ADVANCED SECURITIES Case Digests (ATTY. MIGALLOS)

494 U.S.
56 (1990) firm that had audited the Co-Op's financial statements (and the
REVES ET AL. predecessor to respondent Ernst & Young).
v. 5. Petitioners alleged, inter alia,
ERNST & YOUNG a. that Arthur Young had intentionally failed to follow
No. 88-1480. generally accepted accounting principles in its audit,
Supreme Court of United States. specifically with respect to the valuation of one of the
Argued November 27, 1989 Co-Op's major assets, a gasohol plant
Decided February 21, 1990 b. that Arthur Young violated these principles in an effort to
(Bon) inflate the assets and net worth of the Co-Op.
c. that, had Arthur Young properly treated the plant in its
Doctrine: Under "family resemblance" test, a note is presumed to be a audits, they would not have purchased demand notes
security unless it bears a strong resemblance, determined by examining because the Co-Op's insolvency would have been
four specified factors, to one of a judicially crafted list of categories of apparent
instrument that are not securities. If the instrument is not sufficiently 6. On the basis of these allegations, petitioners claimed that Arthur
similar to a listed item, a court must decide whether another category Young had violated the antifraud provisions of the 1934 Act as
should be added by examining the same factors. well as Arkansas' securities laws.
7. Petitioners prevailed at trial on both their federal and state
Facts: claims, receiving a $6.1 million judgment.
1. Co-Op, an agricultural cooperative, sold promissory notes payable 8. Arthur Young appealed, claiming that the demand notes were not
on demand by the holder in order to raise money to support its "securities" under either the 1934 Act or Arkansas law, and that
general business operations. the statutes' antifraud provisions therefore did not apply.
a. Although the notes were uncollateralized and uninsured, 9. A panel of the Eighth Circuit, agreeing with Arthur Young on both
they paid a variable rate of interest that was the state and federal issues, reversed. Arthur Young &
adjusted monthly to keep it higher than the rate paid by Co. v. Reves, 856 F. 2d 52 (1988). We granted certiorari to
local financial institutions. address the federal issue, 490 U. S. 1105 (1989), and now reverse
2. The Co-Op offered the notes to both members and nonmembers, the judgment of the Court of Appeals.
marketing the scheme as an "Investment Program." 10. The statute in question is as follows:
a. Advertisements for the notes, which appeared in each 1934 Act. Section 3(a)(10) of that Act:
Co-Op newsletter, read in part: "YOUR CO-OP has more "The term `security' means any note, stock, treasury
than $11,000,000 in assets to stand behind your stock, bond, debenture, certificate of interest or
investments. The Investment is not Federal [sic] insured participation in any profit-sharing agreement or in any
but it is. . . Safe . . . Secure . . . and available when you oil, gas, or other mineral royalty or lease, any collateral-
need it." App. 5 (ellipses in original). trust certificate, preorganization certificate or
3. Despite these assurances, the Co-Op filed for bankruptcy in 1984. subscription, transferable share, investment contract,
At the time of the filing, over 1,600 people held notes worth a voting-trust certificate, certificate of deposit, for a
total of $10 million. security, any put, call, straddle, option, or privilege on
4. After the Co-Op filed for bankruptcy, petitioners, a class of any security, certificate of deposit, or group or index of
holders of the notes, filed suit against Arthur Young & Co., the securities (including any interest therein or based on the
Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 1

value thereof), or any put, call, straddle, option, or since an instrument's liquidity does not eliminate the risk
privilege entered into on a national securities exchange associated with securities.
relating to foreign currency, or in general, any instrument
commonly known as a `security'; or any certificate of Tests of assessment whether a “security” or not:
interest or participation in, temporary or interim a. Landereth Timber Formula from Landreth Timber Co. v.
certificate for, receipt for, or warrant or right to subscribe Landreth, 471 U. S. 681 (1985): instrument bearing the name
to or purchase, any of the foregoing; but shall not include "stock" that, among other things, is negotiable, offers the
currency or any note, draft, bill of exchange, or banker's possibility of capital appreciation, and carries the right to
acceptance which has a maturity at the time of issuance dividends contingent on the profits of a business enterprise is
of not exceeding nine months, exclusive of days of grace, plainly within the class of instruments Congress intended the
or any renewal thereof the maturity of which is like-wise securities laws to cover.
limited." 48 Stat. 884, as amended, 15 U. S. C. §  Problem: Does not apply to “notes”. Landreth
78c(a)(10). Timber formula cannot sensibly be applied to notes,
some other principle must be developed to define the
Issue: term "note."
Are the subject “notes” considered as ‘securities”?  A majority of the Courts of Appeals that have considered
the issue have adopted, in varying forms, "investment
Held: versus commercial" approaches that distinguish, on the
YES. basis of all of the circumstances surrounding the
Summary of Ratio: transactions, notes issued in an investment context
Applying the family resemblance approach, the notes at issue are (which are "securities") from notes issued in a
"securities." They do not resemble any of the enumerated commercial or consumer context (which are not).
categories of nonsecurities. Nor does an examination of the four b. Investment Versus Commercial" Approach: distinguish, on the
relevant factors suggest that they should be treated as basis of all of the circumstances surrounding the transactions,
nonsecurities: (1) the Co-Op sold them to raise capital, and notes issued in an investment context (which are "securities")
purchasers bought them to earn a profit in the form of interest, so from notes issued in a commercial or consumer context (which
that they are most naturally conceived as investments in a are not).
business enterprise; (2) there was "common trading" of the notes, c. Family Resemblance Approach: begins with a presumption
which were offered and sold to a broad segment of the public; (3) that any note with a term of more than nine months is a
the public reasonably perceived from advertisements for the "security."
notes that they were investments, and there were no  test permits an issuer to rebut the presumption that a
countervailing factors that would have led a reasonable person to note is a security if it can show that the note in question
question this characterization; and (4) there was no risk-reducing "bear[s] a strong family resemblance" to an item on the
factor that would make the application of the Securities Acts judicially crafted list of exceptions
unnecessary, since the notes were uncollateralized and uninsured d. Howey Test from SEC v. W. J. Howey Co., 328 U. S. 293 (1946): to
and would escape federal regulation entirely if the Acts were held determine whether an instrument is an "investment contract" to
not to apply. The lower court's argument that the demand nature the determination whether an instrument is a "note." Under this
of the notes is very uncharacteristic of a security is unpersuasive, test, a note is a security only if it evidences "(1) an investment; (2)

[4]
in a common enterprise; (3) with a reasonable expection of interest. Indeed, one of the primary inducements
profits; (4) to be derived from the entrepreneurial or managerial offered purchasers was an interest rate constantly
efforts of others. revised to keep it slightly above the rate paid by local
banks and savings and loans. From both sides, then, the
transaction is most naturally conceived as an investment
The test applied by the Court: “Family Resemblance” in a business enterprise rather than as a purely
1. Assess the motivations that would prompt a reasonable seller and commercial or consumer transaction.
buyer to enter into it. 2. plan of distribution" of the instrument
 If the seller's purpose is to raise money for the general  The Co-Op offered the notes over an extended period to
use of a business enterprise or to finance substantial its 23,000 members, as well as to nonmembers, and
investments and the buyer is interested primarily in the more than 1,600 people held notes when the Co-Op filed
profit the note is expected to generate, the instrument is for bankruptcy. To be sure, the notes were not traded on
likely to be a "security." an exchange.
 If the note is exchanged to facilitate the purchase and  They were, however, offered and sold to a broad
sale of a minor asset or consumer good, to correct for segment of the public, and that is all we have held to be
the seller's cash-flow difficulties, or to advance some necessary to establish the requisite "common trading" in
other commercial or consumer purpose, on the other an instrument.
hand, the note is less sensibly described as a "security." 3. The public's reasonable perceptions
2. Examine the "plan of distribution" of the instrument  The fundamental essence of a security" to be its
 It is to determine whether it is an instrument in which character as an "investment." . The advertisements for
there is "common trading for speculation or the notes here characterized them as "investments," and
investment," there were no countervailing factors that would have led
3. Examine the reasonable expectations of the investing public: a reasonable person to question this characterization.
 The Court will consider instruments to be "securities" on  In these circumstances, it would be reasonable for a
the basis of such public expectations, even where an prospective purchaser to take the Co-Op at its word.
economic analysis of the circumstances of the particular 4. Risk Reduction Factor
transaction might suggest that the instruments are not  There is no risk-reducing factor to suggest that these
"securities" as used in that transaction. instruments are not in fact securities. The notes are
4. Examine whether some factor such as the existence of another uncollateralized and uninsured. Moreover, unlike the
regulatory scheme significantly reduces the risk of the instrument, certificates of deposit, which were insured by the Federal
thereby rendering application of the Securities Acts unnecessary. Deposit Insurance Corporation and subject to substantial
regulation under the federal banking laws, and unlike the
APPLYING the Test in the Case: pension plan which was comprehensively regulated
1. Assess the motivations that would prompt a reasonable seller and under the Employee Retirement Income Security Act of
buyer to enter into it. 1974, 88 Stat. 829, 29 U. S. C. § 1001 et seq. (1982 ed.),
 The Co-Op sold the notes in an effort to raise capital for the notes here would escape federal regulation entirely if
its general business operations, and purchasers bought the Acts were held not to apply.
them in order to earn a profit in the form of

The virtually instant liquidity associated with demand notes is coupled with a contract for cultivating, marketing and remitting
inconsistent with the risk ordinarily associated with "securities."  the net proceeds to the investor
WRONG! 2. Securities and Exchange Commission instituted this action to
 Common stock traded on a national exchange is the paradigm of a restrain the respondents from using the mails and
security, and it is as readily convertible into cash as is a demand instrumentalities of interstate commerce in the offer and sale of
note. unregistered and nonexempt securities
 The same is true of publicly traded corporate bonds, debentures, 3. The respondents, W. J. Howey Company and Howey-in-the-Hills
and any number of other instruments that are plainly within the Service, Inc., are Florida corporations under direct common
purview of the Acts. The demand feature of a note does permit a control and management.
holder to eliminate risk quickly by making a demand, but just as a. The Howey Company owns large tracts of citrus acreage
with publicly traded stock, the liquidity of the instrument does in Lake County, Florida
not eliminate risk altogether. i. During the past several years, it has planted
 Indeed, publicly traded stock is even more readily liquid than are about 500 acres annually, keeping half of the
demand notes, in that a demand only eliminates risk when, and if, groves itself and offering the other half to the
payment is made, whereas the sale of a share of stock through a public "to help us finance additional
national exchange and the receipt of the proceeds usually occur development."
simultaneously. b. Howey-in-the-Hills Service, Inc. is a service company
engaged in cultivating and developing many of these
Decision: For the foregoing reasons, we conclude that the demand notes groves, including the harvesting and marketing of the
at issue here fall under the "note" category of instruments that are crops.
"securities" under the 1933 and 1934 Acts. We also conclude that, even 4. Each prospective customer is offered both a land sales contract
under respondent's preferred approach to § 3(a)(10)'s exclusion for short- and a service contract, after having been told that it is not feasible
term notes, these demand notes do not fall within the exclusion. to invest in a grove unless service arrangements are made.
Accordingly, we reverse the judgment of the Court of Appeals and remand a. While the purchaser is free to make arrangements with
the case for further proceedings consistent with this opinion. other service companies, the superiority of Howey-in-
the-Hills Service, Inc., is stressed. Indeed, 85% of the
acreage sold during the 3-year period ending May 31,
1943, was covered by service contracts with Howey-in-
the-Hills Service, Inc.
Securities and Exchange Commission v. Howey Co. b. The land sales contract with the Howey Company
provides for a uniform purchase price per acre or fraction
328 U.S. 293; Murphy; Chants thereof, varying in amount only in accordance with the
number of years the particular plot has been planted
FACTS: with citrus trees.
c. Upon full payment of the purchase price, the land is
1. Case involves the application of § 2(1) of the Securities Act of conveyed to the purchaser by warranty deed. Purchases
1933 to an offering of units of a citrus grove development, are usually made in narrow strips of land arranged so
that an acre consists of a row of 48 trees.

5. During the period between February 1, 1941, and May 31, 1943, and that no registration statement or letter of notification has
31 of the 42 persons making purchases bought less than 5 acres ever been filed with the Commission in accordance with the
each. The average holding of these 31 persons was 1.33 acres, Securities Act of 1933 and the rules and regulations thereunder.
and sales of as little as O.65, O.7 and O.73 of an acre were made.
a. These tracts are not separately fenced, and the sole
indication of several ownership is found in small land ISSUE: Whether, under the circumstances, the land sales contract, the
marks intelligible only through a plat book record. warranty deed and the service contract together constitute an "investment
6. The service contract, generally of a 10-year duration without contract" within the meaning of § 2(1)? YES
option of cancellation, gives Howey-in-the-Hills Service, Inc., a
leasehold interest and "full and complete" possession of the - The lower courts, in reaching a negative answer to this problem,
acreage. treated the contracts and deeds as separate transactions involving
a. For a specified fee plus the cost of labor and materials, no more than an ordinary real estate sale and an agreement by
the company is given full discretion and authority over the seller to manage the property for the buyer.
the cultivation of the groves and the harvest and
marketing of the crops.
b. Without the consent of the company, the landowner or HELD:
purchaser has no right of entry to market the crop; thus,
there is ordinarily no right to specific fruit. - Section 2(1) of the Act defines the term "security" to include the
c. The company is accountable only for an allocation of the commonly known documents traded for speculation or
net profits based upon a check made at the time of investment.
picking. All the produce is pooled by the respondent o also includes "securities" of a more variable character,
companies, which do business under their own names. designated by such descriptive terms as "certificate of
7. The purchasers, for the most part, are nonresidents of Florida. interest or participation in any profit-sharing
They are predominantly business and professional people who agreement," "investment contract," and, "in general, any
lack the knowledge, skill, and equipment necessary for the care interest or instrument commonly known as a security.'
and cultivation of citrus trees. - The term "investment contract" is undefined by the Securities Act
a. They are attracted by the expectation of substantial or by relevant legislative reports
profits o the term was common in many state "blue sky" laws in
b. Many of these purchasers are patrons of a resort hotel existence prior to the adoption of the federal statute,
owned and operated by the Howey Company in a scenic and, although the term was also undefined by the state
section adjacent to the groves. The hotel's advertising laws, it had been broadly construed by state courts so as
mentions the fine groves in the vicinity, and the attention to afford the investing public a full measure of
of the patrons is drawn to the groves as they are being protection.
escorted about the surrounding countryside. They are o Form was disregarded for substance, and emphasis was
told that the groves are for sale; if they indicate an placed upon economic reality
interest in the matter, they are then given a sales talk. - An investment contract thus came to mean a contract or scheme
8. It is admitted that the mails and instrumentalities of interstate for "the placing of capital or laying out of money in a way
commerce are used in the sale of the land and service contracts, intended to secure income or profit from its employment."

o definition was uniformly applied by state courts to a they are attracted solely by the prospects of a return on
variety of situations where individuals were led to invest their investment.
money in a common enterprise with the expectation that o individual development of the plots of land that are
they would earn a profit solely through the efforts of the offered and sold would seldom be economically feasible,
promoter or of someone other than themselves. due to their small size. Such tracts gain utility as citrus
- reasonable to attach that meaning to the term as used by groves only when cultivated and developed as
Congress, especially since such a definition is consistent with the component parts of a larger area.
statutory aims. o A common enterprise managed by respondents or third
- an investment contract, for purposes of the Securities Act, parties with adequate personnel and equipment is
means a contract, transaction or scheme whereby a person therefore essential if the investors are to achieve their
invests his money in a common enterprise and is led to expect paramount aim of a return on their investments. Their
profits solely from the efforts of the promoter or a third party, it respective shares in this enterprise are evidenced by land
being immaterial whether the shares in the enterprise are sales contracts and warranty deeds, which serve as a
evidenced by formal certificates or by nominal interests in the convenient method of determining the investors'
physical assets employed in the enterprise allocable shares of the profits. The resulting transfer of
o It permits the fulfillment of the statutory purpose of rights in land is purely incidental.
compelling full and fair disclosure relative to the - Thus, all the elements of a profit-seeking business venture are
issuance of "the many types of instruments that, in our present here.
commercial world, fall within the ordinary concept of a o The investors provide the capital and share in the
security." earnings and profits; the promoters manage, control, and
o embodies a flexible, rather than a static, principle, one operate the enterprise.
that is capable of adaptation to meet the countless and o It follows that the arrangements whereby the investors'
variable schemes devised by those who seek the use of interests are made manifest involve investment
the money of others on the promise of profits. contracts, regardless of the legal terminology in which
- The transactions in this case clearly involve investment contracts, such contracts are clothed.
as so defined o The investment contracts in this instance take the form
o The respondent companies are offering something more of land sales contracts, warranty deeds, and service
than fee simple interests in land, something different contracts which respondents offer to prospective
from a farm or orchard coupled with management investors.
services. o And respondents' failure to abide by the statutory and
o They are offering an opportunity to contribute money administrative rules in making such offerings, even
and to share in the profits of a large citrus fruit though the failure result from a bona fide mistake as to
enterprise managed and partly owned by respondents. the law, cannot be sanctioned under the Act
o They are offering this opportunity to persons who reside - The Securities Act prohibits the offer, as well as the sale, of
in distant localities and who lack the equipment and unregistered, nonexempt securities.
experience requisite to the cultivation, harvesting, and o Hence, it is enough that the respondents merely offer the
marketing of the citrus products. Such persons have no essential ingredients of an investment contract.
desire to occupy the land, or to develop it themselves;

- The test is whether the scheme involves an investment of money - Romulo E. Munsayac, Jr. inquired from public respondent SEC
in a common enterprise with profits to come solely from the whether petitioner’s business involves "legitimate network
efforts of others. If that test be satisfied, it is immaterial marketing."
whether the enterprise is speculative or nonspeculative, or 3. On the bases of the letters of respondents, SEC held a conference
whether there is a sale of property with or without intrinsic that was attended by petitioner’s incorporators John Lim, Paul
value Nicolas and Leonito Nicolas. The attendees were requested to
o The statutory policy of affording broad protection to submit copies of petitioner’s marketing scheme and list of its
investors is not to be thwarted by unrealistic and members with addresses.
irrelevant formulae. 4. The following day, petitioner submitted to SEC copies of its
1
marketing course module and letters of accreditation/authority
or confirmation from Crown Asia, Fil-Estate Network and Pioneer
POWER HOMES UNLIMITED CORPORATION vs. SECURITIES AND 29 Realty Corporation.
EXCHANGE COMMISSION AND NOEL MANERO 5. SEC visited the business premises of petitioner wherein it
G.R. No. 164182 | February 26, 2008 | PUNO, C.J. ; JUSTIN gathered documents such as certificates of accreditation to
several real estate companies, list of members with web sites,
Doctrine: The business operation or the scheme of petitioner constitutes an investment sample of member mail box, webpages of two (2) members, and
contract that is a security under R.A. No. 8799. Thus, it must be registered with public lists of Business Center Owners who are qualified to acquire real
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
estate properties and materials on computer tutorials.
respondent SEC. The CDO was proper even without a finding of fraud. As an investment - Finding petitioner to be engaged in the sale or offer for sale
contract that is security under R.A. No. 8799, it must be registered with public respondent or distribution of investment contracts, which are considered
SEC, otherwise the SEC cannot protect the investing public from fraudulent securities. The securities under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799,
strict regulation of securities is founded on the premise that the capital markets depend on
the investing public’s level of confidence in the system.
SEC issued a Cease and Desist Order from further engaging in
the sale, offer or distribution of the securities upon the
FACTS: receipt of this order for Power Homes failure to register them
1. Power Homes is a domestic corporation duly registered with SEC in violation of Sec. 8.1 of the same Act
on October 13, 2000 with a primary purpose “To engage in the
transaction of promoting, acquiring, managing, leasing, obtaining 1
The scheme of the [petitioner] corporation requires an investor to become a Business
options on, development, and improvement of real estate
Center Owner (BCO). The BCO is required to pay US$234 as his enrollment fee. His enrollment
properties for subdivision and allied purposes, and in the purchase, entitles him to recruit two investors who should pay US$234 each and out of which amount
sale and/or exchange of said subdivision and properties through he shall receive US$92. In case the two referrals/enrollees would recruit a minimum of four
network marketing.” (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
2. Noel Manero requested SEC to investigate petitioner’s business.
fund from the gross amount of US$184. After recruiting 128 persons in a period of eight (8)
- He claimed that he attended a seminar conducted by months for each Left and Right business groups or a total of 256 enrollees whether directly
petitioner where the latter claimed to sell properties that referred by the BCO or through his down lines, the BCO who receives a total amount of
were inexistent and without any broker’s license. 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 [petitioner’s] accredited real estate developers

6. Petitioner moved for the lifting of the CDO, which public whereby a person (1) makes an investment of money, (2) in a
respondent SEC denied for lack of merit. common enterprise, (3) with the expectation of profits, (4) to
7. Aggrieved, petitioner went to the Court of Appeals imputing grave be derived solely from the efforts of others. Although the
abuse of discretion amounting to lack or excess of jurisdiction on proponents must establish all four elements, the US Supreme
public respondent SEC for issuing the order. It also applied for a Court stressed that the Howey Test "embodies a flexible
temporary restraining order, which the appellate court granted. rather than a static principle, one that is capable of
adaptation to meet the countless and variable schemes
ISSUE: Whether petitioner’s business constitutes an investment contract devised by those who seek the use of the money of others on
which should be registered with public respondent SEC before its sale or the promise of profits." Needless to state, any investment
offer for sale or distribution to the public? contract covered by the Howey Test must be registered
under the Securities Act, regardless of whether its issuer was
DECISION: engaged in fraudulent practices.
1. Public respondent SEC found the petitioner "as a marketing 4. Our R.A. No. 8799 appears to follow this flexible concept for it
company that promotes and facilitates sales of real properties and defines an investment contract as a contract, transaction or
other related products of real estate developers through effective scheme (collectively "contract") whereby a person invests his
leverage marketing." money in a common enterprise and is led to expect profits not
2. An investment contract is defined in the Amended Implementing solely but primarily from the efforts of others. Thus, to be a
Rules and Regulations of R.A. No. 8799 as a "contract, transaction security subject to regulation by the SEC, an investment contract
or scheme (collectively ‘contract’) whereby a person invests his in our jurisdiction must be proved to be: (1) an investment of
money in a common enterprise and is led to expect money, (2) in a common enterprise, (3) with expectation of
profits primarily from the efforts of others." profits, (4) primarily from efforts of others.
3. Our definition of an investment contract traces its roots from the 5. Prescinding from these premises, we affirm the ruling of the
1946 United States (US) case of SEC v. W.J. Howey Co. public respondent SEC and the Court of Appeals that the
- In this case, the US Supreme Court was confronted with the petitioner was engaged in the sale or distribution of an
issue of whether the Howey transaction constituted an investment contract.
"investment contract" under the Securities Act’s definition of - Interestingly, the facts of SEC v. Turner are similar to the case
"security." at bar. In Turner, the SEC brought a suit to enjoin the violation
- The US Supreme Court, recognizing that the term of federal securities laws by a company offering to sell to the
"investment contract" was not defined by the Act or public contracts characterized as self-improvement courses.
illumined by any legislative report, held that "Congress was On appeal from a grant of preliminary injunction, the US
th
using a term whose meaning had been crystallized" under the Court of Appeals of the 9 Circuit held that self-improvement
state’s "blue sky" laws in existence prior to the adoption of contracts which primarily offered the buyer the opportunity
the Securities Act. Thus, it ruled that the use of the catch-all of earning commissions on the sale of contracts to others
term "investment contract" indicated a congressional intent were "investment contracts" and thus were "securities"
to cover a wide range of investment transactions. within the meaning of the federal securities laws. This is
- It established a test to determine whether a transaction falls regardless of the fact that buyers, in addition to investing
within the scope of an "investment contract." Known as money needed to purchase the contract, were obliged to
the Howey Test, it requires a transaction, contract, or scheme

contribute their own efforts in finding prospects and bringing buying was the chance to collect a commission by bringing other
them to sales meetings. purchasers to the company. The district court granted a preliminary
- The appellate court held that it is apparent from the record injunction for the SEC against appellants. Appellants sought review. The
that what is sold is not of the usual "business motivation" court held that the plans were investment contracts under the Securities
type of courses. Rather, the purchaser is really buying the Act of 1933, 15 U.S.C.S. § 77a et seq., and the Securities Exchange of
possibility of deriving money from the sale of the plans by 1934, 15 U.S.C.S. § 78a et seq. Although investors had to put some effort in
Dare to individuals whom the purchaser has brought to Dare. getting a return, i.e. by bringing a potential purchaser to a meeting, the
The promotional aspects of the plan, such as seminars, films, scheme was an investment contract because money was invested, there
and records, are aimed at interesting others in the Plans. was a common enterprise, and the success of the enterprise was
Their value for any other purpose is, to put it mildly, minimal. dependent upon upper management. Therefore, the court affirmed.
- Once an individual has purchased a Plan, he turns his efforts
toward bringing others into the organization, for which he Doctrine: the word "solely" should not be read as a strict or literal
will receive a part of what they pay. His task is to bring limitation on the definition of an investment contract, but rather must be
prospective purchasers to "Adventure Meetings." construed realistically, so as to include within the definition those schemes
6. The business scheme of petitioner in the case at bar is essentially which involve in substance, if not form, securities.
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 Facts:
minimum recruitment of four (4) investors by these two (2)
recruits, who then recruit at least two (2) each, entitles the 1. The question presented is whether the "Adventures" or "Plan"
principal investor to US$184 and the pyramid goes on. enjoined are "securities" within the meaning of the federal
7. We reject petitioner’s claim that the payment of US$234 is for the securities laws. Of the five that Dare offers -- Adventures I, II, III,
seminars on leverage marketing and not for any product. Clearly, and IV, and the $1,000 Plan -- the lower court held that
the trainings or seminars are merely designed to enhance
Adventures III and IV and the $1,000 Plan are securities.
petitioner’s business of teaching its investors the know-how of its
multi-level marketing business. An investor enrolls under the 2. The Adventures and the $1000 Plan -- the facade.
scheme of petitioner to be entitled to recruit other investors and - The five courses offered by Dare ostensibly involve two
to receive commissions from the investments of those directly elements. In return for his money, the purchaser is privileged
recruited by him. Under the scheme, the accumulated amount to attend seminar sessions and receives tapes, records, and
received by the investor comes primarily from the efforts of his other material, all aimed at improving self-motivation and
recruits.
sales ability.
- He also receives, if he purchases either Adventure III or IV or
SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. GLENN the $1,000 Plan, the opportunity to help to sell the courses to
W. TURNER ENTERPRISES, INC., et al., Defendants- others; if successful he receives part of the purchase price as
his commission. There is no doubt that this latter aspect of
OVERVIEW: Appellants developed a system where a person could the purchase is in all respects the significant one.
purchase and sell plans of the company. What the purchaser was really

3. It is apparent from the record that what is sold is not of the usual purchaser who brought the prospect to the meeting, but
"business motivation" type of courses. primarily, by Dare salesmen, specialists in the "hard sell."
- Rather, the purchaser is really buying the possibility of 10. The format of the meeting is preordained. A script created by
deriving money from the sale of the plans by Dare to Dare is strictly adhered to. While no express guarantee of success
individuals whom the purchaser has brought to Dare. is made at the meetings, and the statement is made that the
- The promotional aspects of the plan, such as seminars, films, purchaser must expect to work, the impression which is fostered
and records, are aimed at interesting others n the Plans. Their is of the near inevitability of success to be achieved by anyone
value for any other purpose, is, to put it mildly, minimal. who purchases a plan and follows Dare's instructions.
4. Once an individual has purchased a Plan, he turns his efforts
toward bringing others into the organization, for which he will The role of the purchaser-salesman.
receive a part of what they pay. His task is to bring prospective 1. Once he has bought a plan that empowers him to help sell the
purchasers to "Adventure Meetings." plans to others, the task of the purchaser is to find prospects and
5. These meetings are like an old time revival meeting, but directed induce them to attend Adventure Meetings.
toward the joys of making easy money rather than salvation. Their 2. He is not to tell them that Dare To Be Great, Inc. is involved.
purpose is to convince prospective purchasers, or "prospects," Rather, he catches their interest by intimating that the result of
that Dare is a sure route to great riches. At the meetings are attendance will be significant wealth for the prospect.
employees, officers, and speakers from Dare, as well as 3. The "salesman" is also told that to maximize his chances of
purchasers (now "salesmen") and their prospects. success he should impart an aura of affluence, whether spurious
6. The Dare people, not the purchaser-"salesmen", run the meetings or not -- to pretend that through his association with Dare he has
and do the selling. They exude great enthusiasm, cheering and obtained wealth of no small proportions. He is told to "fake it 'til
chanting; there is exuberant handshaking, standing on chairs, you make it," or to give the impression of wealth even if it has not
shouting, and "moneyhumming". been attained.
7. The Dare people dress in expensive, modern clothes; they display
large sums of cash, flaunting it to those present, and even at Issue/held: WON the Adventure Plans and “ $1000 Plan” are securities?
times throwing it about; they drive new and expensive YES
automobiles. Dare speakers describe, usually in a frenzied
manner, the wealth that awaits the prospects if they will purchase Rationale:
one of the plans.
1. The district court held that Adventures III and IV, and the $1,000
8. The goal of all of this is to persuade the prospect to purchase a
Plan were securities under the Securities Act of 1933, and the
plan Securities Exchange Act of 1934, The definitions of security that
4
9. After the meeting, pressure is applied to the prospect by Dare are found in each Act are almost identical. Both definitions
people, in an effort to induce him to purchase one of the include the terms "investment contract," "certificate of interest
Adventures or the plan. The sale is sometimes closed by the or participation in any profit-sharing agreement," and any
"instrument commonly known as a 'security'." The district court

held that the plans in question fell into all three categories of - Here, however, the investor, or purchaser, must himself exert
securities. The Supreme Court agrees. some efforts if he is to realize a return on his initial cash
2. The 1933 and 1934 Acts are remedial legislation, among the outlay. He must find prospects and persuade them to attend
central purposes of which is full and fair disclosure relative to the Dare Adventure Meetings, and at least some of them must
issuance of securities. then purchase a plan if he is to realize that return. Thus it can
3. It is a familiar canon of legislative construction that remedial be said that the returns or profits are not coming "solely"
legislation should be construed broadly. from the efforts of others.
4. The Acts were designed to protect the American public from 9. But the Court hold that in light of the remedial nature of the
speculative or fraudulent schemes of promoters. For that reason legislation, the statutory policy of affording broad protection to
Congress defined the term "security" broadly, and the Supreme the public, the word "solely" should not be read as a strict or
Court in turn has construed the definition liberally. literal limitation on the definition of an investment contract, but
HN5
5. In SEC v. W. J. Howey Co., supra, the Court stated that the rather must be construed realistically, so as to include within the
definition of a security "embodies a flexible rather than a static definition those schemes which involve in substance, if not form,
principle, one that is capable of adaptation to meet the securities.
countless and variable schemes devised by those who seek the - Within this context, we hold that Adventures III and IV, and
6
use of the money of others on the promise of profits." And in the $1,000 Plan, are investment contracts within the meaning
the recent case of Tcherepnin v. Knight, supra, the Court stated, of the 1933 and 1934 Acts
"In searching for the meaning and scope of the word 'security' in 10. A strict application would be easy to evade by adding a
the Act, form should be disregarded for substance and the requirement that the buyer contribute a modicum of effort. Thus
emphasis should be on economic reality. We approach the the fact that the investors here were required to exert some
definition of a "security" with these admonitions in mind. efforts if a return were to be achieved should not automatically
6. In SEC v. W. J. Howey Co., supra, the Supreme Court set out its by preclude a finding that the Plan or Adventure is an investment
now familiar definition of an investment contract: contract. To do so would not serve the purpose of the legislation.
11. Rather we adopt a more realistic test, whether the efforts made
"The is whether the scheme involves an investment of money in
by those other than the investor are the undeniably significant
a common enterprise with profits to come solely from the efforts ones, those essential managerial efforts which affect the failure or
of others.” success of the enterprise.
7. For purposes of the present case, the sticking point in 12. In this case, Dare's source of income is from selling the
the Howey definition is the word "solely," a qualification which of Adventures and the Plan. The purchaser is sold the idea that he
course exactly fitted the circumstances in Howey. will get a fixed part of the proceeds of the sales. In essence, to get
that share, he invests three things: his money, his efforts to find
8. All the other elements of the Howey test have been met here.
prospects and bring them to the meetings, and whatever it costs
There is an investment of money, a common enterprise,and the
him to create an illusion of his own affluence. He invests them in
expectation of profits to come from the efforts of others. Dare's get-rich-quick scheme. What he buys is a share in the
proceeds of the selling efforts of Dare. Those efforts are the sine

qua non of the scheme; those efforts are what keeps it going. In were told that ASBHI was exactly the same institution that they
our view, the scheme is no less an investment contract merely had previously dealt with.
because he contributes some effort as well as money to get into 5) ASBHI would issue two (2) postdated checks to its lenders, one
it. representing the principal amount and the other covering the
interest thereon. The checks were drawn against DBS Bank and
would mature in 30 to 45 days. On the maturity of the checks, the
BETTY GABIONZA and ISABELITA TAN, - versus - COURT OF APPEALS, individual lenders would renew the loans, either collecting only
LUKE ROXAS and EVELYN NOLASCO, the interest earnings or rolling over the same with the principal
G.R. No. 161057 amounts.
TINGA, J.: September 12, 2008 ; NILO 6) In the first quarter of 2000, DBS Bank started to refuse to pay for
FACTS: the checks purportedly by virtue of “stop payment” orders from
1) On 21 August 2000, petitioners Betty Go Gabionza (Gabionza) and ASBHI. In May of 2000, ASBHI filed a petition for rehabilitation
Isabelita Tan (Tan) filed their respective Complaints-affidavit and receivership with the Securities and Exchange Commission
charging private respondents Luke Roxas (Roxas) and Evelyn (SEC), and it was able to obtain an order enjoining it from paying
Nolasco (Nolasco) with several criminal acts. Roxas was the its outstanding liabilities. This series of events led to the filing of
president of ASB Holdings, Inc. (ASBHI) while Nolasco was the the complaints by petitioners, together with Christine Chua,
senior vice president and treasurer of the same corporation. Elizabeth Chan, Ando Sy and Antonio Villareal, against ASBHI. The
2) According to petitioners, ASBHI was incorporated in 1996 with its complaints were for estafa under Article 315(2)(a) and (2)(d) of
declared primary purpose to invest in any and all real and the Revised Penal Code, estafa under Presidential Decree No.
personal properties of every kind or otherwise acquire the stocks, 1689, violation of the Revised Securities Act and violation of the
bonds, and other securities or evidence of indebtedness of any General Banking Act.
other corporation, and to hold or own, use, sell, deal in, dispose
of, and turn to account any such stocks. ASBHI was organized with 7) Task Force on Financial Fraud (Task Force)  dismissed the
an authorized capital stock of P500,000.00, a fact reflected in the complaint and concluded that the subject transactions were
corporation’s articles of incorporation, copies of which were loans which gave rise only to civil liability; that petitioners were
appended as annexes to the complaint. satisfied with the arrangement from 1996 to 2000; that
3) Both petitioners had previously placed monetary investment with petitioners never directly dealt with Nolasco and Roxas; and that
the Bank of Southeast Asia (BSA). They alleged that between 1996 a check was not a security as contemplated by the Revised
and 1997, they were convinced by the officers of ASBHI to lend or Securities Act.
deposit money with the corporation. They and other investors
were urged to lend, invest or deposit money with ASBHI, and in 8) Secretary of Justice- Hernando Perez  issued a resolution which
return they would receive checks from ASBHI for the amount so partially reversed the Task Force and instead directed the filing of
lent, invested or deposited. five (5) Informations for estafa and an Information for violation of
4) At first, they were issued receipts reflecting the name “ASB Realty Section 4 in relation to Section 56 of the Revised Securities Act.
Development” which they were told was the same entity as BSA 9) Court of Appeals reversed the DOJ and ordered the dismissal of
or was connected therewith, but beginning in March 1998, the the criminal cases.
receipts were issued in the name of ASBHI. They claimed that they

ISSUES:
1) WON RESPONDENTS ARE GUILTY OF THE CRIME OF ESTAFA. YES (3) Third. As earlier stated, there was an explicit and reasonable
conclusion drawn by the DOJ that it was the representation of
The elements of estafa by means of deceit as defined under Article ASBHI to petitioners that it was creditworthy and financially
315(2)(a) of the Revised Penal Code are as follows: capable to pay that induced petitioners to extend the loans.
(1) that there must be a false pretense, fraudulent act or fraudulent Petitioners, in their respective complaint-affidavits, alleged that
means; they were enticed to extend the loans upon the following
(2) that such false pretense, fraudulent act or fraudulent means must representations: that ASBHI was into the very same activities of
be made or executed prior to or simultaneously with the ASB Realty Corp., ASB Development Corp. and ASB Land, Inc., or
commission of the fraud; otherwise held controlling interest therein; that ASB could
(3) that the offended party must have relied on the false pretense, legitimately solicit funds from the public for
fraudulent act or fraudulent means, that is, he was induced to investment/borrowing purposes; that ASB, by itself, or through
part with his money or property because of the false pretense, the corporations aforestated, owned real and personal properties
fraudulent act or fraudulent means; and which would support and justify its borrowing program; that ASB
(4) that as a result thereof, the offended party suffered damage. was connected with and firmly backed by DBS Bank in which
Roxas held a substantial stake; and ASB would, upon maturity of
In the case at bar: the checks it issued to its lenders, pay the same and that it had
(1) First. The DOJ Resolution explicitly identified the false pretense, the necessary resources to do so.
fraudulent act or fraudulent means perpetrated upon the
petitioners. It narrated that petitioners were made to believe that (4) Fourth. The DOJ Resolution established that petitioners sustained
ASBHI had the financial capacity to repay the loans it enticed damage as a result of the acts perpetrated against them. The
petitioners to extend, despite the fact that “it had an authorized damage is
capital stock of only P500,000.00 and paid up capital of considerable as to petitioners. Gabionza lost P12,160,583.32
onlyP125,000.00.” The deficient capitalization of ASBHI is evinced whereas Tan lost 16,411,238.57. In addition, the DOJ Resolution
by its articles of incorporation, the treasurer’s affidavit executed noted that neither Roxas nor Nolasco disputed that ASBHI had
by Nolasco, the audited financial statements of the corporation borrowed funds from about 700 individual investors amounting to
for 1998 and the general information sheets for 1998 and 1999, close to P4B.
all of which petitioners attached to their respective affidavits.
(2) Second. The DOJ Resolution also made it clear that the false  To the benefit of private respondents, the Court of Appeals ruled,
representations have been made to petitioners prior to or citing Sesbreno v. Court of Appeals, that the subject transactions
simultaneously with the commission of the fraud. The assurance “are akin to money market placements which partake the nature
given to them by ASBHI that it is a worthy credit partner occurred of a loan, the non-payment of which does not give rise to criminal
before they parted with their money. Relevantly, ASBHI is not the liability for estafa.” The citation is woefully misplaced.
entity with whom petitioners initially transacted with, and they  Sesbreno affirmed that “a money market transaction partakes the
averred that they had to be convinced with such representations nature of a loan and therefore ‘nonpayment thereof would not
that Roxas and the same group behind BSA were also involved give rise to criminal liability for estafa through misappropriation
with ASBHI. or conversion.’”

o Estafa through misappropriation or conversion is regulated by the SEC, it is hardly likely that the design it chose to
punishable under Article 315(1)(b), while the case at bar employ would have been permitted at all.
involves Article 315 (2)(a), a mode of estafa by means of
deceit.  But was ASBHI able to successfully evade the requirements under
o Indeed, Sesbreno explains: “In money market placement, the Revised Securities Act? As found by the DOJ, there is
the investor is a lender who loans his money to a ultimately a prima facie case that can at the very least sustain
borrower through a middleman or dealer. Petitioner here prosecution of private respondents under that law.
loaned his money to a borrower through Philfinance. o The DOJ Resolution is persuasive in citing American
When the latter failed to deliver back petitioner's authorities which countenance a flexible definition of
placement with the corresponding interest earned at the securities. Moreover, it bears pointing out that the
maturity date, the liability incurred by Philfinance was a definition of “securities” set forth in Section 2 of the
civil one.” That rationale is wholly irrelevant to the Revised Securities Act includes “commercial papers
complaint at bar, which centers not on the inability of evidencing indebtedness of any person, financial or non-
ASBHI to repay petitioners but on the fraud and financial entity, irrespective of maturity, issued,
misrepresentation committed by ASBHI to induce endorsed, sold, transferred or in any manner conveyed
petitioners to part with their money. to another.”
o A check is a commercial paper evidencing indebtedness
 To be clear, it is possible to hold the borrower in a money market of any person, financial or non-financial entity. Since the
placement liable for estafa if the creditor was induced to extend a checks in this case were generally rolled over to augment
loan upon the false or fraudulent misrepresentations of the the creditor’s existing investment with ASBHI, they most
borrower. Such estafa is one by means of deceit. The borrower definitely take on the attributes of traditional stocks.
would not be generally liable for estafa through misappropriation
if he or she fails to repay the loan, since the liability in such
instance is ordinarily civil in nature.  We should be clear that the question of whether the subject
checks fall within the classification of securities under the Revised
2) Does it also establish a prima facie finding that there has been a Securities Act may still be the subject of debate, but at the very
violation of the then-Revised Securities Act, specifically Section 4 least, the DOJ Resolution has established a prima facie case for
in relation to Section 56 thereof? YES prosecuting private respondents for such offense.
o The thorough determination of such issue is best left to a
Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act, full-blown trial of the merits, where private respondents
generally requires the registration of securities and prohibits the sale or are free to dispute the theories set forth in the DOJ
distribution of unregistered securities. Resolution. It is clear error on the part of the Court of
 The Revised Securities Act was geared towards maintaining the Appeals to dismiss such finding so perfunctorily and on
stability of the national investment market against activities such such flimsy grounds that do not consider the grave
as those apparently engaged in by ASBHI. As the DOJ Resolution consequences. After all, as the DOJ Resolution correctly
noted, ASBHI adopted this scheme in an attempt to circumvent pointed out: “[T]he postdated checks themselves serve
the Revised Securities Act, which requires a prior license to sell or as the evidences of the indebtedness. A different rule
deal in securities. After all, if ASBHI’s activities were actually would open the floodgates for a similar scheme, whereby

companies without prior license or authority from the by inducement – does it make sense to compel that they be
SEC. This cannot be countenanced.” jointly charged in the same complaint to the extent that the
exclusion of one leads to the dismissal of the complaint? It does
 Private respondents cannot make capital of the fact that when not.
the DOJ Resolution was issued, the Revised Securities Act had
already been repealed by the Securities Regulation Code of 2000.
As noted by the DOJ, the new Code does punish the same offense o Even if the criminal court fails to acquire jurisdiction over
alleged of petitioners, particularly Section 8 in relation to Section one or some participants to a crime, it still is able to try
73 thereof. The complained acts occurred during the effectivity of those accused over whom it acquired jurisdiction.
the Revised Securities Act. Certainly, the enactment of the new o The absence of one or some of the accused may bea
Code in lieu of the Revised Securities Act could not have r impact on the available evidence for the prosecution or
extinguished all criminal acts committed under the old law. defense, but it does not deprive the trial court to
o In Benedicto v. Court of Appeals that an exception to the accordingly try the case based on the evidence that is
rule that the absolute repeal of a penal law deprives the actually available.
court of authority to punish a person charged with
violating the old law prior to its repeal is “where the  At bar, if it is established after trial that Roxas and Nolasco
repealing act reenacts the former statute and punishes instructed all the employees, agents and traders of ASBHI to
the act previously penalized under the old law.” represent the corporation as financially able to engage in the
o It is worth noting that both the Revised Securities Act challenged transactions and repay its investors, despite their
and the Securities Regulation Code of 2000 provide for knowledge that ASBHI was not established to be in a position to
exactly the same penalty: “a fine of not less than five do so, and that representatives of ASBHI accordingly made such
thousand (P5,000.00) pesos nor more than five hundred representations to petitioners, then private respondents could be
thousand (P500,000.00) pesos or imprisonment of not held liable for estafa.
less than seven (7) years nor more than twenty one (21) o The failure to implead or try the employees, agents or
years, or both, in the discretion of the court.” traders will not negate such potential criminal liability of
Roxas and Nolasco. It is possible that the non-
3) Whether the same charges can be pinned against Roxas and participation of such traders or agents in the trial will
Nolasco? YES. affect the ability of both petitioners and private
respondents to adduce evidence during the trial, but it
 The DOJ Resolution did not consider it exculpatory that Roxas and cannot quell the existence of the crime even before trial
Nolasco had not themselves dealt directly with petitioners, is had. At the very least, the non-identification or non-
observing that “to commit a impleading of such traders or agents cannot negatively
crime,inducement is as sufficient and effective as direct impact the finding of probable cause.
participation.”This conclusion finds textual support in Article 17 of
the Revised Penal Code. 4) Is there sufficient basis then to establish probable cause against
Roxas and Nolasco? Taking into account the relative remoteness
 Assuming that the traders could be tagged as principals by direct of private respondents to petitioners, the DOJ still concluded
participation in tandem with Roxas and Nolasco – the principals that there was.

This appeal emanates from a district court order denying an injunction
 Indeed, the facts as thus established cannot lead to a definite, sought by the Securities & Exchange Commission (SEC) against Koscot
exculpatory conclusion that Roxas and Nolasco did not instruct, Interplanetary, Inc., (Koscot) for allegedly violating the federal securities
much less forbid, their agents from making the laws. Specifically, the SEC maintained that the pyramid promotion
misrepresentations to petitioners. enterprise operated by Koscot was within the ambit of the term security,
o They could of course pose that defense, but such claim and that the manner in which Koscot purveyed its enterprise to potential
can only be established following a trial on the merits investors contravened the anti-fraud provisions
considering that nothing in the record proves without
doubt such law-abiding prudence The Koscot Scheme
on their part. There is also the fact that ABSHI, thei 1. A subsidiary of Glen W. Turner Enterprises, Koscot thrives by enticing
r corporation, actually received the alleged amounts of prospective investors to participate in its enterprise, holding out as a
money from petitioners. lure the expectation of galactic profits.
 It is especially curious that according to the ASBHI balance
sheets dated 31 December 1999, which petitioners attached 2. The vehicle for the lure is a multi-level network of independent
to their affidavit-complaints, over five billion pesos were distributors, purportedly engaged in the business of selling a line of
booked as “advances to stockholder” when,according to the cosmetics.
general information sheet for 1999, Roxas owned 124,996 of  At the lowest level is a "beauty advisor" whose income is derived
the 125,000 subscribed shares ofASBHI. solely from retail sales of Koscot products made available at a
 Considering that ASBHI had an authorized capital stock of discount, customarily of 45%.
only P500,000 and a subscribed capital ofP125,000, it can be  Those desirous of ascending the ladder of the Koscot enterprise
reasonably deduced that such large amounts booked as may also participate on a second level, that of supervisor or retail
“advances to stockholder” could have only come from the manager. For an investment of $1,000, a supervisor receives
loans extended by over 700 investors to ASBHI. cosmetics at a greater discount from retail price, typically 55%, to
be sold either directly to the public or to be held for wholesale
WHEREFORE, the petition is GRANTED. distribution to the beauty advisors. In addition, a supervisor who
introduces a prospect to the Koscot program with whom a sale is
ultimately consummated receives $600 of the $1,000 paid to
SECURITIES AND EXCHANGE COMMISSION, v. KOSCOT INTERPLANETARY, Koscot.
INC., et al.,  The loftiest position in the multi-level scheme is that of
distributor. An investment of $5,000 with Koscot entitles a
No. 73-2339 UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
distributor to purchase cosmetics at an even greater discount,
497 F.2d 473; 1974 U.S. App. LEXIS 7641; Fed. Sec. L. Rep. (CCH) P94,710 typically 65%, for distribution to supervisors and retailers.
July 15, 1974, (digest ponente, Haulo) Moreover, fruitful sponsorship of either a supervisor or
distributor brings $600 or $3,000 respectively to the sponsor.
FACTS: 3. The modus operandi of Koscot and its investors is as follows.

 Investors solicit prospects to attend Opportunity Meetings at
which the latter are introduced to the Koscot scheme.

 Significantly, the investor is admonished not to mention the a mixed reception with the courts that it should not be applied in
details of the business before bringing the prospect to the lieu of the traditional definition.
meeting, a technique euphemistically denominated the "curiosity
approach." This test subsumes within it three elements:
 Thus, in the initial stage, an investor's sole task is to attract (1) first, that there is an investment of money;
individuals to the meeting. (2) second, that the scheme in which an investment is made
 Once a prospect's attendance at a meeting is secured, Koscot functions as a common enterprise; and
employees, frequently in conjunction with investors, undertake to (3) third, that under the scheme, profits are derived solely from the
apprise prospects of the "virtues" of enlisting in the Koscot plan. efforts of individuals other than the investors
 The meeting is conducted in conformity with scripts prepared by
Koscot. Indeed, Koscot distributes a bulletin which states: ". . . this 5. The district court pretermitted a consideration of the first two
program is to be presented by the script. It is strongly elements in finding that the third component of the test was not
recommended that you consider replacing any individual who satisfied because Koscot investors expended effort in soliciting
does not present the program verbatim." recruits to meetings, in participating in the conduct of meetings, and
 The final stage in the promotional scheme is the consummation in attempting to consummate the sale of distributorships and
of the sale. If a prospect capitulates at either an Opportunity subdistributorships
Meeting or a Go-Tour, an investor will not be required to expend
any additional effort. Less fortuitous investors whose prospects
are not as quickly enticed to invest do have to devote additional ISSUE:
effort to consummate a sale, the amount of which is contingent (1) whether the Koscot scheme satisfies the first two elements of the
upon the degree of reluctance of the prospect. Howey test -- and that which the district court did consider –
(2) whether the scheme satisfies the third component of the test.
4. The SEC argued that the scheme qualified as a profit-sharing (3) a determination of whether the "solely from the efforts of others"
arrangement, an interest commonly known as a security, and an standard is to be literally or functionally applied.
investment contract
 The profit-sharing theory was rejected because in the district HELD:
court's view, a successful recruiting distributor receives not a
share of Koscot's profit but rather a fixed fee. A. The First Two Elements
 The court refused to endorse the SEC's position that the pyramid (1) Since it cannot be disputed that purchasers of supervisorships and
arrangement constituted an interest "commonly known as a distributorships made an investment of money, our initial concern is
security" for two reasons. whether the Koscot scheme functions as a common enterprise.
 First, even under a traditional approach, under which the (2) As defined by the Ninth Circuit, HN4 "[a] common enterprise is one in
essential inquiry is how the interest is viewed in legal and financial which the fortunes of the investor are interwoven with and
circles, the question of whether a pyramid arrangement fell within dependent upon the efforts and success of those seeking the
the definition was still a polemical one; and investment or of third parties."
 second, the risk capital theory, which allegedly would encompass (3) In Howey xxxx the Supreme Court emphasized not whether profits
the Koscot arrangement, was of such recent vintage and had such were pooled, but rather the fact that the feasibility and success of the
enterprise, in attracting individuals to invest, and in cultivating,

harvesting and marketing the citrus products, rested on the program, three of which entitled an investor to earn money for
availability of the Howey Company's management coaxing additional prospects into the Dare fold.
(4) Similarly, here, the fact that an investor's return is independent of  To a purchaser of a plan denominated Adventure III, costing
that of other investors in the scheme is not decisive. Rather, the $2,000, Dare proffered tutelage on sales motivation and sales
requisite commonality is evidenced by the fact that the fortunes of ability and authority to sell Adventures I, II and III.
all investors are inextricably tied to the efficacy of the Koscot  Remuneration for a sale of each plan amounted to $100, $300
meetings and guidelines on recruiting prospects and consummating a and $900 respectively.
sale.  Dare bestowed the same benefits upon investors of Adventure IV
but with the additional opportunity to receive $2,500
B. The Third Element -- Solely from the Efforts of Others compensation for sales of Adventure IV to new prospects. This
plan cost $5,000.
Whether a literal or functional approach to the "solely from the efforts of  A purchaser of the $1,000 plan would receive basically the same
others" test should be adopted, i.e., whether the exertion of some effort benefits as would a purchaser of Adventure II, i.e., the sales
by an investor is inimical to the holding that a promotional scheme falls material, and was empowered to sell the plan. Financial gain
within the definition of an investment contract. would inure to him after his seller consummated a sale with two
prospects steered by him to his seller. The purchaser would then
The Legal Standard be entitled to sell plans on his own, being remunerated at $400
per sale.
(5) A literal application of the Howey test would frustrate the remedial  Alternatively a purchaser who lures three people into the scheme
purposes of the Act. would be entitled to sell the $1,000 plan without buying it
(6) In view of these developments and our analysis of the import of the himself.
language in and the derivation of the Howey test, we hold that the (8) As in the Koscot scheme, the initial task of a purchaser of a Dare plan
proper standard in determining whether a scheme constitutes an was to lure prospects to meetings, denominated Adventure Meetings.
investment contract is that explicated by the Ninth Circuit in SEC v. These were characterized by the same over zealous and emotionally
Glen W. Turner Enterprises, Inc., supra. In that case, the court charged atmosphere at which the illusion of affluence fostered in
announced that the critical inquiry is "whether the efforts made by Opportunity Meetings was created and relied upon in securing sales.
those other than the investor are the undeniably significant ones, The Adventure Meetings were run according to script but, as the Ninth
those essential managerial efforts which affect the failure or success Circuit noted, "The Dare People, not the purchaser-'salesmen', run the
of the enterprise." meetings and do the selling."
Application of the Test to the Instant Facts We confine our holding to those schemes in which promoters retain
immediate control over the essential managerial conduct of an enterprise
(7) Our task is greatly simplified by the Ninth Circuit's decision in SEC v.
and where the investor's realization of profits is inextricably tied to the
Glen W. Turner Enterprises, Inc., supra. The promotional scheme
confronting the Ninth Circuit is largely paralleled by that exposed success of the promotional scheme. Thus, we acknowledge that a
before this court. conventional franchise arrangement, wherein the promoter exercises
 Dare to be Great, (Dare) which like Koscot, is a subsidiary of merely remote control over an enterprise and the investor operates largely
Turner Enterprises, offered five plans in its self-improvement unfettered by promoter mandates presents a different question than the

3
one posed herein. But the Koscot scheme does not qualify as a 6. For acceptance into the standard LPI program, an insured must
conventional franchising arrangement. meet the following criteria: (1) be diagnosed with "Full Blown
4
AIDS"; (2) have a life expectancy of twenty-four months or less as
determined by LPI's "independent reviewing physician"; and (3)
be certified as mentally competent.
102 F.3d 587 7. LPI also represents that a policy qualifies for purchase only if it is
322 U.S.App.D.C. 189, Fed. Sec. L. Rep. P 99,368 issued by an insurance company rated "A-" or higher by a national
SECURITIES AND EXCHANGE COMMISSION, Appellee, insurance rating service. In addition, the policy allegedly must be
v. in good standing and be noncontestable, transferable or eligible
LIFE PARTNERS, INCORPORATED and Brian D. Pardo, Appellants. for irrevocable transfer of beneficiary.
Nos. 95-5364, 96-5018 and 96-5090. 8. LPI and Pardo attend to all aspects of finding and evaluating the
United States Court of Appeals, policies. Typically, the policies are assigned to LPI, not to
District of Columbia Circuit. investors. After the insured's death, the benefits are also paid
Dec. 20, 1996 directly to LPI which then pays the investors. Investors have no
(Bon) direct contractual rights against the insurance companies that
issue the policies.
Facts: 9. The Commission alleges that defendants are violating sections
Case Background (Not found in the case citation, see S.E.C. v. LIFE
5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act")
PARTNERS, INC. 898 F.Supp. 14 (1995)/ United States District Court,
[15 U.S.C. §§ 77e(a), 77e(c), 77q(a)], and sections 10(b), 15(a), and
District of Columbia./ August 30, 1995.)
15(c) of the Securities Exchange Act of 1934 ("Exchange Act") [15
1. Defendants Life Partners, Inc. ("LPI") and its president, Brian
U.S.C. §§ 78j(b), 78o(a), 78o(c)].
Pardo, "facilitate" the sale of life insurance policies from AIDS
victims to investors at a discount. The investors then recover the 10. The SEC does not contend that all viatical settlements are
face value of the policy after the policy holder's death. securities, but limits its focus to three LPI offerings.
2. Meanwhile, the terminally ill sellers secure much needed income a. The first is the standard policy of an insured with a life
in the final years of life when employment is unlikely and medical expectancy of twenty-four months or less.
bills are often staggering. b. The second involves the standard policy structured as an
3. This process is known as "viatical settlements" after the Individual Retirement Account ("IRA") investment.
ecclesiastical term "viaticum" (the communion given to a dying
1 c. The third offering permits investors to select the policies
person).
4. The Court must decide whether defendants simply act as agents of viators expected to live longer than two years.
for the investors or whether defendants are repackaging policies 11. Because the return on this longer term investment is more
as investment contracts and promissory notes in violation of speculative, LPI promises to facilitate the resale of these
securities laws. investments to other LPI investors. In the Commission's view, LPI
5. LPI is the largest viatical settlement organizer in the country, is illegally creating a secondary market in these longer term
accounting for approximately one half of the total settlement
policies. In addition, the Commission claims that LPI's solicitation
volume in 1994.
and promotional materials contain materially false and misleading

statements and omissions. Defendants vigorously deny these investors' profits flow predominantly from the efforts of
allegations. others. Id.
12. Court decided in favor of LPI. Now Securities and Exchange wants  Nothing in our application of the Howey test can
for a rehearing of the case. It argues that reasonably be construed to suggest that pre-purchase
13. that the Court declared an "artificial bright-line" rule that an efforts are "irrelevant."
investment is not a security "if the efforts of promoters or others
on which investors rely occur just before, rather than after, the Viatical Settlement is not similar to the mortgage pool
investors commit their money”  In contrast to an LPI viatical settlement, a mortgage pool must be
14. the Court has "place[d] in question the applicability of the federal managed on a continuing basis.
securities laws to ... certain asset-backed securities," including  Among the post-purchase services that should easily meet the
mortgages and securitized interests in commercial real estate, "efforts of others" test as we have interpreted it are: collecting
which account for a vast amount of investment capital. late mortgage payments, initiating foreclosures, structuring and
monitoring work-outs, negotiating concessions in order to avoid
Issue: refinancing, and arranging for a secondary market.
Is the Court correct in considering viatical settlements as NOT securities in  In the case of commercial real estate, the property must be kept
nature? in compliance with an array of tax, safety, and environmental
laws; it must be advertised, leased, re-leased, improved, repaired,
Held: cleaned, heated, and perhaps resold.
YES. The Court used the HOWEY Test
 In order to qualify as a security, an investment must have Decision: Petition for rehearing in en banc was DENIED
been made in an enterprise the profits of which are
derived from the efforts of others. Dissent: J. Wald
 To the extent that we established any rule in applying the  That the court's bright-line rule distinguishing between pre-
"efforts of others" test, we held only "that pre-purchase investment and post-investment efforts is at odds with the
services cannot by themselves suffice to make the profits Supreme Court's frequent remonstrance that courts should apply
of an investment arise predominantly from the efforts of the securities laws flexibly to achieve the goal of investor
others, and that ministerial functions should receive a protection.
good deal less weight than entrepreneurial activities."  The new rule cannot but pose difficulties for enforcement of the
(87 F.3d 536, 548.  earlier case at the CA) securities laws. Investors in viatical settlements depend on viatical
 We examined both "LPI's pre-purchase services as a settlement brokers to provide accurate and honest assessments
finder-promoter and its largely ministerial post- of an insured's health as well as of the likelihood of medical
purchase services," and we concluded that the two in developments occurring that might extend the insured's life
combination were not enough to establish that the expectancy.

 The panel's decision prevents the SEC from protecting investors in 4. P & G filed its First Amended Complaint for Declaratory Relief and
these viatical settlements from dishonest and unscrupulous Damages, adding claims related to a second swap
profiteers. a. This second swap was also a leveraged derivatives
transaction. Its value was based on the four-year German
 And while it is true, as my colleagues point out, that interests in
Deutschemark rate
mortgage pools or commercial real estate (familiar examples of 5. BT now moves to dismiss the following nine Counts of P & G's
asset-backed investments) would likely qualify as securities even Second Amended Complaint
under their test, because of the post-purchase entrepreneurial
and managerial activities required to make these investments ISSUE: Whether these swaps transactions that do not squarely fit within
succeed, it is not difficult to conjure up instances where their rigid the statutory definition are, nevertheless, securities? NO
"before-or-after" measuring stick would result in exempting the
HELD:
sale of other risky asset-backed interests from the scope of the
- derivatives transaction: a bilateral contract or payments exchange
securities laws. agreement whose value derives ... from the value of an underlying
asset or underlying reference rate or index
o Derivatives transactions may be based on the value of
PROCTER & GAMBLE CO. v. BANKERS TRUST CO. foreign currency, U.S. Treasury bonds, stock indexes, or
925 F.Supp. 1270 (1996) interest rates. The values of these underlying financial
instruments are determined by market forces, such as
FACTS: movements in interest rates.
1. Plaintiff, The Procter & Gamble Company ("P & G"), is a publicly - This case involves two interest rate swap agreements
traded Ohio corporation. o A swap is an agreement between two parties
2. Defendant, Bankers Trust Company ("BT"), is a wholly-owned ("counterparties") to exchange cash flows over a period
subsidiary of Bankers Trust New York Corporation ("BTNY"). of time
a. BTNY is a state-chartered banking company. o purpose of an interest rate swap is to protect a party
b. BT trades currencies, securities, commodities and from interest rate fluctuations. The simplest form of
derivatives. swap, a "plain vanilla" interest-rate swap, involves one
c. Defendant BT Securities, also a wholly-owned subsidiary counterparty paying a fixed rate of interest, while the
of BTNY, is a registered broker-dealer. The defendants other counterparty assumes a floating interest rate
are referred to collectively as "BT" in this opinion. based on the amount of the principal of the underlying
3. P & G filed its Complaint for Declaratory Relief and Damages, debt.
alleging fraud, misrepresentation, breach of fiduciary duty, o This is called the "notional" amount of the swap, and this
negligent misrepresentation, and negligence in connection with amount does not change hands; only the interest
an interest rate swap transaction it had entered with BT payments are exchanged.
a. This swap, explained more fully below, was a leveraged o In more complex interest rate swaps, such as those
derivatives transaction whose value was based on the involved in this case, the floating rate may derive its
yield of five-year Treasury notes and the price of thirty- value from any number of different securities, rates or
year Treasury bonds ("the 5s/30s swap"). indexes.

o In each instance, however, the counterparty with the the DM swap rate broke that band, the spread would be
floating rate obligation enters into a transaction whose set on January 16, 1995
precise value is unknown and is based upon activities in o P & G unwound both of these swaps before their spread
the market over which the counterparty has no control. set dates, as interest rates in both the United States and
How the swap plays out depends on how market factors Germany took a significant turn upward, thus putting P &
change. G in a negative position vis-a-vis its counterparty BT. BT
now claims that it is owed over $200 million on the two
The P & G/BT Swap Agreements swaps, while P & G claims the swaps were fraudulently
- Those swaps transactions are governed by written documents induced and fraudulently executed, and seeks a
executed by BT and P & G. BT and P & G entered into an Interest declaratory verdict that it owes nothing.
Rate and Currency Exchange Agreement
- In the 5s/30s swap transaction, BT agreed to pay P & G a fixed Security
rate of interest of 5.30% for five years on a notional amount of - In the 1933 Securities Act, Congress defined the term "security" as
$200 million any note, stock, treasury stock, bond, debenture, evidence of
- P & G agreed to pay BT a floating interest rate. For the first six indebtedness, certificate of interest or participation in any profit-
months, that floating rate was the prevailing commercial paper sharing agreement, collateral-trust certificate, preorganization
("CP") interest rate minus 75 basis points (0.75%). For the certificate or subscription, transferrable share, investment
remaining four-and-a-half years, P & G was to make floating contract, voting-trust certificate, certificate of deposit for a
interest rate payments of CP minus 75 basis points plus a spread. security, fractional undivided interest in oil, gas, or other mineral
- The parties amended this swap transaction rights, any put, call, straddle, option, or privilege on any security,
o they postponed the date the spread was to be set to May certificate of deposit, or group or index of securities (including any
19, 1994, and P & G was to receive CP minus 88 basis interest therein or based on the value thereof), or any put, call,
points, rather than 75 basis points, up to the spread date. straddle, option, or privilege entered into on a national securities
- P & G and BT negotiated a second swap, known as the "DM exchange relating to foreign currency, or, in general, any interest
swap", based on the value of the German Deutschemark or instrument commonly known as a "security", or a certificate of
o The Confirmation for this swap is dated February 14, interest or participation in, temporary or interim certificate for,
1994 receipt for, guarantee of, or warrant or right to subscribe to or
o For the first year, BT was to pay P & G a floating interest purchase, any of the foregoing.
rate plus 233 basis points. P & G was to pay the same - P & G asserts that the 5s/30s and DM swaps fall within any of
floating rate plus 133 basis points; P & G thus received a the following portions of that definition: 1) investment
1% premium for the first year, the effective dates being contracts; 2) notes; 3) evidence of indebtedness; 4) options on
January 16, 1994 through January 16, 1995. On January securities; and 5) instruments commonly known as securities.
16, 1995, P & G was to add a spread to its payments to - note that Congress did not "intend" the Securities Acts "to
BT if the four-year DM swap rate ever traded below provide a broad federal remedy for all fraud."
4.05% or above 6.01% at any time between January 16,
1994, and January 16, 1995. If the DM swap rate stayed A. Investment Contracts
within that band of interest rates, the spread was zero. If

- an "investment contract" is defined as "a contract, transaction or reasonable expectations of the investing public; and 4)
scheme whereby a person invests his money in a common whether some factor, such as the existence of another
enterprise regulatory scheme, significantly reduces the risk of the
- test whether an instrument is an investment contract is whether instrument, thereby rendering application of the
it entails "an investment in a common venture premised on a securities laws unnecessary.
reasonable expectation of profits to be derived from the - the first prong of the "family resemblance" test, the Court in
entrepreneurial or managerial efforts of others. Reves distinguished between the motivations of the parties in
- Howey test as a "flexible one `capable of adaptation or meeting entering into the transaction, drawing a line between investment
the countless and variable schemes devised by those who seek notes as securities and commercial notes as non-securities.
the use of the money of others on the promise of profits. o The Court said: If the seller's purpose is to raise money
- While the swaps may meet certain elements of the Howey test for the general use of a business enterprise or to finance
whether an instrument is an investment contract, what is missing substantial investments and the buyer is interested
is the element of a "common enterprise." primarily in the profit the note is expected to generate,
o P & G did not pool its money with that of any other the instrument is likely to be a "security." If the note is
company or person in a single business venture. exchanged to facilitate the purchase and sale of a minor
o How BT hedged its swaps is not what is at issue — the asset or consumer good, to correct for the seller's cash-
issue is whether a number of investors joined together in flow difficulties, or to advance some other commercial or
a common venture. Certainly, any counterparties with consumer purpose, on the other hand, the note is less
whom BT contracted cannot be lumped together as a sensibly described as a "security."
"common enterprise."  BT's motive was to generate a fee and
o Furthermore, BT was not managing P & G's money; BT commission, while P & G's expressed motive
was a counterparty to the swaps, and the value of the was, in substantial part, to reduce its funding
swaps depended on market forces, not BT's costs. These motives are tipped more toward a
entrepreneurial efforts. The swaps are not investment commercial than investment purpose.
contracts.  As to P & G, there was also an element of
speculation driving its willingness to enter a
B. Notes or "Family Resemblance" to Notes transaction that was based on its expectations
- these swap agreements bear some, but not all, of the earmarks of regarding the path that interest rates would
notes. At the outset, and perhaps most basic, the payments take
required in the swap agreements did not involve the payment or o this prong of the Reves test, standing alone, is not a
repayment of principal sufficient guide to enable one to make the determination
- four-part "family resemblance" test for identifying notes that whether the 5s/30s and DM swaps were notes within the
should be deemed securities meaning of the Securities Acts.
o Those factors are: 1) the motivations of the buyer and - second prong of the Reves test examines the plan of distribution
seller in entering into the transaction (investment for of the instrument "to determine whether it is an instrument in
profit or to raise capital versus commercial); 2) a which there is `common trading for speculation or investment.'
sufficiently broad plan of distribution of the instrument o test is whether the 5s/30s and DM swaps in particular
(common trading for speculation or investment); 3) the were widely distributed. These swaps are analogous to

the notes that were held not to be securities on the basis o It argues that the counterparties promised to pay a debt,
that the plan of distribution was "a limited solicitation to which consists of future obligations to pay interest on the
sophisticated financial or commercial institutions and not notional amounts.
to the general public o Indeed, BT now claims that it is owed millions of dollars
o 5s/30s and DM swaps were customized for Procter & on the swaps. P & G points out that the phrase "evidence
Gamble; they could not be sold or traded to another of indebtedness" in the statute must have a meaning
counterparty without the agreement of BT. They were other than that given to a "note" so that the words
not part of any kind of general offering. "evidence of indebtedness" are not redundant
o Thus, I conclude that the 5s/30s and DM swaps were not o it argues, without citation to authority, that if the swaps
widely distributed and do not meet the second prong of are not notes, then they should be construed as an
the Reves test. evidence of indebtedness "either because they may
- Application of the third Reves factor — the public's reasonable contain terms and conditions well beyond the typical
perceptions — does not support a finding that these swap terms of a note and beyond an ordinary investor's ability
agreements are securities to understand, or because the debt obligation simply
o They were not traded on a national exchange, "the does not possess the physical characteristics of a note."
paradigm of a security." - The test whether an instrument is within the category of
o P & G knew full well that its over-the-counter swap "evidence of indebtedness" is essentially the same as whether an
agreements with BT were not registered with any instrument is a note
regulatory agency. P & G's "perception" that these swap - I do not accept P & G's definition of "evidence of indebtedness" in
agreements were securities did not surface until after it large part because that definition omits an essential element of
had filed its original Complaint in this case. debt instruments — the payment or repayment of principal. Swap
o Thus, I conclude that the 5s/30s and DM swaps do not agreements do not involve the payment of principal; the notional
meet the third prong of the Reves test. amount never changes hands.
- The fourth Reves factor is whether another regulatory scheme
exists that would control and thus reduce the risk of the D. Options on Securities
instrument, making application of the securities laws unnecessary - An option is the right to buy or sell, for a limited time, a particular
o While the 5s/30s and DM swaps may meet this prong of good at a specified price.
the Reves "family resemblance" test, this is not enough o The definition of a "security" in the 1933 and 1934 Acts
to bring these transactions within the statutory definition includes the parenthetical phrase "(including any interest
of a "note" for purposes of the securities laws. therein or based on the value thereof)," which could lead
- Balancing all the Reves factors, I conclude that the 5s/30s and DM to a reading of the statute to mean that an option based
swaps are not notes for purposes of the Securities Acts. on the value of a security is a security. Legislative history,
however, makes it clear that that reading was not
C. Evidence of Indebtedness intended
- P & G argues that if the swaps are not notes, they are evidence of o clear from the House Report that the parenthetical
indebtedness because they contain bilateral promises to pay phrase "(... based on the value thereof)" was intended
money and they evidence debts between the parties. only to modify the immediately preceding clause —

"group or index of securities" — and not the words "any options to purchase securities, promissory notes, all
option" or "any security." forms of commercial paper, evidences of indebtedness,
- While these swaps included option-like features, there is a missing ... any investment contract, any instrument evidencing a
essential element of an option. These swaps were exchanges of promise or an agreement to pay money, ... and the
interest payments; they did not give either counterparty the right currency of any government other than those of the
to exercise an option or to take possession of any security. United States or Canada, ...
o Neither party could choose whether or not to exercise an - Ohio's test for an investment contract is somewhat broader than
option; the stream of interest payments under the swap the Howey test
was mandatory. o Under Ohio law, an investment contract is created
o Consequently, I conclude that the 5s/30s swap is not an whenever:
option on a security or an option based on the value of a  (1) An offeree furnishes initial value to an offer,
security  (2) A portion of the initial value is subjected to
the risks of the enterprise,
E. Instruments Commonly Known as Securities  (3) The furnishing of the initial value is induced
- The Supreme Court uses the Howey test for both "investment by the offeror's promises or representations
contracts" and the more general category of an "instrument" which give rise to a reasonable understanding
commonly known as a "security." that a valuable benefit of some kind, over and
- In the Securities Act the term "security" was defined to include by above the initial value, will accrue to the offeree
name or description many documents in which there is common as a result of the operation of the enterprise,
trading for speculation or investment and
- In any event, the contracts between P & G and BT do not meet  (4) The offeree does not receive the right to
the Howey criteria, particularly because there is no way that they exercise practical and actual control over
can be construed to be a pooling of funds in a common managerial decisions of the enterprise.
enterprise. These swaps do not qualify as securities. - Even though this test may be broader than the Howey test, Ohio
- It is important to point out that the holdings in this case are law still requires a finding of common enterprise
narrow; I do not determine that all leveraged derivatives o The Ohio statute contains a provision that the federal law
transactions are not securities, or that all swaps are not securities. does not have — "any instrument evidencing a promise
Some of these derivative instruments, because of their structure, or an agreement to pay money."
may be securities. I confine my ruling to the 5s/30s and the DM - Swaps are not certificates of deposit; they are bilateral promises
swaps between P & G and BT. to pay in the future, the amount of which would depend on the
rise or fall of the market. Such promises to pay are not securities
V. Ohio Securities Laws Claims (Counts IX — XI) under Ohio law.
- Ohio's Blue Sky law, Ohio Rev.Code § 1707.01(B) (1992) defines o the swaps are not within the definition of a "security" in
"security" in pertinent part as follows: Ohio law, and the parties' agreement precludes
o any certificate or instrument that represents title to or application of Ohio law
interest in ... the capital, assets, profits, property, or - BESIDES The ISDA Master Agreement provides in Section (1) of
credit of any person or of any public or governmental Part 4 of the Schedule: CGoverning Law. This Agreement will be
body, subdivision, or agency. It includes ... warrants or governed by, and construed and enforced in accordance with, the

laws of the State of New York without reference to choice of law - In order to receive a pension an employee was required to
doctrine. have 20 years of continuous service, including time worked
o The inclusion of the phrase "without reference to choice before the start of the plan.
of law doctrine" forecloses the application of Ohio law. 2. The collective-bargaining agreement initially set employer
o The parties consented to be bound by New York statutes contributions to the Pension Trust Fund at $2 a week for each
and caselaw, without regard to any choice of law man-week of covered employment and eligible employees
doctrine. Therefore, there is no claim under Ohio received $75 a month in benefits upon retirement.
statutes, and Count XV is dismissed. - Subsequent collective-bargaining agreements called for
greater employer contributions, which in turn led to higher
- I conclude that the 5s/30s and DM swap agreements are not benefit payments for retirees.
securities as defined by the Securities Acts of 1933 and 1934 and - At the time respondent brought suit, employers contributed
the Ohio Blue Sky Laws; that these swap agreements are exempt $21.50 per employee man-week and pension payments
from the Commodity Exchange Act; that there is no private right ranged from $425 to $525 a month depending on age at
of action available to P & G under the antifraud provisions of that retirement.
Act; and that the choice of law provision in the parties' agreement 3. Respondent began working as a truckdriver in the Chicago area in
precludes claims under the Ohio Deceptive Trade Practices Act. 1950, and joined Local 705 the following year. When the plan first
Therefore, P & G's claims in Counts VII through XV of its Second went into effect, respondent automatically received 5 years'
Amended Complaint are dismissed. credit toward the 20-year service requirement because of his
earlier work experience.
- He retired in 1973 and applied to the plan's administrator for
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, a pension.
WAREHOUSEMEN & HELPERS OF AMERICA v. DANIEL - The administrator determined that respondent was ineligible
(Teamsters v. Daniel) because of a break in service between December 1960 and
439 U.S. 551 | 1979 | Powell ; JUSTIN July 1961. Respondent appealed the decision to the trustees,
who affirmed.
- Respondent then asked the trustees to waive the continuous-
FACTS: service rule as it applied to him. After the trustees refused to
1. In 1954 multiemployer collective bargaining between Local 705 of waive the rule, respondent brought suit in federal court
the International Brotherhood of Teamsters, Chauffeurs, against the International Union, Local 705, and Louis Peick, a
Warehousemen, and Helpers of America and Chicago trucking trustee of the Fund.
firms produced a compulsory and noncontributory pension plan 4. Respondent's complaint alleged that the Teamsters, the Local,
for employees represented by the Local. and Peick misrepresented and omitted to state material facts with
- Employees had no choice as to participation in the plan, and respect to the value of a covered employee's interest in the
did not have the option of demanding that the employer's pension plan; in violation of 10 (b) of the Securities Exchange Act
contribution be paid directly to them as a substitute for of 1934, 48 Stat. 891, 15 U.S.C. 78j (b), and the Securities and
pension eligibility. Exchange Commission's Rule 10b-5, 17 CFR 240.10b-5 (1978).
- The employees paid nothing to the plan themselves. 5. The petitioners moved to dismiss the first two counts of the
complaint on the ground that respondent had no cause of action

under the Securities Acts. But the District Court, as affirmed by - An employee who participates in a noncontributory,
the Court of Appeals for the Seventh Circuit on appeal, denied the compulsory pension plan by definition makes no payment
motion. into the pension fund. He only accepts employment, one of
- It held that respondent's interest in the Pension Fund the conditions of which is eligibility for a possible benefit on
constituted a security within the meaning of the Securities retirement.
Act and of the Securities Exchange Act because the plan 3. Respondent contends, however, that he has "invested" in the
created an "investment contract." Pension Fund by permitting part of his compensation from his
- It also determined that there had been a "sale" of this employer to take the form of a deferred pension benefit. By
interest to respondent within the meaning of the Securities allowing his employer to pay money into the Fund, and by
Act and the Securities Exchange Act because respondent contributing his labor to his employer in return for these
voluntarily gave value for his interest in the plan, because he payments, respondent asserts he has made the kind of
had voted on collective-bargaining agreements that chose investment which the Securities Acts were intended to regulate.
employer contributions to the Fund instead of other wages or 4. In every decision of this Court recognizing the presence of a
benefits. "security" under the Securities Acts, the person found to have
- Respondent's interest in the Pension Fund was a "security” been an investor chose to give up a specific consideration in
because a "sale" took place either when respondent ratified return for a separable financial interest with the characteristics of
a collective-bargaining agreement embodying the Fund or a security.
when he accepted or retained covered employment instead 5. In a pension plan such as this one, by contrast, the purported
of seeking other work. investment is a relatively insignificant part of an employee's total
and indivisible compensation package.
ISSUE: Whether a noncontributory, compulsory pension plan constitutes a - No portion of an employee's compensation other than the
"security" within the meaning of the Securities Act of 1933 and the potential pension benefits has any of the characteristics of a
Securities Exchange Act of 1934? security, yet these noninvestment interests cannot be
segregated from the possible pension benefits.
DECISION: The Securities Acts do not apply to a noncontributory, - Only in the most abstract sense may it be said that an
compulsory pension plan. employee "exchanges" some portion of his labor in return for
1. To determine whether a particular financial relationship these possible benefits. He surrenders his labor as a whole,
constitutes an investment contract, "[t]he test is whether the and in return receives a compensation package that is
scheme involves an investment of money in a common enterprise substantially devoid of aspects resembling a security.
with profits to come solely from the efforts of others." This test is - His decision to accept and retain covered employment may
to be applied in light of "the substance - the economic realities of have only an attenuated relationship, if any, to perceived
the transaction - rather than the names that may have been investment possibilities of a future pension. Looking at the
employed by the parties." economic realities, it seems clear that an employee is selling
2. Looking separately at each element of the Howey test, it is his labor primarily to obtain a livelihood, not making an
apparent that an employee's participation in a noncontributory, investment.
compulsory pension plan such as the Teamsters' does not 6. Respondent also argues that employer contributions on his behalf
comport with the commonly held understanding of an investment constituted his investment into the Fund. But it is inaccurate to
contract.

describe these payments as having been "on behalf" of any of a pension plan to an investment contract but also by various
employee. actions of Congress and the SEC with regard to the Securities Acts.
- The trust agreement used employee man-weeks as a - A close look at each instance, however, reveals only that
convenient way to measure an employer's overall obligation Congress might have believed certain kinds of pension plans,
to the Fund, not as a means of measuring the employer's radically different from the one at issue here, came within the
obligation to any particular employee. coverage of the Securities Acts. There is no evidence that
- Indeed, there was no fixed relationship between Congress at any time thought noncontributory plans similar
contributions to the Fund and an employee's potential to the one before us were subject to federal regulation as
benefits. A pension plan with "defined benefits," such as the securities.
Local's, does not tie a qualifying employee's benefits to the 9. The court below believed, and it now is argued to us, that almost
time he has worked. It ignores the economic realities to from its inception the SEC has regarded pension plans as falling
equate employer contributions with an investment by the within the scope of the Securities Acts. But there are limits,
employee. grounded in the language, purpose, and history of the particular
7. The "touchstone" of the Howey test "is the presence of an statute, on how far an agency properly may go in its interpretative
investment in a common venture premised on a reasonable role. Although these limits are not always easy to discern, it is
expectation of profits to be derived from the entrepreneurial or clear here that the SEC's position is neither longstanding nor even
managerial efforts of others." arguably within the outer limits of its authority to interpret these
- The Court of Appeals believed that Daniel's expectation of Acts.
profit derived from the Fund's successful management and - As we have demonstrated above, the type of pension plan at
investment of its assets. To the extent pension benefits issue in this case bears no resemblance to the kind of
exceeded employer contributions and depended on earnings financial interests the Securities Acts were designed to
from the assets, it was thought they contained a profit regulate.
element. - Further, the SEC's present position is flatly contradicted by its
- The importance of asset earnings in relation to the other past actions. Until the instant litigation arose, the public
benefits received from employment is diminished further by record reveals no evidence that the SEC had ever considered
the fact that where a plan has substantial preconditions to the Securities Acts to be applicable to noncontributory
vesting, the principal barrier to an individual employee's pension plans.
realization of pension benefits is not the financial health of - In 1941, the SEC opined the position that voluntary,
the fund. Rather, it is his own ability to meet the fund's contributory plans had investment characteristics that
eligibility requirements. Thus, even if it were proper to rendered them "securities" under the Acts. At the same time,
describe the benefits as a "profit" returned on some however, the SEC recognized that noncontributory plans
hypothetical investment by the employee, this profit would were not covered by the Securities Acts because such plans
depend primarily on the employee's efforts to meet the did not involve a "sale" within the meaning of the statutes.
vesting requirements, rather than the fund's investment 10. In an attempt to reconcile these interpretations of the Securities
success. Acts with its present stand, the SEC now augments its past
8. The court below believed that its construction of the term position with two additional propositions.
"security" was compelled not only by the perceived resemblance - First, it is argued, noncontributory plans are "securities" even
where a "sale" is not involved.

- Second, the previous concession that noncontributory plans - registered with the securities and Exchange Commission,
do not involve a "sale" was meant to apply only to the under S.E.C. Reg. No. 165565
registration and reporting requirements of the Securities - it has ten incorporators:
Acts; for purposes of the antifraud provisions, a "sale" is
o Priscilla Balasa, Normita Visaya, Analina Francisco,
involved.
11. Unlike the Securities Acts, ERISA deals expressly and in detail with Lolita Gelilang, Cynthia Ang, Norma Francisco,
pension plans. ERISA requires pension plans to disclose specified Purabel Espidol, Melinda Mercado, Rodolfo Ang, Jr.
information to employees in a specified manner in contrast to the and Teresa G. Carandang.
indefinite and uncertain disclosure obligations imposed by the o Five incorporators, namely, Priscilla Balasa, Normita
antifraud provisions of the Securities Acts. Further, ERISA Visaya, Analina Francisco, Lolita Gelilang and Cynthia
regulates the substantive terms of pension plans, setting Ang were named first trustees.
standards for plan funding and limits on the eligibility
2. The management of the foundation was entrusted to:
requirements an employee must meet.
12. The existence of this comprehensive legislation governing the use - Priscilla Balasa, as president and general manager;
and terms of employee pension plans severely undercuts all - Normita Visaya as corporate secretary and head comptroller;
arguments for extending the Securities Acts to noncontributory, - Norma Francisco as cashier;
compulsory pension plans. Congress believed that it was filling a - Guillermo Francisco as the disbursing officer; and
regulatory void when it enacted ERISA, a belief which the SEC - Analina Francisco as treasurer. The latter also doubled as a
actively encouraged. Not only is the extension of the Securities typist of the Foundation.
Acts by the court below unsupported by the language and history
3. One of the foundation’s purpose was to Uplift members'
of those Acts, but in light of ERISA it serves no general purpose.
Whatever benefits employees might derive from the effect of the economic condition by way of financial or consultative basis
Securities Acts are now provided in more definite form through 4. After obtaining its SEC registration, the foundation immediately
ERISA. swung into operation. It sent out brochures soliciting deposits
from the public, assuring would-be depositors that their money
would either be doubled after 21 days or trebled after 30 days.
People v. Balasa
G.R. No. 106357 September 3, 1998 Modus operandi:
1. When a person would deposit an amount, the amount would be

Doctrine: The slots are actually securities, the issuance of which needs the taken by a clerk to be given to the teller. The teller would then fill
approval of the SEC. up a printed form called a "slot." These "slots" were part of a
booklet, with one booklet containing one hundred "slots." A
Facts:
"slot," which resembled a check.
1. On July 6, 1989, the Panata Foundation of the Philippines, Inc., a 2. After the slot had been filled up by the teller, he would give it to
non-stock, non-profit corporation the clerk assigned outside. The clerk would then give the slot to
the depositor. Hence, while it was the teller who prepared and

issued the slot, he had no direct contact with the depositor. The 9. On arraignment, the arrested defendants all pleaded not guilty to
slots handed to a depositor were signed beforehand by the the crimes charged but before the presentation of prosecution
president of the foundation. evidence, Priscilla Balasa and Normita Visaya escaped from police
3. The amounts received by the foundation were deposited in banks. custody.
Thus, a foundation teller would, from time to time, go to PNB, PCI 10. With their escape, only the spouses Guillermo and Norma
Bank, DBP and the Rural Bank of Coron to deposit the collections Francisco were called to present evidence on behalf of the
in a joint account in the names of Priscilla Balasa and Norma defense. Analina Francisco, being a deaf-mute, was not called to
Francisco. the witness stand due to the lack of a competent interpreter.
4. Initially, the operation started with a few depositors, with most 11. RTC found them guilty of the crime charged
depositors investing small amounts. When the foundation paid
double or triple the amounts of their investment at maturity, Issue:
most not only reinvested their earnings but even added to their
1. WON the “ slots” are securities? YES (Securities issues)
initial investments.
2. WON the respondent are guilty of the crime charge? YES(main
5. As word got around that deposits could be doubled within 21
issue)
days, or tripled if the period lasted for more than 30 days, more
depositors were attracted.. Rationale:
6. Most would invest more than P5,000.00, the investment limit set
st
by the foundation. Priscilla Balasa would, however, encourage 1 issue:
depositors to invest more than P5,000.00, provided that the
1. The slots are actually securities, the issuance of which needs the
excess was deposited under the name of others.
approval of the SEC. Knowing fully well that the S.E.C. would not
7. On November 29, 1989, however, the foundation did not open.
approve the issuance of securities by a non-stock, non-profit
Depositors whose investments were to mature on said date
organization, the operators of the Ponzi scheme, nevertheless,
demanded payments but none was forthcoming.
applied for registration as a foundation, an entity not allowed to
- On December 2, 1989, Priscilla Balasa announced that since
engage in securities.
the foundation's money had been invested in the stock
2. Finally, if the foundation were indeed legitimate, the
market, it would resume operations on December 4, 1989.
incorporators, outside of the members of the Francisco family,
- On that date, the foundation remained closed. Depositors
would not have escaped from the clutches of the law. If the
began to demand reimbursement of their deposits, but the
foundation and its investment scheme were legal, then it
foundation was unable to deliver.
behooved them to come out and testify for their own
8. Sixty-four informations, all charging the offense of estafa, as
exoneration. The wicked flee when no man pursueth: but the
defined in Presidential Decree No. 1689, were filed against the
righteous are bold as a lion.
respondents.
nd
2 issue:

1. The elements of the crime defined and penalized by P.D. No. 1689 3. In contravention of these by-laws and modus operandi, the
have been proven beyond reasonable doubt in. people behind the foundation enticed people to "deposit or
- The informations filed against appellants alleged that by invest" funds in the foundation under a "double or treble your
means of false representation or false pretenses and through deposit" scheme. These investment activities were clearly ultra
fraudulent means, complainants were defrauded of various vires acts or acts beyond the foundation's authority. Evidently,
amounts of money by the accused. SEC registration was obtained only for the purpose of giving a
- Article 315, paragraph 2 (a) of the Revised Penal Code semblance of legitimacy to the foundation.
provides that swindling or estafa by false pretenses or 4. The testimonial evidence presented by the prosecution proves
fraudulent acts executed prior to or simultaneously with the that appellants employed fraud and deceit upon gullible people to
commission of the fraud is committed by "using fictitious convince them to invest in the foundation. It has been held that
name, or falsely pretending to possess power, influence, where one states that the future profits or income of an
qualifications, property, credit, agency, business or imaginary enterprise shall be a certain sum, but he actually knows that
transactions, or by other similar deceits." there will be none, or that they will be substantially less than he
- The elements of estafa under this penal provision are: represents, the statement constitutes actionable fraud where
o (1)the accused defrauded another by the hearer believes him and relies on the statement to his
means of deceit and injury.
o (2) damage or prejudice capable of 5. That there was no profit forthcoming can be clearly deduced from
pecuniary estimation is caused to the the fact that the foundation was not engaged nor authorized to
offended party or third party. engage in any lucrative business to finance its operation. It was
- It is indisputable that the foundation failed to return the not shown that it was the recipient of donations or bequest with
investments of the complaining witnesses, hence it is which to finance its "double or triple your money" scheme, nor
undeniable that the complainants suffered damage in the did it have any operating capital to speak of when it started
amount of their unrecouped investments. What needs operations
elucidation is whether or not the element of defraudation by 6. Parenthetically, what appellants offered the public was a "Ponzi
means of deceit has been established beyond reasonable scheme," an investment program that offers impossibly high
doubt. returns and pays these returns to early investors out of the capital
2. In pursuit of their agenda, appellants established a foundation contributed by later investors.
which, by its articles of incorporation, was established, allegedly - However, the Ponzi scheme works only as long as there is an
to "uplift members' economic condition by way of financial or ever-increasing number of new investors joining the scheme..
consultative basis." Organized as a non-stock, non-profit The progression it depends upon is unsustainable. The
charitable institution, its funds were to be obtained through pattern of increase in the number of participants in the
membership dues and such other assessments as may be agreed system explains how it is able to succeed in the short run and,
upon by its board of directors. at the same time, why it must fail in the long run. This game is

difficult to sustain over a long period of time because to WON there was conspiracy? YES but Analina was held innocenct because
continue paying the promised profits to early investors, the of of doubt as to her participation due to her disability (deaf)
operator needs an ever larger pool of later investors.
- The idea behind this type of swindle is that the "con-man" 1. The fact that Guillermo Francisco was not an incorporator of the
collects his money from his second or third round of investors foundation does not make him any less liable for the crime
and then absconds before anyone else shows up to collect. charged. By his own admission, he participated in the
Necessarily, these schemes only last weeks, or months at foundation's activities by serving as its paymaster. Because he is
most. father and husband to three of the organizers of the foundation,
it is not farfetched to presume that he was aware of its
In their defense, appellants would shift the blame on the investors. operations.
Invoking the legal principle of caveat emptor, they maintain that it was the 2. His voluntary and indispensable cooperation was a concatenation
investors' own greed that did them in, implying that the depositors should of the criminal acts performed by his co-accused. In this regard,
have known that no sensible business could afford to pay such extravagant appellant Guillermo Francisco is not being implicated as a co-
returns conspirator solely because he is the father of the principal
proponent of the Ponzi scheme. He is held liable as a conspirator
SC because of his indispensable act of being the paymaster of the
foundation.
1. It has often been held that the buyer of a business or property is
3. Likewise, Norma Francisco's bare denial cannot exempt her from
entitled to rely on the seller's statements concerning its profits,
complicity. Denials of an accused cannot be accorded greater
income or rents. The rule — that where a speaker has knowingly
evidentiary weight than the positive declarations of credible
and deliberately made a statement concerning a fact the falsity
witnesses who testify on affirmative matters. Moreover, her
of which is not apparent to the hearer, and has thus
efforts to show that she was a mere housewife who simply helped
accomplished a fraudulent result, he cannot defend against the
in her daughter's "business" is refuted by the prosecution
fraud by proving that the victim was negligent in failing to
witnesses.
discover the falsity of the statement — is said to be peculiarly
4. Moreover, Norma was an incorporator.
applicable where the owner of the property or a business
5. As for Analina Francisco, however, the evidence adduced as to her
intentionally makes a false statement concerning its rents, profits
complicity in the nefarious scheme is far from conclusive. While
or income.
she was an incorporator and treasurer of the foundation, there is
2. The doctrine ofcaveat emptor has been held not to apply to such
no denying the fact that she is a deaf-mute. This casts serious
a case.
doubt on whether she could be deemed to have similarly
conspired and confederated with the other accused.
- We are not, however, convinced that she was actually
Other issues: involved in the sinister scheme. In fact, she was given the

manual task of typing papers, despite her being the treasurer 2. These are the only elements of the crime under Section 1 of the
of the foundation. decree. The two other "ingredients" added by appellants to
- Her disability might have been the principal reason for giving constitute the crime of economic sabotage under P.D. No. 1689
her that job — she was literally deaf and mute to the have been taken from the "whereas" clause or preamble of the
nefarious activities going on in the foundation that she did law. A preamble is not exactly an essential part of an act as it is an
not pose a danger to it. introductory or preparatory clause that explains the reasons for
- Furthermore, it is well settled that where the acts of an the enactment, usually introduced by the word "whereas."
accused are capable of two interpretations, that which is in 3. Assuming arguendo that the preamble was part of the statute, the
consonance with innocence should prevail. act prohibited therein need not necessarily threaten the stability
of the nation. It is sufficient that it "contravenes public interest."
WON there was double jeopardy? 4. Public interest was affected by the solicitation of deposits under a
promise of substantial profits, as it was people coming from the
SC
lower income brackets who were victimized by the illegal scheme.
1. The offense charge are different. While the case arose the same
scheme, the fraudulent acts were committed by different
persons. Hence it does not constitute a same offense. SEC Opinion dated 21 February 1984 re multi-level marketing – Nilo
WON they can be convicted with PD 1689? YES

[PED * CASE NO. 98-2220. May 22, 1998.]
The appellants point out thaht there could not have been an economic IN THE MATTER OF OCTOPUS NETWORK, INC.
sabotage because the money allegedly embezzled is P125 400. Thus, it did OMNIBUS ORDER, (digest ponente, Haulo)
not weaken national economic stability.
SC:
DOCTRINE:
1. Under this law, the elements of the crime are: Modified Howey test
- (a) estafa or other forms of swindling as defined in Articles I. There is a contract, transaction or scheme
315 and 316 of the Revised Penal Code is committed; II. There is an investment of money.
- (b) the estafa or swindling is committed by a syndicate, and ( III. The investment is made in a common enterprise.
- c) defraudation results in the misappropriation of moneys IV. There is expectation of profits.
contributed by stockholders, or members of rural banks, V. Profits arise from the entrepreneurial and managerial efforts of
cooperatives, "samahang nayon(s)," or farmers associations, others
or of funds solicited by corporations/associations from the
general public. FACTS:

1. Admittedly, the definition of securities is extraordinarily broad.
1. Records of the Commission show that Octopus Network, Inc. Included within the scope of "security" are such standard documents
(Octopus, for brevity), is a corporation duly registered with the as stocks and bonds.
Commission on January 8, 1998, with the primary purpose of engaging
 Also included are instruments of a more variable character
in the business of trading of goods, such as novelty items, and
handicrafts on wholesale/retail basis. designated by such descriptive terms as "investment contract"
2. Records further show that the following persons appeared as and "in general any interest or instrument commonly known as
incorporators/directors thereof: Renato F. Sugay II; Renato L. Sugay; "security".
Aileen C. Sugay; Ma. Luisa F. Sugay and Rene Anne F. Sugay.  In particular, the term "investment contract" has been viewed by
3. The Commission upon proper investigation has determined that the the courts as a "catch all" phrase designed to encompass novel
documents/papers in the form of . . . . coupons . . . . being issued, sold devices which serve the same purpose as a "security" (Cary &
disposed, offered or distributed to the public for value by . . .
Eisenberg Corp. 6th Ed. Concise UCB-22 p. 948)
.OCTOPUS NETWORK, INC. are not registered and permitted to be
sold in accordance with the registration requirements mandated by 2. In SEC vs. W.J. Howey Co., 328 U.S. 293 (1946), the U.S. Supreme
Section 4 of the Revised Securities Act. Court established a definition of an investment contract as follows:
 are hereby ordered to SHOW CAUSE in writing why no sanctions  "An investment contract for purposes of the Securities Act
should be imposed against them for said violation . . . means a contract, transaction or scheme whereby a .person
4. Octopus posited the argument that the "product coupons", do not invests his money in a common enterprise and is led to expect
fall within the definition of "securities" as defined in Section 2 of profits solely from the efforts of the promoter or a third party . .
Batas Pambansa Blg. 178, otherwise known as the Revised Securities
."
Act (RSA).
I. There is a contract, transaction or scheme
ISSUE: 3. It is clear that the term "investment contract" as interpreted in the

Howey case was not limited to the existence of a mere agreement by
whether or not OCTOPUS NETWORK, INC. in engaging in the line of and between the promoter and the investor. It was given such a broad
business of selling, or offering for sale or distribution to the public the
meaning as to include schemes for as long as it involves the use of the
product coupons pursuant to a marketing scheme has violated the
provisions of the Revised Securities Act, more particularly Section 4 in money of others on the promise of profits
relation to Section 2, thereof. 4. In the case at bar, Octopus is undisputedly engaged in a multi-level
marketing scheme which indispensably makes use of the distribution
This Commission rules in the affirmative, and/or sale of coupons with promise of financial yield or cash
windfall.
HELD:  Looking deeper into its so called marketing scheme as clearly
shown in the coupon and the brochures being distributed to
What is security?
participants, the same has seven (7) levels.

 The levels represent the ranking or position of the participants
and tell how far a participant has gone into the scheme with the III. The investment is made in a common enterprise.
newest participant starting from the lowest position (7th position)
until he reaches the top or number one position. 8. Several tests have evolved to determine what constitutes "common
5. As clearly shown and indicated in the coupon and the brochure, enterprise". One of these tests is the horizontal commonality
 the prospective participant shall purchase a coupon (from one approach.
already a participant) in the amount of P100.00;  Under this test, the determination of whether a transaction
 deposit the amount of P100.00 to the bank account of the person satisfies the commonality element of the modified Howey test
on the top or in the number one position as appearing in the involves an inquiry into whether said transaction involved the
coupon; joint participation of more than one investor in the investment
 submit the purchased coupon together with the machine of funds or the sharing of profits.
validated deposit slip to the office of Octopus;  Furthermore, joint participation by investors in the same
 pay Octopus P100.00 and receive the three (3) product coupons investment enterprise, achieved by pooling the invested funds for
with the name of the new participant appearing in the bottom a common purpose, is required in order to satisfy the common
position (7th position), distribute or sell the three (3) coupons to enterprise element
three (3) prospective participants at P100.00 each. 9. In the case at bar, there are 21,201 participants in the scheme based
 Simply put, as participants come into the picture, one reaches a upon the "List of Participants" submitted by Octopus to this
certain level or position and when he reaches top level or Commission.
number one position, the 2,187 participants will remit to his 10. Clearly, the horizontal approach has been satisfied with the number of
bank account P100.00 each or a total sum of P218,700.00. participants that have joined the scheme since its inception. Likewise,
there is a pooling as participants deposit P100.00 each to the account
II. There is an investment of money. of the participant on the top position.
6. As it is, one joining Octopus' multi-level marketing scheme stands to IV. There is expectation of profits.
part with the amount of P300.00 with the intention of participating in 11. If the said participant moves on in accordance with the scheme and
the scheme including all the seven (7) positions as hereinabove thus reaches the top level or number one position, the investment of
described with the expectation of receiving P218,700 in accordance P300.00 will earn P218,700.00. This fact has been admitted and
with the scheme, hence, there is an investment. confirmed by Ms. Sugay,
7. From the foregoing, it is quite clear that the money being shelled out,
though it is paid to three different persons namely the immediate V. Profits arise from the entrepreneurial and managerial efforts of
recruiter, Octopus Network, Inc. and the person appearing in the top others
level or in number one position, is an investment, intended to derive
therefrom the amount of P218,700.00 by way of profit.

12. The question under the modified Howey test is whether efforts made within the purview of the RSA. Being a security, it cannot be offered
by those other than the investor are undeniably the significant ones, publicly without first being registered with this Commission.
those essential managerial efforts that affect failure or success of the
enterprise ------End------
13. In the instant case, profits in the maximum amount of P218,700.00
out of an investment in the amount of P300.00 arise without a doubt
from the entrepreneurial and managerial efforts of Octopus.
 Firstly, the scheme subject of this case as a multi level marketing
network was conceptualized and promoted by Octopus.
 Secondly, the manner by which one can avail of the benefits of
the scheme is dictated undoubtedly by Octopus. If one will not
obtain a coupon or fail to follow the instructions/steps as
appearing in the coupons being issued, his participation will not
be processed and activated and thus be unable to get into the
scheme and receive the P218,700.00. Once activated, it is
Octopus and not the participants who determines one's position
in the scheme.
14. As may be clearly observed, the efforts exerted by Octopus are
undeniably the significant ones, since the participants are substantially
dependent upon the activation and monitoring and management of
Octopus in order to obtain the promised windfall
 Upon the other hand, the participant, while he is not totally
inactive, merely participates to a limited degree in the operation
of the scheme.
15. The U.S. courts have held that a pyramid selling scheme constituted
investment contracts notwithstanding the fact that the investors
themselves participated in the operation of the enterprise.
The totality of the elements of the Howey test being present in the instant
case, taking into consideration every step of the way the general legislative
intent of protection to public investors, the Commission is convinced that
the multi level marketing scheme of Octopus including the distribution of
coupons to the public is an investment contract and therefore a security

ADVANCED SECURITIES REGULATIONS - REGISTRATION AND LISTING 3. Nestle filed a letter signed by its Corporate Secretary, M.L.
CALUAG - CHUA – HAULO – RICO – SUGCANG – UY | FEB. 4, 2013 Antonio, with the SEC seeking exemption of its proposed issuance
of additional shares to its existing principal shareholders, from the
NESTLE PHILIPPINES, INC. vs. COURT OF APPEALS and SECURITIES AND registration requirement of Section 4 of the Revised Securities Act
EXCHANGE COMMISSION and from payment of the fee referred to in Section 6(c) of the
G.R. No. 86738 | November 13, 1991 | FELICIANO, J. JUSTIN same Act.
o The principal argument presented by Nestle was that
FACTS: Section 6(a) (4) of the Revised Securities Act the “use of
1. In February 1983, the authorized capital stock of petitioner Nestle the term "increased capital stock" should be interpreted
Philippines Inc. was increased from P300 million divided into 3 to refer to additional capital stock or equity participation
million shares with a par value of P100.00 per share, to P600 of the existing stockholders as a consequence of either an
million divided into 6 million shares with a par value of P100.00 increase of the authorized capital stock or the issuance of
per share. unissued capital stock. If the intention of the pertinent
o Nestle underwent the necessary procedures involving legal provision [were] to limit the exemption to
Board and stockholders approvals and effected the subscription to proposed increases in the authorized
necessary filings to secure the approval of the increase of capital stock of a corporation, we see no reason why the
authorized capital stock by respondent Securities and law should not have been more specific or accurate about
Exchange Commission, which approval was in fact it. It certainly should have mentioned "increase in the
granted. authorized capital stock of the corporation" rather than
o Nestle also paid to the SEC the amount of P50,000.00 as merely the expression "the issuance of additional capital
filing fee in accordance with the Schedule of Fees and stock.”
Charges being implemented by the SEC under the o In respect of its claimed exemption from the fee
Corporation Code. provided for in Section 6(c) of the Revised Securities Act,
o Nestle has only two (2) principal stockholders: San Nestle contended that since Section 6 (a) (4) of the
Miguel Corporation and Nestle S.A. The other statute declares (in Nestle's view) the proposed issuance
stockholders, who are individual natural persons, own of 344,500 previously authorized but unissued shares of
only one (1) share each, for qualifying purposes, i.e., to Nestle's capital stock to its existing shareholders as an
qualify them as members of the Board of Directors being exempt transaction, the SEC could not collect fees for
elected thereto on the strength of the votes of one or "the same transaction" twice.
the other principal shareholder. 4. The SEC through its then Chairman Julio A. Sulit, Jr. responded
2. Nestle Board of Directors and stockholders approved resolutions adversely to petitioner's requests and ruled that the proposed
authorizing the issuance of 344,500 shares out of the previously issuance of shares did not fall under Section 6 (a) (4) of the
authorized but unissued capital stock of Nestle, exclusively to San Revised Securities Act, since Section 6 (a) (4) is applicable only
Miguel Corporation and to Nestle S.A. San Miguel Corporation where there is an increase in the authorized capital stock of a
subscribed to and completely paid up 168,800 shares, while corporation. Chairman Sulit held, however, that the proposed
Nestle S.A. subscribed to and paid up the balance of 175,700 transaction could be considered by the Commission as an exempt
shares of stock. transaction “if it finds that the enforcement of the requirements of
registration under this Act with respect to such transactions is not

necessary in the public interest and for the protection of the authorized capital stock of a corporation; or 2) to previously
investors by reason of the small amount involved or the limited authorized but unissued capital stock.
character of the public offering.” Thus, SEC then advised 2. In the first place, it is a principle too well established to
petitioner to file the appropriate request for exemption and to require extensive documentation that the construction given
pay the fee required under Section 6 (c) of the statute to a statute by an administrative agency charged with the
5. MR to SEC unsuccessful. Sought review to SC but referred to CA. interpretation and application of that statute is entitled to
CA sustained the ruling of the SEC. great respect and should be accorded great weight by the
o Both the SEC and the Court of Appeals resolved the courts, unless such construction is clearly shown to be in
ambiguity by construing Section 6 (a) (4) as sharp conflict with the governing statute or the Constitution
referring only to the issuance of shares of stock as part of and other laws.
and in the course of increasing the authorized capital 3. Secondly, the reading by the SEC of the scope of application
stock of Nestle. of Section 6(a) (4) permits greater opportunity for the SEC to
o Since the 344,500 shares of Nestle capital stock are implement the statutory objective of protecting the investing
proposed to be issued from already authorized but still public by requiring proposed issuers of capital stock to inform
unissued capital stock and since the present authorized such public of the true financial conditions and prospects of
capital stock of 6,000,000 shares with a par value of the corporation. By limiting the class of exempt transactions
P100.00 per share is not proposed to be further contemplated by the last clause of Section 6(a) (4) to
increased, the SEC and the Court of Appeals rejected issuances of stock done in the course of and as part of the
Nestle's petition. process of increasing the authorized capital stock of a
corporation, the SEC is enabled to examine issuances by a
ISSUE: Does the issuance of a previously authorized but unissued capital corporation of previously authorized but theretofore
stock automatically constitute an exempt transaction? unissued capital stock, on a case-to-case basis, under Section
6(b); and thereunder, to grant or withhold exemption from
DECISION: We believe and so hold that the construction thus given by the the normal registration requirements depending upon the
SEC and the Court of Appeals to Section 6 (a) (4) of the Revised Securities perceived level of need for protection by the investing public
Act must be upheld. in particular cases.
1. Examining the words actually used in Section 6 (a) (4) of the 4. Under Section 38 of the Corporation Code, a corporation
Revised Securities Act, and bearing in mind common must issue at least twenty-five percent (25%) of the newly or
corporate usage in this jurisdiction, it will be seen that the contemporaneously authorized capital stock in the course of
statutory phrase "issuance of additional capital stock" is complying with the requirements of the Corporation Code for
indeed infected with a certain degree of ambiguity. This increasing its authorized capital stock. In contrast, after
phrase may refer either to: a) the issuance of capital stock as approval by the SEC of the increase of its authorized capital
part of and in the course of increasing the authorized capital stock, and from time to time thereafter, the corporation, by a
stock of a corporation; or (b) issuance of already authorized vote of its Board of Directors, and without need of either
but still unissued capital stock. By the same token, the stockholder or SEC approval, may issue and sell shares of its
phrase "increased capital stock" found at the end of Section already authorized but still unissued capital stock to existing
6 (a) (4), may refer either: 1) to newly or contemporaneously shareholders or to members of the general public.
authorized capital stock issued in the course of increasing the

5. There would, accordingly, under the view taken by 1. On October 9 1984, private respondent Cornelio T. Rivera filed a
petitioner Nestle, no opportunity for the SEC to see to it that case against the C.R. Agro Industrial Development Corporation
shareholders (especially the small stockholders) have a (Argo)
reasonable opportunity to inform themselves about the 2. On April 29,1981, defendants Renato M. Leuterio and Erlinda
very fact of such issuance and about the condition of the Victoria, who were Sr. Vice President and Assistant Vice President
corporation and the potential value of the shares of stock and Comptroller, respectively, of defendant corporation issued a
being offered. "Promissory Note" in the name of the defendant Corporation in
6. In contrast, under the ruling issued by the SEC, an issuance favor of plaintiff.
of previously authorized but still unissued capital stock may, 3. That after maturity of the aforesaid promissory note plaintiff on
in a particular instance, be held to be an exempt transaction several occasions requested defendants, verbally and in writing,
by the SEC under Section 6(b) so long as the SEC finds that for payment of the promissory note.
the requirements of registration under the Revised 4. Petitioner alleged defendants Luis Rivilla, Lourdes Rivilla, Rosalina
Securities Act are "not necessary in the public interest and Vidal, Renato Leuterio, Erlinda Victoria, Rosario Africa, Oscar
for the protection of the investors" by reason, inter alia, of Africa and Erlinda Gonzales who were the Controlling
the small amount of stock that is proposed to be issued or Stockholders and/or officers of the defendant corporation clearly
because the potential buyers are very limited in number and and actually used the said corporation as a shield to perpetuate or
are in a position to protect themselves. In fine, petitioner commit fraud and/or evade just and valid obligations against
Nestle's proposed construction of Section 6(a) (4) would plaintiff by issuing a promissory note in the name of the said
establish an inflexible rule of automatic exemption of corporation without prior registration thereof with the Securities
issuances of additional, previously authorized but unissued, and Exchange Commission as required by the Securities.
capital stock. We must reject an interpretation which may 5. In Answer, the defendants moved to dismiss the case on on the
disable the SEC from rendering protection to investors, in the ground that the Securities and Exchange Commission (SEC) has
public interest, precisely when such protection may be most original and exclusive jurisdiction over the subject of the
needed. complaint.
6. RTC denied the motion to dismiss. CA affirmed the decision.
LUIS TIRSO RIVILLA, LOURDES COJUANGCO RIVILLA ROSARIO AFRICA,
OSCAR T. AFRICA and ERLINDA G. GONZALES, petitioners, Issue/held:
vs. 1. Was there fraud on the part of the petitioner? (related issue)YES
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. FILEMON N. 2. WON SEC has jurisdiction of the case? YES
MENDOZA and CORNELIO T. RIVERA, respondents. st
1 issue:
Doctrine: The issuance of the promissory note in the name of a 1. Evidently, the present controversy is within the contemplation of
Corporation by the petitioners, who are its officers and/or controlling Sec. 5 (a) of PD No. 902-A, as amended. The issuance of the
stockholders, without prior registration of the note with the SEC, as promissory note in the name of C.R. Agro Industrial Development
required by Sec. 4 of the Revised Securities Act in, may be considered as a Corporation by the petitioners, who are its officers and/or
device or scheme amounting to fraud and misrepresentation. controlling stockholders, without prior registration of the note
with the SEC, as required by Sec. 4 of the Revised Securities Act in
Facts:

order to protect the investing public, may be considered as a DISMISSING the complaint in Civil Case No. Q-43027, without prejudice to
device or scheme amounting to fraud and misrepresentation its re-filing with the Securities and Exchange Commission.
- Because by not registering the note with the SEC, the
petitioners could later try to disclaim any liability under the
said promissory note by claiming that the corporation has a
separate and distinct personality from its officers and
stockholders. UNION BANK OF THE PHILIPPINES vs. SECURITY AND EXCHANGE
- Besides, petitioners could even divert the funds invested with COMMISSION
the said corporation by re-investing them in other G.R. No. 138949 June 6, 2001
corporations or business ventures. This form of manipulation PANGANIBAN, J.: NILO
apparently resorted to by the petitioners is detrimental to the
interest of the public, and contravenes the government's DOCTRINE: The mere fact that petitioner, in regard to its banking
policy of encouraging investments in private corporations and functions, is already subject to the supervision of the Bangko Sentral ng
enterprises. Pilipinas does not exempt the former from reasonable disclosure
regulations issued by the Securities and Exchange Commission (SEC). These
2nd issue: regulations -- imposed on petitioner as a banking institution listed in the
stock market -- are meant to assure full, fair and accurate information for
2. A careful review of the record shows that the case at bar is not the protection of investors. Imposing such regulations is a function within
simply an action for the recovery of a sum of money, as held by the jurisdiction of the SEC.
the Court of Appeals. It springs from an investment made by
private respondent with the C.R. Agro Industrial Development FACTS:
Corporation, as evidenced by a promissory note issued in the 1. "Records show that on April 4, 1997, petitioner, through its
name of the said corporation, which has already matured. General Counsel and Corporate Secretary, sought the opinion of
3. Private respondent now seeks the return of his investment by the Chairman Perfecto Yasay, Jr. of respondent Commission as to the
corporation, and more particularly, by herein petitioners, its applicability and coverage of the Full Material Disclosure Rule on
corporate officers and/or controlling stockholders. banks, contending that said rules, in effect, amend Section 5 (a)
4. In his complaint, private respondent alleged that petitioners (3) of the Revised Securities Act which exempts securities issued
actually used the corporation as a shield to perpetrate or commit or guaranteed by banking institutions from the registration
fraud and/or evade their just and valid obligation to him by requirement provided by Section 4 of the same Act.
issuing the promissory note in the name of the corporation 2. "In reply thereto, Chairman Yasay, in a letter dated April 8, 1997,
without prior registration thereof with the SEC as required by the informed petitioner that while the requirements of registration do
Securities Act, and by falsely representing that it was registered not apply to securities of banks which are exempt under Section 5
with the SEC. (a) (3) of the Revised Securities Act,
a. however, banks with a class of securities listed for
WHEREFORE, the petition is GRANTED and the questioned decision, dated trading on the Philippine Stock Exchange, Inc. are
30 October 1986, and resolution, dated 10 April 1987, of the Court of covered by certain Revised Securities Act Rules governing
Appeals are hereby SET ASIDE, and a new one is hereby entered 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; xxx xxx xxx
(2) Rule 34-(a)-1 requiring submission of Proxy (3) Any security issued or guaranteed by any banking institution authorized
Statements; and (3) Rule 34-(c)-1 requiring submission of to do business in the Philippines, the business of which is substantially
Information Statements, among others. confined to banking, or a financial institution licensed to engage in quasi-
3. "On July 17, 1997, respondent Commission wrote petitioner, banking, and is supervised by the Central Bank."
enjoining the latter to show cause why it should not be penalized
for its failure to submit a Proxy/Information Statement in  This provision exempts from registration the securities issued by
connection with its annual meeting held on May 23, 1997, in banking or financial institutions mentioned in the law. Nowhere
violation of respondent Commission's Full Material Disclosure does it state or even imply that petitioner, as a
Rule.' listed corporation, is exempt from complying with the reports
4. "Failing to respond to the aforesaid communication, petitioner required by the assailed RSA Implementing Rules.
was given a '2nd Show Cause with Assessment' by respondent
Commission on July 21, 1997. Petitioner was then assessed a fine Worth repeating is the CA's disquisition on the matter, which we quote:
of P50,000.00 plus P500.00 for every day that report [was] not  "However, the exemption from the registration requirement
filed, or a total of P91,000.00as of July 21, 1997. Petitioner was enjoyed petition does nor necessarily connote that [it is]
likewise advised by respondent Commission to submit the exempted from the other reportorial requirements. Having
required reports and settle the assessment, or submit the case to confined the exemption enjoyed by the petitioner merely to the
a formal hearing. initial requirement of registration of securities for public offering,
5. Petitioner then elevated its case to the Court of Appeals which, as and not, [to] the subsequent filing of various periodic reports,
already stated, affirmed the questioned Orders. respondent Commission, as the regulatory agency, is able to
exercise its power of supervision and control over corporations
PETITIONER ARGUES  Because its securities are exempt from the and over the securities market as a whole.
registration requirements under Section 5(a) (3) of the Revised Securities o Otherwise, the objectives of the 'Full Material Disclosure'
Act, petitioner argues that it is not covered by RSA Implementing Rule 11 policy would be defeated since petitioner corporation
(a)-1, which requires the filing of annual, quarterly, current predecessor and its dealings would be totally beyond the reach of
and successor reports; Rule 34(a)-1, which mandates the filing of proxy respondent Commission and the investing public."
statements and forms of proxy; and Rule 34(c)-1, which obligates the
submission of information statements.  It must be emphasized that petitioner is a commercial banking
corporation listed in a stock exchange. Thus, it must adhere not
ISSUE: Is the bank required to comply with the respondent SEC’s full only to banking and other allied special laws, but also to the rules
disclosure rules despite its exemption from the securities registration promulgated by Respondent SEC, the government entity tasked
requirements under Sec. 5 (a) (3) of the Revised Securities Act? YES not only with the enforcement of the Revised Securities Act, but
also the supervision of all corporations, partnerships or
RULING: associations which are grantees of government-issued primary
Section 5(a) (3) of the said Act reads: franchises and/or licenses or permits to operate in the Philippines.
"Sec. 5. Exempt Securities. (a) Except expressly provided, the requirement
of registration under subsection (a) of Section four of this Act shall not  RSA Rules 11 (a)-1, 34 (a)-1 and 34 (c)-1 require the submission of
apply to any of the following classes of securities: certain reports to ensure full, fair accurate disclosure of

information for the protection of the investing public. These Rules WHEREFORE, the Petition is hereby DENIED, and the assailed Decision of
were issued by the respondent pursuant to the authority the Court of Appeals AFFIRMED.Costs against petitioner.
conferred upon it by Section 3 of the RSA.
o 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 G.R. No. 158941. February 11, 2008.*
trading its securities in the stock market. TIMESHARE REALTY CORPORATION, petitioner, vs. CE-SAR LAO and
CYNTHIA V. CORTEZ, respondents. [Timeshare Realty Corporation vs. Lao,
 That petitioner is under the supervision of the Bangko Sentral ng
Pilipinas (BSP) and the Philippine Stock Exchange (PSE) does not 544 SCRA 254(2008)], (digest ponente, Haulo)
exempt it from complying with the continuing disclosure
requirements embodied in the assailed Rules.
o Petitioner, as a bank, is primarily subject to the control of DOCTRINE:
the BSP; and as a corporation trading its securities in the The provisions of B.P. Blg. 178 do not support the contention of petitioner
stock market, it is under the supervision of the SEC. It that its mere registration as a corporation already authorizes it to deal
must be pointed out that even the PSE is under the
with unregistered timeshares—corporate registration is just one of
control and supervision of respondent.14 There is no
over-supervision here. Each regulating authority several requirements before it may deal with timeshares
operates within the sphere of its powers. That stringent
requirements are imposed is understandable,
considering the paramount importance given to the FACTS:
interests of the investing public. 1. On October 6, 1996, herein petitioner sold to Ceasar M. Lao and
Cynthia V. Cortez (respondents), one timeshare of Laguna de Boracay
 Otherwise stated, the mere fact that in regard to its banking for US$7,500.00 under Contract No. 135000998 payable in eight
functions, petitioner is already subject to the supervision of the months and fully paid by the respondents.
BSP does not exempt the former reasonable disclosure 2. Sometime in February 1998, the SEC issued a resolution to the effect
regulations issued by the SEC. that petitioner was without authority to sell securities, like
o These regulations are meant to assure full, fair and timeshares, prior to February 11, 1998.
accurate disclosure of information for the protection of  It further stated in the resolution/order that the Registration
investors in the stock market. Imposing such regulations Statement of petitioner became effective only on February 11,
is a function within the jurisdiction of the SEC. Since 1998.
petitioner opted to trade its shares in the exchange, then  It also held that the 30 days within which a purchaser may
it must abide by the reasonable rules imposed by the exercise the option to unilaterally rescind the purchase
SEC. agreement and receive the refund of money paid applies to all
purchase agreements entered into by petitioner prior to the
effectivity of the Registration Statement.

3. Petitioner sought a reconsideration of the aforesaid order but the SEC
denied the same in a letter dated March 9, 1998. 1. As cited by the SEC En Banc in its March 25, 2002 Decision, as early as
4. On March 30, 1998, respondents wrote petitioner demanding their February 13, 1998, the SEC, through Director Linda A. Daoang, already
right and option to cancel their Contract, as it appears that Laguna
rendered a ruling on the effectivity of the registration statement of
de Boracay is selling said shares without license or authority from
the SEC. petitioner, viz.:
5. Respondents directly filed with SEC En Banc a Complaint7 against  “This has reference to your registration statement which was
petitioner and the Members of its Board of Directors for violation of rendered effective February 1998. The 30 days within which a
Section 4 of Batas Pambansa Bilang (B.P. Blg.) 178. purchaser may exercise the option to unilaterally rescind the
 Petitioner filed an Answer to the Complaint but the SEC En Banc, purchase agreement and receive the refund of money paid,
in an Order10 dated April 25, 2000, expunged the Answer from applies to all purchase agreements entered into by the registrant
the records due to tardiness.
prior to the effectivity of the registration statement. The 30-day
6. On March 25, 2002, the SEC En Banc rendered a Decision in favor of
respondents, ordering petitioner …., to pay respondents the amount rescission period for contracts signed before the Registration
of US$7,500.00. Statement was rendered effective shall commence on 11
 Petitioner filed a Motion for Reconsideration which the SEC En February 1998. The rescission period for contracts after 11
Banc denied in an Order13 dated June 24, 2002. February 1998 shall commence on the date of purchase
agreement. (Emphasis supplied.)”34
ISSUE:
2. Finally, the provisions of B.P. Blg. 178 do not support the contention
Whether or not a party in a contract could withdraw or rescind unilaterally of petitioner that its mere registration as a corporation already
without valid reason authorizes it to deal with unregistered time-shares. Corporate
registration is just one of several requirements before it may deal
HELD: with timeshares:
 “Section 8. Procedure for registration.—(a) All securities required
Petitioner claims that at the time it entered into a time-share purchase to be registered under subsection (a) of Section four of this Act
agreement with respondents on October 6, 1996, it already possessed the shall be registered through the filing by the issuer or by any dealer
requisite license and marketing agreement to engage in such transactions, or underwriter interested in the sale thereof, in the office of the
as evidenced by its registration with the SEC as a corporation. Petitioner Commission, of a sworn registration statement with respect to
argues that when it was registered and authorized by the SEC as broker of such securities, containing or having attached thereto, the
securities—such as the Laguna de Boracay timeshares—this had the effect following:
of ratifying its October 6, 1996 purchase agreement with respondents, and xxxx
removing any cause for the latter to rescind it. (36) Unless previously filed and registered with the Commission
and brought up to date:
The Court is not persuaded.

(a) A copy of its articles of incorporation with all amendments management. Ideally individual subscriptions would be
thereof and its existing by-laws or instruments corresponding pegged at the amount of at least P10 million each.
thereto, whatever the name, if the issuer be a corporation.” 3. The principal distributors of the fund (who most likely are the
fund sponsors too) are looking at no more than twenty (20)
3. Prior to fulfillment of all the other requirements of Section 8,
individuals and/or institutional (sic) from whom subscriptions
petitioner is absolutely proscribed under Section 4 from dealing with will be raised.
unregistered timeshares, thus: 4. Subscription shall be denominated in the local currency. A
4. “Section 4. Requirement of registration of securities.—a) No securities, working account shall be opened with a local commercial
except of a class exempt under any of the provisions of Section five bank where subscriptions will be deposited and
hereof or unless sold in any transaction exempt under any of the disbursements effected.
provisions of Section six hereof, shall be sold or offered for sale or 5. Angping and Associates Securities, Inc., (AASI) will most likely act
as financial advisor and local representative agent and fund
distribution to the public within the Philippines unless such securities
sponsors.
shall have been registered and permitted to be sold as hereinafter
provided.” QUERIES:
1. Does the Fund need to be registered under the Revised Securities
Act considering that the Fund will not be retailed to the public?
2. Should the fund sponsor instead seek exemption from registration
before commencing acceptance of placements? if so, what are the
requirements and fees to be paid, if any?
Mr. Jorge Ma. A. Yuzon
Angping & Associates Securities, Inc.
SEC OPINION:
Suite 2003/2004 The Peak, 107 Alfaro St.,
The pertinent provisions of the Revised Securities Act of the Philippines
Salcedo Village, Makati, Metro Manila
provide:
February 6, 1996 ; NILO
"SECTION 4. Requirement of registration of securities. — (a) and
SECTION 6. Exempt transactions. — . . . (b)
Sir:
This refers to your letter dated November 15, 1995 requesting opinion on
 Therefore, as a general rule selling or offering for sale or
the possibility of making available shares or units of participation of an
distribution of securities within the Philippines is subject to
offshore mutual fund invested exclusively in Philippine listed equities
registration. However, the Law allows exemptions by reason of
under the following facts:
the small amount or limited character of the offering.
1. Participation in the fund shall be via private placements in the
local currency.
 Accordingly, if it can be shown that the offering will be limited
2. The sponsors of the offshore fund are not looking at retailing
only to not more than 20 investors who are in the position to
subscriptions to the fund (i.e., selling to the public). Instead,
know the present affairs of the Fund and the risks of investing
they are looking at tapping a few high networth individuals
therein such that the registration of the securities to be offered is
and potentially some institutions, to raise assets under
necessary for the protection of the investors, the transaction may
be exempted from the registration requirements under the

Revised Securities Act, but only after complying with the It appears from the above provisions that as a general rule, selling or
following: offering for sale or distribution of securities within the Philippines are
1. A certificate of exemption shall be secured by filing a request for subject to registration. However, the Law allows exemptions by reason of
exemption from the registration requirements stating the
the small amount or limited character of the offering. Thus, for invoking
reasons why it should be exempted under Section 6(b) of the
Revised Securities Act. such justification, the Commission, on several occasions, had treated
2. Payment of exemption fee amounting to one-tenth of one stock option plans granted by foreign companies in favor of qualified
percentum of the maximum aggregate price or issued value employees of their Philippine subsidiaries as exempt transactions.
of the securities as required under Section 6(c) of the Revised
Securities Act. Accordingly, the above proposed corporate savings plan may be
exempted from registration requirements if it can be shown that the
 However, it is to be understood that the exemption which may be
registration thereof is not necessary in the public interest and for the
granted on the above transaction shall only be for the specific
offering to the twenty (20) intended investors and shall not be protection of the investors by reason of the small amount and limited
construed to cover subsequent transfer of the shares in the character of the offering and provided that the following requirements are
course of repeated and successive transactions. complied with:
1. Filing of a request for exemption from the registration requirements
 Take note further that the moment the offshore mutual fund shall stating the reasons why it should be exempted under Section 6 (b)
operate in the Philippines, it shall comply with registration of the Revised Securities Act;
requirements under the Corporation Code, Foreign Investments
2. Payment of exemption fee amounting to one-tenth of one per
Act of 1991 and RA 2629, otherwise known as the Investment
Company Act. centum of the maximum aggregate price or issued value of the
securities as required under Section 6(c) of the Revised Securities
January 16, 1996 Act.
Air Liquide Asia Management Pte, Ltd.
#02-08 French Business Center Singapore
SEC OPINION date November 7, 1995 to: Atty. Roberto O. Parel
Attention : Ms. Alexandra Lauvaux, (digest ponente, Haulo)
(Bon)
Facts:
ISSUE: whether the proposed corporate savings plan of Air Liquide Asia
Management Pte. Ltd., a French company, in favor of the employees of its 1. Atty. Parel wrote to SEC a letter dated September 28, 1995
subsidiaries in the Philippines is legally feasible under Philippine laws re: inquiring whether the investment scheme described therein is
whether the employees can freely subscribe the shares issued by said violative of SEC Rules and Regulations on registration of securities.
company; and if allowed, what are the procedure and requirements to be 2. His (Parel) client corporation has started the groundworks for an
followed. Cdpr initial public offering (IPO) of shares of stock.
HELD:

3. The exact listing date is still undetermined and subject to the event the corporation fails to start the IPO within the period
registration process with the Securities and Exchange of nine (9) months.
Commission.  It can be construed from the above provisions that "mere
4. However, several persons have expressed the intention of making attempt" to offer shares to the public is subject to the
reservations subscribing to the shares to be offered under the IPO registration requirement under the Revised Securities Act.
and are prepared to remit an amount equivalent to 10% of their The inclusion in the definition of a "mere attempt" is
contemplated subscription as deposit. designed to prevent evasion from registration requirements
5. Because of an inordinately large number of similar requests by promoters who may adopt ingenious investment schemes
received by the corporation, the latter is inclined to accommodate to escape regulation.
such requests under the following conditions: Section 4 of the Revised Securities Act provides:
a. The amount paid shall be considered as a reservation fee
or deposit; (a) No securities, except of a class exempt under any of the
b. The reservation fee/deposit shall not exceed ten percent provisions of Section five hereof or unless sold in any transaction
(10%) of the intended investment. Any investor exempt under any of the provisions of Section six hereof, shall be
depositing a reservation fee should intend to invest to sold or offered for sale or distribution to the public within the
not less than P500,000.00 worth of shares and not more Philippines unless such securities shall have been registered and
than P10 Million. The corporation makes no commitment permitted to be sold as hereinafter provided. (Emphasis supplied)
to make the public offer and the investor agrees to
assume such risk. xxx xxx xxx"
c. In the event that the corporation fails to offer its shares Likewise, Section 2 thereof provides:
to the public within a period of nine (9) months from the "SECTION 2. Definitions. — The purposes of this Act:
payment of the reservation fee/deposit, then the xxx xxx xxx
investor shall have the option to seek a refund of the (c) "Sale" or "sell" shall include every contract of sale or
reservation fee/deposit with interest at twelve percent disposition of a security or interest in a security, for value. The
(12%) per annum or to maintain the reservation fee for terms "offer to sell", "offer for sale", or "offer shall include every
another six (6) months. attempt or offer to dispose of or solicitation of an offer to buy, a
Issue/ Query: Assuming that the underwriters have no objection to the security or interest in a security, for value.
above arrangement, is the above trtansaction subject to the SRC rules?
Held:
YES. In the present case, the act of accepting subscription deposits from March 30, 2004; SEC OPINION NO. 19-04
the public for an intended initial public offering (IPO) is an indication that Subject : Information Dissemination
there is an attempt to offer the shares to the public. Mr. Manuel M. Moraza; Chairman; URM, Inc.
 Moreover, the deposits cannot be merely treated as FACTS:

reservation fees inasmuch as they will bear interest in the

1. URM, Inc. is a stock corporation duly registered under Philippine
laws with SEC Certificate of Registration No. CS2002261667 with HELD: Applicable rule in the instant case is Sec. 8.3 of the Amended
the following primary purpose: Implementing Rules and Regulations of the Securities Regulation Code, the
a. To act as managers or managing agents of persons, firms, pertinent portion of which reads thus:
associations, corporations, partnerships, and other “Written Communication Not Deemed an Offer for Sale.
entities, to provide management, investment and
technical advice for commercial, industrial, A notice, circular, advertisement, letter, or other communication does not
manufacturing and other kinds of enterprises; and to constitute an offer for sale in violation of Section 8 of the Code if it is
undertake, carry on, assist or participate in the published or transmitted to any person after a registration statement has
promotion, organization, management, liquidation or been filed and contains any or all of the following information:
reorganization of corporations, partnerships and other
entities, except the management of funds, securities, A. the name of the issuer of the security;
portfolio or similar assets of the managed entities or B. the full title of the security and the amount being offered;
corporations. C. a brief indication of the general type of business of the issuer;
2. Subject corporation intends to offer its services as Investor D. the price of the security or, if the price is not known, the
Information Coordinators to various listed companies method of its determination or the probable price range as
a. In the process, URM, Inc shall render said service jointly specified by the issuer or the managing underwriter;
with its associate Georgeson Shareholder E. in the case of a debt security with a fixed (non contingent)
Communications. interest provision, the yield or, if the yield is not known, the
b. Its objectives are: to reach out to relatively small probable yield range, as specified by the issuer or the managing
shareholders/investors who may possibly have been underwriter;
disenfranchised considering that they are situated in F. the name and address of the sender of the communication and
remote areas; reduce annual shareholder servicing costs; the fact that he is participating, or expects to participate, in the
increase trading liquidity and assist shareholders in distribution of the security;
selling their holdings conveniently. G. the names of the underwriters;
c. Georgeson's role shall be the following: The proposed H. the approximate date upon which the proposed sale to the
services shall consist of dissemination to the public is anticipated to commence;
stockholder/investor of corporate information, mailing of I. whether the security is being offered through rights issued to
information and the possible facilitation of selling their existing security holders, and, if so, the class of securities the
investments on a voluntary basis through regular holders of which will be entitled to subscribe, the subscription
registered brokers. In no case, shall the corporation ratio, the actual or proposed record date, the date upon which
engage in brokering functions for the small stockholders the rights were issued or are expected to be issued, the actual or
since it shall solely disseminate needed information from anticipated date upon which they will expire, and the
the issuer companies, brokers or other parties to the approximate subscription price, or any of the foregoing;
shareholders. J. with respect to any class of debt securities, any class of
convertible debt securities or any class of preferred stock, the
ISSUE: Whether or not the proposed information dissemination activities security rating or ratings assigned to the class of securities by any
by URM is legally feasible in this jurisdiction? YES credit rating agency recognized or accredited by the Commission

and the name of such rating agency/ies which assigned such the regulated activities of a broker-dealer for which a secondary
ratings. license must be secured from the Commission, such as but not
limited to:
2. Every communication, used pursuant to this Rule shall contain o (1) receiving, holding or pooling of securities and/or cash
the following: of shareholders for and on their behalf, or for the
A. If a registration statement has not yet become effective, the account of URM, Inc. and/or Georgeson Shareholder
following statement in bold face prominent type Communications as trustee/agent of the shareholders;
A REGISTRATION STATEMENT RELATING TO THESE (2) soliciting authority from shareholders to buy/sell
SECURITIES HAS BEEN FILED WITH THE SECURITIES AND securities; (3) acting as a trustee or agent of brokers-
EXCHANGE COMMISSION, BUT HAS YET BECOME dealers or shareholders for the purpose of selling/buying
EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR securities; (4) assisting or facilitating brokers-dealers or
OFFERS TO BUY THE SAME BE ACCEPTED PRIOR TO THE shareholders to buy/sell securities; (5) doing such other
TIME THE REGISTRATION STATEMENT BECOMES activities that may, in the future, be considered by the
EFFECTIVE. THIS COMMUNICATION SHALL NOT Commission or other government/regulatory agency as a
CONSTITUTE AN OFFER TO SELL OR BE CONSIDERED A regulated activity pursuant to pertinent laws, rules and
SOLICITATION OR AN OFFER TO BUY. regulations; and (6) receiving commissions from the
B. A statement whether the security is being offered in shareholders and/or brokers-dealers or any other
connection with a distribution by the issuer or by a security compensation arrangement as payment for the services
holder, or both, and whether the issue represents new financing rendered in connection with, but not limited to, nos. (1)
or refinancing or both; 2004cdtai to (5).
C. The name/s and addresses of a person/s from whom a written
prospectus, which accordingly meets the requirements of Section
12 of the Code, may be obtained. PHILIPPINE STOCK EXCHANGE, INC.,
vs.
 can be deduced that an ordinary information dissemination THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
activity or other form of communication may not be treated as an COMMISSION and PUERTO AZUL LAND, INC.,
offer for sale of securities contemplated under Sec 8 of the TORRES, JR., J.: G.R. No. 125469 October 27, 1997 ; NILO
Securities Regulation Code. DOCTRINE: The Securities and Exchange Commission is the government
 Considering that based on the representations of URM, Inc. that it agency, under the direct general supervision of the Office of the
will, in cooperation with Georgeson Shareholder Communications, President, with the immense task of enforcing the Revised Securities Act,
merely engage in the dissemination of information from the issuer and all other duties assigned to it by pertinent laws. Among its inumerable
companies to its shareholders, the proposed activity may be functions, and one of the most important, is the supervision of all
allowed subject to the provisions of Section 8 of the Securities corporations, partnerships or associations, who are grantees of primary
Regulation Code and its implementing rules and regulations. franchise and/or a license or permit issued by the government to operate
 must be understood, however, that pursuant to its further in the Philippines.
representation that it will not engage in brokering functions for FACTS:
the stockholders, URM, Inc. and/or its associate, Georgeson 1. The Puerto Azul Land, Inc. (PALI), a domestic real estate
Shareholder Communications, shall in no case engage in any of corporation, had sought to offer its shares to the public in

order to raise funds allegedly to develop its properties and by or any means with the consideration, processing and
pay its loans with several banking institutions. In January, approval by the PSE of the initial public offering of PALI."
1995, PALI was issued a Permit to Sell its shares to the public 5. Board of Governors of the PSE reached its decision to reject PALI's
by the Securities and Exchange Commission (SEC). To application.
facilitate the trading of its shares among investors, PALI 6. On April 11, 1996, PALI wrote a letter to the SEC addressed to the
sought to course the trading of its shares through the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the
Philippine Stock Exchange, Inc. (PSE), for which purpose it SEC's attention the action taken by the PSE in the application
filed with the said stock exchange an application to list its of PALI for the listing of its shares with the PSE, and
shares, with supporting documents attached. requesting that the SEC, in the exercise of its supervisory and
2. On February 14, 1996, before it could act upon PALI's application, regulatory powers over stock exchanges under Section 6(j) of
the Board of Governors of the PSE received a letter from the P.D. No. 902-A, review the PSE's action on PALI's listing
heirs of Ferdinand E. Marcos, claiming that the late President application and institute such measures as are just and
Marcos was the legal and beneficial owner of certain proper under the circumstances.
properties forming part of the Puerto Azul Beach Hotel and 7. SEC rendered its Order, reversing the PSE's decision.
Resort Complex which PALI claims to be among its assets and 8. PSE filed a motion for reconsideration of the said order on April
that the Ternate Development Corporation, which is among 29, 1996, which was, however denied by the Commission in
the stockholders of PALI, likewise appears to have been held its May 9, 1996 Order which states:
and continue to be held in trust by one Rebecco Panlilio for 9. Court of Appeals promulgated its Resolution dismissing the PSE's
then President Marcos and now, effectively for his estate, Petition for Review. Hence, this Petition by the PSE.
and requested PALI's application to be deferred. PALI was
requested to comment upon the said letter. PHIL. STOCK EXCHANGE  submits that the Court of Appeals erred in
3. PALI's answer stated that the properties forming part of the ruling that the SEC had authority to order the PSE to list the shares of PALI
Puerto Azul Beach Hotel and Resort Complex were not in the stock exchange. Under presidential decree No. 902-A, the powers of
claimed by PALI as its assets. On the contrary, the resort is the SEC over stock exchanges are more limited as compared to its
actually owned by Fantasia Filipina Resort, Inc. and the authority over ordinary corporations. In connection with this, the powers
Puerto Azul Country Club, entities distinct from PALI. of the SEC over stock exchanges under the Revised Securities Act are
Furthermore, the Ternate Development Corporation owns specifically enumerated, and these do not include the power to reverse the
only 1.20% of PALI. decisions of the stock exchange.
a. The Marcoses responded that their claim is not confined  Authorities are in abundance even in the United States, from
to the facilities forming part of the Puerto Azul Hotel and which the country's security policies are patterned, to the effect
Resort Complex, thereby implying that they are also of giving the Securities Commission less control over stock
asserting legal and beneficial ownership of other exchanges, which in turn are given more lee-way in making the
properties titled under the name of PALI. decision whether or not to allow corporations to offer their stock
4. On March 4, 1996, the PSE was informed that the Marcoses to the public through the stock exchange.
received a Temporary Restraining Order on the same date, o This is in accord with the "business judgment rule"
enjoining the Marcoses from, among others, "further whereby the SEC and the courts are barred from
impeding, obstructing, delaying or interfering in any manner intruding into business judgments of corporations, when
the same are made in good faith. the said rule precludes

the reversal of the decision of the PSE to deny PALI's of primary franchises and/or a license or permit issued by the
listing application, absent a showing of bad faith on the government to operate in the Philippines. . ."
part of the PSE. - The SEC's regulatory authority over private corporations
 Under the listing rules of the PSE, to which PALI had previously encompasses a wide margin of areas, touching nearly all of a
agreed to comply, the PSE retains the discretion to accept or corporation's concerns. This authority springs from the fact
reject applications for listing. Thus, even if an issuer has complied that a corporation owes its existence to the concession of its
with the PSE listing rules and requirements, PSE retains the corporate franchise from the state.
discretion to accept or reject the issuer's listing application if the - The SEC's power to look into the subject ruling of the PSE,
PSE determines that the listing shall not serve the interests of the therefore, may be implied from or be considered as
investing public. necessary or incidental to the carrying out of the SEC's
 Moreover, PSE argues that the SEC has no jurisdiction over express power to insure fair dealing in securities traded upon
sequestered corporations, nor with corporations whose a stock exchange or to ensure the fair administration of such
properties are under sequestration. exchange. It is, likewise, observed that the principal function
 PSE, likewise, assails the SEC's and the Court of Appeals reliance of the SEC is the supervision and control over corporations,
on the alleged policy of "full disclosure" to uphold the listing of partnerships and associations with the end in view that
PALI's shares with the PSE, in the absence of a clear mandate for investment in these entities may be encouraged and
the effectivity of such policy. As it is, the case records reveal the protected, and their activities for the promotion of economic
truth that PALI did not comply with the listing rules and disclosure development.
requirements.
o In fact, PALI's documents supporting its application  We affirm that the SEC is the entity with the primary say as to
contained misrepresentations and misleading whether or not securities, including shares of stock of a
statements, and concealed material information. The corporation, may be traded or not in the stock exchange. This is in
matter of sequestration of PALI's properties and the fact line with the SEC's mission to ensure proper compliance with the
that the same form part of military/naval/forest laws, such as the Revised Securities Act and to regulate the sale
reservations were not reflected in PALI's application. and disposition of securities in the country.
ISSUES: WON the SEC had both jurisdiction and authority to look into the  This is not to say, however, that the PSE's management
decision of the petitioner PSE? NO except when the decision of the PSE is prerogatives are under the absolute control of the SEC. The PSE is,
attended with Bad faith. alter all, a corporation authorized by its corporate franchise to
WON PSE is correct to deny the application of PALI? YES engage in its proposed and duly approved business. One of the
PSE's main concerns, as such, is still the generation of profit for its
RULING: stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold
 Section 3 of Presidential Decree 902-A, standing alone, is enough property in its own name, to enter (or not to enter) into contracts
authority to uphold the SEC's challenged control authority over with third persons, and to perform all other legal acts within its
the petitioner PSE even as it provides that "the Commission shall allocated express or implied powers.
have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees

 Thus, notwithstanding the regulatory power of the SEC over the  Also, as the primary market for securities, the PSE has established
PSE, and the resultant authority to reverse the PSE's decision in its name and goodwill, and it has the right to protect such
matters of application for listing in the market, the SEC may goodwill by maintaining a reasonable standard of propriety in the
exercise such power only if the PSE's judgment is attended by bad entities who choose to transact through its facilities. It was
faith. reasonable for the PSE, therefore, to exercise its judgment in the
o In Board of Liquidators vs. Kalaw, it was held that bad manner it deems appropriate for its business identity, as long as
faith does not simply connote bad judgment or no rights are trampled upon, and public welfare is safeguarded.
negligence. It imports a dishonest purpose or some o In any case, for the purpose of determining whether PSE
moral obliquity and conscious doing of wrong. It means a acted correctly in refusing the application of PALI, the
breach of a known duty through some motive or interest true ownership of the properties of PALI need not be
of ill will, partaking of the nature of fraud. determined as an absolute fact.
o What is material is that the uncertainty of the properties'
 In reaching its decision to deny the application for listing of PALI, ownership and alienability exists, and this puts to
the PSE considered important facts, which, in the general scheme, question the qualification of PALI's public offering. In
brings to serious question the qualification of PALI to sell its sum, the Court finds that the SEC had acted arbitrarily in
shares to the public through the stock exchange. During the time arrogating unto itself the discretion of approving the
for receiving objections to the application, the PSE heard from the application for listing in the PSE of the private
representative of the late President Ferdinand E. Marcos and his respondent PALI, since this is a matter addressed to the
family who claim the properties of the private respondent to be sound discretion of the PSE, a corporation entity, whose
part of the Marcos estate. business judgments are respected in the absence of bad
o In time, the PCGG confirmed this claim. In fact, an order faith.
of sequestration has been issued covering the properties
of PALI, and suit for reconveyance to the state has been  The question as to what policy is, or should be relied upon in
filed in the Sandiganbayan Court. How the properties approving the registration and sale of securities in the SEC is not
were effectively transferred, despite the sequestration for the Court to determine, but is left to the sound discretion of
order, from the TDC and MSDC to Rebecco Panlilio, and the Securities and Exchange Commission. In mandating the SEC to
to the private respondent PALI, in only a short span of administer the Revised Securities Act, and in performing its other
time, are not yet explained to the Court, but it is clear functions under pertinent laws, the Revised Securities Act, under
that such circumstances give rise to serious doubt as to Section 3 thereof, gives the SEC the power to promulgate such
the integrity of PALI as a stock issuer. rules and regulations as it may consider appropriate in the public
o The petitioner was in the right when it refused interest for the enforcement of the said laws.
application of PALI, for a contrary ruling was not to the o The second paragraph of Section 4 of the said law, on the
best interest of the general public. The purpose of the other hand, provides that no security, unless exempt by
Revised Securities Act, after all, is to give adequate and law, shall be issued, endorsed, sold, transferred or in any
effective protection to the investing public against other manner conveyed to the public, unless registered
fraudulent representations, or false promises, and the in accordance with the rules and regulations that shall be
imposition of worthless ventures. 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 least two points (nos. 1 and 5) has failed to support the
regulatory agency, has supervision and control over all propriety of the issue of its shares with unfailing clarity,
corporations and over the securities market as a whole, thereby lending support to the conclusion that the PSE
and as such, is given ample authority in determining acted correctly in refusing the listing of PALI in its stock
appropriate policies. exchange.
o Pursuant to this regulatory authority, the SEC has o This does not discount the effectivity of whatever
manifested that it has adopted the policy of "full material method the SEC, in the exercise of its vested authority,
disclosure" where all companies, listed or applying for chooses in setting the standard for public offerings of
listing, are required to divulge truthfully and accurately, corporations wishing to do so. However, the SEC must
all material information about themselves and the recognize and implement the mandate of the law,
securities they sell, for the protection of the investing particularly the Revised Securities Act, the provisions of
public, and under pain of administrative, criminal and which cannot be amended or supplanted by mere
civil sanctions. administrative issuance.
o In connection with this, a fact is deemed material if it
tends to induce or otherwise effect the sale or purchase  In resume, the Court finds that the PSE has acted with justified
of its securities. While the employment of this policy is circumspection, discounting, therefore, any imputation of
recognized and sanctioned by the laws, nonetheless, the arbitrariness and whimsical animation on its part. Its action in
Revised Securities Act sets substantial and procedural refusing to allow the listing of PALI in the stock exchange is
standards which a proposed issuer of securities must justified by the law and by the circumstances attendant to this
satisfy. case.
 Pertinently, Section 9 of the Revised Securities Act sets forth the ACCORDINGLY, in view of the foregoing considerations, the Court hereby
possible Grounds for the Rejection of the registration of a GRANTS the Petition for Review on Certiorari.
security.
o A reading of the foregoing grounds reveals 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.
o This measure was meant to protect the interests 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.
o The absolute reliance on the full disclosure method in the
registration of securities is, therefore, untenable. As it is,
the Court finds that the private respondent PALI, on at

ADVANCED SECURITIES – FEB. 11, 2013 ADDITIONAL SEC OPINIONS December 8, 1997
CALUAG – CHUA – HAULO- RICO – SUCGANG – UY Mr. Claro P. Ison
PentaCapital Investment Corporation
Ms. Imelda P. Maiquez 10/F, ACT Tower, 135 Sen. Gil Puyat Ave.,
Cagayan Electric Power & Light Co., Inc. Salcedo Village, Makati, Metro Manila
JUSTIN c/o NILO SEC OPINION RE: CERTIFICATE OF PARTICIPATION:
FACTS: 1. "Two (2) local "commercial banks" through their respective trust
As stated, the Subscription Agreement which was distributed to all departments and a "finance company with quasi-banking license"
stockholders during the exercise of the pre-emptive rights contained the will act as trustees of their clients (the "Trustors") and sell
following provision: participation in the co-ownership interests of the Trustees in the
". . . the subscription rights under these Contract are exclusive and non- parcels of land owned by the Trustors (the "Property") which have
transferable." been contracted for development.
2. The trustees will become co-owners of the Property through the
QUERY: opinion whether a stockholder can lawfully assign to another conveyance by the Trustors of pro-indiviso and undivided portions
stockholder her pre-emptive right over a new allotment of shares brought of the Property to each of the Trustees. These conveyance will be
about by the company's increase in capitalization. annotated on the titles covering the Property.
3. For the orderly sale of the said participation, the co-ownership
OPINION: interests of each of the Trustees in the property will be divided
 The Commission, in a previous ruling, has held that in order to into units and each unit will be converted by a "Certificate of
legally effect restrictions on the transfer of shares of stock, such Participation" to be issued by the Trustee concerned and
restrictions must be provided for in the articles of incorporation. confirmed by the Trustors. Upon the sale of a Certificate of
(Ltr. to Ozaeta, Gibbs & Ozaeta dtd. October 13, 1964) Participation the said sale will be registered in a register of
 Accordingly, it follows that in order to legally effect any restriction beneficiaries to be maintained by the issuing Trustees."
on transfer of shares of stock, including restrictions on the rights Issue/held: WON it is exempt from registration?No
attached to it, e.g. transfer of pre-emptive right to subscribe, the
same must be provided for in the articles of incorporation. "SECTION 5. Exempt Securities. — (a) Except as expressly
 Furthermore, considering that shares of stocks burdened with provided, the requirement of registration under subsection (a) of
restrictions on transferability may fall into the hands of innocent section four of this Act shall not apply to any of the following
purchasers, the Commission as a matter of policy, also requires classes of securities. Cdpr
that the restrictions shall be printed on the stock certificates of xxx xxx xxx
the corporation. (3) Any security issued or guaranteed by any banking institution
 Thus, unless the restriction referred to in your letter is reflected in authorized to do business in the Philippines, the business of which
the articles of incorporation and in the certificate of stocks, it is substantially confined to banking or a financial institution
cannot be enforced. licensed to engage in quasi-banking, and is supervised by the
Central Bank." (Emphasis supplied)
1.

2. Take note that the above provision uses the phrase "and is SECTION 5. Exempt Securities. —
supervised by the Central Bank" as a condition for the securities
to be considered as "exempt". (7) Any security covering any right or interest in real property,
- The philosophy behind the above exemption is that including a subdivision lot or a condominium unit, where the sale or
registration under the RSA is no longer necessary in the public transfer of such security is subject to the supervision and regulation of the
interest or for the protection of the investors inasmuch as
Ministry of Human Settlement or any of its authorized constituent or
they are issued by institutions over which the Bangko Sentral
attached agencies."
already exercises regulatory and supervisory care, and
therefore are presumed to be already adequately regulated
 However, take note that the provision uses the phrase: "subject
by that Office.
3. However, in the present case, the Bangko Sentral, in its letter- to the supervision and regulation of the Ministry of Human
comment dated October 22, 1997, manifested that the Settlements or any of its authorized or attached agencies".
certificates of participation to be issued under the proposed  Thus, in the event the proposed investment scheme described in
scheme do not appear to be related to banking business, and your letter is not regulated by the concerned Agency, it shall be
therefore, are not among those contemplated to be exempt from required to be registered under the Revised Securities Act,
SEC registration (a xerox copy of the BSP letter is herewith
otherwise, it would be unregulated leaving the investors without
attached for ready reference).
any protection.
- Inasmuch as the Bangko Sentral itself recognizes the fact that
the investment scheme is not regulated by that Agency, the  At present, it is doubtful that such investment scheme is
securities above described do not fall within the exemption regulated by the Housing and Land Regulatory Board or any other
contemplated in the above-cited RSA, provision. Therefore, government agency.
the issuance thereof requires registration under the RSA. June 30, 2003 SEC OPINION NO. 35-03
Ms. Marietta B. Valleser
January 12, 1998 (digest ponente, Haulo)
Ms. Luz Policarpio Say
Chanelay Development Corporation
NILO
DOCTRINE: Cooperatives not exempt from SRC
QUERY: WON the proposed condominium co-ownership scheme (Condo
Pine Concept) described is exempted from registration? FACTS:
OPINION: On the basis of the foregoing provision, the certificate of 1. Your query is premised on Article 62(8) of the Cooperative Code of
participation in the condo pie program described in your letter may be the Philippines, which provides:
considered as exempt securities.  "(8) Any security issued by cooperatives shall be exempt from
the provisions of the Securities Act provided such security shall
The Revised Securities Act (RSA) provides: not be speculative."

ISSUE: whether or not cooperatives are exempt from the provisions of 6. SRC was enacted to protect investors, ensure full and fair disclosure
the Securities Regulation Code (SRC). about securities, minimize if not totally eliminate fraudulent or
manipulative devices and practices which create distortions in the free
HELD: We answer your query in the negative.
market.
1. Previously, securities issued by cooperative marketing associations are
 The primary means of accomplishing this goal is the disclosure of
exempt from registration requirement. The exemption is pursuant to
important financial information through registration of securities.
Section 5(a)(4) of the Revised Securities Act (RSA) 3, which reads:
 In general, registration calls for a description of the company's
2. "SEC. 5. Exempt Securities. — (a) Except as expressly provided,
properties and business, description of the security to be offered
the "requirement of registration under Subsection (a) of Section four
for sale, effect of the securities issue on the ownership and key
of this Act shall not apply to any of the following classes of securities:
points characterizing the risks of the offering. This information
 (4) Any security issued by a building and loan association,
enables investors to make informed judgment whether to
non-stock savings and loan association, or similar institution, xxx
purchase a company's securities.
; or any security issued by rural credit associations or by
 Without registration, SEC could not inquire into the qualification
cooperative marketing associations which are subject to
of securities and would not be able to regulate public
regulation and supervision by the proper government agency."
distribution and trading of securities. Consequently, SEC could
3. However, the RSA was repealed in its entirety by the SRC 4 and the
not protect the public from issuers of worthless securities and
exemption accorded to cooperative marketing associations under
curb fraudulent transactions.
Section 5(a)(4) of the RSA was not reproduced in the SRC.
 It is axiomatic that provisions of an old law, like RSA, that were
not replicated in the revision thereof covering the same subject
are deemed repealed and discarded.
 It indicates the manifest intention of the legislature to suppress
the exemption. Clearly, the exemption from registration
requirement previously granted to cooperative marketing
associations no longer exists.
It may be argued that the Article 62(8) is a specific provision in the

Cooperative Code which cannot be overruled by the SRC. We do not
subscribe to that proposition.
4. Article 62(8) of the Cooperative Code is inconsistent with the intent
and purpose of the SRC 6, hence, it is deemed repealed by the SRC.
5. Statutes should be construed in the light of the objective to be
achieved and the evil to be suppressed.

ADVANCED SECURITIES (PROTECTION OF SHAREHOLDERS, FRAUD, Regulation Code is not applicable to the purchase by petitioner of
MANIPULATION AND INSIDER TRADING) MARCH 18, 2013 the majority of shares of UCC.
5. In a letter dated 16 July 2004, Director JustinaCallangan of the
CEMCO HOLDINGS, INC., petitioner, vs. NATIONAL LIFE INSURANCE SEC’s Corporate Finance Department responded to the query of
COMPANY OF THE PHILIPPINES, INC., respondent. the PSE that while it was the stance of the department that the
G.R. No. 171815. August 7, 2007.J.Chico Nazario tender offer rule was not applicable, the matter must still have to
(Bon) be confirmed by the SEC en banc.
Doctrine: The power conferred upon the Securities and Exchange 6. Thereafter, in a subsequent letter dated 27 July 2004, Director
Commission (SEC) to promulgate rules and regulations is a legislative Callangan confirmed that the SEC en banc had resolved that the
recognition of the complexity and the constantly-fluctuating nature of the Cemco transaction was not covered by the tender offer rule.
market and the impossibility of foreseeing all the possible contingencies 7. Feeling aggrieved by the transaction, respondent National Life
that cannot be addressed in advance; A tender offer is an offer by the Insurance Company of the Philippines, Inc., a minority stockholder
acquiring person to stockholders of a public company for them to tender of UCC, sent a letter to Cemco demanding the latter to comply
their shares therein on the terms specified in the offer; A public company with the rule on mandatory tender offer. Cemco, however,
is defined as a corporation which is listed on an exchange, or a corporation refused.
with assets exceeding P50,000,000.00 and with 200 or more stockholders, 8. Share Purchase Agreement was executed by ACC and BCI, as
at least 200 of them holding not less than 100 shares of such company. sellers, and Cemco, as buyer. On 12 August 2004, the transaction
was consummated and closed.
Facts: 9. On 19 August 2004, respondent National Life Insurance Company
1. Union Cement Corporation (UCC), a publicly-listed company, has of the Philippines, Inc. filed a complaint with the SEC asking it to
two principal stockholders—UCHC, a non-listed company, with reverse its 27 July 2004 Resolution and to declare the purchase
shares amounting to 60.51%, and petitioner Cemco with 17.03%. agreement of Cemco void and praying that the mandatory tender
Majority of UCHC’s stocks were owned by BCI with 21.31% and offer rule be applied to its UCC shares.
ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC 10. SEC ruled in favor of the respondent by reversing and setting
stocks. aside its 27 July 2004 Resolution and directed petitioner Cemco to
2. In a disclosure letter dated 5 July 2004, BCI informed the make a tender offer for UCC shares to respondent and other
Philippine Stock Exchange (PSE) that it and its subsidiary ACC had holders of UCC shares similar to the class held by UCHC in
passed resolutions to sell to Cemco BCI’s stocks in UCHC accordance with Section 9(E), Rule 19 of the Securities Regulation
equivalent to 21.31% and ACC’s stocks in UCHC equivalent to Code.
29.69%. 11. Petitioner filed a petition with the Court of Appeals challenging
3. In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it the SEC’s jurisdiction to take cognizance of respondent’s
was stated that as a result of petitioner Cemco’s acquisition of BCI complaint and its authority to require Cemco to make a tender
and ACC’s shares in UCHC, petitioner’s total beneficial ownership, offer for UCC shares, and arguing that the tender offer rule does
direct and indirect, in UCC has increased by 36% and amounted to not apply, or that the SEC’s re-interpretation of the rule could not
at least 53% of the shares of UCC be made to retroactively apply to Cemco’s purchase of UCHC
4. As a consequence of this disclosure, the PSE, in a letter to the SEC shares.
dated 15 July 2004, inquired as to whether the Tender Offer Rule 12. The Court of Appeals rendered a decision affirming the ruling of
under Rule 19 of the Implementing Rules of the Securities the SEC. It ruled that the SEC has jurisdiction to render the

questioned decision and, in any event, Cemco was barred by complaint, may nullify the said acquisition and
estoppel from questioning the SEC’s jurisdiction. It, likewise, held direct the holding of a tender offer. This shall be
that the tender offer requirement under the Securities Regulation without prejudice to the imposition of other
Code and its Implementing Rules applies to Cemco’s purchase of sanctions under the Code.
UCHC stocks.
PROVISIONS SHOWING SEC POWERS OVER THE CASE
Issue: PROVISION EXPLANATION BY COURT
1. Does SEC have jurisdiction over respondent’s complaint and to Rule 19(13) of the The foregoing rule emanates from
require Cemco to make a tender offer for respondent’s UCC Amended Implementing the SEC’s power and authority to
shares?YES Rules and Regulations of regulate, investigate or supervise
2. IS the rule on mandatory tender offer applies to the indirect the Securities Regulation the activities of persons to ensure
acquisition of shares in a listed company, in this case, the indirect Code, to wit: compliance with the Securities
acquisition by Cemco of 36% of UCC, a publicly-listed company, Regulation Code, more specifically
through its purchase of the shares in UCHC, a non-listed 13. Violation the provision on mandatory tender
company?YES If there shall be violation offer under Section 19 thereof
of this Rule by pursuing
Held: a purchase of equity
1. YES. shares of a public
Petitioner contention: Having been vested with purely company at threshold
administrative authority, the SEC can only impose administrative amounts without the
sanctions such as the imposition of administrative fines, the required tender offer,
suspension or revocation of registrations with the SEC, and the the Commission, upon
like. Petitioner stresses that there is nothing in the statute which complaint, may nullify
authorizes the SEC to issue orders granting affirmative reliefs. the said acquisition and
Since the SEC’s order commanding it to make a tender offer is an direct the holding of a
affirmative relief fixing the respective rights and obligations of tender offer. This shall
parties, such order is void. be without prejudice to
a. In taking cognizance of respondent’s complaint against the imposition of other
petitioner and eventually rendering a judgment which sanctions under the
ordered the latter to make a tender offer, the SEC was Code.
acting pursuant to Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Section 5, Subsection The foregoing provision bestows
Regulation Code 5.1. (d) of the Securities upon the SEC the general
 13. Violation Regulation Code adjudicative power which is
If there shall be violation of this Rule by provides: implied from the express powers of
pursuing a purchase of equity shares of a public the Commission or which is
company at threshold amounts without the [T]he Commission shall incidental to, or reasonably
required tender offer, the Commission, upon have, among others, the necessary to carry out, the

following powers and performance of the administrative supervise compliance the investors and the minimization,
functions: duties entrusted to it. As a with such rules, if not total elimination, of
x xxx regulatory agency, it has the regulations and orders.” fraudulent and manipulative
(d) Regulate, investigate incidental power to conduct devises
or supervise the hearings and render decisions Section 72 of the
activities of persons to fixing the rights and obligations of Securities Regulation
ensure compliance. the parties. In fact, to deprive the Code reads:
SEC of this power would render the
Rule 19(13) of the agency inutile, because it would “72.1. x xx To effect the
Amended Implementing become powerless to regulate and provisions and purposes
Rules and Regulations of implement the law. of this Code, the
the Securities Regulation Commission may issue,
Code amend, and rescind such
rules and regulations
“[T]he Commission shall and orders necessary or
have, among others, the appropriate, x xx.
following powers and 72.2. The Commission
functions: shall promulgate rules
x xxx and regulations
(n) Exercise such other providing for reporting,
powers as may be disclosure and the
provided by law as well prevention of
as those which may be fraudulent, deceptive or
implied from, or which manipulative practices in
are necessary or connection with the
incidental to the carrying purchase by an issuer, by
out of, the express tender offer or
powers granted the otherwise, of and equity
Commission to achieve security of a class issued
the objectives and by it that satisfies the
purposes of these laws.” requirements of
Subsection 17.2. Such
Subsection 5.1(g) SEC has the authority to rules and regulations
“Prepare, approve, promulgate rules and regulations, may require such issuer
amend or repeal rules, subject to the limitation that the to provide holders of
regulations and orders, same are consistent with the equity securities of such
and issue opinions and declared policy of the Code. dates with such
provide guidance on and Among them is the protection of information relating to

the reasons for such regulatory functions, it will have the duty and
purchase, the source of authority to resolve the dispute for the best interests
funds, the number of of the public.
shares to be purchased,  Moreover, petitioner is barred from questioning
the price to be paid for the jurisdiction of the SEC. It must be pointed out
such securities, the that petitioner had participated in all the
method of purchase and proceedings before the SEC and had prayed for
such additional affirmative relief.
information as the  Petitioner did not question the jurisdiction of the
Commission deems SEC when it rendered an opinion favorable to it, such
necessary or appropriate as the 27 July 2004 Resolution, where the SEC
in the public interest or opined that the Cemco transaction was not covered
for the protection of by the mandatory tender offer rule. It was only when
investors, or which the the case was before the Court of Appeals and after
Commission deems to the SEC rendered an unfavorable judgment against it
be material to a that petitioner challenged the SEC’s competence.
determination by
holders whether such 2. YES
security should be sold.” Petitioner Contention: Petitioner asserts that the mandatory
tender offer rule applies only to direct acquisition of shares in the
public company
 SEC has the competence to render the particular WHAT IS TENDER OFFER:
decision it made in this case. A definite inference  Tender offer is a publicly announced intention by a
may be drawn from the provisions of the SRC that person acting alone or in concert with other persons to
the SEC has the authority not only to investigate acquire equity securities of a public company.
complaints of violations of the tender offer rule,  A public company is defined as a corporation which is
but to adjudicate certain rights and obligations of listed on an exchange, or a corporation with assets
the contending parties and grant appropriate reliefs exceeding P50,000,000.00 and with 200 or more
in the exercise of its regulatory functions under the stockholders, at least 200 of them holding not less than
SRC. 100 shares of such company.
 We must bear in mind in interpreting the powers  Stated differently, a tender offer is an offer by the
and functions of the SEC that the law has made the acquiring person to stockholders of a public company for
SEC primarily a regulatory body with the incidental them to tender their shares therein on the terms
power to conduct administrative hearings and make specified in the offer.
decisions. A regulatory body like the SEC may  Tender offer is in place to protect minority shareholders
conduct hearings in the exercise of its regulatory against any scheme that dilutes the share value of their
powers, and if the case involves violations or investments. It gives the minority shareholders the
conflicts in connection with the performance of its chance to exit the company under reasonable terms,

giving them the opportunity to sell their shares at the relations of parties thereby making it a judgment conclusive on all the
same price as those of the majority shareholders. parties. Said letter was merely advisory.
 SEE Section 19 of Republic Act No. 8799,
Under existing SEC Rules,16 the 15% and 30% threshold Decision: WHEREFORE, the Decision and Resolution of the Court of
acquisition of shares under the foregoing provision was Appeals dated 24 October 2005 and 6 March 2006, respectively, affirming
increased to thirty-five percent (35%). It is further provided the Decision dated 14 February 2005 of the Securities and Exchange
therein that mandatory tender offer is still applicable even if the Commission En Banc, are hereby AFFIRMED.
acquisition is less than 35% when the purchase would result in
ownership of over 51% of the total outstanding equity securities Ongkiko v. Roberto V. Ongpin, et al., SEC Case No. 11-156, Branch I58,
of the public company.17 Pasig City
The SEC and the Court of Appeals correctly ruled ruled that the SMOLOWE V. DELENDO CORP. ET AL
indirect acquisition by petitioner of 36% of UCC shares through United States Court of Appeals for the Second Circuit
the acquisition of the non-listed UCHC shares is covered by the 136 F.2d 231 (1943)
mandatory tender offer rule. (bon)
LEGISLATIVE Conference as AUTHORITY Doctrine:Provision of the Securities and Exchange Act of 1934 that allows a
 The SEC and the Court of Appeals accurately pointed out that the corporation to recover profits made by certain corporate insiders from
coverage of the mandatory tender offer rule covers not only “short-swing trading” or the purchase and sale or the sale and a purchase
direct acquisition but also indirect acquisition or “any type of of stock within a six moth time period, excluding transactions related to
acquisition.” This is clear from the discussions of the Bicameral preexisting debt. Liability under Section 16 (b) does not result only for
Conference Committee on the Securities Act of 2000, on 17 July profits from a proved unfair use of inside information.
2000.
 The legislative intent of Section 19 of the Code is to regulate Facts:
activities relating to acquisition of control of the listed company
and for the purpose of protecting the minority stockholders of a 1. DELENDO CORPORATION et al. (all the named defendants) had
listed corporation. Whatever may be the method by which control been connected with the Corporation (whose name was
of a public company is obtained, either through the direct Oldetyme Distillers Corporation until after the transactions here
purchase of its stocks or through an indirect means, mandatory involved) since 1933, and each owned around 12 per cent
tender offer applies. (approximately 100,000 shares) of the 800,000 shares of $1 par
value stock issued by the Corporation and listed on the New York
NOTE:
As to retroactive effect: The action of the SEC on the PSE request for Curb Exchange.
opinion on the Cemco transaction cannot be construed as passing merits 2. Oldetyme Distillers Corporation had negotiated for a sale of all its
or giving approval to the questioned transaction. As aptly pointed out by assets to Schenley Distillers Corporation in 1935-1936; but the
the respondent, the letter dated 27 July 2004 of the SEC was nothing but negotiations were then terminated because of Delendo's
an approval of the draft letter prepared by Director Callanga. There was no contingent liability for a tax claim of the United States against a
public hearing where interested parties could have been heard. Hence, it
corporation acquired by it, then in litigation.
was not issued upon a definite and concrete controversy affecting the legal

3. This claim, originally in the amount of $3,600,000, had been to April 11, 1940; he sold 200 shares on February 15, and
reduced by agreement to $487,265, with the condition that trial the remaining shares between April 16 and May 14, 1940
was to be postponed (to await the trial of other cases) until, but (both to private individuals and through brokers on the
not later than, December 31, 1939. Curb).
4. Oldetyme Distillers Corporation was, therefore, pressing for trial 9. Except as to 1,700 shares, the certificates delivered by each of
when on February 29, 1940, the present attorney for the them upon selling were not the same certificates received by
defendants submitted to the Attorney General a formal offer of them on purchases during the period.
settlement of $65,000, which was accepted April 2 and publicly a. In other words, for all but about 2,000 shares, different
announced April 5, 1940. certificates were received for the purchases than the
5. Negotiations with Schenley's were reopened on April 11 and were ones given for the sales
consummated by sale on April 30, 1940, for $4,000,000, plus the 10. Shareholders Smolowe and Levy (plaintiffs) sued the defendants
assumption of certain of the Corporation's liabilities. in district court under Securities and Exchange Act of 1934 (SEA),
5
6. Proceedings for dissolution of the Corporation were thereupon 15 U.S.C. § 16(b) .
initiated and on July 16, 1940, an initial liquidating dividend of
$4.35 was paid. 5
Section 16(b) of the Securities Exchange Act of 1934 provides: "For the
2
7. During the six months here in question, Seskis purchased 15,504 purpose of preventing the unfair use of information which may have been
shares for $25,150.20 and sold 15,800 shares for $35,550, while obtained by such beneficial owner, director, or officer by reason of his
3
Kaplan purchased 22,900 shares for $48,172 and sold 21,700 relationship to the issuer, any profit realized by him from any purchase and
shares for $53,405.16. sale, or any sale and purchase, of any equity security of such issuer (other
than an exempted security) within any period of less than six months,
8. Between December 1939 and May 1940, Seskis bought over
unless such security was acquired in good faith in connection with a debt
15,000 shares and sold nearly 16,000 shares. During that time previously contracted, shall inure to and be recoverable by the issuer,
Kaplan bought nearly 23,000 shares and sold over 21,000 shares. irrespective of any intention on the part of such beneficial owner, director,
a. Seskis purchased 584 shares on the Curb Exchange and or officer in entering into such transaction of holding the security
the rest from a corporation; he made the sale at one purchased or of not repurchasing the security sold for a period exceeding
time thereafter to Kaplan at $2.25 per share — 15,583 six months. Suit to recover such 235*235profit may be instituted at law or
in equity in any court of competent jurisdiction by the issuer, or by the
shares in purported satisfaction of a loan made him by
owner of any security of the issuer in the name and in behalf of the issuer if
Kaplan in 1936 and 217 shares for cash. Kaplan's
the issuer shall fail or refuse to bring such suit within sixty days after
purchases, in addition to the stock received from Seskis, request or shall fail diligently to prosecute the same thereafter; but no such
4
were made on the Curb Exchange at various times prior suit shall be brought more than two years after the date such profit was
realized. This subsection shall not be construed to cover any transaction
where such beneficial owner was not such both at the time of the purchase
2
One of the defendants together with Delendo Corp. and sale, or the sale and purchase, of the security involved, or any
3
One of the defendants together with Delendo Corp. transaction or transactions which the Commission by rules and regulations
4
An early name for what is now the American Stock Exchange. may exempt as not comprehended within the purpose of this subsection."

a. Section 16(b) of the Securities Exchange Act of 1934 to the extent of about $3, since theyown only 150 out of 800,000 shares.
requires ten percent owners, directors and officers of a Note that this was not strictly an action for moneybelonging to either class,
company to disgorge "any profit realized ... from any but for a penalty payable to the corporation. Ordinarily thecorporate issuer
must bring the action; and only upon its refusal or delay to do so, ashere,
purchase and sale, or any sale and purchase, of any
may a security holder act for it in its name and on its behalf. This, in effect,
equity security" of the company within a six-month
creates a derivative right of action in every stockholder, regardless of the
period. fact that hehas no holdings from the class of security subjected to a short-
11. The district court held the transactions within the statute and by swing operation or that he can receive no tangible benefits, directly or
matching purchases and sales to show the highest profits held indirectly, from an action because of his position in the security hierarchy.
Seskis for $9,733.80 and Kaplan for $9,161.05 to be paid to the
Corporation. Both the named defendants and the Corporation
While some economic justification was claimed for this type of
have appealed.
speculation in that it increased the ability of the market to discount
Issue:
future events or trends, the insiders' failure to disclose all pertinent
In interpreting the preamble of Section 16(b), should the liability result information gave them an unfair advantage of the general body of
only for profits from a proved unfair use of inside information? stockholders which was not to be condoned.
Held:  A subjective standard of proof, requiring a showing of an actual

unfair use of inside information, would render senseless the
NO. provisions of the legislation limiting the liability period to six
months, making an intention to profit during that period
SIMPLE ANSWER (medyo complicated yung case eh): FROM SCRIBD
immaterial, and exempting transactions wherein there is a bona
It is conceded that the defendants did not make unfair use of information fide acquisition of stock in connection with a previously
theypossessed as officers at the time of the transactions. But they knew contracted debt. It would also torture the conditional "may" in
they werepressing the tax suit; and they, of course, knew of the corporate the preamble into a conclusive "shall have" or "has."
offer to settle it,which re-established the offer to purchase and led to the  And its total effect would be to render the statute little more of
favorable sale. “It is naive tosuppose that their knowledge of their own an incentive to insiders to refrain from profiteering at the
plans as officers did not give them most valuable inside knowledge as to
expense of the outside stockholder than are the common-law
what would probably happen to the stock in whichtheywere dealing.”
Although it is difficult to find such use as "unfair" in the sense of being rules of liability; it would impose a more stringent statute of
illegal, it is certainly an advantage and a temptation within the general limitation upon the party aggrieved at the same time that it
scope of the prohibition allowed the wrongdoer to share in the spoils of recovery.
The Congressional hearings indicate that § 16(b), specifically, was
designed to protect the "outside" stockholders against at least short-
NOTE: The total recovery against the directors accruing to the corporation swing speculation by insiders with advance information.
is $18,894.85, pluscosts of $38.93. By this, plaintiffs will be benefited only

 It is apparent too, from the language of § 16(b) itself, as well as  Section 16(b) then appears simply as a statement that any profit
from the Congressional hearings, that the only remedy which its from any contract to purchase and any contract to sell — or vice
framers deemed effective for this reform was the imposition of a versa — any stock or similar security shall be recoverable by the
liability based upon an objective measure of proof. corporate issuer.
 Significantly, however, it makes recoverable the profit from any  There is no express limitation in this language; its generality
purchase and sale, or sale and purchase, within the period. permits and points to the matching of purchases and sales
The present case would seem to be of the type which the statute was followed below.
designed to include. Here it is conceded that the defendants did not make  The fact that purchases and sales may be thus coupled, regardless
unfair use of information they possessed as officers at the time of the of the intent of the insider with respect to a particular purchase or
transactions. a particular sale and without limitation to a specific stock
certificate, points to an arbitrary matching to achieve the showing
 When these began they had no offer from Schenley's. But they of a maximum profit.
knew they were pressing the tax suit; and they, of course, knew  Thus, where an insider purchases one certificate and sells
of the corporate offer to settle it which re-established the offer another, the purchase and sale may be connected, even though
to purchase and led to the favorable sale. the insider contends that he is holding the purchased security for
 It is naive to suppose that their knowledge of their own plans as sale after six months.
officers did not give them most valuable inside knowledge as to 6
First In, First Out rule in TAX cannot apply.
what would probably happen to the stock in which they were
dealing.  The rule there is first in, first out, regardless of price, wherever
 Within the six months' period here involved, defendant Seskis the stock actually purchased and sold is not identifiable. But this
paid a debt owing to defendant Kaplan in stock of the does show the rule the proponents had in mind, even though its
corporation. It is obvious that the stock so acquired by source is erroneously stated. Analysis will show that the income
defendant Kaplan was exempt from § 16(b), and the district tax rules cannot apply without defeating the law almost
court properly so held. completely.
 But defendant Seskis contends that it erroneously refused to
exempt the stock which he acquired to discharge the debt. The 6
Method of inventory valuation based on the assumption that goods are
language of the exemption, however, does not naturally cover
sold or used in the same chronological order in which they are bought.
this situation, and there is no reason in policy why it should. It Hence, the cost of goods purchased first (first-in) is the cost of goods sold
would mean that profits could be washed out by the simple first (first-out). During periods of high inflation-rates, the FIFO method
expedient of borrowing money to be repaid in stock. yields higher value of the ending inventory, lower cost of goods sold, and a
Court describes Section 16 (b) higher gross profit (hence the higher taxable income) than that yielded by
the last-in first-out (LIFO) method.
Read more: http://www.businessdictionary.com/definition/first-in-first-
out-FIFO.html#ixzz2NrLeqPb5

 Under the basic rule of identifying the stock certificate, the large between the selfish interest of a fiduciary officer, director, or
stockholder, who in most cases is also an officer or director, stockholder and the faithful performance of his duty.
could speculate in long sales with impunity merely by reason of  The only rule whereby all possible profits can be surely
having a reserve of stock and upon carefully choosing his stock recovered is that of lowest price in, highest price out — within
certificates for delivery upon his sales from this reserve. six months — as applied by the district court. We affirm it here,
 Moreover, his profits from any sale followed by a purchase defendants having failed to suggest another more reasonable
would be practically untouchable, for the principle of identity rule.
admits of no gain without laboring proof of a subjective intent — _________________________________________
always a nebulous issue — to effectuate the connected phases
of this type of transaction. In consequence the statute would be
SECURITIES AND EXCHANGE COMMISSION, petitioner, vs. THE
substantially emasculated. We cannot ascribe to it a meaning so
HONORABLE COURT OF APPEALS, CUALOPING SECURITIES CORPORATION
inconsistent with its declared purpose. AND FIDELITY STOCK TRANSFERS, INC., respondents.
 it does not fit the broad statutory language; a purchase followed G.R. Nos. 106425 & 106431-32. July 21, 1995.J. Vitug
immediately by a sale, albeit a transaction within the exact (Bon)
statutory language, would often be held immune from the Doctrine: To constitute a violation of the Revised Securities Act that can
statutory penalty because the purchase would be deemed by 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
arbitrary rule to have been made at an earlier date; while a sale
offender must be established.
followed by purchase would never even be within the terms of
the rule Facts:
7
Court suggests the Computation on matching transactions to produce 1. Cualoping Securities Corporation (CUALOPING for brevity) is a
the maximum possible profit ( stockbroker, Fidelity Stock Transfer, Inc. (FIDELITY for brevity), on
the other hand, is the stock transfer agent of Philex Mining
 We must suppose that the statute was intended to be thorough- Corporation (PHILEX for brevity).
going, to squeeze all possible profits out of stock transactions, and 2. Certificates of stock of PHILEX representing one million four
thus to establish a standard so high as to prevent any conflict hundred [thousand] (1,400,000) shares were stolen from the
premises of FIDELITY.
a. These stock certificates consisting of stock dividends of
7
This came into picture because in the original case under the district certain PHILEX shareholders had been returned to
court, the issue revolved on whether sale of one security and the purchase FIDELITY for lack of forwarding addresses of the
of a different security issued by the same company can be paired under shareholders concerned.
Section 16 (b). The court went on to agree with the District Court that, as a 3. Later, the stolen stock certificates ended in the hands of a certain
matter of textual interpretation, the use of the singular in the term “any Agustin Lopez, a messenger of New World Security, Inc ., an
equity security” means that transactions involving different equity entirely different stock brokerage firm.
securities cannot be paired under § 16(b). The provision thus applies only 4. Agustin Lopez brought the stolen stock certificates to CUALOPING
to the purchase and sale of “the same equity security.” for trading and sale with the stock exchange.

5. When the said stocks were brought to CUALOPING, all of the said 13. From the above resolution, as well as that which denied a motion
stock certificates bore the ‘apparent’ indorsement (signature) in for reconsideration, both CUALOPING and FIDELITY appealed to
blank of the owners (the stockholders to whom the stocks were the Commission En Banc.
issued by PHILEX) thereof. 14. Upon appeal of both parties, the Commission en banc, found both
a. At the side of these indorsements (signatures), the words Cualoping Securities Corporation and Fidelity Stock Transfers, Inc.
‘Signature Verified’ apparently of FIDELITYwere stamped equally negligent in the performance of their duties hereby orders
on each and every certificate. Further, on the words them to (1) jointly replace the subject shares and for Fidelity to
‘Signature Verified’ showed the usual initials of the cause the transfer thereof in the names of the buyers and (2) to
officers of FIDELITY. pay a fine of P50,000.00 each for hav[ing] violated Section 29 (a)
6. Upon receipt of the said certificates from Agustin Lopez, of the Revised Securities Act.”4
CUALOPING stamped each and every certificate with the words 15. CA reversed the SEC and set aside SEC’s order “without prejudice
‘Indorsement Guaranteed,’ and thereafter traded the same with to the right of persons injured to file the proper action for
the stock exchange. damages.”
7. After the stock exchange awarded and confirmed the sale of the 16. The Commission has brought the case to this Court in the instant
stocks represented by said certificates to different buyers, the petition for review on certiorari, contending that the appellate
same were delivered to FIDELITY for the cancellation of the stocks court erred in setting aside the decision of the SEC which had (a)
certificates and for issuance of new certificates in the name of the ordered the replacement of the certificates of stock of Philex and
new buyers. (b) imposed fines on both FIDELITY and CUALOPING.
8. Agustin Lopez on the other hand was paid by CUALOPING with
several checks for Four Hundred Thousand (P400,000.00) Pesos Issue:
for the value of the stocks. Did SEC aptly applied the provisions of Section 29, in relation to Section 46,
9. After acquiring knowledge of the pilferage, FIDELITY conducted an of the Revised Securities Act?
investigation with assistance of the National Bureau of
Investigation (NBI) and found that two of its employees were Held:
involved and signed the certificates.
10. After two (2) months from receipt of said stock certificates, YES.
FIDELITY rejected the issuance of new certificates in favor of the
buyers for reasons that the signatures of the owners of the PROVISION:
certificates were allegedly forged and thus the cancellation and Sec. 29. Fraudulent transactions.—(a) It shall be unlawful for any
new issuance thereof cannot be effected. person, directly or indirectly, in connection with the purchase or
11. FIDELITY sought an opinion on the matter from SEC. sale of any securities—
12. The Brokers and Exchange Department (“BED”) of the SEC “x xx xxx xxx
Ordered Fidelity to replace all the subject shares and to cause the “(3) To engage in any act, transaction, practice, or course of
transfer thereof in the names of the buyers within ten days from business which operates or would operate as a fraud or deceit
actual receipt hereof. Cualoping Securities, Inc. for having violated upon any person.”
Section 29 a(3) of the Revised Securities Act was ordered to pay a “Sec. 46. Administrative sanctions.—If, after proper notice and
fine of P50,000.00 within five (5) days from actual receipt hereof. 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 NOTE:
statement of a material fact, or omitted to state any material fact
required to be stated therein or necessary to make the Although as FIDELITY asserts that their violation of SEC-BED Memorandum
statements therein not misleading, or refused to permit any Circular No. 9, series of 1987 is only raised for the first time by the Solicitor
unlawful examination into its affairs, it shall, in its discretion, General, the court said that what is being raised is not a new issue but only
impose any or all of the following sanctions : the memorandum. It cited two cases:
“(a) Suspension, or revocation of its certificate of registration and  Insular Life Assurance Co., Ltd., Employees Association-NATU vs.
permit to offer securities; Insular Life Assurance Co., Ltd.,7 this Court has ruled that when
“(b)A fine of no less than two hundred (P200.00) pesos nor more issues are not specifically raised but they bear relevance and close
than fifty thousand (P50,000.00) pesos plus not more than five relation to those properly raised, a court has the authority to
hundred (P500.00) pesos for each day of continuing violation.” include all such issues in passing upon and resolving the
(Italics supplied.) controversy.
 In Bank of America, NT & SA vs. Court of Appeals, 228 SCRA 357,
TO WARRANT THE APPLICATION OF THE PROVISION we have said that “the rule that only issues or theories raised in
 To constitute, however, a violation of the Revised Securities Act the initial proceedings may be taken up by a party thereto on
that can warrant an imposition of a fine under Section 29(3), in appeal should only refer to independent, not concomitant
relation to Section 46 of the Act, fraud or deceit, not mere matters, to support or oppose the cause of action or defense.”
negligence, on the part of the offender must be established.
 Fraud here is akin to bad faith which implies a conscious and Decision: WHEREFORE, the decision of the Court of Appeals is AFFIRMED
intentional design to do a wrongful act for a dishonest purpose or except the portion thereof which sets aside the imposition by the
moral obliquity; it is unlike that of the negative idea of negligence Securities and Exchange Commission of a fine on FIDELITY which is hereby
in that fraud or bad faith contemplates a state of mind REINSTATED.
affirmatively operating with furtive objectives.
 The Revised Securities Act (Batas PambansaBlg. 178) is designed,
in main, to protect public investors from fraudulent schemes by SECURITIES AND EXCHANGE COMMISSION, petitioner, vs. INTERPORT
regulating the sale and disposition of securities, creating, for this RESOURCES CORPORATION, MANUEL S. RECTO, RENE S. VILLARICA,
purpose, a Securities and Exchange Commission to ensure proper
PELAGIO RICALDE, ANTONIO REINA, FRANCISCO ANONUEVO, JOSEPH SY
compliance with the law.
and SANTIAGO TANCHAN, JR., respondents.
IN THE CASE AT BAR:
G.R. No. 135808; October 6, 2008; CHICO-NAZARIO [SUPRA]
 FIDELITY is candid enough to admit that it has truly failed to
promptly notify CUALOPING and the clearing house of the
pilferage of the certificates of stock
 Given the factual circumstances found by the appellate court,
FACTS:
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.

1. Board of Directors of IRC approved a Memorandum of Agreement 5. IRC sent a letter, attaching thereto copies of the Memorandum of
with Ganda Holdings Berhad (GHB). Agreement.
a. Under the Memorandum of Agreement, IRC acquired a. Its directors, Manuel Recto, Rene Villarica and Pelagio
100% or the entire capital stock of Ganda Energy Ricalde, also appeared before the SEC to explain IRC's
Holdings, Inc. (GEHI), which would own and operate a alleged failure to immediately disclose material
102 megawatt (MW) gas turbine power-generating barge information as required under the Rules on Disclosure of
b. agreement also stipulates that GEHI would assume a five- Material Facts.
year power purchase contract with National Power 6. SEC Chairman issued an Order finding that IRC violated the Rules
Corporation. on Disclosure of Material Facts, in connection with the Old
c. GEHI's power-generating barge was 97% complete and Securities Act of 1936, when it failed to make timely disclosure of
would go on-line by mid-September of 1994. its negotiations with GHB.
d. IRC will issue to GHB 55% of the expanded capital stock a. the SEC pronounced that some of the officers and
of IRC amounting to 40.88 billion shares which had a directors of IRC entered into transactions involving IRC
total par value of P488.44 million. shares in violation of Section 30, in relation to Section 36,
e. IRC would acquire 67% of the entire capital stock of of the Revised Securities Act.
Philippine Racing Club, Inc. (PRCI). PRCI owns 25.724 7. Respondents filed an Omnibus Motion which was superseded by
hectares of real estate property in Makati. an Amended Omnibus Motion, alleging that the SEC had no
f. Under the Agreement, GHB, a member of the Westmont authority to investigate the subject matter, since under Section 8
Group of Companies in Malaysia, shall extend or arrange of Presidential Decree No. 902-A, as amended by Presidential
a loan required to pay for the proposed acquisition by Decree No. 1758, jurisdiction was conferred upon the Prosecution
IRC of PRCI. and Enforcement Department (PED) of the SEC.
2. IRC alleged that on 8 August 1994, a press release announcing the a. Respondents also claimed that the SEC violated their
approval of the agreement was sent through facsimile right to due process when it ordered that the
transmission to the Philippine Stock Exchange and the SEC, but respondents appear before the SEC and "show cause why
that the facsimile machine of the SEC could not receive it. no administrative, civil or criminal sanctions should be
a. Upon the advice of the SEC, the IRC sent the press imposed on them," and, thus, shifted the burden of proof
release on the morning of 9 August 1994. to the respondents.
3. SEC averred that it received reports that IRC failed to make timely b. Lastly, they sought to have their cases tried jointly given
public disclosures of its negotiations with GHB and that some of the identical factual situations surrounding the alleged
its directors, respondents herein, heavily traded IRC shares violation committed by the respondents.
utilizing this material insider information 8. Respondents also filed a Motion for Continuance of Proceedings,
4. SEC Chairman issued a directive requiring IRC to submit to the SEC wherein they moved for discontinuance of the investigations and
a copy of its aforesaid Memorandum of Agreement with GHB. the proceedings before the SEC until the undue publicity had
a. The SEC Chairman further directed all principal officers of abated and the investigating officials had become reasonably free
IRC to appear at a hearing before the Brokers and from prejudice and public pressure.
Exchanges Department (BED) of the SEC to explain IRC's 9. No formal hearings were conducted in connection with the
failure to immediately disclose the information as aforementioned motions, but the SEC issued an Omnibus Order
required by the Rules on Disclosure of Material Facts. which thus disposed of the same

10. Respondents filed an Omnibus Motion for Partial Reconsideration,  thus, under the new law, the PED has been abolished, and the
questioning the creation of the special investigating panel to hear Securities Regulation Code has taken the place of the Revised
the case and the denial of the Motion for Continuance. The SEC Securities Act.
denied reconsideration
11. The respondents filed a petition before the Court of Appeals
12. During the proceedings before the Court of Appeals, respondents I. Sections 8, 30 and 36 of the Revised Securities Act do not require the
filed a Supplemental Motion, wherein they prayed for the enactment of implementing rules to make them binding and effective.
issuance of a writ of preliminary injunction enjoining the SEC and
its agents from investigating and proceeding with the hearing of  The Court of Appeals ruled that absent any implementing rules for
the case against respondents herein Sections 8, 30 and 36 of the Revised Securities Act, no civil,
13. Court of Appeals granted their motion and issued a writ of criminal or administrative actions can possibly be had against the
preliminary injunction, which effectively enjoined the SEC from respondents without violating their right to due process and equal
filing any criminal, civil or administrative case against the protection, citing as its basis the case Yick Wo v. Hopkins. This is
respondents herein. untenable.
14. SEC filed a Motion for Leave to Quash SEC Omnibus Orders so that  In the absence of any constitutional or statutory infirmity, which
the case may be investigated by the PED in accordance with the may concern Sections 30 and 36 of the Revised Securities Act, this
SEC Rules and Presidential Decree No. 902-A, and not by the Court upholds these provisions as legal and binding
special body whose creation the SEC had earlier ordered. o Unless and until a specific provision of the law is declared
15. The Court of Appeals promulgated a Decision invalid and unconstitutional, the same is valid and
16. The SEC filed a Motion for Reconsideration, which the Court of binding for all intents and purposes
Appeals denied o The mere absence of implementing rules cannot
17. Hence, the present petition effectively invalidate provisions of law, where a
reasonable construction that will support the law may be
given
ISSUE: Whether the CA committed an error in issuing its decision? YES o The necessity for vesting administrative authorities with
power to make rules and regulations is based on the
impracticability of lawmakers' providing general
regulations for various and varying details of
HELD: The petition is impressed with merit. management.
o To rule that the absence of implementing rules can
 Before discussing the merits of this case, it should be noted that render ineffective an act of Congress, such as the Revised
while this case was pending in this Court, Republic Act No. 8799, Securities Act, would empower the administrative bodies
otherwise known as the Securities Regulation Code, took effect on to defeat the legislative will by delaying the
8 August 2000. implementing rules
 Section 8 of Presidential Decree No. 902-A, as amended, which o where the statute contains sufficient standards and an
created the PED, was already repealed as provided for in Section unmistakable intent, as in the case of Sections 30 and 36
76 of the Securities Regulation Code of the Revised Securities Act, there should be no
impediment to its implementation.

 This Court does not discern any vagueness or ambiguity in o there may be valid corporate reasons for the
Sections 30 and 36 of the Revised Securities Act, such that the nondisclosure of material information
acts proscribed and/or required would not be understood by a  Where such reasons exist, an issuer's decision
person of ordinary intelligence. not to make any public disclosures is not
 Section 30 of the Revised Securities Act : ordinarily considered as a violation of insider
o provision explains in simple terms that the insider's trading.
misuse of nonpublic and undisclosed information is the  At the same time, the undisclosed information
gravamen of illegal conduct. The intent of the law is the should not be improperly used for non-
protection of investors against fraud, committed when corporate purposes, particularly to disadvantage
an insider, using secret information, takes advantage of other persons with whom an insider might
an uninformed investor. transact, and therefore the insider must abstain
o Insiders are obligated to disclose material information to from entering into transactions involving such
the other party or abstain from trading the shares of his securities.
corporation  Respondents further aver that under Section 30 of the Revised
o duty to disclose or abstain is based on two factors: Securities Act, the SEC still needed to define the following terms:
 first, the existence of a relationship giving "material fact," "reasonable person," "nature and reliability"
access, directly or indirectly, to information and "generally available."
intended to be available only for a corporate o In determining whether or not these terms are vague,
purpose and not for the personal benefit of these terms must be evaluated in the context of Section
anyone; and 30 of the Revised Securties Act.
 second, the inherent unfairness involved when a o To fully understand how the terms were used in the
party takes advantage of such information aforementioned provision, a discussion of what the law
knowing it is unavailable to those with whom he recognizes as a fact of special significance is required,
is dealing. since the duty to disclose such fact or to abstain from any
 In the United States (U.S.), the obligation to disclose or abstain transaction is imposed on the insider only in connection
has been traditionally imposed on corporate "insiders," with a fact of special significance.
particularly officers, directors, or controlling stockholders, but  Under the law, what is required to be disclosed is a fact of
that definition has since been expanded. "special significance" which may be
o term "insiders" now includes persons whose relationship o (a) a material fact which would be likely, on being made
or former relationship to the issuer gives or gave them generally available, to affect the market price of a
access to a fact of special significance about the issuer or security to a significant extent, or
the security that is not generally available, and one who o (b) one which a reasonable person would consider
learns such a fact from an insider knowing that the especially important in determining his course of action
person from whom he learns the fact is such an insider. with regard to the shares of stock.
o Insiders have the duty to disclose material facts which  (a) Material Fact - The concept of a "material fact" is not a new
are known to them by virtue of their position but which one
are not known to persons with whom they deal and o "[a] fact is material if it induces or tends to induce or
which, if known, would affect their investment judgment. otherwise affect the sale or purchase of its securities

o if a fact affects the sale or purchase of securities, as well must be clearly viewed in connection with the particular
as its price, then the insider would be required to circumstances of a case.
disclose such information to the other party to the o To enumerate all circumstances that would render the
transaction involving the securities. This is the first "nature and reliability" of a fact to be of special
definition given to a "fact of special significance." significance is close to impossible
 (b.1) Reasonable Person - The second definition given to a fact of  (c) Materiality Concept - A discussion of the "materiality concept"
special significance involves the judgment of a "reasonable would be relevant to both a material fact which would affect the
person." market price of a security to a significant extent and/or a fact
o “reasonable person" is not a problematic legal concept which a reasonable person would consider in determining his or
that needs to be clarified for the purpose of giving effect her cause of action with regard to the shares of stock.
to a statute; rather, it is the standard on which most of o what is referred to in our laws as a fact of special
our legal doctrines stand significance is referred to in the U.S. as the "materiality
o This Court differentiated the reasonable and prudent concept" and the latter is similarly not provided with a
man from "a person with training in the law such as a precise definition
prosecutor or a judge," and identified him as "the o materiality "will depend at any given time upon a
average man on the street," who weighs facts and balancing of both the indicated probability that the event
circumstances without resorting to the calibrations of will occur and the anticipated magnitude of the event in
our technical rules of evidence of which his knowledge is light of the totality of the company activity."
nil  (d) Generally Available - Section 30 of the Revised Securities Act
 Rather, he relies on the calculus of common allows the insider the defense that in a transaction of securities,
sense of which all reasonable men have in where the insider is in possession of facts of special significance,
abundance such information is "generally available" to the public
 (b.2) Nature and Reliability – o Whether information found in a newspaper, a specialized
o The factors affecting the second definition of a "fact of magazine, or any cyberspace media be sufficient for the
special significance," which is of such importance that it term "generally available" is a matter which may be
is expected to affect the judgment of a reasonable man, adjudged given the particular circumstances of the case
were substantially lifted from a test of materiality  Section 36(a) of the Revised Securities Act
pronounced in the case In the Matter of Investors o As regards Section 36(a) of the Revised Securities Act,
Management Co., Inc.: respondents claim that the term "beneficial ownership"
o Among the factors to be considered in determining is vague and that it requires implementing rules to give
whether information is material under this test are the effect to the law.
degree of its specificity, the extent to which it differs o Section 36(a) of the Revised Securities Act is a
from information previously publicly disseminated, and straightforward provision that imposes upon (1) a
its reliability in light of its nature and source and the beneficial owner of more than ten percent of any class of
circumstances under which it was received. any equity security or (2) a director or any officer of the
o can be deduced from the foregoing that the "nature and issuer of such security, the obligation to submit a
reliability" of a significant fact in determining the course statement indicating his or her ownership of the issuer's
of action a reasonable person takes regarding securities

securities and such changes in his or her ownership o To avert the occurrence of such an event, Section 30 of
thereof. the Revised Securities Act prevented the unfair use of
o Section 36(a) refers to the "beneficial owner." Beneficial non-public information in securities transactions, while
owner has been defined in the following manner: Section 36 allowed the SEC to monitor the transactions
 [F]irst, to indicate the interest of a beneficiary in entered into by corporate officers and directors as
trust property (also called "equitable regards the securities of their companies.
ownership"); and  The Revised Securities Act was approved on 23 February 1982.
 second, to refer to the power of a corporate The fact that the Full Disclosure Rules were promulgated by the
shareholder to buy or sell the shares, though SEC only on 24 July 1996 does not render ineffective in the
the shareholder is not registered in the meantime Section 36 of the Revised Securities Act
corporation's books as the owner. o the Revised Securities Act requires full disclosure and the
 Usually, beneficial ownership is distinguished Full Disclosure Rules were issued to make the
from naked ownership, which is the enjoyment enforcement of the law more consistent, efficient and
of all the benefits and privileges of ownership, effective.
as against possession of the bare title to  equally reasonable to state that the disclosure
property. forms later provided by the SEC, do not, in any
 Even assuming that the term way imply that no compliance was required
"beneficial ownership" was vague, it before the forms were provided.
would not affect respondents' case,  The effectivity of a statute which imposes
where the respondents are directors reportorial requirements cannot be suspended
and/or officers of the corporation, who by the issuance of specified forms, especially
are specifically required to comply with where compliance therewith may be made even
the reportorial requirements under without such forms. The forms merely made
Section 36(a) of the Revised Securities more efficient the processing of requirements
Act already identified by the statute.
 The validity of a statute may be  Court of Appeals made an evident mistake when it ruled that no
contested only by one who will sustain civil, criminal or administrative actions can possibly be had against
a direct injury as a result of its the respondents in connection with Sections 8, 30 and 36 of the
enforcement. Revised Securities Act due to the absence of implementing rules.
 Sections 30 and 36 of the Revised Securities Act were enacted to o provisions are sufficiently clear and complete by
promote full disclosure in the securities market and prevent themselves
unscrupulous individuals, who by their positions obtain non-public o requirements are specifically set out, and the acts which
information, from taking advantage of an uninformed public. are enjoined are determinable.
o No individual would invest in a market which can be o Section 8 of the Revised Securities Act is a
manipulated by a limited number of corporate insiders. straightforward enumeration of the procedure for the
Such reaction would stifle, if not stunt, the growth of the registration of securities and the particular matters
securities market. which need to be reported in the registration statement
thereof.

o The Decision, dated 20 August 1998, provides no valid o The law creating PED empowers it to investigate
reason to exempt the respondent IRC from such violations of the rules and regulations promulgated by
requirements. the SEC and to file and prosecute such cases.
o The lack of implementing rules cannot suspend the o It fails to mention any adjudicatory functions insofar as
effectivity of these provisions. the PED is concerned. Thus, the PED Rules of Practice and
o Thus, this Court cannot find any cogent reason to Procedure need not comply with the provisions of the
prevent the SEC from exercising its authority to Administrative Code on adjudication, particularly Section
investigate respondents for violation of Section 8 of the 12(3), Chapter 3, Book VII.
Revised Securities Act. o In Cariño v. Commission on Human Rights, this Court sets
out the distinction between investigative and
adjudicative functions, thus:
II. The right to cross-examination is not absolute and cannot be  "Investigate," commonly understood, means to
demanded during investigative proceedings before the PED. examine, explore, inquire or delve or probe into,
research on, study
 Court of Appeals pronounced that the PED Rules of Practice and  The legal meaning of "investigate" is
Procedure was invalid since Section 8, Rule V thereof failed to essentially the same: "(t)o follow up
provide for the parties' right to cross-examination, in violation of step by step by patient inquiry or
the Administrative Code of 1987 particularly Section 12(3), observation
Chapter 3, Book VII thereof.  In a legal sense, "adjudicate" means: "To settle
o This ruling is incorrect. in the exercise of judicial authority. To
 Firstly, Section 4, Rule I of the PED Rules of Practice and determine finally. Synonymous with adjudge in
Procedure, categorically stated that the proceedings before the its strictest sense;" and "adjudge" means: "To
PED are summary in nature pass on judicially, to decide, settle, or decree, or
o PED Rules provided that the Hearing Officer may require to sentence or condemn. x x x Implies a judicial
the parties to submit their respective verified position determination of a fact, and the entry of a
papers, together with all supporting documents and judgment."
affidavits of witnesses. A formal hearing was not  no merit to the respondent's averment that the sections under
mandatory; it was within the discretion of the Hearing Chapter 3, Book VII of the Administrative Code, do not distinguish
Officer to determine whether there was a need for a between investigative and adjudicatory functions.
formal hearing. o Respondents insist that the PED performs adjudicative
o Since, according to the foregoing rules, the holding of a functions, as enumerated under Section 1(h) and (j), Rule
hearing before the PED is discretionary, then the right to II; and Section 2(4), Rule VII of the PED Rules of Practice
cross-examination could not have been demanded by and Procedure
either party. o Even assuming that these are adjudicative functions, the
 Secondly, it must be pointed out that Chapter 3, Book VII of the PED, in the instant case, exercised its investigative
Administrative Code, entitled "Adjudication," does not affect the powers; thus, respondents do not have the requisite
investigatory functions of the agencies. standing to assail the validity of the rules on adjudication.

o valid source of a statute or a rule can only be contested and evidence. In fact, the hearings before such agencies
by one who will sustain a direct injury as a result of its do not connote full adversarial proceedings.
enforcement. o Thus, it is not necessary for the rules to require affiants
 respondents are only being investigated by the to appear and testify and to be cross-examined by the
PED for their alleged failure to disclose their counsel of the adverse party. To require otherwise would
negotiations with GHB and the transactions negate the summary nature of the administrative or
entered into by its directors involving IRC shares quasi-judicial proceedings.
 The respondents have not shown themselves to o In order to comply with the requirements of due process,
be under any imminent danger of sustaining any what is required, among other things, is that every
personal injury attributable to the exercise of litigant be given reasonable opportunity to appear and
adjudicative functions by the SEC. defend his right and to introduce relevant evidence in his
 They are not being or about to be subjected by favor
the PED to charges, fees or fines; to citations for
contempt; or to the cancellation of their
certificate of registration under Section 1(h), III. The Securities Regulations Code did not repeal Sections 8, 30 and 36 of
Rule II of the PED Rules of Practice and the Revised Securities Act since said provisions were reenacted in the new
Procedure. law.
 The authority granted to the PED under Section 1(b), (e), and (f),
Rule II of the PED Rules of Practice and Procedure, need not  The Securities Regulations Code absolutely repealed the Revised
comply with Section 12, Chapter 3, Rule VII of the Administrative Securities Act. While the absolute repeal of a law generally
Code, which affects only the adjudicatory functions of deprives a court of its authority to penalize the person charged
administrative bodies. with the violation of the old law prior to its appeal, an exception
o Thus, the PED would still be able to investigate the to this rule comes about when the repealing law punishes the act
respondents under its rules for their alleged failure to previously penalized under the old law
disclose their negotiations with GHB and the transactions  In the present case, a criminal case may still be filed against the
entered into by its directors involving IRC shares. respondents despite the repeal, since Sections 8, 12, 26, 27 and
o not to say that administrative bodies performing 23 of the Securities Regulations Code impose duties that are
adjudicative functions are required to strictly comply substantially similar to Sections 8, 30 and 36 of the repealed
with the requirements of Chapter 3, Rule VII of the Revised Securities Act.
Administrative Code, particularly, the right to cross-  Section 8 of the Revised Securities Act, which previously provided
examination. for the registration of securities and the information that needs to
 abbreviated proceedings are prescribed in the disposition of be included in the registration statements, was expanded under
administrative cases Section 12, in connection with Section 8 of the Securities
o As a consequence, in proceedings before administrative Regulations Code
or quasi-judicial bodies, decisions may be reached on the o Further details of the information required to be
basis of position papers or other documentary evidence disclosed by the registrant are explained in the Amended
only. They are not bound by technical rules of procedure Implementing Rules and Regulations of the Securities

Regulations Code, issued on 30 December 2003, o the SEC Chairman, having already made initial findings
particularly Sections 8 and 12 thereof. that respondents failed to make timely disclosures of
 Section 30 of the Revised Securities Act has been reenacted as their negotiations with GHB, ordered a special
Section 27 of the Securities Regulations Code, still penalizing an investigating panel to hear the case.
insider's misuse of material and non-public information about the  The investigative proceedings were interrupted only by the writ of
issuer, for the purpose of protecting public investors. Section 26 preliminary injunction issued by the Court of Appeals, which
of the Securities Regulations Code even widens the coverage of became permanent
punishable acts, which intend to defraud public investors through  During the pendency of this case, the Securities Regulations Code
various devices, misinformation and omissions repealed the Revised Securities Act. As in Morato v. Court of
 Section 23 of the Securities Regulations Code was practically lifted Appeals, the repeal cannot deprive SEC of its jurisdiction to
from Section 36(a) of the Revised Securities Act. Both provisions continue investigating the case; or the regional trial court, to hear
impose upon (1) a beneficial owner of more than ten percent of any case which may later be filed against the respondents.
any class of any equity security or (2) a director or any officer of
the issuer of such security, the obligation to submit a statement
indicating his or her ownership of the issuer's securities and such V. The instant case has not yet prescribed.
changes in his or her ownership thereof.
 Clearly, the legislature had not intended to deprive the courts of  Respondents have taken the position that this case is moot and
their authority to punish a person charged with violation of the academic, since any criminal complaint that may be filed against
old law that was repealed; in this case, the Revised Securities Act. them resulting from the SEC's investigation of this case has
already prescribed
o point out that the prescription period applicable to
IV. The SEC retained the jurisdiction to investigate violations of the offenses punished under special laws, such as violations
Revised Securities Act, reenacted in the Securities Regulations Code, of the Revised Securities Act, is twelve years
despite the abolition of the PED. o Since the offense was committed in 1994, they reasoned
that prescription set in as early as 2006 and rendered this
 Section 53 of the Securities Regulations Code clearly provides that case moot. Such position, however, is incongruent with
criminal complaints for violations of rules and regulations the factual circumstances of this case, as well as the
enforced or administered by the SEC shall be referred to the applicable laws and jurisprudence.
Department of Justice (DOJ) for preliminary investigation, while  preliminary investigation interrupts the prescription period. A
the SEC nevertheless retains limited investigatory powers. preliminary investigation is essentially a determination whether
Additionally, the SEC may still impose the appropriate an offense has been committed, and whether there is probable
administrative sanctions under Section 54 of the aforementioned cause for the accused to have committed an offense:
law.  Securities Exchange Commission (SEC) has the authority to "make
 SEC already commenced the investigative proceedings against such investigations as it deems necessary to determine whether
respondents as early as 1994. Respondents were called to appear any person has violated or is about to violate any provision of this
before the SEC and explain their failure to disclose pertinent Act XXX.
information on 14 August 1994

o After a finding that a person has violated the Revised  only after this Court corrects the erroneous
Securities Act, the SEC may refer the case to the DOJ for ruling of the Court of Appeals in its Decision
preliminary investigation and prosecution. dated 20 August 1998 that either the SEC or DOJ
o While the SEC investigation serves the same purpose and may properly conduct any kind of investigation
entails substantially similar duties as the preliminary against the respondents for violations of
investigation conducted by the DOJ, this process cannot Sections 8, 30 and 36 of the Revised Securities
simply be disregarded Act. Until then, the prescription period is
 criminal complaint is first filed with the SEC, which determines the deemed interrupted.
existence of probable cause, before a preliminary investigation  the period during which the SEC was prevented from continuing
can be commenced by the DOJ with its investigation should not be counted against it. The law on
o it is imperative that the criminal prosecution be initiated the prescription period was never intended to put the prosecuting
before the SEC, the administrative agency with the bodies in an impossible bind in which the prosecution of a case
special competence. would be placed way beyond their control; for even if they avail
 SEC started investigative proceedings against the respondents as themselves of the proper remedy, they would still be barred from
early as 1994. investigating and prosecuting the case.
o This investigation effectively interrupted the prescription  Indubitably, the prescription period is interrupted by commencing
period. the proceedings for the prosecution of the accused.
o said proceedings were disrupted by a preliminary o In criminal cases, this is accomplished by initiating the
injunction issued by the Court of Appeals on 5 May 1995, preliminary investigation.
which effectively enjoined the SEC from filing any o The prosecution of offenses punishable under the
criminal, civil, or administrative case against the Revised Securities Act and the Securities Regulations
respondents herein. Code is initiated by the filing of a complaint with the SEC
o the appellate court issued the assailed Decision in C.A. or by an investigation conducted by the SEC motu
G.R. SP. No. 37036 ordering that the writ of injunction be proprio.
made permanent and prohibiting the SEC from taking o Only after a finding of probable cause is made by the SEC
cognizance of and initiating any action against herein can the DOJ instigate a preliminary investigation.
respondents o Thus, the investigation that was commenced by the SEC
o The SEC was bound to comply with the aforementioned in 1995, soon after it discovered the questionable acts of
writ of preliminary injunction and writ of injunction the respondents, effectively interrupted the prescription
issued by the Court of Appeals enjoining it from period. Given the nature and purpose of the
continuing with the investigation of respondents for 12 investigation conducted by the SEC, which is equivalent
years. to the preliminary investigation conducted by the DOJ in
o Any deviation by the SEC from the injunctive writs would criminal cases, such investigation would surely interrupt
be sufficient ground for contempt. Moreover, any step the prescription period.
the SEC takes in defiance of such orders will be
considered void for having been taken against an order
issued by a court of competent jurisdiction. VI. The Court of Appeals was justified in denying SEC's Motion for Leave
to Quash SEC Omnibus Orders dated 23 October 1995.

 The SEC avers that the Court of Appeals erred when it denied its information for the protection of investors. Imposing such regulations is a
Motion for Leave to Quash SEC Omnibus Orders, in the light of its function within the jurisdiction of the SEC.
admission that the PED had the sole authority to investigate the
present case. On this matter, this Court cannot agree with the FACTS:
SEC. 6. "Records show that on April 4, 1997, petitioner, through its
 no implementing rules were needed to render effective Sections General Counsel and Corporate Secretary, sought the opinion of
8, 30 and 36 of the Revised Securities Act; nor was the PED Rules Chairman Perfecto Yasay, Jr. of respondent Commission as to the
of Practice and Procedure invalid, prior to the enactment of the applicability and coverage of the Full Material Disclosure Rule on
Securities Regulations Code, for failure to provide parties with the banks, contending that said rules, in effect, amend Section 5 (a)
right to cross-examine the witnesses presented against them. (3) of the Revised Securities Act which exempts securities issued
 Thus, the respondents may be investigated by the appropriate or guaranteed by banking institutions from the registration
authority under the proper rules of procedure of the Securities requirement provided by Section 4 of the same Act.
Regulations Code for violations of Sections 8, 30, and 36 of the 7. "In reply thereto, Chairman Yasay, in a letter dated April 8, 1997,
Revised Securities Act. 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,
DECISION: IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. a. however, banks with a class of securities listed for
This Court hereby REVERSES the assailed Decision of the Court of Appeals trading on the Philippine Stock Exchange, Inc. are
promulgated on 20 August 1998 in CA-G.R. SP No. 37036 and LIFTS the covered by certain Revised Securities Act Rules governing
the filing of various reports with respondent Commission,
permanent injunction issued pursuant thereto. This Court further
i.e., (1) Rule 11 (a)-1 requiring the filing of Annual,
DECLARES that the investigation of the respondents for violations of Quarterly, Current, Predecessor and Successor Reports;
Sections 8, 30 and 36 of the Revised Securities Act may be undertaken by (2) Rule 34-(a)-1 requiring submission of Proxy
the proper authorities in accordance with the Securities Regulations Code. Statements; and (3) Rule 34-(c)-1 requiring submission of
No costs. Information Statements, among others.
8. "On July 17, 1997, respondent Commission wrote petitioner,
UNION BANK OF THE PHILIPPINES vs. SECURITY AND EXCHANGE enjoining the latter to show cause why it should not be penalized
COMMISSION for its failure to submit a Proxy/Information Statement in
G.R. No. 138949 June 6, 2001 connection with its annual meeting held on May 23, 1997, in
PANGANIBAN, J.: NILO violation of respondent Commission's Full Material Disclosure
Rule.'
DOCTRINE: The mere fact that petitioner, in regard to its banking 9. "Failing to respond to the aforesaid communication, petitioner
functions, is already subject to the supervision of the was given a '2nd Show Cause with Assessment' by respondent
BangkoSentralngPilipinas does not exempt the former from reasonable Commission on July 21, 1997. Petitioner was then assessed a fine
disclosure regulations issued by the Securities and Exchange Commission of P50,000.00 plus P500.00 for every day that report [was] not
(SEC). These regulations -- imposed on petitioner as a banking institution filed, or a total of P91,000.00as of July 21, 1997. Petitioner was
listed in the stock market -- are meant to assure full, fair and accurate likewise advised by respondent Commission to submit the

required reports and settle the assessment, or submit the case to and not, [to] the subsequent filing of various periodic reports,
a formal hearing. respondent Commission, as the regulatory agency, is able to
10. Petitioner then elevated its case to the Court of Appeals which, as exercise its power of supervision and control over corporations
already stated, affirmed the questioned Orders. and over the securities market as a whole.
o Otherwise, the objectives of the 'Full Material Disclosure'
PETITIONER ARGUES  Because its securities are exempt from the policy would be defeated since petitioner corporation
registration requirements under Section 5(a) (3) of the Revised Securities and its dealings would be totally beyond the reach of
Act, petitioner argues that it is not covered by RSA Implementing Rule 11 respondent Commission and the investing public."
(a)-1, which requires the filing of annual, quarterly, current predecessor  It must be emphasized that petitioner is a commercial banking
and successor reports; Rule 34(a)-1, which mandates the filing of proxy corporation listed in a stock exchange. Thus, it must adhere not
statements and forms of proxy; and Rule 34(c)-1, which obligates the only to banking and other allied special laws, but also to the rules
submission of information statements. promulgated by Respondent SEC, the government entity tasked
not only with the enforcement of the Revised Securities Act, but
ISSUE: Is the bank required to comply with the respondent SEC’s full also the supervision of all corporations, partnerships or
disclosure rules despite its exemption from the securities registration associations which are grantees of government-issued primary
requirements under Sec. 5 (a) (3) of the Revised Securities Act? YES franchises and/or licenses or permits to operate in the Philippines.
RULING:
Section 5(a) (3) of the said Act reads:  RSA Rules 11 (a)-1, 34 (a)-1 and 34 (c)-1 require the submission of
"Sec. 5. Exempt Securities. (a) Except expressly provided, the requirement certain reports to ensure full, fair accurate disclosure of
of registration under subsection (a) of Section four of this Act shall not information for the protection of the investing public. These Rules
apply to any of the following classes of securities: were issued by the respondent pursuant to the authority
xxxxxxxxx conferred upon it by Section 3 of the RSA.
(3) Any security issued or guaranteed by any banking institution authorized o The said Rules do not amend Section 5(a)(3) of the
to do business in the Philippines, the business of which is substantially Revised Securities Act, because they do not revoke or
confined to banking, or a financial institution licensed to engage in quasi- amend the exemption from registration of the securities
banking, and is supervised by the Central Bank." enumerated thereunder. They are reasonable regulations
imposed upon petitioner as a banking corporation
 This provision exempts from registration the securities issued by trading its securities in the stock market.
banking or financial institutions mentioned in the law. Nowhere  That petitioner is under the supervision of the
does it state or even imply that petitioner, as a BangkoSentralngPilipinas (BSP) and the Philippine Stock Exchange
listed corporation, is exempt from complying with the reports (PSE) does not exempt it from complying with the continuing
required by the assailed RSA Implementing Rules. disclosure requirements embodied in the assailed Rules.
Worth repeating is the CA's disquisition on the matter, which we quote: o Petitioner, as a bank, is primarily subject to the control of
 "However, the exemption from the registration requirement the BSP; and as a corporation trading its securities in the
enjoyed petition doesnor necessarily connote that [it is] stock market, it is under the supervision of the SEC. It
exempted from the other reportorial requirements. Having must be pointed out that even the PSE is under the
confined the exemption enjoyed by the petitioner merely to the control and supervision of respondent.14 There is no
initial requirement of registration of securities for public offering, 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.
o 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.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision of

the Court of Appeals AFFIRMED.Costs against petitioner.

POWER OF SEC – APRIL 1, 2013 – CALUAG, CHUA, HAULO, RICO, a. Upon the advice of the SEC, the IRC sent the press
SUCGANG, UY, release on the morning of 9 August 1994.
20. SEC averred that it received reports that IRC failed to make timely
CEMCO v. National Life, 529 SCRA 355 (2007) SUPRA public disclosures of its negotiations with GHB and that some of
its directors, respondents herein, heavily traded IRC shares
[SUPRA] SECURITIES AND EXCHANGE COMMISSION, petitioner, vs. utilizing this material insider information
INTERPORT RESOURCES CORPORATION, MANUEL S. RECTO, RENE S. 21. SEC Chairman issued a directive requiring IRC to submit to the SEC
VILLARICA, PELAGIO RICALDE, ANTONIO REINA, FRANCISCO ANONUEVO, a copy of its aforesaid Memorandum of Agreement with GHB.
JOSEPH SY and SANTIAGO TANCHAN, JR., respondents. a. The SEC Chairman further directed all principal officers of
IRC to appear at a hearing before the Brokers and
G.R. No. 135808; October 6, 2008; CHICO-NAZARIO Exchanges Department (BED) of the SEC to explain IRC's
failure to immediately disclose the information as
FACTS:
required by the Rules on Disclosure of Material Facts.
18. Board of Directors of IRC approved a Memorandum of Agreement 22. IRC sent a letter, attaching thereto copies of the Memorandum of
with Ganda Holdings Berhad (GHB). Agreement.
a. Under the Memorandum of Agreement, IRC acquired a. Its directors, Manuel Recto, Rene Villarica and Pelagio
100% or the entire capital stock of Ganda Energy Ricalde, also appeared before the SEC to explain IRC's
Holdings, Inc. (GEHI), which would own and operate a alleged failure to immediately disclose material
102 megawatt (MW) gas turbine power-generating barge information as required under the Rules on Disclosure of
b. agreement also stipulates that GEHI would assume a five- Material Facts.
year power purchase contract with National Power 23. SEC Chairman issued an Order finding that IRC violated the Rules
Corporation. on Disclosure of Material Facts, in connection with the Old
c. GEHI's power-generating barge was 97% complete and Securities Act of 1936, when it failed to make timely disclosure of
would go on-line by mid-September of 1994. its negotiations with GHB.
d. IRC will issue to GHB 55% of the expanded capital stock a. the SEC pronounced that some of the officers and
of IRC amounting to 40.88 billion shares which had a directors of IRC entered into transactions involving IRC
total par value of P488.44 million. shares in violation of Section 30, in relation to Section 36,
e. IRC would acquire 67% of the entire capital stock of of the Revised Securities Act.
Philippine Racing Club, Inc. (PRCI). PRCI owns 25.724 24. Respondents filed an Omnibus Motion which was superseded by
hectares of real estate property in Makati. an Amended Omnibus Motion, alleging that the SEC had no
f. Under the Agreement, GHB, a member of the Westmont authority to investigate the subject matter, since under Section 8
Group of Companies in Malaysia, shall extend or arrange of Presidential Decree No. 902-A, as amended by Presidential
a loan required to pay for the proposed acquisition by Decree No. 1758, jurisdiction was conferred upon the Prosecution
IRC of PRCI. and Enforcement Department (PED) of the SEC.
19. IRC alleged that on 8 August 1994, a press release announcing the a. Respondents also claimed that the SEC violated their
approval of the agreement was sent through facsimile right to due process when it ordered that the
transmission to the Philippine Stock Exchange and the SEC, but respondents appear before the SEC and "show cause why
that the facsimile machine of the SEC could not receive it. no administrative, civil or criminal sanctions should be

imposed on them," and, thus, shifted the burden of proof HELD: The petition is impressed with merit.
to the respondents.
b. Lastly, they sought to have their cases tried jointly given  Before discussing the merits of this case, it should be noted that
the identical factual situations surrounding the alleged while this case was pending in this Court, Republic Act No. 8799,
violation committed by the respondents. otherwise known as the Securities Regulation Code, took effect on
25. Respondents also filed a Motion for Continuance of Proceedings, 8 August 2000.
wherein they moved for discontinuance of the investigations and  Section 8 of Presidential Decree No. 902-A, as amended, which
the proceedings before the SEC until the undue publicity had created the PED, was already repealed as provided for in Section
abated and the investigating officials had become reasonably free 76 of the Securities Regulation Code
from prejudice and public pressure.  thus, under the new law, the PED has been abolished, and the
26. No formal hearings were conducted in connection with the Securities Regulation Code has taken the place of the Revised
aforementioned motions, but the SEC issued an Omnibus Order Securities Act.
which thus disposed of the same
27. Respondents filed an Omnibus Motion for Partial Reconsideration,
questioning the creation of the special investigating panel to hear I. Sections 8, 30 and 36 of the Revised Securities Act do not require the
the case and the denial of the Motion for Continuance. The SEC enactment of implementing rules to make them binding and effective.
denied reconsideration
28. The respondents filed a petition before the Court of Appeals  The Court of Appeals ruled that absent any implementing rules for
29. During the proceedings before the Court of Appeals, respondents Sections 8, 30 and 36 of the Revised Securities Act, no civil,
filed a Supplemental Motion, wherein they prayed for the criminal or administrative actions can possibly be had against the
issuance of a writ of preliminary injunction enjoining the SEC and respondents without violating their right to due process and equal
its agents from investigating and proceeding with the hearing of protection, citing as its basis the case Yick Wo v. Hopkins. This is
the case against respondents herein untenable.
30. Court of Appeals granted their motion and issued a writ of  In the absence of any constitutional or statutory infirmity, which
preliminary injunction, which effectively enjoined the SEC from may concern Sections 30 and 36 of the Revised Securities Act, this
filing any criminal, civil or administrative case against the Court upholds these provisions as legal and binding
respondents herein. o Unless and until a specific provision of the law is declared
31. SEC filed a Motion for Leave to Quash SEC Omnibus Orders so that invalid and unconstitutional, the same is valid and
the case may be investigated by the PED in accordance with the binding for all intents and purposes
SEC Rules and Presidential Decree No. 902-A, and not by the o The mere absence of implementing rules cannot
special body whose creation the SEC had earlier ordered. effectively invalidate provisions of law, where a
32. The Court of Appeals promulgated a Decision reasonable construction that will support the law may be
33. The SEC filed a Motion for Reconsideration, which the Court of given
Appeals denied o The necessity for vesting administrative authorities with
34. Hence, the present petition power to make rules and regulations is based on the
impracticability of lawmakers' providing general
regulations for various and varying details of
ISSUE: Whether the CA committed an error in issuing its decision? YES management.

o To rule that the absence of implementing rules can o term "insiders" now includes persons whose relationship
render ineffective an act of Congress, such as the Revised or former relationship to the issuer gives or gave them
Securities Act, would empower the administrative bodies access to a fact of special significance about the issuer or
to defeat the legislative will by delaying the the security that is not generally available, and one who
implementing rules learns such a fact from an insider knowing that the
o where the statute contains sufficient standards and an person from whom he learns the fact is such an insider.
unmistakable intent, as in the case of Sections 30 and 36 o Insiders have the duty to disclose material facts which
of the Revised Securities Act, there should be no are known to them by virtue of their position but which
impediment to its implementation. are not known to persons with whom they deal and
 This Court does not discern any vagueness or ambiguity in which, if known, would affect their investment judgment.
Sections 30 and 36 of the Revised Securities Act, such that the o there may be valid corporate reasons for the
acts proscribed and/or required would not be understood by a nondisclosure of material information
person of ordinary intelligence.  Where such reasons exist, an issuer's decision
 Section 30 of the Revised Securities Act : not to make any public disclosures is not
o provision explains in simple terms that the insider's ordinarily considered as a violation of insider
misuse of nonpublic and undisclosed information is the trading.
gravamen of illegal conduct. The intent of the law is the  At the same time, the undisclosed information
protection of investors against fraud, committed when should not be improperly used for non-
an insider, using secret information, takes advantage of corporate purposes, particularly to disadvantage
an uninformed investor. other persons with whom an insider might
o Insiders are obligated to disclose material information to transact, and therefore the insider must abstain
the other party or abstain from trading the shares of his from entering into transactions involving such
corporation securities.
o duty to disclose or abstain is based on two factors:  Respondents further aver that under Section 30 of the Revised
 first, the existence of a relationship giving Securities Act, the SEC still needed to define the following terms:
access, directly or indirectly, to information "material fact," "reasonable person," "nature and reliability"
intended to be available only for a corporate and "generally available."
purpose and not for the personal benefit of o In determining whether or not these terms are vague,
anyone; and these terms must be evaluated in the context of Section
 second, the inherent unfairness involved when a 30 of the Revised Securties Act.
party takes advantage of such information o To fully understand how the terms were used in the
knowing it is unavailable to those with whom he aforementioned provision, a discussion of what the law
is dealing. recognizes as a fact of special significance is required,
 In the United States (U.S.), the obligation to disclose or abstain since the duty to disclose such fact or to abstain from any
has been traditionally imposed on corporate "insiders," transaction is imposed on the insider only in connection
particularly officers, directors, or controlling stockholders, but with a fact of special significance.
that definition has since been expanded.  Under the law, what is required to be disclosed is a fact of
"special significance" which may be

o (a) a material fact which would be likely, on being made pronounced in the case In the Matter of Investors
generally available, to affect the market price of a Management Co., Inc.:
security to a significant extent, or o Among the factors to be considered in determining
o (b) one which a reasonable person would consider whether information is material under this test are the
especially important in determining his course of action degree of its specificity, the extent to which it differs
with regard to the shares of stock. from information previously publicly disseminated, and
 (a) Material Fact - The concept of a "material fact" is not a new its reliability in light of its nature and source and the
one circumstances under which it was received.
o "[a] fact is material if it induces or tends to induce or o can be deduced from the foregoing that the "nature and
otherwise affect the sale or purchase of its securities reliability" of a significant fact in determining the course
o if a fact affects the sale or purchase of securities, as well of action a reasonable person takes regarding securities
as its price, then the insider would be required to must be clearly viewed in connection with the particular
disclose such information to the other party to the circumstances of a case.
transaction involving the securities. This is the first o To enumerate all circumstances that would render the
definition given to a "fact of special significance." "nature and reliability" of a fact to be of special
 (b.1) Reasonable Person - The second definition given to a fact of significance is close to impossible
special significance involves the judgment of a "reasonable  (c) Materiality Concept - A discussion of the "materiality concept"
person." would be relevant to both a material fact which would affect the
o “reasonable person" is not a problematic legal concept market price of a security to a significant extent and/or a fact
that needs to be clarified for the purpose of giving effect which a reasonable person would consider in determining his or
to a statute; rather, it is the standard on which most of her cause of action with regard to the shares of stock.
our legal doctrines stand o what is referred to in our laws as a fact of special
o This Court differentiated the reasonable and prudent significance is referred to in the U.S. as the "materiality
man from "a person with training in the law such as a concept" and the latter is similarly not provided with a
prosecutor or a judge," and identified him as "the precise definition
average man on the street," who weighs facts and o materiality "will depend at any given time upon a
circumstances without resorting to the calibrations of balancing of both the indicated probability that the event
our technical rules of evidence of which his knowledge is will occur and the anticipated magnitude of the event in
nil light of the totality of the company activity."
 Rather, he relies on the calculus of common  (d) Generally Available - Section 30 of the Revised Securities Act
sense of which all reasonable men have in allows the insider the defense that in a transaction of securities,
abundance where the insider is in possession of facts of special significance,
 (b.2) Nature and Reliability – such information is "generally available" to the public
o The factors affecting the second definition of a "fact of o Whether information found in a newspaper, a specialized
special significance," which is of such importance that it magazine, or any cyberspace media be sufficient for the
is expected to affect the judgment of a reasonable man, term "generally available" is a matter which may be
were substantially lifted from a test of materiality adjudged given the particular circumstances of the case
 Section 36(a) of the Revised Securities Act

o As regards Section 36(a) of the Revised Securities Act, a direct injury as a result of its
respondents claim that the term "beneficial ownership" enforcement.
is vague and that it requires implementing rules to give  Sections 30 and 36 of the Revised Securities Act were enacted to
effect to the law. promote full disclosure in the securities market and prevent
o Section 36(a) of the Revised Securities Act is a unscrupulous individuals, who by their positions obtain non-public
straightforward provision that imposes upon (1) a information, from taking advantage of an uninformed public.
beneficial owner of more than ten percent of any class of o No individual would invest in a market which can be
any equity security or (2) a director or any officer of the manipulated by a limited number of corporate insiders.
issuer of such security, the obligation to submit a Such reaction would stifle, if not stunt, the growth of the
statement indicating his or her ownership of the issuer's securities market.
securities and such changes in his or her ownership o To avert the occurrence of such an event, Section 30 of
thereof. the Revised Securities Act prevented the unfair use of
o Section 36(a) refers to the "beneficial owner." Beneficial non-public information in securities transactions, while
owner has been defined in the following manner: Section 36 allowed the SEC to monitor the transactions
 [F]irst, to indicate the interest of a beneficiary in entered into by corporate officers and directors as
trust property (also called "equitable regards the securities of their companies.
ownership"); and  The Revised Securities Act was approved on 23 February 1982.
 second, to refer to the power of a corporate The fact that the Full Disclosure Rules were promulgated by the
shareholder to buy or sell the shares, though SEC only on 24 July 1996 does not render ineffective in the
the shareholder is not registered in the meantime Section 36 of the Revised Securities Act
corporation's books as the owner. o the Revised Securities Act requires full disclosure and the
 Usually, beneficial ownership is distinguished Full Disclosure Rules were issued to make the
from naked ownership, which is the enjoyment enforcement of the law more consistent, efficient and
of all the benefits and privileges of ownership, effective.
as against possession of the bare title to  equally reasonable to state that the disclosure
property. forms later provided by the SEC, do not, in any
 Even assuming that the term way imply that no compliance was required
"beneficial ownership" was vague, it before the forms were provided.
would not affect respondents' case,  The effectivity of a statute which imposes
where the respondents are directors reportorial requirements cannot be suspended
and/or officers of the corporation, who by the issuance of specified forms, especially
are specifically required to comply with where compliance therewith may be made even
the reportorial requirements under without such forms. The forms merely made
Section 36(a) of the Revised Securities more efficient the processing of requirements
Act already identified by the statute.
 The validity of a statute may be  Court of Appeals made an evident mistake when it ruled that no
contested only by one who will sustain civil, criminal or administrative actions can possibly be had against

the respondents in connection with Sections 8, 30 and 36 of the mandatory; it was within the discretion of the Hearing
Revised Securities Act due to the absence of implementing rules. Officer to determine whether there was a need for a
o provisions are sufficiently clear and complete by formal hearing.
themselves o Since, according to the foregoing rules, the holding of a
o requirements are specifically set out, and the acts which hearing before the PED is discretionary, then the right to
are enjoined are determinable. cross-examination could not have been demanded by
o Section 8 of the Revised Securities Act is a either party.
straightforward enumeration of the procedure for the  Secondly, it must be pointed out that Chapter 3, Book VII of the
registration of securities and the particular matters Administrative Code, entitled "Adjudication," does not affect the
which need to be reported in the registration statement investigatory functions of the agencies.
thereof. o The law creating PED empowers it to investigate
o The Decision, dated 20 August 1998, provides no valid violations of the rules and regulations promulgated by
reason to exempt the respondent IRC from such the SEC and to file and prosecute such cases.
requirements. o It fails to mention any adjudicatory functions insofar as
o The lack of implementing rules cannot suspend the the PED is concerned. Thus, the PED Rules of Practice and
effectivity of these provisions. Procedure need not comply with the provisions of the
o Thus, this Court cannot find any cogent reason to Administrative Code on adjudication, particularly Section
prevent the SEC from exercising its authority to 12(3), Chapter 3, Book VII.
investigate respondents for violation of Section 8 of the o In Cariño v. Commission on Human Rights, this Court sets
Revised Securities Act. out the distinction between investigative and
adjudicative functions, thus:
 "Investigate," commonly understood, means to
II. The right to cross-examination is not absolute and cannot be examine, explore, inquire or delve or probe into,
demanded during investigative proceedings before the PED. research on, study
 The legal meaning of "investigate" is
 Court of Appeals pronounced that the PED Rules of Practice and essentially the same: "(t)o follow up
Procedure was invalid since Section 8, Rule V thereof failed to step by step by patient inquiry or
provide for the parties' right to cross-examination, in violation of observation
the Administrative Code of 1987 particularly Section 12(3),  In a legal sense, "adjudicate" means: "To settle
Chapter 3, Book VII thereof. in the exercise of judicial authority. To
o This ruling is incorrect.
determine finally. Synonymous with adjudge in
 Firstly, Section 4, Rule I of the PED Rules of Practice and its strictest sense;" and "adjudge" means: "To
Procedure, categorically stated that the proceedings before the pass on judicially, to decide, settle, or decree, or
PED are summary in nature to sentence or condemn. x x x Implies a judicial
o PED Rules provided that the Hearing Officer may require determination of a fact, and the entry of a
the parties to submit their respective verified position judgment."
papers, together with all supporting documents and
affidavits of witnesses. A formal hearing was not

 no merit to the respondent's averment that the sections under o not to say that administrative bodies performing
Chapter 3, Book VII of the Administrative Code, do not distinguish adjudicative functions are required to strictly comply
between investigative and adjudicatory functions. with the requirements of Chapter 3, Rule VII of the
o Respondents insist that the PED performs adjudicative Administrative Code, particularly, the right to cross-
functions, as enumerated under Section 1(h) and (j), Rule examination.
II; and Section 2(4), Rule VII of the PED Rules of Practice  abbreviated proceedings are prescribed in the disposition of
and Procedure administrative cases
o Even assuming that these are adjudicative functions, the o As a consequence, in proceedings before administrative
PED, in the instant case, exercised its investigative or quasi-judicial bodies, decisions may be reached on the
powers; thus, respondents do not have the requisite basis of position papers or other documentary evidence
standing to assail the validity of the rules on adjudication. only. They are not bound by technical rules of procedure
o valid source of a statute or a rule can only be contested and evidence. In fact, the hearings before such agencies
by one who will sustain a direct injury as a result of its do not connote full adversarial proceedings.
enforcement. o Thus, it is not necessary for the rules to require affiants
 respondents are only being investigated by the to appear and testify and to be cross-examined by the
PED for their alleged failure to disclose their counsel of the adverse party. To require otherwise would
negotiations with GHB and the transactions negate the summary nature of the administrative or
entered into by its directors involving IRC shares quasi-judicial proceedings.
 The respondents have not shown themselves to o In order to comply with the requirements of due process,
be under any imminent danger of sustaining any what is required, among other things, is that every
personal injury attributable to the exercise of litigant be given reasonable opportunity to appear and
adjudicative functions by the SEC. defend his right and to introduce relevant evidence in his
 They are not being or about to be subjected by favor
the PED to charges, fees or fines; to citations for
contempt; or to the cancellation of their
certificate of registration under Section 1(h), III. The Securities Regulations Code did not repeal Sections 8, 30 and 36 of
Rule II of the PED Rules of Practice and the Revised Securities Act since said provisions were reenacted in the new
Procedure. law.
 The authority granted to the PED under Section 1(b), (e), and (f),
Rule II of the PED Rules of Practice and Procedure, need not  The Securities Regulations Code absolutely repealed the Revised
comply with Section 12, Chapter 3, Rule VII of the Administrative Securities Act. While the absolute repeal of a law generally
Code, which affects only the adjudicatory functions of deprives a court of its authority to penalize the person charged
administrative bodies. with the violation of the old law prior to its appeal, an exception
o Thus, the PED would still be able to investigate the to this rule comes about when the repealing law punishes the act
respondents under its rules for their alleged failure to previously penalized under the old law
disclose their negotiations with GHB and the transactions  In the present case, a criminal case may still be filed against the
entered into by its directors involving IRC shares. respondents despite the repeal, since Sections 8, 12, 26, 27 and
23 of the Securities Regulations Code impose duties that are

substantially similar to Sections 8, 30 and 36 of the repealed Department of Justice (DOJ) for preliminary investigation, while
Revised Securities Act. the SEC nevertheless retains limited investigatory powers.
 Section 8 of the Revised Securities Act, which previously provided Additionally, the SEC may still impose the appropriate
for the registration of securities and the information that needs to administrative sanctions under Section 54 of the aforementioned
be included in the registration statements, was expanded under law.
Section 12, in connection with Section 8 of the Securities  SEC already commenced the investigative proceedings against
Regulations Code respondents as early as 1994. Respondents were called to appear
o Further details of the information required to be before the SEC and explain their failure to disclose pertinent
disclosed by the registrant are explained in the Amended information on 14 August 1994
Implementing Rules and Regulations of the Securities o the SEC Chairman, having already made initial findings
Regulations Code, issued on 30 December 2003, that respondents failed to make timely disclosures of
particularly Sections 8 and 12 thereof. their negotiations with GHB, ordered a special
 Section 30 of the Revised Securities Act has been reenacted as investigating panel to hear the case.
Section 27 of the Securities Regulations Code, still penalizing an  The investigative proceedings were interrupted only by the writ of
insider's misuse of material and non-public information about the preliminary injunction issued by the Court of Appeals, which
issuer, for the purpose of protecting public investors. Section 26 became permanent
of the Securities Regulations Code even widens the coverage of  During the pendency of this case, the Securities Regulations Code
punishable acts, which intend to defraud public investors through repealed the Revised Securities Act. As in Morato v. Court of
various devices, misinformation and omissions Appeals, the repeal cannot deprive SEC of its jurisdiction to
 Section 23 of the Securities Regulations Code was practically lifted continue investigating the case; or the regional trial court, to hear
from Section 36(a) of the Revised Securities Act. Both provisions any case which may later be filed against the respondents.
impose 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 V. The instant case has not yet prescribed.
indicating his or her ownership of the issuer's securities and such
changes in his or her ownership thereof.  Respondents have taken the position that this case is moot and
 Clearly, the legislature had not intended to deprive the courts of academic, since any criminal complaint that may be filed against
their authority to punish a person charged with violation of the them resulting from the SEC's investigation of this case has
old law that was repealed; in this case, the Revised Securities Act. already prescribed
o point out that the prescription period applicable to
offenses punished under special laws, such as violations
IV. The SEC retained the jurisdiction to investigate violations of the of the Revised Securities Act, is twelve years
Revised Securities Act, reenacted in the Securities Regulations Code, o Since the offense was committed in 1994, they reasoned
despite the abolition of the PED. that prescription set in as early as 2006 and rendered this
case moot. Such position, however, is incongruent with
 Section 53 of the Securities Regulations Code clearly provides that the factual circumstances of this case, as well as the
criminal complaints for violations of rules and regulations applicable laws and jurisprudence.
enforced or administered by the SEC shall be referred to the

 preliminary investigation interrupts the prescription period. A continuing with the investigation of respondents for 12
preliminary investigation is essentially a determination whether years.
an offense has been committed, and whether there is probable o Any deviation by the SEC from the injunctive writs would
cause for the accused to have committed an offense: be sufficient ground for contempt. Moreover, any step
 Securities Exchange Commission (SEC) has the authority to "make the SEC takes in defiance of such orders will be
such investigations as it deems necessary to determine whether considered void for having been taken against an order
any person has violated or is about to violate any provision of this issued by a court of competent jurisdiction.
Act XXX.  only after this Court corrects the erroneous
o After a finding that a person has violated the Revised ruling of the Court of Appeals in its Decision
Securities Act, the SEC may refer the case to the DOJ for dated 20 August 1998 that either the SEC or DOJ
preliminary investigation and prosecution. may properly conduct any kind of investigation
o While the SEC investigation serves the same purpose and against the respondents for violations of
entails substantially similar duties as the preliminary Sections 8, 30 and 36 of the Revised Securities
investigation conducted by the DOJ, this process cannot Act. Until then, the prescription period is
simply be disregarded deemed interrupted.
 criminal complaint is first filed with the SEC, which determines the  the period during which the SEC was prevented from continuing
existence of probable cause, before a preliminary investigation with its investigation should not be counted against it. The law on
can be commenced by the DOJ the prescription period was never intended to put the prosecuting
o it is imperative that the criminal prosecution be initiated bodies in an impossible bind in which the prosecution of a case
before the SEC, the administrative agency with the would be placed way beyond their control; for even if they avail
special competence. themselves of the proper remedy, they would still be barred from
 SEC started investigative proceedings against the respondents as investigating and prosecuting the case.
early as 1994.  Indubitably, the prescription period is interrupted by commencing
o This investigation effectively interrupted the prescription the proceedings for the prosecution of the accused.
period. o In criminal cases, this is accomplished by initiating the
o said proceedings were disrupted by a preliminary preliminary investigation.
injunction issued by the Court of Appeals on 5 May 1995, o The prosecution of offenses punishable under the
which effectively enjoined the SEC from filing any Revised Securities Act and the Securities Regulations
criminal, civil, or administrative case against the Code is initiated by the filing of a complaint with the SEC
respondents herein. or by an investigation conducted by the SEC motu
o the appellate court issued the assailed Decision in C.A. proprio.
G.R. SP. No. 37036 ordering that the writ of injunction be o Only after a finding of probable cause is made by the SEC
made permanent and prohibiting the SEC from taking can the DOJ instigate a preliminary investigation.
cognizance of and initiating any action against herein o Thus, the investigation that was commenced by the SEC
respondents in 1995, soon after it discovered the questionable acts of
o The SEC was bound to comply with the aforementioned the respondents, effectively interrupted the prescription
writ of preliminary injunction and writ of injunction period. Given the nature and purpose of the
issued by the Court of Appeals enjoining it from investigation conducted by the SEC, which is equivalent

to the preliminary investigation conducted by the DOJ in - The annual stockholders’ meeting of the Manila Electric Company
criminal cases, such investigation would surely interrupt (Meralco) was scheduled on 27 May 2008. In connection with the
the prescription period. annual meeting, proxieswere required to be submitted on or
before 17 May 2008, and the proxy validation was slated for five
days later, or 22 May.
VI. The Court of Appeals was justified in denying SEC's Motion for Leave - In view of the resignation of CamiloQuiason, the position of
to Quash SEC Omnibus Orders dated 23 October 1995. corporate secretary of Meralco became vacant.
o On 15 May 2008, the board of directors of Meralco
 The SEC avers that the Court of Appeals erred when it denied its designated Jose Vitug to act as corporate secretary for
Motion for Leave to Quash SEC Omnibus Orders, in the light of its the annual meeting.
admission that the PED had the sole authority to investigate the o However, when the proxy validation began on 22 May,
present case. On this matter, this Court cannot agree with the the proceedings were presided over by respondent
SEC. Anthony Rosete, assistant corporate secretary and in-
 no implementing rules were needed to render effective Sections house chief legal counsel of Meralco.
8, 30 and 36 of the Revised Securities Act; nor was the PED Rules - Private respondents nonetheless argue that Rosete was the acting
of Practice and Procedure invalid, prior to the enactment of the corporate secretary of Meralco. Petitioner Government Service
Securities Regulations Code, for failure to provide parties with the Insurance System (GSIS), a major shareholder in Meralco, was
right to cross-examine the witnesses presented against them. distressed over the proxy validation proceedings, and the
 Thus, the respondents may be investigated by the appropriate resulting certification of proxies in favor of the Meralco
authority under the proper rules of procedure of the Securities management.
Regulations Code for violations of Sections 8, 30, and 36 of the - On 23 May 2008, GSIS filed a complaint with the Regional Trial
Revised Securities Act. Court of Pasay City, seeking the declaration of certain proxies
as invalid.
- Three days later, GSIS filed a Notice with the RTC manifesting the
DECISION: IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. dismissal of the complaint. On the same day, GSIS filed an Urgent
This Court hereby REVERSES the assailed Decision of the Court of Appeals
Petition with the Securities and Exchange Commission (SEC)
promulgated on 20 August 1998 in CA-G.R. SP No. 37036 and LIFTS the
seeking to restrain Rosete from “recognizing, counting and
permanent injunction issued pursuant thereto. This Court further
tabulating, directly or indirectly, notionally or actually or in
DECLARES that the investigation of the respondents for violations of
whatever way, form, manner or means, or otherwise honoring the
Sections 8, 30 and 36 of the Revised Securities Act may be undertaken by
shares covered by” the proxies in favor of respondents “or any
the proper authorities in accordance with the Securities Regulations Code.
officer representing MERALCO Management,” and to annul and
No costs. declare invalid said proxies. GSIS also prayed for the issuance of
a Cease and Desist Order (CDO) to restrain the use of said proxies
GSIS v. CA during the annual meeting scheduled for the following day.
G.R. No.183905/184275 | April 16, 2009 | Tinga, J. - The SEC has enjoined the use and annul the validation, of the
proxies issued in favor of several of the private respondents,
particularly in connection with the annual meeting.
FACTS:

o A CDO to that effect signed by SEC Commissioner Jesus transferred to the courts of general jurisdiction or the appropriate
Martinez was issued on the same day the complaint was regional trial court.
filed. During the annual meeting held on the following o In addition, private respondents cite the Interim Rules on
day, Rosete announced that the meeting would push Intra-Corporate Controversies (Interim Rules)
through, expressing the opinion that the CDO is null and promulgated by this Court in 2001, most pertinently,
void. Section 2 of Rule 6 (on Election Contests), which defines
o The SEC issued a Show Cause Order (SCO) against private “election contests.”
respondents, ordering them to appear before the
Commission and explain why they should not be cited in ISSUE: Whether the SEC has jurisdiction over the petition filed by GSIS?
contempt.
- On 29 May 2008, respondents filed a petition for certiorari with DECISION: RTC
prohibition with the Court of Appeals, praying that the CDOand - In private respondents’ favor, the provisions of law they cite
the SCO be annulled. pertain directly and exclusively to the statutory jurisdiction of trial
- The Court of Appeals Eighth Division promulgated a decision courts acquired by virtue of the transfer of jurisdiction following
dismissing the complaint filed by GSIS in the SEC due to SEC’s lack the passage of the SRC. In contrast, the SRC provisions relied upon
of jurisdiction, due to forum shopping by respondent GSIS, and by GSIS do not immediately or directly establish that body’s
due to splitting of causes of action by respondent GSIS and jurisdiction over the petition, since it necessitates the linkage of
declaring the SEC’s undated cease and desist order and the SEC’s Section 20 to Section 53.1 of the SRC before the point can bear on
show cause order null and void. us.
- GSIS primarily anchors its argument on two correlated provisions - On the other hand, the distinction between “proxy solicitation”
of the SRC. These are Section 53.1 and Section 20.1. and “proxy validation” cannot be dismissed offhand. The right of
o The argument, stripped of extravagance, is that since a stockholder to vote by proxy is generally established by t
proxy solicitations following Section 20.1 have to be heCorporation Code, but it is the SRC which specifically regulates
made in accordance with rules and regulations issued by the form and use of proxies, more particularly the procedure of
the SEC, it is the SEC under Section 53.1 that has the proxy solicitation, primarily through Section 20
jurisdiction to investigate alleged violations of the rules - It is plain that proxy solicitation is a procedure that antecedes
on proxy solicitations. proxy validation. The former involves the securing and submission
o The GSIS petition invoked AIRR-AIRR-SRC Rule 20, of proxies, while the latter concerns the validation of such
otherwise known as “The Proxy Rule,” which enumerates secured and submitted proxies. GSIS raises the sensible point that
the requirements as to form of proxy and delivery of there was no election yet at the time it filed its petition with the
information to security holders. According to GSIS, the SEC, hence no proper election contest or controversy yet over
information statement Meralco had filed with the SEC in which the regular courts may have jurisdiction. And the point ties
connection with the annual meeting did not contain any its cause of action to alleged irregularities in the proxy solicitation
proxy form as required under AIRR-SRC Rule 20. procedure, a process that precedes either the validation of
- On the other hand, private respondents argue before us that proxies or the annual meeting itself.
under Section 5.2 of the SRC, the SEC’s jurisdiction over all cases - Under Section 20.1, the solicitation of proxies must be in
enumerated in Section 5 of Presidential Decree No. 902-A was accordance with rules and regulations issued by the SEC, such as
AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the

discretion “to make such investigations as it deems necessary to trustees, officers or managers of corporations, partnerships, or
determine whether any person has violated” any rule issued by it, associations.” Evidently, the jurisdiction of the regular courts
such as AIRR-SRC Rule 4. The investigatory power of the SEC over so-called election contests or controversies under Section
established by Section 53.1 is central to its regulatory authority, 5(c) does not extend to every potential subject that may be
most crucial to the public interest especially as it may pertain to voted on by shareholders, but only to the election of directors or
corporations with publicly traded shares. For that reason, we are trustees, in which stockholders are authorized to participate
not keen on pursuing private respondents’ insistence that the under Section 24 of the Corporation Code.
GSIS complaint be viewed as rooted in an intra-corporate - This qualification allows for a useful distinction that gives due
controversy solely within the jurisdiction of the trial courts to effect to the statutory right of the SEC to regulate proxy
decide. It is possible that an intra-corporate controversy may solicitation, and the statutory jurisdiction of regular courts over
animate a disgruntled shareholder to complain to the SEC a election contests or controversies. The power of the SEC to
corporation’s violations of SEC rules and regulations, but that investigate violations of its rules on proxy solicitation is
motive alone should not be sufficient to deprive the SEC of its unquestioned when proxies are obtained to vote on matters
investigatory and regulatory powers, especially so since such unrelated to the cases enumerated under Section 5 of Presidential
powers are exercisable on a motuproprio basis. Decree No. 902-A. However, when proxies are solicited in
- At the same time, Meralco raises the substantial point that relation to the election of corporate directors, the resulting
nothing in the SRC empowers the SEC to annul or invalidate controversy, even if it ostensibly raised the violation of the SEC
improper proxies issued in contravention of Section 20. It cites rules on proxy solicitation, should be properly seen as an
that the penalties defined by the SEC itself for violation of Section election controversy within the original and exclusive
20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the jurisdiction of the trial courts by virtue of Section 5.2 of the SRC
first offense, and pecuniary fines for succeeding in relation to Section 5(c) of Presidential Decree No. 902-A.
[43]
offenses. Indeed, if the SEC does not have the power to - The Court recognizes that GSIS’s position flirts with the abhorrent
invalidate proxies solicited in violation of its promulgated rules, evil of split jurisdiction, allowing as it does both the SEC and the
serious questions may be raised whether it has the power to regular courts to assert jurisdiction over the same controversies
adjudicate claims of violation in the first place, since the relief it surrounding an election contest. Should the argument of GSIS be
may extend does not directly redress the cause of action of the sustained, we would be perpetually confronted with the spectacle
complainant seeking the exclusion of the proxies. of election controversies being heard and adjudicated by both the
- Based on the foregoing, it is evident that the linchpin in deciding SEC and the regular courts, made possible through a mere
the question is whether or not the cause of action of GSIS before allegation that the anteceding proxy solicitation process was
the SEC is intimately tied to an election controversy, as defined errant, but the competing cases filed with one objective in mind –
under Section 5(c) of Presidential Decree No. 902-A. to affect the outcome of the election of the board of directors.
There is no definitive statutory provision that expressly mandates
Scope of the power of trial courts to resolve controversies in corporate so untidy a framework, and we are disinclined to construe the SRC
elections in such a manner as to pave the way for the splitting of
- Under Section 5(c) of Presidential Decree No. 902-A, in relation to jurisdiction
the SRC, the jurisdiction of the regular trial courts with respect to - That the proxy challenge raised by GSIS relates to the election of
election-related controversies is specifically confined to the directors of Meralco is undisputed. The controversy was
“controversies in the election or appointment of directors, engendered by the looming annual meeting, during which the

stockholders of Meralco were to elect the directors of the maximum duration of the CDO issued under Section 53.3
corporation. GSIS very well knew of that fact. On 17 March 2008, is ten (10) days.
the Meralco board of directors adopted a board resolution stating o The third basis for the issuance of a CDO is Section 64.
it delegates to the Nomination & Governance Committee the This CDO is founded on a determination of an act or
authority to approve and adopt appropriate rules on: practice, which unless restrained, “will operate as a fraud
(1) nomination of candidates for election to the board of on investors or is otherwise likely to cause grave or
directors; (2) appreciation of ballots during the election of irreparable injury or prejudice to the investing public”.
members of the board of directors; and (3) validation of proxies Section 64.1 plainly provides three segregate instances
for regular or special meetings of the stockholders. upon which the SEC may issue the CDO under this
- Under the circumstances, we do not see it feasible for GSIS to provision: (1) after proper investigation or
posit that its challenge to the solicitation or validation of proxies verification, (2) motuproprio, or (3) upon verified
bore no relation at all to the scheduled election of the board of complaint by any aggrieved party. While no lifetime is
directors of Meralco during the annual meeting. GSIS very well expressly specified for the CDO under Section 64, the
knew that the controversy falls within the contemplation of an respondent to the CDO may file a formal request for the
election controversy properly within the jurisdiction of the regular lifting thereof, which the SEC must hear within fifteen
courts. Otherwise, it would have never filed its original petition (15) days from filing and decide within ten (10) days from
with the RTC of Pasay. GSIS may have withdrawn its petition with the hearing.
the RTC on a new assessment made in good faith that the - It appears that the CDO under Section 5(i) is similar to
controversy falls within the jurisdiction of the SEC, yet the reality the CDO under Section 64.1. Both require a common finding of a
is that the reassessment is precisely wrong as a matter of law. need to prevent fraud or injury to the investing public. At the
same time, no mention is made whether the CDO defined under
On the validity of CDO Section 5(i) may be issued ex-parte, while the CDO under Section
- There are three distinct bases for the issuance by the SEC of 64.1 requires “grave and irreparable” injury, language absent in
the CDO. Section 5(i). Notwithstanding the similarities between Section 5(i)
o The first, allocated by Section 5(i), is predicated on a and Section 64.1, it remains clear that the CDO issued under
necessity “to prevent fraud or injury to the investing Section 53.3 is a distinct creation from that under Section 64.
public”. No other requisite or detail is tied to - The Court of Appeals cited the CDO as having been issued in
this CDO authorized under Section 5(i). violation of the constitutional provision on due process, which
o The second basis, found in Section 53.3, involves a requires both prior notice and prior hearing.Yet interestingly,
determination by the SEC that “any person has engaged the CDO as contemplated in Section 53.3 or in Section 64, may be
or is about to engage in any act or practice constituting a issued “ex-parte” (under Section 53.3) or “without necessity of
violation of any provision of this Code, any rule, hearing” (under Section 64.1). Nothing in these provisions impose
regulation or order thereunder, or any rule of an a requisite hearing before the CDO may be issued thereunder.
Exchange, registered securities association, clearing Nonetheless, there are identifiable requisite actions on the part of
agency or other self-regulatory organization.” The the SEC that must be undertaken before the CDO may be issued
provision additionally requires a finding that “there is a either under Section 53.3 or Section 64. In the case of Section
reasonable likelihood of continuing [or engaging in] 53.3, the SEC must make two findings: (1) that such person has
further or future violations by such person.” The engaged in any such act or practice, and (2) that there is a

reasonable likelihood of continuing, (or engaging in) further or expeditiously, any verified complaint praying for the
future violations by such person. In the case of Section 64, the SEC provisional remedy of a cease and desist order.”
must adjudge that the act, unless restrained, will operate as a o The CDO then discusses the nature of the right of GSIS to
fraud on investors or is otherwise likely to cause grave or obtain the CDO, as well as “the urgent and paramount
irreparable injury or prejudice to the investing public.” necessity to prevent serious damage because the
o Noticeably, the CDO is not precisely clear whether it was stockholders’ meeting is scheduled on May 28, 2008 x
issued on the basis of Section 5.1, Section 53.3 or Section xx” Had the CDO stopped there, the unequivocal
64 of the SRC. The CDO actually refers and cites all three impression would have been that the order is based on
provisions, yet it is apparent that a singular CDO could Section 64.
not be founded on Section 5.1, Section 53.3 and Section o But the CDO goes on to cite Section 5.1, quoting
64 collectively. At the very least, the CDO under Section paragraphs (i) and (n) in full, ratiocinating that under
53.3 and under Section 64 have their respective these provisions, the SEC had “the power to issue cease
requisites and terms. and desist orders to prevent fraud or injury to the public
o GSIS was similarly cagey in its petition before the SEC, it and such other measures necessary to carry out the
demurring to state whether it was seeking Commission’s role as regulator.” Immediately thence,
the CDO under Section 5.1, Section 53.3, or Section 64. the CDO cites Section 53.3 as providing “that whenever it
Considering that injunctive relief generally avails upon shall appear to the Commission that nay person has
the showing of a clear legal right to such relief, the engaged or is about to engage in any act or practice
inability or unwillingness to lay bare the precise statutory constituting a violation of any provision, any rule,
basis for regulation or order thereunder, the Commission may
the prayer for injunction is an obvious impediment to issue ex-parte a cease and desist order for a maximum
a successfulapplication. Nonetheless, the error of the SEC period of ten (10) days, enjoining the violation and
in granting the CDO without stating which kind of CDO it compelling compliance therewith.”
was issuing is more unpardonable, as it is an act that - The citation in the CDO of Section 5.1, Section 53.3 and Section 64
contravenes due process of law. together may leave the impression that it is grounded on all three
- We have particularly required, in administrative proceedings, that provisions, and that may very well have been the intention of the
the body or tribunal “in all controversial questions, render its SEC. Assuming that is so, it is legally impermissible for the SEC to
decision in such a manner that the parties to the proceeding can have utilized both Section 53.3 and Section 64 as basis for
know the various issues involved, and the reason for the decision the CDO at the same time. The CDO under Section 53.3 is
rendered.” This requirement is vital, as its fulfillment would afford premised on distinctly different requisites than the CDO under
the adverse party the opportunity to interpose a reasoned and Section 64. Even more crucially, the lifetime of the CDO under
intelligent appeal that is responsive to the grounds cited against Section 53.3 is confined to a definite span of ten (10) days, which
it. The CDO extended by the SEC fails to provide the needed is not the case with the CDO under Section 64. This CDO under
reasonable clarity of the rationale behind its issuance. Section 64 may be the object of a formal request for lifting within
o The subject CDO first refers to Section 64, citing its five (5) days from its issuance, a remedy not expressly afforded to
provisions, then stating: “[p]rescinding from the the CDO under Section 53.3.
aforequoted, there can be no doubt whatsoever that the - Any respondent to a CDO which cites both Section 53.3 and
Commission is in fact mandated to take up, if Section 64 would not have an intelligent or adequate basis to

respond to the same. Such respondent would not know whether functions, and one of the most important, is the supervision of all
the CDO would have a determinate lifespan of ten (10) days, as in corporations, partnerships or associations, who are grantees of primary
Section 53.3, or would necessitate a formal request for lifting franchise and/or a license or permit issued by the government to operate
within five (5) days, as required under Section 64.1. This lack of in the Philippines.
clarity is to the obvious prejudice of the respondent, and is in FACTS:
clear defiance of the constitutional right to due process of law. 10. The Puerto Azul Land, Inc. (PALI), a domestic real estate
Indeed, the veritable mélange that the assailed CDO is, with its corporation, had sought to offer its shares to the public in
jumbled mixture of premises and conclusions, the antithesis of order to raise funds allegedly to develop its properties and
due process. pay its loans with several banking institutions. In January,
- To make matters worse for the SEC, the fact that the CDO was 1995, PALI was issued a Permit to Sell its shares to the public
signed, much less apparently deliberated upon, by only by one by the Securities and Exchange Commission (SEC). To
commissioner likewise renders the order fatally infirm. facilitate the trading of its shares among investors, PALI
o The SEC is a collegial body composed of a Chairperson sought to course the trading of its shares through the
[58]
and four (4) Commissioners. In order to constitute a Philippine Stock Exchange, Inc. (PSE), for which purpose it
quorum to conduct business, the presence of at least filed with the said stock exchange an application to list its
three (3) Commissioners is required. shares, with supporting documents attached.
o Simply put, Commissioner Martinez is not the SEC. He 11. On February 14, 1996, before it could act upon PALI's application,
alone does not speak for and in behalf of the SEC. The the Board of Governors of the PSE received a letter from the
SEC acts through a five-person body, and the five heirs of Ferdinand E. Marcos, claiming that the late President
members of the commission each has one vote to cast in Marcos was the legal and beneficial owner of certain
every deliberation concerning a case or any incident properties forming part of the Puerto Azul Beach Hotel and
therein that is subject to the jurisdiction of the SEC. 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 RebeccoPanlilio for
then President Marcos and now, effectively for his estate,
Philippine Stock Exchange v. Court of Appeals, 281 SCRA 232 (1997) and requested PALI's application to be deferred. PALI was
(SUPRA) requested to comment upon the said letter.
12. PALI's answer stated that the properties forming part of the
PHILIPPINE STOCK EXCHANGE, INC., Puerto Azul Beach Hotel and Resort Complex were not
vs. claimed by PALI as its assets. On the contrary, the resort is
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE actually owned by Fantasia Filipina Resort, Inc. and the
COMMISSION and PUERTO AZUL LAND, INC., Puerto Azul Country Club, entities distinct from PALI.
TORRES, JR., J.: G.R. No. 125469 October 27, 1997 ; NILO Furthermore, the Ternate Development Corporation owns
DOCTRINE: The Securities and Exchange Commission is the government only 1.20% of PALI.
agency, under the direct general supervision of the Office of the a. The Marcoses responded that their claim is not confined
President, with the immense task of enforcing the Revised Securities Act, to the facilities forming part of the Puerto Azul Hotel and
and all other duties assigned to it by pertinent laws. Among its inumerable Resort Complex, thereby implying that they are also

asserting legal and beneficial ownership of other decision whether or not to allow corporations to offer their stock
properties titled under the name of PALI. to the public through the stock exchange.
13. On March 4, 1996, the PSE was informed that the Marcoses o This is in accord with the "business judgment rule"
received a Temporary Restraining Order on the same date, whereby the SEC and the courts are barred from
enjoining the Marcoses from, among others, "further intruding into business judgments of corporations, when
impeding, obstructing, delaying or interfering in any manner the same are made in good faith. the said rule precludes
by or any means with the consideration, processing and the reversal of the decision of the PSE to deny PALI's
approval by the PSE of the initial public offering of PALI." listing application, absent a showing of bad faith on the
14. Board of Governors of the PSE reached its decision to reject PALI's part of the PSE.
application.  Under the listing rules of the PSE, to which PALI had previously
15. On April 11, 1996, PALI wrote a letter to the SEC addressed to the agreed to comply, the PSE retains the discretion to accept or
then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the reject applications for listing. Thus, even if an issuer has complied
SEC's attention the action taken by the PSE in the application with the PSE listing rules and requirements, PSE retains the
of PALI for the listing of its shares with the PSE, and discretion to accept or reject the issuer's listing application if the
requesting that the SEC, in the exercise of its supervisory and PSE determines that the listing shall not serve the interests of the
regulatory powers over stock exchanges under Section 6(j) of investing public.
P.D. No. 902-A, review the PSE's action on PALI's listing  Moreover, PSE argues that the SEC has no jurisdiction over
application and institute such measures as are just and sequestered corporations, nor with corporations whose
proper under the circumstances. properties are under sequestration.
16. SEC rendered its Order, reversing the PSE's decision.  PSE, likewise, assails the SEC's and the Court of Appeals reliance
17. PSE filed a motion for reconsideration of the said order on April on the alleged policy of "full disclosure" to uphold the listing of
29, 1996, which was, however denied by the Commission in PALI's shares with the PSE, in the absence of a clear mandate for
its May 9, 1996 Order which states: the effectivity of such policy. As it is, the case records reveal the
18. Court of Appeals promulgated its Resolution dismissing the PSE's truth that PALI did not comply with the listing rules and disclosure
Petition for Review. Hence, this Petition by the PSE. requirements.
o In fact, PALI's documents supporting its application
PHIL. STOCK EXCHANGE  submits that the Court of Appeals erred in contained misrepresentations and misleading
ruling that the SEC had authority to order the PSE to list the shares of PALI statements, and concealed material information. The
in the stock exchange. Under presidential decree No. 902-A, the powers of matter of sequestration of PALI's properties and the fact
the SEC over stock exchanges are more limited as compared to its that the same form part of military/naval/forest
authority over ordinary corporations. In connection with this, the powers reservations were not reflected in PALI's application.
of the SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to reverse the ISSUES: WON the SEC had both jurisdiction and authority to look into the
decisions of the stock exchange. decision of the petitioner PSE? NO except when the decision of the PSE is
 Authorities are in abundance even in the United States, from attended with Bad faith.
which the country's security policies are patterned, to the effect WON PSE is correct to deny the application of PALI? YES
of giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making the RULING:

corporations, including the right to sue and be sued, to hold
 Section 3 of Presidential Decree 902-A, standing alone, is enough property in its own name, to enter (or not to enter) into contracts
authority to uphold the SEC's challenged control authority over with third persons, and to perform all other legal acts within its
the petitioner PSE even as it provides that "the Commission shall allocated express or implied powers.
have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees  Thus, notwithstanding the regulatory power of the SEC over the
of primary franchises and/or a license or permit issued by the PSE, and the resultant authority to reverse the PSE's decision in
government to operate in the Philippines. . ." matters of application for listing in the market, the SEC may
- The SEC's regulatory authority over private corporations exercise such power only if the PSE's judgment is attended by bad
encompasses a wide margin of areas, touching nearly all of a faith.
corporation's concerns. This authority springs from the fact o In Board of Liquidators vs. Kalaw, it was held that bad
that a corporation owes its existence to the concession of its faith does not simply connote bad judgment or
corporate franchise from the state. negligence. It imports a dishonest purpose or some
- The SEC's power to look into the subject ruling of the PSE, moral obliquity and conscious doing of wrong. It means a
therefore, may be implied from or be considered as breach of a known duty through some motive or interest
necessary or incidental to the carrying out of the SEC's of ill will, partaking of the nature of fraud.
express power to insure fair dealing in securities traded upon
a stock exchange or to ensure the fair administration of such  In reaching its decision to deny the application for listing of PALI,
exchange. It is, likewise, observed that the principal function the PSE considered important facts, which, in the general scheme,
of the SEC is the supervision and control over corporations, brings to serious question the qualification of PALI to sell its
partnerships and associations with the end in view that shares to the public through the stock exchange. During the time
investment in these entities may be encouraged and for receiving objections to the application, the PSE heard from the
protected, and their activities for the promotion of economic representative of the late President Ferdinand E. Marcos and his
development. family who claim the properties of the private respondent to be
part of the Marcos estate.
 We affirm that the SEC is the entity with the primary say as to o In time, the PCGG confirmed this claim. In fact, an order
whether or not securities, including shares of stock of a of sequestration has been issued covering the properties
corporation, may be traded or not in the stock exchange. This is in of PALI, and suit for reconveyance to the state has been
line with the SEC's mission to ensure proper compliance with the filed in the Sandiganbayan Court. How the properties
laws, such as the Revised Securities Act and to regulate the sale were effectively transferred, despite the sequestration
and disposition of securities in the country. order, from the TDC and MSDC to RebeccoPanlilio, and
to the private respondent PALI, in only a short span of
 This is not to say, however, that the PSE's management time, are not yet explained to the Court, but it is clear
prerogatives are under the absolute control of the SEC. The PSE is, that such circumstances give rise to serious doubt as to
alter all, a corporation authorized by its corporate franchise to the integrity of PALI as a stock issuer.
engage in its proposed and duly approved business. One of the o The petitioner was in the right when it refused
PSE's main concerns, as such, is still the generation of profit for its application of PALI, for a contrary ruling was not to the
stockholders. Moreover, the PSE has all the rights pertaining to best interest of the general public. The purpose of the

Revised Securities Act, after all, is to give adequate and law, shall be issued, endorsed, sold, transferred or in any
effective protection to the investing public against other manner conveyed to the public, unless registered
fraudulent representations, or false promises, and the in accordance with the rules and regulations that shall be
imposition of worthless ventures. promulgated in the public interest and for the protection
of investors by the Commission. Presidential Decree No.
 Also, as the primary market for securities, the PSE has established 902-A, on the other hand, provides that the SEC, as
its name and goodwill, and it has the right to protect such regulatory agency, has supervision and control over all
goodwill by maintaining a reasonable standard of propriety in the corporations and over the securities market as a whole,
entities who choose to transact through its facilities. It was and as such, is given ample authority in determining
reasonable for the PSE, therefore, to exercise its judgment in the appropriate policies.
manner it deems appropriate for its business identity, as long as o Pursuant to this regulatory authority, the SEC has
no rights are trampled upon, and public welfare is safeguarded. manifested that it has adopted the policy of "full material
o In any case, for the purpose of determining whether PSE disclosure" where all companies, listed or applying for
acted correctly in refusing the application of PALI, the listing, are required to divulge truthfully and accurately,
true ownership of the properties of PALI need not be all material information about themselves and the
determined as an absolute fact. securities they sell, for the protection of the investing
o What is material is that the uncertainty of the properties' public, and under pain of administrative, criminal and
ownership and alienability exists, and this puts to civil sanctions.
question the qualification of PALI's public offering. In o In connection with this, a fact is deemed material if it
sum, the Court finds that the SEC had acted arbitrarily in tends to induce or otherwise effect the sale or purchase
arrogating unto itself the discretion of approving the of its securities. While the employment of this policy is
application for listing in the PSE of the private recognized and sanctioned by the laws, nonetheless, the
respondent PALI, since this is a matter addressed to the Revised Securities Act sets substantial and procedural
sound discretion of the PSE, a corporation entity, whose standards which a proposed issuer of securities must
business judgments are respected in the absence of bad satisfy.
faith.
 Pertinently, Section 9 of the Revised Securities Act sets forth the
 The question as to what policy is, or should be relied upon in possible Grounds for the Rejection of the registration of a
approving the registration and sale of securities in the SEC is not security.
for the Court to determine, but is left to the sound discretion of o A reading of the foregoing grounds reveals the intention
the Securities and Exchange Commission. In mandating the SEC to of the lawmakers to make the registration and issuance
administer the Revised Securities Act, and in performing its other of securities dependent, to a certain extent, on the
functions under pertinent laws, the Revised Securities Act, under merits of the securities themselves, and of the issuer, to
Section 3 thereof, gives the SEC the power to promulgate such be determined by the Securities and Exchange
rules and regulations as it may consider appropriate in the public Commission.
interest for the enforcement of the said laws. o This measure was meant to protect the interests of the
o The second paragraph of Section 4 of the said law, on the investing public against fraudulent and worthless
other hand, provides that no security, unless exempt by securities, and the SEC is mandated by law to safeguard

these interests, following the policies and rules therefore 1. Petitioner Philippine Association of Stock Transfer and Registry
provided. Agencies, Inc. is an association of stock transfer agents principally
o The absolute reliance on the full disclosure method in the engaged in the registration of stock transfers in the stock-and-
registration of securities is, therefore, untenable. As it is, transfer book of corporations.
the Court finds that the private respondent PALI, on at 2. Petitioner’s Board of Directors unanimously approved a
least two points (nos. 1 and 5) has failed to support the resolution allowing its members to increase the transfer
propriety of the issue of its shares with unfailing clarity, processing fee they charge their clients from P45 per certificate
thereby lending support to the conclusion that the PSE to P75 per certificate, effective July 1, 1996; and eventually
acted correctly in refusing the listing of PALI in its stock to P100 per certificate.
exchange. - The resolution also authorized the imposition of a processing
o This does not discount the effectivity of whatever fee for the cancellation of stock certificates at P20 per
method the SEC, in the exercise of its vested authority, certificate effective July 1, 1996.
chooses in setting the standard for public offerings of
corporations wishing to do so. However, the SEC must - According to petitioner, the rates had to be increased since
recognize and implement the mandate of the law, it had been over five years since the old rates were fixed and
particularly the Revised Securities Act, the provisions of an increase of its fees was needed to sustain the financial
which cannot be amended or supplanted by mere viability of the association and upgrade facilities and services.
administrative issuance. 3. After a dialogue with petitioner, public respondent Securities
and Exchange Commission (SEC) allowed petitioner to impose
 In resume, the Court finds that the PSE has acted with justified the P75 per certificate transfer fee and P20 per certificate
circumspection, discounting, therefore, any imputation of cancellation fee effective July 1, 1996. But, approval of the
arbitrariness and whimsical animation on its part. Its action in additional increase of the transfer fees to P100 per certificate
refusing to allow the listing of PALI in the stock exchange is effective October 1, 1996, was withheld until after a public
justified by the law and by the circumstances attendant to this hearing.
case. 4. On June 27, 1996, the SEC advised petitioner to hold in abeyance
the implementation of the increases until the matter was cleared
ACCORDINGLY, in view of the foregoing considerations, the Court hereby with all the parties concerned. The SEC stated that it was
GRANTS the Petition for Review on Certiorari. reconsidering its earlier approval in light of the opposition and
required petitioner to file comment. Petitioner nonetheless
proceeded with the implementation of the increased fees.
PASTRA v. CA 5. The SEC wrote petitioner on July 1, 1996, reiterating the directive
of June 27, 1996.
Doctrine: The regulatory and supervisory powers of the Commission under 6. On July 2, 1996, following a complaint from the Philippine Stock
Section 40 of the then Revised Securities Act were broad enough to include Exchange, the SEC again sent petitioner a second letter strongly
the power to regulate petitioner’s fees. urging petitioner to desist from implementing the new rates in
the interest of all participants in the security market.
Facts: 7. Petitioner replied on July 3, 1996 that it had no intention of
defying the orders but stated that it could no longer hold in

abeyance the implementation of the new fees because its management prerogative and was intended to protect the
members had already put in place the procedures necessary for viability of petitioner’s members.
their implementation. Court’s Rationale:
- Petitioner also argued that the imposition of the processing
1. The Court notes that before its repeal, Section 47 of The Revised
fee was a management prerogative, which was beyond the
Securities Act clearly gave the SEC the power to enjoin the acts or
SEC’s authority to regulate absent an express rule or
practices of securities-related organizations even without first
regulation.
conducting a hearing if, upon proper investigation or verification,
8. On July 8, 1996, the SEC issued Order No. 104 enjoining
the SEC is of the opinion that there exists the possibility that the
petitioner from imposing the new fees
act or practice may cause grave or irreparable injury to the
9. Thus, for violating its orders, the SEC ordered petitioner to pay a
investing public, if left unrestrained.
basic fine of P5,000 and a daily fine of P500 for continuing
2. Said section enforces the power of general supervision of the SEC
violations
under Section 40 of the then Revised Securities Act.
10. The petitioner filed a case in the CA but CA dismissed it
3. As a securities-related organization under the jurisdiction and
- CA: the power to regulate petitioner’s fees was included in supervision of the SEC by virtue of Section 40 of The Revised
the general power given to the SEC under Section 40of The Securities Act and Section 3 of Presidential Decree No. 902-A,
Revised Securities Act to regulate, supervise, examine, petitioner was under the obligation to comply with the
suspend or otherwise discontinue, the operation of July 8, 1996 Order.
securities-related organizations like petitioner 4. Defiance of the order was subject to administrative sanctions
Issue/held provided in Section 46of The Revised Securities Act.
5. Petitioner failed to show that the SEC, which undoubtedly
1. Whether the SEC acted with grave abuse of discretion or lack or possessed the necessary expertise in matters relating to the
excess of jurisdiction in issuing the controverted Orders? NO, The regulation of the securities market, gravely abused its discretion
regulatory and supervisory powers of the Commission under in finding that there was a possibility that the increase in fees and
Section 40 of the then Revised Securities Actwere broad enough imposition of cancellation fees will cause grave or irreparable
to include the power to regulate petitioner’s fees. injury or prejudice to the investing public
Petitioner’s contentions: 6. In Philippine Stock Exchange, Inc. v. Court of Appeals,the Court
held that the SEC is without authority to substitute its judgment
1. Petitioner argues that the SEC violated petitioner’s right to due
for that of the corporation’s board of directors on business
process because cease-and-desist order without first conducting a
matters so long as the board of directors acts in good faith.
hearing.
2. SEC cannot restrict petitioner’s members from increasing the - This Court notes, however, that this case involves, not
transfer and processing fees they charge their clients because whether petitioner’s actions pertained to management
there is no specific law, rule or regulation authorizing prerogatives or whether petitioner acted in good
it. Section 40 of the then Revised Securities Act could not be faith. Rather, this case involves the question of whether the
interpreted to justify the SEC’s unjustified interference with SEC had the power to enjoin petitioner’s planned increase in
petitioner’s decision to increase its transfer fees and impose fees after the SEC had determined that said act if pursued
processing fees, especially since the decision involved a may cause grave or irreparable injury or prejudice to the
investing public.

- Petitioner was fined for violating the SEC’s cease-and-desist before the Juvenile and Domestic Relations Court of Quezon City,
order which the SEC had issued to protect the interest of the for voluntary dissolution of conjugal properties.
investing public, and not simply for exercising its judgment in  As their differences worsened, the private respondent filed on
the manner it deems appropriate for its business. January 27, 1971 a petition for legal separation against Pastor on
7. The regulatory and supervisory powers of the Commission the ground of infidelity before the then Juvenile and Domestic
under Section 40 of the then Revised Securities Act, in our view, Relations Court of Quezon City. The petition was amended into one
were broad enough to include the power to regulate petitioner’s for Support with Alimony and the case was docketed as Civil Case
fees. No. QE-0030.
 On February 17, 1972, the court rendered a decision, awarding
P3,000 monthly support to the private respondent and the children
[SPEED DISTRIBUTING CORP. VS. COURT OF APPEALS, 425 SCRA
3. On June 24, 1975, the private respondent filed a motion for execution.
691(2004)](digest ponente, Haulo)
The court issued an order granting the motion and the sheriff levied
on the properties of Skyline.
DOCTRINE: To determine whether a case involves an intra-corporate
 skyline filed, on December 19, 1975, a third-party claim, alleging
controversy, and is to be heard and decided by the Branches of the RTC
that the properties levied were its personal properties and not
specifically designated by the Court to try and decide such cases, two
those of Pastor, who was only one of its stockholders.
elements must concur: (a) the status or relationship of the parties; and (2)
 Skyline filed a petition for certiorari with prayer for temporary
the nature of the question that is the subject of their controversy.
restraining order before the Court of Appeals for the nullification of
the order of the trial court quashing the third-party claim.
FACTS:
 Skyline, then, filed a petition for review before this Court, but the
1. On September 20, 1953, Pastor Y. Lim married private respondent
petition was dismissed in a Resolution dated August 6, 1976.
RufinaLuy Lim.
4. On August 21, 1987, the Speed Distributing Corporation (Speed, for
 During the early part of their marriage, Pastor organized some
brevity), was registered with the Securities and Exchange Commission,
family corporations using their conjugal funds.
with Pastor Lim as one of the incorporators. He owned ten shares,
 Among these corporations was Skyline International Corporation
valued at P100.00 per share.
(Skyline, for brevity) which was engaged in the importation and
5. On June 21, 1991, the Leslim Corporation (Leslim, for brevity), was
sale of Hankook Brand Korean Tires and the acquisition of real
registered with the Securities and Exchange Commission with a capital
estate.
stock of P12,000,000.00, divided into 120,000 shares at par value of
 The couple were incorporators and major stockholders of the
P100.00 per share. Pastor Lim subscribed to 95,700 shares valued at
corporation and were also employed therein.
P9,570,000.00.
2. Pastor and the private respondent did not have a child. They decided
6. On August 26, 1994, Leslim Corporation executed a deed of absolute
to "adopt" Leonard Lim and petitioner Lita Lim Marcelo, who were
sale in favor of the Speed, represented by its Vice-President,
children of their distant poor relatives in Zamboanga City.
petitioner Ireneo Marcelo, over the parcel of lot located at Diliman
 There was, however, no formal court adoption. Sometime
Quezon City…
thereafter, marital problems arose, as a result of which the private
7. On June 11, 1994, Pastor Lim died intestate and was survived by his
respondent stopped working at Skyline.
wife, the private respondent.
 As the domestic problems remained unresolved, Pastor and the
 On March 17, 1995, the private respondent, through her nephew
private respondent jointly filed on August 13, 1968 a Petition
and attorney-in-fact George Luy, filed a petition for the

administration of the estate of her deceased husband before the the SEC had jurisdiction, the CA ordered the remand of the case to the RTC,
Regional Trial Court of Quezon City, for the determination, among others, of the resolution of the issue of
 The private respondent filed a motion praying for the annotation whether or not the private respondent was the real party-in-interest.
of a notice of lispendens at the dorsal portion of all titles over the
properties in the name of Pastor. In their petition at bar, the petitioners argue that –
 Included in the said properties were those registered in the name  The petitioners contend that the RTC had no jurisdiction over the
of other corporations of which Pastor was a stockholder, private respondent’s complaint because the case involved intra-
including that parcel of land covered by TCT No. T-116717 corporate controversies.
registered under the name of Speed.  Since Rep. Act No. 8799 took effect only on August 8, 2000, while
 The court granted the motion. the private respondent’s appeal in the CA was pending, it should
8. The affected corporations, including Speed, filed motions to cancel the not be given retroactive effect.
notices of lispendens and motions for exclusion of certain properties  Furthermore, Section 5.2 of RA 8799 proscribes the transfer of
from Pastor’s estate. cases to the RTC; as such, the CA should have dismissed the private
 On June 8, 1995, the Court granted the motions and ordered the respondent’s appeal without prejudice to her right to refile her
exclusion of certain properties from the estate of Pastor and the complaint in the RTC. The petitioners argue that the CA cannot
cancellation of the notices of lispendens on properties registered in order the case remanded to the RTC for the sake of convenience.
the name of the said corporations, including that covered by TCT
No. T-116716 under the name of Speed. For her part, the private respondent asserts that the complaint does not
9. On June 27, 1995, the private respondent filed a verified amended involve intra-corporate controversies and the RTC had jurisdiction over the
petition in SP No. Q-95-23334 alleging, among others, that during his action and the issues raised by the parties in their pleadings. The private
lifetime, Pastor substantially owned the following business entities: respondent, likewise, opines that there is nothing wrong with the CA’s
Skyline Sales Corporation, Speed Distributing, Inc., and Leslim ruling directing the RTC to hear the case to avoid any consequent delay.
Corporation
10. on August 1, 1995, the private respondent filed a complaint against ISSUE:
Speed, and the petitioners with the RTC of Quezon City, for the whether or not the CA erred in remanding the case to the RTC and
nullification of the Deed of Absolute Sale executed by Leslim in favor directing it to decide and hear the complaint on its merits, in view of Rep.
of Speed Act No. 8799 which took effect on August 8, 2000, during the pendency of
the case before it, effectively transferring jurisdiction over cases involving
The CA ruled that the private respondent failed to prove that Pastor Lim, intra-corporate controversies from the SEC to the RTC.
not Speed, owned the property. It also ruled that the finding of the
probate court that the property belonged to Pastor Lim was only WON this is an intra-corporate dispute?
provisional in nature.
HELD:
The CA ruled that, as gleaned from the pleadings of the parties, the action The Private Respondent’s Action in the RTC Does Not Involve an Intra-
involved intra-corporate controversies as defined in Section 5 of Corporate Dispute.
Presidential Decree (PD) No. 902-A; as such, the RTC had no jurisdiction 1. To determine whether a case involves an intra-corporate controversy,
over the action. However, in light of Rep. Act No. 8799 which transferred and is to be heard and decided by the Branches of the RTC specifically
to courts of general jurisdiction or the appropriate RTC cases over which designated by the Court to try and decide such cases, two elements
must concur: (a) the status or relationship of the parties; and (2) the Leslim’s corporate secretary. The private respondent further
nature of the question that is the subject of their controversy. averred that the amount of P3,900,000.00, the purchase price of
2. The first element requires that the controversy must arise out of intra- the property under the deed of absolute sale, was not paid to
corporate or partnership relations between any or all of the parties Leslim, and that petitioners Spouses Marcelo and petitioner Pedro
and the corporation, partnership or association of which they are Aquino contrived the said deed to consummate their devious
stockholders, members or associates; between any or all of them and scheme and chicanery. The private respondent concluded that the
the corporation, partnership or association of which they are Deed of Absolute Sale was simulated; hence, null and void.
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it The Private Respondent is a Real Party-in-Interest as Plaintiff.
concerns their individual franchises.
3. The second element requires that the dispute among the parties be The private respondent filed the complaint as one of the heirs of Pastor
intrinsically connected with the regulation of the corporation. If the Lim, who died intestate on June 11, 1994. She was, in fact, the surviving
nature of the controversy involves matters that are purely civil in spouse of the deceased, a compulsory heir by operation of law. The
character, necessarily, the case does not involve an intra-corporate general rule under the law on succession is that successional rights are
controversy. The determination of whether a contract is simulated or transmitted from the moment of death of the decedent and compulsory
not is an issue that could be resolved by applying pertinent provisions heirs are called upon to succeed by operation of law to the inheritance
of the Civil Code. without the need of further proceedings.
4. In the present recourse, it is clear that the private respondent’s
complaint in the RTC is not an intra-corporate case. All the Compulsory Heirs of the Decedent and Leslim Corporation are
 For one thing, the private respondent has never been a stockholder Indispensable Parties.
of Leslim, or of Speed for that matter.
 The complaint is one for the nullification of the deed of absolute In her complaint, the private respondent sought the nullification of the
sale executed by Leslim in favor of Speed over the property Deed of Absolute Sale executed by Leslim Corporation in favor of Speed, as
covered by TCT No. T-36617 in the name of Leslim, the cancellation well as TCT No. T-36617 under its name. Thus, Leslim Corporation is an
of TCT No. T-116716 in the name of Speed, as well as the indispensable party, and should be impleaded as a party-defendant
Secretary’s Certificate dated August 22, 1994. conformably to Section 7, Rule 3 of the Rules of Court, as amended.
 The private respondent alleged that since her deceased husband,
Pastor Lim, acquired the property during their marriage, the said IN LIGHT OF ALL THE FOREGOING, the petition is DISMISSED. The records
property is conjugal in nature, although registered under the are remanded to the Regional Trial Court of Quezon City, Branch 222, for
name of Leslim under TCT No. T-36617. further proceedings on the merits of the case.
 She asserted that the petitioners connived to deprive the estate of
Pastor Lim and his heirs of their possession and ownership over the
said property using a falsified Secretary’s Certificate stating that INTESTATE ESTATE OF ALEXANDER TY V. COURT OF APPEALS, 356 SCRA
the Board of Directors of Leslim had a meeting on August 19, 1995, 661 (2001),
when, in fact, no such meeting was held. (digest ponente, Haulo)
 Petitioner Lita Lim was never a stockholder of Leslim or a member FACTS:
of its Board of Directors; her husband, petitioner Ireneo Marcelo 1. Petitioner Sylvia S. Ty was married to Alexander T. Ty, son of private
was the Vice-President of Speed; and, petitioner Pedro Aquino was respondent Alejandro B. Ty, on January 11, 1981. Alexander died of
leukemia on May 19, 1988 and was survived by his wife, petitioner intra-corporate in nature and jurisdiction consequently falls with the
Sylvia, and only child, Krizia Katrina. In the settlement of his estate, SEC.
petitioner was appointed administratrix of her late husband’s 2. Presidential Decree 902-A did not confer upon the SEC absolute
intestate estate. jurisdiction and control over all matters affecting corporations,
2. On November 4, 1992, petitioner filed a motion for leave to sell or regardless of the nature of the transaction which gave rise to such
mortgage estate property in order to generate funds for the payment disputes (Jose Peneyra, et. al. vs. Intermediate Appellate Court, et. al.,
of deficiency estate taxes in the sum of P4,714,560.00. Included in 181 SCRA 245 [1990] citing DMRC Enterprises vs. Este del Sol
the inventory of property were the following: (basically shares of stock Mountain Reserve, Inc., 132 SCRA 293 [1984]).
of different companies) 3. The better policy in determining which body has jurisdiction over this
3. Private respondent Alejandro Ty then filed two complaints for the case would be to consider, not merely the status of the parties
recovery of the above-mentioned property, ..praying for the involved, but likewise the nature of the question that is the subject of
declaration of nullity of the deed of absolute sale of the shares of the controversy (Viray vs. Court of Appeals, 191 SCRA 309 [1990]).
stock executed by private respondent in favor of the deceased When the nature of the controversy involves matters that are purely
Alexander, and civil in character, it is beyond the ambit of the limited jurisdiction of
 Civil Case ..praying for the recovery of the pieces of property that the SEC (Saura vs. Saura, Jr., 313 SCRA 465 [1999]).
were placed in the name of deceased Alexander by private 4. In the cases at bar, the relationship of private respondent when he
respondent, the same property being sought to be sold out, sold his shares of stock to his son was one of vendor and vendee,
mortgaged, or disposed of by petitioner. nothing else.
 Private respondent claimed in both cases that even if said  The question raised in the complaints is whether or not there was
property were placed in the name of deceased Alexander, they indeed a sale in the absence of cause or consideration.
were acquired through private respondent’s money, without any  The proper forum for such a dispute is a regular trial court.
cause or consideration from deceased Alexander.  The Court agrees with the ruling of the Court of Appeals that no
4. Motions to dismiss were filed by petitioner. Both motions alleged lack special corporate skill is necessary in resolving the issue of the
of jurisdiction of the trial court, claiming that the cases involved intra- validity of the transfer of shares from one stockholder to another
corporate dispute cognizable by the Securities and Exchange of the same corporation. Both actions, although involving
Commission (SEC). different property, sought to declare the nullity of the transfers of
said property to the decedent on the ground that they were not
Petitioner argues that the present case involves a suit between two supported by any cause or consideration, and thus, are
stockholders of the same corporation which thus places it beyond the considered void ab initio for being absolutely simulated or
jurisdictional periphery of regular trial courts and more within the fictitious.
exclusive competence of the SEC by reason of Section 5(b) of Presidential  The determination whether a contract is simulated or not is an
Decree 902-A, since repealed. issue that could be resolved by applying pertinent provisions of
the Civil Code, particularly those relative to obligations and
ISSUE:WON SEC has jurisdiction? NO contracts.
 Disputes concerning the application of the Civil Code are properly
HELD: cognizable by courts of general jurisdiction.
1. It does not necessarily follow that when both parties of a dispute are  No special skill is necessary that would require the technical
stockholders of a corporation, the dispute is automatically considered expertise of the SEC.
3. On account of the following specific allegations of petitioners in
It should also be noted that under the newly enacted Securities Regulation their petition before the SEC:
Code (Republic Act No. 8799), this issue is now moot and academic a. Since respondents, particularly respondent Mercedes
because whether or not the issue is intra-corporate, it is the regional trial Coloma (who was manager of the bank for 18 years)
court and not longer the SEC that takes cognizance of the controversy. assumed their position, there has been no declaration of
Under Section 5.2 of Republic Act No. 8799, original and exclusive cash dividend to the stockholders despite the big income
jurisdiction to hear and decide cases involving intra-corporate of the bank as shown in its latest financial statement
controversies have been transferred to courts of general jurisdiction or the hereto attached as Annex "X".
appropriate regional trial court. b. petitioners are unlawfully deprived of income from their
investment.
c. When asked to account for the undistributed profit,
LEONARDO M. ANDRES, LEONARDO C. ANDRES, FLORENTINO SANTOS, respondent Mercedes Coloma however, finds her excuse
DOMITILA MARCELO, ERLINDA ANDRES, ELVIRA SANTOS, RAFAEL AGRA by claiming that stock dividends were instead distributed
and CORAZON GAVINA AGRA, Petitioners, vs. JUSTICE SECRETARY d. Sad to say however, as far as petitioners can remember,
SERAFIN R. CUEVAS, in his capacity as Secretary of Justice, CITY no notice of such alleged declaration of stock dividends
PROSECUTOR OF MANDALUYONG, METRO-POLITAN TRIAL COURT OF was ever given to them
MANDALUYONG, BELEN G. SANTOS, JESUS SANTOS and MERCEDES S. e. For having committed the aforesaid fraudulent acts,
COLOMA, Respondents. respondents are liable in their personal capacity for
G.R. No. 150869; June 9, 2005; CARPIO MORALES; Chants whatever amount petitioners and the rural bank may
have been unlawfully deprived of. Unfortunately
FACTS: however, they are leaving the country anytime now and
1. petitioners, along with Julita Andres, Jesus Andres, Rolando are about to dispose of their property with intent to
Andres and Alicia Agra, as majority stockholders of the Rural Bank defraud herein petitioners, the Rural Bank of Pandi and
of Pandi, Bulacan, filed a Petition for Injunction, Mandamus, the innocent stockholders, depositors and borrowers
Nullification of Transfer of Shares, Call for Special Election, thereof.
Accounting, Damages, Production of Corporate Records with 4. private respondents filed a Complaint-Affidavit before the Office
prayer for Appointment of Management Committee pendente of the City Prosecutor of Mandaluyong City, charging petitioners
lite, and Issuance of Writs of Attachment and Temporary with perjury for making willful and corrupt assertions of falsehood
Restraining Order before the Securities and Exchange Commission on material matters.
(SEC) against private respondents Mercedes Coloma, Belen Santos 5. Private respondents likewise faulted petitioner Leonardo M.
and Jesus Santos (private respondents), together with Cecilia Andres for stating in the Affidavit of Merit for a Writ of
Andres, Ricaredo Andres, Richelle Marie Andres, Pia Marie Attachment attached to the SEC Petition that "respondents are
Andres, Diane Angeli Andres and Ricaredo Andres II, who were about to dispose of their properties with intent to defraud the
minority stockholders of said bank petitioners and their other creditors," on account of which
2. In the petition before the SEC, petitioners alleged, inter alia, that affidavit, a writ of attachment was issued
respondents-minority stockholders committed acts of a. allegedly causing damage to private respondents
mismanagement, fraud and conflict of interest as directors and Mercedes S. Coloma and Jesus Santos in the amount of
officers of the bank.
P30 million and to private respondent Belen G. Santos in a. The verification and certification against non-forum
the amount of P20 million. shopping appended to the petition was signed only by
6. Attached to the complaint for perjury were Minutes of Board petitioner Leonardo Andres.
Meetings and Stockholders’ Meetings approving declaration of 17. Petitioners subsequently filed, however, an Amended Petition
dividends and proof of payment through Schedules of Dividends, which was appended a verification and certification against non-
cashier’s checks, and Planters Development Bank checks issued to forum shopping signed by all of them
stockholders covering the period from May 3, 1981 to March 6, 18. CA dismissed the original petition, ratiocinating that the
1990, which documents, private respondents averred, indicated verification and certification of non-forum shopping attached
that from March 3, 1981 to July 27, 1990, a total of P1,960,564.00 thereto was signed by petitioner Leonardo Andres only and that
in stock and cash dividends was declared and consequently there was no showing that he was duly authorized by the other
received by all bank stockholders including petitioners petitioners to execute the same
7. In their Counter-Affidavit, petitioners stated that the questioned 19. Petitioners filed a Motion for Reconsideration which was denied
allegations in their SEC petition, prepared by their counsel and for lack of merit
couched in legal language, hence, not their choice, were made in 20. Petitioners thus come before this Court via petition for review on
good faith in the course of an intracorporate controversy. certiorari
8. an Information for perjury was filed against petitioners
9. Petitioners appealed the Mandaluyong City Prosecutor’s
resolution finding probable cause against them for perjury by ISSUE: Whether the CA was correct in dismissing the case? NO
Petition for Review before the Department of Justice (DOJ).
10. the DOJ, through Assistant Chief State Prosecutor Apolinario G. HELD:
Exevea, dismissed the Petition.
Petitioners argue that they filed, as a matter of right their Amended
11. Petitioners appealed to the Office of the Secretary of Justice.
Petition containing a new verification and certification of non-forum
12. in the SEC case, after receiving ex-parte evidence for petitioners
shopping signed by all of them within the reglementary period
following private respondents’ declaration in default for failure to
file their Answer within the reglementary period, the SEC found in a. Petitioners’ argument is well-taken.
favor of petitioners.  a party is given the right to file an amended pleading within the
13. then Secretary of Justice Silvestre H. Bello III reversed the DOJ time and upon the conditions specified and without the necessity
Resolution and directed the withdrawal of the Information for of obtaining leave of court since a party may amend his pleading
perjury against petitioners once, whether a new cause of action or change in theory is
14. On private respondents’ Motion for Reconsideration, then Justice introduced, as a matter of right at any time before a responsive
Secretary Serafin R. Cuevas reversed the February 18, 1998 pleading is served.
Resolution of then Secretary Bello and directed the refiling of the  amendment of pleadings is favored and should be liberally
Information for perjury against the petitioners allowed in the furtherance of justice in order to determine every
15. Petitioners moved for a reconsideration of then Secretary Cuevas’ case as far as possible on its merits without regard to
resolution which was denied. technicalities
16. petitioners filed a petition for certiorari under Rule 65 of the Rules
of Court before the CA
 petitioners filed an Amended Petition filed within the 60-day o Notatu dignum is petitioners’ ventilating before this
reglementary period for the filing of a petition for certiorari under Court the merits of their defenses. The issue of whether
Rule 65 of the Rules of Court they acted in good faith is best determined, however,
petitioners argue that the CA erred in affirming the January 20, 1999 and during the trial proper.
January 26, 2000 Resolutions of then o not the occasion for the full and exhaustive display of
their evidence. The presence or absence of the elements
Secretary Cuevas ordering the refiling of the information for perjury of the crime is evidentiary in nature and is a matter of
against them. defense that may be passed upon after a full-blown trial
on the merits.
 As a general rule, the Court will not issue writs of prohibition or o In fine, the validity and merits of a party’s defense or
injunction, preliminary or final, to enjoin or restrain criminal accusation, as well as admissibility of testimonies and
prosecution. In extreme cases though, the following exceptions to evidence, are better ventilated during trial proper than at
the rule have been recognized: the preliminary investigation level.
(1) when the injunction is necessary to afford adequate protection to the
constitutional rights of the accused;
(2) when it is necessary for the orderly administration of justice or to avoid As for petitioners’ suggestion that the DOJ should have deferred to the
oppression or multiplicity of actions; primary and exclusive jurisdiction of the SEC as what was involved was a
(3) when there is a prejudicial question which is subjudice; dispute among stockholders of the bank, a corporation duly registered
(4) when the acts of the officer are without or in excess of authority; with the SEC, and the allegedly perjurious statements were made by them
(5) where the prosecution is under an invalid law; ordinance or regulation; in connection with that case, the same is unavailing
(6) when double jeopardy is clearly apparent;
(7) where the Court has no jurisdiction over the offense;  the fact that the parties involved in the controversy are all
(8) where it is a case of persecution rather than prosecution; stockholders or that the parties involved are the stockholders
(9) where the charges are manifestly false and motivated by the lust for and the corporation does not necessarily place the dispute
vengeance; and within the loop of jurisdiction of the SEC.
(10) when there is clearly no prima facie case against the accused and a  Apart from the fact that perjury and intracorporate disputes are
motion to quash on that ground has been denied. two entirely different matters with entirely different elements,
 Petitioners have not shown, however, that the case at bar falls the SEC has no jurisdiction over criminal cases like perjury.
within any of the recognized exceptions above set forth.  At all events, under Section 5.2 of Republic Act No. 8799,
 Consistent with its policy of non-interference in the conduct of otherwise known as the Securities Regulation Code, which
preliminary investigations, and to leave to the investigating amended Section 5 of Presidential Decree 902-A, whether the
prosecutor sufficient latitude of discretion in the exercise of issue is intracorporate or not is no longer material, the SEC having
determination of what constitutes sufficient evidence as will been divested of its jurisdiction thereover
establish probable cause for filing of an information against a HELD: WHEREFORE, the petition is hereby DENIED.
supposed offender, this Court finds no reason to disturb the
finding of the appellate court that no grave abuse of discretion Calleja v. Panday
attended then Justice Cuevas’ resolution finding probable cause G.R. No. 168696 | February 28, 2006 | Austria-Martinez
for perjury against petitioners to hale them into court.
FACTS: Commission Cases arising within their respective territorial
- Respondents filed a petition with the Regional Trial jurisdiction with respect to the National Capital Region and within
Court for quo warranto with Damages and Prayer for Mandatory the respective provinces in the First to Twelve Judicial
and Prohibitory Injunction, Damages and Issuance of Temporary Region. Accordingly, in the Province of Camarines Sur, (Naga City)
Restraining Order against petitioners. RTC Branch 23 presided by the Hon. Pablo M. Paqueo, Jr. was
o Respondents alleged that from 1985 up to the filing of designated as “special court”
the petition with the trial court, they had been members - Petitioners no longer moved for reconsideration of the foregoing
of the board of directors and officers of St. John Hospital, Order and, instead, immediately elevated the case to this Court
Incorporated via a petition for review on certiorari under Rule 45
o Sometime in May 2005, petitioners, who are also among o In their Comment, respondents argue that the present
the incorporators and stockholders of said corporation, petition should be denied due course and dismissed on
forcibly and with the aid of armed men usurped the the grounds that (1) an appeal under Rule 45 is
powers which supposedly belonged to respondents. inappropriate in this case because the Order is merely an
- RTC-Br. 58 issued an Order transferring the case to the Regional interlocutory order; (2) a petition for review
Trial Court in Naga City since the verified petition showed on certiorari under Rule 45 is the wrong remedy under
petitioners therein (herein respondents) to be residents A.M. No. 04-9-07-SC, which provides that “all decisions
of Naga City, then pursuant to Section 7, Rule 66 of the 1997 and final orders in cases falling under the Interim Rules of
Rules of Civil Procedure, the action for quo warranto should be Corporate Rehabilitation and the Interim Rules of
brought in the Regional Trial Court exercising jurisdiction over the Procedure Governing Intra-Corporate Controversies
territorial area where the respondents or any of the respondents under Republic Act No. 8799 shall be appealable to the
resides. Court of Appeals through a petition for review under
- However, the Executive Judge of RTC, Naga City refused to receive Rule 43 of the Rules of Court;” and (3) the petition was
the case folder of the subject case for quo warranto, stating that intended merely to delay the proceedings in the trial
improper venue is not a ground for transferring court because when the case was transferred to Branch
a quo warranto case to another administrative jurisdiction. 21 of the Regional Trial Court, said court granted
- RTC-Br. 58 proceeded to issue and serve summons on herein petitioners’ motion to hold the proceedings in view of
petitioners (respondents below). Petitioner Tabora filed his the present petition pending before this Court.
Answer dated June 8, 2005, raising therein the affirmative
defenses of (1) improper venue, (2) lack of jurisdiction, and (3) ISSUE: What court has jurisdiction to hear the case?
wrong remedy of quo warranto. Thereafter, the other petitioners
also filed their Answer, also raising the same affirmative defenses. DECISION: A.M. No. 03-03-03-SC took effect as early as July 1, 2003 and it
- RTC-Br. 58 issued the assailed Order denying the Motion to was clearly provided therein that such petitions shall be filed in the Office
Dismiss for being a prohibited pleading and remanding the case to of the Clerk of Court in the official station of the designated Special
RTC Naga City: “Pursuant to this mandate of RA 8799, the Commercial Court. Since the official station of the designated Special
Supreme Court in the exercise of said mandated authority, Commercial Court for Camarines Sur is the Regional Trial Court
promulgated on November 21, 2000, A.M. No. 00-11-03-SC which in Naga City, respondents should have filed their petition with said court.
took effect 15 December 2000 designated certain branches of the - It should be noted that allegations in a complaint
Regional Trial Court to try and decide Securities and Exchange for quo warranto that certain persons usurped the offices, powers
and functions of duly elected members of the board, trustees designating certain branches of the Regional Trial Courts to try
and/or officers make out a case for an intra-corporate and decide cases formerly cognizable by the Securities and
controversy. Prior to the enactment of R.A. No. 8799, the Court, Exchange Commission. For the Fifth Judicial Region, this Court
adopting Justice Jose Y. Feria’s view, declared in Unilongo v. Court designated the following branches of the Regional Trial Court
of Appeals that Section 1, Rule 66 of the 1997 Rules of Civil [Camarines Sur (Naga City) Branch 23]
Procedure is “limited to actions of quo warranto against persons - The next question then is, which branch of the Regional Trial
who usurp a public office, position or franchise; public officers Court has jurisdiction over the present action
who forfeit their office; and associations which act as for quo warrato? Section 5 of the Interim Rules provides that the
corporations without being legally incorporated,” while petition should be commenced and tried in the Regional Trial
“[a]ctions of quowarranto against corporations, or against Court that has jurisdiction over the principal office of the
persons who usurp an office in a corporation, fall under the corporation. It is undisputed that the principal office of the
jurisdiction of the Securities and Exchange Commission and are corporation is situated at Goa, Camarines Sur. Thus, pursuant to
governed by its rules. (P.D. No. 902-A as amended). A.M. No. 00-11-03-SC and A.M. No. 03-03-03-SC, it is the Regional
- However, R.A. No. 8799 was passed and therefore, actions of quo Trial Court designated as Special Commercial
warranto against persons who usurp an office in a corporation, Courts in Camarines Sur which shall have jurisdiction over the
which were formerly cognizable by the Securities and Exchange petition for quo warranto filed by herein respondents.
Commission under PD 902-A, have been transferred to the courts - Evidently, the RTC-Br. 58 in San Jose, Camarines Sur is bereft of
of general jurisdiction. But, this does not change the fact that jurisdiction over respondents’ petition for quo warranto. Based
Rule 66 of the 1997 Rules of Civil Procedure does not apply on the allegations in the petition, the case was clearly one
toquo warranto cases against persons who usurp an office in a involving an intra-corporate dispute. The trial court should have
private corporation. been aware that under R.A. No. 8799 and the aforementioned
- As explained in the Unilongo case, Section 1(a) of Rule 66 of the administrative issuances of this Court, RTC-Br. 58 was never
present Rules no longer contains the phrase “or an office in a designated as a Special Commercial Court; hence, it was never
corporation created by authority of law” which was found in the vested with jurisdiction over cases previously cognizable by the
old Rules. Clearly, the present Rule 66 only applies to actions SEC.
of quo warranto against persons who usurp a public office, - Such being the case, RTC-Br. 58 did not have the requisite
position or franchise; public officers who forfeit their office; and authority or power to order the transfer of the case to another
associations which act as corporations without being legally branch of the Regional Trial Court. The only action that RTC-Br. 58
incorporated despite the passage of R.A. No. 8799. It is, could take on the matter was to dismiss the petition for lack of
therefore, The Interim Rules of Procedure Governing Intra- jurisdiction. In HLC Construction and Development Corp. v. Emily
Corporate Controversies Under R.A. No. 8799 (hereinafter the Homes Subdivision Homeowners’ Association, the Court held that
Interim Rules) which applies to the petition for quo warranto filed the trial court, having no jurisdiction over the subject matter of
by respondents before the trial court since what is being the complaint, should dismiss the same so the issues therein
questioned is the authority of herein petitioners to assume the could be expeditiously heard and resolved by the tribunal which
office and act as the board of directors and officers of St. John was clothed with jurisdiction.
Hospital, Incorporated.
- Pursuant to Section 5.2 of R.A. No. 8799, the Supreme Court
promulgated A.M. No. 00-11-03-SC (effective December 15, 2000)
4. Despite its solvent status, respondent filed a Petition for
Rehabilitation and for Declaration in a State of Suspension of
Orendain v. BF homes Payments under Section 4 of PD No. 1758 before SEC
5. In the said petition, respondent prayed that—in the meantime it
G.R. No. 146313October 31, 2006 ; MIKE was continuing its business operations—it be afforded time to pay
its aforesaid obligations, freed from various proceedings either
Doctrine: two elements must concur to determine if it’s an intra-corporate
judicially or extra-judicially against its assets and properties.
dispute
- Thereafter, on February 2, 1988, the SEC ordered the
The first element requires that the controversy must arise out of intra- appointment of a rehabilitation receiver, FBO Management
corporate or partnership relations between any or all of the parties and Networks, Inc., with petitioner Orendain as Chairman to
the corporation, partnership or association of which they are stockholders, prevent paralyzation of BF Homes’ business operations.
[
members or associates; between any or all of them and the corporation, 6. On October 8, 1993, a Deed of Absolute Sale was executed by
partnership or association of which they are stockholders, members or and between BF Homes—represented by petitioner Orendain—as
associates, respectively; and between such corporation, partnership or absolute and registered owner, and the Local Superior of the
association and the State insofar as it concerns their individual franchises. Franciscan Sisters of the Immaculate Phils., Inc. (LSFSIPI) over a
parcel of land.
The second element requires that the dispute among the parties be 7. Meanwhile, on November 7, 1994, the SEC hearing panel released
intrinsically connected with the regulation of the corporation. If the nature [10]
an Omnibus Order which admitted and confirmed the
of the controversy involves matters that are purely civil in character, Closing Report submitted by the receiver, petitioner Orendain.
necessarily, the case does not involve an intra-corporate controversy. The 8. In its August 22, 1995 Order,the SEC denied BF Homes’ and
determination of whether a contract is simulated or not is an issue that the intervenor-derivative suitor Eduardo S. Rodriguez’s motions
could be resolved by applying pertinent provisions of the Civil Code for reconsideration of its November 7, 1994 Omnibus Order.
9. On January 23, 1996, BF Homes filed a Complaint before the Las
Facts:
Piñas RTC against LSFSIPI and petitioner Orendain, for
1. BF Homes, Inc. is a domestic corporation operating under reconveyance of the property covered by TCT No. T-36482
Philippine laws and organized primarily to develop and sell - alleging, inter alia, that the LSFSIPI transacted with Orendain
residential lots and houses and other related realty business. in his individual capacity and therefore, neither FBO
2. Records show that respondent BF Homes had to avail itself of Management, Inc. nor Orendain had title to the property
financial assistance from various sources to enable it to buy transferred.
properties and convert them into residential subdivisions. - Moreover, BF Homes averred that the selling price was
3. This resulted in its incurring liabilities amounting to PhP grossly inadequate or insufficient amounting to fraud and
1,542,805,068.23as of July 31, 1984. On the other hand, during conspiracy with the LSFSIPI.
its business operations, it was able to acquire properties and
assets worth PhP 2,482,843,358.81 as of July 31, 1984, which, if - Hence, it prayed in the Complaint that LSFSIPI reconvey the
liquidated, were more than enough to pay all its creditors. disputed property or, if reconveyance was no longer feasible,
pay the present value of the property.
10. Florencio B. Orendain filed a Motion to Dismiss stating that (1) the depends on the ratification by the SEC of the acts of its agent
RTC had no jurisdiction over the reconveyance suit; (2) the or the receiver because the act of Orendain was allegedly not
Complaint was barred by the finality of the November 7, 1994 within the scope of his authority as receiver.
Omnibus Order of the SEC hearing panel; and (3) BF Homes, acting 6. Furthermore, the determination of the validity of the sale to
through its Committee of Receivers, had neither the interest nor LSFSIPI will necessitate the application of the provisions of the
the personality to prosecute the said action, in the absence of Civil Code on obligations and contracts, agency, and other
SEC’s clear and actual authorization for the institution of the said pertinent provisions.
suit. 7. In addition, jurisdiction over the case for reconveyance is clearly
11. CA: dismissed it vested in the RTC as provided in paragraph (2), Section 19, B.P.
Issue/held: Blg. 129
Jurisdiction in civil cases. – Regional Trial Courts shall
1. WON the trial court has jurisdiction over the reconveyance suit? exercise exclusive [and] original jurisdiction
YES
1. jurisdiction over the subject matter is conferred by law. The (1) In all civil actions in which the subject of the
nature of an action, as well as which court or body has litigation is incapable of pecuniary estimation; and
jurisdiction over it, is determined based on the allegations (2) In all civil actions which involve the title to, or
contained in the complaint of the plaintiff, irrespective of possession of, real property or any interest therein,
whether or not plaintiff is entitled to recover upon all or some where the assessed value of the property involved
of the claims asserted therein. It cannot depend on the exceeds Twenty Thousand pesos (P20,000.00) or for
defenses set forth in the answer, in a motion to dismiss, or in a civil actions in Metro Manila, where such value
motion for reconsideration by the defendant exceeds Fifty Thousand pesos (P50,000.00)
2. In the case at bench, the BF Homes’ Complaint for reconveyance
was filed on January 23, 1996 against LSFSIPI and Florencio B.
Orendain, in Civil Case No. LP-96-002.
3. Clearly, the controversy involves matters purely civil in character ALDERITO Z. YUJUICO, BONIFACIO C. SUMBILLA, and DOLNEY S.
and is beyond the ambit of the limited jurisdiction of the SUMBILLA
SEC. As held in Viray v. Court of Appeals, “[t]he better policy in vs.
determining which body has jurisdiction over a case would be CEZAR T. QUIAMBAO, JOSE M. MAGNO III, MA. CHRISTINA F. FERREROS,
to consider not only [1] the status or relationship of the ANTHONY K. QUIAMBAO, SIMPLICIO T. QUIAMBAO, JR., ERIC C. PILAPIL,
parties but also [2] the nature of the question that is the ALBERT M. RASALAN, and REGIONAL TRIAL COURT, BRANCH 48,
subject of their controversy.” URDANETA CITY
4. The LSFSIPI is neither an officer nor a stockholder of BF Homes, SANDOVAL-GUTIERREZ, J.: G.R. No. 168639 January 29, 2007; NILO
and this case does not involve intra-corporate proceedings. In FACTS:
addition, the seller, petitioner Orendain, is being sued in his 1. Strategic Alliance Development Corporation (STRADEC) is a
individual capacity for the unauthorized sale of the property in domestic corporation engaged in the business of providing
controversy. financial and investment advisory services and investing in
5. Hence, we find no cogent reason to sustain petitioner’s projects through consortium or joint venture information.
manifestation that the resolution of the instant controversy
A. From its inception, STRADEC’s principal place of business 6. On November 2, 2004, petitioners filed their Answer with
was located at the 24th Floor, One Magnificent Mile- Counterclaim prayed for the dismissal of the complaint on the
Citra Building, San Miguel Avenue, Ortigas Center, Pasig following grounds, among others:
City. On July 27, 1998, the Securities and Exchange A. (a) the complaint does not state a cause of action; (b) the
Commission (SEC) approved the amendment of action is barred by prescription for it was filed beyond
STRADEC’s Articles of Incorporation authorizing the the 15-day prescriptive period provided by Section 2,
change of its principal office from Pasig City to Rule 6 of the Interim Rules and Procedure Governing
Bayambang, Pangasinan. Intra-Corporate Controversies under Republic Act (R.A.)
2. STRADEC held its annual stockholders’ meeting in its Pasig City No. 8799; (c) respondents’ prayer that a special
office as indicated in the notices sent to the stockholders. At the stockholders’ meeting be held in Bayambang, Pangasinan
said meeting, the following were elected members of the Board of "is premature pending the establishment of a principal
Directors: Alderito Z. Yujuico, Bonifacio C. Sumbilla, Dolney S. office of STRADEC in said municipality;" and (d)
Sumbilla (petitioners herein), Cesar T. Quiambao, Jose M. Magno respondents waived their right to object to the venue as
III and Ma. Christina Ferreros (respondents herein). Petitioners they attended and participated in the said March 1, 2004
Alderito Yujuico was elected Chairman and President, while meeting and election without any protest.
Bonifacio Sumbilla was elected Treasurer. All of them then 7. Judge Meliton Emuslan still issued an Order granting
discharged the duties of their office. respondents’ application for preliminary injunction ordering (1)
3. After five (5) months, respondents filed with the Regional Trial the holding of a special stockholders’ meeting of STRADEC on
Court (RTC), San Carlos City, Pangasinan a Complaint against December 10, 2004 "in the principal office of the corporation in
STRADEC (represented by herein petitioners as members of its Bayambang, Pangasinan;"
Board of Directors). 8. On December 10, 2004, petitioners, claiming that a motion for
A. The complaint prays that: (1) the March 1, 2004 election reconsideration is a prohibited pleading under Section 8(3), Rule 1
be nullified on the ground of improper venue, pursuant of the Interim Rules of Procedure Governing Intra-Corporate
to Section 51 of the Corporation Code; (2) all ensuing Controversies under R.A. No. 8799, filed with the Court of Appeals
transactions conducted by the elected directors be a Petition for Certiorari with Prayer for the Issuance of a TRO
likewise nullified; and (3) a special stockholders’ meeting and/or Preliminary Injunction, assailing Judge Emuslan’s
be held anew. November 25, 2004 Order. The petition was docketed as CA-G.R.
4. Subsequently, respondents filed an Amended Complaint dated SP No. 87785. In the proceedings before the appellate court,
September 2, 2004 further praying for the issuance of a petitioners raised the following issues:
temporary restraining order (TRO) and/or writ of preliminary A. Only the SEC, not the RTC, has jurisdiction to order the
injunction to enjoin petitioners from discharging their functions as holding of a special stockholders’ meeting involving an
directors and officers of STRADEC. intra-corporate controversy;
5. As the controversy involves an intra-corporate dispute, the trial B. Judge Emuslan acted with grave abuse of discretion
court, on October 4, 2004, issued an Order transferring Civil Case amounting to lack or excess of jurisdiction in granting the
No. SCC-2874 to RTC, Branch 48, Urdaneta City, being a writ of preliminary injunction.
designated Special Commercial Court. The case was then re- 9. Meanwhile, on the same day (December 10), as directed in the
docketed as Civil (SEC) Case No. U-14. November 25, 2004 Order of Judge Emuslan, a special
stockholders’ meeting of STRADEC was held in Bayambang,
Pangasinan wherein a new set of directors were elected for the 4. among the stockholders, partners or associates themselves."
term 2004-2005.
10. On March 31, 2005, the Court of Appeals rendered a Decision There is thus no dispute that respondents’ complaint in Civil (SEC) Case No.
dismissing the Petition for Certiorari. It upheld the jurisdiction of U-14 before the RTC, Branch 48, Urdaneta City involves an intra-corporate
the RTC over the controversy and sustained the validity of Judge controversy, the contending parties being stockholders and officers of a
Emuslan’s Order of November 25, 2004. Petitioners’ motion for corporation.
reconsideration was denied in a Resolution dated June 29, 2005. Originally, Section 5 of Presidential Decree (P.D.) No. 902-A bestowed the
11. Hence, the instant Petition for Review on Certiorari. SEC original and exclusive jurisdiction over cases involving the following:
A. FIRST, petitioners contend that the Court of Appeals a) Devices or schemes employed by, or any act of, the board of
erred in ruling that the RTC has the power to call a directors, business associates, its officers or partners, amounting
special stockholders’ meeting involving an intra- to fraud and misrepresentation which may be detrimental to the
corporate controversy. They maintain that it is only the interest of the public and/or of the stockholders, partners, or
SEC that may do so to be held under its supervision. members of associations registered with the Commission;
B. The respondents, in their comment, counter that the b) Controversies arising out of intra-corporate or partnership
appellate court correctly ruled that the power to hear relations, between and among stockholders, members or
and decide controversies involving intra-corporate associates; between any or all of them and the corporation,
disputes, as well as to act on matters incidental and partnership or association and the State insofar as it concerns
necessary thereto, have been transferred from the SEC their individual franchise or right as such entity;
to the RTCs designated as Special Commercial Courts. It c) Controversies in the election or appointment of directors,
would be the height of absurdity, they argue, to require trustees, officers or managers of such corporations, partnership
the filing of a separate case with the SEC for the sole or associations;
purpose of asking the said agency to order the holding of d) Petitioners of corporations, partnerships or associations to be
a special stockholders’ meeting where there is already a declared in the state of suspension of payment in cases where the
pending case involving the same matter before the corporation, partnership or association possesses sufficient
proper court. property to cover all its debts but foresees the impossibility of
meeting them when they fall due or in cases where the
ISSUE: WON RTC HAS THE POWER TO CALL A SPECIAL STOCKHOLDERS’ corporation, partnership or association has no sufficient assets to
MEETING? cover its liabilities but is under the management of a
RULING: YES rehabilitation receiver or management committee created
pursuant to this Decree.
An intra-corporate controversy is one which "pertains to any of the
following relationships: Upon the enactment of R.A. No. 8799, otherwise known as "The Securities
1. between the corporation, partnership or association and the Regulation Code" which took effect on August 8, 2000, the jurisdiction of
public; the SEC over intra-corporate controversies and other cases enumerated in
2. between the corporation, partnership or association and the State Section 5 of P.D. No. 902-A has been transferred to the courts of general
in so far as its franchise, permit or license to operate is concerned; jurisdiction, or the appropriate RTC. Section 5.2 of R.A. No. 8799 provides:
3. between the corporation, partnership or association and its
stockholders, partners, members or officers; and
5.2. The Commission’s jurisdiction over all cases enumerated in Section 5 d) the supervision, monitoring, suspension or take over the activities
of Presidential Decree No. 902-A is hereby transferred to the Courts of of exchanges, clearing agencies, and other SROs;
general jurisdiction or the appropriate Regional Trial Court, Provided, That e) the imposition of sanctions for the violation of laws and the rules,
the Supreme Court in the exercise of its authority may designate the regulations and orders issued pursuant thereto;
Regional Trial Court branches that shall exercise jurisdiction over these f) the issuance of cease-and-desist orders to prevent fraud or injury
cases. to the investing public;
 The Commission shall retain jurisdiction over pending cases g) the compulsion of the officers of any registered corporation or
involving intra-corporate disputes submitted for final resolution association to call meetings of stockholders or members thereof
which should be resolved within one (1) year from the enactment under its supervision; and
of this Code. The Commission shall retain jurisdiction over h) the exercise of such other powers as may be provided by law as
pending suspension of payments/rehabilitation cases filed as of well as those which may be implied from, or which are necessary
30 June 2000 until finally disposed. or incidental to the carrying out of, the express powers granted
the Commission to achieve the objectives and purposes of these
laws."
Pursuant to R.A. No. 8799, the Court issued a Resolution dated November
21, 2000 in A.M. No. 00-11-03-SC designating certain branches of the RTC Clearly, the RTC has the power to hear and decide the intra-corporate
to try and decide cases enumerated in Section 5 of P.D. No. 902-A. Branch controversy of the parties herein. Concomitant to said power is the
48 of RTC, Urdaneta City, the court a quo, is among those designated as a authority to issue orders necessary or incidental to the carrying out of the
Special Commercial Court. On March 13, 2001, the Court approved the powers expressly granted to it. Thus, the RTC may, in appropriate cases,
Interim Rules of Procedure Governing Intra-Corporate Controversies under order the holding of a special meeting of stockholders or members of a
R.A. No. 8799 which took effect on April 1, 2001. Sections 1 and 2, Rule 6 corporation involving an intra-corporate dispute under its supervision.
of the said Rules provide:
SEC. 1. Cases covered. – The provisions of this rule shall apply to election ISSUE: WON RTC JUDGE COMMITTED GRAVE ABUSE OF DISCRETION IN
contests in stock and non-stock corporations. ISSUING THE WRIT OF INJUNCTION? YES
 To repeat, the purpose of the writ of preliminary injunction is to
In Morato v. Court of Appeals, we held that pursuant to R.A. No. 8799 and preserve the status quo until the court could hear the merits of
the Interim Rules of Procedure Governing Intra-Corporate Controversies, the case. The status quo is the last actual peaceable uncontested
"among the powers and functions of the SEC which were transferred to the status that preceded the controversy which, in the instant case, is
RTC include the following: the holding of the annual stockholders’ meeting on March 1, 2004
a) jurisdiction and supervision over all corporations, partnerships or and the ensuing election of the directors and officers of STRADEC.
associations which are the grantees of primary franchises and/or But instead of preserving the status quo, Judge Emuslan’s Order
a license or permit issued by the Government; messed it up when, in compliance therewith, a special
b) the approval, rejection, suspension, revocation or requirement for stockholders’ meeting was held anew and a new set of directors
registration statements, and registration and licensing and officers of STRADEC was elected. That effectively resolved
applications; respondents’ principal action without even a full-blown trial on
c) the regulation, investigation, or supervision of the activities of the merits since the Order impliedly ruled that the March 1, 2004
persons to ensure compliance; annual stockholders’ meeting and election are void. Verily, the
issuance of the questioned Order violates the established
principle that courts should avoid granting a writ of preliminary Special Corporate Court can call for a stockholders’ meeting, Rule 6 (citing
injunction that would in effect dispose of the main case without Sections 1 and 2) of the Interim Rules completely puts to rest said issue.
trial. xxx
 Equally important is the fact that the Order was issued even Clearly, therefore, said Rule empowers the special corporate courts to
though respondents’ right to an injunctive relief is doubtful or has decide election cases x x x
been vehemently disputed.
 We note that petitioners, in their answer with counterclaim,  As pointed out by petitioners in their answer with counterclaim,
raised serious and valid defenses, among which is that the action under Section 3, Rule 6 of the Interim Rules of Procedure
is premature since the principal office of STRADEC in Bayambang, Governing Intra-Corporate Controversies under R.A. No. 8799, an
Pangasinan is yet to be established, as authorized by the SEC. election contest must be "filed within 15 days from the date of
Obviously, pending the establishment of a principal office in the election." It was only on August 16, 2004 that respondents
Bayambang, Pangasinan, all the stockholders’ meetings of instituted an action questioning the validity of the March 1, 2004
STRADEC have been properly held in their principal office in Pasig stockholders’ election, clearly beyond the 15-day prescriptive
City. period.
 Another weighty defense raised by petitioners is that the action  In sum, Judge Emuslan, in granting the writ of preliminary
has prescribed. One of the reliefs sought by respondents in the injunction, acted with grave abuse of discretion amounting to lack
complaint is the nullification of the election of the Board of or excess of jurisdiction.
Directors and corporate officers held during the March 1, 2004
annual stockholders’ meeting on the ground of improper venue, WHEREFORE, we GRANT the instant petition and reverse the assailed
in violation of the Corporation Code. Hence, the action involves an Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 87785.
election contest, falling squarely under the Interim Rules of
Procedure Governing Intra-Corporate Controversies under R.A.
No. 8799. Baviera v. Paglinawan, 515 SCRA 170 (2007), (digest ponente, Haulo)
It is important to note that the Court of Appeals itself ruled that
respondents’ action before the RTC, Branch 48, Urdaneta City is an FACTS:
election contest, thus: 1. Manuel Baviera, petitioner in these cases, was the former head of the
Likewise, as clearly provided in Section 1, Rule 1 of the Interim Rules of HR Service Delivery and Industrial Relations of Standard Chartered
Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, Bank-Philippines (SCB), one of herein respondents. SCB is a foreign
among the intra-corporate controversies transferred to the special courts banking corporation
are: 2. Pursuant to Resolution No. 1142 dated December 3, 1992 of the
xxx Monetary Board of the BangkoSentralngPilipinas (BSP), the conduct of
(3) Controversies in the election or appointment of directors, trustees, SCB’s business in this jurisdiction is subject to the following conditions:
officers, or managers of corporation, partnerships or associations;  At the end of a one-year period from the date the SCB starts its
xxx trust functions, at least 25% of its trust accounts must be for the
Undoubtedly, therefore, the instant case is an intra-corporate controversy account of non-residents of the Philippines and that actual
among the stockholders themselves relative to the election of directors or foreign exchange had been remitted into the Philippines to fund
officers of STRADEC, specifically between respondents x x x on one hand such accounts or that the establishment of such accounts had
and petitioners x x x on the other. x x x. If there is still any doubt that the reduced the indebtedness of residents (individuals or
corporations or government agencies) of the Philippines to non-  Meanwhile, in a Resolution11 dated April 4, 2004, the DOJ
residents. At the end of the second year, the above ratio shall be dismissed petitioner’s complaint in I.S. No. 2004-229 (violation of
50%, which ratio must be observed continuously thereafter; Securities Regulation Code), holding that it should have been
3. Apparently, SCB did not comply with the above conditions. Instead, filed with the SEC.
as early as 1996, it acted as a stock broker, soliciting from local 8. Hence, the instant petitions for review on certiorari.
residents foreign securities called "GLOBAL THIRD PARTY MUTUAL
FUNDS" (GTPMF), denominated in US dollars. These securities were ISSUE:For our resolution is the fundamental issue of whether the Court of
not registered with the Securities and Exchange Commission (SEC). Appeals erred in concluding that the DOJ did not commit grave abuse of
These were then remitted outwardly to SCB-Hong Kong and SCB- discretion in dismissing petitioner’s complaint in I.S. 2004-229 for violation
Singapore. of Securities Regulation Code and his complaint in I.S. No. 2003-1059 for
4. SCB’s counsel, Romulo Mabanta Buenaventura Sayoc and Delos syndicated estafa.
Angeles Law Office, advised the bank to proceed with the selling of
the foreign securities although unregistered with the SEC, under the HELD:
guise of a "custodianship agreement;" and should it be questioned, it
shall invoke Section 723 of the General Banking Act (Republic Act The Court of Appeals held that under the above provision, a criminal
No.337).4 In sum, SCB was able to sell GTPMF securities worth around complaint for violation of any law or rule administered by the SEC must
P6 billion to some 645 investors. first be filed with the latter. If the Commission finds that there is probable
5. However, SCB’s operations did not remain unchallenged. On July 18, cause, then it should refer the case to the DOJ. Since petitioner failed to
1997, the Investment Capital Association of the Philippines (ICAP) filed comply with the foregoing procedural requirement, the DOJ did not
with the SEC a complaint alleging that SCB violated the Revised gravely abuse its discretion in dismissing his complaint in I.S. No. 2004-229.
Securities Act, particularly the provision prohibiting the selling of
securities without prior registration with the SEC; and that its actions 1. A criminal charge for violation of the Securities Regulation Code is a
are potentially damaging to the local mutual fund industry. specialized dispute.
 SCB denied offering and selling securities, contending that it has 2. Hence, it must first be referred to an administrative agency of special
been performing a "purely informational function" without competence, i.e., the SEC.
solicitations for any of its investment outlets abroad; that it has a 3. Under the doctrine of primary jurisdiction, courts will not determine a
trust license and the services it renders under the "Custodianship controversy involving a question within the jurisdiction of the
Agreement" for offshore investments are authorized by Section administrative tribunal, where the question demands the exercise of
726 of the General Banking Act; that its clients were the ones sound administrative discretion requiring the specialized knowledge
who took the initiative to invest in securities; and it has been and expertise of said administrative tribunal to determine technical
acting merely as an agent or "passive order taker" for them. and intricate matters of fact.
6. On February 7, 2004, petitioner filed with the DOJ a complaint for 4. The Securities Regulation Code is a special law. Its enforcement is
violation of Section 8.19 of the Securities Regulation Code against particularly vested in the SEC. Hence, all complaints for any violation
private respondents, docketed as I.S. No. 2004-229. of the Code and its implementing rules and regulations should be filed
7. On February 23, 2004, the DOJ rendered its Joint Resolution10 with the SEC. Where the complaint is criminal in nature, the SEC shall
dismissing petitioner’s complaint for syndicated estafa in I.S. No. indorse the complaint to the DOJ for preliminary investigation and
2003-1059; … prosecution as provided in Section 53.1 earlier quoted.
We thus agree with the Court of Appeals that petitioner committed a fatal 6. CMC filed a motion for the issuance of a temporary restraining
procedural lapse when he filed his criminal complaint directly with the order and a writ of preliminary injunction with the SEC to enjoin
DOJ. Verily, no grave abuse of discretion can be ascribed to the DOJ in the foreclosure of the real estate mortgage.
dismissing petitioner’s complaint. 7. SEC issued a temporary restraining order to maintain the status
quo and ordered the immediate transfer of the case records to
the trial court.
CONSUELO METAL CORPORATION, petitioner, vs. PLANTERS 8. Trial court denied CMC’s motion for issuance of a temporary
DEVELOPMENT BANK and ATTY. JESUSA PRADO-MANINGAS, in her restraining order saying that since the SEC had already terminated
capacity as Ex-officio Sheriff of Manila, respondents and decided on the merits CMC’s petition for suspension of
G.R. No. 152580. June 26, 2008. J.Carpio payment, the trial court no longer had legal basis to act on CMC’s
(Bon) motion.
9. The trial court ruled that CMC’s petition for suspension of
Doctrine: While the SEC has jurisdiction to order the dissolution of a payment could not be converted into a petition for dissolution
corporation, jurisdiction over the liquidation of the corporation now and liquidation because they covered different subject matters
pertains to the appropriate regional trial courts—the liquidation of a and were governed by different rules.
corporation requires the settlement of claims for and against the 10. CMC filed a petition for certiorari with the Court of Appeals.
corporation, which clearly falls under the jurisdiction of the regular courts. a. CMC alleged that the trial court acted with grave abuse
of discretion amounting to lack of jurisdiction when it
Facts: required CMC to file a new petition for dissolution and
1. On 1 April 1996, CMC filed before the SEC a petition to be liquidation with either the SEC or the trial court when the
declared in a state of suspension of payment, for rehabilitation, SEC clearly retained jurisdiction over the case.
and for the appointment of a rehabilitation receiver or 11. Planters Bank extrajudicially foreclosed the real estate mortgage.
management committee. 12. Court of Appeals dismissed the petition and upheld the order of
2. SEC found the petition sufficient in form and substance, declared the trial court.
the suspension of payment. a. The Court of Appeals held that the trial court correctly
3. SEC directed the creation of a management committee to denied CMC’s motion for the issuance of a temporary
undertake CMC’s rehabilitation and reiterated the suspension of restraining order because it was only an ancillary remedy
all actions for claims against CMC. to the petition for suspension of payment which was
4. Upon the management committee’s recommendation, the SEC already terminated.
issued an Omnibus Order directing the dissolution and liquidation b. Section 121 of the Corporation Code,14 the SEC has
of CMC. The SEC also directed that “the proceedings on and jurisdiction to hear CMC’s petition for dissolution and
implementation of the order of liquidation be commenced at the liquidation.
Regional Trial Court to which this case shall be transferred.” 13. CMC argued that it does not have to file a new petition for
5. Rspondent Planters Development Bank (Planters Bank), one of dissolution and liquidation with the SEC but that the case should
CMC’s creditors, commenced the extra-judicial foreclosure of just be remanded to the SEC as a continuation of its jurisdiction
CMC’s real estate mortgage. over the petition for suspension of payment. CMC also asked that
Planters Bank’s foreclosure of the real estate mortgage be
declared void.
14. Later, Court of Appeals partially granted CMC’s motion for  The SEC assumed jurisdiction over CMC’s petition for suspension
reconsideration and ordered that the case be remanded to the of payment and issued a suspension order on 2 April 1996 after it
SEC under Section 121 of the Corporation Code. found CMC’s petition to be sufficient in form and substance.
15. The Court of Appeals also ruled that since the SEC already ordered While CMC’s petition was still pending with the SEC as of 30 June
CMC’s dissolution and liquidation, Planters Bank’s foreclosure of 2000, it was finally disposed of on 29 November 2000 when the
the real estate mortgage was in order. SEC issued its Omnibus Order directing the dissolution of CMC and
the transfer of the liquidation proceedings before the appropriate
Issue: trial court.
 Does case fall under Section 121 of the Corporation Code, which  The SEC finally disposed of CMC’s petition for suspension of
refers to the SEC’s jurisdiction over CMC’s dissolution and payment when it determined that CMC could no longer be
liquidation, or is it only a continuation of the SEC’s jurisdiction successfully rehabilitated.
over CMC’s petition for suspension of payment?
Trial Court’s Jurisdiction on Liquidation
Held:  While the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the corporation
The SEC has jurisdiction to order CMC’s dissolution but the trial court has now pertains to the appropriate regional trial courts.
jurisdiction over CMC’s liquidation.  This is the reason why the SEC, in its 29 November 2000 Omnibus
Order, directed that “the proceedings on and implementation of
SEC has jurisdiction over suspension of payments. the order of liquidation be commenced at the Regional Trial Court
 Republic Act No. 8799 (RA 8799)15 transferred to the appropriate to which this case shall be transferred.”
regional trial courts the SEC’s jurisdiction defined under Section  This is the correct procedure because the liquidation of a
5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799 corporation requires the settlement of claims for and against the
provides: corporation, which clearly falls under the jurisdiction of the
o “The Commission’s jurisdiction over all cases enumerated regular courts. The trial court is in the best position to convene
under Sec. 5 of Presidential Decree No. 902-A is hereby all the creditors of the corporation, ascertain their claims, and
transferred to the Courts of general jurisdiction or the determine their preferences.
appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may Decision: WHEREFORE, we DENY the petition. We REINSTATE the 29
designate the Regional Trial Court branches that shall November 2000 Omnibus Order of the Securities and Exchange
exercise jurisdiction over these cases. The Commission Commission directing the Regional Trial Court, Branch 46, Manila to
shall retain jurisdiction over pending cases involving immediately undertake the liquidation of Consuelo Metal Corporation. We
intra-corporate disputes submitted for final resolution AFFIRM the ruling of the Court of Appeals that Planters Development
which should be resolved within one (1) year from the Bank’s extra-judicial foreclosure of the real estate mortgage is valid.
enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000
until finally disposed. (Emphasis supplied) SEC v. Interport Resources Corporation, et al., 567 SCRA 354 (2008) –
Chantal (Supra)

ADVANCED SECURITIES Case Digests (ATTY. MIGALLOS)

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494 U.S.

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 1

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 2

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 3

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 4

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 5

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 6

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 7

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 8

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 9

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 10

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 11

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 12

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 13

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 14

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 15

FACTS: 3. The modus operandi of Koscot and its investors is as follows.

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 16

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 17

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 18

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 19

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 20

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 21

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 22

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 23

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 24

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 25

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 26

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 27

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 28

1. When a person would deposit an amount, the amount would be

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 29

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 30

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 31

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 32

WON they can be convicted with PD 1689? YES

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 33

ISSUE: 3. It is clear that the term "investment contract" as interpreted in the

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 34

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 35

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 36

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 37

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 38

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 39

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 40

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 41

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 42

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 43

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 44

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 45

 Moreover, the deposits cannot be merely treated as FACTS:

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 46

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 47

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 48

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 49

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 50

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 51

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 52

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 53

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 54

It may be argued that the Article 62(8) is a specific provision in the

Advanced Securities – Atty. Migallos | CALUAG, CHUA, HAULO, RICO, SUCGANG, UY ( R E A D O R I G I N A L C A S E S ) 55