Registration of Securities

SECURITIES AND EXCHANGE COMMISSION, , vs. G.

COSMOS PHILIPPINES, INC.

Petitioner G. Cosmos Philippines, Inc., is a corporation duly registered with

the Securities and Exchange Commission, whose primary purpose, to create
advertising campaign plans that will transmit in an effective manner as
possible the message of the advertiser's products and services through the
utilization of print, television, radio, cinema and other various advertising
media and to render services in terms of and/or merchandizing public
relations and marketing counsel, thereby offering a complete marketing
service. cS

Under its G. System, the petitioner invites sponsors (investors) who are
willing to bear the cost of advertising the sale of products of small
manufacturers all over the world, to be marketed and sold in Japan by
way of the mail order sales system. In return, the sponsors are entitled
to receive, as their gain 30% of the sales revenue of the products
advertised and sold.

Upon two complaint-letters received by the SEC from Telford Rizarri

and Ruperto Garcia requesting the said Commission to conduct an
investigation of G. Cosmos Philippines, Inc., the SEC created a team to
determine compliance with the provisions of RA 8799, otherwise known as
the Securities Regulations Code. The petitioner was found to have violated
the provision of Section 8.1 of the Securities Regulation Code, which states
that:

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.

Respondent SEC contends that the petitioner's scheme of collecting

from its members the advertising costs for its mail order sales in
Japan falls within the purview of an investment contract which is included in
the definition of securities.
Respondent SEC contends that the petitioner's scheme of collecting from its
members the advertising costs for its mail order sales in Japan falls within
the purview of an investment contract which is included in the definition of
securities.

Since the participation or interest of the 'sponsors'/members in the

respondent corporation partakes of the nature of securities and the
same have not yet been registered with the Commission, the SEC, on
July 26, 2001 issued a temporary Cease and Desist Order directing the
petitioner to cease and desist from engaging in the activities of
selling, offering for sale or distributing securities in order to protect
the interest of the investors and the public in general.

-Order and the payment of a fine of P57,180,000.00

CA: On appeal, the respondent maintained that it had not engaged in

the business of securities as defined by the Securities Regulation Code;
and that the issuance by the SEC of the cease and desist order (CDO)
was without factual and legal basis.

- that although the respondent should rightfully be fined for

engaging in the unauthorized selling of securities, the total fine of
P51,780,000.00 was excessive and unconscionable because the
maximum amount of fine under the Securities Regulation Code
should not exceed P1,000,000.00.

- In contrast, the respondent asserts that the CA correctly lowered

the fine because the CA held, in interpreting Section 54.1 (ii) of
the Securities Regulation Code, that "it is not the intendment of
the law to impose a fine for each act of selling or offering of an
unregistered security. . . ." 9

- The decisive question is whether or not the CA erred in reducing

the penalty from P51,780,000.00 to P1,000,000.00.

Issue:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING IN ITS

RESOLUTION DATED MARCH 11, 2005 THAT "IT IS NOT THE INTENDMENT OF
THE LAW TO IMPOSE A FINE FOR EACH ACT OF SELLING OR OFFERING OF AN
UNREGISTERED SECURITY."

Rule:
(i) Suspension, or revocation of any registration for the offering of securities;

(ii) A fine of not less than Ten thousand pesos (P10,000.00) nor more
than One million pesos (P1,000,000.00) plus not more than Two
thousand pesos (P2,000.00) for each day of continuing violation

Sub-item (a) of Section 54.1 must be read together with sub- items (b)
to (d) of the section. As such, sub-item (a) must be taken to mean that
the violation of the Securities Regulation Code, rules and
orders is a continuing act. We cannot consider each occasion of a
violation of sub-item (a) as an act warranting the imposition of a
sanction for each violation, for to do so is to read Section 54.1 in
truncated parts that are detached or isolated from each other, which
will run counter to the pronouncement in Philippine International
Trading Corporation v. Commission on Audit, supra. Thereby, such a
reading would penalize its violation every single time notwithstanding
that Section 54.1 punishes a single continuing act.

Section 54.1 penalizes a continuing act, resulting in the one-time

imposition of a fine that is not to be less than P10,000.00 but not to be
more than P1,000,000.00, plus an incremental fine of not less than
P2,000.00 for each day the violator continues to violate the Securities
Regulation Code.

- the SEC could validly impose the incremental daily fine of not more
than P2,000.00 in addition to the main fine of not less than P10,000.00
nor more than P1,000,000.00.
POWER HOMES UNLIMITED CORPORATION , vs. SECURITIES AND EXCHANGE
COMMISSION AND NOEL MANERO

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 petitioner's business. He claimed that he attended a seminar
conducted by petitioner where the latter claimed to sell properties that were
inexistent and without any broker's license.

On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public
respondent SEC whether petitioner's 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
petitioner's incorporators John Lim, Paul Nicolas and Leonito Nicolas. The
attendees were requested to submit copies of petitioner's 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.

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

Issue:

whether petitioner's 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.

Ruling:

- The scheme of the [petitioner] corporation requires an investor to become a

Business Center Owner (BCO

- the BCO shall mean an independent representative of Power Homes, who is

enrolled in the company's 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

- 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
 - 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 [petitioner's] 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." 1

- The Howey Test "embodies a flexible rather than a static principle

- 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.

In the case of SEC v. Turner, 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. 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…… 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 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 ….. 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
CITIBANK, N.A., petitioner, vs. JOSE U. PUA AND BENJAMIN HANBEN U. PUA

At a function organized by Citibank, N.A.'s (petitioner) Binondo Branch (Binondo

Branch) for its selected clients, respondent Jose was introduced by Binondo
Branch Manager, Angelina Guada Ang (Ang), to Ching Yee Yau (Yau), an officer of
petitioner's Hong Kong Branch (Hong Kong Branch).

Thereafter, on three separate occasions, Yau offered and sold to respondents,

securities issued by public limited companies established in Jersey, Channel
Islands.

As a precondition to the sale, respondents opened an account with the Hong

Kong Branch (bank account). Jose was also required to sign an undated
document known as the Terms and Conditions for Credit Services-Individual.

Respondents averred that petitioner then made it appear that they obtained loans
from the bank and used these loans and the cash in Jose's bank account to pay
unto itself the purchase price of the first two subscriptions.

According to respondents, all papers for the opening of the bank account, the
Subscription Agreements and all related documents were completed and
executed in the Binondo Branch, with full knowledge of its officers who told Jose
that any bank employee who could refer a securities buyer would earn a
commission. 10

Respondents later discovered that the aforesaid securities, the Subscription

Agreements and the "Terms and Conditions for Credit Services-Individual"

Respondents also averred that the securities turned out to be worthless, and
despite their demands, petitioner refused to credit the money previously debited
from their bank account and to release US$309,723.59 from their Time Deposit
Account with the Hong Kong Branch.11 Consequently, on December 2, 2002, they
filed a Complaint for Declaration of Nullity of Contracts and Sums of Money with
Damages against petitioner.

After presenting only the testimony of their trial lawyer on the latter's attorney's
fees and the deposition upon oral examination of its Country Counsel, petitioner
was deemed to have lost its chance to present further evidence for failing to
produce additional evidence despite several settings.

Issue:

W/N Petitioner can use its alleged separate personality from Citibank Hong
Kong to disown its participation in the transaction. Likewise, w/n petitioner can
claim that the subject transactions are outside the operation of Philippine
securities laws because they were allegedly perfected outside the Philippines

Ruling:

As the RTC and the CA found, petitioner indeed offered to sell and sold foreign
securities to respondents in violation of Philippine securities laws.

Under Section 4 (a) 23 of Batas Pambansa Blg. 178, and Sections 8, 9 and 10 of
Republic Act No. 8799, also known as the Securities Regulation Code, all
securities sold or offered for sale or distribution in the Philippines must be
registered, unless they are exempt from registration.24 This is for the protection
of investors as securities transactions are imbued with public interest, thus,
subject to regulation. 25 As the CA found, the subject securities do not classify as
exempt transactions under Philippine securities laws. 26

The CA aptly pointed out that SEC Director Callangan testified that the
instruments offered to respondents were actually securities which require prior
registration before they are sold or offered for sale in the Philippines. 28

Petitioner cannot use its alleged separate personality from Citibank Hong Kong
to disown its participation in the transaction. Likewise, petitioner cannot claim
that the subject transactions are outside the operation of Philippine securities
laws because they were allegedly perfected outside the Philippines. Petitioner's
actions prior to, during and after the transactions showed that it actively
participated therein.

. Petitioner made use of its entire web of departments to convince and make
respondents agree to the sale of the subject securities. All papers for the opening
of respondents' bank account in Hong Kong and all documents related to the
sale of the subject securities were prepared, accomplished and executed in
petitioner's Binondo Branch. Respondents had never been to Hong Kong to seal
the deal.

In executing the Subscription Agreements, petitioner even readily offered its

Binondo Branch as respondents' mailing address. Evidence showed that
petitioner had been aggressive in tapping potential investors from the
Philippines, launching for this purpose its enhanced referral program which
promises a referral pay-out of US$1,000 for each referral resulting in booked
business.

It was a Citigold Executive who referred respondents to Yau who then sold the
subject securities to the latter with full support of the Binondo Branch. During
the transactions, petitioner made it appear that all its dealings are those of
Citibank as a single unit. 3

In addition, Article 1409 32 of the Civil Code also provides that contracts
expressly prohibited by law are inexistent and void from the beginning. Thus,
the subject sale transactions, which are prohibited under the Philippine securities
laws, are void ab initio.
 Reportorial Requirements

PHILIPPINE VETERANS BANK v SECURITIES AND EXCHANGE COMMISSION

Tender Offers
 Prohibitions on Fraud, Manipulation and Insider Trading

-
Reportorial Requirements

PHILIPPINE VETERANS BANK vs. SECURITIES AND EXCHANGE COMMISSION