Government Service Insurance System v.

Court of Appeals
G.R. No. 183905 April 16, 2009
Tinga, J:

Facts:
The annual stockholders’ meeting (annual meeting) of the Manila Electric Company (Meralco) was
scheduled on 27 May 2008. In connection with the annual meeting, proxies were required to be submitted
on or before 17 May 2008, and the proxy validation was slated for five days later, or 22 May.

In view of the resignation of Camilo Quiason, the position of corporate secretary of Meralco became
vacant. On 15 May 2008, the board of directors of Meralco designated Jose Vitug to act as corporate
secretary for the annual meeting. However, when the proxy validation began on 22 May, the proceedings
were presided over by respondent Anthony Rosete (Rosete), assistant corporate secretary and in-house
chief legal counsel of Meralco. Private respondents nonetheless argue that Rosete was the acting
corporate secretary of Meralco. Petitioner Government Service Insurance System (GSIS), a major
shareholder in Meralco, was distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management.

In its petition before the SEC, GSIS prayed for the issuance of a Cease and Desist Order (CDO) to
restrain the use of said proxies during the annual meeting scheduled for the following day. A CDO to that
effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the same day the
complaint was filed. During the annual meeting held on the following day, Rosete announced that the
meeting would push through, expressing the opinion that the CDO is null and void.

The CA ruled that the CDO issued by the SEC is void for having been issued without prior notice and
hearing.

Issue:
What are the cease and desist powers of the SEC and how should it be invoked?

Held:
The provisions of the SRC relevant to the issuance of a CDO are as follows:

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
with transparency and shall have the powers and functions provided by this
Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
the Financing Company Act and other existing laws. Pursuant thereto the Commission shall
have, among others, the following powers and functions:

xxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

xxx

[SEC.] 53.3. Whenever it shall appear to the Commission that any person has
engaged or is about to engage in any act or practice constituting a violation of any provision
of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered
securities association, clearing agency or other self-regulatory organization, it may issue an
order to such person to desist from committing such act or practice: Provided,
however, That the Commission shall not charge any person with violation of the rules of an
 Exchange or other self regulatory organization unless it appears to the Commission that
such Exchange or other self-regulatory organization is unable or unwilling to take action
against such person. After finding that such person has engaged in any such act or practice
and that there is a reasonable likelihood of continuing, further or future violations by such
person, the Commission may issue ex-parte a cease and desist order for a maximum period
of ten (10) days, enjoining the violation and compelling compliance with such provision.
The Commission may transmit such evidence as may be available concerning any violation
of any provision of this Code, or any rule, regulation or order thereunder, to the Department
of Justice, which may institute the appropriate criminal proceedings under this Code.

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.

64.2. Until the Commission issues a cease and desist order, the fact that an
investigation has been initiated or that a complaint has been filed, including the contents of
the complaint, shall be confidential. Upon issuance of a cease and desist order, the
Commission shall make public such order and a copy thereof shall be immediately
furnished to each person subject to the order.

64.3. Any person against whom a cease and desist order was issued may, within five (5)
days from receipt of the order, file a formal request for a lifting thereof. Said request shall be set
for hearing by the Commission not later than fifteen (15) days from its filing and the resolution
thereof shall be made not later than ten (10) days from the termination of the hearing. If the
Commission fails to resolve the request within the time herein prescribed, the cease and desist
order shall automatically be lifted.

There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated by Section 5(i),
is predicated on a necessity “to prevent fraud or injury to the investing public”. No other requisite or
detail is tied to this CDO authorized under Section 5(i).

The second basis, found in Section 53.3, involves a determination by the SEC that “any person has
engaged or is about to engage in any act or practice constituting a violation of any provision of this Code,
any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association,
clearing agency or other self-regulatory organization.” The provision additionally requires a finding that
“there is a reasonable likelihood of continuing [or engaging in] further or future violations by such
person.” The maximum duration of the CDO issued under Section 53.3 is ten (10) days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act
or practice, which 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”. Section 64.1 plainly provides three
segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent to the CDO may
file a formal request for the lifting thereof, which the SEC must hear within fifteen (15) days from filing
and decide within ten (10) days from the hearing.

It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both require a
common finding of a need to prevent fraud or injury to the investing public. At the same time, no mention
is made whether the CDO defined under Section 5(i) may be issued ex-parte, while the CDO under
Section 64.1 requires “grave and irreparable” injury, language absent in Section 5(i). Notwithstanding the
similarities between Section 5(i) and Section 64.1, it remains clear that the CDO issued under Section
53.3 is a distinct creation from that under Section 64.

The Court of Appeals cited the CDO as having been issued in violation of the constitutional provision on
due process, which requires both prior notice and prior hearing. Yet interestingly, the CDO as
contemplated in Section 53.3 or in Section 64, may be issued “ex-parte” (under Section 53.3) or “without
necessity of hearing” (under Section 64.1). Nothing in these provisions impose a requisite hearing before
the CDO may be issued thereunder. Nonetheless, there are identifiable requisite actions on the part of the
SEC that must be undertaken before the CDO may be issued either under Section 53.3 or Section 64. In
the case of Section 53.3, the SEC must make two findings: (1) that such person has engaged in any such
act or practice, and (2) that there is a reasonable likelihood of continuing, (or engaging in) further or
future violations by such person. In the case of Section 64, the SEC must adjudge that the act, 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.”

Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3
or Section 64 of the SRC. The CDO actually refers and cites all three provisions, yet it is apparent that a
singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64 collectively. At the very
least, the CDO under Section 53.3 and under Section 64 have their respective requisites and terms.

GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking
the CDO under Section 5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails
upon the showing of a clear legal right to such relief, the inability or unwillingness to lay bare the precise
statutory basis for the prayer for injunction is an obvious impediment to a successful application.
Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it was issuing
is more unpardonable, as it is an act that contravenes due process of law.