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SECOND DIVISION

SECURITIES AND EXCHANGE G.R. No. 154131


COMMISSION,
Petitioner, Present:

PUNO, J., Chairperson,


SANDOVAL-GUTIERREZ,
- versus - CORONA,
AZCUNA, and
GARCIA, JJ.

PERFORMANCE FOREIGN Promulgated:


EXCHANGE CORPORATION,
Respondent. July 20, 2006

x -------------------------------------------------------------------------------------- x

DECISION

SANDOVAL-GUTIERREZ, J.:
For our resolution is the Petition for Review on Certiorari [1] assailing the
Decision[2] dated February 11, 2002 and Resolution dated July 3, 2002 of the Court
of Appeals in CA-G.R. SP No. 65217, entitled Performance Foreign Exchange
Corporation, petitioner, versus Securities and Exchange Commission, respondent.

The pertinent facts as found by the Court of Appeals are:

Performance Foreign Exchange Corporation, herein respondent, is a


domestic corporation duly registered on June 23, 1998 under
Securities and Exchange Commission (SEC) Registration No. A199808910, with
the following purposes:

Primary Purpose
To operate as a broker/agent between market participants in
transactions involving, but not limited to, foreign exchange, deposits,
interest rate instruments, fixed income securities, bonds/bills,
repurchased agreements of fixed income securities, certificate of
deposits, bankers acceptances, bills of exchange, over-the-counter option
of the aforementioned instruments, Lesser Developed Countrys (L.D.C.)
debt, energy and stock indexes and all related, similar or derivative
products, other than acting as a broker for the trading of securities
pursuant to the Revised Securities Act of the Philippines.

Secondary Purpose

To engage in money changer or exchanging foreign currencies


into domestic currency, Philippine currency or other foreign currencies
into another currencies.

After two years of operation, respondent received a letter dated November


28, 2000 from the SEC, herein petitioner, requiring it to appear before the
Compliance and Enforcement Department (CED) on December 14, 2000 for
a clarificatory conference regarding its business operations. Respondents officers
complied and explained before the CED the nature of their business.

On January 16, 2001, Emilio B. Aquino, Director of CED, issued a Cease


and Desist Order,[3] in CED Case No. 99-2297, stating that his department
conducted an inquiry on respondents business operations for possible violation of
Republic Act (R.A.) No. 8799 (otherwise known as The Securities Regulation
Code); that the outcome of the inquiry shows that respondent is engaged in the
trading of foreign currency futures contracts in behalf of its clients without the
necessary license; that such transaction can be deemed as a direct violation of
Section 11 of R.A. No. 8799[4] and the related provisions of its Implementing Rules
and Regulations; and that it is imperative to enjoin respondent from further
operating as such to protect the interest of the public. The dispositive portion of the
said Order reads:

WHEREFORE, pursuant to the authority vested in the Commission,


PERFORMANCE FOREIGN EXCHANGE CORPORATION, its
officers, directors, agents, representatives, and any and all persons
claiming and acting under their authority, are hereby ordered to
immediately CEASE AND DESIST from further engaging in the
solicitation of funds for foreign currency trading and operating as a
foreign currency futures merchant/broker, upon receipt of this
Order.
In accordance with the provisions of Section 64.3 [5] of Republic
Act 8799, otherwise known as the Securities Regulation Code, the
parties subject of this Cease and Desist Order may file a request for the
lifting thereof within five (5) days from receipt hereof.

SO ORDERED.

On January 25, 2001, respondent filed with petitioner SEC a


motion[6] praying for the lifting of the Cease and Desist Order, alleging that: (a) it
has not violated any law or regulation in the conduct of its business; (b) it has been
operating in accordance with the purposes for which it was organized, which
purposes were duly approved by petitioner; (c) it has not engaged
in currency futures contracts trading; and (d) its business involves spot currency
trading which is not a form of currency futures transaction.
On February 8, 2001, then SEC Chairman Lilia R. Bautista, in her desire to
know with certainty the nature of respondents business, sent a letter[7] to
the BangkoSentral ng Pilipinas (BSP), requesting a definitive statement that
respondents business transactions are a form of financial derivatives and, therefore,
can only be undertaken by banks or non-bank financial intermediaries performing
quasi-banking functions.

Without waiting for BSPs determination of the matter, petitioner, the


following day (February 9, 2001), issued an Order [8] denying respondents motion
for the lifting of the Cease and Desist Order and directing that the same stays until
respondent shall have submitted the appropriate endorsement from the BSP
that it can engage in financial derivative transactions. The Order states that the
contracts entered into, offered and sold by respondent are in the nature
of commodity futures contracts;[9] and that such contracts may be considered a form
of financial derivatives instruments, the trading of which is regulated by BSP.

On February 16, 2001, respondent filed a Manifestation With Urgent


Motion[10] praying that, pending determination by the BSP of the real nature of its
business, the implementation of the February 9, 2001 Order be temporarily
suspended to allow it to continue its operations.
On March 15, 2001, respondent, in compliance with petitioners February 9,
2001 Order requiring it to submit the appropriate BSP endorsement, presented
before the BSP panel of officers a summary of its operations and its foreign
exchange spot product.

On April 23, 2001, petitioner issued an Order [11] making the Cease and Desist
Order permanent, thus:

WHEREAS, on February 19, 2001, PFEC filed with the


Commission its Manifestation with Urgent Motion to Temporarily
Suspend Implementation of Order dated 09 February 2001, which
Manifestation was denied by the Commission en banc during its
meeting on February 22, 2001, and the said denial was
conveyed verbally to the corporation;

WHEREFORE, premises considered, and pursuant to the


authority vested in the Commission, the Cease and Desist Order is now
made permanent, and Performance Foreign Exchange Corporation is
hereby directed to show cause within thirty (30) days from receipt of
this Order why its certificate of registration should not be revoked for
violation of the Securities Regulation Code, and/or PD 902-A
specifically on the ground of serious misrepresentation as to what
the corporation can do or is doing, to the great prejudice or damage
to the general public. (Underscoring supplied)

On May 4, 2001, respondent filed a motion [12] praying that the said Order be
set aside. Petitioner, however, did not act on the motion. This prompted respondent
to file with petitioner a notice[13] dated June 14, 2001 that it is withdrawing its
motion in order to seek a more appropriate and speedy remedy.

Feeling the injurious effects of petitioners acts to its business operations,


respondent, on June 20, 2001, filed with the Court of Appeals a Petition for
Certiorari[14] with prayer for a temporary restraining order and preliminary
injunction, docketed as CA-G.R. SP No. 65217. Respondent alleged, among
others, that petitioner SEC acted without or in excess of its jurisdiction or with
grave abuse of discretion when it issued the Cease and Desist Order and its
subsequent Order making the same permanent without waiting for
the BSPs determination of the real nature of its business operations; and that
petitioners Orders, issued without any factual basis, violated its (respondents)
fundamental right to due process.

Meanwhile, on August 13, 2001, Amado M. Tetangco, Jr., then Officer-in-


Charge, Office of the Governor, BSP, in answer to SEC Chairman Lilia Bautistas
letter-request of February 8, 2001, stated that respondents business activity does
not fall under the category of futures trading and can not be classified as
financial derivatives transactions, thus:

Dear Ms. Bautista,

This refers to your letter dated February 8, 2001 requesting for a


definitive statement that the foreign currency leverage trading engage in
by private corporations, particularly, Performance Foreign Exchange
Corporation (PFEC), is a financial derivatives transaction and that it can
only be undertaken by banks or non-bank financial intermediaries
performing quasi-banking functions and/or its subsidiaries/affiliates.

As indicated in your description of the transactions and the


documents submitted, the foreign currency leverage trading, subject
of your query, is essentially similar in mechanics to currency future
trading, particularly with respect to the margin requirements, standard
contract size, and daily market-to-market of open position. However, it
does not fall under the category of futures trading because it is not
exchange-traded. Further, we can not classify it as being financial
derivatives transactions as we consider the transaction as plain
currency margin trading, which by its mechanics, involve the set-up of
margin and non-delivery of the currencies involved.

In view of the foregoing facts, the activities of the aforesaid


corporation are not covered by BSP guidelines on derivative licensing.

We hope we have satisfactorily clarified your concerns.

Very truly yours,


(Sgd.)
AMANDO M. TETANGCO, JR. [15]
On February 11, 2002, the Court of Appeals rendered a Decision [16] in favor
of respondent, thus:
WHEREFORE, premises considered, the instant petition
is GRANTED and accordingly, the assailed Orders dated January 16,
2001, February 9, 2001, February 22, 2001 and April 23, 2001 of the
Securities and Exchange Commission are SET ASIDE.
SO ORDERED.

The Court of Appeals ruled that petitioner acted with grave abuse of
discretion when it issued its challenged Orders without a positive factual
finding that respondent violated the Securities Regulation Code.

Petitioner filed a motion for reconsideration but it was denied by the


appellate court in a Resolution[17] dated July 3, 2002.

Hence, the instant Petition for Review on Certiorari.

Petitioner, through the Solicitor General, contends that the Court of Appeals
erred in not applying the rule that factual findings of quasi-judicial bodies, like the
SEC, which have acquired expertise because their jurisdiction is confined to
specific matters, are generally accorded not only respect but even finality if such
findings are supported by substantial evidence.[18]

In its Comment,[19] respondent counters that the instant petition utterly lacks
merit and should be dismissed.

The issue for our resolution is whether petitioner SEC acted with grave
abuse of discretion in issuing the Cease and Desist Order and its subsequent Order
making it permanent.

Section 64 of R.A. No. 8799, provides:

Sec. 64. Cease and Desist Order. 64.1. The Commission, after
proper investigation or verification, motu proprio, or upon verified
complaint by any aggrieved party, may issue a cease and desist
order without the necessity of a prior hearing if in its judgment the act
or practice, unless restrained, will operate as a fraud on investors or
is otherwise likely to cause grave or irreparable injury or prejudice
to the investing public.
x x x. (Underscoring supplied)

Under the above provision, there are two essential requirements that must be
complied with by the SEC before it may issue a cease and desist order: First, it
must conduct proper investigation or verification; and Second, there must be a
finding that the act or practice, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to
the investing public.

Here, the first requirement is not present. Petitioner did not conduct proper
investigation or verification before it issued the challenged
orders. The clarificatoryconference undertaken by petitioner regarding respondents
business operations cannot be considered a proper investigation or verification
process to justify the issuance of the Cease and Desist Order. It was merely
an initial stage of such process, considering that after it issued the said order
following the clarificatory conference, petitioner still soughtverification from the
BSP on the nature of respondents business activity. Its letter to the BSP dated
February 8, 2001 states in part:

The Securities and Exchange Commission has been


investigating corporations which engage in foreign currency trading
abroad. The following illustrates their operations:

xxx

Enclosed are pertinent documents which were submitted by a


corporation showing how its transactions operate. It is claimed by the
corporation in question that theirs are all spot transactions and are not
covered by the Bangko Sentral ng Pilipinas. We understand, however,
that in other jurisdiction, this type of activity can only be done by banks.

Previous inquiries from the Bangko Sentral ng Pilipinas,


specifically Department of Commercial Banks II, and your department,
Commercial Banks I, lead to conclude that this kind of trading in foreign
currencies may be a form of financial derivatives.
May we, therefore, request a definitive statement that the
above-described transactions, and as illustrated in the attached
documents, are a form of financial derivatives and, therefore, can
only be undertaken by banks, or non-bank financial intermediaries
performing quasi-banking functions and/or its subsidiaries/affiliates.
[20]
(Underscoring supplied)

Petitioners act of referring the matter to the BSP is an essential part of the
investigation and verification process. In fact, such referral indicates that
petitioner concedes to the BSPs expertise in determining the nature of respondents
business. It bears stressing, however, that such investigation and verification, to be
proper, must be conducted by petitioner before, not after, issuing the Cease and
Desist Order in question. This, petitioner utterly failed to do. The issuance of such
order even before it could finish its investigation and verification on
respondents business activity obviously contravenes Section 64 of R.A. No. 8799
earlier quoted.

Worse, when respondent filed a motion praying that the same order be lifted for
being premature, petitioner, in its Order dated February 9, 2001, even denied the
motion despite its admission therein that it cannot determine certain material
facts involving respondents transactions and, as such, the matter must be referred
to the BSP for determination, thus:

In the light of the above circumstances, and the fact that the
Commission cannot determine whether such transactions are
actually executed in Singapore or Hongkong as alleged, and whether
the foreign currency rates used in the transactions are verifiable, it is
our position that the same be endorsed to the BSP.

In view of the foregoing, the cease and desist order stays against
the corporation until the latter shall be able to submit the appropriate
endorsement from the Bangko Sentral ng Pilipinasthat it can engage in
financial derivative transactions.

SO ORDERED.[21] (Underscoring supplied)


And worst, without waiting for BSPs action, petitioner proceeded to issue its
Order dated April 23, 2001 making the Cease and Desist Order permanent. In the
same Order, petitioner further directed respondent to show cause x x x why its
certificate of registration should not be revoked for alleged violation of the
Securities Regulation Code and/or Presidential Decree No. 902-A, specifically on
the ground of serious misrepresentation as to what the corporation can do or is
doing to the great prejudice or damage to the general public. Obviously,
without BSPs determination of the nature of respondents business, there was no
factual and legal basis to justify the issuance of such order.

Which brings us to the second requirement. Before a cease and desist order
may be issued by the SEC, there must be a showing that the act or practice sought
to be restrained will operate as a fraud on investors or is likely to cause grave,
irreparable injury or prejudice to the investing public. Such requirement implies
that the act to be restrained has been determined after conducting the proper
investigation/verification. In this case, the nature of the act to be restrained can
only be determined after the BSP shall have submitted its findings to
petitioner. However, there is nothing in the questioned Orders that shows how the
public is greatly prejudiced or damaged by respondents business operation.

In sum, we find no reversible error committed by the Court of Appeals in


rendering its assailed Decision and Resolution.

WHEREFORE, we DENY the petition. The challenged Decision and


Resolution of the Court of Appeals in CA-G.R. SP No. 65217 are AFFIRMED.

SO ORDERED.
CEMCO HOLDINGS, INC., G.R. No. 171815

Petitioner,
Present:

YNARES-SANTIAGO, J.,

Chairperson,
AUSTRIA-MARTINEZ,
- versus -
CHICO-NAZARIO, and
NACHURA, JJ.

Promulgated:

NATIONAL LIFE August 7, 2007


INSURANCE COMPANY OF
THE PHILIPPINES, INC.,

Respondent.

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- - -x

DECISION

CHICO-NAZARIO, J.:

This Petition for Review under Rule 45 of the Rules of Court


seeks to reverse and set aside the 24 October 2005
Decision[1] and the 6 March 2006 Resolution [2] of the Court of
Appeals in CA-G.R. SP No. 88758 which affirmed the
judgment[3] dated 14 February 2005 of the Securities and
Exchange Commission (SEC) finding that the acquisition of
petitioner Cemco Holdings, Inc. (Cemco) of the shares of stock
of Bacnotan Consolidated Industries, Inc. (BCI) and Atlas Cement
Corporation (ACC) in Union Cement Holdings Corporation (UCHC)
was covered by the Mandatory Offer Rule under Section 19 of
Republic Act No. 8799, otherwise known as the Securities
Regulation Code.

The Facts

Union Cement Corporation (UCC), a publicly-listed company,


has two principal stockholders UCHC, a non-listed company, with
shares amounting to 60.51%, and petitioner Cemco with
17.03%. Majority of UCHCs stocks were owned by BCI with
21.31% and ACC with 29.69%. Cemco, on the other hand, owned
9% of UCHC stocks.

In a disclosure letter dated 5 July 2004, BCI informed the


Philippine Stock Exchange (PSE) that it and its subsidiary ACC had
passed resolutions to sell to Cemco BCIsstocks in UCHC
equivalent to 21.31% and ACCs stocks in UCHC equivalent to
29.69%.

In the PSE Circular for Brokers No. 3146-2004 dated 8 July


2004, it was stated that as a result of
petitioner Cemcos acquisition of BCI and ACCs shares in UCHC,
petitioners total beneficial ownership, direct and indirect, in UCC
has increased by 36% and amounted to at least 53% of the shares
of UCC, to wit[4]:

Particulars Percentage
Existing shares of Cemco in UCHC 9%
Acquisition by Cemco of BCIs and ACCs 51%
shares in UCHC
Total stocks of Cemco in UCHC 60%
Percentage of UCHC ownership in UCC 60%
Indirect ownership of Cemco in UCC 36%
Direct ownership of Cemco in UCC 17%
Total ownership of Cemco in UCC 53%

As a consequence of this disclosure, the PSE, in a letter to


the SEC dated 15 July 2004, inquired as to whether the Tender
Offer Rule under Rule 19 of the Implementing Rules of the
Securities Regulation Code is not applicable to the purchase by
petitioner of the majority of shares of UCC.

In a letter dated 16 July 2004, Director Justina Callangan of


the SECs Corporate Finance Department responded to the query
of the PSE that while it was the stance of the department that the
tender offer rule was not applicable, the matter must still have to
be confirmed by the SEC en banc.
Thereafter, in a subsequent letter dated 27 July 2004,
Director Callangan confirmed that the SEC en banc had resolved
that the Cemco transaction was not covered by the tender offer
rule.

On 28 July 2004, feeling aggrieved by the transaction,


respondent National Life Insurance Company of the Philippines,
Inc., a minority stockholder of UCC, sent a letter
to Cemco demanding the latter to comply with the rule on
mandatory tender offer. Cemco, however, refused.

On 5 August 2004, a Share Purchase Agreement was


executed by ACC and BCI, as sellers, and Cemco, as buyer.

On 12 August 2004, the transaction was consummated and


closed.

On 19 August 2004, respondent National Life Insurance


Company of the Philippines, Inc. filed a complaint with the SEC
asking it to reverse its 27 July 2004 Resolution and to declare the
purchase agreement of Cemco void and praying that the
mandatory tender offer rule be applied to its UCC
shares. Impleaded in the complaint were Cemco, UCC, UCHC, BCI
and ACC, which were then required by the SEC to file their
respective comment on the complaint. In their comments, they
were uniform in arguing that the tender offer rule applied only to
a direct acquisition of the shares of the listed company and did
not extend to an indirect acquisition arising from the purchase of
the shares of a holding company of the listed firm.

In a Decision dated 14 February 2005, the SEC ruled in favor


of the respondent by reversing and setting aside its 27 July 2004
Resolution and directed petitioner Cemco to make a tender offer
for UCC shares to respondent and other holders of UCC shares
similar to the class held by UCHC in accordance with Section 9(E),
Rule 19 of the Securities Regulation Code.

Petitioner filed a petition with the Court of Appeals


challenging the SECs jurisdiction to take cognizance of
respondents complaint and its authority to require Cemco to make
a tender offer for UCC shares, and arguing that the tender offer
rule does not apply, or that the SECs re-interpretation of the rule
could not be made to retroactively apply to Cemcos purchase of
UCHC shares.

The Court of Appeals rendered a decision affirming the ruling


of the SEC. It ruled that the SEC has jurisdiction to render the
questioned decision and, in any event, Cemco was barred
by estoppel from questioning the SECs jurisdiction. It, likewise,
held that the tender offer requirement under the Securities
Regulation Code and its Implementing Rules applies
to Cemcos purchase of UCHC stocks. The decretal portion of the
said Decision reads:
IN VIEW OF THE FOREGOING, the assailed decision of the SEC is
AFFIRMED, and the preliminary injunction issued by the Court LIFTED. [5]

Cemco filed a motion for reconsideration which was denied


by the Court of Appeals.

Hence, the instant petition.

In its memorandum, petitioner Cemco raises the following


issues:

I.
ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER
NATIONAL LIFES COMPLAINT AND THAT THE SECS RE-INTERPRETATION
OF THE TENDER OFFER RULE IS CORRECT, WHETHER OR NOT THAT
REINTERPRETATION CAN BE APPLIED RETROACTIVELY TO CEMCOS
PREJUDICE.

II.
WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE
DISPUTE BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT
REQUIRING CEMCO TO MAKE A TENDER OFFER FOR UCC SHARES.

III.

WHETHER OR NOT CEMCOS PURCHASE OF UCHC SHARES IS SUBJECT


TO THE TENDER OFFER REQUIREMENT.

IV.
WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA
DECISION, IS AN INCOMPLETE JUDGMENT WHICH PRODUCED NO
EFFECT.[6]
Simply stated, the following are the issues:

1. Whether or not the SEC has jurisdiction over respondents


complaint and to require Cemco to make a tender offer for
respondents UCC shares.

2. Whether or not the rule on mandatory tender offer applies to


the indirect acquisition of shares in a listed company, in this
case, the indirect acquisition by Cemco of 36% of UCC, a
publicly-listed company, through its purchase of the shares in
UCHC, a non-listed company.

3. Whether or not the questioned ruling of the SEC can be


applied retroactively to Cemcos transaction which was
consummated under the authority of the SECs prior resolution.

On the first issue, petitioner Cemco contends that while the


SEC can take cognizance of respondents complaint on the alleged
violation by petitioner Cemco of the mandatory tender offer
requirement under Section 19 of Republic Act No. 8799, the same
statute does not vest the SEC with jurisdiction to adjudicate and
determine the rights and obligations of the parties since, under
the same statute, the SECs authority is purely
administrative. Having been vested with purely administrative
authority, the SEC can only impose administrative sanctions such
as the imposition of administrative fines, the suspension or
revocation of registrations with the SEC, and the like. Petitioner
stresses that there is nothing in the statute which authorizes the
SEC to issue orders granting affirmative reliefs. Since the SECs
order commanding it to make a tender offer is an affirmative relief
fixing the respective rights and obligations of parties, such order
is void.
Petitioner further contends that in the absence of any
specific grant of jurisdiction by Congress, the SEC cannot, by
mere administrative regulation, confer on itself that jurisdiction.

Petitioners stance fails to persuade.

In taking cognizance of respondents complaint against


petitioner and eventually rendering a judgment which ordered the
latter to make a tender offer, the SEC was acting pursuant to Rule
19(13) of the Amended Implementing Rules and Regulations of
the Securities Regulation Code, to wit:
13. Violation

If there shall be violation of this Rule by pursuing a purchase of


equity shares of a public company at threshold amounts without the
required tender offer, the Commission, upon complaint, may nullify the
said acquisition and direct the holding of a tender offer. This shall be
without prejudice to the imposition of other sanctions under the Code.

The foregoing rule emanates from the SECs power and


authority to regulate, investigate or supervise the activities of
persons to ensure compliance with the Securities Regulation
Code, more specifically the provision on mandatory tender offer
under Section 19 thereof.[7]

Another provision of the statute, which provides the basis of


Rule 19(13) of the Amended Implementing Rules and Regulations
of the Securities Regulation Code, is Section 5.1(n), viz:

[T]he Commission shall have, among others, the following powers and
functions:
xxxx

(n) Exercise such other powers as may be provided by law as


well as those which may be implied from, or which are necessary or
incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.

The foregoing provision bestows upon the SEC the general


adjudicative power which is implied from the express powers of
the Commission or which is incidental to, or reasonably necessary
to carry out, the performance of the administrative duties
entrusted to it. As a regulatory agency, it has the incidental power
to conduct hearings and render decisions fixing the rights and
obligations of the parties. In fact, to deprive the SEC of this power
would render the agency inutile, because it would become
powerless to regulate and implement the law. As correctly held by
the Court of Appeals:

We are nonetheless convinced that the SEC has the competence


to render the particular decision it made in this case. A definite
inference may be drawn from the provisions of the SRC that the SEC
has the authority not only to investigate complaints of violations of the
tender offer rule, but to adjudicate certain rights and obligations of the
contending parties and grant appropriate reliefs in the exercise of its
regulatory functions under the SRC. Section 5.1 of the SRC allows a
general grant of adjudicative powers to the SEC which may be implied
from or are necessary or incidental to the carrying out of its express
powers to achieve the objectives and purposes of the SRC. We must
bear in mind in interpreting the powers and functions of the SEC that
the law has made the SEC primarily a regulatory body with the
incidental power to conduct administrative hearings and make
decisions. A regulatory body like the SEC may conduct hearings in the
exercise of its regulatory powers, and if the case involves violations or
conflicts in connection with the performance of its regulatory functions,
it will have the duty and authority to resolve the dispute for the best
interests of the public.[8]
For sure, the SEC has the authority to promulgate rules and
regulations, subject to the limitation that the same are consistent
with the declared policy of the Code. Among them is the
protection of the investors and the minimization, if not total
elimination, of fraudulent and manipulative devises. Thus,
Subsection 5.1(g) of the law provides:

Prepare, approve, amend or repeal rules, regulations and orders,


and issue opinions and provide guidance on and supervise compliance
with such rules, regulations and orders.

Also, Section 72 of the Securities Regulation Code reads:

72.1. x x x To effect the provisions and purposes of this Code,


the Commission may issue, amend, and rescind such rules and
regulations and orders necessary or appropriate, x x x.

72.2. The Commission shall promulgate rules and regulations


providing for reporting, disclosure and the prevention of fraudulent,
deceptive or manipulative practices in connection with the purchase by
an issuer, by tender offer or otherwise, of and equity security of a class
issued by it that satisfies the requirements of Subsection 17.2. Such
rules and regulations may require such issuer to provide holders of
equity securities of such dates with such information relating to the
reasons for such purchase, the source of funds, the number of shares
to be purchased, the price to be paid for such securities, the method of
purchase and such additional information as the Commission deems
necessary or appropriate in the public interest or for the protection of
investors, or which the Commission deems to be material to a
determination by holders whether such security should be sold.

The power conferred upon the SEC to promulgate rules and


regulations is a legislative recognition of the complexity and the
constantly-fluctuating nature of the market and the impossibility
of foreseeing all the possible contingencies that cannot be
addressed in advance. As enunciated in Victorias Milling Co., Inc.
v. Social Security Commission[9]:

Rules and regulations when promulgated in pursuance of the


procedure or authority conferred upon the administrative agency by
law, partake of the nature of a statute, and compliance therewith may
be enforced by a penal sanction provided in the law. This is so because
statutes are usually couched in general terms, after expressing the
policy, purposes, objectives, remedies and sanctions intended by the
legislature. The details and the manner of carrying out the law are
often times left to the administrative agency entrusted with its
enforcement. In this sense, it has been said that rules and regulations
are the product of a delegated power to create new or additional legal
provisions that have the effect of law.

Moreover, petitioner is barred from questioning the


jurisdiction of the SEC. It must be pointed out that petitioner had
participated in all the proceedings before the SEC and had prayed
for affirmative relief. In fact, petitioner defended the jurisdiction of
the SEC in its Comment dated 15 September 2004, filed with the
SEC wherein it asserted:

This Honorable Commission is a highly specialized body created


for the purpose of administering, overseeing, and managing the
corporate industry, share investment and securities market in
the Philippines. By the very nature of its functions, it dedicated to the
study and administration of the corporate and securities laws and has
necessarily developed an expertise on the subject. Based on said
functions, the Honorable Commission is necessarily tasked to issue
rulings with respect to matters involving corporate matters and share
acquisitions. Verily when this Honorable Commission rendered the
Ruling that the acquisition of Cemco Holdings of the majority shares of
Union Cement Holdings, Inc., a substantial stockholder of a listed
company, Union Cement Corporation, is not covered by the mandatory
tender offer requirement of the SRC Rule 19, it was well within its
powers and expertise to do so. Such ruling shall be respected, unless
there has been an abuse or improvident exercise of authority. [10]
Petitioner did not question the jurisdiction of the SEC when it
rendered an opinion favorable to it, such as the 27 July
2004 Resolution, where the SEC opined that
the Cemco transaction was not covered by the mandatory tender
offer rule. It was only when the case was before the Court of
Appeals and after the SEC rendered an unfavorable judgment
against it that petitioner challenged the SECs competence. As
articulated in Ceroferr Realty Corporation v. Court of Appeals[11]:

While the lack of jurisdiction of a court may be raised at any


stage of an action, nevertheless, the party raising such question may
be estopped if he has actively taken part in the very proceedings which
he questions and he only objects to the courts jurisdiction because the
judgment or the order subsequently rendered is adverse to him.

On the second issue, petitioner asserts that the mandatory


tender offer rule applies only to direct acquisition of shares in the
public company.

This contention is not meritorious.

Tender offer is a publicly announced intention by a person


acting alone or in concert with other persons to acquire equity
securities of a public company. [12] A public company is defined as
a corporation which is listed on an exchange, or a corporation
with assets exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not less than 100
shares of such company.[13] Stated differently, a tender offer is an
offer by the acquiring person to stockholders of a public company
for them to tender their shares therein on the terms specified in
the offer.[14] Tender offer is in place to protect minority
shareholders against any scheme that dilutes the share value of
their investments. It gives the minority shareholders the chance
to exit the company under reasonable terms, giving them the
opportunity to sell their shares at the same price as those of the
majority shareholders.[15]

Under Section 19 of Republic Act No. 8799, it is stated:

Tender Offers. 19.1. (a) Any person or group of persons acting in


concert who intends to acquire at least fifteen percent (15%) of any
class of any equity security of a listed corporation or of any class of
any equity security of a corporation with assets of at least Fifty million
pesos (P50,000,000.00) and having two hundred (200) or more
stockholders with at least one hundred (100) shares each or who
intends to acquire at least thirty percent (30%) of such equity over a
period of twelve (12) months shall make a tender offer to stockholders
by filing with the Commission a declaration to that effect; and furnish
the issuer, a statement containing such of the information required in
Section 17 of this Code as the Commission may prescribe. Such person
or group of persons shall publish all requests or invitations for tender,
or materials making a tender offer or requesting or inviting letters of
such a security. Copies of any additional material soliciting or
requesting such tender offers subsequent to the initial solicitation or
request shall contain such information as the Commission may
prescribe, and shall be filed with the Commission and sent to the issuer
not later than the time copies of such materials are first published or
sent or given to security holders.

Under existing SEC Rules,[16] the 15% and 30% threshold


acquisition of shares under the foregoing provision was increased
to thirty-five percent (35%). It is further provided therein that
mandatory tender offer is still applicable even if the acquisition is
less than 35% when the purchase would result in ownership of
over 51% of the total outstanding equity securities of the public
company.[17]

The SEC and the Court of Appeals ruled that the indirect
acquisition by petitioner of 36% of UCC shares through the
acquisition of the non-listed UCHC shares is covered by the
mandatory tender offer rule.
This interpretation given by the SEC and the Court of
Appeals must be sustained.

The rule in this jurisdiction is that the construction given to a


statute by an administrative agency charged with the
interpretation and application of that statute is entitled to great
weight by the courts, unless such construction is clearly shown to
be in sharp contrast with the governing law or statute. [18] The
rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the
establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to accumulation of
experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular
statute.[19]

The SEC and the Court of Appeals accurately pointed out


that the coverage of the mandatory tender offer rule covers not
only direct acquisition but also indirect acquisition or any type of
acquisition. This is clear from the discussions of the Bicameral
Conference Committee on the Securities Act of 2000, on 17 July
2000.

SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody


controls 67% of the Company. Of course, he will pay a premium for the
first 67%. Control yan, eh. Eh, kawawa yung mgamaiiwan, ang 33%
because the value of the stock market could go down, could go down
after that, because there will (p. 41) be no more
market. Wala nang gustong bumenta. Wala nang I
mean maraming gustong bumenta, walang gustong bumili kung hindi y
ung majority owner. And they will not buy. They already have
67%. They already have control. And this protects the minority.And we
have had a case in Cebu wherein Ayala A who already owned 40% of
Ayala B made an offer for another 40% of Ayala B without offering the
20%. Kawawa naman yung nakahawakngayon ng 20%. Ang baba ng sh
are sa market. But we did not have a law protecting them at that time.

CHAIRMAN ROCO. So what is it that you want to achieve?


SEN. S. OSMEA. That if a certain group achieves a certain
amount of ownership in a corporation, yeah, he is obligated to buy
anybody who wants to sell.

CHAIRMAN ROCO. Pro-rata lang. (p. 42).

xxxx

REP. TEODORO. As long as it reaches 30, ayan na. Any type of


acquisition just as long as it will result in 30 (p.50) reaches
30, ayan na. Any type of acquisition just as long as it will result
in 30, general tender, pro-rata.[20] (Emphasis supplied.)

Petitioner counters that the legislators reference to any type


of acquisition during the deliberations on the Securities
Regulation Code does not indicate that congress meant to include
the indirect acquisition of shares of a public corporation to be
covered by the tender offer rule. Petitioner also avers that it did
not directly acquire the shares in UCC and the incidental benefit
of having acquired the control of the said public company must
not be taken against it.

These arguments are not convincing. The legislative intent of


Section 19 of the Code is to regulate activities relating to
acquisition of control of the listed company and for the purpose of
protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a
public company is obtained, either through the direct purchase of
its stocks or through an indirect means, mandatory tender offer
applies. As appropriately held by the Court of Appeals:

The petitioner posits that what it acquired were stocks of UCHC and not
UCC. By happenstance, as a result of the transaction, it became an
indirect owner of UCC. We are constrained, however, to construe
ownership acquisition to mean both direct and indirect. What is
decisive is the determination of the power of control. The legislative
intent behind the tender offer rule makes clear that the type of activity
intended to be regulated is the acquisition of control of the listed
company through the purchase of shares. Control may [be] effected
through a direct and indirect acquisition of stock, and when this takes
place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the shareholder of the listed
company the opportunity to decide whether or not to sell in connection
with a transfer of control. x x x.[21]

As to the third issue, petitioner stresses that the ruling on


mandatory tender offer rule by the SEC and the Court of Appeals
should not have retroactive effect or be made to apply to its
purchase of the UCHC shares as it relied in good faith on the letter
dated 27 July 2004 of the SEC which opined that the proposed
acquisition of the UCHC shares was not covered by the mandatory
offer rule.

The argument is not persuasive.

The action of the SEC on the PSE request for opinion on


the Cemco transaction cannot be construed as passing merits or
giving approval to the questioned transaction. As aptly pointed
out by the respondent, the letter dated 27 July 2004 of the SEC
was nothing but an approval of the draft letter prepared by
Director Callanga. There was no public hearing where interested
parties could have been heard. Hence, it was not issued upon a
definite and concrete controversy affecting the legal relations of
parties thereby making it a judgment conclusive on all the
parties. Said letter was merely advisory. Jurisprudence has it that
an advisory opinion of an agency may be stricken down if it
deviates from the provision of the statute. [22] Since the letter
dated 27 July 2004 runs counter to the Securities Regulation
Code, the same may be disregarded as what the SEC has done in
its decision dated 14 February 2005.
Assuming arguendo that the letter dated 27 July
2004 constitutes a ruling, the same cannot be utilized to
determine the rights of the parties. What is to be applied in the
present case is the subsequent ruling of the SEC dated 14
February 2005 abandoning the opinion embodied in the letter
dated 27 July 2004. In Serrano v. National Labor Relations
Commission,[23] an argument was raised similar to the case under
consideration. Private respondent therein argued that the new
doctrine pronounced by the Court should only be applied
prospectively. Said postulation was ignored by the Court when it
ruled:

While a judicial interpretation becomes a part of the law as of


the date that law was originally passed, this is subject to the
qualification that when a doctrine of this Court is overruled and a
different view is adopted, and more so when there is a reversal thereof,
the new doctrine should be applied prospectively and should not apply
to parties who relied on the old doctrine and acted in good faith. To
hold otherwise would be to deprive the law of its quality of fairness and
justice then, if there is no recognition of what had transpired prior to
such adjudication.

It is apparent that private respondent misconceived the import


of the ruling. The decision in Columbia Pictures does not mean that if a
new rule is laid down in a case, it should not be applied in that case
but that said rule should apply prospectively to cases arising
afterwards. Private respondents view of the principle of prospective
application of new judicial doctrines would turn the judicial function
into a mere academic exercise with the result that the doctrine laid
down would be no more than a dictum and would deprive the holding
in the case of any force.

Indeed, when the Court formulated the Wenphil doctrine, which


we reversed in this case, the Court did not defer application of the rule
laid down imposing a fine on the employer for failure to give notice in a
case of dismissal for cause. To the contrary, the new rule was applied
right then and there. x x x.
Lastly, petitioner alleges that the decision of the SEC
dated 14 February 2005 is incomplete and produces no effect.

This contention is baseless.

The decretal portion of the SEC decision states:

In view of the foregoing, the letter of the Commission, signed by


Director Justina F. Callangan, dated July 27, 2004, addressed to the
Philippine Stock Exchange is hereby REVERSED and SET
ASIDE. Respondent Cemco is hereby directed to make a tender offer for
UCC shares to complainant and other holders of UCC shares similar to
the class held by respondent UCHC, at the highest price it paid for the
beneficial ownership in respondent UCC, strictly in accordance with
SRC Rule 19, Section 9(E).[24]

A reading of the above ruling of the SEC reveals that the


same is complete. It orders the conduct of a mandatory tender
offer pursuant to the procedure provided for under Rule 19(E) of
the Amended Implementing Rules and Regulations of the
Securities Regulation Code for the highest price paid for the
beneficial ownership of UCC shares. The price, on the basis of the
SEC decision, is determinable. Moreover, the implementing rules
and regulations of the Code are sufficient to inform and guide the
parties on how to proceed with the mandatory tender offer.

WHEREFORE, the Decision and Resolution of the Court of


Appeals dated 24 October 2005 and 6 March 2006, respectively,
affirming the Decision dated 14 February 2005 of the Securities
and Exchange Commission En Banc, are
hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

POWER HOMES UNLIMITED G.R. No. 164182


CORPORATION,
Petitioner,
Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus - CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.

SECURITIES AND EXCHANGE


COMMISSION AND NOEL Promulgated:
MANERO,
Respondents. February 26, 2008

x------------------------------------------------
-x

DECISION

PUNO, C.J.:

This petition for review seeks the reversal and setting aside
of the July 31, 2003 Decision [1] of the Court of Appeals that
affirmed the January 26, 2001 Cease and Desist Order (CDO) [2] of
public respondent Securities and Exchange Commission (SEC)
enjoining petitioner Power Homes Unlimited Corporations
(petitioner) officers, directors, agents, representatives and any
and all persons claiming and acting under their authority, from
further engaging in the sale, offer for sale or distribution of
securities; and its June 18, 2004 Resolution [3] which denied
petitioners motion for reconsideration.
The facts: Petitioner is a domestic corporation duly
registered with public respondent SEC on October 13, 2000 under
SEC Reg. No. A200016113. Its primary purpose is:

To engage in the transaction of promoting, acquiring,


managing, leasing, obtaining options on, development,
and improvement of real estate properties for subdivision
and allied purposes, and in the purchase, sale and/or
exchange of said subdivision and properties through
network marketing.[4]

On October 27, 2000, respondent Noel Manero requested public


respondent SEC to investigate petitioners business. He claimed
that he attended a seminar conducted by petitioner where the
latter claimed to sell properties that were inexistent and without
any brokers license.

On November 21, 2000, one Romulo E. Munsayac, Jr.


inquired from public respondent SEC whether petitioners business
involves legitimate network marketing.

On the bases of the letters of respondent Manero and


Munsayac, public respondent SEC held a conference on December
13, 2000 that was attended by petitioners incorporators John Lim,
Paul Nicolas and Leonito Nicolas. The attendees were requested to
submit copies of petitioners marketing scheme and list of its
members with addresses.

The following day or on December 14, 2000, petitioner


submitted to public respondent SEC copies of its marketing course
module and letters of accreditation/authority or confirmation from
Crown Asia, Fil-Estate Network and Pioneer 29 Realty Corporation.

On January 26, 2001, public respondent SEC visited the


business premises of petitioner wherein it gathered documents
such as certificates of accreditation to several real estate
companies, list of members with web sites, sample of member
mail box, webpages of two (2) members, and lists of Business
Center Owners who are qualified to acquire real estate properties
and materials on computer tutorials.
On the same day, after finding petitioner to be engaged in
the sale or offer for sale or distribution of investment contracts,
which are considered securities under Sec. 3.1 (b) of Republic Act
(R.A.) No. 8799 (The Securities Regulation Code), [5] but failed to
register them in violation of Sec. 8.1 of the same Act, [6] public
respondent SEC issued a CDO that reads:

WHEREFORE, pursuant to the authority vested in the


Commission, POWER HOMES UNLIMITED, CORP., its
officers, directors, agents, representatives and any and all
persons claiming and acting under their authority, are
hereby ordered to immediately CEASE AND DESIST from
further engaging in the sale, offer or distribution of the
securities upon the receipt of this order.

In accordance with the provisions of Section 64.3 of


Republic Act No. 8799, otherwise known as the Securities
Regulation Code, the parties subject of this Cease and
Desist Order may file a request for the lifting thereof
within five (5) days from receipt.[7]

On February 5, 2001, petitioner moved for the lifting of the CDO,


which public respondent SEC denied for lack of merit on February
22, 2001.

Aggrieved, petitioner went to the Court of Appeals imputing


grave abuse of discretion amounting to lack or excess of
jurisdiction on public respondent SEC for issuing the order. It also
applied for a temporary restraining order, which the appellate
court granted.
On May 23, 2001, the Court of Appeals consolidated petitioners
case with CA-G.R. [SP] No. 62890 entitled Prosperity.Com,
Incorporated v. Securities and Exchange Commission
(Compliance and Enforcement Department), Cristina T. De
La Cruz, et al.

On June 19, 2001, petitioner filed in the Court of Appeals a


Motion for the Issuance of a Writ of Preliminary Injunction. On July
6, 2001, the motion was heard. On July 12, 2001, public
respondent SEC filed its opposition. On July 13, 2001, the
appellate court granted petitioners motion, thus:
Considering that the Temporary Restraining Order
will expire tomorrow or on July 14, 2001, and it appearing
that this Court cannot resolve the petition immediately
because of the issues involved which require a further
study on the matter, and considering further that with the
continuous implementation of the CDO by the SEC would
eventually result to the sudden demise of the petitioners
business to their prejudice and an irreparable damage
that may possibly arise, we hereby resolve to grant the
preliminary injunction.

WHEREFORE, let a writ of preliminary injunction be


issued in favor of petitioner, after posting a bond in the
amount of P500,000.00 to answer whatever damages the
respondents may suffer should petitioner be adjudged not
entitled to the injunctive relief herein granted.[8]

On August 8, 2001, public respondent SEC moved for


reconsideration, which was not resolved by the Court of Appeals.

On July 31, 2003, the Court of Appeals issued its


Consolidated Decision. The disposition pertinent to petitioner
reads:[9]

WHEREFORE, x x x x the petition for certiorari and


prohibition filed by the other petitioner Powerhomes
Unlimited Corporation is hereby DENIED for lack of merit
and the questioned Cease and Desist Order issued by
public respondent against it is accordingly AFFIRMED IN
TOTO.

On June 18, 2004, the Court of Appeals denied petitioners


motion for reconsideration;[10] hence, this petition for review.

The issues for determination are: (1) whether public


respondent SEC followed due process in the issuance of the
assailed CDO; and (2) whether petitioners business constitutes an
investment contract which should be registered with public
respondent SEC before its sale or offer for sale or distribution to
the public.
On the first issue, Sec. 64 of R.A. No. 8799 provides:
Sec. 64. Cease and Desist Order. 64.1. The Commission,
after proper investigation or verification, motu proprio or
upon verified complaint by any aggrieved party, may
issue a cease and desist order without the necessity of a
prior hearing if in its judgment the act or practice, unless
restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or
prejudice to the investing public.

We hold that petitioner was not denied due process. The


records reveal that public respondent SEC properly examined
petitioners business operations when it (1) called into conference
three of petitioners incorporators, (2) requested information from
the incorporators regarding the nature of petitioners business
operations, (3) asked them to submit documents pertinent
thereto, and (4) visited petitioners business premises and
gathered information thereat. All these were done before the CDO
was issued by the public respondent SEC. Trite to state, a formal
trial or hearing is not necessary to comply with the requirements
of due process. Its essence is simply the opportunity to explain
ones position. Public respondent SEC abundantly allowed
petitioner to prove its side.

The second issue is whether the business of petitioner


involves an investment contract that is considered security [11] and
thus, must be registered prior to sale or offer for sale or
distribution to the public pursuant to Section 8.1 of R.A. No.
8799, viz:
Section 8. Requirement of Registration of Securities. 8.1. Securities shall
not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Commission. Prior to
such sale, information on the securities, in such form and with such substance as
the Commission may prescribe, shall be made available to each prospective
purchaser.

Public respondent SEC found the petitioner as a marketing


company that promotes and facilitates sales of real properties and
other related products of real estate developers through effective
leverage marketing. It also described the conduct of petitioners
business as follows:

The scheme of the [petitioner] corporation requires


an investor to become a Business Center Owner (BCO)
who must fill-up and sign its application form. The Terms
and Conditions printed at the back of the application form
indicate that the BCO shall mean an independent
representative of Power Homes, who is enrolled in the
companys referral program and who will ultimately
purchase real property from any accredited real estate
developers and as such he is entitled to a referral
bonus/commission. Paragraph 5 of the same indicates
that there exists no employer/employee relationship
between the BCO and the Power Homes Unlimited, Corp.

The BCO is required to pay US$234 as his


enrollment fee. His enrollment entitles him to recruit two
investors who should pay US$234 each and out of which
amount he shall receive US$92. In case the two
referrals/enrollees would recruit a minimum of four (4)
persons each recruiting two (2) persons who become
his/her own down lines, the BCO will receive a total
amount of US$147.20 after deducting the amount of
US$36.80 as property fund from the gross amount of
US$184. After recruiting 128 persons in a period of eight
(8) months for each Left and Right business groups or a
total of 256 enrollees whether directly referred by the
BCO or through his down lines, the BCO who receives a
total amount of US$11,412.80 after deducting the amount
of US$363.20 as property fund from the gross amount of
US$11,776, has now an accumulated amount of US$2,700
constituting as his Property Fund placed in a Property
Fund account with the Chinabank. This accumulated
amount of US$2,700 is used as partial/full down payment
for the real property chosen by the BCO from any of
[petitioners] accredited real estate developers.[12]

An investment contract is defined in the Amended


Implementing Rules and Regulations of R.A. No. 8799 as a
contract, transaction or scheme (collectively contract) whereby a
person invests his money in a common enterprise and is led to
expect profits primarily from the efforts of others.[13]

It behooves us to trace the history of the concept of an


investment contract under R.A. No. 8799. Our definition of an
investment contract traces its roots from the 1946 United States
(US) case of SEC v. W.J. Howey Co.[14] In this case, the US
Supreme Court was confronted with the issue of whether
the Howey transaction constituted an investment contract under
the Securities Acts definition of security. [15] The US Supreme
Court, recognizing that the term investment contract was not
defined by the Act or illumined by any legislative report, [16] held
that Congress was using a term whose meaning had been
crystallized[17] under the states blue sky laws [18] in existence prior
to the adoption of the Securities Act. [19] Thus, it ruled that the use
of the catch-all term investment contract indicated a
congressional intent to cover a wide range of investment
transactions.[20] It established a test to determine whether a
transaction falls within the scope of an investment contract.
[21]
Known as the Howey Test, it requires a transaction, contract,
or scheme whereby a person (1) makes an investment of money,
(2) in a common enterprise, (3) with the expectation of profits, (4)
to be derived solely from the efforts of others.[22] Although the
proponents must establish all four elements, the US Supreme
Court stressed that the Howey Test embodies a flexible rather
than a static principle, one that is capable of adaptation to meet
the countless and variable schemes devised by those who seek
the use of the money of others on the promise of profits.
[23]
Needless to state, any investment contract covered by
the Howey Test must be registered under the Securities Act,
regardless of whether its issuer was engaged in fraudulent
practices.

After Howey came the 1973 US case of SEC v. Glenn W.


Turner Enterprises, Inc. et al.[24] In this case, the 9th Circuit of
the US Court of Appeals ruled that the element that profits must
come solely from the efforts of others should not be given a strict
interpretation. It held that a literal reading of the
requirement solely would lead to unrealistic results. It reasoned
out that its flexible reading is in accord with the statutory policy of
affording broad protection to the public. Our R.A. No. 8799
appears to follow this flexible concept for it defines an investment
contract as a contract, transaction or scheme (collectively
contract) whereby a
person invests his money in a common enterprise and is led to e
xpect profits not solely but primarily from the efforts of
others. Thus, to be a security subject to regulation by the SEC,
an investment contract in our jurisdiction must be proved to
be: (1) an investment of money, (2) in a common enterprise, (3)
with expectation of profits, (4) primarily from efforts of others.

Prescinding from these premises, we affirm the ruling of the


public respondent SEC and the Court of Appeals that the
petitioner was engaged in the sale or distribution of an
investment contract. Interestingly, the facts of SEC v.
Turner [25]
are similar to the case at bar. In Turner, the SEC
brought a suit to enjoin the violation of federal securities laws by
a company offering to sell to the public contracts characterized as
self-improvement courses. On appeal from a grant of preliminary
injunction, the US Court of Appeals of the 9th Circuit held that self-
improvement contracts which primarily offered the buyer the
opportunity of earning commissions on the sale of contracts to
others were investment contracts and thus were securities within
the meaning of the federal securities laws. This is regardless of
the fact that buyers, in addition to investing money needed to
purchase the contract, were obliged to contribute their own
efforts in finding prospects and bringing them to sales
meetings. The appellate court held:

It is apparent from the record that what is sold is not


of the usual business motivation type of courses. Rather,
the purchaser is really buying the possibility of
deriving money from the sale of the plans by Dare to
individuals whom the purchaser has brought to Dare. The
promotional aspects of the plan, such as seminars, films,
and records, are aimed at interesting others in the
Plans. Their value for any other purpose is, to put it
mildly, minimal.

Once an individual has purchased a Plan, he


turns his efforts toward bringing others into the
organization, for which he will receive a part of
what they pay. His task is to bring prospective
purchasers to Adventure Meetings.

The business scheme of petitioner in the case at bar is essentially


similar. An investor enrolls in petitioners program by paying
US$234. This entitles him to recruit two (2) investors who pay
US$234 each and out of which amount he receives US$92. A
minimum recruitment of four (4) investors by these two (2)
recruits, who then recruit at least two (2) each, entitles the
principal investor to US$184 and the pyramid goes on.

We reject petitioners claim that the payment of US$234 is for


the seminars on leverage marketing and not for any product.
Clearly, the trainings or seminars are merely designed to enhance
petitioners business of teaching its investors the know-how of its
multi-level marketing business. An investor enrolls under the
scheme of petitioner to be entitled to recruit other investors and
to receive commissions from the investments of those directly
recruited by him. Under the scheme, the accumulated amount
received by the investor comes primarily from the efforts of his
recruits.

We therefore rule that the business operation or the scheme


of petitioner constitutes an investment contract that is a security
under R.A. No. 8799. Thus, it must be registered with public
respondent SEC before its sale or offer for sale or distribution to
the public. As petitioner failed to register the same, its offering to
the public was rightfully enjoined by public respondent SEC. The
CDO was proper even without a finding of fraud. As an investment
contract that is security under R.A. No. 8799, it must be registered
with public respondent SEC, otherwise the SEC cannot protect the
investing public from fraudulent securities. The strict regulation of
securities is founded on the premise that the capital markets
depend on the investing publics level of confidence in the system.

IN VIEW WHEREOF, the petition is DENIED. The July 31,


2003 Decision of the Court of Appeals, affirming the January 26,
2001 Cease and Desist Order issued by public respondent
Securities and Exchange Commission against petitioner Power
Homes Unlimited Corporation, and its June 18, 2004 Resolution
denying petitioners Motion for Reconsideration are AFFIRMED. No
costs.

SO ORDERED.
SECURITIES AND
EXCHANGE COMMISSION, G.R. No. 135808

Petitioner,

Present:

PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,*
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
INTERPORT RESOURCES VELASCO, JR.,
CORPORATION, MANUEL
NACHURA,**
S. RECTO, RENE S.
VILLARICA, PELAGIO REYES,
RICALDE, ANTONIO REINA, DE CASTRO, and
FRANCISCO ANONUEVO,
JOSEPH SY and SANTIAGO BRION,** JJ.
TANCHAN, JR.,
Respondents.

Promulgated:

October 6, 2008
x---------------------------- --------------------
-x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the


Rules of Court, assailing the Decision, [1] dated 20 August 1998,
rendered by the Court of Appeals in C.A.-G.R. SP No. 37036,
enjoining petitioner Securities and Exchange Commission (SEC)
from taking cognizance of or initiating any action against the
respondent corporation Interport Resources Corporation (IRC) and
members of its board of directors, respondents Manuel S. Recto,
Rene S. Villarica, Pelagio Ricalde, Antonio Reina,
Francisco Anonuevo, Joseph Sy and Santiago Tanchan, Jr., with
respect to Sections 8, 30 and 36 of the Revised Securities Act. In
the same Decision of the appellate court, all the proceedings
taken against the respondents, including the assailed SEC
Omnibus Orders of 25 January 1995 and 30 March 1995, were
declared void.
The antecedent facts of the present case are as follows.

On 6 August 1994, the Board of Directors of IRC approved a


Memorandum of Agreement
with Ganda Holdings Berhad (GHB). Under the Memorandum of
Agreement, IRC acquired 100% or the entire capital stock
of Ganda Energy Holdings, Inc. (GEHI),[2] which would own and
operate a 102 megawatt (MW) gas turbine power-generating
barge. The agreement also stipulates that GEHI would assume a
five-year power purchase contract with National Power
Corporation. At that time, GEHIs power-generating barge was
97% complete and would go on-line by mid-September of
1994. In exchange, IRC will issue to GHB 55% of the expanded
capital stock of IRC amounting to 40.88 billion shares which had
a total par value of P488.44 million.[3]

On the side, IRC would acquire 67% of the entire capital


stock of Philippine Racing Club, Inc. (PRCI). PRCI owns 25.724
hectares of real estate property in Makati.Under the Agreement,
GHB, a member of the Westmont Group of Companies
in Malaysia, shall extend or arrange a loan required to pay for
the proposed acquisition by IRC of PRCI. [4]

IRC alleged that on 8 August 1994, a press release announcing


the approval of the agreement was sent through facsimile
transmission to the Philippine Stock Exchange and the SEC, but
that the facsimile machine of the SEC could not receive it. Upon
the advice of the SEC, the IRC sent the press release on the
morning of 9 August 1994.[5]
The SEC averred that it received reports that IRC failed to
make timely public disclosures of its negotiations with GHB and
that some of its directors, respondents herein, heavily traded IRC
shares utilizing this material insider information. On 16 August
1994, the SEC Chairman issued a directive requiring IRC to
submit to the SEC a copy of its aforesaid Memorandum of
Agreement with GHB. The SEC Chairman further directed all
principal officers of IRC to appear at a hearing before the Brokers
and Exchanges Department (BED) of the SEC to explain IRCs
failure to immediately disclose the information as required by
the Rules on Disclosure of Material Facts. [6]

In compliance with the SEC Chairmans directive, the IRC sent a


letter dated 16 August 1994 to the SEC, attaching thereto copies
of the Memorandum of Agreement. Its directors, Manuel Recto,
Rene Villarica and Pelagio Ricalde, also appeared before the SEC
on 22 August 1994 to explain IRCs alleged failure to immediately
disclose material information as required under the Rules on
Disclosure of Material Facts.[7]

On 19 September 1994, the SEC Chairman issued an Order


finding that IRC violated the Rules on Disclosure of Material
Facts, in connection with the Old Securities Act of 1936, when it
failed to make timely disclosure of its negotiations with GHB. In
addition, the SEC pronounced that some of the officers and
directors of IRC entered into transactions involving IRC shares in
violation of Section 30, in relation to Section 36, of the Revised
Securities Act.[8]

Respondents filed an Omnibus Motion, dated 21 September


1994, which was superseded by an Amended Omnibus Motion,
filed on 18 October 1994, alleging that the SEC had no authority
to investigate the subject matter, since under Section 8 of
Presidential Decree No. 902-A,[9] as amended by Presidential
Decree No. 1758, jurisdiction was conferred upon the
Prosecution and Enforcement Department (PED) of the
SEC. Respondents also claimed that the SEC violated their right
to due process when it ordered that the respondents appear
before the SEC and show cause why no administrative, civil or
criminal sanctions should be imposed on them, and, thus, shifted
the burden of proof to the respondents. Lastly, they sought to
have their cases tried jointly given the identical factual
situations surrounding the alleged violation committed by the
respondents.[10]

Respondents also filed a Motion for Continuance of Proceedings


on 24 October 1994, wherein they moved for discontinuance of
the investigations and the proceedings before the SEC until the
undue publicity had abated and the investigating officials had
become reasonably free from prejudice and public pressure. [11]

No formal hearings were conducted in connection with the


aforementioned motions, but on 25 January 1995, the SEC
issued an Omnibus Order which thus disposed of the same in
this wise:[12]

WHEREFORE, premised on the foregoing


considerations, the Commission resolves and hereby rules:

1. To create a special investigating panel to hear and


decide the instant case in accordance with the Rules of
Practice and Procedure Before the Prosecution and
Enforcement Department (PED), Securities and Exchange
Commission, to be composed of Attys. James
K. Abugan, Medardo Devera (Prosecution and Enforcement
Department), and Jose Aquino (Brokers and Exchanges
Department), which is hereby directed to expeditiously
resolve the case by conducting continuous hearings, if
possible.

2. To recall the show cause orders dated September 19,


1994 requiring the respondents to appear and show cause
why no administrative, civil or criminal sanctions should be
imposed on them.

3. To deny the Motion for Continuance for lack of merit.

Respondents filed an Omnibus Motion for Partial


Reconsideration, [13]
questioning the creation of the special
investigating panel to hear the case and the denial of the Motion
for Continuance. The SEC denied reconsideration in its Omnibus
Order dated 30 March 1995.[14]
The respondents filed a petition before the Court of Appeals
docketed as C.A.-G.R. SP No. 37036, questioning the Omnibus
Orders dated 25 January 1995 and 30 March 1995.[15] During the
proceedings before the Court of Appeals, respondents filed a
Supplemental Motion[16] dated 16 May 1995, wherein they
prayed for the issuance of a writ of preliminary injunction
enjoining the SEC and its agents from investigating and
proceeding with the hearing of the case against respondents
herein. On 5 May 1995, the Court of Appeals granted their
motion and issued a writ of preliminary injunction, which
effectively enjoined the SEC from filing any criminal, civil or
administrative case against the respondents herein. [17]

On 23 October 1995, the SEC filed a Motion for Leave to


Quash SEC Omnibus Orders so that the case may be
investigated by the PED in accordance with the SEC Rules and
Presidential Decree No. 902-A, and not by the special body
whose creation the SEC had earlier ordered. [18]

The Court of Appeals promulgated a Decision [19] on 20


August 1998. It determined that there were no implementing
rules and regulations regarding disclosure, insider trading, or
any of the provisions of the Revised Securities Acts which the
respondents allegedly violated. The Court of Appeals likewise
noted that it found no statutory authority for the SEC to initiate
and file any suit for civil liability under Sections 8, 30 and 36 of
the Revised Securities Act. Thus, it ruled that no civil, criminal or
administrative proceedings may possibly be held against the
respondents without violating their rights to due process and
equal protection. It further resolved that absent any
implementing rules, the SEC cannot be allowed to quash the
assailed Omnibus Orders for the sole purpose of re-filing the
same case against the respondents.[20]
The Court of Appeals further decided that the Rules of
Practice and Procedure Before the PED, which took effect on 14
April 1990, did not comply with the statutory requirements
contained in the Administrative Code of 1997. Section 8, Rule V
of the Rules of Practice and Procedure Before the PED affords a
party the right to be present but without the right to cross-
examine witnesses presented against him, in violation of Section
12(3), Chapter 3, Book VII of the Administrative Code. [21]

In the dispositive portion of its Decision, dated 20 August


1998, the Court of Appeals ruled that[22]:

WHEREFORE, [herein petitioner SECs] Motion for Leave


to Quash SEC Omnibus Orders is hereby DENIED. The
petition for certiorari, prohibition and mandamus is
GRANTED.Consequently, all proceedings taken against
[herein respondents] in this case, including the Omnibus
Orders of January 25, 1995 and March 30, 1995 are
declared null and void. The writ of preliminary
injunction is hereby made permanent and,
accordingly, [SEC] is hereby prohibited from taking
cognizance or initiating any action, be they civil,
criminal, or administrative against [respondents] with
respect to Sections 8 (Procedure for Registration), 30
(Insiders duty to disclose when trading) and 36 (Directors,
Officers and Principal Stockholders) in relation to Sections
46 (Administrative sanctions) 56 (Penalties) 44 (Liabilities
of Controlling persons) and 45 (Investigations, injunctions
and prosecution of offenses) of the Revised Securities Act
and Section 144 (Violations of the Code) of the
Corporation Code. (Emphasis provided.)

The SEC filed a Motion for Reconsideration, which the Court


of Appeals denied in a Resolution[23] issued on 30 September
1998.

Hence, the present petition, which relies on the following


grounds[24]:

THE COURT OF APPEALS ERRED WHEN IT DENIED


PETITIONERS MOTION FOR LEAVE TO QUASH THE
ASSAILED SEC OMNIBUS ORDERS DATED JANUARY 25
AND MARCH 30, 1995.
II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT


THERE IS NO STATUTORY AUTHORITY WHATSOEVER FOR
PETITIONER SEC TO INITIATE AND FILE ANY SUIT BE THEY
CIVIL, CRIMINAL OR ADMINISTRATIVE AGAINST
RESPONDENT CORPORATION AND ITS DIRECTORS WITH
RESPECT TO SECTION 30 (INSIDERS DUTY TO DISCOLSED
[sic] WHEN TRADING) AND 36 (DIRECTORS OFFICERS AND
PRINCIPAL STOCKHOLDERS) OF THE REVISED SECURITIES
ACT; AND

III

THE COURT OF APPEALS ERRED WHEN IT RULED THAT


RULES OF PRACTICE AND PROSECUTION BEFORE THE PED
AND THE SICD RULES OF PROCEDURE ON
ADMINISTRATIVE ACTIONS/PROCEEDINGS ARE INVALID
[25]

AS THEY FAIL TO COMPLY WITH THE STATUTORY


REQUIREMENTS CONTAINED IN THE ADMINISTRATIVE
CODE OF 1987.

The petition is impressed with merit.

Before discussing the merits of this case, it should be


noted that while this case was pending in this Court, Republic
Act No. 8799, otherwise known as the Securities Regulation
Code, took effect on 8 August 2000. Section 8 of Presidential
Decree No. 902-A, as amended, which created the PED, was
already repealed as provided for in Section 76 of the Securities
Regulation Code:

SEC. 76. Repealing Clause. The Revised Securities


Act (Batas Pambansa Blg. 178), as amended, in its
entirety, and Sections 2, 4 and 8 of Presidential Decree
902-A, as amended, are hereby repealed. All other laws,
orders, rules and regulations, or parts thereof,
inconsistent with any provision of this Code are hereby
repealed or modified accordingly.

Thus, under the new law, the PED has been abolished, and
the Securities Regulation Code has taken the place of the Revised
Securities Act.

The Court now proceeds with a discussion of the present


case.

I. Sctions 8, 30 and 36 of the Revised Securities


Act do not require the enactment of
implementing rules to make them binding
and effective.

The Court of Appeals ruled that absent any implementing


rules for Sections 8, 30 and 36 of the Revised Securities Act, no
civil, criminal or administrative actions can possibly be had
against the respondents without violating their right to due
process and equal protection, citing as its basis the
case Yick Wo v. Hopkins.[26] This is untenable.
In the absence of any constitutional or statutory infirmity,
which may concern Sections 30 and 36 of the Revised Securities
Act, this Court upholds these provisions as legal and binding. It is
well settled that every law has in its favor the presumption of
validity. Unless and until a specific provision of the law is declared
invalid and unconstitutional, the same is valid and binding for all
intents and purposes.[27] The mere absence of implementing rules
cannot effectively invalidate provisions of law, where a reasonable
construction that will support the law may be given. In People v.
Rosenthal,[28] this Court ruled that:

In this connection we cannot pretermit reference to the


rule that legislation should not be held invalid on the
ground of uncertainty if susceptible of any reasonable
construction that will support and give it effect. An Act will
not be declared inoperative and ineffectual on the ground
that it furnishes no adequate means to secure the
purpose for which it is passed, if men of common sense
and reason can devise and provide the means, and all the
instrumentalities necessary for its execution are within
the reach of those intrusted therewith. (25 R.C.L., pp. 810,
811)

In Garcia v. Executive Secretary,[29] the Court underlined the


importance of the presumption of validity of laws and the careful
consideration with which the judiciary strikes down as invalid acts
of the legislature:

The policy of the courts is to avoid ruling on constitutional


questions and to presume that the acts of the political
departments are valid in the absence of a clear and
unmistakable showing to the contrary. To doubt is to
sustain. This presumption is based on the doctrine of
separation of powers which enjoins upon each
department a becoming respect for the acts of the other
departments.The theory is that as the joint act of
Congress and the President of the Philippines, a law has
been carefully studied and determined to be in
accordance with the fundamental law before it was finally
enacted.

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 management. [30] To rule that the
absence of implementing rules can render ineffective an act of
Congress, such as the Revised Securities Act, would empower the
administrative bodies to defeat the legislative will by delaying the
implementing rules. To assert that a law is less than a law,
because it is made to depend on a future event or act, is to rob
the Legislature of the power to act wisely for the public welfare
whenever a law is passed relating to a state of affairs not yet
developed, or to things future and impossible to fully know. [31] It is
well established that administrative authorities have the power to
promulgate rules and regulations to implement a given statute
and to effectuate its policies, provided such rules and regulations
conform to the terms and standards prescribed by the statute as
well as purport to carry into effect its general policies.
Nevertheless, it is undisputable that the rules and regulations
cannot assert for themselves a more extensive prerogative or
deviate from the mandate of the statute. [32]Moreover, where the
statute contains sufficient standards and an unmistakable intent,
as in the case of Sections 30 and 36 of the Revised Securities Act,
there should be no impediment to its implementation.
The reliance placed by the Court of Appeals in Yick Wo v.
Hopkins[33] shows a glaring error. In the cited case, this Court
found unconstitutional an ordinance which gave the board of
supervisors authority to refuse permission to carry on laundries
located in buildings that were not made of brick and stone,
because it violated the equal protection clause and was highly
discriminatory and hostile to Chinese residents and not because
the standards provided therein were vague or ambiguous.

This Court does not discern any vagueness or ambiguity


in Sections 30 and 36 of the Revised Securities Act, such
that the acts proscribed and/or required would not be understood
by a person of ordinary intelligence.

Section 30 of the Revised Securities Act

Section 30 of the Revised Securities Act reads:

Sec. 30. Insiders duty to disclose when trading.


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

(b) Insider means (1) the issuer, (2) a director or


officer of, or a person controlling, controlled by, or under
common control with, the issuer, (3) a person whose
relationship or former relationship to the issuer gives or
gave him access to a fact of special significance about the
issuer or the security that is not generally available, or (4)
a person who learns such a fact from any of the foregoing
insiders as defined in this subsection, with knowledge
that the person from whom he learns the fact is such an
insider.

(c) A fact is of special significance if (a) in addition to


being material it would be likely, on being made generally
available, to affect the market price of a security to a
significant extent, or (b) a reasonable person would
consider it especially important under the circumstances
in determining his course of action in the light of such
factors as the degree of its specificity, the extent of its
difference from information generally available
previously, and its nature and reliability.

(d) This section shall apply to an insider as defined


in subsection (b) (3) hereof only to the extent that he
knows of a fact of special significance by virtue of his
being an insider.

The provision explains in simple terms that the insider's


misuse of nonpublic and undisclosed information is
the gravamen of illegal conduct. The intent of the law is the
protection of investors against fraud, committed when an insider,
using secret information, takes advantage of an uninformed
investor. Insiders are obligated to disclose material information to
the other party or abstain from trading the shares of his
corporation. This duty to disclose or abstain is based on two
factors: first, the existence of a relationship giving access, directly
or indirectly, to information intended to be available only for a
corporate purpose and not for the personal benefit of anyone; and
second, the inherent unfairness involved when a party takes
advantage of such information knowing it is unavailable to those
with whom he is dealing.[34]

In the United States (U.S.), the obligation to disclose or


abstain has been traditionally imposed on corporate insiders,
particularly officers, directors, or controlling stockholders, but that
definition has since been expanded. [35] The term insiders now
includes persons whose relationship or former relationship to the
issuer gives or gave them access to a fact of special significance
about the issuer or the security that is not generally available,
and one who learns such a fact from an insider knowing that the
person from whom he learns the fact is such an insider. Insiders
have the duty to disclose material facts which are known to them
by virtue of their position but which are not known to persons with
whom they deal and which, if known, would affect their
investment judgment. In some cases, however, there may be
valid corporate reasons for the nondisclosure of material
information. Where such reasons exist, an issuers decision not to
make any public disclosures is not ordinarily considered as a
violation of insider trading. At the same time, the undisclosed
information should not be improperly used for non-corporate
purposes, particularly to disadvantage other persons with whom
an insider might transact, and therefore the insider must abstain
from entering into transactions involving such securities. [36]

Respondents further aver that under Section 30 of the


Revised Securities Act, the SEC still needed to define the following
terms: material fact, reasonable person, nature and
reliability and generally available. [37] In determining whether
or not these terms are vague, these terms must be evaluated in
the context of Section 30 of the Revised Securties Act. To fully
understand how the terms were used in the aforementioned
provision, a discussion of what the law recognizes as a fact of
special significance is required, since the duty to disclose such
fact or to abstain from any transaction is imposed on the insider
only in connection with a fact of special significance.

Under the law, what is required to be disclosed is a fact of


special significance which may be (a) a material fact which
would be likely, on being made generally available, to affect the
market price of a security to a significant extent, or (b) one which
a reasonable person would consider especially important in
determining his course of action with regard to the shares of
stock.

(a) Material Fact The concept of a material fact is not a


new one. As early as 1973, the Rules Requiring Disclosure of
Material Facts by Corporations Whose Securities Are Listed In Any
Stock Exchange or Registered/Licensed Under the Securities Act,
issued by the SEC on 29 January 1973, explained that [a] fact is
material if it induces or tends to induce or otherwise affect the
sale or purchase of its securities. Thus, Section 30 of the Revised
Securities Act provides that if a fact affects the sale or purchase
of securities, as well as its price, then the insider would be
required to disclose such information to the other party to the
transaction involving the securities. This is the first definition
given to a fact of special significance.
(b.1) Reasonable Person The second definition given to a fact of
special significance involves the judgment of a reasonable person.
Contrary to the allegations of the respondents, a reasonable
person is not a problematic legal concept that needs to be
clarified for the purpose of giving effect to a statute; rather, it is
the standard on which most of our legal doctrines stand. The
doctrine on negligence uses the discretion of the reasonable man
as the standard.[38] A purchaser in good faith must also take into
account facts which put a reasonable man on his guard. [39] In
addition, it is the belief of the reasonable and prudent man that
an offense was committed that sets the criteria for probable
cause for a warrant of arrest. [40] This Court, in such cases,
differentiated the reasonable and prudent man from a person with
training in the law such as a prosecutor or a judge, and identified
him as the average man on the street, who weighs facts and
circumstances without resorting to the calibrations of our
technical rules of evidence of which his knowledge is nil. Rather,
he relies on the calculus of common sense of which all reasonable
men have in abundance.[41] In the same vein, the U.S. Supreme
Court similarly determined its standards by the actual significance
in the deliberations of a reasonable investor, when it ruled in TSC
Industries, Inc. v. Northway, Inc.,[42] that the determination of
materiality requires delicate assessments of the inferences a
reasonable shareholder would draw from a given set of facts and
the significance of those inferences to him.

(b.2) Nature and Reliability The factors affecting the


second definition of a fact of special significance, which is of such
importance that it is expected to affect the judgment of a
reasonable man, were substantially lifted from a test of
materiality pronounced in the case In the Matter of Investors
Management Co., Inc.[43]:

Among the factors to be considered in determining


whether information is material under this test are the
degree of its specificity, the extent to which it differs from
information previously publicly disseminated, and its
reliability in light of its nature and source and the
circumstances under which it was received.
It can be deduced from the foregoing that the nature and
reliability of a significant fact in determining the course of action a
reasonable person takes regarding securities must be clearly
viewed in connection with the particular circumstances of a
case. To enumerate all circumstances that would render the
nature and reliability of a fact to be of special significance is close
to impossible. Nevertheless, the proper adjudicative body would
undoubtedly be able to determine if facts of a certain nature and
reliability can influence a reasonable persons decision to retain,
sell or buy securities, and thereafter explain and justify its factual
findings in its decision.

(c) Materiality Concept A discussion of the materiality


concept would be relevant to both a material fact which would
affect the market price of a security to a significant extent and/or
a fact which a reasonable person would consider in determining
his or her cause of action with regard to the shares of
stock. Significantly, what is referred to in our laws as a fact of
special significance is referred to in the U.S. as the materiality
concept and the latter is similarly not provided with a precise
definition. In Basic v. Levinson,[44]the U.S. Supreme Court
cautioned against confining materiality to a rigid formula, stating
thus:

A bright-line rule indeed is easier to follow than a


standard that requires the exercise of judgment in the
light of all the circumstances. But ease of application
alone is not an excuse for ignoring the purposes of the
Securities Act and Congress policy decisions. Any
approach that designates a single fact or occurrence as
always determinative of an inherently fact-specific finding
such as materiality, must necessarily
be overinclusive or underinclusive.
Moreover, materiality will depend at any given time upon a
balancing of both the indicated probability that the event will
occur and the anticipated magnitude of the event in light of the
totality of the company activity. [45] In drafting the Securities Act of
1934, the U.S. Congress put emphasis on the limitations to the
definition of materiality:

Although the Committee believes that ideally it would be


desirable to have absolute certainty in the application of
the materiality concept, it is its view that such a goal is
illusory and unrealistic. The materiality concept is
judgmental in nature and it is not possible to
translate this into a numerical formula. The
Committee's advice to the [SEC] is to avoid this
quest for certainty and to continue consideration
of materiality on a case-by-case basis as disclosure
problems are identified. House Committee on
Interstate and Foreign Commerce, Report of the Advisory
Committee on Corporate Disclosure to the Securities and
Exchange Commission, 95th Cong., 1st Sess., 327
(Comm.Print 1977). (Emphasis provided.)[46]

(d) Generally Available Section 30 of the Revised


Securities Act allows the insider the defense that in a
transaction of securities, where the insider is in possession of
facts of special significance, such information is generally
available to the public. Whether information found in a
newspaper, a specialized magazine, or any cyberspace media
be sufficient for the term generally available is a matter which
may be adjudged given the particular circumstances of the
case. The standards cannot remain at a standstill. A medium,
which is widely used today was, at some previous point in
time, inaccessible to most. Furthermore, it would be difficult to
approximate how the rules may be applied to the instant case,
where investigation has not even been started. Respondents
failed to allege that the negotiations of their agreement with
GHB were made known to the public through any form of
media for there to be a proper appreciation of the issue
presented.

Section 36(a) of the Revised Securities Act

As regards Section 36(a) of the Revised Securities Act,


respondents claim that the term beneficial ownership is vague
and that it requires implementing rules to give effect to the
law. Section 36(a) of the Revised Securities Act is a
straightforward provision that imposes upon (1) a beneficial
owner of more than ten percent of any class of any equity
security or (2) a director or any officer of the issuer of such
security, the obligation to submit a statement indicating his or her
ownership of the issuers securities and such changes in his or her
ownership thereof. The said provision reads:

Sec. 36. Directors, officers and principal


stockholders. (a) Every person who is directly or
indirectly the beneficial owner of more than ten per
centum of any [class] of any equity security which is
registered pursuant to this Act, or who is [a] director or an
officer of the issuer of such security, shall file, at the time
of the registration of such security on a securities
exchange or by the effective date of a registration
statement or within ten days after he becomes such a
beneficial owner, director or officer, a statement with the
Commission and, if such security is registered on a
securities exchange, also with the exchange, of the
amount of all equity securities of such issuer of which he
is the beneficial owner, and within ten days after the
close of each calendar month thereafter, if there has been
a change in such ownership during such month, shall file
with the Commission, and if such security is registered on
a securities exchange, shall also file with the exchange, a
statement indicating his ownership at the close of the
calendar month and such changes in his ownership as
have occurred during such calendar month. (Emphasis
provided.)

Section 36(a) refers to the beneficial owner. Beneficial owner has


been defined in the following manner:

[F]irst, to indicate the interest of a beneficiary in trust


property (also called equitable ownership); and second, to
refer to the power of a corporate shareholder to buy or
sell the shares, though the shareholder is not registered
in the corporations books as the owner. Usually, beneficial
ownership is distinguished from naked ownership, which
is the enjoyment of all the benefits and privileges of
ownership, as against possession of the bare title to
property.[47]

Even assuming that the term beneficial ownership was vague, it


would not affect respondents case, where the respondents are
directors and/or officers of the corporation, who are specifically
required to comply with the reportorial requirements under
Section 36(a) of the Revised Securities Act. The validity of a
statute may be contested only by one who will sustain a direct
injury as a result of its enforcement. [48]
Sections 30 and 36 of the Revised Securities Act were
enacted to promote full disclosure in the securities market and
prevent unscrupulous individuals, who by their positions obtain
non-public information, from taking advantage of an uninformed
public. No individual would invest in a market which can be
manipulated by a limited number of corporate insiders. Such
reaction would stifle, if not stunt, the growth of the securities
market. To avert the occurrence of such an event, Section 30 of
the Revised Securities Act prevented the unfair use of non-public
information in securities transactions, while Section 36 allowed
the SEC to monitor the transactions entered into by corporate
officers and directors as regards the securities of their companies.

In the case In the Matter of Investors Management Co., [49] it


was cautioned that the broad language of the anti-fraud
provisions, which include the provisions on insider trading, should
not be circumscribed by fine distinctions and rigid
classifications. The ambit of anti-fraud provisions is necessarily
broad so as to embrace the infinite variety of deceptive conduct.
[50]

In Tatad v. Secretary of Department of Energy,[51] this Court


brushed aside a contention, similar to that made by the
respondents in this case, that certain words or phrases used in a
statute do not set determinate standards, declaring that:

Petitioners contend that the words as far as practicable,


declining and stable should have been defined in R.A.
No. 8180 as they do not set determinate and
determinable standards. This stubborn submission
deserves scant consideration. The dictionary meanings of
these words are well settled and cannot confuse men of
reasonable intelligence. x x x. The fear of petitioners that
these words will result in the exercise of executive
discretion that will run riot is thus groundless. To be sure,
the Court has sustained the validity of similar, if not more
general standards in other cases.

Among the words or phrases that this Court upheld as valid


standards were simplicity and dignity, [52] public interest,[53] and
interests of law and order.[54]

The Revised Securities Act was approved on 23 February


1982. The fact that the Full Disclosure Rules were promulgated by
the SEC only on 24 July 1996 does not render ineffective in the
meantime Section 36 of the Revised Securities Act. It is already
unequivocal that the Revised Securities Act requires full disclosure
and the Full Disclosure Rules were issued to make the
enforcement of the law more consistent, efficient and effective. It
is equally reasonable to state that the disclosure forms later
provided by the SEC, do not, in any way imply that no compliance
was required before the forms were provided. The effectivity of a
statute which imposes reportorial requirements cannot be
suspended by the issuance of specified forms, especially where
compliance therewith may be made even without such forms. The
forms merely made more efficient the processing of requirements
already identified by the statute.

For the same reason, the Court of Appeals made an evident


mistake when it ruled that no civil, criminal or administrative
actions can possibly be had against the respondents in connection
with Sections 8, 30 and 36 of the Revised Securities Act due to
the absence of implementing rules. These provisions are
sufficiently clear and complete by themselves.Their requirements
are specifically set out, and the acts which are enjoined are
determinable. In particular, Section 8[55] of the Revised Securities
Act is a straightforward enumeration of the procedure for the
registration of securities and the particular matters which need to
be reported in the registration statement thereof. The Decision,
dated 20 August 1998, provides no valid reason to exempt the
respondent IRC from such requirements. The lack of implementing
rules cannot suspend the effectivity of these provisions. Thus, this
Court cannot find any cogent reason to prevent the SEC from
exercising its authority to investigate respondents for violation of
Section 8 of the Revised Securities Act.

II. The right to cross-examination is not absolute


and cannot be demanded during
investigative proceedings before the PED.

In its assailed Decision dated 20 August 1998, the Court of


Appeals pronounced that the PED Rules of Practice and Procedure
was invalid since Section 8, Rule V [56]thereof failed to provide for
the parties right to cross-examination, in violation of the
Administrative Code of 1987 particularly Section 12(3), Chapter 3,
Book VII thereof. This ruling is incorrect.

Firstly, Section 4, Rule I of the PED Rules of Practice and


Procedure, categorically stated that the proceedings before the
PED are summary in nature:

Section 4. Nature of Proceedings Subject to the


requirements of due process, proceedings before the PED
shall be summary in nature not necessarily adhering to or
following the technical rules of evidence obtaining in the
courts of law. The Rules of Court may apply in said
proceedings in suppletory character whenever
practicable.
Rule V of the PED Rules of Practice and Procedure further
specified that:

Section 5. Submission of Documents During the


preliminary conference/hearing, or immediately
thereafter, the Hearing Officer may require the parties to
simultaneously submit their respective verified position
papers accompanied by all supporting documents and the
affidavits of their witnesses, if any which shall take the
place of their direct testimony. The parties shall furnish
each other with copies of the position papers together
with the supporting affidavits and documents submitted
by them.

Section 6. Determination of necessity of hearing.


Immediately after the submission by the parties of their
position papers and supporting documents, the Hearing
Officer shall determine whether there is a need for a
formal hearing. At this stage, he may, in his discretion,
and for the purpose of making such determination, elicit
pertinent facts or information, including documentary
evidence, if any, from any party or witness to complete,
as far as possible, the facts of the case. Facts or
information so elicited may serve as basis for his
clarification or simplifications of the issues in the
case. Admissions and stipulation of facts to abbreviate the
proceedings shall be encouraged.

Section 7. Disposition of Case. If the Hearing Officer finds


no necessity of further hearing after the parties have
submitted their position papers and supporting
documents, he shall so inform the parties stating the
reasons therefor and shall ask them to acknowledge the
fact that they were so informed by signing the minutes of
the hearing and the case shall be deemed submitted for
resolution.

As such, the PED Rules provided that the Hearing Officer may
require the parties to submit their respective verified position
papers, together with all supporting documents and affidavits of
witnesses. A formal hearing was not mandatory; it was within the
discretion of the Hearing Officer to determine whether there was
a need for a formal hearing.Since, according to the foregoing
rules, the holding of a hearing before the PED is discretionary,
then the right to cross-examination could not have been
demanded by either party.

Secondly, it must be pointed out that Chapter 3, Book VII of


the Administrative Code, entitled Adjudication, does not affect the
investigatory functions of the agencies. The law creating the PED,
Section 8 of Presidential Decree No. 902-A, as amended, defines
the authority granted to the PED, thus:

SEC. 8. The Prosecution and Enforcement Department shall have,


subject to the Commissions control and supervision, the exclusive
authority to investigate, on complaint or motu proprio, any act or
omission of the Board of Directors/Trustees of corporations, or of
partnerships, or of other associations, or of their stockholders, officers or
partners, including any fraudulent devices, schemes or representations,
in violation of any law or rules and regulations administered and
enforced by the Commission; to file and prosecute in accordance with
law and rules and regulations issued by the Commission and in
appropriate cases, the corresponding criminal or civil case before the
Commission or the proper court or body upon prima facie finding of
violation of any laws or rules and regulations administered and enforced
by the Commission; and to perform such other powers and functions as
may be provided by law or duly delegated to it by the Commission.
(Emphasis provided.)

The law creating PED empowers it to investigate violations of the


rules and regulations promulgated by the SEC and to file and
prosecute such cases. It fails to mention any adjudicatory
functions insofar as the PED is concerned. Thus, the PED Rules of
Practice and Procedure need not comply with the provisions of the
Administrative Code on adjudication, particularly Section 12(3),
Chapter 3, Book VII.

In Cario v. Commission on Human Rights,[57] this Court sets out the


distinction between investigative and adjudicative functions, thus:

Investigate, commonly understood, means to


examine, explore, inquire or delve or probe into, research
on, study. The dictionary definition of investigate is to
observe or study closely; inquire into systematically: to
search or inquire into xx to subject to an official probe xx:
to conduct an official inquiry. The purpose of an
investigation, of course is to discover, to find out, to learn,
obtain information. Nowhere included or intimated is the
notion of settling, deciding or resolving a controversy
involved in the facts inquired into by application of the
law to the facts established by the inquiry.

The legal meaning of investigate is essentially the


same: (t)o follow up step by step by patient inquiry or
observation. To trace or track; to search into; to examine
and inquire into with care and accuracy; to find out by
careful inquisition; examination; the taking of evidence; a
legal inquiry; to inquire; to make an investigation,
investigation being in turn described as (a)n
administrative function, the exercise of which ordinarily
does not require a hearing. 2 Am J2d Adm L Sec. 257; xx
an inquiry, judicial or otherwise, for the discovery and
collection of facts concerning a certain matter or matters.

Adjudicate, commonly or popularly understood,


means to adjudge, arbitrate, judge, decide, determine,
resolve, rule on, settle. The dictionary defines the term as
to settle finally (the rights and duties of parties to a court
case) on the merits of issues raised: xx to pass judgment
on: settle judicially: xx act as judge. And adjudge means
to decide or rule upon as a judge or with judicial or quasi-
judicial powers: xx to award or grant judicially in a case of
controversy x x x.

In a legal sense, adjudicate means: To settle in the


exercise of judicial authority. To determine
finally. Synonymous with adjudge in its strictest sense;
and adjudge means: To pass on judicially, to decide,
settle, or decree, or to sentence or condemn. x x x Implies
a judicial determination of a fact, and the entry of a
judgment.

There is no merit to the respondents averment that the


sections under Chapter 3, Book VII of the Administrative Code, do
not distinguish between investigative and adjudicatory
functions. Chapter 3, Book VII of the Administrative Code, is
unequivocally entitled Adjudication.
Respondents insist that the PED performs adjudicative
functions, as enumerated under Section 1(h) and (j), Rule II; and
Section 2(4), Rule VII of the PED Rules of Practice and Procedure:

Section 1. Authority of the Prosecution and Enforcement


Department Pursuant to Presidential Decree No. 902-A, as
amended by Presidential Decree No. 1758, the
Prosecution and Enforcement Department is primarily
charged with the following:

xxxx

(h) Suspends or revokes, after proper notice and hearing


in accordance with these Rules, the franchise or
certificate of registration of corporations, partnerships or
associations, upon any of the following grounds:

1. Fraud in procuring its certificate of registration;

2. Serious misrepresentation as to what the corporation


can do or is doing to the great prejudice of or damage to
the general public;

3. Refusal to comply or defiance of any lawful order of the


Commission restraining commission of acts which would
amount to a grave violation of its franchise;

xxxx
(j) Imposes charges, fines and fees, which by law, it is
authorized to collect;

xxxx

Section 2. Powers of the Hearing Officer. The Hearing


Officer shall have the following powers:

xxxx

4. To cite and/or declare any person in direct or indirect


contempt in accordance with pertinent provisions of the
Rules of Court.

Even assuming that these are adjudicative functions, the


PED, in the instant case, exercised its investigative powers; thus,
respondents do not have the requisite standing to assail the
validity of the rules on adjudication. A valid source of a statute or
a rule can only be contested by one who will sustain a direct
injury as a result of its enforcement. [58]In the instant case,
respondents are only being investigated by the PED for their
alleged failure to disclose their negotiations with GHB and the
transactions entered into by its directors involving IRC shares. The
respondents have not shown themselves to be under any
imminent danger of sustaining any personal injury attributable to
the exercise of adjudicative functions by the SEC. They are not
being or about to be subjected by the PED to charges, fees or
fines; to citations for contempt; or to the cancellation of their
certificate of registration under Section 1(h), Rule II of the PED
Rules of Practice and Procedure.
To repeat, the only powers which the PED was likely to
exercise over the respondents were investigative in nature, to wit:

Section 1. Authority of the Prosecution and Enforcement


Department Pursuant to Presidential Decree No. 902-A, as
amended by Presidential Decree No. 1758, the
Prosecution and Enforcement Department is primarily
charged with the following:
xxxx

b. Initiates proper investigation of corporations and


partnerships or persons, their books, records and
other properties and assets, involving their business
transactions, in coordination with the operating
department involved;

xxxx

e. Files and prosecutes civil or criminal cases before the


Commission and other courts of justice involving
violations of laws and decrees enforced by the
Commission and the rules and regulations
promulgated thereunder;

f. Prosecutes erring directors, officers and stockholders


of corporations and partnerships, commercial paper
issuers or persons in accordance with the pertinent
rules on procedures;
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
comply with Section 12, Chapter 3, Rule VII of the Administrative
Code, which affects only the adjudicatory functions of
administrative bodies. Thus, the PED would still be able to
investigate the respondents under its rules for their alleged failure
to disclose their negotiations with GHB and the transactions
entered into by its directors involving IRC shares.

This is not to say that administrative bodies performing


adjudicative functions are required to strictly comply with the
requirements of Chapter 3, Rule VII of the Administrative Code,
particularly, the right to cross-examination. It should be noted
that under Section 2.2 of Executive Order No. 26, issued on 7
October 1992, abbreviated proceedings are prescribed in the
disposition of administrative cases:

2. Abbreviation of Proceedings. All administrative


agencies are hereby directed to adopt and include in their
respective Rules of Procedure the following provisions:
xxxx

2.2 Rules adopting, unless otherwise provided by special


laws and without prejudice to Section 12, Chapter 3, Book
VII of the Administrative Code of 1987, the mandatory use
of affidavits in lieu of direct testimonies and the preferred
use of depositions whenever practicable and convenient.

As a consequence, in proceedings before administrative or


quasi-judicial bodies, such as the National Labor Relations
Commission and the Philippine Overseas Employment Agency,
created under laws which authorize summary proceedings,
decisions may be reached on the basis of position papers or other
documentary evidence only.They are not bound by technical rules
of procedure and evidence. [59] In fact, the hearings before such
agencies do not connote full adversarial proceedings. [60] Thus, it is
not necessary for the rules to require affiants to appear and
testify and to be cross-examined by the counsel of the adverse
party. To require otherwise would negate the summary nature of
the administrative or quasi-judicial proceedings. [61] In Atlas
Consolidated Mining and Development Corporation v. Factoran, Jr.,
[62]
this Court stated that:

[I]t is sufficient that administrative findings of fact are


supported by evidence, or negatively stated, it is
sufficient that findings of fact are not shown to be
unsupported by evidence. Substantial evidence is all that
is needed to support an administrative finding of fact, and
substantial evidence is such relevant evidence as a
reasonable mind might accept as adequate to support a
conclusion.

In order to comply with the requirements of due process, what is


required, among other things, is that every litigant be given
reasonable opportunity to appear and defend his right and to
introduce relevant evidence in his favor.[63]

III. The Securities Regulations Code


did not repeal Sections 8, 30
and 36 of the Revised
Securities Act since said
provisions were reenacted in
the new law.
The Securities Regulations Code absolutely repealed the
Revised Securities Act. While the absolute repeal of a law
generally deprives a court of its authority to penalize the person
charged with the violation of the old law prior to its appeal, an
exception to this rule comes about when the repealing law
punishes the act previously penalized under the old law. The
Court, in Benedicto v. Court of Appeals, sets down the rules in
such instances:[64]

As a rule, an absolute repeal of a penal law has the


effect of depriving the court of its authority to punish a
person charged with violation of the old law prior to its
repeal. This is because an unqualified repeal of a penal
law constitutes a legislative act of rendering legal what
had been previously declared as illegal, such that the
offense no longer exists and it is as if the person who
committed it never did so. There are,
however, exceptions to the rule. One is the inclusion of a
saving clause in the repealing statute that provides that
the repeal shall have no effect on pending
actions. Another exception is where the repealing
act reenacts the former statute and punishes the act
previously penalized under the old law. In such instance,
the act committed before the reenactment continues to
be an offense in the statute books and pending cases are
not affected, regardless of whether the new penalty to be
imposed is more favorable to the accused. (Emphasis
provided.)

In the present case, a criminal case may still be filed against


the respondents despite the repeal, since Sections 8, [65] 12,[66] 26,
[67]
27[68] and 23[69] of the Securities Regulations Code impose
duties that are substantially similar to Sections 8, 30 and 36 of
the repealed Revised Securities Act.

Section 8 of the Revised Securities Act, which previously


provided for the registration of securities and the information that
needs to be included in the registration statements, was
expanded under Section 12, in connection with Section 8 of the
Securities Regulations Code. Further details of the information
required to be disclosed by the registrant are explained in the
Amended Implementing Rules and Regulations of the Securities
Regulations Code, issued on 30 December 2003, particularly
Sections 8 and 12 thereof.

Section 30 of the Revised Securities Act has been reenacted


as Section 27 of the Securities Regulations Code, still penalizing
an insiders misuse of material and non-public information about
the issuer, for the purpose of protecting public investors. Section
26 of the Securities Regulations Code even widens the coverage
of punishable acts, which intend to defraud public investors
through various devices, misinformation and omissions.

Section 23 of the Securities Regulations Code was practically


lifted from Section 36(a) of the Revised Securities Act. Both
provisions 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 indicating his or her ownership of the issuers securities
and such changes in his or her ownership thereof.

Clearly, the legislature had not intended to deprive the


courts of their authority to punish a person charged with violation
of the old law that was repealed; in this case, the Revised
Securities Act.

IV. The SEC retained the jurisdiction


to investigate violations of the
Revised Securities Act,
reenacted in the Securities
Regulations Code, despite the
abolition of the PED.

Section 53 of the Securities Regulations Code clearly


provides that criminal complaints for violations of rules and
regulations enforced or administered by the SEC shall be referred
to the Department of Justice (DOJ) for preliminary investigation,
while the SEC nevertheless retains limited investigatory powers.
[70]
Additionally, the SEC may still impose the appropriate
administrative sanctions under Section 54 of the aforementioned
law.[71]

In Morato v. Court of Appeals,[72] the cases therein were still


pending before the PED for investigation and the SEC for
resolution when the Securities Regulations Code was enacted. The
case before the SEC involved an intra-corporate dispute, while the
subject matter of the other case investigated by the PED involved
the schemes, devices, and violations of pertinent rules and laws
of the companys board of directors. The enactment of the
Securities Regulations Code did not result in the dismissal of the
cases; rather, this Court ordered the transfer of one case to the
proper regional trial court and the SEC to continue with the
investigation of the other case.
The case at bar is comparable to the aforecited case. In this case,
the SEC already commenced the investigative proceedings
against respondents as early as 1994. Respondents were called to
appear before the SEC and explain their failure to disclose
pertinent information on 14 August 1994. Thereafter, the SEC
Chairman, having already made initial findings that respondents
failed to make timely disclosures of their negotiations with GHB,
ordered a special investigating panel to hear the case. The
investigative proceedings were interrupted only by the writ of
preliminary injunction issued by the Court of Appeals, which
became permanent by virtue of the Decision, dated 20 August
1998, in C.A.-G.R. SP No. 37036. During the pendency of this
case, the Securities Regulations Code repealed the Revised
Securities Act. As in Morato v. Court of Appeals, the repeal cannot
deprive SEC of its jurisdiction to continue investigating the case;
or the regional trial court, to hear any case which may later be
filed against the respondents.

V. The instant case has not yet


prescribed.

Respondents have taken the position that this case is moot and
academic, since any criminal complaint that may be filed against
them resulting from the SECs investigation of this case has
already prescribed.[73] They point out that the prescription period
applicable to offenses punished under special laws, such as
violations of the Revised Securities Act, is twelve years under
Section 1 of Act No. 3326, as amended by Act No. 3585 and Act
No. 3763, entitled An Act to Establish Periods of Prescription for
Violations Penalized by Special Acts and Municipal Ordinances and
to Provide When Prescription Shall Begin to Act. [74] Since the
offense was committed in 1994, they reasoned that prescription
set in as early as 2006 and rendered this case moot. Such
position, however, is incongruent with the factual circumstances
of this case, as well as the applicable laws and jurisprudence.

It is an established doctrine that a preliminary investigation


interrupts the prescription period.[75] A preliminary investigation is
essentially a determination whether an offense has been
committed, and whether there is probable cause for the accused
to have committed an offense:

A preliminary investigation is merely inquisitorial, and it is


often the only means of discovering the persons who may
be reasonably charged with a crime, to enable the fiscal to
prepare the complaint or information. It is not a trial of the
case on the merits and has no purpose except that of
determining whether a crime has been committed or
whether there is probable cause to believe that the accused
is guilty thereof.[76]

Under Section 45 of the Revised Securities Act, which is


entitled Investigations, Injunctions and Prosecution of
Offenses, the Securities Exchange Commission (SEC) has the
authority to make such investigations as it deems necessary to
determine whether any person has violated or is about to violate
any provision of this Act XXX. After a finding that a person has
violated the Revised Securities Act, the SEC may refer the case to
the DOJ for preliminary investigation and prosecution.

While the SEC investigation serves the same purpose and


entails substantially similar duties as the preliminary investigation
conducted by the DOJ, this process cannot simply be
disregarded. In Baviera v. Paglinawan,[77] this Court enunciated
that a criminal complaint is first filed with the SEC, which
determines the existence of probable cause, before a
preliminary investigation can be commenced by the DOJ. In
the aforecited case, the complaint filed directly with the DOJ was
dismissed on the ground that it should have been filed first with
the SEC. Similarly, the offense was a violation of the Securities
Regulations Code, wherein the procedure for criminal prosecution
was reproduced from Section 45 of the Revised Securities
Act. [78] This Court affirmed the dismissal, which it explained thus:

The Court of Appeals held that under the above


provision, a criminal complaint for violation of any law or
rule administered by the SEC must first be filed with the
latter. If the Commission finds that there is probable
cause, then it should refer the case to the DOJ. Since
petitioner failed to comply with the foregoing procedural
requirement, the DOJ did not gravely abuse its discretion
in dismissing his complaint in I.S. No. 2004-229.

A criminal charge for violation of the Securities


Regulation Code is a specialized dispute. Hence, it must
first be referred to an administrative agency of special
competence, i.e., the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a controversy
involving a question within the jurisdiction of the
administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the
specialized knowledge and expertise of said
administrative tribunal to determine technical and
intricate matters of fact. The Securities Regulation Code
is a special law. Its enforcement is particularly vested in
the SEC. Hence, all complaints for any violation of the
Code and its implementing rules and regulations should
be filed with the SEC. Where the complaint is criminal in
nature, the SEC shall indorse the complaint to the DOJ for
preliminary investigation and prosecution as provided in
Section 53.1 earlier quoted.

We thus agree with the Court of Appeals that


petitioner committed a fatal procedural lapse when he
filed his criminal complaint directly with the DOJ. Verily,
no grave abuse of discretion can be ascribed to the DOJ in
dismissing petitioners complaint.

The said case puts in perspective the nature of the investigation undertaken
by the SEC, which is a requisite before a criminal case may be referred to the
DOJ. The Court declared that it is imperative that the criminal prosecution be
initiated before the SEC, the administrative agency with the special competence.

It should be noted that the SEC started investigative


proceedings against the respondents as early as 1994. This
investigation effectively interrupted the prescription
period.However, said proceedings were disrupted by a preliminary
injunction issued by the Court of Appeals on 5 May 1995, which
effectively enjoined the SEC from filing any criminal, civil, or
administrative case against the respondents herein. [79] Thereafter,
on 20 August 1998, the appellate court issued the assailed
Decision in C.A. G.R. SP. No. 37036 ordering that the writ of
injunction be made permanent and prohibiting the SEC from
taking cognizance of and initiating any action against herein
respondents. The SEC was bound to comply with the
aforementioned writ of preliminary injunction and writ of
injunction issued by the Court of Appeals enjoining it from
continuing with the investigation of respondents for 12 years. Any
deviation by the SEC from the injunctive writs would be sufficient
ground for contempt. Moreover, any step 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.

An investigation of the case by any other administrative or


judicial body would likewise be impossible pending the injunctive
writs issued by the Court of Appeals. Given the ruling of this Court
in Baviera v. Paglinawan,[80] the DOJ itself could not have taken
cognizance of the case and conducted its preliminary
investigation without a prior determination of probable cause by
the SEC. Thus, even presuming that the DOJ was not enjoined by
the Court of Appeals from conducting a preliminary investigation,
any preliminary investigation conducted by the DOJ would have
been a futile effort since the SEC had only started with its
investigation when respondents themselves applied for and were
granted an injunction by the Court of Appeals.

Moreover, the DOJ could not have conducted a preliminary


investigation or filed a criminal case against the respondents
during the time that issues on the effectivity of Sections 8, 30 and
36 of the Revised Securities Act and the PED Rules of Practice and
Procedure were still pending before the Court of Appeals. After the
Court of Appeals declared the aforementioned statutory and
regulatory provisions invalid and, thus, no civil, criminal or
administrative case may be filed against the respondents for
violations thereof, the DOJ would have been at a loss, as there
was no statutory provision which respondents could be accused of
violating.
Accordingly, it is only after this Court corrects the erroneous
ruling of the Court of Appeals in its Decision dated 20 August
1998 that either the SEC or DOJ may properly conduct any kind of
investigation against the respondents for violations of Sections 8,
30 and 36 of the Revised Securities Act. Until then, the
prescription period is deemed interrupted.
To reiterate, the SEC must first conduct its investigations and
make a finding of probable cause in accordance with the doctrine
pronounced in Baviera v. Paglinawan.[81]In this case, the DOJ was
precluded from initiating a preliminary investigation since the SEC
was halted by the Court of Appeals from continuing with its
investigation. Such a situation leaves the prosecution of the case
at a standstill, and neither the SEC nor the DOJ can conduct any
investigation against the respondents, who, in the first place,
sought the injunction to prevent their prosecution. All that the
SEC could do in order to break the impasse was to have the
Decision of the Court of Appeals overturned, as it had done at the
earliest opportunity in this case. Therefore, the period during
which the SEC was prevented from continuing with its
investigation should not be counted against it. The law on the
prescription period was never intended to put the prosecuting
bodies in an impossible bind in which the prosecution of a case
would be placed way beyond their control; for even if they avail
themselves of the proper remedy, they would still be barred from
investigating and prosecuting the case.

Indubitably, the prescription period is interrupted by


commencing the proceedings for the prosecution of the
accused. In criminal cases, this is accomplished by initiating the
preliminary investigation. The prosecution of offenses punishable
under the Revised Securities Act and the Securities Regulations
Code is initiated by the filing of a complaint with the SEC or by an
investigation conducted by the SEC motu proprio. Only after a
finding of probable cause is made by the SEC can the DOJ
instigate a preliminary investigation. Thus, the investigation that
was commenced by the SEC in 1995, soon after it discovered the
questionable acts of the respondents, effectively interrupted the
prescription period. Given the nature and purpose of the
investigation conducted by the SEC, which is equivalent to the
preliminary investigation conducted by the DOJ in criminal cases,
such investigation would surely interrupt the prescription period.

VI. The Court of Appeals was


justified in denying SECs
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 Motion for Leave to Quash SEC Omnibus Orders,
dated 23 October 1995, in the light of its admission that the PED
had the sole authority to investigate the present case. On this
matter, this Court cannot agree with the SEC.

In the assailed decision, the Court of Appeals denied the


SECs Motion for Leave to Quash SEC Omnibus Orders, since it
found other issues that were more important than whether or not
the PED was the proper body to investigate the matter. Its refusal
was premised on its earlier finding that no criminal, civil, or
administrative case may be filed against the respondents under
Sections 8, 30 and 36 of the Revised Securities Act, due to the
absence of any implementing rules and regulations. Moreover, the
validity of the PED Rules on Practice and Procedure was also
raised as an issue. The Court of Appeals, thus, reasoned that if
the quashal of the orders was granted, then it would be deprived
of the opportunity to determine the validity of the aforementioned
rules and statutory provisions. In addition, the SEC would merely
pursue the same case without the Court of Appeals having
determined whether or not it may do so in accordance with due
process requirements. Absent a determination of whether the SEC
may file a case against the respondents based on the assailed
provisions of the Revised Securities Act, it would have been
improper for the Court of Appeals to grant the SECs Motion for
Leave to Quash SEC Omnibus Orders.

IN ALL, this Court rules that no implementing rules were


needed to render effective Sections 8, 30 and 36 of the Revised
Securities Act; nor was the PED Rules of Practice and Procedure
invalid, prior to the enactment of the Securities Regulations Code,
for failure to provide parties with the right to cross-examine the
witnesses presented against them. Thus, the respondents may be
investigated by the appropriate authority under the proper rules
of procedure of the Securities Regulations Code for violations of
Sections 8, 30, and 36 of the Revised Securities Act. [82]

IN VIEW OF THE FOREGOING, the instant Petition


is GRANTED. This Court hereby REVERSES the assailed Decision
of the Court of Appeals promulgated on 20 August 1998 in CA-
G.R. SP No. 37036 and LIFTS the permanent injunction issued
pursuant thereto. This Court further DECLARES that the
investigation of the respondents for violations of Sections 8, 30
and 36 of the Revised Securities Act may be undertaken by the
proper authorities in accordance with the Securities Regulations
Code. No costs.

SO ORDERED.
G.R. No. 180064 September 16, 2013

JOSE U. PUA and BENJAMIN HANBEN U. PUA, Petitioners,


vs.
CITIBANK, N. A., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 21, 2007 and
Resolution3 dated October 16, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 79297, which
reversed and set aside the Orders dated May 14, 2003 4 and July 16, 20035 of the Regional Trial
Court of Cauayan City, Isabela, Branch 19 (RTC), dismissing petitioners Jose(Jose) and Benjamin
Hanben U. Pua's (petitioners) complaint against respondent Citibank, N. A. (respondent).

The Facts

On December 2, 2002, petitioners filed before the RTC a Complaint6 for declaration of nullity of
contract and sums of money with damages against respondent, 7 docketed as Civil Case No. 19-
1159.8 In their complaint, petitioners alleged that they had been depositors of Citibank Binondo
Branch (Citibank Binondo) since 1996. Sometime in 1999, Guada Ang, Citibank Binondos Branch
Manager, invited Jose to a dinner party at the Manila Hotel where he was introduced to several
officers and employees of Citibank Hongkong Branch (Citibank Hongkong). 9 A few months after,
Chingyee Yau (Yau), Vice-President of Citibank Hongkong, came to the Philippines to sell securities
to Jose. They averred that Yau required Jose to open an account with Citibank Hongkong as it is one
of the conditions for the sale of the aforementioned securities.10 After opening such account, Yau
offered and sold to petitioners numerous securities11 issued by various public limited companies
established in Jersey, Channel I sands. The offer, sale, and signing of the subscription agreements
of said securities were all made and perfected at Citibank Binondo in the presence of its officers and
employees.12 Later on, petitioners discovered that the securities sold to them were not registered
with the Securities and Exchange Commission (SEC)and that the terms and conditions covering the
subscription were not likewise submitted to the SEC for evaluation, approval, and
registration.13 Asserting that respondents actions are in violation of Republic Act No.8799, entitled
the "Securities Regulation Code" (SRC), they assailed the validity of the subscription agreements
and the terms and conditions thereof for being contrary to law and/or public policy.14

For its part, respondent filed a motion to dismiss15 alleging, inter alia, that petitioners complaint
should be dismissed outright for violation of the doctrine of primary jurisdiction. It pointed out that the
merits of the case would largely depend on the issue of whether or not there was a violation of the
SRC, in particular, whether or not there was a sale of unregistered securities. In this regard,
respondent contended that the SRC conferred upon the SEC jurisdiction to investigate compliance
with its provisions and thus, petitioners complaint should be first filed with the SEC and not directly
before the RTC.16

Petitioners opposed17 respondents motion to dismiss, maintaining that the RTC has jurisdiction over
their complaint. They asserted that Section 63of the SRC expressly provides that the RTC has
exclusive jurisdiction to hear and decide all suits to recover damages pursuant to Sections 56 to 61
of the same law.18

The RTC Ruling

In an Order19 dated May 14, 2003, the RTC denied respondents motion to dismiss. It noted that
petitioners complaint is for declaration of nullity of contract and sums of money with damages and,
as such, it has jurisdiction to hear and decide upon the case even if it involves the alleged sale of
securities. It ratiocinated that the legal questions or issues arising from petitioners causes of action
against respondent are more appropriate for the judiciary than for an administrative agency to
resolve.20

Respondent filed an omnibus motion21 praying, among others, for there consideration of the
aforesaid ruling, which petitioners, in turn, opposed. 22 In an Order23 dated July 16, 2003, the RTC
denied respondents omnibus motion with respect to its prayer for reconsideration. Dissatisfied,
respondent filed a petition for certiorari before the CA.24

The CA Ruling

In a Decision25 dated May 21, 2007, the CA reversed and set aside the RTCs Orders and dismissed
petitioners complaint for violation of the doctrine of primary jurisdiction. The CA agreed with
respondents contention that since the case would largely depend on the issue of whether or not the
latter violated the provisions of the SRC, the matter is within the special competence or knowledge
of the SEC. Citing the case of Baviera v. Paglinawan26(Baviera), the CA opined that all complaints
involving violations of the SRC should be first filed before the SEC.27

Aggrieved, petitioners moved for reconsideration,28 which was, however, denied by the CA in a
Resolution29dated October 16, 2007.Hence, this petition.

The Issue Before the Court

The essential issue in this case is whether or not petitioners action falls within the primary
jurisdiction of the SEC.

Petitioners reiterate their original position that the SRC itself provides that civil cases for damages
arising from violations of the same law fall within the exclusive jurisdiction of the regional trial
courts.30

On the contrary, respondent maintains that since petitioners complaint would necessarily touch on
the issue of whether or not the former violated certain provisions of the SRC, then the said complaint
should have been first filed with the SEC which has the technical competence to resolve such
dispute.31

The Courts Ruling

The petition is meritorious.

At the outset, the Court observes that respondent erroneously relied on the Baviera ruling to support
its position that all complaints involving purported violations of the SRC should be first referred to the
SEC. A careful reading of the Baviera case would reveal that the same involves a criminal
prosecution of a purported violator of the SRC, and not a civil suit such as the case at bar. The
pertinent portions of the Baviera ruling thus read:

A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it
must first be referred to an administrative agency of special competence, i.e., the SEC. Under the
doctrine of primary jurisdiction, courts will not determine a controversy involving a question within the
jurisdiction of the administrative tribunal, where the question demands the exercise of sound
administrative discretion requiring the specialized knowledge and expertise of said administrative
tribunal to determine technical and intricate matters of fact. The Securities Regulation Code is a
special law. Its enforcement is particularly vested in the SEC.
Hence, all complaints for any violation of the Code and its implementing rules and regulations should
be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the complaint
to the DOJ for preliminary investigation and prosecution as provided in Section 53.1 earlier quoted.

We thus agree with the Court of Appeals that petitioner committed a fatal procedural lapse when he
filed his criminal complaint directly with the DOJ. Verily, no grave abuse of discretion can be ascribed
to the DOJ in dismissing petitioners complaint.32 (Emphases and underscoring supplied)

Records show that petitioners complaint constitutes a civil suit for declaration of nullity of contract
and sums of money with damages, which stemmed from respondents alleged sale of unregistered
securities, in violation of the various provisions of the SRC and not a criminal case such as that
involved in Baviera.

In this light, when the Court ruled in Baviera that "all complaints for any violation of the [SRC] x x x
should be filed with the SEC,"33 it should be construed as to apply only to criminal and not to civil
suits such as petitioners complaint.

Moreover, it is a fundamental rule in procedural law that jurisdiction is conferred by law; 34 it cannot be
inferred but must be explicitly stated therein. Thus, when Congress confers exclusive jurisdiction to a
judicial or quasi-judicial entity over certain matters by law, this, absent any other indication to the
contrary, evinces its intent to exclude other bodies from exercising the same.

It is apparent that the SRC provisions governing criminal suits are separate and distinct from those
which pertain to civil suits. On the one hand, Section 53 of the SRC governs criminal suits involving
violations of the said law, viz.:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses.

53.1. The Commission may, in its discretion, make such investigations as it deems necessary to
determine whether any person has violated or is about to violate any provision of this Code, any rule,
regulation or order thereunder, or any rule of an Exchange, registered securities association,
clearing agency, other self-regulatory organization, and may require or permit any person to file with
it a statement in writing, under oath or otherwise, as the Commission shall determine, as to all facts
and circumstances concerning the matter to be investigated. The Commission may publish
information concerning any such violations, and to investigate any fact, condition, practice or matter
which it may deem necessary or proper to aid in the enforcement of the provisions of this Code, in
the prescribing of rules and regulations thereunder, or in securing information to serve as a basis for
recommending further legislation concerning the matters to which this Code relates: Provided,
however, That any person requested or subpoenaed to produce documents or testify in any
investigation shall simultaneously be notified in writing of the purpose of such investigation:
Provided, further, That all criminal complaints for violations of this Code, and the implementing rules
and regulations enforced or administered by the Commission shall be referred to the Department of
Justice for preliminary investigation and prosecution before the proper court:

Provided, furthermore, That in instances where the law allows independent civil or criminal
proceedings of violations arising from the same act, the Commission shall take appropriate action to
implement the same: Provided, finally, That the investigation, prosecution, and trial of such cases
shall be given priority.
On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the SRC pertain to civil suits
involving violations of the same law. Among these, the applicable provisions to this case are
Sections 57.1 and 63.1 of the SRC which provide:

SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports.

57.1. Any person who:

(a) Offers to sell or sells a security in violation of Chapter III;

or

(b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code,
by the use of any means or instruments of transportation or communication, by means of a
prospectus or other written or oral communication, which includes an untrue statement of a
material fact or omits to state a material fact necessary in order to make the statements, in
the light of the circumstances under which they were made, not misleading (the purchaser
not knowing of such untruth or omission), and who shall fail in the burden of proof that he did
not know, and in the exercise of reasonable care could not have known, of such untruth or
omission, shall be liable to the person purchasing such security from him, who may sue to
recover the consideration paid for such security with interest thereon, less the amount of any
income received thereon, upon the tender of such security, or for damages if he no longer
owns the security.

xxxx

SEC. 63. Amount of Damages to be Awarded. 63.1. All suits to recover damages pursuant to
Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court which shall have
exclusive jurisdiction to hear and decide such suits. The Court is hereby authorized to award
damages in an amount not exceeding triple the amount of the transaction plus actual damages.

x x x x (Emphases and underscoring supplied)

Based on the foregoing, it is clear that cases falling under Section 57of the SRC, which pertain to
civil liabilities arising from violations of the requirements for offers to sell or the sale of securities, as
well as other civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be exclusively brought
before the regional trial courts. It is a well-settled rule in statutory construction that the term "shall" is
a word of command, and one which has always or which must be given a compulsory meaning, and
it is generally imperative or mandatory.35 Likewise, it is equally revelatory that no SRC provision of
similar import is found in its sections governing criminal suits; quite the contrary, the SRC states that
criminal cases arising from violations of its provisions should be first referred to the SEC. 1wphi1

Therefore, based on these considerations, it stands to reason that civil suits falling under the SRC
are under the exclusive original jurisdiction of the regional trial courts and hence, need not be first
filed before the SEC, unlike criminal cases wherein the latter body exercises primary jurisdiction.

All told, petitioners' filing of a civil suit against respondent for purported violations of the SRC was
properly filed directly before the RTC.
WHEREFORE, the petition is GRANTED. Accordingly, the Court of Appeals' Decision dated May 21,
2007 and Resolution dated October 16,2007 in CA-G.R. SP No. 79297 are hereby REVERSED and
SET ASIDE. Let Civil Case No. 19-1159 be REINSTATED and REMANDED to the Regional Trial
Court of Cauayan City, Isabela, Branch 19 for further proceedings.

SO ORDERED.

G.R. No. 195542, March 19, 2014

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. OUDINE SANTOS, Respondent.

DECISION

PEREZ, J.:

Before us is another cautionary tale of an investment arrangement which, at the outset, appeared good,
unraveling unhappily as a deal toogoodtobetrue.

This petition for review on certiorari under Rule 45 of the Rules of Court assails the Decision 1 of the Court of
Appeals in CAG.R. SP No. 112781 affirming the Resolutions2 of the Secretary of Justice in I.S. No. 2007
1054 which, among others, dismissed the criminal complaint for violation of Section 28 of Republic Act No.
8799, the Securities Regulation Code, filed by petitioner Securities and Exchange Commission (SEC) against
respondent Oudine Santos (Santos).

Sometime in 2007, yet another investment scam was exposed with the disappearance of its primary
perpetrator, Michael H.K. Liew (Liew), a selfstyled financial guru and Chairman of the Board of Directors of
Performance Investment Products Corporation (PIPCBVI), a foreign corporation registered in the British
Virgin Islands.

To do business in the Philippines, PIPCBVI incorporated herein as Philippine International Planning Center
Corporation (PIPC Corporation).

Because the head of PIPC Corporation had gone missing and with it the monies and investment of a
significant number of investors, the SEC was flooded with complaints from thirtyone (31) individuals
against PIPC Corporation, its directors, officers, employees, agents and brokers for alleged violation of
certain provisions of the Securities Regulation Code, including Section 28 thereof. Santos was charged in
the complaints in her capacity as investment consultant of PIPC Corporation, who supposedly induced
private complainants Luisa Mercedes P. Lorenzo (Lorenzo) and Ricky Albino P. Sy (Sy), to invest their monies
in PIPC Corporation.

The common recital in the 31 complaints is that: chanRoble svirtualLawlibrary

x x x [D]ue to the inducements and solicitations of the PIPC corporations directors, officers and
employees/agents/brokers, the former were enticed to invest their hardearned money, the minimum
amount of which must be US$40,000.00, with PIPCBVI, with a promise of higher income potential of an
interest of 12 to 18 percentum (%) per annum at relatively lowrisk investment program. The private
complainants also claimed that they were made to believe that PIPC Corporation refers to Performance
Investment Product Corporation, the Philippine office or branch of PIPCBVI, which is an entity engaged in
foreign currency trading, and not Philippine International Planning Center Corporation. 3

Soon thereafter, the SEC, through its Compliance and Endorsement Division, filed a complaintaffidavit for
violation of Sections 8,4 265 and 286 of the Securities Regulation Code before the Department of Justice
which was docketed as I.S. No. 20071054. Among the respondents in the complaintaffidavit were the
principal officers of PIPC: Liew, Chairman and President; Cristina GonzalezTuason, Director and General
Manager; Ma. Cristina BautistaJurado, Director; and herein respondent Santos.

Private complainants, Lorenzo and Sy, in their affidavits annexed to SECs complaintaffidavit, respectively
narrated Santos participation in how they came to invest their monies in PIPC Corporation: chanRoblesvirtualLa wlibrary
1. Lorenzos affidavit

xxxx

2. I heard about PIPC Corporation from my friend Derrick Santos during an informal gathering sometime in
March 2006. He said that the investments in PIPC Corporation generated a return of 1820% p.a. every two
(2) months. He then gave me the number of his sister, Oudine Santos who worked for PIPC Philippines to
discuss the investment further.

3. I then met with Oudine Santos sometime during the first week of April 2006 at PIPC Philippines lounge x
x x. Oudine Santos conducted for my personal benefit a presentation of the characteristics of their
investment product called Performance Managed Portfolio (PMP). The main points of her presentation are
indicated in a summary she gave me, x x x: chanRoble svirtualLawlibrary

xxxx

4. I asked Oudine Santos who were the traders, she said their names were confidential.

5. Oudine Santos also emphasized in that same meeting that I should keep this transaction to myself
because they were not allowed to conduct foreign currency trading. However, she assured me that I should
not worry because they have a lot of big people backing them up. She also mentioned that they were
applying for a seat in the stock exchange.

6. I ultimately agreed to put in FORTY THOUSAND US DOLLARS (US$40,000.00) in their investment


product.

7. Oudine Santos then gave me instructions on how to place my money in PMP and made me sign a
Partnership Agreement. x x x.

xxxx

8. Soon thereafter, pursuant to the instructions Oudine Santos gave me, I remitted US$40,000.00 to ABN
AMRO Hong Kong.

9. Afterwards, I received a letter dated 17 April 2006, signed by Michael H.K. Liew, welcoming my
investment.

xxxx

10. Sometime on May 2006, I added another US$ 60,000.00 to my then subsisting account #181372, thus
totaling US$100,000.00. This amount, pursuant to the instructions of Oudine Santos, was remitted to
Standard Chartered Bank.

xxxx

14. Then sometime on May 2007, I planned to pull out my remaining US$100,000.00 investment in PIPC
Philippines. On 22 May 2007, I met with Oudine Santos at the 15th Floor of Citibank Tower in Makati City. I
told her I wanted to terminate all my investments.

15. Oudine Santos instead said that PIPC Philippines has a new product I might be interested in. x x x She
explained that this product had the following characteristics: chanRoblesvirtualLa wlibrary

xxxx

16. Oudine Santos reiterated these claims in an email she sent me on 22 May 2007. x x x.

17. Enticed by these assurances and promises of large earnings, I put in FOUR HUNDRED THOUSAND US
DOLLARS (US$400,000.00) in PMP (RZB), which became account # R149432.

18. Pursuant to the instructions Oudine Santos gave me, I remitted the amount of US$ 400,000.00 to RZB
Austria, Singapore Branch.
xxxx

22. I tried calling Oudine Santos and was finally able to reach her at around 7 in the morning. She
confirmed what Leah Caringal told me. I told her then that I want full recovery of my investment in
accordance with their 100% principal guarantee. To this day[,] I have not received my principal investment. 7

5. Sys affidavit

2. I have been a depositor of the Bank of the Philippine Islands (BPI) Pasong Tamo branch for the past 15
years. Sometime in the last quarter of 2006, I was at BPI Pasong Tamo to accomplish certain routine
transactions. Being a client of long standing, the bank manager[,] as a matter of courtesy, allowed me to
wait in her cubicle. It was there that the bank manager introduced me to another bank client, Ms. Oudine
Santos. After exchanging pleasantries, and in the course of a brief conversation, Ms. Santos told me that she
is a resident of Damarias Village and was working as an investment consultant for a certain company,
Performance Investment Products Corporation [PIPC]. She told me that she wanted to invite me to her office
at the Citibank Tower in Makati so that she could explain the investment products that they are offering. I
gave her my contact number and finished my transaction with the bank for that day;

3. Ms. Santos texted me to confirm our meeting. A few days later, I met her at the business lounge of
[PIPC] located at the 15th Floor of Citibank Tower, Makati. During the meeting, Ms. Santos enticed me to
invest in their Performance Managed Portfolio which she explained was a risk controlled investment program
designed for individuals like me who are looking for higher investment returns than bank deposits while still
having the advantage of security and liquidity. She told me that they were engaged in foreign currency
trading abroad and that they only employ professional and experienced foreign exchange traders who
specialize in trading the Japanese Yen, Euro, British Pound, Swiss Francs and Australian Dollar. I then told
her that I did not have any experience in foreign currency trading and was quite conservative in handling my
money;

4. Ms. Santos quickly allayed my fears by emphasizing that the capital for any investment with [PIPC] is
secure. She then trumpeted [PIPCs] track record in the Philippines, having successfully solicited investments
from many wealthy and wellknown individuals since 2001;

5. Ms. Santos convinced me to invest in Performance Management Portfolio I x x x [which] features full
protection for the principal investment and a 60%40% sharing of the profit between the client and [PIPC]
respectively;

6. In November of 2006, I decided to invest USD 40,000 specifically in Performance Management Portfolio I
x x x. After signing the Partnership Agreement, x x x, I was instructed by Ms. Santos to deposit the amount
by telegraphic transfer to [PIPCs] account in ABN AMRO Bank Hong Kong. I did as instructed;

xxxx

8. Sometime January to March of 2007, [Santos] was convincing me to make an additional investment
under a second product, Performance Management Portfolio II [PMP II] which provides a more limited
guarantee for the principal investment of USD 100,000 and a 80%20% sharing of the profit between the
client and [PIPC] respectively. In both schemes, the clients participation will be limited to choosing two
currencies which will in turn be traded by professional traders abroad. Profit earned from the transaction will
then be remitted to the clients account every 8 weeks;

xxxx

10. After I made my USD 40,000 PMP I investment, Ms. Santos invited me to meet Mr. Michael Liew in the
business lounge some time during the first quarter of this year. My impression was that he was quite
unassuming considering that he was the head of an international investment firm. x x x.8

On the whole, Lorenzo and Sy charge Santos in her capacity as investment consultant of PIPC Corporation
who actively engaged in the solicitation and recruitment of investors. Private complainants maintain that
Santos, apart from being PIPC Corporations employee, acted as PIPC Corporations agent and made
representations regarding its investment products and that of the supposed global corporation PIPCBVI.
Facilitating Lorenzos and Sys investment with PIPC Corporation, Santos represented to the two that
investing with PIPC Corporation, an affiliate of PIPCBVI, would be safe and fullproof.
In SECs complaintaffidavit, it charged the following: chanRoblesvirtualLa wlibrary

xxxx

12. This case stems from the act of fraud and chicanery masterfully orchestrated and executed by the
officers and agents of PIPC Corp. against their unsuspecting investors. The deception is founded on the basic
fact that neither PIPC Corp. nor its officers, employees and agents are registered brokers/dealers, making
their numerous transactions of buying and selling securities to the public a blatant violation of the provisions
of the SRC, specifically Sections 8 and 28 thereof. Their illegal offer/sale of securities in the form of the
Performance Management Partnership Agreement to the public was perpetrated for about nine (9) years
and would have continued were it not for the alleged, and most probably, contrived and deliberate
withdrawal of the entire funds of the corporation by Michael H.K. Liew. The [scam] was masked by a
supposed offshore foreign currency trading scheme promising that the principal or capital infused will be
guaranteed or fully protected. Coupled with this [full] guarantee for the principal is the prospect of profits at
an annual rate of 12 to 18%. [One of] the other enticements provided by the subject company were free
use of its business either for personal or business purposes, free subscription of imported magazines, [trips]
abroad, and insurance coverage, just to name a few. Fully convinced and enamored [by the] thought of
earning higher rates of interest along with the promise of a guaranteed [capital] the investors placed and
entrusted their money to PIPC Corp., only to find out later [that they] had been deceived and taken for a
ride.

xxxx

17. Sometime in 2006, an investigation was undertaken by the [Compliance and Enforcement Division of
the SEC] on the [account] of PIPC Corp. Per its Articles of Incorporation, PIPC Corp. was authorized to
engage [in the] dissemination of information on the current flow of foreign exchange (forex) as x x x
precious metals such as gold, silver, and oil, and items traded in stock and securities/commodities
exchanges around the world. To be more specific, PIPC Corp. [was] authorized to act only as a research
arm of their foreign clients.

xxxx

22. x x x.

Name of Broker Bank/Locatio Date Account Amount of Bank/Location


Investor / n Number Investment
s Agent to which xxx
funds were
transferred
xxxx
23. Luisa Oudin RZB Austria, June R149432 US$500,00 Not provided
Mercede e Singapore 2007 0
s P. Santos Branch
Lorenzo
xxxx
32. Oudin ABNAMRO 9 080028776 US$40,000 BPI Pasong
Ricky e Bank Octobe 9 Tamo B9
Albino P. Santos Hongkong r 2006
Sy

23. A careful perusal of the complaintaffidavits revealed that for every completed investment transaction,
a company brochure, depending on the type of investment portfolio chosen, was provided to each investor
containing the following information on Performance BVI and its investment product called Performance
Managed Portfolio or PMP, the points of which are as follows:

a. 8 calendar week maturity period[,]

b. principal investment (minimum of USD 40,000) is protected[,]

c. investments maintained in strict confidentiality[,]

d. features: security, liquidity, short term commitment,

e. taxexemption status for offshore investments.

24. The investment flow is described as follows:

a. Investors funds will be placed into a fixed deposit account with a PIPC designated
bank and shall not be exposed for trading purposes. The PIPC designated bank
shall then extend a margin line request for trading based on the deposit;

b. PIPC shall open a separate account which will contain an amount of not more than
30% of its own funds to serve as a profit and loss account;

c. Trading will commence with PIPC designated bank closely monitoring the
performance to ensure that if losses are incurred trading will cease immediately
should the 20% stop limit be hit;

d. Profits will be credited into the Profit and Loss account with PIPC designated bank
account. Losses will be debited from the same account up to the controlled 20%
limit;

e. Notice of withdrawals must be submitted two weeks prior to schedule of maturity


otherwise investment is automatically rolled over to the next batch;

f. At maturity, profits accumulated in the settlement account shall be distributed and


deposited into each investors dollar bank account within fourteen (14) banking
days;

g. The funds of various investors are pooled, batched and deposited with PIPC
designated bank account acting as custodian bank, to form a massive asset base.
This account is separate and distinct from the Profit and Loss Account. The line
from this pooled fund is then entrusted to full time professional and experienced
foreign traders who each specialize in the following currencies: Japanes Yen, Euro,
British Pound, Swiss Francs and Australian Dollar. Profits generated from trading
these major currencies is credited into the Profit and Loss Account, which at the
end of the eight calendar week lockin period, will be distributed among the
investors. Investors are informed of their account status thru trading statements
issued by PIPC every time there is a trade made in their respective accounts.

xxxx

25. Furthermore, it was relayed by the officers and agents to complainantsinvestors that PIPC Corp. is the
Philippine office of the Performance Group of Companies affiliates situated in different parts of the world,
particularly China, Indonesia, Hong Kong, Japan, Korea, Singapore, and the British Virgin Islands (BVI),
even reaching Switzerland. With such basic depiction of the legitimacy and stability of PIPC Corp.,
complainantsinvestors deduced that it was clothed with the authority to solicit, offer [and] sell securities.
As regards the officers and agents of [PIPC Corp.], they secured proper individual licenses with the SEC as
brokers/dealers of securities to enable to solicit, offer and/or sell the same.
26. Official SEC documents would show that while PIPC Corp. is indeed registered with the SEC, it having
engaged in the solicitation and sale of securities was contrary to the purpose for which it was established
which is only to act as a financial research. Corollarily, PIPC Corp.s officers, agents, and brokers were not
licensed to solicit, offer and sell securities to the public, a glaring violation of Sections 8 and 28 of the SRC. 10

In refutation, Santos denied intentionally defrauding complainants Lorenzo and Sy: chanRoble svirtualLawlibrary

12. I cannot understand how I can be charged of forming, or even of being a part of, a syndicate formed
with the intention of carrying an unlawful or illegal act, transaction, enterprise or scheme. If this charge has
reference to PIPC Corp. then I certainly cannot be held liable therefore. As I mentioned above, I joined PIPC
Corp. only in April 2005 and, by that time, the company was already in existence for over four years. I had
no participation whatsoever in its creation or formation, as I was not even connected with PIPC Corp. at the
time of its incorporation. In fact, I have never been a stockholder, director, general manager or officer of
PIPC Corp. Further, PIPC Corp. was duly registered with the Securities and Exchange Commission and was
organized for a legitimate purpose, and certainly not for the purpose of perpetrating a fraud against the
public.

13. That I was an employee and, later on, an independent information provider of PIPC Corp. is of little
consequence. My duties as such were limited to providing information about the corporate clients of PIPC
Corp. that had been expressly requested by interested individuals. I performed my assigned job without any
criminal intent or malice. In this regard, I have been advised that offenses penalized under the RPC are
intentional felonies for which criminal liability attaches only when it is shown that the malefactors acted with
criminal intent or malice. There can be no crime when the criminal mind is wanting. In this case, I
performed my task of providing requested information about the clients of PIPC Corp. without any intent to
violate the law. Thus, there can be no criminal liability.

[14]. I have also been advised that under the law, the directors and officers of a corporation who act for and
in behalf of the corporation, who keep within the lawful scope of their authority, and act in good faith, do not
become liable, whether civilly or otherwise, for the consequences of their acts, as these acts are properly
attributed to the corporation alone. The same principle should apply to individual, like myself, who was only
acting within the bounds of her assigned tasks and had absolutely no decisionmaking power in the
management and supervision of the company.

[15]. Neither can I be liable of forming a syndicate with respect to PIPCBVI. To reiterate, at no time was I
ever a stockholder, director, employee, officer or agent of PIPCBVI. Said company is simply one of many
companies serviced by PIPC Corp. I had no participation whatsoever in its creation and/or in the direction of
its daytoday affairs.

xxxx

19. Further, I have been advised by counsel that conspiracy must be established by positive and conclusive
evidence. It cannot be based on mere conjecture but must be established as a fact. In this case, no proof of
conspiracy was presented against me. In fact, it appears that I have been dragged in to this allegation based
on the hearsay statement of Felicia Tirona that I was one of the inhouse account executives or work
force of PIPCBVI and PIPC Corp. There was no allegation whatsoever of any illegal act done by me to
warrant the institution of criminal charges against me. If at all, only Michael Liew should be held criminally
liable, as he was clearly the one who absconded with the money of the investors of PIPCBVI. Mr. Liew has
since disappeared and efforts to locate him have apparently proved to be futile to date.

xxxx

23. In the first place, I did not receive any money or property from any of the complainants. As clearly
shown by the documents submitted to this Honorable Office, particularly, the Portfolio Management
Partnership Agreement, Security Agreement, Declaration of Trust, bank statements and acknowledgement
receipts, complainants delivered their money to PIPCBVI, not to PIPC Corp. Complainants deposited their
investment in PIPCBVIs bank account, and PIPCBVI would subsequently issue an acknowledgement
receipt. No part of the said money was ever delivered to PIPC Corp. or to me.

24. Indeed, complainants own evidence show that the Portfolio Management Partnership Agreement,
Security Agreement and Declaration of Trust were executed between PIPCBVI and the individual
complainants. Further, paragraph 2 of the Declaration of Trust explicitly stated that PIPCBVI hold the said
amount of money UPON TRUST for the Beneficiary Owner. The complainants cannot, therefore, hold PIPC
Corp., or any of its officers or employees, with misappropriating their money or property when they were
fully aware that they delivered their money to, and transacted solely with, PIPCBVI, and not PIPC Corp.

25. It also bears stressing that of the twentyone (21) complainants in this case, only complainant Ricky
Albino Sy alleged that he had actually dealt with me. Complainant Sy himself never alleged that he
delivered or entrusted any money or property to me. On the contrary, complainant Sy admitted that he
deposited his investment of U.S.$40,000.00 by bank transfer to PIPCBVIs account in the ABN Amro Bank.
That the money was delivered to PIPCBVI, and not to me, is shown by the fact that the receipt was issued
by PIPCBVI. I never signed or issued any acknowledgement receipt, as I never received any such money.
Neither did I ever gain physical or juridical possession of the said money.11 (Emphasis and underscoring
supplied).

Santos defense consisted in: (1) denying participation in the conspiracy and fraud perpetrated against the
investorcomplainants of PIPC Corporation, specifically Sy and Lorenzo; (2) claiming that she was initially
and merely an employee of, and subsequently an independent information provider for, PIPC Corporation;
(3) PIPC Corporation being a separate entity from PIPCBVI of which Santos has never been a part of in any
capacity; (4) her not having received any money from Sy and Lorenzo, the two having, in actuality, directly
invested their money in PIPCBVI; (5) Santos having dealt only with Sy and the latter, in fact, deposited
money directly into PIPCBVIs account; and (6) on the whole, PIPCBVI as the other party in the
investment contracts signed by Sy and Lorenzo, thus the only corporation liable to Sy and Lorenzo and the
other complainants.

On 18 April 2008, the DOJ, in I.S. No. 20071054, issued a Resolution signed by a panel of three (3)
prosecutors, with recommendation for approval of the Assistant Chief State Prosecutor, and ultimately
approved by Chief State Prosecutor Jovencito R. Zuo, indicting: (a) Liew and GonzalezTuason for violation
of Sections 8 and 26 of the Securities Regulation Code; and (b) herein respondent Santos, along with
Cristina GonzalezTuason and 12 others for violation of Section 28 of the Securities Regulation Code. The
same Resolution likewise dismissed the complaint against 8 of the respondents therein for insufficiency of
evidence. In the 18 April 2008 Resolution, the DOJ discussed at length the liability of PIPC Corporation and
its officers, employees, agents and all those acting on PIPC Corporations behalf, to wit:chanRoble svirtualLawlibrary

Firstly, complainant SEC filed the instant case for alleged violation by respondents [therein, including herein
respondent, Santos,] of Section 8 of the SRC.

Sec. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.

Based on the above provision of the law, complainant SEC is now accusing all respondents [therein,
including Santos,] for violating the same when they allegedly sold and/or offered for sale unregistered
securities.

However, Section 8.5 thereof provides that The Commission may audit the financial statements, assets and
other information of a firm applying for registration of its securities whenever it deems the same necessary
to insure full disclosure or to protect the interest of the investors and the public in general.

The abovequoted provision is loud and clear and needs no further interpretation. It is the firm through its
authorized officers that is required to register its securities with the SEC and not the individual persons
allegedly selling and/or offering for sale said unregistered securities. To do otherwise would open the
floodgates to numerous complaints against innocent individuals who have no hand in the control, decision
making and operations of said investment company.

Clearly, it is only the PIPC Corp. and respondents Michael H. Liew and Cristina GonzalezTuason being the
President and the General Manager respectively, of PIPC Corp. who violated Section 8 of the SRC.

xxxx

Respondents Liew and Tuason are directors and officers of PIPC Corp. who exercise power of control and
supervision in the management of said corporation. Surely they cannot claim having no knowledge of the
operations of PIPC Corp. visvis its scope of authority since they are the ones who actually created and
manage the same. They are well aware that PIPC Corp. is a mere financial research facility and has nothing
to do with selling or offering for sale securities to the general public. But despite knowledge, they continue
to recruit and deceive the general public by making it appear that PIPC Corp. is a legitimate investment
company.

Moreover, they cannot evade liability by hiding behind the veil of a corporate fiction. x x x.

xxxx

In the case at bar, the investors were made to believe that PIPC Corp. and PIPCBVI is one and the same
corporation. There is nothing on record that would show that private complainants were informed that PIPC
Corp. and PIPCBVI are two entities distinct and separate from one another. In fact, when they invested
their money, they dealt with PIPC Corp. and the people acting on its behalf but when they signed documents
they were provided with ones bearing the name of PIPCBVI. Clearly, this obvious and intentional confusion
of names of the two entities is designed to defraud and later to avoid liabilities from their victims. Therefore,
the defense of a corporate fiction is unavailing in the instant case.

xxxx

Buying and selling of securities is an indispensable element that makes one a broker or dealer. So if one is
not engaged in the business of buying and selling of securities, naturally he or she cannot be considered as
a broker or dealer. However, a person may be considered as an agent of another, juridical or natural person,
if it can be inferred that he or she acts as an agent of his or her principal as abovedefined. One can also be
an investor and agent at the same time.

An examination of the records and the evidence submitted by the parties, we have observed that all
respondents are investors of PIPCBVI, same with the private complainants, they also lost thousands of
dollars. We also noted the fact that most of the private complainants and alleged brokers or agents are long
time friends if not blood related individuals. Notably also is the fact that most of them are highly educated
businessmen/businesswomen who are financially welloff. Hence, they are regarded to be wiser and more
prudent and expected to exercise due diligence of a good father of a family in managing their finances as
compared to those who are less fortunate in life.

However, we still need to delve deeper into the facts and the [evidence] on record to determine the degree
of respondents participations and if on the basis of their actions, it can be inferred that they acted as
employeesagents or investoragents of PIPC Corp. or PIPCBVI then are liable under Section 28 of the SRC
otherwise, they cannot be [blamed] for being mere employees or investors thereof.

xxxx

Oudine Santos. Investment Consultant of PIPC Corp. who allegedly invited, convinced and assured private
complainants Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy to invest in PIPC Corp. To prove their
allegations, respondents attached email exchanges with respondent Santos regarding the details in investing
with PIPCBVI. Respondent Santos failed to submit counteraffidavit despite subpoena.

xxxx

After painstakingly going over the record and the supporting documents attached thereto and after carefully
evaluating the respective claims and defenses raised by all the parties, the undersigned panel of prosecutors
has a reason to believe that Section 28 of the SRC has been violated and that the following respondents are
probably guilty thereof and should, therefore, be held for trial:

1. Cristina GonzalezTuason

2. x x x.

xxxx
13. Oudine Santos
The abovenamed respondents, aside from being officers, employees or investors, clearly acted as agents of
PIPC Corp. who made representations regarding PIPC Corp. and PIPCBVI investment products. They
assured their clients that investing with PIPCBVI will be 100% guaranteed. In addition, they also facilitated
their clients investments with PIPCBVI and some, if not all, even received money investors as evidenced by
the acknowledgement receipts they signed and on behalf of PIPCBVI. The documentary evidence submitted
by witnesses and their categorical and positive assertion of facts which, taken together corroborate one
another, prevails over the defense of denial raised by the abovenamed respondents which are mostly self
serving in nature.

A formal or written contract of agency between two or more persons is not necessary for one to become an
agent of the other for as long as it can be inferred from their actions that there exists a principalagent
relationship between them on the one hand and the PIPC Corp. or PIPCBVI on the other hand, then, it is
implied that a contract of agency is created.

As to their contention that they are not officers or employees of PIPC Corp., the Supreme Court ruled that
one may be an agent of a domestic corporation although he or she is not an officer thereto. x x x. The basis
of agency is representation; the question of whether an agency has been created is ordinarily a question
which may be established in the same way as any other fact, either by direct or substantial evidence;
though that fact or extent of authority of the agents may not, as a general rule, be established from the
declarations of the agents alone, if one professes to act as agent for another, he or she is estopped to deny
her agency both as against the asserted principal and third persons interested in the transaction in which he
or she is engaged.

Further, they cannot raise the defense of good faith for the simple reason that the SRC is a special law
where criminal intent is not an essential element. Mere violation of which is punishable except in some
provisions thereof where fraud is a condition sine qua non such as Section 26 of the said law.

xxxx

WHEREFORE, the foregoing considered, it is respectfully recommended that this resolution be APPROVED
and that:

1. An information for violation of Section 8 of the SRC be filed against respondent PIPC Corp.,
MICHAEL H. LIEW and CRISTINA GONZALEZTUASON;

2. An information for violation of Section 26 thereof be also filed against respondents MICHAEL
H. LIEW and CRISTINA GONZALEZTUASON; and

3. An information for violation of Section 28 thereof be filed against respondents CRISTINA


GONZALEZTUASON, MA. CRISTINA BAUTISTAJURADO, BARBARA GARCIA, ANTHONY
KIERULF, EUGENE GO, MICHAEL MELCHOR NUBLA, MA. PAMELA MORRIS, LUIS JIMBO
ARAGON, RENATO SARMIENTO, JR., VICTOR JOSE VERGEL DE DIOS, NICOLINE AMORANTO
MENDOZA, JOSE JAY TENGCO III, [respondent] OUDINE SANTOS AND HERLEY JESUITAS;
and

4. The complaint against MAYENNE CARMONA, YEYE SAN PEDROCHOA, MIA LEGARDA,
NICOLE ORTEGA, DAVID CHUAUNSU, STANLEY CHUAUNSU, DEBORAH V. YABUT,
CHRISTINE YU and JONATHAN OCAMPO be dismissed for insufficiency of evidence. 12
(Emphasis supplied)

In sum, the DOJ panel based its finding of probable cause on the collective acts of the majority of the
respondents therein, including herein respondent Santos, which consisted in their acting as employees
agent and/or investoragents of PIPC Corporation and/or PIPCBVI. Specifically alluding to Santos as
Investment Consultant of PIPC Corporation, the DOJ found probable cause to indict her for violation of
Section 28 of the Securities Regulation Code for engaging in the business of selling or offering for sale
securities, on behalf of PIPC Corporation and/or PIPCBVI (which were found to be an issuer13 of securities
without the necessary registration from the SEC) without Santos being registered as a broker, dealer,
salesman or an associated person.
On separate motions for reconsideration of the respondents therein, including herein respondent Santos, the
DOJ panel issued a Resolution dated 2 September 2008 modifying its previous ruling and excluding
respondent Victor Jose Vergel de Dios from prosecution for violation of Section 28 of the Securities
Regulation Code, thus: chanRoble svirtualLawlibrary

After an assiduous reevaluation of the facts and the evidence submitted by the parties in support of their
respective positions, the undersigned panel finds x x x [that the] rest of the respondents mainly rehashed
their earlier arguments except for a few respondents who, in one way or another, failed to participate in the
preliminary investigation; hence raising their respective defenses for the first time in their motions for
reconsideration.

xxxx

With respect to respondents Luis Jimbo Aragon and Oudine Santos who also claimed to have not received
subpoenas, this panel, after thoroughly evaluating their respective defenses, finds them to be similarly
situated with the other respondents who acted as agents for and in behalf of PIPC Corp. and/or PIPCBVI;
hence, their inclusion in the information is affirmed.

xxxx

x x x As to the issue on whether or not PMPA is a security contract, we rule in the affirmative, as supported
by the herein below provisions of the SRC, particularly: chanRoble svirtualLawlibrary

Sec. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale or
distribution within the Philippines, without registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.

Securities have been defined as shares, participation or interest in a corporation or in a commercial


enterprise or profit making venture and evidenced by a certificate, contract, instrument, whether written or
electronic in character. It includes among others, investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of deposit for a future subscription.

Under the SRCs Amended Implementing Rules and Regulations, specifically Rule 3, par. 1 subpar. G, an
investment contract has been defined as a contract, transaction or scheme (collectively contract), whereby
a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of
others. It is likewise provided in the said provision that an investment contract is presumed to exist
whenever a person seeks to use the money or property of others on the promise of profits and a common
enterprise is deemed created when two (2) or more investors pool their resources creating a common
enterprise, even if the promoter receives nothing more than a brokers commission. Undoubtedly, the PMPA
is an investment contract falling within the purview of the term securities as defined by law.

xxxx

It bears to emphasize that the purpose of a preliminary investigation and/or confrontation between the
partylitigants is for them to lay down all their cards on the table to properly inform and apprise the other of
the charges against him/her, to avoid suprises and to afford the adverse party all the opportunity to defend
himself/herself based on the evidence submitted against him/her. Thus, failure on the part of the defaulting
party to submit evidence that was then available to him is deemed a waiver on his part to submit it in the
same proceedings against the same party for the same issue.

WHEREFORE, the foregoing premises considered, the undersigned panel of prosecutors respectfully
recommends that the assailed resolution be modified by dismissing the complaint against Victor Jose Vergel
De Dios and that the Information filed with the appropriate court for violation of Section 28 of the SRC be
amended accordingly.14

Respondent Santos filed a petition for review before the Office of the Secretary of the DOJ assailing the
Resolutions dated 18 April 2008 and 2 September 2008 and claiming that she was a mere clerical
employee/information provider who never solicited nor recruited investors, in particular complainants Sy and
Lorenzo, for PIPC Corporation or PIPCBVI. Santos also claimed dearth of evidence indicating she was a
salesman/agent or an associated person of a broker or dealer, as defined under the Securities Regulation
Code.

The SEC filed its Comment opposing Santos petition for review. Thereafter, the Office of the Secretary of the
DOJ, through its then Undersecretary Ricardo R. Blancaflor, issued a Resolution dated 1 October 2009 which,
as previously adverted to, excluded respondent Santos from prosecution for violation of Section 28 of the
Securities Regulation Code. For a complete picture, we quote in full the disquisition of the Secretary of the
DOJ: chanRoblesvirtualLa wlibrary

[Santos] argues that while Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy mentioned two (2) instances
wherein she allegedly enticed them to invest, their own pieces of evidence, particularly the Annex E series
(several Details of Profit distribution & Renewal of Partnership Agreement bearing different dates
addressed to Ricky Albino P. Sy with stamped signature for PIPCBVI), indicate that they invested and
reinvested their money with PIPCBVI repeatedly and even earned profits from these transactions through
direct dealing with PIPCBVI and without her participation. In addition, she maintains that Luisa Mercedes P.
Lorenzo and Ricky Albino P. Sy had several opportunities to divest or withdraw their respective investments
but opted not to do so at their own volitions.

xxxx

The sole issue in this case is whether or not respondent Santos acted as agent of PIPC Corp. or had enticed
Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy to buy PIPC Corp. or PIPCBVIs investment products.

We resolve in the negative.

Section 28 of the Securities Regulation Code (SRC) reads:

SEC. [28]. Registration of Brokers, Dealers, Salesmen and Associated Persons. 28.1. No person
shall engage in the business of buying or selling securities in the Philippines as a broker or dealer unless
registered as such with the Commission.

28.2. No registered broker or dealer shall employ any salesman or any associated person, and no issuer
shall employ any salesman, who is not registered as such with the Commission.

Jurisprudence defines an agent as a business representative, whose function is to bring about, modify,
affect, accept performance of, or terminate contractual obligations between principal and third persons. x x
x On the other hand, the Implementing Rules of the SRC simply provides that an agent or a salesman is a
person employed as such or as an agent, by the dealer, issuer or broker to buy and sell securities x x x.

A judicious examination of the records indicates the lack of evidence that respondent Santos violated
Section 28 of the SRC, or that she had acted as an agent for PIPC Corp. or enticed Luisa Mercedes P.
Lorenzo or Ricky Albino P. Sy to buy PIPC Corp. or PIPCBVIs investment products.

The annex D (Welcome to PMP Letter dated [17 April 2006] addressed to Luisa Mercedes P. Lorenzo
signed by Michael Liew as president of PIPCBVI), Annex E (Fixed Deposit Advice Letter dated [26 June
2006] addressed to Luisa Mercedes P. Lorenzo and stamped signature for PIPCBVI), and Annex H
(Welcome to PMP Letter dated [30 May 2007] addressed to Luisa Mercedes P. Lorenzo signed by Michael
Liew as President of PIPCBVI) of the complaintaffidavit dated [11 September 2007] of Luisa Mercedes P.
Lorenzo show that she directly dealt with PIPCBVI in placing her investment. The same is true with regard
to Annex A series (Portfolio Management Partnership Agreement between Ricky Albino P. Sy and PIPCBVI,
Security Agreement between Ricky Albino P. Sy and PIPCBVI, and Declaration of Trust between Ricky Albino
P. Sy and PIPCBVI), Annex B (Official Receipt dated 09 November 2006 issued by PIPCBVI), Annex C
(Welcome to PMP Letter dated [10 November 2006] addressed to Ricky Albino P. Sy and signed by Michael
[Liew] as President of PIPCBVI), and Annex D (Fixed Deposit Advice Letter dated [29 January 2007]
addressed to Ricky Albino P. Sy with stamped signature for PIPCBVI) of the complaintaffidavit dated [26
September 2007] of Ricky Albino P. Sy. These documents categorically show that the parties therein, i.e.,
Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy and PIPCBVI, transacted with each other directly without
any participation from respondent Santos. These documents speak for themselves. Moreover, it bears
stressing that Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy admit in their respective affidavits that they
directly deposited their investments by bank transfer to PIPCBVIs offshore bank account.

Annex B (Printed background of the PMP of [PIPC]BVI enumerating the features of said product) and
Annex C (Printed Procedures in PMP Account Opening instructing the client what to do in placing his/her
investment) of the complaintaffidavit of Luisa Mercedes P. Lorenzo actually supports the allegations of
respondent Santos that there were printed forms/brochures for distribution to persons requesting the same.
These printed/prepared handouts contain the assurances or guarantees of PIPCBVI and the instructions on
where and how to deposit the investors money.

Likewise, Luisa Mercedes P. Lorenzos Annex A (2006 GIS of PIPC Corp. listing the stockholders, board of
directors an[d] officers thereof), Annex F (Deposit Confirmation dated [14 June 2006] from Standard
Chartered Bank) and Annexes I to L (SEC Certifications stating that PIPC Corp., PIPC, PIPCBVI and
Performance Investment Products Ltd., respectively, are not registered issuer of securities nor licensed to
offer or sell securities to the public) are not evidence against respondent Santos. Her name is not even
mentioned in any of these documents. If at all, these documents are evidence against PIPC Corp. and its
officers named therein.

Further, it is important to note that in the Request Form, one of the documents being distributed by
respondent Santos x x x, it is categorically stated therein that said request shall not be taken as an
investment solicitation x x x, but is mainly for the purpose of providing me with information. Clearly, this
document proves that respondent Santos did not or was not involved in the solicitation of investments but
merely shows that she is an employee of PIPC Corp. In addition, the Information Dissemination Agreement
between her employer PIPC Corp. and PIPCBVI readably and understandably provides that she is prohibited
from soliciting investments in behalf of PIPCBVI and her authority is limited only to providing interested
persons with the necessary information regarding how to communicate directly with PIPC. Parenthetically,
the decision to sign the partnership Agreement with PIPCBVI to invest and repeatedly reinvest their monies
with PIPCBVI were made by Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy themselves without any
inducement or undue influence from respondent Santos.

xxxx

WHEREFORE, the assailed resolution is hereby MODIFIED, the Chief State Prosecutor is directed to EXCLUDE
respondent Oudine Santos from the Information for violation of Section 28 of the Securities and Regulation
Code, if any has been filed, and report the action taken thereon within ten (10) days from receipt hereof.15

Expectedly, after the denial of the SECs motion for reconsideration before the Secretary of the DOJ, the SEC
filed a petition for certiorari before the Court of Appeals seeking to annul the 1 October 2009 Resolution of
the DOJ.

The Court of Appeals dismissed the SECs petition for certiorari and affirmed the 1 October 2009 Resolution
of the Secretary of the DOJ:chanRoble svirtualLawlibrary

Prescinding from the foregoing, a person must first and foremost be engaged in the business of buying and
selling securities in the Philippines before he can be considered as a broker, a dealer or salesman within the
coverage of the Securities Regulation Code. The record in this case however is bereft of any showing that
[Santos] was engaged in the business of buying and selling securities in the Philippines, whether for herself
or in behalf of another person or entity. Apart from [SECs] sweeping allegation that [Santos] enticed Sy and
Lorenzo and solicited from them investments for PIPCBVI without first being registered as broker, dealer or
salesman with SEC, no evidence had been adduced that shows [Santos] actual participation in the alleged
offer and sale of securities to the public, particularly to Sy and Lorenzo, within the Philippines. There was
likewise no exchange of funds between Sy and Lorenzo, on one hand, and [Santos], on the other hand, as
the price of certain securities offered by PIPCBVI. There was even no specific proof that [Santos]
misrepresented to Sy and Lorenzo that she was a licensed broker, dealer or salesperson of securities,
thereby inducing them to invest and deliver their hardearned money with PIPCBVI. In fact, the
Information Dissemination Agreement between PIPC Corporation, [Santos employer], and PIPCBVI clearly
provides that [Santos] was prohibited from soliciting investments in behalf of PIPCBVI and that her
authority is limited only to providing prospective client with the necessary information on how to
communicate directly with PIPC. Thus, it is obvious that the final decision of investing and reinvesting their
money with PIPCBVI was made solely by Sy and Lorenzo themselves.

xxxx

WHEREFORE, in view of the foregoing premises, the petition filed in this case is hereby DENIED and,
consequently, DISMISSED. The assailed Resolutions dated [1 October 2009] and [23 November 2009] of
the Secretary of Justice in I.S. No. 20071054 are hereby AFFIRMED.16
Hence, this appeal by certiorari raising the sole error of Santos exclusion from the Information for violation
of Section 28 of the Securities Regulation Code.

Generally, at the preliminary investigation proper, the investigating prosecutor, and ultimately, the Secretary
of the DOJ, is afforded wide latitude of discretion in the exercise of its power to determine probable cause to
warrant criminal prosecution. The determination of probable cause is an executive function where the
prosecutor determines merely that a crime has been committed and that the accused has committed the
same.17 The rules do not require that a prosecutor has moral certainty of the guilt of a person simply for
preliminary investigation purposes.

However, the authority of the prosecutor and the DOJ is not absolute; it cannot be exercised arbitrarily or
capriciously. Where the findings of the investigating prosecutor or the Secretary of the DOJ as to the
existence of probable cause are equivalent to a gross misapprehension of facts, certiorari will lie to correct
these errors.18

While it is our policy not to interfere in the conduct of preliminary investigations, we have, on more than one
occasion, adhered to some exceptions to the general rule: chanRoblesvirtualLa wlibrary

1. when necessary to afford adequate protection to the constitutional rights of the accused;

2. when necessary for the orderly administration of justice or to avoid oppression or


multiplicity of actions;

3. when there is a prejudicial question which is sub judice;

4. when the acts of the officer are without or in excess of authority;

5. where the prosecution is under an invalid law, ordinance or regulation;

6. when double jeopardy is clearly apparent;

7. where the court has no jurisdiction over the offense;

8. where it is a case of persecution rather than prosecution;

9. where the charges are manifestly false and motivated by the lust for vengeance;

10. when there is clearly no prima facie case against the accused and a motion to quash on
that ground has been denied.19 (Italics supplied).

In excluding Santos from the prosecution of the supposed violation of Section 28 of the Securities Regulation
Code, the Secretary of the DOJ, as affirmed by the appellate court, debunked the DOJ panels finding that
Santos was prima facie liable for either: (1) selling securities in the Philippines as a broker or dealer, or (2)
acting as a salesman, or an associated person of any broker or dealer on behalf of PIPC Corporation and/or
PIPCBVI without being registered as such with the SEC.

To get to that conclusion, the Secretary of the DOJ and the appellate court ruled that no evidence was
adduced showing Santos actual participation in the final sale by PIPC Corporation and/or PIPCBVI of
unregistered securities since the very affidavits of complainants Lorenzo and Sy proved that Santos had
never signed, neither was she mentioned in, any of the investment documents between Lorenzo and Sy, on
one hand, and PIPC Corporation and/or PIPCBVI, on the other hand.

The conclusions made by the Secretary of the DOJ and the appellate court are a myopic view of the
investment solicitations made by Santos on behalf of PIPC Corporation and/or PIPCBVI while she was not
licensed as a broker or dealer, or registered as a salesman, or an associated person of a broker or dealer.
We sustain the DOJ panels findings which were not overruled by the Secretary of the DOJ and the appellate
court, that PIPC Corporation and/or PIPCBVI was: (1) an issuer of securities without the necessary
registration or license from the SEC, and (2) engaged in the business of buying and selling securities. In
connection therewith, we look to Section 3 of the Securities Regulation Code for pertinent definitions of
terms:chanRoble svirtualLawlibrary

Sec. 3. Definition of Terms. x x x.

xxxx

3.3. Broker is a person engaged in the business of buying and selling securities for the account of others.

3.4. Dealer means [any] person who buys [and] sells securities for his/her own account in the ordinary
course of business.

3.5. Associated person of a broker or dealer is an employee thereof whom, directly exercises control of
supervisory authority, but does not include a salesman, or an agent or a person whose functions are solely
clerical or ministerial.

xxxx

3.13. Salesman is a natural person, employed as such [or] as an agent, by a dealer, issuer or broker to
buy and sell securities.

To determine whether the DOJ Secretarys Resolution was tainted with grave abuse of discretion, we pass
upon the elements for violation of Section 28 of the Securities Regulation Code: (a) engaging in the business
of buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or (c)
acting as an associated person of any broker or dealer, unless registered as such with the SEC.

Tying it all in, there is no quarrel that Santos was in the employ of PIPC Corporation and/or PIPCBVI, a
corporation which sold or offered for sale unregistered securities in the Philippines. To escape probable
culpability, Santos claims that she was a mere clerical employee of PIPC Corporation and/or PIPCBVI and
was never an agent or salesman who actually solicited the sale of or sold unregistered securities issued by
PIPC Corporation and/or PIPCBVI.

Solicitation is the act of seeking or asking for business or information; it is not a commitment to an
agreement.20

Santos, by the very nature of her function as what she now unaffectedly calls an information provider,
brought about the sale of securities made by PIPC Corporation and/or PIPCBVI to certain individuals,
specifically private complainants Sy and Lorenzo by providing information on the investment products of
PIPC Corporation and/or PIPCBVI with the end in view of PIPC Corporation closing a sale.

While Santos was not a signatory to the contracts on Sys or Lorenzos investments, Santos procured the
sale of these unregistered securities to the two (2) complainants by providing information on the investment
products being offered for sale by PIPC Corporation and/or PIPCBVI and convincing them to invest therein.

No matter Santos strenuous objections, it is apparent that she connected the probable investors, Sy and
Lorenzo, to PIPC Corporation and/or PIPCBVI, acting as an ostensible agent of the latter on the viability of
PIPC Corporation as an investment company. At each point of Sys and Lorenzos investment, Santos
participation thereon, even if not shown strictly on paper, was prima facie established.

In all of the documents presented by Santos, she never alleged or pointed out that she did not receive extra
consideration for her simply providing information to Sy and Lorenzo about PIPC Corporation and/or PIPC
BVI. Santos only claims that the monies invested by Sy and Lorenzo did not pass through her hands. In
short, Santos did not present in evidence her salaries as a supposed mere clerical employee or information
provider of PIPCBVI. Such presentation would have foreclosed all questions on her status within PIPC
Corporation and/or PIPCBVI at the lowest rung of the ladder who only provided information and who did
not use her discretion in any capacity.

We cannot overemphasize that the very information provided by Santos locked the deal on unregistered
securities with Sy and Lorenzo.

In fact, Sy alleged in his affidavit, which allegation was not refuted by Santos, that he was introduced to
Santos while he performed routine transactions at his bank: chanRoblesvirtualLa wlibrary

2. I have been a depositor of the Bank of the Philippine Islands (BPI) Pasong Tamo branch for the past 15
years. Sometime in the last quarter of 2006, I was at BPI Pasong Tamo to accomplish certain routine
transactions. Being a client of long standing, the bank manager[,] as a matter of courtesy, allowed me to
wait in her cubicle. It was there that the bank manager introduced me to another bank client, Ms. Oudine
Santos. After exchanging pleasantries, and in the course of a brief conversation, Ms. Santos told me that she
is a resident of Damarias Village and was working as an investment consultant for a certain company,
Performance Investment Products Corporation [PIPC]. She told me that she wanted to invite me to her office
at the Citibank Tower in Makati so that she could explain the investment products that they are offering. I
gave her my contact number and finished my transaction with the bank for that day;

3. Ms. Santos texted me to confirm our meeting. A few days later, I met her at the business lounge of
[PIPC] located at the 15th Floor of Citibank Tower, Makati. During the meeting, Ms. Santos enticed me to
invest in their Performance Managed Portfolio which she explained was a risk controlled investment program
designed for individuals like me who are looking for higher investment returns than bank deposits while still
having the advantage of security and liquidity. She told me that they were engaged in foreign currency
trading abroad and that they only employ professional and experienced foreign exchange traders who
specialize in trading the Japanese Yen, Euro, British Pound, Swiss Francs and Australian Dollar. I then told
her that I did not have any experience in foreign currency trading and was quite conservative in handling my
money;21

Santos countered that: chanRoble svirtualLawlibrary

28. I also categorically deny complainant Sys allegation that I enticed him to enter into a Partnership
Agreement with PIPCBVI. In the first place, I came to know complainant Sy only when he was referred to
me by a mutual acquaintance, Ms. Ana Liliosa Santos, who was then the Manager of the Bank of the
Philippine Islands, Pasong Tamo Branch. Ms. Ana Santos set up a meeting between complainant Sy and me
because complainant Sy wanted to know more about PIPCBVI. As with the other individuals who expressed
interest in PIPC Corp.s client companies, I then provided complainant Sy with additional information about
PIPCBVI. The decision to enter into the aforementioned Partnership Agreement with PIPCBVI was made
by complainant Sy alone without any inducement or undue influence from me, as in fact I only met him
twice the first one was on the meeting set up by Ms. Ana Santos and the second one was to introduce him
to Michael Liew. Indeed, complainant Sy appears to be a welleducated person with years of experience as
a businessman. It is reasonable to assume that before entering into the said Partnership Agreement with
PIPCBVI, complainant Sy had fully understood the nature of the agreement and that in entering thereto, he
had been motivated by a desire to earn a profit and had believed, as I myself have been led to believe, that
PIPCBVI was a legitimate business concern which offered a reasonable return on investment, Moreover,
complainant Sy could have withdrawn his initial investment of US$40,000.00 on its date of maturity, i.e., 26
January 2007, as indicated in the PIPCBVIs letter dated 10 November 2006, a copy of which is attached to
complainant Sys Sworn Statement. Complainant Sy, however, obviously decided on his own volition to keep
his investment with PIPCBVI presumably because he wanted to gain more profit therefrom. Complainant Sy
in fact admitted that he received monetary returns from PIPCBVI in the total amount of US$2,439.12. 22

What is palpable from the foregoing is that Sy and Lorenzo did not go directly to Liew or any of PIPC
Corporations and/or PIPCBVIs principal officers before making their investment or renewing their prior
investment. However, undeniably, Santos actively recruited and referred possible investors to PIPC
Corporation and/or PIPCBVI and acted as the gobetween on behalf of PIPC Corporation and/or PIPCBVI.

The DOJs and Court of Appeals reasoning that Santos did not sign the investment contracts of Sy and
Lorenzo is specious. The contracts merely document the act performed by Santos.

Individual complainants and the SEC have categorically alleged that Liew and PIPC Corporation and/or PIPC
BVI is not a legitimate investment company but a company which perpetrated a scam on 31 individuals
where the president, a foreign national, Liew, ran away with their money. Liews absconding with the monies
of 31 individuals and that PIPC Corporation and/or PIPCBVI were not licensed by the SEC to sell securities
are uncontroverted facts.
The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or
participation in a profit sharing agreement that falls within the definition of the law. When the investor is
relatively uninformed and turns over his money to others, essentially depending upon their representations
and their honesty and skill in managing it, the transaction generally is considered to be an investment
contract.23 The touchstone is the presence of an investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or managerial efforts of others. 24

At bottom, the exculpation of Santos cannot be preliminarily established simply by asserting that she did not
sign the investment contracts, as the facts alleged in this case constitute fraud perpetrated on the public.
Specially so because the absence of Santos signature in the contract is, likewise, indicative of a scheme to
circumvent and evade liability should the pyramid fall apart.

Lastly, we clarify that we are only dealing herein with the preliminary investigation aspect of this case. We
do not adjudge respondents guilt or the lack thereof. Santos defense of being a mere employee or simply
an information provider is best raised and threshed out during trial of the case.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CAG.R. No. SP No.
112781 and the Resolutions of the Department of Justice dated 1 October 2009 and 23 November 2009
are ANNULLED and SET ASIDE. The Resolution of the Department of Justice dated 18 April 2008 and 2
September 2008 are REINSTATED. The Department of Justice is directed to include respondent Oudine
Santos in the Information for violation of Section 28 of the Securities and Regulation Code.

SO ORDERED.

G.R. No. 187702, October 22, 2014

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. THE HONORABLE COURT OF APPEALS,


OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA, Respondents.

G.R. NO. 189014

ASTRA SECURITIES CORPORATION, Petitioner, v. OMICO CORPORATION, EMILIO S. TENG AND


TOMMY KIN HING TIA, Respondents.

DECISION

SERENO, C.J.:

G.R. No. 187702 is a Petition for Certiorari under Rule 65 of the Rules of Court seeking to nullify the Court of
Appeals (CA) Decision1 dated 18 March 2009 in CA-G.R. SP No. 106006. G.R. No. 189014 is a Petition for
Review on Certiorari under Rule 45 of the Rules of Court assailing the same Decision, as well as the CA
Resolution2 dated 9 July 2009. On 12 October 2009, the Court resolved to consolidate the two cases. 3

The CA Decision ruled that because controversies involving the validation of proxies are considered election
contests under the Interim Rules of Procedure Governing Intra-Corporate Controversies, they are properly
cognizable by the regular courts, not by the Securities and Exchange Commission. The CA Resolution denied
the motion for reconsideration filed by Astra Securities Corporation.

FACTS

Omico Corporation (Omico) is a company whose shares of stock are listed and traded in the
Philippine Stock Exchange, Inc.4 Astra Securities Corporation (Astra) is one of the stockholders of Omico
owning about 18% of the latters outstanding capital stock.5

Omico scheduled its annual stockholders meeting on 3 November 2008. 6 It set the deadline for submission
of proxies on 23 October 2008 and the validation of proxies on 25 October 2008.

Astra objected to the validation of the proxies issued in favor of Tommy Kin Hing Tia (Tia), representing
about 38% of the outstanding capital stock of Omico.7 Astra also objected to the inclusion of the proxies
issued in favor of Tia and/or Martin Buncio, representing about 2% of the outstanding capital stock of
Omico.8

Astra maintained that the proxy issuers, who were brokers, did not obtain the required express written
authorization of their clients when they issued the proxies in favor of Tia. In so doing, the issuers were
allegedly in violation of SRC Rule 20(11)(b)(xviii)9 of the Amended Securities Regulation Code (SRC or
Republic Act No. 8799) Rules.10 Furthermore, the proxies issued in favor of Tia exceeded 19, thereby giving
rise to the presumption of solicitation thereof under SRC Rule 20(2)(B)(ii)(b) 11 of the Amended SRC Rules.
Tia did not comply with the rules on proxy solicitation, in violation of Section 20.1 12 of the SRC.

Despite the objections of Astra, Omicos Board of Inspectors declared that the proxies issued in favor of Tia
were valid.13

On 27 October 2008, Astra filed a Complaint14 before the Securities and Exchange Commission (SEC)
praying for the invalidation of the proxies issued in favor of Tia. Astra also prayed for the issuance of a cease
and desist order (CDO) enjoining the holding of Omicos annual stockholders meeting until the SEC had
resolved the issues pertaining to the validation of proxies.

On 30 October 2008, SEC issued the CDO enjoining Omico from accepting and including the questioned
proxies in determining a quorum and in electing the members of the board of directors during the annual
stockholders meeting on 3 November 2008.15

Attempts to serve the CDO on 3 November 2008 failed, and the stockholders meeting proceeded as
scheduled with 52.3% of the outstanding capital stock of Omico present in person or by proxy.16 The
nominees for the board of directors were elected upon motion. 17

Astra instituted before the SEC a Complaint18 for indirect contempt against Omico for disobedience of the
CDO. On the other hand, Omico filed before the CA a Petition for Certiorari and Prohibition 19imputing grave
abuse of discretion on the part of the SEC for issuing the CDO.

RULING OF THE CA

In the assailed Decision dated 18 March 2009, the CA declared the CDO null and void. 20

The CA held that the controversy was an intra-corporate dispute. 21 The SRC expressly transferred the
jurisdiction over actions involving intra-corporate controversies from the SEC to the regional trial
courts.22 Furthermore, Section 2, Rule 623 of the Interim Rules of Procedure Governing Intra-Corporate
Disputes,24 provides that any controversy or dispute involving the validation of proxies is an election contest,
the jurisdiction over which has also been transferred by the SRC to the regular courts. 25 cralawred

Thus, according to the CA, the SEC committed grave abuse of discretion in taking cognizance of Astras
complaint.26 The CDO was a patent nullity, for an order issued without jurisdiction is no order at all.

Aggrieved by the CA Decision, the SEC filed before us the instant Petition for Certiorari docketed as G.R. No.
187702.27 Meanwhile, Astra filed a Motion for Reconsideration before the CA, 28 which subsequently denied
the motion in the assailed Resolution dated 9 July 2009.

On 14 September 2009, Astra filed the instant Petition for Review on Certiorari docketed as G.R. No.
189014.29 The Court consolidated the two petitions on 12 October 2009. 30

ISSUE

Whether the SEC has jurisdiction over controversies arising from the validation of proxies for the election of
the directors of a corporation.

OUR RULING

About a month after the CA issued the assailed Decision, this Court promulgated GSIS v. CA,31 which
squarely answered the above issue in the negative.

In that case, we observed that Section 632(g) of Presidential Decree No. (P.D.) 902-A dated 11 March 1976
conferred on SEC the power [t]o pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent stockholders or members. Section 6, however, opens thus: In order to effectively
exercise such jurisdiction x x x. This opening clearly refers to the preceding Section 5. 33 The Court pointed
out therein that the power to pass upon the validity of proxies was merely incidental or ancillary to the
powers conferred on the SEC under Section 5 of the same decree. With the passage of the SRC, the powers
granted to SEC under Section 5 were withdrawn, together with the incidental and ancillary powers
enumerated in Section 6.

While the regular courts now had the power to hear and decide cases involving controversies in the election
of directors, it was not clear whether the SRC also transferred to these courts the incidental and ancillary
powers of the SEC as enumerated in Section 6 of P.D. 902-A. Thus, in GSIS v. CA, it was necessary for the
Court to determine whether the action to invalidate the proxies was intimately tied to an election
controversy. Hence, the Court pronounced: chanRoblesvirtualLa wlibrary

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular
trial courts with respect to election-related controversies is specifically confined to controversies in the
election or appointment of directors, trustees, officers or managers of corporations, partnerships, or
associations. Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5 (c) does not extend to every potential subject that may be voted
on by shareholders, but only to the election of directors or trustees, in which stockholders are
authorized to participate under Section 24 of the Corporation Code.

This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to
regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned
when proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of
Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC
rules on proxy solicitation, should be properly seen as an election controversy within the original
and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5 (c) of Presidential Decree No. 902-A.

The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the
election of corporate directors must be seen as intended to confine to one body the adjudication of all
related claims and controversy arising from the election of such directors. For that reason, the aforequoted
Section 2, Rule 6 of the Interim Rules broadly defines the term election contest as encompassing all
plausible incidents arising from the election of corporate directors, including: (1) any controversy or dispute
involving title or claim to any elective office in a stock or nonstock corporation, (2) the validation of
proxies, (3) the manner and validity of elections and (4) the qualifications of candidates, including the
proclamation of winners. If all matters anteceding the holding of such election which affect its manner and
conduct, such as the proxy solicitation process, are deemed within the original and exclusive jurisdiction of
the SEC, then the prospect of overlapping and competing jurisdictions between that body and the regular
courts becomes frighteningly real. From the language of Section 5 (c) of Presidential Decree No. 902-A, it is
indubitable that controversies as to the qualification of voting shares, or the validity of votes cast in favor of
a candidate for election to the board of directors are properly cognizable and adjudicable by the regular
courts exercising original and exclusive jurisdiction over election cases. 34 x x x.

The ruling harmonizes the seeming conflict between the Amended SRC Rules promulgated by the SEC and
the Interim Rules of Procedure Governing Intra-Corporate Disputes promulgated by the Court.

SRC Rule 20(11)(b)(xxi) of the Amended SRC Rules provides: chanRoble svirtualLawlibrary

SRC RULE 20.

Disclosures to Stockholders Prior to Meeting


(formerly, SRC Rule 20 The Proxy Rule)

xxxx

11. Other Procedural Requirements

xxxx
b. Proxy

xxxx
xxi. In the validation of proxies, a special committee of inspectors shall be designated or appointed by
the Board of Directors which shall be empowered to pass on the validity of proxies. Any dispute that may
arise pertaining thereto, shall be resolved by the Securities and Exchange Commission upon
formal complaint filed by the aggrieved party, or by the SEC officer supervising the proxy
validation process. (Emphasis supplied)

On the other hand, these are the provisions of Section 1, Rule 1; and Section 2, Rule 6 of the Interim Rules
of Procedure Governing Intra-Corporate Disputes: chanRoblesvirtualLa wlibrary

RULE 1
General Provisions

SECTION 1. (a) Cases Covered These Rules shall govern the procedure to be observed in civil
cases involving the following:

a) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or
partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation, partnership, or association; cralawlawlibrary

b) Controversies arising out of intra-corporate, partnership, or association relations, between and among
stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or
association of which they are stockholders, members, or associates, respectively; cralawlawlibrary

c) Controversies in the election or appointment of directors, trustees, officers, or managers of


corporations, partnerships, or associations;

d) Derivative suits; and

e) Inspection of corporate books.

xxxx

RULE 6
Election Contests

xxxx

SECTION 2. Definition. An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and
validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office
of director, trustee or other officer directly elected by the stockholders in a close corporation or by members
of a non-stock corporation where the articles of incorporation or by-laws so provide. (Emphases supplied)

The Court explained that the power of the SEC to regulate proxies remains in place in instances when
stockholders vote on matters other than the election of directors. 35 The test is whether the controversy
relates to such election. All matters affecting the manner and conduct of the election of directors are
properly cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for
resolution based on the regulatory powers it exercises over corporations, partnerships and associations.

Astra endeavors to remove the instant case from the ambit of GSIS v. CA by arguing that 1) the validation
of proxies in this case relates to the determination of the existence of a quorum; and 2) no actual voting for
the members of the board of directors was conducted, as the directors were merely elected by motion.

Indeed, the validation of proxies in this case relates to the determination of the existence of a quorum.
Nonetheless, it is a quorum for the election of the directors, and, as such, which requires the presence in
person or by proxy of the owners of the majority of the outstanding capital stock of Omico. 36 Also, the fact
that there was no actual voting did not make the election any less so, especially since Astra had never
denied that an election of directors took place.
We find no merit either in the proposal of Astra regarding the two (2) viable, non-exclusive and successive
legal remedies to question the validity of proxies.37 It suggests that the power to pass upon the validity of
proxies to determine the existence of a quorum prior to the conduct of the stockholders meeting should lie
with the SEC; but, after the stockholders meeting, questions regarding the use of invalid proxies in the
election of directors should be cognizable by the regular courts, since there was already an election to speak
of.

First, this interpretation is akin to the argument struck down by the Court in GSIS v. CA. If the Court adopts
the suggestion, we would be perpetually confronted with the spectacle of election controversies being heard
and adjudicated by both the SEC and the regular courts, made possible through a mere allegation that the
anteceding x x x process was errant, but the competing cases [were] filed with one objective in mind to
affect the outcome of the election of the board of directors.38

Second, the validation of proxies serves a number of purposes, including determining the existence of a
quorum and ascertaining the authenticity of proxies to be used for the election of directors at the
stockholders meeting. Section 2, Rule 6, of the Interim Rules of Procedure Governing Intra-Corporate
Disputes provides that an election contest covers any controversy or dispute involving the validation of
proxies, in general. Thus, it can only refer to all the beneficial purposes that validation of proxies can bring
about when made in connection with a forthcoming election of directors. Thus, there is no point in making
distinctions between who has jurisdiction before and who has jurisdiction after the election of directors, as
all controversies related thereto whether before, during or after shall be passed upon by regular courts
as provided by law.

The Court closes with an observation.

As in the instant cases, GSIS v. CA is a consolidation of two cases, one of which was filed by a private party
and the other by the SEC itself. In both cases, the parties were aggrieved by the CA ruling, so they filed the
cases seeking a pronouncement from the Court that it recognizes the jurisdiction of the SEC over the
controversy.

Calling to mind established jurisprudential principles, the Court therein ruled that quasi-judicial agencies do
not have the right to seek the review of an appellate court decision reversing any of their rulings. 39 This is
because they are not real parties-in-interest. Thus, the Court expunged the petition filed by the SEC for the
latters lack of capacity to file the suit. So it must be in the instant cases.

WHEREFORE, the petition in G.R. No. 187702 is EXPUNGED for lack of capacity of petitioner to file the
suit.

The petition in G.R. No. 189014 is DENIED. The Court of Appeals Decision dated 18 March 2009 and
Resolution dated 9 July 2009 in CA-G.R. SP No. 106006 are AFFIRMED.

SO ORDERED. chanroblesvirtuallawlibrary

Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe, JJ., concur.

Endnotes:

1
Rollo (G.R. No. 187702), pp. 43-55; penned by Associate Justice Myrna Dimaranan Vidal, with Associate
Justices Martin S. Villarama, Jr. (now a Member of this Court) and Rosalinda Asuncion-Vicente concurring.

Rollo (G.R. No. 189014), p. 42; penned by Associate Justice Myrna Dimaranan Vidal, with Associate Justices
2

Martin S. Villarama, Jr. (now a Member of this Court) and Magdangal M. de Leon concurring.

3
Id. at 388-389.

4
Rollo (G.R. No. 187702), p. 110.

5
Id. at 60.
6
Id. at 44.

7
Id. at 46, 133.

8
Id.

9
SRC RULE 20. Disclosures to Stockholders Prior to Meeting (formerly, SRC Rule 20 The Proxy Rule)

xxxx

11. Other Procedural Requirements

xxxx

b. Proxy

xxxx
xviii. No member of the Stock Exchange and no broker/dealer shall give any proxy, consent or
authorization, in respect of any security carried for the account of a customer to a person other
than the customer, without the express written authorization of such customer. The proxy executed by the
broker shall be accompanied by a certification under oath stating that before the proxy was given to the
broker, he had duly obtained the written consent of the persons in whose account the shares are held.
(Emphasis supplied.)
10
Rollo (G.R. No. 187702), p. 46.

11
SRC RULE 20. Disclosures to Stockholders Prior to Meeting (formerly, SRC Rule 20 The Proxy Rule)

xxxx

2. Definitions
xxxx

B. Solicitation

i. The terms solicit and solicitation shall include:

a. any request for a proxy or authorization;

b. any request to execute or not to execute, or to revoke, a proxy or


authorization; or

c. the furnishing of a form of proxy or other communication to security


holders under a circumstance reasonably calculated to result in the
procurement, withholding or revocation of a proxy.

ii. The terms shall not apply to:

a. the performance by any person of ministerial acts on behalf of a person


soliciting a proxy; or

b. any solicitation made otherwise than on behalf of the registrant


where the total number of persons solicited is not more than
nineteen (19). (Emphasis supplied.)

12
SECTION 20. Proxy Solicitations. 20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission.
13
Rollo (G.R. No. 187702), p. 46.

14
Id. at 59-71.

15
Id. at 110-113.

16
Id. at 47; rollo (G.R. No. 189014), p. 176.

17
Rollo (G.R. No. 189014), p. 177.

18
Id. at 170-185.

19
Rollo (G.R. No. 187702), pp. 73-109.

20
Id. at 54.

21
Id. at 49.

22
Id. at 49-50.

23
SECTION 2. Definition. An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and
validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office
of director, trustee or other officer directly elected by the stockholders in a close corporation or by members
of a non-stock corporation where the articles of incorporation or by-laws so provide. (Emphasis supplied)

24
A.M. No. 01-2-04-SC, 13 March 2001.

25
cralawre d Rollo (G.R. No. 187702), p. 51.

26
Id. at 52.

27
Id. at 2-41.

28
Rollo (G.R. No. 189014), pp. 23-41.

29
Id. at 45-92.

30
Id. at 388.

31
603 Phil. 676 (2009).

32
SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers: chanRoble svirtualLawlibrary

a) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it
has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply; cralawlawlibrary

b) To issue writs of attachment in cases in which it has jurisdiction, in order to preserve the rights of parties
and in such cases the pertinent provisions of the Rules of Court shall apply; cralawla wlibrary

c) To appoint one or more receivers of the property, real and personal, which is the subject of the action
pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such
other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors: Provided, however, That the Commission may, in appropriate
cases, appoint a rehabilitation receiver of corporations, partnerships or other associations not supervised or
regulated by other government agencies who shall have, in addition to the powers of a regular receiver
under the provisions of the Rules of Court, such functions and powers as are provided for in the succeeding
paragraph d) hereof: Provided, further, That the Commission may appoint a rehabilitation receiver of
corporations, partnerships or other associations supervised or regulated by other government agencies, such
as banks and insurance companies, upon request of the government agency concerned: Provided, finally,
That upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this
Decree, all actions for claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly.

d) To create and appoint a management committee, board, or body upon petition or motu proprio to
undertake the management of corporations, partnerships or other associations not supervised or regulated
by other government agencies in appropriate cases when there is imminent danger of dissipation, loss,
wastage or destruction of assets or other properties of paralization of business operations of such
corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or
the general public: Provided, further, That the Commission may create or appoint a management committee,
board or body to undertake the management of corporations, partnerships or other associations supervised
or regulated by other government agencies, such as banks and insurance companies, upon request of the
government agency concerned.

The management committee or rehabilitation receiver, board or body shall have the power to take custody
of, and control over, all the existing assets and property of such entities under management; to evaluate the
existing assets and liabilities, earnings and operations of such corporations, partnerships or other
associations; to determine the best way to salvage and protect the interest of the investors and creditors; to
study, review and evaluate the feasibility of continuing operations and restructure and rehabilitate such
entities if determined to be feasible by the Commission. It shall report and be responsible to the Commission
until dissolved by order of the Commission: Provided, however, That the Commission may, on the basis of
the findings and recommendation of the management committee, or rehabilitation receiver, board or body,
or on its own findings, determine that the continuance in business of such corporation or entity would not be
feasible or profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the
general public, order the dissolution of such corporation entity and its remaining assets liquidated
accordingly. The management committee or rehabilitation receiver, board or body may overrule or revoke
the actions of the previous management and board of directors of the entity or entities under management
notwithstanding any provision of law, articles of incorporation or by-laws to the contrary.

The management committee, or rehabilitation receiver, board or body shall not be subject to any action,
claim or demand for, or in connection with, any act done or omitted to be done by it in good faith in the
exercise of its functions, or in connection with the exercise of its power herein conferred.

e) To punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent
provisions of, and penalties prescribed by, the Rules of Court; cralawla wlibrary

f) To compel the officers of any corporation or association registered by it to call meetings of stockholders or
members thereof under its supervision; cralawlawlibrary

g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent
stockholders or members; cralawla wlibrary

h) To issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission
and in appropriate cases order the examination, search and seizure of all documents, papers, files and
records, tax returns, and books of accounts of any entity or person under investigation as may be necessary
for the proper disposition of the cases before it, notwithstanding the provisions of any law to the contrary.

i) To impose fines and/or penalties for violation of this Decree or any other laws being implemented by the
Commission, the pertinent rules and regulations, its orders, decisions and/or rulings; cralawla wlibrary

j) To authorize the establishment and operation of stock exchanges, commodity exchanges and such other
similar organization and to supervise and regulate the same; including the authority to determine their
number, size and location, in the light of national or regional requirements for such activities with the view
to promote, conserve or rationalize investment; cralawla wlibrary

k) To pass upon, refuse or deny, after consultation with the Board of Investments, Department of Industry,
National Economic and Development Authority or any other appropriate government agency, the application
for registration of any corporation, partnership or association or any form of organization falling within its
jurisdiction, if their establishment, organization or operation will not be consistent with the declared national
economic policies; cralawlawlibrary

l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the
following: chanRoblesvirtualLa wlibrary

1. Fraud in procuring its certificate of registration;

2. Serious misrepresentation as to what the corporation can do or is doing to the great


prejudice of or damage to the general public;

3. Refusal to comply or defiance of any lawful order of the Commission restraining commission
of acts which would amount to a grave violation of its franchise;

4. Continuous inoperation for a period of at least five (5) years;

5. Failure to file by-laws within the required period;

6. Failure to file required reports in appropriate forms as determined by the Commission within
the prescribed period;

m) To exercise such powers as may be provided by law as well as those which may be implied from, or
which are necessary or incidental to the carrying out of, the express powers granted to the Commission to
achieve the objectives and purposes of this Decree.

In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be conducted by
the Commission or by a Commissioner or by such other bodies, boards, committees and/or any officer as
may be created or designated by the Commission for the purpose. The decision, ruling or order of any such
Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission sitting en
banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The
Commission shall promulgate rules of procedures to govern the proceedings, hearings and appeals of cases
falling within its jurisdiction.

The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the
Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court.
(Emphasis supplied.)

33
SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as expressly
granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving: chanRoblesvirtualLa wlibrary

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or organizations registered with the
Commission; cralawla wlibrary

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members, or associates; between any or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual franchise or right to exist as such entity; cralawla wlibrary

c) Controversies in the election or appointments of directors, trustees, officers or managers of such


corporations, partnerships or associations.

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of


payments in cases where the corporation, partnership or association possesses sufficient property to cover
all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where
the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the
management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.

34
Supra note 31, at 707-708.
35
Id. at 709.

36
THE CORPORATION CODE OF THE PHILIPPINES, Sec. 24.

37
Rollo (G.R. No. 189014), p. 66.

38
GSIS v. CA, supra at 709.

39
Id. at 696.