CASES

DISCUSSED IN CLASS/MIDTERMS CASE REVIEWER THING:

Registration of Securities

Power Homes Unli Corp v SEC

Power Homes was investigated for allegedly selling real estate
without the proper brokers license. Upon investigation, it was found out
that they were also selling securities without having registered with the
SEC. Pyramid Scheme. This was held to be an investment contract under
the Howey Test.
Howey Test. It states that an investment contract requires a
transaction, contract or scheme whereby a person (1) makes an
investment of money; (2) in a common enterprise; (3) with the expectation
of profits; and (4) to be derived solely from the efforts others.

SEC v Prosperity Corp, Inc.

The case involved a pyramid scheme wherein the first line buyer is
to acquire a website from PCI and then garner added benefits if they were
to hire buyers down the line. The court used the Howey Test and ruled that
requisite #1 and 4 were not present. First, there was no investment as
they clients bought the product of PCI a website. Second, profit was not
derived solely from the efforts of others as PCI also sold websites.

Francis Lim: Why did the court rule differently in the two cases? What is
the current rule if we take into account the Turner test which says that #4
should say primarily instead of solely?

Nestle Philippines v CA
An increase in authorized capital stock prompted Nestle to issue
more stocks to its current stockholders. The SEC then contends that this
transaction should be registered in accordance with the rules. SC: Only the
issuance of already authorized but still unissued stock MUST be
registered. The case of Nestle is an exemption.

Francis Lim: Is this the current ruling? NO. Under the revised SRC, any
issuance, whether from an increase of authorized capital stock or not, as
long as it is issued exclusively to current stockholders, need not be
registered.

Gustafson v Alloyd Co

Is a prospectus in a private sale contract, evidenced by a Deed of
Sale, covered by the Securities Regulation Code?

NO. Prospectus is the term used for a document soliciting the
public to acquire securities from a certain company. The Securities
Regulation Code does not cover private sales. This is so even when the
private sale is that of stocks of a corporation.

Francis Lim: The U.S. Securities Code only says sale hence this debate.
However, the Philippine SRC specifically states sale to the public. The
PH Securities Law is much better than the US Securities Law.

Disclosure Requirements

Basic, Inc. v Levinson

The case involved a merger between Basic, Inc. and Combustion.
Injured former and current stockholders are suing based on nondisclosure
of material public information. Basic, Inc.s main defense was the
agreement-in-principle theory. The plaintiffs, on the other hand, instituted
a class action suit and did not individually state their loss causation
because of the fraud-on-the-market theory.
Agreement-in-Principle Theory. This theory states that until the
parties to a merger agree on both the price and the structure of the new
surviving company, there is no need for disclosure.
CAs Defenses for the Agreement-in-Principle Theory vis--vis
SCs decision.
(1) CA: Investor should not be overwhelmed with
discussions that are inherently tentative. SC: This assumes that
investors are nitwits that are unable to understand the risky
propositions of a merger.
(2) CA: A merger is confidential. SC: This seems irrelevant
to an assessment whether their existence is significant to the
trading decision of a reasonable investor. To avoid a "bidding war"
over its target, an acquiring firm often will insist that negotiations
remain confidential.
(3) CA: This provides a bright line rule for mergers on the
need to disclose information. SC: Not a good enough justification!
SECREG MIDTERMS CASE NOTES Atty. Francis Lim
(Sad attempt) By: Jeah


Fraud-on-the-market Theory. This theory states that all
stock/securities prices are a reflection of all available information in the
market. Essentially, all fraud results from these information.

Reliance Presumption. This presumption gives the causal
connection between the misrepresentation and the economic loss suffered
by the respondents.

State Teachers v Fluor

The case involved a bidding for a Coal Gasification Plant in South
Africa. Contract bore a stipulation of confidentiality. The plaintiffs are
currently suing for nondisclosure of material information. SC: In light of
Flours agreement not to disclose the said contract, there has been no
violation for disclosure committed by Fluor as there was yet no duty to
disclose. Further, it was not a secret that Fluor had placed a bid on the
project. Therefore, it cannot be treated as material non-public information.

People v Tan

Articles of Information best evidence for authorized capital
stock of a corporation when suing someone for acquisition of a certain
percentage that would lead to mandatory disclosure. No AoI = No proof =
Acquittal.

Dura Pharmaceuticals Inc v Broudo

The case involved Duras representation that the FDA would
approve its asthmatic device and sales were to go up. When this did not
occur, injured investors decide to sue based on inflated purchase price. SC:
Mere allegation of inflated purchase price is not enough. This is because
when one buys at an inflated price, he still garners a stock that is
supposedly the same price. For there to be a cause of action, loss must
be proven.

Elements of a cause of action. (1) Material mispresentation or
omission (2) Economic loss (3) Scienter (intent to defraud) (4) Reliance

Proxy Solicitation

Mills c Electric Autolite (1970)

The case involved a merger between Electric Autolite and MLC.
The management of Electric Autolite had sent proxy solicitations regarding

the merger without disclosing that the officers of the two merging
corporations were practically the same people. The injured stockholders
are now suing.
SC: Loss causation does not have to be proven BUT materiality of
the nondisclosed information is important. The misrepresentations are
material when they are related to subject matter which might have been
considered important by a reasonable shareholder who was in the process
of deciding how to vote.

TSC v Northway (1976)

The case involed a joint proxy statement wherein National was to
buy out all the stocks of TSC. The injured party alleges that there were
material information omitted such as opinions from investment bankers
and transactions with mutual funds.

Tests for Materiality.
CA of this case: WON it might affect stockholders
actions! CA was saying that it does not matter whether or not the
information is trivial.
SC of this case: Substantial Likelihood Test. It should be
WON it would have affected stockholders actions.

Francis Lim: Does this apply in our PH setting? We do not know! THESIS
TOPIC. The SRC should delineate what is material and what isnt for more
efficient rules on disclosure!

Tender Offer

Cemco Holdings, Inc. v National Life Insurance Co.

The case involved Cemco Holdings garnering shares from a nonpublic holding company and through that transaction indirectly garnering
shares from a public company and bypassing the mandatory tender offer.
SEC previously advised that there was no need for a Tender Offer as they
were only buying shares of the non-public holding company but then
reversed and said a Tender Offer is needed.

SC: TENDER OFFER NEEDED. This applies even though ownership
was acquired indirectly.

SECREG MIDTERMS CASE NOTES Atty. Francis Lim

(Sad attempt) By: Jeah

Francis Lim: Does this apply in the PH context? YES. In fact, our Securities
Regulation Code adapts this in the rules.

Current case: The Liberty Tender Offer

PLDT & Globe have acquired a corporation previously owned by
San Miguel named Liberty to be able to use the frequency of 700MHz that
is currently in its possession.

Francis Lim: Should this be under a mandatory tender offer if Globe and
PLDT both do not reach the threshold individually? YES because the code
says that a tender offer can be done alone or in concert with others

Francis Lim: What was their defense in that they did not have to tender
offer? That Liberty was not publicly traded and that it was only Vega that
was publicly traded. Will this reasoning stand? NO. See Cemco case.

Current case: The Splash Tender Offer

Splash, in an effort to delist, has filed for an issuer tender offer to
buy back all its stocks.

Manipulative and Fraudulent Practices

Important Provision:
Section 26. Fraudulent Transactions. It shall be unlawful for any person,
directly or indirectly, in connection with the purchase or sale of any
securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a
material fact of any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which
they were made, not misleading; or
26.3. Engage in any act, transaction, practice or course of business which
operates or would operate as a fraud or deceit upon any person.

SEC v CA

The stock transfer agent of Philex Mining negligently misplaced its
stocks. It is then found out that its employees, for personal gain, forged
signatures and sold the stocks. SC: Fidelity not liable under Sec 26(3)

To constitute, a violation of Section 26(3), fraud or deceit, not
mere negligence, on the part of the offender must be established.

Francis Lim: In Sec 26(3) the law provides that scienter is necessary; other
sections are not discussed. Do you agree? Well, Francis Lim seems to not
agree because would operate as a fraud or deceit signifies that there
does not have to be actual fraud or deceit. (?)

Aaron v CA

This case interprets the US counterpart provision of Sec 26 (which
is Sec17) as follows:
The language of 17(a) strongly suggests that Congress
contemplated a scienter requirement under 17(a)(1), but not under
17(a)(2) or 17(a)(3). The language of 17(a)(1) evinces an intent on
Congress to proscribe only knowing or intentional misconduct. Even if it
be assumed that the term "defraud" is ambiguous, the terms "device,"
"scheme," and "artifice" all connote knowing or intentional practices. The
language of 17(a)(2), which prohibits any person from obtaining money
or property "by means of any untrue statement of a material fact or
anyomission to state a material fact," is devoid of any suggestion
whatsoever of a scienter requirement or intent to defraud." Finally, the
language of 17(a)(3), under which it is unlawful for any person "to
engage in any transaction, practice, or course of business which operates
or would operate as a fraud or deceit," quite plainly focuses upon the
effect of particular conduct on members of the investing public, rather
than upon the culpability of the person responsible.

Ernst & Ernst v Hockfelder

This case revolved around an auditing company which audited a
corporation whose president defrauded the stockholders and committed
suicide right after. The stockholders are now suing the auditing company.

SC: No accusation of intent equates to no liability under Section
17(a)(1). Scienter is an important requirement!

Francis Lim: So in the US cases, only the first one requires scienter? Do you
agree? Does the PH courts agree? NO. See SEC v CA.


SECREG MIDTERMS CASE NOTES Atty. Francis Lim
(Sad attempt) By: Jeah

Wharf Ltd v United International Holdings

The case involved an oral option contract to buy 10% of Wharf
Holdings Stock in exchange for assistance in garnering an HK cable
television franchise. Ultimately, Wharf refused to acknowledge this oral
contract. SC: There was no "convincing reason to interpret the Act to
exclude oral contracts as a class. The Act itself says that it applies to 'any
contract' for the purchase or sale of a security.



Affiliated Ute Citizens v US

This case involved the partition act of the Indians to the allocation
of the resources awarded to them by the US. To facilitate, a corporation
was created. Two bank managers failed to disclose stock valuations s well
as certain rights that the tribe members had when they sold their stocks to
whites. The SEC held the bank liable together with the bank managers.

Francis Lim: This case emphasizes that the extraordinary diligence of banks
extends even to the selection and supervision of their employees.

SEC v Zandford

Where a stockbroker participates in a deceitful scheme in which
he yields sales of his customers securities for his own benefit, such
deceitful behavior is in connection with the purchase or sale of any
security as defined by 10(b).

Francis Lim: In connection with is broad enough to include even those
that are NOT arising from" a securities transaction.

Birnbaum v Newport

The case involved a president and major shareholder of a
corporation suddenly selling all of his stock in the middle of negotiations of
a merger with another company. The alleged injured parties are the other
shareholders who believe to be left captive by the new corporation that
was to take over. SC: NO CAUSE OF ACTION.
Classes protected by 10(b). (1) Misrepresentaition or fraudulent
practice usually associated with the sale or purchase of securities OR (2)
actual purchaser or seller.
In this case, they were not parties to the sale AT ALL.

Blue Chip v Manor

Pursuant to an anti-trust decree, Blue Chip had to divest 55% of
its securities to Manor Drug Stores. Blue Chip lied in its prospectus. Manor
Drug Stores naturally declined thereby allowing Blue Chip to sell to the
general public at higher rates. Manor Drug Stores found out about the
fraud and are now suing.

SC: NOT PURCHASER/SELLER. No cause of action. The SEC had
attempted to get Congress to amend 10b-5 to contain any attempt to
purchase or sell a security, but Congress had declined to do this. Congress
desired to restrict 10b-5 to cases of actual damage, and if we were to
apply the provision to the said case, evidence of damage would be too
theoretical. This case reiterates the Birnbaum Doctrine.

Insider Trading

US v Chestman

President of the corporation told her children about a possible
merger with a bigger corporation. One of the children told her husband.
The husband contacts a stockbroker for advise. The stockbroker uses
information for himself. Stockbroker is held liable. Can the husband be
sued?

SC: NO. The misappropriation theory states that it must first be
proven that there was a fiduciary duty to withhold the information. A
fiduciary relationship does not arise simply by entrusting a person with
confidential information, nor does marriage or family automatically create
a fiduciary relationship. However, the frequent discussion of business
affairs amongst family members is sufficient to amount to a relationship of
trust and confidence.

Misappropriation Theory. To be liable as an aider or abetter, the
tipper must owe a fiduciary duty of confidentiality to the corporation and
the aider and abetter must know of the tippers breach of fiduciary duty.

Francis Lim: Does the misappropriation theory apply in the PH? THESIS
TOPIC?

SECREG MIDTERMS CASE NOTES Atty. Francis Lim

(Sad attempt) By: Jeah