
The actions of the Monetary Board taken under
this section or under Section 29 of this Act shall
be final and executory, and may not be restrained
or set aside by the court except on petition for
certiorari on the ground that the action taken was
in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of

jurisdiction. The petition for certiorari may only

be filed by the stockholders of record
representing the majority of the capital stock
within ten (10) days from receipt by the board of
directors of the institution of the order directing
receivership, liquidation or conservatorship.
The designation of a conservator under Section
29 of this Act or the appointment of a receiver
under this section shall be vested exclusively with
the
Monetary
Board.
Furthermore,
the
designation of a conservator is not a precondition
to the designation of a receiver.33
On the strength of these provisions, it is the
Monetary
Board
that
exercises
exclusive
jurisdiction over proceedings for receivership of
banks.
Crystal clear in Section 30 is the provision that
says the "appointment of a receiver under this
section shall be vested exclusively with the
Monetary
Board."
The
term
"exclusively"
connotes that only the Monetary Board can
resolve the issue of whether a bank is to be
placed under receivership and, upon an
affirmative finding, it also has authority to
appoint a receiver. This is further affirmed by the
fact that the law allows the Monetary Board to
take action "summarily and without need for prior
hearing."
And, as a clincher, the law explicitly provides that
"actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be
final and executory, and may not be restrained or
set aside by the court except on a petition for
certiorari on the ground that the action taken was
in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of
jurisdiction."1avvphi1
From the foregoing disquisition, there is no doubt
that the RTC has no jurisdiction to hear and
decide a suit that seeks to place Banco Filipino
under receivership.
Banko Sentral v. Valenzuela
The "close now, hear later" doctrine has already
been justified as a measure for the protection of
the public interest. Swift action is called for on
the part of the BSP when it finds that a bank is in

dire straits. Unless adequate and determined

efforts are taken by the government against
distressed and mismanaged banks, public faith in
the banking system is certain to deteriorate to
the prejudice of the national economy itself, not
to mention the losses suffered by the bank
depositors, creditors, and stockholders, who all
deserve the protection of the government.13
The respondent banks have failed to show their
entitlement to the writ of preliminary injunction. It
must be emphasized that an application for
injunctive relief is construed strictly against the
pleader.14 The respondent banks cannot rely on a
simple appeal to procedural due process to prove
entitlement. The requirements for the issuance of
the writ have not been proved. No invasion of the
rights of respondent banks has been shown, nor
is their right to copies of the ROEs clear and
unmistakable. There is also no necessity for the
writ to prevent serious damage. Indeed the

issuance of the writ of preliminary injunction

tramples upon the powers of the MB and prevents
it from fulfilling its functions. There is no right
that the writ of preliminary injunction would
protect in this particular case. In the absence of a
clear legal right, the issuance of the injunctive
writ constitutes grave abuse of discretion. 15 In the
absence of proof of a legal right and the injury
sustained by the plaintiff, an order for the
issuance of a writ of preliminary injunction will be
nullified.16