SECURITIES FRAUD: DETECTION,

INVESTIGATION AND PREVENTION

Director Jose P. Aquino
Enforcement and Investor Protection Department
Securities and Exchange Commission
Presentation Targets
• Provide an overview of the objectives and functions of
the SEC

• Introduce the offenses involving fraud which are

investigated by the SEC

• Provide practical tips on how to detect and avoid these

offenses
Objectives of the SEC
• To develop the Philippine Capital Markets
• Encourage wider participation of share ownership
• Promote self regulation in the securities industry
• Ensure full and fair disclosure about securities and
• Minimize and eliminate insider trading and other
fraudulent or manipulative devices.
SEC Mission
• To strengthen the corporate and capital market
infrastructure of the Philippines, and to maintain a
regulatory system, based on international best
standards and practices, that promotes the interests
of investors in a free, fair and competitive business
environment.
Governing Laws
 SEC Reorganization Act (PD 902-A of 1976)

 Revised Securities Act (BP 178 of 1982)

 Securities Regulation Code (RA No. 8799 of 2000)

 13 February 2004 Amended Implementing Rules
and Regulations
 2006 Rules of Procedure
 Various Commission Memorandum Circulars.
Legal Definitions of Fraud
• “‘Fraud’ is defined as a generic term embracing all
multifarious means which human ingenuity can devise,
and which are resorted to by one individual to secure an
advantage over another by false suggestions or by
suppression of truth and includes all surprise, trick,
cunning, dissembling and any unfair way by which
another is cheated.”

(Alleje v. Court of Appeals G.R. No. 107152, 25 January 1995)

Legal Definitions of Fraud
• "Fraud" is defined as an instance or an act of trickery or deceit especially when
involving misrepresentation (Webster's Third New International Dictionary of the
English Language, 1993 Ed., p. 904). It is also defined as "An intentional perversion
of truth for the purpose of inducing another in reliance upon it to part with some
valuable thing belonging to him or to surrender a legal right. A false representation of
a matter of fact, whether by words or by conduct, by false or misleading allegations,
or by concealment of that which should have been disclosed, which deceives and is
intended to deceive another so that he shall act upon it to his legal injury. Anything
calculated to deceive, whether by a single act or combination, or by suppression of
truth, or suggestion of what is false, whether it be by direct falsehood or innuendo, by
speech or silent, word of mouth or look or gesture. . . A generic term, embracing all
multifarious means which human ingenuity can devise, and which are resorted to by
one individual to get advantage over another by false suggestions or by suppression
of truth, and includes all surprise, trick, dissembling, and any unfair way by which
another is cheated. . . 'Bad faith' and 'fraud' are synonymous, and also synonyms of
dishonesty, infidelity, faithlessness, perfidy, unfairness, etc." (Black's Law Dictionary,
1990 Ed. p. 660, citations omitted).”

(Flores v. Layosa G.R. No. 154714, 12 August 2004, footnote 25)

Detection and Investigation
• Aside from investigative and visitorial powers, the SEC
has the following functions to bolster its detection and
investigation of fraudulent activities:
Maintains the registry for all corporate filings such as
general information sheets, audited financial
statements, etc.
Issues secondary licenses for securities issuers and
salesman licenses for securities salesmen
Provides guidelines on reportorial and compliance
requirements
The Wisdom of Registration
• Registration and disclosure of a security and its relevant
details provides the SEC with information concerning the
viability of the underlying business

• A security which is not registered is not only a violation of the

law but is a red flag for likely fraudulent activity because non-
registration implies an intention to conceal information.

• Considering that securities and investment products are

frequently innovated, the requirement of registration enables
the SEC to confirm the viability and validity of new products
Selling/Offering for Sale of
Unregistered Securities
• Section 8.1 - Requirement of Registration of Securities. –
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.

• 3.1. “Securities” are shares, participation or interests in a

corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character.
Kinds of Securities
(a) Shares of stock, bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in
a profit sharing agreement, certificates of deposit for a future
subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments;
(f) Proprietary or non proprietary membership certificates
incorporations; and
(g) Other instruments as may in the future be determined by the
Commission.
What is an Investment Contract?
• “Howey Test”

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

(Power Homes Unlimited v. SEC G.R. No. 164182,

26 February 2008)
Power Homes Unlimited v. SEC Case
• Court applied the Howey Test and found the scheme to be an
Investment Contract based on the following findings:

“An investor enrolls in petitioner’s 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 petitioner’s 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 petitioner’s 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.”
Fraudulent Offenses
• Fraudulent Transactions

• Market Manipulation

• Insider Trading

• Fraudulent Reporting

Monetary Profit is the motive behind these offenses!

Fraudulent Transactions
• SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale of any securities to:

26.1. Employ any device, scheme, or artifice to defraud;

26.2. Obtain money or property by means of any untrue statement of a material fact or
any omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made, not misleading;

26.3. Engage in any act, transaction, practice or course of business which operates or
would operate as a fraud or deceit upon any person.

• Best examples are investment scams (Ponzi, Pyramid, Boiler room, etc.)

• A charge for violation of Sec. 26 (fraud) may be filed along with a charge for violation
of Sec. 8.1 (non-registration).
Popular Investment Scams
 Pyramiding Schemes
 Ponzi Schemes
 Boiler Room Operations

Victim Profiles:
- A, B, C sectors of society
- Government employees/retirees
- Private sector
- Retirees
- In short, anyone with money to invest.
PYRAMID SCAMS
Illustration
Features
 Rewards participants for inducing other people to
join the program.
 A participant pays for the chance to receive
compensation for introducing new persons to the
scheme, as well as when those new persons
themselves introduce new participants.
 Focuses primarily on the exchange of money for
recruitment.
Features
• Selling point: each participant can recoup his
original investment and make more money by
recruiting more participants.

• Hides scam by layering or associating the scheme

with products or privileges, even if these:
 Have no real world value
 Are priced in an inflated manner
 Do not appeal to the investors without the
promise of getting commissions from
recruitment
Red Flags
• Victims are asked to purchase a large and expensive
inventory of goods (without refund for unsold
goods).
• The perpetrators conduct “opportunity” meetings,
whether face to face or en masse, with a high-
pressure atmosphere emphasizing the high returns
of the scheme and its successful members.
• Participants are rewarded for inducing other people
to join the program.
Red Flags
• The perpetrators claim huge profits through
continued growth of “downlines” or bonuses based
on the participants’ advancement in the structure.

• The marketing of a product or privilege, if done at

all, is only of secondary importance and is used to
provide a cover of legitimate activity to evade
prosecution.
Recent Examples of Pyramid Schemes

• Motivational/Self-Improvement Programs
• Travel Club
• Marketing Seminars on Real Estate Property
• So-called Internet Affiliate Programs
What’s the Difference between
Pyramid Schemes and Direct Selling/
Multi-Level Marketing
• Direct Selling is face-to-face selling to the consumers
through independent distributors or sales people. It is a
legitimate marketing medium that is used to sell
practically anything.

• Pyramiding is an illegal money scam often confused with

legitimate network marketing plans, where people are
convinced to pay money for a chance to profit from the
payments of others who might join late

(Based on the Direct Sellers Association of the Philippines)

How to Distinguish between a Pyramid
Scheme and Direct-Selling/MLM
• 8 Point Test
1. Is there a product?
2. Are commissions paid on sale of products and not on registration/entry fees?
3. Is the intent to sell a product not a position?
4. Is there no direct correlation between the number of recruits and compensation?
5. If recruitment were to be stopped today, will the participants still make money?
6. Is there a reasonable product return policy?
7. Do products have fair market value?
8. Is there a compelling reason to buy?

If the answer to all the questions is YES, then the company being evaluated is a
legitimate company. But if the answer is NO, then there is a high probability that it is a
pyramid scam.
(Based
on the Direct Sellers Association of the Philippines)
What can you do?
• Do not merely rely on the favorable testimonies of ordinary
people even your own friends and family. These scams prey
and exploit these kinds of relationships.
• Call the SEC to inquire whether the entity providing
investment opportunities possesses a secondary license to do
so.
• Call the Direct Selling Association of the Philippines (DSAP)
to check if the entity engaged in the recruitment activity is a
bona fide member.
• Exercise caution and do not part with your money unless you
have verified the legitimacy of the entity’s operations.

Note: The SEC cannot guarantee the recovery of your money!!!

Ponzi Schemes
History of the Ponzi Scheme
• Named after Charles Ponzi (Carlo Pietro Giovanni Guglielmo
Tebaldo Ponzi) an Italian businessman and con artist

• In the early 1920’s, he promised clients a 50% profit within

45 days, or 100% profit within 90 days, by buying
discounted postal reply coupons in other countries and
redeeming them at face value in the United States as a form
of arbitrage.

• In reality, Ponzi was paying early investors using the

investments of later investors. This type of scheme is now
known as a “Ponzi Scheme". His scheme ran for over a year
before it collapsed, costing his "investors" $20 million.
Features
• Investors are enticed with the promise of extremely
high returns (ranging from a low of 6% to a high of
29% per month).

• Initial investors are paid exceptional returns from the

deposits of a growing number of new investors.

• “Profits” to investors are not created by the success

of the underlying business but instead are derived
from the capital contributions of others.
Features
• Schemes always offer an economic purpose so that
investors think they are investing in a viable venture
that generates income.

• Guarantee payments by issuance of postdated

checks.
How a Ponzi Scheme works?
Promise of
unusually high
Company COMPANY interest rates
returns part of (6% to 29%) a
A’s investment month
as “interest”

“A”
invests
“A” tells others of good investment opportunity
 How a Ponzi Scheme works?

Company pays Company

A’s next returns part
interest due COMPANY of B’s
from B’s money investment as
“interest”

“A” “B” invests

“A” and “B” tell others of good investment opportunity
How a Ponzi Scheme unravels?
• The obligation to pay off all the previous investors
can no longer be met with the revenues collected
from new recruits.

• News of non-payment of investments spreads and

investors rush in to withdraw their funds similar to a
“bank run”

• The Promoter disappears together with the

investors’ money.
Red Flags
• Unrealistic high returns on investment

• Underlying business activity is not explained well or

is too complicated and laden with technical terms
such as “Futures commodities trading”, “Gold-
backed long-term securities” or “Foreign Exchange
Swap Arrangements”

• The Promoter discourages the investor from cashing

out his investment and encourages the rolling over
of the investment and/or infusing more money
Red Flags
• Reliance on the release of “Account Statements”
instead of actual cash pay-outs as evidence of the
high returns to the investors

• Delays in the payment of the returns are not

adequately explained and brushed aside as
inconsequential

• Promoter possesses no secondary license to sell or

offer securities from the SEC and its salesmen have
no license to act as such
Recent Examples
• Aman Group of Companies (Manuel Amalilio)
• Multitel (Rosario Baladjay)
• Everflow (Felix and Iris Aquino)
• H-Factor Marketing and Trading Corporation
 How to Distinguish between a Ponzi
Scheme and a Legitimate Investment
• Check with the SEC if the Promoter possesses a secondary license to sell that
specific security it is offering or selling

 Do not merely rely on the Promoter possessing Articles of Incorporation as a duly

registered corporation with the SEC.
 No person or corporation, even if duly registered with the SEC, can offer or sell
securities without a secondary license.
 The secondary license/license to sell relates to a specific investment product only!

• The underlying business operation is properly explained, legitimate and viable.

• The return on investment is reasonable and not unrealistic.

• Endorsement or association with a reputable person/s or entity is not always a

guarantee of legitimacy.

Ex. (i) Bernie Madoff was a former regulator and respected icon in Wall Street.

(ii) Performance Investment Products Corporation (PIPC) targeted the elite,

politicians and celebrities.
What can you do?
• Do not merely rely on the favorable testimonies of ordinary
people even your own friends and family. These scams prey
and exploit these kinds of relationships.

• Call the SEC to inquire whether the entity providing

investment opportunities possesses a secondary license to do
so or if its salesmen have bona fide licenses.

• Exercise caution and do not part with your money unless you
have verified the legitimacy of the Promoter’s operations.

Note: The SEC cannot guarantee the recovery of your money!!!

Boiler Room Operations
• The use of high-pressure sales tactics to sell
illegitimate investment products such as:

 Unreasonable rates of returns & promises of profit

 Guaranteed returns without any sound basis
 “This investment opportunity is ‘once-in-a-lifetime’ and you would
be stupid to miss out on it!”
 “Think of your family and their future!”
 “Well-known rich people are doing this and don’t you want to be
rich?”
 “This information is secret and I’m only telling this to you.”

Note: The movies “Boiler Room” and “Wolf of Wall Street” are actually
based on the life of Jordan Belfort, a stockbroker who defrauded his
1,510 clients of over USD 200 Million in his various stock scams.
Effect of Technology on Pyramid Scams, Ponzi
Schemes and Boiler Room Operations

• Ponzi and Pyramid Schemes have found their way on the Internet through
websites, e-mails and even on social media.

• Payment, promotion and recruitment are no longer done face-to-face and involve
no physical contact.

• Scammers are harder to catch since there is no contact with the clients and the
money is harder to recover since the transactions are cross-border.

• Increased Risk for the Investor

• Rule of Thumb:
When in doubt, just keep your money!!!
 Market
Manipulation
Market Manipulation
• SEC. 24. Manipulation of Security Prices; Devices and Practices. - 24.1 It shall be unlawful
for any person acting for himself or through a dealer or broker, directly or indirectly:

(a) To create a false or misleading appearance of active trading in any listed security
traded in an Exchange or any other trading market
(b) To effect, alone or with others, a series of transactions in securities that raises or
depresses the price:
(c) To circulate or disseminate information that the price of any security listed in an
Exchange will or is likely to rise or fall because of manipulative market operations of any
one or more persons conducted for the purpose of raising or depressing the price of the
security for the purpose of inducing the purchase or sale of such security.
(d) To make false or misleading statements with respect to any material fact, which he
knew or had reasonable ground to believe was so false or misleading, for the purpose
of inducing the purchase or sale of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale
of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing
the price of such security, unless otherwise allowed by this Code or by rules of the
Commission.
Types of Market Manipulation

 By employing trading schemes that creates a false or

misleading appearance relative to the price or activity in a
security. (Ref. to pars. (a) and (b), Section 24.1 of SRC)

 By circulating false information about the security or the

unusual movement of a security. (Ref. to pars. (c) and
(d), Section 24.1)

 By practicing other trading methods contrary to rules.

(Ref. To par. (e), section 24.1 and Section 24.2)
Motive for Market Manipulation
• To gain immediate profit or minimize losses

• To window dress a trading or loan portfolio

• To avoid breaching regulatory requirements or

business contracts

• Greed in general!
Effects of Market Manipulation
• It erodes confidence in the market as an investment
venue as the presence of such practices results in
financial losses to victims.

• It destroys the credibility of the market as a venue

for price discovery as it results in inefficient price
levels.

• It robs the nation of an efficient mechanism in

allocating and distributing its resources.
Participants in Market Manipulation

A. Issuers of securities
B. Participants in the securities market (beneficial
owners/retail clients)
C. Market intermediaries (brokers)
D. Any combination of the above acting in
cooperation with one another

*The offense may be carried out through a conspiracy.

Wash Sales
• Wash sales are transactions where the same person (or
affiliate) is, for all practical purposes both the purchaser and
seller. A wash sale thus has only the appearance of a bona
fide transaction since there is no genuine change in actual
ownership of a security .

• Objective: A group of investors (pool operators) engage in a

series of wash sales at successively higher prices, hoping to
lure other investors to purchase by the illusion that the stock
price was on steady upward trend. If successful, members
of the pool dump their holdings of the stock at the high price
and then watch the price fall.
Improperly Matched Orders
• Engaging in transactions where both the buy and sell orders are entered at
the same time with the same price and quantity by different but colluding
parties.
 Normally, under the PSE trading system, a buy order should be
matched to an available sell order of the same stock at the price and
quantity stated. If a sell order has insufficient quantity, the buy order
may be matched to another sell order to fulfill the quantity of the
purchase. Conversely, a sell order may be matched to multiple buy
orders to cover the total quantity to be sold.

Ex. Orders to buy or sell of Customer A and his associates of substantially

the same volume at the same price were executed in PAM
System/PSE Trade by different brokers for the account of Customer A
and his associates.

• Usually carried out in collusion of the trader/broker

Painting the Tape
• Engaging in a series of transactions in
securities that are reported publicly to give
the impression of activity or price
movement in a security

• Refers to activity on the PSE ticker-tape

 Examples of Painting the Tape
• A group acting together create a flurry of unusual activity in a stock,
which attracts the attention of people who monitors the ticker-tape.
These hapless investors would think, “Gee, something must be going
on. Someone must know something. I’ll jump on board.”

• That makes the activity and upward spike in the stock price even more
noticeable, attracting other momentum players – and before you know
it, there’s a full-fledged little rally (increased activity) going on in this
stock.

• So now the stock is really on a roll, CNBC commentators are trying to

come up with knowing one-line explanations (“expectations of street-
beating third quarter earnings”), and it’s easy for the perpetrators to
sell the shares you traded back and forth to get this going.
Marking the Close
• Buying and selling securities at the close of the market (3:30 p.m.) in
an effort to alter the closing price of the security

• Also called “End of Day Price Ramping”

Ex.
Stock ZTE market price @ P100
Broker A for the account of Broker B whose client is individual C
would execute trades ranging from 20,000 to 40,000 shares at
around 3:15 – 3:30 p.m. at P105
Purpose: to peg or set the closing price of ZTE for the day
Hype and Dump
• Engaging in buying activity at increasingly higher prices and then
selling securities in the market at the higher prices or vice versa (i.e.
selling activity at lower prices and then buying at such lower prices);

 Pump and dump schemes often occur on the Internet through

forums and message boards geared towards investors.
 Messages posted urge readers to buy a stock quickly or to sell
before the price goes down, or a telemarketer will call using the
same sort of pitch.
 Often the promoters will claim to have "inside" information
about an impending development or to use an "infallible"
combination of economic and stock market data to pick stocks.
Hype and Dump
• In reality, those who hype a stock may be company insiders or paid
promoters who stand to gain by selling their shares after the stock
price is "pumped" up by the buying frenzy they create.

• Once these fraudsters "dump" their shares and stop hyping the
stock, the price typically falls, and investors lose their money.

• Usually, shares hyped do not have any recent disclosures which

would affect their price.

• Also called “Pump and Dump”

Ex. Steve Madden Ltd. (Footwear Company)’s IPO was pumped

and pumped by the brokerage firm Stratten Oakmont which
was owned by Jordan Belfort, whose life was the basis for the
movies “Boiler Room” and “The Wolf of Wall Street”
Squeezing the Float
• Taking advantage of a shortage of securities in the
market by controlling the demand side and exploiting
market congestion during such shortages in a way as
to create artificial prices. (SRC Rule 24.1, Amended
IRR)

• Float = the total number of shares publicly owned and

available for trading. The float is calculated by
subtracting restricted shares from outstanding shares.

• Akin to hoarding of basic commodities in case of

shortages.
Squeezing the Float Example
• Underwriters in an IPO transfer a significant portion of their allotment
to their trading accounts, from which the securities are sold by the
underwriters in the aftermarket at a price substantially above the
offer price.

• This practice constricts the supply of shares available to investors at

the IPO price and contributes to the securities’ higher aftermarket
price.

• The underwriter may sell a significant portion of the underwritten

security at the offering price to its employees, officers, relatives or
other broker dealers with whom the underwriter has reciprocal
arrangements – such allotments are made notwithstanding the fact
that the underwriters has customers who are unable to purchase the
security at its original price.
Insider Trading
Insider Trading
• SEC. 27. Insider’s Duty to Disclose When Trading. –
27.1. It shall be unlawful for an insider to sell or buy
a security of the issuer, while in possession of
material information with respect to the issuer or the
security that is not generally available to the
public…
Insider Trading
“The provision explains in simple terms that the insider's misuse of
nonpublic and undisclosed information is the gravamen of illegal
conduct. The intent of the law is the protection of investors against
fraud, committed when an insider, using secret information, takes
advantage of an uninformed investor. Insiders are obligated to disclose
material information to the other party or abstain from trading the
shares of his corporation. This duty to disclose or abstain is based on
two factors: first, the existence of a relationship giving access, directly
or indirectly, to information intended to be available only for a corporate
purpose and not for the personal benefit of anyone; and second, the
inherent unfairness involved when a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing.”

(SEC v. Interport Resources Corporation, G.R. No. 135808, 6 October

2008)
Material Non-Public Information
• 27.2. For purposes of this Section, information is
“material non-public” if:
(a) It has not been generally disclosed to the public
and would likely affect the market price of the security
after being disseminated to the public and the lapse
of a reasonable time for the market to absorb the
information; or

(b) would be considered by a reasonable person

important under the circumstances in determining his
course of action whether to buy, sell or hold a
security.
Who are Insiders?
• 3.8. “Insider” means:
(a) the issuer;
(b) a director or officer (or person performing similar functions) of, or
a person controlling the issuer;
(c) a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer
or the security that is not generally available to the public;
(d) a government employee, or director, or officer of an exchange,
clearing agency and/or self-regulatory organization who has
access to material information about an issuer or a security that
is not generally available to the public; or
(e) a person who learns such information by a communication from
any of the foregoing insiders.
Elements of Insider Trading

i. Respondent possessed non-public information about

the issuer-company or the market for its shares.
ii. Such non-public information was material information.
iii. Respondent bought or sold the securities of the
company.
iv. Respondent owed a duty to disclose to the seller (or
buyer) of the securities.
v. Respondent failed to disclose the non-public
information he possessed.
Exemptions to Insider Trading
• Insider Trading cannot be committed if:

(a) The insider proves that the information was not gained from such
relationship; or
(b) If the other party selling to or buying from the insider (or his agent) is
identified, the insider proves:
(i) that he disclosed the information to the other party, or

(ii) that he had reason to believe that the other party otherwise
is also in possession of the information.
Presumptions on Insider Trading
• A purchase or sale of a security of the issuer
made by an insider defined in Subsection 3.8
of the SRC, or such insider’s spouse or
relatives by affinity or consanguinity within
the second degree, legitimate or common-
law, shall be presumed to have been effected
while in possession of material non-public
information if transacted after such
information came into existence but prior to
dissemination of such information to the
public and the lapse of a reasonable time for
the market to absorb such information:
Presumptions on Insider Trading
• Presumption may be rebutted upon a showing by
the purchaser or seller that he was not aware of the
material non-public information at the time of the
purchase or sale.
Fraudulent
Reporting
Reportorial Requirements
• Sec 6(i)[6] of Presidential Decree 902-A:
 Power to punish corporations for failure to file required reports in appropriate
forms as determined by the Commission within the prescribed period;

• Sec. 141. of the Corporation Code

 Every corporation, domestic or foreign, lawfully doing business in the
Philippines shall submit to the Securities and Exchange Commission an annual
report of its operations, together with a financial statement of its assets and
liabilities, certified by any independent certified public accountant in appropriate
cases, covering the preceding fiscal year and such other requirements as the
Securities and Exchange Commission may require. Such report shall be
submitted within such period as may be prescribed by the Securities and
Exchange Commission.

• Other various rules, regulations and memorandum circulars of the Commission

Policy on Self-Reporting
• Transparency

• Accuracy

• Fairness in Representations

 Corporate Reports and Filings are meant to provide

relevant and accurate information to the public and
to form the basis for their own investment and
business decisions
System of Self-Reporting
• Practical since the Commission received thousands of
reports and documents annually

• However, reports are usually scrutinized for

completeness and compliance with required forms by the
appropriate receiving Department

• Reports and filings usually contain a signed undertaking

that any inaccuracy in the information provided may be
the basis for a case of perjury
Sample Undertakings

• Annual General Information Sheet

I, CORPORATE SECRETARY OF THE ABOVE-MENTIONED

(Name) (Position)
DECLARE UNDER THE PENALTY OF PERJURY, THAT ALL MATTERS SET FORTH IN THIS
INFORMATION SHEET WHICH CONSISTS OF ( ) PAGES HAVE BEEN MADE IN GOOD FAITH, DULY VERIFIED BY
ME AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, ARE TRUE AND CORRECT.

I UNDERSTAND THAT THE FAILURE OF THE CORPORATION TO FILE THIS GIS FOR FIVE (5) CONSECUTIVE YEARS SHALL BE
CONSTRUED AS NON-OPERATION OF THE CORPORATION AND A GROUND FOR THE REVOCATION OF THE
CORPORATION'S CERTIFICATE OF INCORPORATION. IN THIS EVENTUALITY, THE CORPORATION HEREBY WAIVES ITS RIGHT TO
A HEARING FOR THE SAID REVOCATION.

DONE THIS DAY OF , 20 IN .

Sample Undertakings
• Audited Financial Statements
“Statement of Management’s Responsibility for Financial Statements

The management of (name of registrant) is responsible for all information and representations contained in the
financial statements for the year(s) ended (date). The financial statements have been prepared in conformity with
generally accepted accounting principles and reflect amounts that are based on the best estimates and informed
judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary
internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against
unauthorized use of disposition and liabilities are recognized.

The Board of Directors reviews the financial statements before such statements are approved and submitted to
the stockholders of the company.

(Name of auditing firm), the independent auditors appointed by the stockholders, have examined the financial
statements of the company in accordance with generally accepted auditing standards and have expressed their
opinion of the fairness of presentation upon completion of such examination, in their report to stockholders.

(Signed by CEO and CFO)

The independent certified public accountant’s responsibility for the financial statements required to be filed with
the Commission is confined to the expression of his opinion on such statements which he has examined.
Special Accounting Rules under the
SRC
• SEC. 68. Special Accounting Rules. – The Commission shall have the
authority to make, amend, and rescind such accounting rules and
regulations as may be necessary to carry out the provisions of this Code,
including rules and regulations governing registration statements and
prospectuses for various classes of securities and issuers, and defining
accounting, technical and trade terms used in this Code. Among other
things, the Commission may prescribe the form or forms in which required
information shall be set forth, the items or details to be shown in the balance
sheet and income statement, and the methods to be followed in the
preparation of accounts, appraisal or valuation of assets and liabilities,
determination of depreciation and depletion, differentiation of recurring and
non-recurring income, differentiation of investment and operating income,
and in the preparation, where the Commission deems it necessary or
desirable, of consolidated balance sheets or income accounts of any person
directly or indirectly controlling or controlled by the issuer, or any person
under direct or indirect common control with, the issuer.
Administrative Liability
• SEC. 54 – Administrative Sanctions – If after due notice and
hearing, the Commission finds that:

(c) Any registrant or other person has, in a registration statement or

in other reports, applications, accounts, records or documents
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, in the case of an
underwriter, has failed to conduct an inquiry with reasonable
diligence to insure that a registration statement is accurate and
complete in all material respects;
 Civil Liability for Fraudulent Reporting
• SEC. 56. Civil Liabilities on Account of False Registration Statement. –
56.1. Any person acquiring a security, the registration statement of which or any
part thereof contains on its effectivity an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to make
such statements not misleading, and who suffers damage, may sue and recover
damages from the following enumerated persons, unless it is proved that at the
time of such acquisition he knew of such untrue statement or omission:
(a) The issuer and every person who signed the registration statement;
(b) Every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the
filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted;
(c) Every person who is named in the registration statement as being or about to become a director of, or a person performing similar
functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement;
(d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or
prospectus.
(e) Every person who, with his written consent, which shall be filed with the registration statement, has been named as having prepared
or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in
connection with the registration statement, with respect to the statement, report, or valuation, which purports to have been prepared
or certified by him.
(f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement, with respect to
that portion of the registration statement which purports to have been contributed by him.
(g) Every underwriter with respect to such security.
Civil Liability for Fraudulent Reporting
• 57.2. Any person who shall make or cause to be made any
statement in any report, or document filed pursuant to this Code or
any rule or regulation thereunder, which statement was at the time
and in the light of the circumstances under which it was made false
or misleading with respect to any material fact, shall be liable to any
person who, not knowing that such statement was false or
misleading, and relying upon such statements shall have purchased
or sold a security at a price which was affected by such statement,
for damages caused by such reliance, unless the person sued shall
prove that he acted in good faith and had no knowledge that such
statement was false or misleading.
Common Cases of Reportorial Fraud

• Overstatement of Gross Income

• Understatement of Liabilities
• Overstatement of Expenses
• Understatement of Net Income
• Concealment of Specific Transactions
• Unsupported Write-offs
• Excessive Window-Dressing
How to Detect Fraudulent Reports?
• When possible, check the working papers or the
documentary basis for the entries made in the reports
• In some cases, a whistleblower or insider is necessary to
uncover the fraud
• Assess whether the reports are actually consistent with
the level of operations, recent actions and/or financial
health of the corporation
• Determine if there are some officers or employees in the
corporation with the motive to make false reports
Thank you for Listening!
THE END
Our Location : SEC Building, EDSA,
Greenhills
Mandaluyong City,
Metro Manila
Philippines
Our Telephone : (632) 584-0923
Numbers
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Our e-mail address : inquiry@sec.gov.ph