ABACUS SECURITIES CORPORATION vs. RUBEN U.

AMPIL
GR No. 160016 February 27, 2006
 
PANGANIBAN, CJ:
 
BOTTOMLINE!
 Pang-essay Alert
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.

NOTE
T+4: 4 days subsequent to trading

FACTS
 
ABACUS (Petitioner) is engaged in business as a broker and dealer of securities of listed
companies at the Philippine Stock Exchange Center.
 
Respondent Ampil opened a cash or regular account with ABACUS for the purpose of
buying and selling securities. 
 
Since April 10, 1997, Ampil actively traded his account, and as a result of such trading
activities, he accumulated an outstanding obligation in favor of ABACUS in the principal
sum of P6,617,036.22 as of April 30, 1997.
 
Despite the lapse of the period within which to pay his account as well as sufficient time
given by ABACUS to comply with his proposal to settle his account, the latter failed to do
so. Such that ABACUS thereafter sold Ampil’s securities to set off against his unsettled
obligations.
 
After the sale of Ampil’s securities and application of the proceeds thereof against his account,
Ampil’s remaining unsettled obligation to ABACUS was P3,364,313.56. ABACUS then
referred the matter to its legal counsel for collection purposes.
 
ABACUS, through counsel, demanded that Ampil settle his obligation plus the agreed penalty
charges accruing thereon equivalent to the average 90-day Treasury Bill rate plus 2% per annum
(200 basis points).
 
Ampil failed and/or refused to pay his accountabilities to ABACUS.
 
For his defense, Ampil claims that he was induced to trade in a stock security with
ABACUS because the latter allowed offset settlements wherein he is not obliged to pay
the purchase price. Rather, it waits for the customer to sell. And if there is a loss,
ABACUS only requires the payment of the deficiency (higher buying price - the lower
selling price). In addition, it charges a commission for brokering the sale. However, if the
customer sells and there is a profit, ABACUS deducts the purchase price and delivers only
the surplus after charging its commission.

Ampil further claims that all his trades with ABACUS were not paid in full in cash at
anytime after purchase or within the T+4 and none of these trades was cancelled by
ABACUS as required by the parties’ Agreement. Neither did ABACUS apply with either
the PSE or the SEC for an extension of time for the payment or settlement of his cash
purchases. 

Had petitioner followed the provision under their Agreement which stipulated the
liquidation within the T+3, his net deficit would only be P1,601,369.59. Ampil, however
affirmed that this is not in accordance with RSA, which mandates that if you do not pay
for the first order, you cannot subsequently make any further order without depositing
the cash price in full. 

When Ampil failed to comply with the T+3, ABACUS did not require him to put up a
deposit before it executed its subsequent orders. ABACUS did not likewise apply for
extension of the T+4 rule. Because of the offset transaction, Ampil was induced to take
a risk which resulted in the filing of the instant suit against him because of which he
suffered moral damages.

RTC ruled that ABACUS  violated Sections 23 and 25 of the Revised Securities Act (RSA) and
Rule 25-1 of the Rules Implementing the Act (RSA Rules) when it failed to:
1. require the respondent to pay for his stock purchases within three (T+3) or four days
(T+4) from trading; and
2. request from the appropriate authority an extension of time for the payment of
respondents cash purchases. 

The trial court also found respondent to be equally at fault, by incurring excessive credits and
waiting to see how his investments turned out before deciding to invoke the RSA. Thus, the RTC
concluded that petitioner and respondent were in pari delicto and therefore without recourse
against each other.

The CA upheld the lower courts finding that the parties were in pari delicto.
 
ISSUES
Does the Pari Delicto Rule find application in this case?
Yes, but only in the transactions subsequent to April 10 and 11.

 Disscussions on the Rights and Obligations of a Broker or Dealer under the RSA are
more important! Include the expounded version of the Preliminary Statement.
 
DISCUSSION

PRELIMINARY DISCUSSION ON THE MANDATORY CLOSE OUT RULE

LEGAL BASIS

Sections 23 and 25 of the RSA

  
SEC. 23. Margin Requirements.
a. xxx
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
1. On any security other than an exempted security, in contravention of the
rules and regulations which the Commission shall prescribe under subsection
(a) of this Section;
2. Without collateral or on any collateral other than securities, except
i. to maintain a credit initially extended in conformity with the rules and
regulations of the Commission and
ii. in cases where the extension or maintenance of credit is not for the
purpose of purchasing or carrying securities or of evading or
circumventing the provisions of subparagraph (1) of this subsection.
 
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 non-margin 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. x x x.

SO THE POINT IS BAWAL MAGPAUTANG SI BROKER KASI “YOUR CREDIT IS

GOOD BUT WE NEED CASH”

 
 RSA RULE 25-1
 
Purchases and Sales in Cash Account
a. Purchases by a customer in a cash account shall be paid in full within three (3) business
days after the trade date.
b. If full payment is not received within the required time period, the broker or dealer shall
cancel or otherwise liquidate the transaction, or the unsettled portion thereof, starting on
the next business day but not beyond ten (10) business days following the last day for the
customer to pay, unless such sale cannot be effected within said period for justifiable
reasons.
c. If a transaction is cancelled or otherwise liquidated as a result of non-payment by the
customer, prior to any subsequent purchase during the next ninety (90) days, the customer
shall be required to deposit sufficient funds in the account to cover each purchase
transaction prior to execution.
d. xxx
e. xxx
f. Written application for an extension of the period of time required for payment under
paragraph (a) be made by the broker or dealer to the Philippine Stock Exchange, in the case
of a member of the Exchange, or to the Commission, in the case of a non-member of the
Exchange. Applications for the extension must be based upon exceptional circumstances
and must be filed and acted upon before the expiration of the original payment period or
the expiration of any subsequent extension.

 
Section 23(b) 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.

The United States, from which our country’s security policies are patterned, abound with authorities
explaining the main purpose of the above statute on margin requirements. This purpose is to regulate the
volume of credit flow, by way of speculative transactions, into the securities market and redirect
resources into more productive uses. Specifically, the main objective of the law on margins is explained
in this wise:
 
The main purpose of these margin provisions is not to increase the safety of security loans for
lenders. Banks and brokers normally require sufficient collateral to make themselves safe
without the help of law. Nor is the main purpose even protection of the small speculator by
making it impossible for him to spread himself too thinly although such a result will be achieved
as a byproduct of the main purpose.
 
The main purpose is to give a government credit agency an effective method of reducing the
aggregate amount of the nation’s credit resources which can be directed by speculation into the
stock market and out of other more desirable uses of commerce and industry.
 
A related purpose of the governmental regulation of margins is the stabilization of the
economy. Restrictions on margin percentages are imposed in order to achieve the objectives of
the government with due regard for the promotion of the economy and prevention of the use of
excessive credit.
 
Otherwise stated, the margin requirements set out in the RSA are primarily intended to
achieve a macroeconomic purpose -- the protection of the overall economy from excessive
speculation in securities. Their recognized secondary purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily upon the
brokers and dealers. Sections 23 and 25 and Rule 25-1, otherwise known as the
mandatory close-out rule, clearly vest upon petitioner ABACUS the obligation,
not just the right, to cancel or otherwise liquidate a customer’s 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.
 
It will be noted that trading on credit (or margin trading) allows investors to buy more securities
than their cash position would normally allow. 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. 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 margins 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 discouraging an
abnormal attraction of funds into the stock market and achieving a more balanced use of such
resources.
 
The 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.
 
The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time,
the status of the clients account. Brokers, therefore, are in the superior position to prevent the
unlawful extension of credit. Because of this awareness, the law imposes upon them the primary
obligation to enforce the margin requirements.
 
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.
 
 Respondent Liable for the First,
But Not for the Subsequent Trades
 
 
Nonetheless, these margin requirements are applicable only to transactions entered into by
the 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 latter’s
outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of the
shares pursuant to the RSA Rules. Petitioner’s right to collect is justified under the general law
on obligations and contracts.
 
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.
  
Since a brokerage relationship is essentially a contract for the employment of an agent, principles
of contract law also govern the broker-principal relationship.
 
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.

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.
 

In securities trading, the brokers are essentially the counterparties to the stock
transactions at the Exchange. Since the principals of the broker are generally
undisclosed, the broker is personally liable for the contracts thus made. Hence,
petitioner had to advance the payments for respondent’s trades. Brokers have a right
to be reimbursed for sums advanced by them with the express or implied authorization
of the principal, 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. 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 plea of
respondent to give him time to raise funds therefor. These stipulations, in relation to paragraph
4, 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.
 

So the thing is, ABACUS cannot collect from Ampil for transactions subsequent to April 10
and 11 kasi Ampil’s cash account with ABACUS was converted to a credit account. Eh bawal
nga ang pautang. ABACUS failed to require a deposit from Ampil for transactions subsequent
to April 10 and 11. Required siyang magdeposit to cover for the purchase price nung stocks na
napurchase on April 10 and 11 na di pa bayad. Required siyang magdeposit kasi the T+3 was
not observed.

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.

Respondent Equally Guilty

for Subsequent Trades
 
 
On the other hand, we find Ampil 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, Ampil 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. Obviously, 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 respondent’s 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. 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. In 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 (*v*). 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.
 
Jurisdiction
 
It is axiomatic that the allegations in the complaint, not the defenses set up in the answer or in the
motion to dismiss determine which court has jurisdiction over an action. Were we to be governed
by the latter rule, the question of jurisdiction would depend almost entirely upon the defendant.
 
The instant controversy is an ordinary civil case seeking to enforce rights arising from the
Agreement (AOF) between petitioner and respondent. 
 It relates to acts committed by the parties in the course of their business relationship. 
 The purpose of the suit is to collect respondent’s alleged outstanding debt to petitioner for
stock purchases.
 
To be sure, the RSA and its Rules are to be read into the Agreement entered into between
petitioner and respondent. Compliance with the terms of the AOF necessarily means compliance
with the laws. Thus, to determine whether the parties fulfilled their obligations in the AOF, this
Court had to pass upon their compliance with the RSA and its Rules. This, in no way, deprived
the Securities and Exchange Commission (SEC) of its authority to determine willful violations of
the RSA and impose appropriate sanctions therefor, as provided under Sections 45 and 46 of the
Act.
 
SO ORDERED.
 [G.R. No. 125469. October 27, 1997]
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT OF
APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL
LAND, INC., respondents.
TORRES, JR., J.:
ISSUE
What is the extent of the regulatory authority of the SEC in so far as the PSE is concerned?

It has the power to regulate and even overturn the decision of the PSE. However, the
Business Judgment Rule still applies, the SEC may only substitute the PSE’s decisions
if such are tainted with bad faith. Absent bad faith, the SEC cannot meddle with the
affairs of PSE as the PSE is a corporation, the management of the same being vested
on its Board and the wisdom of the Board’s decision is outside the prerogative of the
SEC to control, as long as the said decision is made in good faith.

In other words, pwede sana i-reverse ni SEC si PSE kung PSE acted in bad faith in
denying PALI’s request for listing. Kaso, walang bad faith kasi justified si PSE sa
denial. There is a clear doubt as to PALI’s viability to be listed in the PSE.

Si PSE, parang si COMELEC. Meron rin siyang jurisdiction to determine whether an

applicant/ candidate is a nuisance candidate. So pag nadetermine niya yun, denial of
the application may be had.

The question as to what policy is, or should be relied upon in approving the registration
and sale of securities in the SEC is not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. 

FACTS

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer
its shares to the public in order to raise funds allegedly to develop its properties and pay its
loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell
its shares to the public by the SEC. To facilitate the trading of its shares among investors,
PALI sought to course the trading of its shares through the PSE, for which purpose PALI filed
with the PSE an application to list its shares, with supporting documents attached.

The Listing Committee of the PSE, upon a perusal of PALIs application, recommended to the
PSEs Board of Governors the approval of PALIs listing application.

Before it could act upon PALIs application, the Board of Governors of PSE received a letter
from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal
and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and
Resort Complex which PALI claims to be among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI, likewise appears to have been held
and continue to be held in trust by one Rebecco Panlilio for then President Marcos and now,
effectively for his estate, and requested PALIs application to be deferred. PALI was requested
to comment upon the said letter.

The Board of Governors of the PSE reached its decision to reject PALIs application, citing
the existence of serious claims, issues and circumstances surrounding PALIs ownership
over its assets that adversely affect the suitability of listing PALIs shares in the stock
exchange.
PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr.,
bringing to the SECs attention the action taken by the PSE in the application of PALI for the
listing of its shares with the PSE, and requesting that the SEC, in the exercise of its
supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-
A, review the PSEs action on PALIs listing application and institute such measures as are
just and proper and under the circumstances.

Ultimately, the SEC rendered its Order, reversing the PSEs decision. 

PSE filed a motion for reconsideration, which was, however denied by the Commission.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals a Petition for Review
assailing the orders of the SEC. The CA dismissed the Petition of the PSE. Hence, this Petition
by the PSE.

DISCUSSION

The Securities and Exchange Commission is the government agency, under the direct general
supervision of the Office of the President, with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable
functions, and one of the most important, is the supervision of all corporations, partnerships
or associations, who are grantees or primary franchise and/or a license or permit issued by the
government to operate in the Philippines.

We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This
is in line with the SECs mission to ensure proper compliance with the laws, such as the
Revised Securities Act and to regulate the sale and disposition of securities in the country.
As the appellate court explains:
Paramount policy also supports the authority of the public respondent to review
petitioner’s denial of the listing. Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the economy moves on the basis
of the rise and fall of stocks being traded. By its economic power, the petitioner
certainly can dictate which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own rules liberally as it may
please. PSE can either allow or deny the entry to the market of securities. To repeat,
the monopoly, unless accompanied by control, becomes subject to abuse; hence,
considering public interest, then it should be subject to government regulation.

The role of the SEC in our national economy cannot be minimized. The legislature,
through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent
laws, has entrusted to it the serious responsibility of enforcing all laws affecting
corporations and other forms of associations not otherwise vested in some other
government office.
This is not to say, however, that the PSEs management prerogatives are under the absolute
control of the SEC. The PSE is, after all, a corporation authorized by its corporate
franchise to engage in its proposed and duly approved business. One of the PSEs main
concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all
the rights pertaining to corporations, including the right to sue and be sued, to hold property in its
own name, to enter (or not to enter) into contracts with third persons, and to perform all other
legal acts within its allocated express or implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed

corporate name, and with a distinct legal personality. In organizing itself as a collective body, it
waives no constitutional immunities and perquisites appropriate to such body. As to its
corporate and management decisions, therefore, the state will generally not interfere with
the same. Questions of policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without authority to substitute
their judgment for the judgment of the board of directors. The board is the business manager
of the corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts.

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority
to reverse the PSEs decision in matters of application for listing in the market, the SEC may
exercise such power only if the PSEs judgment is attended by bad faith. 

Board of Liquidators vs. Kalaw:

bad faith does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or interest of ill will,
partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which in the general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock exchange: 
 That some of PALI’s properties were being claimed by the heirs of the late President
Ferdinand E. Marcos.
 In time, the PCGG confirmed this claim. In fact, an order of sequestration has been issued
covering the properties of PALI, and suit for reconveyance to the state has been filed in
the Sandiganbayan Court. 

Thus, these give rise to serious doubt as to the integrity of PALI as a stock
issuer. The PSE was in the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the general public. The purpose
of the Revised Securities Act, after all, is to give adequate and effective
protection to the investing public against fraudulent representations, or false
promises, and the imposition of worthless ventures.

It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:
The Securities Act, often referred to as the truth in securities Act, was designed not
only to provide investors with adequate information upon which to base their decisions
to buy and sell securities, but also to protect legitimate business seeking to obtain
capital through honest presentation against competition form crooked promoters and
to prevent  fraud in the sale of securities.
As has been pointed out, the effects of such Securities Act are chiefly:
1. prevention of excesses and fraudulent transactions, merely by requirement of that details
be revealed;
2. placing the market during the early stages of the offering of a security a body of
information, which operating indirectly through investment services and expert investors,
will tend to produce a more accurate appraisal of a security. 

Thus, the Commission may refuse to permit a registration statement to become effective if
it appears on its face to be incomplete or inaccurate in any material respect, and empower
the Commission to issue a stop order suspending the effectiveness of any registration
statement which is found to include any untrue statement of a material fact or to omit to
state any material fact required to be stated therein or necessary to make the statements
therein not misleading.

The observation that the title of PALI over its properties is absolute and can no longer be
assailed is of no moment. At this juncture, there is the claim that the properties were owned by
the TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco
Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong to
Marcos estate, and were held only in trust by Rebecco Panlilio.  In any case, for the purpose of
determining whether PSE acted correctly in refusing the application of PALI, the true ownership
of the properties of PALI need not be determined as an absolute fact. What is material is that
the uncertainty of the properties ownership and alienability exists, and this puts to question
the qualification of PALIs public offering. 

In sum, the Court finds that the SEC had acted arbitrarily in arrogating unto itself the
discretion of approving the application for listing in the PSE of the private respondent
PALI, since this is a matter addressed to the sound discretion of the PSE, a corporate
entity, whose business judgments are respected in the absence of bad faith.
The Powers of the SEC
 to administer the Revised Securities Act
 Section 3, Revised Securities Act: gives the SEC the power to promulgate such rules
and regulations as it may consider appropriate in the public interest for the enforcement
of the said laws. 
 Section 4, RSA: promulgate rules and regulations, in the interest of the public, in relation
to registration of security (except those exempted by law). No security shall be issued,
endorsed, sold, transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall be promulgated in the
public interest and for the protection of investors by the Commission. 
 Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory
agency, has supervision and control over all corporations and over the securities market
as a whole, and as such, is given ample authority in determining appropriate policies. 

Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy
of full material disclosure where all companies, listed or applying for listing, are
required to divulge truthfully and accurately, all material information about themselves
and the securities they sell, for the protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or purchase of its securities. While
the employment of this policy is recognized and sanctioned by laws, nonetheless, the Revised
Securities Act sets substantial and procedural standards which a proposed issuer of securities
must satisfy.

It is the intention of the lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to
be determined by the Securities and Exchange Commission. This measure was meant to
protect the interest of the investing public against fraudulent and worthless securities, and the
SEC is mandated by law to safeguard these interests, following the policies and rules therefore
provided. The absolute reliance on the full disclosure method in the registration of securities is,
therefore, untenable. At it is, the Court finds that the private respondent PALI has failed to
support the propriety of the issue of its shares with unfailing clarity, thereby lending support to
the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the exercise of
its vested authority, chooses in setting the standard for public offerings of corporations wishing
to do so.

SO ORDERED.
 
 
 SECURITIES AND EXCHANGE COMMISION, Petitioner vs. INTERPORT RESOURCES
CORPORATION, MANUEL S. RECTO RENE S. VILLARICA, PELAGIO RICALDE, ANTONIO REINA,
FRANCISCO ANONUEVO, JOSEPH SY and SANTIAGO TANCHAN, JR., Respondents
GR No. 135808 October 6, 2008
CHICO-NAZARIO, J.:
FACTS 
On 6 August 1994, the Board of Directors of IRC approved a Memorandum of Agreement
with Ganda Holdings Berhad (GHB). Under the Memorandum of Agreement, IRC acquired 100% or the entire
capital stock of Ganda Energy Holdings, Inc. (GEHI), which would own and operate a 102 megawatt (MW) gas
turbine power-generating barge. The agreement also stipulates that GEHI would assume a five-year power purchase
contract with National Power Corporation. At that time, GEHIs power-generating barge was 97% complete and
would go on-line by mid-September of 1994. In exchange, IRC will issue to GHB 55% of the expanded capital stock
of IRC amounting to 40.88 billion shares which had a total par value of P488.44 million.
 
On the side, IRC would acquire 67% of the entire capital stock of Philippine Racing Club, Inc. (PRCI). PRCI
owns 25.724 hectares of real estate property in Makati. Under the Agreement, GHB, a member of the Westmont
Group of Companies in Malaysia, shall extend or arrange a loan required to pay for the proposed acquisition by
IRC of PRCI. IRC alleged that on 8 August 1994, a press release announcing the approval of the agreement
was sent through facsimile transmission to the Philippine Stock Exchange and the SEC, but that the facsimile
machine of the SEC could not receive it. Upon the advice of the SEC, the IRC sent the press release on the
morning of 9 August 1994.
 
The SEC averred that it received reports that IRC failed to make timely public disclosures of its negotiations
with GHB and that some of its directors, respondents herein, heavily traded IRC shares utilizing this material
insider information. 
 
In compliance with the SEC Chairmans directive, the IRC sent a letter to the SEC. Its directors, Manuel Recto,
Rene Villarica and Pelagio Ricalde, also appeared before the SEC to explain IRCs alleged failure to immediately
disclose material information as required under the Rules on Disclosure of Material Facts.
 
The SEC Chairman issued an Order finding that IRC violated the Rules on Disclosure of Material Facts, in
connection with the Old Securities Act of 1936, when it failed to make timely disclosure of its negotiations with
GHB. In addition, the SEC pronounced that some of the officers and directors of IRC entered into transactions
involving IRC shares in violation of Section 30, in relation to Section 36, of the Revised Securities Act.
 
Respondents filed an Omnibus Motion, alleging that the SEC had no authority to investigate the subject
matter, since under Section 8 of Presidential Decree No. 902-A, as amended, jurisdiction was conferred upon the
Prosecution and Enforcement Department (PED) of the SEC. Respondents also claimed that the SEC violated
their right to due process when it ordered that the respondents appear before the SEC and show cause why
no administrative, civil or criminal sanctions should be imposed on them, and, thus, shifted the burden of
proof to the respondents. 

The SEC issued an Omnibus Order which ordered the recall of the show cause order but also ordered the creation of
a special investigating panel to hear and decide the case according to the Rules of Practice and Procedure Before the
Prosecution and Enforcement Department (PED), Securities and Exchange Commission.  
 
Respondents filed an Omnibus Motion for Partial Reconsideration, questioning the creation of the special
investigating panel to hear the case. The SEC denied reconsideration. The respondents filed a petition before the
Court of Appeals wherein they seek to enjoining the SEC and its agents from investigating and proceeding with the
hearing of the case against respondents herein. 
 
The Court of Appeals promulgated a Decision. It determined that there were no implementing rules and regulations
regarding disclosure, insider trading, or any of the provisions of the Revised Securities Acts which the respondents
allegedly violated. The Court of Appeals likewise noted that it found no statutory authority for the SEC to initiate
and file any suit for civil liability under Sections 8, 30 and 36 of the Revised Securities Act. Thus, it ruled that no
civil, criminal or administrative proceedings may possibly be held against the respondents without violating their
rights to due process and equal protection. It further resolved that absent any implementing rules, the SEC cannot be
allowed to quash the assailed Omnibus Orders for the sole purpose of re-filing the same case against the
respondents.

The SEC filed a Motion for Reconsideration, which the Court of Appeals denied. Hence, the present petition.
ISSUES
Is there a need for Implementing Rules to supplant the ambiguity in the terminologies used in
RSA?
Nope, the law is clear.

 Ultimately, see discussion on these terminologies, in connection with INSIDER

TRADING.

IMPORTANT NOTE:

Before discussing the merits of this case, it should be noted that while this case was pending in
this Court, Republic Act No. 8799, otherwise known as the Securities Regulation Code, took
effect on 8 August 2000. Section 8 of Presidential Decree No. 902-A, as amended, which
created the PED, was already repealed as provided for in Section 76 of the Securities
Regulation Code:
  
Thus, under the new law, the PED has been abolished, and the Securities Regulation Code
has taken the place of the Revised Securities Act.

DISSCUSION
The petition is impressed with merit

Section 30 of the Revised Securities

 
Sec. 30. Insiders duty to disclose when trading.
a. It shall be unlawful for an insider to sell or buy a security of the issuer, if he knows a fact of special
significance with respect to the issuer or the security that is not generally available, unless
1. the insider proves that the fact is generally available or
2. if the other party to the transaction (or his agent) is identified,
 the insider proves that the other party knows it, or
 that other party in fact knows it from the insider or otherwise.

b. Insider means
1. the issuer,
2. a director or officer of, or a person controlling, controlled by, or under common control with,
the issuer,
3. a person whose relationship or former relationship to the issuer gives or gave him access to a
fact of special significance about the issuer or the security that is not generally available, or
4. a person who learns such a fact from any of the foregoing insiders as defined in this
subsection, with knowledge that the person from whom he learns the fact is such an insider.
 
c. A fact is of special significance if
1. in addition to being material it would be likely, on being made generally available, to affect
the market price of a security to a significant extent, or
2. a reasonable person would consider it especially important under the circumstances in
determining his course of action in the light of such factors as the degree of its specificity, the
extent of its difference from information generally available previously, and its nature and
reliability.
 
d. This section shall apply to an insider as defined in subsection (b) (3) hereof only to the extent that he
knows of a fact of special significance by virtue of his being an insider.
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:
1. 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
2. the inherent unfairness involved when a party takes advantage of such information
knowing it is unavailable to those with whom he is dealing.
 
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. 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.
 
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.  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.
 
 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.
 
 In the Matter of Investors Management Co., Inc.:
 
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.

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. A purchaser in good faith must also take
into account facts which put a reasonable man on his guard. 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. 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. 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.

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.
 MATERIALITY CONCEPT

In Basic v. Levinson, the U.S. Supreme Court cautioned against confining materiality to a
  rigid formula, stating thus:
 
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.
 
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. 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. 

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 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
 
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.
 
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 issuers securities and such changes
in his or her ownership thereof.  
 
BENEFICIAL OWNER
 
First, 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 corporations 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.

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.
 
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 non-public 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.
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.
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, public interest, and interests of law and order.
 
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 8 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 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.
 
 
OTHER NOTES
 The SEC retained the jurisdiction to investigate violations of the Revised Securities Act,
reenacted in the Securities Regulations Code, despite the abolition of the PED.
 
Section 53 of the Securities Regulations Code clearly provides that criminal complaints
for violations of rules and regulations enforced or administered by the SEC shall be
referred to the Department of Justice (DOJ) for preliminary investigation, while the SEC
nevertheless retains limited investigatory powers. Additionally, the SEC may still impose
the appropriate administrative sanctions under Section 54 of the aforementioned law.
 
 
IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This Court
hereby REVERSES the assailed Decision of the Court of Appeals promulgated on 20 August
1998 in CA-G.R. SP No. 37036 and LIFTS the permanent injunction issued pursuant
thereto. This Court further DECLARES that the investigation of the respondents for
violations of Sections 8, 30 and 36 of the Revised Securities Act may be undertaken by the
proper authorities in accordance with the Securities Regulations Code. No costs.
 
SO ORDERED.
 G.R. Nos. 106425 & 106431-32 July 21, 1995
SECURITIES AND EXCHANGE COMMISSION, petitioner, 
vs.
THE HONORABLE COURT OF APPEALS, CUALOPING SECURITIES
CORPORATION AND FIDELITY STOCK TRANSFERS, INC., respondents.

VITUG, J.:
The Securities and Exchange Commission ("SEC") has both regulatory and adjudicative
functions.
Under its regulatory responsibilities,
 the SEC may pass upon applications for, or may suspend or revoke (after due notice and
hearing), certificates of registration of corporations, partnerships and associations
(excluding cooperatives, homeowners' associations, and labor unions);
 compel legal and regulatory compliances;
 conduct inspections; and
 impose fines or other penalties for violations of the Revised Securities Act, as well as
implementing rules and directives of the SEC, such as may be warranted.

Relative to its adjudicative authority, the SEC has original and exclusive jurisdiction to hear
and decide controversies and cases involving —
a. Intra-corporate and partnership relations between or among the corporation, officers and
stockholders and partners, including their elections or appointments;
b. State and corporate affairs in relation to the legal existence of corporations, partnerships
and associations or to their franchises; and
c. Investors and corporate affairs, particularly in respect of devices and schemes, such as
fraudulent practices, employed by directors, officers, business associates, and/or other
stockholders, partners, or members of registered firms; as well as
d. Petitions for suspension of payments filed by corporations, partnerships or associations
possessing sufficient property to cover all their debts but which foresee the impossibility
of meeting them when they respectively fall due, or possessing insufficient assets to
cover their liabilities and said entities are upon petition or motu proprio, placed under the
management of a Rehabilitation Receiver or Management Committee.
FACTS
The petition before this Court relates to the exercise by the SEC of its powers in a case involving a
stockbroker (CUALOPING) and a stock transfer agency (FIDELITY).
For the factual backdrop, we adopt the findings of the Court of Appeals; we quote:
Cualoping Securities Corporation (CUALOPING for brevity) is a stockbroker, Fidelity Stock
Transfer, Inc. (FIDELITY for brevity), on the other hand, is the stock transfer agent of Philex Mining
Corporation (PHILEX for brevity).

On or about the first half of 1988, certificates of stock of PHILEX representing 1,400,000 shares were
stolen from the premises of FIDELITY. These stock certificates consisting of stock dividends of certain
PHILEX shareholders had been returned to FIDELITY for lack of forwarding addresses of the
shareholders concerned.

Later, the stolen stock certificates ended in the hands of a certain Agustin Lopez, a  messenger of
New World Security Inc., an entirely different stock brokerage firm. In the first half of 1989, Agustin
Lopez brought the stolen stock certificates to CUALOPING for trading and sale with the stock
exchange. When the said stocks were brought to CUALOPING, all of the said stock certificates
bore the "apparent" indorsement (signature) in blank of the owners (the stockholders to whom the
stocks were issued by PHILEX) thereof. At the side of these indorsements (signatures), the words
"Signature Verified" apparently of FIDELITY were stamped on each and every certificate. Further,
on the words "Signature Verified" showed the usual initials of the officers of FIDELITY.

Upon receipt of the said certificates from Agustin Lopez, CUALOPING stamped each and every
certificate with the words "Indorsement Guaranteed," and thereafter traded the same with the stock
exchange.

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

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

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

On 11 August 1988, FIDELITY sought an opinion on the matter from SEC.

On 26 October 1988, the Brokers and Exchange Department ("BED") of the SEC ordered
FIDELITY to replace all the subject shares and to cause the transfer thereof in the names of the
buyers. The SEC also made Cualoping Securities, INC., pay a fine of Php 50,000.00 for having violated
Section 29 a(3) of the Revised Securities Act.

Both CUALOPING and FIDELITY appealed the SEC Ruling to the Commission En Banc. The
Commission En Banc found both Cualoping ang Fidelty guilty of negligence, hence they were
ordered to "jointly replace the subject shares and for FIDELITY to cause the transfer thereof in
the names of the buyers." The CA, on appeal, reversed the SEC Ruling.

The Commission has brought the case to this Court in the instant petition for review on certiorari,
contending that the appellate court erred in setting aside the decision of the SEC.
ISSUE
 Does the SEC have the authority to order that the replacement of the shares of stock
an cause their transfer in the names of the buyers?

No. This order may be binding only when the SEC exercises its adjudicatory
powers. The SEC may only exercise such power if the proper parties brought the
case before it. FIDELITY is not the proper party to invoke SEC’s adjudicatory
powers as FIDELITY merely sought an Opinion from SEC.

 Does the SEC have authority to impose a fine upon FIDELITY?

Yes. To fine a fraudulent or deceitful transaction is well within the regulatory
function of the SEC in accordance with its function to protect the public from
fraudulent schemes by regulating the trading business.

(See also portion on what constitutes Bad Faith.)

RULING
I
The portion of the SEC’s decision which orders the two stock transfer agencies to "jointly
replace the subject shares and for FIDELITY to cause the transfer thereof in the names of the
buyers" clearly calls for an exercise of SEC's adjudicative jurisdiction. This case, it might be
recalled, has started only on the basis of a request by FIDELITY for an opinion from the SEC.
The stockholders who have been deprived of their certificates of stock or the persons to
whom the forged certificates have ultimately been transferred by the supposed indorsee thereof
are yet to initiate, if minded, an appropriate adversarial action. Neither have they been
made parties to the proceedings now at bench. A justiciable controversy such as can
occasion an exercise of SEC's exclusive jurisdiction would require an assertion of a right by
a proper party against another who, in turn, contests it. It is one instituted by and against
parties having interest in the subject matter appropriate for judicial determination predicated on a
given state of facts. That controversy must be raised by the party entitled to maintain the action.
He is the person to whom the right to seek judicial redress or relief belongs which can be
enforced against the party correspondingly charged with having been responsible for, or to have
given rise to, the cause of action. A person or entity tasked with the power to adjudicate stands
neutral and impartial and acts on the basis of the admissible representations of the contending
parties.

In the case at bench, the proper parties that can bring the controversy and can cause an
exercise by the SEC of its original and exclusive jurisdiction would be all or any of those
who are adversely affected by the transfer of the pilfered certificates of stock. Any
peremptory judgment by the SEC, without such proceedings having first been initiated,
would be precipitate. We thus see nothing erroneous in the decision of the Court of
Appeals, albeit not for the reason given by it, to set aside the SEC's adjudication "without
prejudice" to the right of persons injured to file the necessary proceedings for appropriate
relief.
 II
The other issue, i.e., the question on the legal propriety of the imposition by the SEC of a
P50,000 fine on each of FIDELITY and CUALOPING, is an entirely different matter. This time,
it is the regulatory power of the SEC which is involved. When, on appeal to the Court of
Appeals, the latter set aside the fines imposed by the SEC, the latter, in its instant petition, can no
longer be deemed just a nominal party but a real party in interest sufficient to pursue an appeal to
this Court.

The Revised Securities Act (Batas Pambansa Blg. 178) is designed, in main, to protect public
investors from fraudulent schemes by regulating the sale and disposition of securities, creating,
for this purpose, a Securities and Exchange Commission to ensure proper compliance with the
law.

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

xxx xxx xxx

(3) To engage in any act, transaction practice, or course of business which

operates or would operate as a fraud or deceit upon any person.
Sec. 46. Administrative sanctions. — If, after proper notice and hearing, the
Commission finds that there is a violation of this Act, its rules, or its orders or that any
registrant has, in a registration statement and its supporting papers and other reports
required by law or rules to be filed with the Commission, made any untrue statement of a
material fact, or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or refused to permit any
unlawful examination into its affairs, it shall, in its discretion, impose any or all of the
following sanctions:

(a) Suspension, or revocation of its certificate of registration and permit to offer

securities;

(b) A fine of no less than two hundred (P200.00) pesos nor more than fifty
thousand (P50,000.00) pesos plus not more than five hundred (P500.00) pesos for
each day of continuing violation. (Emphasis supplied.)

There is, to our mind, no question that both FIDELITY and CUALOPING have been
guilty of negligence in the conduct of their affairs involving the questioned certificates of
stock. To constitute, however, a violation of the Revised Securities Act that can warrant an
imposition of a fine under Section 29(3), in relation to Section 46 of the Act, fraud or deceit,
not mere negligence, on the part of the offender must be established. Fraud here is akin to
bad faith which implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity; it is unlike that of the negative idea of negligence in that
fraud or bad faith contemplates a state of mind affirmatively operating with furtive objectives.

Given the factual circumstances found by the appellate court, neither FIDELITY nor
CUALOPING,  albeit  indeed remiss in the observance of due diligence, can be held liable
under the above provisions of the Revised Securities Act. We do not imply, however, that the
negligence committed by private respondents would not at all be actionable; upon the other hand,
as we have earlier intimated, such an action belongs not to the SEC but to those whose rights
have been injured.
 
THIRD DIVISION
 
 
CEMCO HOLDINGS, INC.,   G.R. No. 171815
Petitioner,  
  Present:
  YNARES-SANTIAGO, J.,
  Chairperson,
-  versus - AUSTRIA-MARTINEZ,
  CHICO-NAZARIO, and
  NACHURA, JJ.
   
NATIONAL LIFE INSURANCE Promulgated:
COMPANY OF THE PHILIPPINES,  
INC., August 7, 2007
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
 
 
DECISION
 
 
CHICO-NAZARIO, J.:
 
 
This Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set aside the
24 October 2005 Decision[1] and the 6 March 2006 Resolution[2] of the Court of Appeals in CA-
G.R. SP No. 88758 which affirmed the judgment[3] dated 14 February 2005 of the Securities and
Exchange Commission (SEC) finding that the acquisition of petitioner Cemco Holdings, Inc.
(Cemco) of the shares of stock of Bacnotan Consolidated Industries, Inc. (BCI) and Atlas
Cement Corporation (ACC) in Union Cement Holdings Corporation (UCHC) was covered by the
Mandatory Offer Rule under Section 19 of Republic Act No. 8799, otherwise known as the
Securities Regulation Code.
 
The Facts
 
Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders
UCHC, a non-listed company, with shares amounting to 60.51%, and petitioner Cemco with
17.03%. Majority of UCHCs stocks were owned by BCI with 21.31% and ACC with
29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.
 
In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that
it and its subsidiary ACC had passed resolutions to sell to Cemco BCIsstocks in UCHC
equivalent to 21.31% and ACCs stocks in UCHC equivalent to 29.69%.
 
In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a result of
petitioner Cemcos acquisition of BCI and ACCs shares in UCHC, petitioners total beneficial
ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of
the shares of UCC, to wit[4]:
 
 Particulars Percentage
Existing shares of Cemco in UCHC 9%
Acquisition by Cemco of BCIs and ACCs shares in 51%
UCHC
Total stocks of Cemco in UCHC 60%
Percentage of UCHC ownership in UCC 60%
Indirect ownership of Cemco in UCC 36%
Direct ownership of Cemco in UCC 17%
Total ownership of Cemco in UCC 53%
 
 
As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, inquired
as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities
Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC.
 
In a letter dated 16 July 2004, Director Justina Callangan of the SECs Corporate Finance
Department responded to the query of the PSE that while it was the stance of the department that
the tender offer rule was not applicable, the matter must still have to be confirmed by the SEC en
banc.
Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan confirmed that the
SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule.
 
On 28 July 2004, feeling aggrieved by the transaction, respondent National Life Insurance
Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter
to Cemco demanding the latter to comply with the rule on mandatory tender offer. Cemco,
however, refused.
 
On 5 August 2004, a Share Purchase Agreement was executed by ACC and BCI, as sellers,
and Cemco, as buyer.
 
On 12 August 2004, the transaction was consummated and closed.
 
On 19 August 2004, respondent National Life Insurance Company of the Philippines, Inc. filed a
complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the
purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied
to its UCC shares. Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC, which
were then required by the SEC to file their respective comment on the complaint. In their
comments, they were uniform in arguing that the tender offer rule applied only to a direct
acquisition of the shares of the listed company and did not extend to an indirect acquisition
arising from the purchase of the shares of a holding company of the listed firm.
 
In a Decision dated 14 February 2005, the SEC ruled in favor of the respondent by reversing and
setting aside its 27 July 2004 Resolution and directed petitioner Cemco to make a tender offer for
UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in
accordance with Section 9(E), Rule 19 of the Securities Regulation Code.
 
Petitioner filed a petition with the Court of Appeals challenging the SECs jurisdiction to take
cognizance of respondents complaint and its authority to require Cemco to make a tender offer
for UCC shares, and arguing that the tender offer rule does not apply, or that the SECs re-
interpretation of the rule could not be made to retroactively apply to Cemcos purchase of UCHC
shares.
 
The Court of Appeals rendered a decision affirming the ruling of the SEC. It ruled that the SEC
has jurisdiction to render the questioned decision and, in any event, Cemcowas barred
by estoppel from questioning the SECs jurisdiction. It, likewise, held that the tender offer
requirement under the Securities Regulation Code and its Implementing Rules applies
to Cemcos purchase of UCHC stocks. The decretal portion of the said Decision reads:
 
IN VIEW OF THE FOREGOING, the assailed decision of the SEC is AFFIRMED, and the
preliminary injunction issued by the Court LIFTED.[5]
 
Cemco filed a motion for reconsideration which was denied by the Court of Appeals.
 
Hence, the instant petition.
 
In its memorandum, petitioner Cemco raises the following issues:
 
I.
ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER NATIONAL LIFES
COMPLAINT AND THAT THE SECS RE-INTERPRETATION OF THE TENDER OFFER
RULE IS CORRECT, WHETHER OR NOT THAT REINTERPRETATION CAN BE
APPLIED RETROACTIVELY TO CEMCOS PREJUDICE.
 
II.
WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE DISPUTE
BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT REQUIRING CEMCO TO
MAKE A TENDER OFFER FOR UCC SHARES.
 
III.
 
WHETHER OR NOT CEMCOS PURCHASE OF UCHC SHARES IS SUBJECT TO THE
TENDER OFFER REQUIREMENT.
 
IV.
WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA DECISION, IS AN
INCOMPLETE JUDGMENT WHICH PRODUCED NO EFFECT.[6]
 
 
Simply stated, the following are the issues:
 
1.                  Whether or not the SEC has jurisdiction over respondents complaint and to
require Cemco to make a tender offer for respondents UCC shares.
 
2.                  Whether or not the rule on mandatory tender offer applies to the indirect acquisition
of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a
publicly-listed company, through its purchase of the shares in UCHC, a non-listed company.
 
3.                  Whether or not the questioned ruling of the SEC can be applied retroactively
to Cemcos transaction which was consummated under the authority of the SECs prior resolution.
 
 
On the first issue, petitioner Cemco contends that while the SEC can take cognizance of
respondents complaint on the alleged violation by petitioner Cemco of the mandatory tender
offer requirement under Section 19 of Republic Act No. 8799, the same statute does not vest the
SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties since,
under the same statute, the SECs authority is purely administrative. Having been vested with
purely administrative authority, the SEC can only impose administrative sanctions such as the
imposition of administrative fines, the suspension or revocation of registrations with the SEC,
and the like. Petitioner stresses that there is nothing in the statute which authorizes the SEC to
issue orders granting affirmative reliefs. Since the SECs order commanding it to make a tender
offer is an affirmative relief fixing the respective rights and obligations of parties, such order is
void.
 
Petitioner further contends that in the absence of any specific grant of jurisdiction by Congress,
the SEC cannot, by mere administrative regulation, confer on itself that jurisdiction.
 
Petitioners stance fails to persuade.
 
In taking cognizance of respondents complaint against petitioner and eventually rendering a
judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to Rule
19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code,
to wit:
13. Violation
 
If there shall be violation of this Rule by pursuing a purchase of equity shares of a public
company at threshold amounts without the required tender offer, the Commission, upon
complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be
without prejudice to the imposition of other sanctions under the Code.
 
 
The foregoing rule emanates from the SECs power and authority to regulate, investigate or
supervise the activities of persons to ensure compliance with the Securities Regulation Code,
more specifically the provision on mandatory tender offer under Section 19 thereof.[7]
 
Another provision of the statute, which provides the basis of Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Regulation Code, is Section 5.1(n), viz:
 
[T]he Commission shall have, among others, the following powers and functions:
 
x x x x
 
(n) Exercise such other powers as may be provided by law as well as those which may be
implied from, or which are necessary or incidental to the carrying out of, the express powers
granted the Commission to achieve the objectives and purposes of these laws.
 
 
The foregoing provision bestows upon the SEC the general adjudicative power which is implied
from the express powers of the Commission or which is incidental to, or reasonably necessary to
carry out, the performance of the administrative duties entrusted to it. As a regulatory agency, it
has the incidental power to conduct hearings and render decisions fixing the rights and
obligations of the parties. In fact, to deprive the SEC of this power would render the agency
inutile, because it would become powerless to regulate and implement the law. As correctly held
by the Court of Appeals:
 
We are nonetheless convinced that the SEC has the competence to render the particular decision
it made in this case. A definite inference may be drawn from the provisions of the SRC that the
SEC has the authority not only to investigate complaints of violations of the tender offer rule, but
to adjudicate certain rights and obligations of the contending parties and grant
appropriate reliefs in the exercise of its regulatory functions under the SRC. Section 5.1 of the
SRC allows a general grant of adjudicative powers to the SEC which may be implied from or are
necessary or incidental to the carrying out of its express powers to achieve the objectives and
purposes of the SRC. We must bear in mind in interpreting the powers and functions of the SEC
that the law has made the SEC primarily a regulatory body with the incidental power to conduct
administrative hearings and make decisions. A regulatory body like the SEC may conduct
hearings in the exercise of its regulatory powers, and if the case involves violations or conflicts
in connection with the performance of its regulatory functions, it will have the duty and authority
to resolve the dispute for the best interests of the public.[8]
 
 
For sure, the SEC has the authority to promulgate rules and regulations, subject to the limitation
that the same are consistent with the declared policy of the Code. Among them is the protection
of the investors and the minimization, if not total elimination, of fraudulent and manipulative
devises. Thus, Subsection 5.1(g) of the law provides:
 
Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide
guidance on and supervise compliance with such rules, regulations and orders.
 
 
Also, Section 72 of the Securities Regulation Code reads:
 
72.1. x x x To effect the provisions and purposes of this Code, the Commission may issue,
amend, and rescind such rules and regulations and orders necessary or appropriate, x x x.
 
72.2. The Commission shall promulgate rules and regulations providing for reporting, disclosure
and the prevention of fraudulent, deceptive or manipulative practices in connection with the
purchase by an issuer, by tender offer or otherwise, of and equity security of a class issued by it
that satisfies the requirements of Subsection 17.2. Such rules and regulations may require such
issuer to provide holders of equity securities of such dates with such information relating to the
reasons for such purchase, the source of funds, the number of shares to be purchased, the price to
be paid for such securities, the method of purchase and such additional information as the
Commission deems necessary or appropriate in the public interest or for the protection of
investors, or which the Commission deems to be material to a determination by holders whether
such security should be sold.
 
 
The power conferred upon the SEC to promulgate rules and regulations is a legislative
recognition of the complexity and the constantly-fluctuating nature of the market and the
impossibility of foreseeing all the possible contingencies that cannot be addressed in advance. As
enunciated in Victorias Milling Co., Inc. v. Social Security Commission[9]:
 
Rules and regulations when promulgated in pursuance of the procedure or authority conferred
upon the administrative agency by law, partake of the nature of a statute, and compliance
therewith may be enforced by a penal sanction provided in the law. This is so because statutes
are usually couched in general terms, after expressing the policy, purposes, objectives, remedies
and sanctions intended by the legislature. The details and the manner of carrying out the law are
often times left to the administrative agency entrusted with its enforcement. In this sense, it has
been said that rules and regulations are the product of a delegated power to create new or
additional legal provisions that have the effect of law.
 
 
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed
out that petitioner had participated in all the proceedings before the SEC and had prayed for
affirmative relief. In fact, petitioner defended the jurisdiction of the SEC in its Comment
dated 15 September 2004, filed with the SEC wherein it asserted:
 
This Honorable Commission is a highly specialized body created for the purpose of
administering, overseeing, and managing the corporate industry, share investment and securities
market in the Philippines. By the very nature of its functions, it dedicated to the study and
administration of the corporate and securities laws and has necessarily developed an expertise on
the subject. Based on said functions, the Honorable Commission is necessarily tasked to issue
rulings with respect to matters involving corporate matters and share acquisitions. Verily when
this Honorable Commission rendered the Ruling that the acquisition of Cemco Holdings of the
majority shares of Union Cement Holdings, Inc., a substantial stockholder of a listed company,
Union Cement Corporation, is not covered by the mandatory tender offer requirement of the
SRC Rule 19, it was well within its powers and expertise to do so. Such ruling shall be respected,
unless there has been an abuse or improvident exercise of authority.[10]
 
 
Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to
it, such as the 27 July 2004 Resolution, where the SEC opined that the Cemco transaction was
not covered by the mandatory tender offer rule. It was only when the case was before the Court
of Appeals and after the SEC rendered an unfavorable judgment against it that petitioner
challenged the SECs competence. As articulated in Ceroferr Realty Corporation v. Court of
Appeals[11]:
 
While the lack of jurisdiction of a court may be raised at any stage of an action, nevertheless, the
party raising such question may be estopped if he has actively taken part in the very proceedings
which he questions and he only objects to the courts jurisdiction because the judgment or the
order subsequently rendered is adverse to him.
 
 
On the second issue, 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.[15]
 
Under Section 19 of Republic Act No. 8799, it is stated:
 
Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire
at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any
class of any equity security of a corporation with assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred
(100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a
period of twelve (12) months shall make a tender offer to stockholders by filing with the
Commission a declaration to that effect; and furnish the issuer, a statement containing such of the
information required in Section 17 of this Code as the Commission may prescribe. Such person
or group of persons shall publish all requests or invitations for tender, or materials making a
tender offer or requesting or inviting letters of such a security. Copies of any additional material
soliciting or requesting such tender offers subsequent to the initial solicitation or request shall
contain such information as the Commission may prescribe, and shall be filed with the
Commission and sent to the issuer not later than the time copies of such materials are first
published or sent or given to security holders.
 
 
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.[17]
 
The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of
UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory
tender offer rule.
This interpretation given by the SEC and the Court of Appeals must be sustained.
 
The rule in this jurisdiction is that the construction given to a statute by an administrative agency
charged with the interpretation and application of that statute is entitled to great weight by the
courts, unless such construction is clearly shown to be in sharp contrast with the governing law
or statute.[18] The rationale for this rule relates not only to the emergence of the multifarious
needs of a modern or modernizing society and the establishment of diverse administrative
agencies for addressing and satisfying those needs; it also relates to accumulation of experience
and growth of specialized capabilities by the administrative agency charged with implementing a
particular statute.[19]
 
The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory
tender offer rule covers not only direct acquisition but also indirect acquisition or any type of
acquisition. This is clear from the discussions of the Bicameral Conference Committee on the
Securities Act of 2000, on 17 July 2000.
 
SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody controls 67% of the Company. Of
course, he will pay a premium for the first 67%. Control yan,
eh. Eh, kawawa yung mgamaiiwan, ang 33% because the value of the stock market could go
down, could go down after that, because there will (p. 41) be no more
market. Wala nang gustong bumenta. Wala nang I
mean maraming gustong bumenta, walang gustong bumili kung hindi yung majority owner. And
they will not buy. They already have 67%. They already have control. And this protects the
minority.And we have had a case in Cebu wherein Ayala A who already owned 40% of Ayala B
made an offer for another 40% of Ayala B without offering the
20%. Kawawa naman yung nakahawakngayon ng 20%. Ang baba ng share sa market. But we did
not have a law protecting them at that time.
 
CHAIRMAN ROCO. So what is it that you want to achieve?
SEN. S. OSMEA. That if a certain group achieves a certain amount of ownership in a
corporation, yeah, he is obligated to buy anybody who wants to sell.
 
CHAIRMAN ROCO. Pro-rata lang. (p. 42).
 
x x x x
 
REP. TEODORO. As long as it reaches 30, ayan na. Any type of acquisition just as long as it
will result in 30 (p.50) reaches 30, ayan na. Any type of acquisition just as long as it will result in
30, general tender, pro-rata.[20] (Emphasis supplied.)
 
 
Petitioner counters that the legislators reference to any type of acquisition during the
deliberations on the Securities Regulation Code does not indicate that congress meant to include
the indirect acquisition of shares of a public corporation to be covered by the tender offer rule.
Petitioner also avers that it did not directly acquire the shares in UCC and the incidental benefit
of having acquired the control of the said public company must not be taken against it.
 
These arguments are not convincing. 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. As appropriately held by the Court of
Appeals:
 
The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance,
as a result of the transaction, it became an indirect owner of UCC. We are constrained, however,
to construe ownership acquisition to mean both direct and indirect. What is decisive is the
determination of the power of control. The legislative intent behind the tender offer rule makes
clear that the type of activity intended to be regulated is the acquisition of control of the listed
company through the purchase of shares. Control may [be] effected through a direct and indirect
acquisition of stock, and when this takes place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the shareholder of the listed company the opportunity
to decide whether or not to sell in connection with a transfer of control. x x x.[21]
 
 
As to the third issue, petitioner stresses that the ruling on mandatory tender offer rule by the SEC
and the Court of Appeals should not have retroactive effect or be made to apply to its purchase of
the UCHC shares as it relied in good faith on the letter dated 27 July 2004 of the SEC which
opined that the proposed acquisition of the UCHC shares was not covered by the mandatory
offer rule.
 
The argument is not persuasive.
 
The action of the SEC on the PSE request for opinion on the Cemco transaction cannot be
construed as passing merits or giving approval to the questioned transaction. As aptly pointed out
by the respondent, the letter dated 27 July 2004 of the SEC was nothing but an approval of the
draft letter prepared by Director Callanga. There was no public hearing where interested parties
could have been heard. Hence, it was not issued upon a definite and concrete controversy
affecting the legal relations of parties thereby making it a judgment conclusive on all the
parties. Said letter was merely advisory. Jurisprudence has it that an advisory opinion of an
agency may be stricken down if it deviates from the provision of the statute.[22] Since the letter
dated 27 July 2004 runs counter to the Securities Regulation Code, the same may be disregarded
as what the SEC has done in its decision dated 14 February 2005.
 
Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling, the same cannot be
utilized to determine the rights of the parties. What is to be applied in the present case is the
subsequent ruling of the SEC dated 14 February 2005 abandoning the opinion embodied in the
letter dated 27 July 2004. In Serrano v. National Labor Relations Commission,[23] an argument
was raised similar to the case under consideration. Private respondent therein argued that the new
doctrine pronounced by the Court should only be applied prospectively. Said postulation was
ignored by the Court when it ruled:
 
While a judicial interpretation becomes a part of the law as of the date that law was originally
passed, this is subject to the qualification that when a doctrine of this Court is overruled and a
different view is adopted, and more so when there is a reversal thereof, the new doctrine should
be applied prospectively and should not apply to parties who relied on the old doctrine and acted
in good faith. To hold otherwise would be to deprive the law of its quality of fairness and justice
then, if there is no recognition of what had transpired prior to such adjudication.
 
It is apparent that private respondent misconceived the import of the ruling. The decision in
Columbia Pictures does not mean that if a new rule is laid down in a case, it should not be
applied in that case but that said rule should apply prospectively to cases arising afterwards.
Private respondents view of the principle of prospective application of new judicial doctrines
would turn the judicial function into a mere academic exercise with the result that the doctrine
laid down would be no more than a dictum and would deprive the holding in the case of any
force.
 
Indeed, when the Court formulated the Wenphil doctrine, which we reversed in this case, the
Court did not defer application of the rule laid down imposing a fine on the employer for failure
to give notice in a case of dismissal for cause. To the contrary, the new rule was applied right
then and there. x x x.
 
 
Lastly, petitioner alleges that the decision of the SEC dated 14 February 2005 is incomplete and
produces no effect.
 
This contention is baseless.
 
The decretal portion of the SEC decision states:
 
In view of the foregoing, the letter of the Commission, signed by Director Justina F. Callangan,
dated July 27, 2004, addressed to the Philippine Stock Exchange is hereby REVERSED and SET
ASIDE. Respondent Cemco is hereby directed to make a tender offer for UCC shares to
complainant and other holders of UCC shares similar to the class held by respondent UCHC, at
the highest price it paid for the beneficial ownership in respondent UCC, strictly in accordance
with SRC Rule 19, Section 9(E).[24]
 
 
A reading of the above ruling of the SEC reveals that the same is complete. It orders the conduct
of a mandatory tender offer pursuant to the procedure provided for under Rule 19(E) of the
Amended Implementing Rules and Regulations of the Securities Regulation Code for the highest
price paid for the beneficial ownership of UCC shares. The price, on the basis of the SEC
decision, is determinable. Moreover, the implementing rules and regulations of the Code are
sufficient to inform and guide the parties on how to proceed with the mandatory tender offer.
 
WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24 October
2005 and 6 March 2006, respectively, affirming the Decision dated 14 February 2005 of the
Securities and Exchange Commission En Banc, are hereby AFFIRMED. Costs against petitioner.
 
SO ORDERED.
 
FIRST DIVISION
 
 
POWER HOMES UNLIMITED G.R. No. 164182
CORPORATION,
Petitioner,
Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus - CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.
 
SECURITIES AND EXCHANGE
COMMISSION AND NOEL Promulgated:
MANERO,
Respondents. February 26, 2008
 
x-------------------------------------------------x
 
DECISION
 
PUNO, C.J.:
 
This petition for review seeks the reversal and setting aside of the July 31, 2003 Decision[1] of the
Court of Appeals that affirmed the January 26, 2001 Cease and Desist Order (CDO)[2] of public
respondent Securities and Exchange Commission (SEC) enjoining petitioner Power Homes
Unlimited Corporations (petitioner) officers, directors, agents, representatives and any and all
persons claiming and acting under their authority, from further engaging in the sale, offer for sale
or distribution of securities; and its June 18, 2004 Resolution[3] which denied petitioners motion
for reconsideration.
The facts: Petitioner is a domestic corporation duly registered with public respondent SEC
on October 13, 2000 under SEC Reg. No. A200016113. Its primary purpose is:
 
To engage in the transaction of promoting, acquiring, managing, leasing, obtaining options on,
development, and improvement of real estate properties for subdivision and allied purposes, and
in the purchase, sale and/or exchange of said subdivision and properties through network
marketing.[4]
 
On October 27, 2000, respondent Noel Manero requested public respondent SEC to investigate
petitioners business. He claimed that he attended a seminar conducted by petitioner where the
latter claimed to sell properties that were inexistent and without any brokers license.
 
On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public respondent SEC
whether petitioners business involves legitimate network marketing.
 
On the bases of the letters of respondent Manero and Munsayac, public respondent SEC held a
conference on December 13, 2000 that was attended by petitioners incorporators John Lim, Paul
Nicolas and Leonito Nicolas. The attendees were requested to submit copies of petitioners
marketing scheme and list of its members with addresses.
The following day or on December 14, 2000, petitioner submitted to public respondent SEC
copies of its marketing course module and letters of accreditation/authority or confirmation from
Crown Asia, Fil-Estate Network and Pioneer 29 Realty Corporation.
 
On January 26, 2001, public respondent SEC visited the business premises of petitioner wherein
it gathered documents such as certificates of accreditation to several real estate companies, list of
members with web sites, sample of member mail box, webpages of two (2) members, and lists of
Business Center Owners who are qualified to acquire real estate properties and materials on
computer tutorials.
On the same day, after finding petitioner to be engaged in the sale or offer for sale or distribution
of investment contracts, which are considered securities under Sec. 3.1 (b) of Republic Act
(R.A.) No. 8799 (The Securities Regulation Code),[5] but failed to register them in violation of
Sec. 8.1 of the same Act,[6] public respondent SEC issued a CDO that reads:
 
WHEREFORE, pursuant to the authority vested in the Commission, POWER HOMES
UNLIMITED, CORP., its officers, directors, agents, representatives and any and all persons
claiming and acting under their authority, are hereby ordered to immediately CEASE AND
DESIST from further engaging in the sale, offer or distribution of the securities upon the receipt
of this order.
 
In accordance with the provisions of Section 64.3 of Republic Act No. 8799, otherwise known as
the Securities Regulation Code, the parties subject of this Cease and Desist Order may file a
request for the lifting thereof within five (5) days from receipt.[7]
 
On February 5, 2001, petitioner moved for the lifting of the CDO, which public respondent SEC
denied for lack of merit on February 22, 2001.
 
Aggrieved, petitioner went to the Court of Appeals imputing grave abuse of discretion
amounting to lack or excess of jurisdiction on public respondent SEC for issuing the order. It
also applied for a temporary restraining order, which the appellate court granted.
On May 23, 2001, the Court of Appeals consolidated petitioners case with CA-G.R. [SP] No.
62890 entitled Prosperity.Com, Incorporated v. Securities and Exchange Commission
(Compliance and Enforcement Department), Cristina T. De La Cruz, et al.
 
On June 19, 2001, petitioner filed in the Court of Appeals a Motion for the Issuance of a Writ of
Preliminary Injunction. On July 6, 2001, the motion was heard. On July 12, 2001, public
respondent SEC filed its opposition. On July 13, 2001, the appellate court granted petitioners
motion, thus:
Considering that the Temporary Restraining Order will expire tomorrow or on July 14, 2001, and
it appearing that this Court cannot resolve the petition immediately because of the issues
involved which require a further study on the matter, and considering further that with the
continuous implementation of the CDO by the SEC would eventually result to the sudden demise
of the petitioners business to their prejudice and an irreparable damage that may possibly arise,
we hereby resolve to grant the preliminary injunction.
 
WHEREFORE, let a writ of preliminary injunction be issued in favor of petitioner, after posting
a bond in the amount of P500,000.00 to answer whatever damages the respondents may suffer
should petitioner be adjudged not entitled to the injunctive relief herein granted.[8]
 
On August 8, 2001, public respondent SEC moved for reconsideration, which was not resolved
by the Court of Appeals.
 
On July 31, 2003, the Court of Appeals issued its Consolidated Decision. The disposition
pertinent to petitioner reads:[9]
 
WHEREFORE, x x x x the petition for certiorari and prohibition filed by the other petitioner
Powerhomes Unlimited Corporation is hereby DENIED for lack of merit and the questioned
Cease and Desist Order issued by public respondent against it is accordingly AFFIRMED IN
TOTO.
 
On June 18, 2004, the Court of Appeals denied petitioners motion for reconsideration;[10] hence,
this petition for review.
The issues for determination are: (1) whether public respondent SEC followed due process in the
issuance of the assailed CDO; and (2) whether petitioners business constitutes an investment
contract which should be registered with public respondent SEC before its sale or offer for sale
or distribution to the public.
 
On the first issue, Sec. 64 of R.A. No. 8799 provides:
Sec. 64. Cease and Desist Order.  64.1. The Commission, after proper investigation or
verification, motu proprio or upon verified complaint by any aggrieved party, may issue a cease
and desist order without the necessity of a prior hearing if in its judgment the act or practice,
unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or
irreparable injury or prejudice to the investing public.
 
We hold that petitioner was not denied due process. The records reveal that public respondent
SEC properly examined petitioners business operations when it (1) called into conference three
of petitioners incorporators, (2) requested information from the incorporators regarding the
nature of petitioners business operations, (3) asked them to submit documents pertinent thereto,
and (4) visited petitioners business premises and gathered information thereat. All these were
done before the CDO was issued by the public respondent SEC. Trite to state, a formal trial or
hearing is not necessary to comply with the requirements of due process. Its essence is simply
the opportunity to explain ones position. Public respondent SEC abundantly allowed petitioner to
prove its side.
 
The second issue is whether the business of petitioner involves an investment contract that is
considered security[11] and thus, must be registered prior to sale or offer for sale or distribution to
the public pursuant to Section 8.1 of R.A. No. 8799, viz:
 
Section 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered
for sale or distribution within the Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the securities, in such form and
with such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.
 
Public respondent SEC found the petitioner as a marketing company that promotes and facilitates
sales of real properties and other related products of real estate developers through effective
leverage marketing. It also described the conduct of petitioners business as follows:
 
The scheme of the [petitioner] corporation requires an investor to become a Business Center
Owner (BCO) who must fill-up and sign its application form. The Terms and Conditions printed
at the back of the application form indicate that the BCO shall mean an independent
representative of Power Homes, who is enrolled in the companys referral program and who will
ultimately purchase real property from any accredited real estate developers and as such he is
entitled to a referral bonus/commission. Paragraph 5 of the same indicates that there exists no
employer/employee relationship between the BCO and the Power Homes Unlimited, Corp.
 
The BCO is required to pay US$234 as his enrollment fee. His enrollment entitles him to recruit
two investors who should pay US$234 each and out of which amount he shall receive US$92. In
case the two referrals/enrollees would recruit a minimum of four (4) persons each recruiting two
(2) persons who become his/her own down lines, the BCO will receive a total amount of
US$147.20 after deducting the amount of US$36.80 as property fund from the gross amount of
US$184. After recruiting 128 persons in a period of eight (8) months for each Left and Right
business groups or a total of 256 enrollees whether directly referred by the BCO or through his
down lines, the BCO who receives a total amount of US$11,412.80 after deducting the amount
of US$363.20 as property fund from the gross amount of US$11,776, has now an accumulated
amount of US$2,700 constituting as his Property Fund placed in a Property Fund account with
the Chinabank. This accumulated amount of US$2,700 is used as partial/full down payment for
the real property chosen by the BCO from any of [petitioners] accredited real estate developers.
[12]

 
An investment contract is defined in the Amended Implementing Rules and Regulations of R.A.
No. 8799 as a contract, transaction or scheme (collectively contract) whereby a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of others.[13]
It behooves us to trace the history of the concept of an investment contract under R.A. No.
8799. Our definition of an investment contract traces its roots from the 1946 United States (US)
case of SEC v. W.J. Howey Co.[14] In this case, the US Supreme Court was confronted with the
issue of whether 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 laws[18] in
existence prior to the adoption of the Securities Act.[19] Thus, it ruled that the use of the catch-all
term investment contract indicated a congressional intent to cover a wide range of investment
transactions.[20] It established a test to determine whether a transaction falls within the scope of
an investment contract.[21] Known as 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.[23] Needless to state, any investment contract covered by the Howey
Test must be registered under the Securities Act, regardless of whether its issuer was engaged in
fraudulent practices.
After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al.[24] In this
case, the 9th Circuit of the US Court of Appeals ruled that the element that profits must come
solely from the efforts of others should not be given a strict interpretation. It held that a literal
reading of the requirement solely would lead to unrealistic results. It reasoned out that its flexible
reading is in accord with the statutory policy of affording broad protection to the public. Our
R.A. No. 8799 appears to follow this flexible concept for it defines an investment contract as a
contract, transaction or scheme (collectively contract) whereby a
person invests his money in a common enterprise and is led to expect profits not solely but
primarily from the efforts of others. Thus, to be a security subject to regulation by the SEC, an
investment contract in our jurisdiction must be proved to be: (1) an investment of money, (2) in a
common enterprise, (3) with expectation of profits, (4) primarily from efforts of others.
 
Prescinding from these premises, we affirm the ruling of the public respondent SEC and the
Court of Appeals that the petitioner was engaged in the sale or distribution of an investment
contract. Interestingly, the facts of SEC v. Turner[25] are similar to the case at bar. In Turner, the
SEC brought a suit to enjoin the violation of federal securities laws by a company offering to sell
to the public contracts characterized as self-improvement courses. On appeal from a grant of
preliminary injunction, the US Court of Appeals of the 9th Circuit held that self-improvement
contracts which primarily offered the buyer the opportunity of earning commissions on the sale
of contracts to others were investment contracts and thus were securities within the meaning of
the federal securities laws. This is regardless of the fact that buyers, in addition to investing
money needed to purchase the contract, were obliged to contribute their own efforts in finding
prospects and bringing them to sales meetings. The appellate court held:
 
It is apparent from the record that what is sold is not of the usual business motivation type of
courses. Rather, the purchaser is really buying the possibility of deriving money from the sale of
the plans by Dare to individuals whom the purchaser has brought to Dare. The promotional
aspects of the plan, such as seminars, films, and records, are aimed at interesting others in the
Plans. Their value for any other purpose is, to put it mildly, minimal.
 
Once an individual has purchased a Plan, he turns his efforts toward bringing others into the
organization, for which he will receive a part of what they pay. His task is to bring prospective
purchasers to Adventure Meetings.
The business scheme of petitioner in the case at bar is essentially similar. An investor enrolls in
petitioners program by paying US$234. This entitles him to recruit two (2) investors who pay
US$234 each and out of which amount he receives US$92. A minimum recruitment of four (4)
investors by these two (2) recruits, who then recruit at least two (2) each, entitles the principal
investor to US$184 and the pyramid goes on.
 
We reject petitioners claim that the payment of US$234 is for the seminars on leverage
marketing and not for any product. Clearly, the trainings or seminars are merely designed to
enhance petitioners business of teaching its investors the know-how of its multi-level marketing
business. An investor enrolls under the scheme of petitioner to be entitled to recruit other
investors and to receive commissions from the investments of those directly recruited by
him. Under the scheme, the accumulated amount received by the investor comes primarily from
the efforts of his recruits.
 
We therefore rule that the business operation or the scheme of petitioner constitutes an
investment contract that is a security under R.A. No. 8799. Thus, it must be registered with
public respondent SEC before its sale or offer for sale or distribution to the public. As petitioner
failed to register the same, its offering to the public was rightfully enjoined by public respondent
SEC. The CDO was proper even without a finding of fraud. As an investment contract that is
security under R.A. No. 8799, it must be registered with public respondent SEC, otherwise the
SEC cannot protect the investing public from fraudulent securities. The strict regulation of
securities is founded on the premise that the capital markets depend on the investing publics
level of confidence in the system.
 
IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003 Decision of the Court of
Appeals, affirming the January 26, 2001 Cease and Desist Order issued by public respondent
Securities and Exchange Commission against petitioner Power Homes Unlimited Corporation,
and its June 18, 2004 Resolution denying petitioners Motion for Reconsideration are
AFFIRMED. No costs.
 
SO ORDERED.
G.R. No. 138949            June 6, 2001
UNION BANK OF THE PHILIPPINES, petitioner, 
vs.
SECURITY AND EXCHANGE COMMISSION, respondent.
PANGANIBAN, J.:
The mere fact that petitioner, in regard to its banking functions, is already subject to the
supervision of the Bangko Sentral ng Pilipinas does not exempt the former from reasonable
disclosure regulations issued by the Securities and Exchange Commission (SEC). These
regulations -- imposed on petitioner as a banking institution listed in the stock market -- are
meant to assure full, fair and accurate information for the protection of investors. Imposing such
regulations is a function within the jurisdiction of the SEC.1âwphi1.nêt
The Case
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
challenging the November 16, 1998 Decision2 of the Court of Appeals (CA) in CA-GR SP No.
48002. The dispositive portion of the assailed Decision reads as follows:
"GIVEN THE FOREGOING, the assailed Orders dated November 5, 1997 and April14,1998 are
hereby AFFIRMED, with the MODIFICATION that petitioner is assessed a single fine of FIFTY
THOUSAND (P50,OOO.00) PESOS plus FIVE HUNDRED (P500.00) PESOS beginning July
21, 1997, for each day of continuing violation."3
Likewise assailed is the May 31, 1999: A Resolution,4 which denied petitioner's A Motion for
Reconsideration.
The Facts
The court a quo summarized the antecedents of the case as follows:
"Records show that on April 4, 1997, petitioner, through its General Counsel and Corporate
Secretary, sought the opinion of Chairman Perfecto Yasay, Jr. of respondent Commission as to
the applicability and coverage of the Full Material Disclosure Rule on banks, contending that
said rules, in effect, amend Section 5 (a) (3) of the Revised Securities Act which exempts
securities issued or guaranteed by banking institutions from the registration requirement
provided by Section 4 of the same Act. (Annex "C", p. 20, Rollo).
"In reply thereto, Chairman Yasay, in a letter dated April 8, 1997, informed petitioner that while
the requirements of registration do not apply to securities of banks which are exempt under
Section 5 (a) (3) of the Revised Securities Act, however, banks with a class of securities listed
for trading on the Philippine Stock Exchange, Inc. are covered by certain Revised Securities Act
Rules governing the filing of various reports with respondent Commission, i.e., (1) Rule 11 (a)-1
requiring the filing of Annual, Quarterly, Current, Predecessor and Successor Reports; (2) Rule
34-(a)-1 requiring submission of Proxy Statements; and (3) Rule 34-(c)-1 requiring submission
of Information Statements, among others. (Annex D, P, U, Rollo).
"Not satisfied, petitioner, per letter dated April 30, 1997, informed Chairman Yasay that they
will refer the matter to the Philippine Stock Exchange for clarification. (Annex E, p. 22, Rollo)
"On May 9, 1997, respondent Commission, through its Money Market Operations Department
Director, wrote petitioner, reiterating its previous position that petitioner is not exempt from the
filing of certain reports. The letter further stated that the Revised Securities Act Rule 11 (a)
requires the submission of reports necessary for full, fair and accurate disclosure to the investing
public, and not the registration of its shares. (Annex F, p. 23, Rollo).
"On July 17, 1997, respondent Commission wrote petitioner, enjoining the latter to show cause
why it should not be penalized for its failure to submit a Proxy/Information Statement in
connection with its annual meeting held on May 23, 1997, in violation of respondent
Commission's Full Material Disclosure Rule.' (Annex 6, p. 24, Rollo ).
"Failing to respond to the aforesaid communication, petitioner was given a '2nd Show Cause with
Assessment' by respondent Commission on July 21, 1997. Petitioner was then assessed a fine of
P50,000.00 plus P500.00 for every day that report [was] not filed, or a total of P91,000.00as of
July 21, 1997. Petitioner was likewise advised by respondent Commission to submit the required
reports and settle the assessment, or submit the case to a formal hearing. (Annex H, p. 25, Rollo).
"On August 18,1997, petitioner wrote respondent Commission disputing the assessment. (Annex
I, pp. 26-27, Rollo).
"Thus, on November 5,1997, respondent issued the assailed Order, the dispositive portion of
which provides:
"In view of the foregoing, the appeal filed by the Union Bank of the Philippines is hereby denied.
The penalty imposed in the amount of P91,000.00 as of July 21, 1997, for failure to file SEC
Form 11-A excludes the fine accruing after the cut-off date until the final submission of the
report. Further, the amount of P50,000.00 shall be collected for the violation of RSA Rule 34(a)-
or Rule34(c)(1)." (p.17, Rollo).
"Petitioner sought a reconsideration thereof which was denied by respondent Commission per
assailed Order dated Apri14, 1998, the dispositive portion of which reads:
"There being no new matters raised in the motion for reconsideration to overcome the denial of
the Appeal by the Commission En Banc in its Order of November 5, 1997, and considering that
the reasons advanced are [a] mere rehash of its defenses duly addressed in the Appeal, the
Motion for Reconsideration is hereby, DENIED. (p. 19, Rollo)."5
Petitioner then elevated its case to the Court of Appeals which, as already stated, affirmed the
questioned Orders.
The CA Ruling
In its well-written 10-page Decision, the Court of Appeals cited expertise of Respondent SEC on
matters within the ambit the latter's mandate, as follows:
"To begin with, it is already well-settled that the construction given to a statute by an
administrative agency charged with the interpretation and application of the statute is entitled to
great respect and should be accorded great weight by the courts, unless such construction is
clearly shown to be in sharp conflict with the governing statute or the Constitution and other
laws. (Nestle Philippines, Inc. v. Court of Appeals, 203 SCRA 504 [1991], at page 510). The
rationale for this rule relates not only to the emergence of the multi-farious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for the addressing
and satisfying those needs; it also relates to accumulation of experience and growth of
specialized capabilities by the administrative agency charged with implementing a particular
statute. (Nestle Philippines, Inc. v Court of Appeals, ibid., at pp. 510-511)
"In this regard, the Supreme Court, in Philippine Stock Exchange v. Securities and Exchange
Commission, et. al., G.R. No.125469, October 27, 1998, already upheld the power of respondent
Securities and Exchange Commission to promulgate rules and regulations, as it may consider
appropriate, for the enforcement of the Revised Securities Act and the other pertinent laws. Thus,
pursuant to their regulatory authority, respondent Securities and Exchange Commission adopted
the policy of 'full material disclosure' where all companies, listed or applying for listing, are
required to divulge truthfully and accurately, all material information about themselves and the
securities they sell, for the protection of the investing public, and under pain of administrative,
criminal and civil sanctions. While the employment of the 'full material disclosure' policy is
sanctioned and recognized by the laws, nonetheless, the Revised Securities Act sets substantial
and procedural standards which a proposed issuer of securities must satisfy.
"Moreover and perhaps most importantly, the construction given by the respondent Commission
on the scope of application of the 'Full Material Disclosure' policy permits greater opportunity
for respondent Commission to implement [its] statutory mandate of protecting the investing
public by requiring public issuers of securities to inform the public of the true financial
conditions and prospects of the corporation."6
The court a quo stressed that Rules 11 (a)-1, 34 (a)-1, and 34 (c)-1 were issued by respondent to
implement the Revised Securities Act (RSA). They do not require the registration of petitioner's
securities; thus, it cannot be said that the SEC amended Section 5 (a) (3) of the said Act.
Hence, this Petition.7
Issues
Petitioner submits for our resolution the following issues:
"A. Whether or not petitioner is required to comply with the respondent SEC's full disclosure
rules.
"B. Whether or not the SEC's full disclosure rules [are] contrary to and effectively [amend]
section 5 (a) (3) of the Revised Securities Act.
"C. Whether or not Respondent Court of Appeals gravely erred in holding that petitioner violated
three (3) Rules namely: Rule 11 (A)-1, Rule 34 (A)-1 and Rule 34 (C)-1 of the full disclosure
rule.
"D. Whether or not Respondent Court of Appeals erred in affirming with modification the
imposition of excessive fines in violation of the Philippine Constitution.8
In the main, the Court will determine (1) the applicability of RSA Implementing Rules 11 (a)-1,
34 (a)-1 and 34 (c)-1 to petitioner; and (2) the propriety of the fine imposed upon the latter.
The Court's Ruling
The Petition is not meritorious.
First Issue:
Applicabilitv of the Assailed RSA Implementing Rules
Because its securities are exempt from the registration requirements under Section 5(a) (3) of the
Revised Securities Act, petitioner argues that it is not covered by RSA Implementing Rule 11
(a)-1, which requires the filing of annual, quarterly, current predecessor and successor reports;
Rule 34(a)-1, which mandates the filing of proxy statements and forms of proxy; and Rule 34(c)-
1, which obligates the submission of information statements.
We do not agree. Section 5(a) (3) of the said Act reads:
"Sec. 5. Exempt Securities. (a) Except expressly provided, the requirement of registration under
subsection (a) of Section four of this Act shall not apply to any of the following classes of
securities:
xxx xxx xxx
(3) Any security issued or guaranteed by any banking institution authorized to do business in the
Philippines, the business of which is substantially confined to banking, or a financial institution
licensed to engage in quasi-banking, and is supervised by the Central Bank."
This provision exempts from registration the securities  issued by banking or financial
institutions mentioned in the law. Nowhere does it state or even imply that petitioner, as a
listed corporation, is exempt from complying with the reports required by the assailed RSA
Implementing Rules. Worth repeating is the CA's disquisition on the matter, which we quote:
"However, the exemption from the registration requirement enjoyed petition does nor necessarily
connote that [it is] exempted from the other reportorial requirements. Having confined the
exemption enjoyed by the petitioner merely to the initial requirement of registration of securities
for public offering, and not, [to] the subsequent filing of various periodic reports, respondent
Commission, as the regulatory agency, is able to exercise its power of supervision and control
over corporations and over the securities market as a whole. Otherwise, the objectives of the 'Full
Material Disclosure' policy would be defeated since petitioner corporation and its dealings would
be totally beyond the reach of respondent Commission and the investing public."9
It must be emphasized that petitioner is a commercial banking corporation10 listed in a stock
exchange. Thus, it must adhere not only to banking and other allied special laws, but also to the
rules promulgated by Respondent SEC, the government entity tasked not only with the
enforcement of the Revised Securities Act,11 but also the
supervision of all corporations, partnerships or associations which are grantees of government-
issued primary franchises and/or licenses or permits to operate in the Philippines.12
RSA Rules 11 (a)-1, 34 (a)-1 and 34 (c)-1 require the submission of certain reports to ensure full,
fair accurate disclosure of information for the protection of the investing public. These Rules
were issued by the respondent pursuant to the authority conferred upon it by Section 3 of the
RSA.13
The said Rules do not amend Section 5(a)(3) of the Revised Securities Act, because they do
not revoke or amend the exemption from registration of the securities enumerated thereunder.
They are reasonable regulations imposed upon petitioner as a banking corporation trading its
securities in the stock market.
That petitioner is under the supervision of the Bangko Sentral ng Pilipinas (BSP) and the
Philippine Stock Exchange (PSE) does not exempt it from complying with the continuing
disclosure requirements embodied in the assailed Rules. Petitioner, as a bank, is primarily subject
to the control of the BSP; and as a corporation trading its securities in the stock market, it is
under the supervision of the SEC. It must be pointed out that even the PSE is under the control
and supervision of respondent.14 There is no over-supervision here. Each regulating authority
operates within the sphere of its powers. That stringent requirements are imposed is
understandable, considering the paramount importance given to the interests of the investing
public.
Otherwise stated, the mere fact that in regard to its banking functions, petitioner is already
subject to the supervision of the BSP does not exempt the former reasonable disclosure
regulations issued by the SEC. These regulations are meant to assure full, fair and accurate
disclosure of information for the protection of investors in the stock market. Imposing such
regulations is a function within the jurisdiction of the SEC. Since petitioner opted to trade its
shares in the exchange, then it must abide by the reasonable rules imposed by the SEC.
Second Issue:
Propriety of Fine Imposed
Contending that both respondent and the CA erred in imposing an excessive fine upon it,
petitioner complaints that it was not given an opportunity to be heard regarding the matter.
It bears stressing that the fine imposed upon petitioner is sanctioned by Section 46 (b) of the
RSA, which reads as follows:
"Sec. 46. Administrative sanctions. If, after proper notice and hearing, the Commission finds that
there is a violation of this Act, its rules, or its orders or that any registrant has, in a registration
statement and its supporting papers and other reports required by the law or rules to be filed with
the Commission, made any untrue statement of a material fact, or omitted to state any material
fact required to be stated therein or necessary to make the statements therein not misleading, or
refused to permit any lawful examination into its affairs, it shall, in its discretion, impose any or
all of the following sanctions: xxx xxx xxx
(b ) A fine of no less than two hundred (P200.00) pesos nor more than fifty thousand
(P50,000.00) pesos plus not more than five hundred (P500.00) pesos for each day of continuing
violation."
Petitioner complied with RSA Rule 11 (a)-1 on April 30,1998. To date, it still has not complied
with either RSA Rule 34 (a)-1 or Rule 34 (c)-1. That there was a failure to submit the required
reports on time is evident in the present case. Thus, respondent was justified in imposing a fine
upon it.
We reject the contention of petitioner that it was not heard on the matter of the fine imposed. The
latter was assessed after the former had failed to respond to the SEC's first show-cause letter
dated June 17, 1997.15 In its August 18,1997 letter,16 petitioner sought before the SEC en banc
the nullification of the fine. The matter was raised to the appellate court, which then considered
it. Clearly then, petitioner satisfied the essence of due process-notice and opportunity to be
heard.17 That it received adverse rulings from both respondent and the CA does nor mean that its
right to be heard was discarded.1âwphi1.nêt
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision of the Court of
Appeals AFFIRMED. Costs against petitioner.
SO ORDERED.