such monetary instruments or property would thus be inhibited from
ANTI MONEY LAUNDERING ACT (AMLA) utilizing the same for the duration of the freeze order. To make such
1. Republic of the Philippines vs Hon. Antonio M.
Eugenio Jr.
Facts: A search and investigation was conducted in relation to the
corruptions surrounding the NAIA terminal 3 project. The search
yielded that Pantaleon Alvarez maintained eight bank accounts in 6
different banks.
The council authorized the investigation into the bank accounts of
Alvarez et al by the AMLC because of the findings that there was
transfer of deposits from HK to Alvarez’ bank account.
Thereafter, Alvarez filed a motion to stay the said execution. Lilia
Cheng, wife of one of the accused in this case also filed for injunction,
saying that there cannot be an ex parte application for inquiry into the
bank deposits as the same would deprive the other party of ones right
to due process.
Issue: What are the standards that should be observed in the
application for said inquiry?
Whether a bank inquiry order issued in accordance with Section 10 of
the AMLA may be stayed by injunction.
Held: Money laundering has been generally defined by the
International Criminal Police Organization (Interpol) `as any act or
attempted act to conceal or disguise the identity of illegally obtained
proceeds so that they appear to have originated from legitimate
sources. Even before the passage of the AMLA, the problem was
addressed by the Philippine government through the issuance of
various circulars by the Bangko Sentral ng Pilipinas. Yet ultimately,
legislative proscription was necessary, especially with the inclusion of
the Philippines in the Financial Action Task Forces list of non-
cooperative countries and territories in the fight against money
laundering.
The AMLA also authorizes certain provisional remedies that would aid
the AMLC in the enforcement of the AMLA. These are the freeze order
authorized under Section 10, and the bank inquiry order authorized
under Section 11.
Respondents posit that a bank inquiry order under Section 11 may be
obtained only upon the pre-existence of a money laundering offense
case already filed before the courts.
The conclusion is based on the phrase upon order of any competent
court in cases of violation of this Act, the word cases generally
understood as referring to actual cases pending with the courts.
We are unconvinced by this proposition, and agree instead with the
then Solicitor General who conceded that the use of the phrase in
cases of was unfortunate, yet submitted that it should be interpreted
to mean in the event there are violations of the AMLA, and not that
there are already cases pending in court concerning such violations.
Whether an ex parte application is allowed
No, an ex parte application is not expressly prohibited. A reading of
Section 10, which involves the freezing of the account expressly
provides that there can be an ex parte application.
The court said that both freezing and inquiry are two of the remedies
provided for by the said law. Hence, if the lawmakers intended that
inquiry ex parte is allowed, then it should have expressly provided so
similar to that of Section 10.
The Court could divine the sense in allowing ex parte proceedings
under Section 10 and in proscribing the same under Section 11. A
freeze order under Section 10 on the one hand is aimed at preserving
monetary instruments or property in any way deemed related to
unlawful activities as defined in Section 3(i) of the AMLA. The owner of
freeze order anteceded by a judicial proceeding with notice to the
account holder would allow for or lead to the dissipation of such funds
even before the order could be issued.
On the other hand, a bank inquiry order under Section 11 does not
necessitate any form of physical seizure of property of the account
holder. What the bank inquiry order authorizes is the examination of
the particular deposits or investments in banking institutions or non-
bank financial institutions. The monetary instruments or property
deposited with such banks or financial institutions are not seized in a
physical sense, but are examined on particular details such as the
account holders record of deposits and transactions. Unlike the assets
subject of the freeze order, the records to be inspected under a bank
inquiry order cannot be physically seized or hidden by the account
holder. Said records are in the possession of the bank and therefore
cannot be destroyed at the instance of the account holder alone as
that would require the extraordinary cooperation and devotion of the
bank.
The court cannot base its probable cause merely on the findings of the
AMLC.
Just because the AMLA establishes additional exceptions to the Bank
Secrecy Act it does not mean that the later law has dispensed with the
general principle established in the older law that [a]ll deposits of
whatever nature with banks or banking institutions in the Philippines x
x x are hereby considered as of an absolutely confidential nature.
2. Republic of the Philippines vs Glasgow Credit and
Collection Services Inc.
Facts:
A civil forfeiture case was filed against the bank account of respondent
pursuant to AMLA was filed in the RTC of Manila.
The trial court dismissed the case, on the ground of improper venue
since the case should have been filed in the RTC of Pasig City, where
the depositary bank is located and for failure to state the cause of
action.
Issue:
Where is the proper venue involving civil forfeiture case?
Whether the complaint for civil forfeiture is premature because of the
failure of the tribunal to prove unlawful activity?
Held:
1. The trial court acquired jurisdiction over the case
Section 3, Title II (Civil Forfeiture in the Regional Trial Court) of the
Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 3. Venue of cases cognizable by the regional trial court. A petition
for civil forfeiture shall be filed in any regional trial court of the
judicial region where the monetary instrument, property or
proceeds representing, involving, or relating to an unlawful
activity or to a money laundering offense are located; provided,
however, that where all or any portion of the monetary instrument,
property or proceeds is located outside the Philippines, the petition
may be filed in the regional trial court in Manila or of the judicial region
where any portion of the monetary instrument, property, or proceeds
is located, at the option of the petitioner.
Under Section 3, Title II of the Rule of Procedure in Cases of Civil
Forfeiture, therefore, the venue of civil forfeiture cases is any RTC of
the judicial region where the monetary instrument, property or
proceeds representing, involving, or relating to an unlawful activity or
to a money laundering offense are located. Pasig City, where the
account sought to be forfeited in this case is situated, is within the
National Capital Judicial Region (NCJR). Clearly, the complaint for civil
forfeiture of the account may be filed in any RTC of the NCJR. Since
the RTC Manila is one of the RTCs of the NCJR, it was a proper venue
of the Republics complaint for civil forfeiture of Glasgows account.
2. The complaint provides for a specific cause of action
Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture
provides:
Sec. 4. Contents of the petition for civil forfeiture. - The petition for
civil forfeiture shall be verified and contain the following allegations:
(a) The name and address of the respondent;
(b) A description with reasonable particularity of the monetary
instrument, property, or proceeds, and their location; and
(c) The acts or omissions prohibited by and the specific provisions of
the Anti-Money Laundering Act, as amended, which are alleged to be
the grounds relied upon for the forfeiture of the monetary instrument,
property, or proceeds; and
[(d)] The reliefs prayed for.
In this case, the complaint was able to meet the requirements stated
in Section 4.
RA 9160, as amended, and its implementing rules and regulations lay
down two conditions when applying for civil forfeiture:
i. When there is a suspicious transaction report or a covered
transaction report deemed suspicious after investigation by
the AMLC and
ii. The court has, in a petition filed for the purpose, ordered the
seizure of any monetary instrument or property, in whole or
in part, directly or indirectly, related to said report.
It is the preliminary seizure which brings the property within the reach
of the court. The injunctive writ placed the said property in the
possession of the court.
Since the account covered a series of covered and suspicious
transactions and was placed in the process of the court, the case was
not prematurely filed.
Whether or not there is truth in the allegation that the account
contains the proceeds of unlawful activities is an evidentiary matter
that may be proven during trial.
A criminal conviction for an unlawful activity is not a prerequisite for
the institution of a civil forfeiture proceeding. Stated otherwise, a
finding of guilt for an unlawful activity is not an essential element of
civil forfeiture.
Section 6 of RA 9160, as amended, provides:
SEC. 6. Prosecution of Money Laundering.
(a) Any person may be charged with and convicted of both the
offense of money laundering and the unlawful activity as
herein defined.
(b) Any proceeding relating to the unlawful activity shall be
given precedence over the prosecution of any offense or
violation under this Act without prejudice to the freezing and
other remedies provided.
Rule 6.1 of the Revised Implementing Rules and Regulations of RA
9160, as amended, states:
Rule 6.1. Prosecution of Money Laundering
a) Any person may be charged with and convicted of both the
offense of money laundering and the unlawful activity as
defined under Rule 3(i) of the AMLA.
b) Any proceeding relating to the unlawful activity shall be
given precedence over the prosecution of any offense or
violation under the AMLA without prejudice to the
application ex-parte by the AMLC to the Court of Appeals for
a freeze order with respect to the monetary instrument or
property involved therein and resort to other remedies
provided under the AMLA, the Rules of Court and other
pertinent laws and rules.
Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture
provides:
Sec. 27. No prior charge, pendency or conviction necessary. No prior
criminal charge, pendency of or conviction for an unlawful
activity or money laundering offense is necessary for the
commencement or the resolution of a petition for civil
forfeiture. (emphasis supplied)
Thus, regardless of the absence, pendency or outcome of a criminal
prosecution for the unlawful activity or for money laundering, an action
for civil forfeiture may be separately and independently prosecuted
and resolved.
SECURITIES REGULATION CODE (SRC)
1. SEC vs Universal Rightfield Property Holdings Inc.
Facts: Petitioner Securities and Exchange Commission (SEC), through
its Corporate Finance Department, issued an Order revoking URPHI's
Registration of Securities and Permit to Sell Securities to the Public for
its failure to timely file its Year 2001 Annual Report and Year 2002 1st,
2nd and 3rd Quarterly Reports pursuant to Section 173 of the
Securities Regulation Code (SRC).
URPI was given an extension, yet they still failed to comply with the
requirements. SEC revoked URPHI's Registration of Securities and
Permit to Sell Securities to the Public for its failure to submit its
reportorial requirements within the final extension period.
The CA granted the petition and set aside the SEC Order of Revocation
after finding that URPHI was not afforded due process because no due
notice was given and no hearing was conducted before its registration
of securities and permit to sell them to the public was revoked. The CA
noted that the hearing conducted was only for the purpose of
determining whether URPHI's registration and permit to sell should be
suspended and not whether said registration should be revoked.
Issue: Whether a separate notice is needed for the revocation of the
permit?
Held: No, Contrary to the view that a separate notice of hearing to
revoke is necessary to initiate the revocation proceeding, the Court
holds that such notice would be a superfluity since the Order dated
July 27, 2004 already states that such proceeding shall ensue if URPHI
would still fail to submit the reportorial requirements after the lapse of
the 60-day suspension period. After all, "due notice" simply means the
information that must be given or made to a particular person or to
the public within a legally mandated period of time so that its recipient
will have the opportunity to respond to a situation or to allegations
that affect the individual's or public's legal rights or duties.
Granted that no formal hearing was held before the issuance of the
Order of Revocation, the Court finds that there was substantial
compliance with the requirements of due process when URPHI was
given opportunity to be heard. Upon receipt of the SEC Order dated
July 27, 2004, URPHI filed the letters dated September 13 and 28,
2004, seeking a final extension to submit the reportorial requirements,
and admitting that its failure to submit its 2nd Quarterly Report for
2004 was due to the same reasons that it was unable to submit its
2003 Annual Report and 1st Quarterly Report for 2004. Notably, in its
Order of Revocation, the SEC considered URPHI's letters and stated
that it still failed to submit the required reports, despite the lapse of
the final extension requested.
There is no dispute that violation of the reportorial requirements under
Section 17.119 of the Amended Implementing Rules and Regulation20
of the SRC is a ground for suspension or revocation of registration of
securities pursuant to Sections 13.1 and 54.1 of the SRC. However,
contrary to the CA ruling that separate notices and hearings for
suspension and revocation of registration of securities and permit to
sell them to the public are required, Sections 13 .1 and 54.1 of the
SRC expressly provide that the SEC may suspend or revoke such
registration only after due notice and hearing, to wit:
13.1. The Commission may reject a registration statement and refuse
registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder
after due notice and hearing by issuing an order to such effect, setting
forth its findings in respect thereto, if it finds that:
a) The issuer:
xxxx
(ii) Has violated any of the provisions of this Code, the rules
promulgated pursuant thereto, or any order of the Commission of
which the issuer has notice in connection with the offering for which a
registration statement has been filed;
xxxx
54.1. If, after due notice and hearing, the Commission finds that: (a)
There is a violation of this Code, its rules, or its orders; (b) Any
registered broker or dealer, associated person thereof has failed
reasonably to supervise, with a view to preventing violations, another
person subject to supervision who commits any such violation; ( c) Any
registrant or other person has, in a registration statement or in other
reports, applications, accounts, records or documents required by law
or rules to be filed with the Commission, made any untrue statement
of a material fact, or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; or, in the case of an underwriter, has failed to conduct an
inquiry with reasonable diligence to insure that a registration
statement is accurate and complete in all material respects; or ( d) Any
person has refused to permit any lawful examinations into its affairs, it
shall, in its discretion, and subject only to the limitations hereinafter
prescribed, impose any or all of the following sanctions as may be
appropriate in light of the facts and circumstances:
(i) Suspension, or revocation of any registration for the offering of
securities;
The Court has consistently held that the essence of due process is
simply an opportunity to be heard, or as applied to administrative
proceedings, an opportunity to explain one's side or an opportunity to
seek a reconsideration of the action or ruling complained of. Any
seeming defect in its observance is cured by the filing of a motion for
reconsideration, and denial of due process cannot be successfully
invoked by a party who has had the opportunity to be heard on such
motion. What the law prohibits is not the absence of previous notice,
but the absolute absence thereof and the lack of opportunity to be
heard.
2. SEC vs Subic Bay Golf and Country Club Inc.
Intra-corporate controversies, previously under the Securities and
Exchange Commission's jurisdiction, are now under the jurisdiction of
Regional Trial Courts designated as commercial courts. However, the
transfer of jurisdiction to the trial courts does not oust the Securities
and Exchange Commission of its jurisdiction to determine if
administrative rules and regulations were violated.
FACTS: Subic Bay Golf Course, also known as Binictican Valley Golf
Course, was operated by Subic Bay Metropolitan Authority (SBMA).
Universal International Group of Taiwan (UIG), a Taiwanese
corporation, was chosen to implement the plan to privatize the golf
course.
Subsequently, SBMA and UIG entered into a Lease and Development
Agreement. UIG agreed to "develop, manage and maintain the golf
course and other related facilities within the complex.” Later, Universal
International Group Development Corporation (UIGDC) succeeded to
the interests of UIG on the golf course development.
UIGDC executed a Deed of Assignment in favor of Subic Bay Golf and
Country Club, Inc. (SBGCCI). Under the Deed of Assignment, UIGDC
assigned all its rights and interests in the golf course's development,
operations, and marketing to SBGCCI. SBGCCI and UIGDC entered into
a Development Agreement. UIGDC agreed to "finance, construct and
develop the golf course for and in consideration of the payment by
SBGCCI of its 1,530 shares of stock."
Thereafter, SBGCCI applied in the SEC for the permit to offer the
shares. The SEC then approved the sale of 3,000 shares valued at
P425,000 per share. The proceeds will be used to pay UIGDC for the
development of the golf course.
Thereafter, certain buyers of the shares asked for a refund because
the promised facilities of the golf course were not delivered. Moreover,
they claimed that despite SBGCCI's and UIGDC's failure to deliver the
promised amenities, they started to charge them monthly dues. They
also never received any billing statement from them until they were
sent a demand notice to pay the alleged back dues of P39,000.00
within five (5) days.
The SEC made an investigation and found out that SBGCII failed to
substantially comply with their obligation. In effect, it ordered SBGCII
to make the necessary refund. The Corporation Finance Department
found that Filart and Villareal invested in the golf course because of
SBGCCI and UIGDC's representation that a 27-hole, world-class golf
course would be developed. It also found that SBGCCI and UIGDC
failed to comply with their commitments and representations as stated
in their prospectus.
The CA said that the SEC acted in excess of its jurisdiction because the
case was that of an intra corporate dispute.
The SEC contends that it acted within its jurisdiction because it was
done pursuant to its rule making power.
ISSUE: Whether the SEC did not have any jurisdiction to rule on the
case?
HELD: The SEC had jurisdiction.
Under Presidential Decree No. 902-A, the Securities and Exchange
Commission has jurisdiction over acts amounting to fraud and
misrepresentation by a corporation's board of directors, business
associates, and officers. It also provides that it has jurisdiction over
intra-corporate disputes.
For a dispute to be "intra-corporate," it must satisfy the relationship
and nature of controversy tests.
The relationship test requires that the dispute be between a
corporation/partnership/association and the public; a
corporation/partnership/association and the state regarding the entity's
franchise, permit, or license to operate; a
corporation/partnership/association and its stockholders, partners,
members, or officers; and among stockholders, partners, or associates
of the entity.
The nature of the controversy test requires that the action involves the
enforcement of corporate rights and obligations.
Villareal and Filart's right to a refund of the value of their shares was
based on SBGCCI and UIGDC's alleged failure to abide by their
representations in their prospectus. Specifically, Villareal and Filart
alleged in their letter-complaint that the world-class golf course that
was promised to them when they purchased shares did not
materialize. This is an intra-corporate matter that is under the
designated Regional Trial Court's jurisdiction. It involves the
determination of a shareholder's rights under the Corporation Code or
other intra-corporate rules when the corporation or association fails to
fulfill its obligations.
However, even though the Complaint filed before the Securities and
Exchange Commission contains allegations that are intra-corporate in
nature, it does not necessarily oust the Securities and Exchange
Commission of its regulatory and administrative jurisdiction to
determine and act if there were administrative violations committed.
Any fraud or misrepresentation in the issuance of securities injures the
public. The Securities and Exchange Commission's power to suspend
or revoke registrations and to impose fines and other penalties
provides the public with a certain level of assurance that the securities
contain representations that are true, and that misrepresentations if
later found, would be detrimental to the erring corporation. It creates
risks to corporations that issue securities and adds cost to errors,
misrepresentations, and violations related to the issuance of those
securities. This protects the public who will rely on representations of
corporations and partnerships regarding financial instruments that they
issue. The Securities and Exchange Commission's regulatory power
over securities-related activities is tied to the government's duty to
protect the investing public from illegal and fraudulent instruments.
Thus, when Villareal and Filart alleged in their letter-complaint that
SBGCCI and UIGDC committed misrepresentations in the sale of their
shares, nothing prevented the Securities and Exchange Commission
from taking cognizance of it to determine if SBGCCI and UIGDC
committed administrative violations and were liable under the
Securities Regulation Code. The Securities and Exchange Commission
may investigate activities of corporations under its jurisdiction to
ensure compliance with the law.
However, the Securities and Exchange Commission's regulatory power
does not include the authority to order the refund of the purchase
price of Villareal's and Filart's shares in the golf club. The issue of
refund is intra-corporate or civil in nature. Similar to issues such as the
existence or inexistence of appraisal rights, pre-emptive rights, and the
right to inspect books and corporate records, the issue of refund is an
intra-corporate dispute that requires the court to determine and
adjudicate the parties' rights based on law or contract. Injuries, rights,
and obligations involved in intra-corporate disputes are specific to the
parties involved. They do not affect the Securities and Exchange
Commission or the public directly.
Provisions of the SRC:
SEC. 13. Rejection and Revocation of Registration of Securities. - 13.1.
The Commission may reject a registration statement and refuse
registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder
after due notice and hearing by issuing an order to such effect, setting
forth its findings in respect thereto, if it finds that:
The issuer:
Has been judicially declared insolvent;
Has violated any of the provisions of this Code, the rules promulgated
pursuant thereto, or any order of the Commission of which the issuer
has notice in connection with the offering for which a registration
statement has been filed;
Has been engaged or is about to engage in fraudulent transactions;
Has made any false or misleading representation of material facts in
any prospectus concerning the issuer or its securities;
Has failed to comply with any requirement that the Commission may
impose as a condition for registration of the security for which the
registration statement has been filed; or
The registration statement is on its face incomplete or inaccurate in
any material respect or includes any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; or
The issuer, any officer, director or controlling person of the issuer, or
person performing similar functions, or any underwriter has been
convicted, by a competent judicial or administrative body, upon plea of
guilty, or otherwise, of an offense involving moral turpitude and/or
fraud or is enjoined or restrained by the Commission or other
competent judicial or administrative body for violations of securities,
commodities, and other related laws.
....
13.4. If the Commission deems it necessary, it may issue an order
suspending the offer and sale of the securities pending any
investigation. The order shall state the grounds for taking such action,
but such order of suspension although binding upon the persons
notified thereof, shall be deemed confidential, and shall not be
published. Upon the issuance of the suspension order, no further offer
or sale of such security shall be made until the same is lifted or set
aside by the Commission. Otherwise, such sale shall be void.
....
SEC. 15. Suspension of Registration. - 15.1. If, at any time, the
information contained in the registration statement filed is or has
become misleading, incorrect, inadequate or incomplete in any
material respect, or the sale or offering for sale of the security
registered thereunder may work or tend to work a fraud, the
Commission may require from the issuer such further information as
may In its judgment be necessary to enable the Commission to
ascertain whether the registration of such security should be revoked
on any ground specified in this Code. The Commission may also
suspend the right to sell and offer for sale such security pending
further investigation, by entering an order specifying the grounds for
such action, and by notifying the issuer, underwriter, dealer or broker
known as participating in such offering.80
To ensure compliance with the law and the rules, the Securities and
Exchange Commission is also given the power to impose fines and
penalties. It may also investigate motu proprio whether corporations
comply with the Corporation Code, Securities Regulation Code, and
rules implemented by the Securities and Exchange Commission.
SEC. 5. Powers and Functions of the Commission. - 5.1. The
Commission shall act with transparency and shall have the powers and
functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and
functions:
...
d. Regulate, investigate or supervise the activities of persons to ensure
compliance;
...
f. Impose sanctions for the violation of laws and the rules, regulations
and orders issued pursuant thereto;
...
i. Issue cease and desist orders to prevent fraud or injury to the
investing public;
...
m. 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; and
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.
3. SEC vs Baguio Country Club Corporation
Facts: Respondent in this case amended their by laws increasing the
term of the BODs to 2 years. After the amendment, someone asked
the SEC’s opinion on the validity of the said provision to which the SEC
said that it was done contrary to law.
Respondent on the other hand claims that the SEC can no longer rule
otherwise on the amendment since it already approved of the same.
Thereafter, the complaint was formalized before the SEC where they
asked that the SEC issue an order mandating the election of the BOD.
BCC questioned the said order and said that Erlinda and Ramon
Ilusorio both do not have legal standing in questioning the said order
as both of them are not stockholders. Moreover, BCC claims that the
matter is an intra corporate dispute and therefore jurisdiction is with
the RTC and not with the SEC.
Issue: Whether or not the SEC has jurisdiction over the case?
Held:
The OSG argues that the matter at hand does not involve an intra
corporate dispute as the said matter was merely seeking for an
affirmative remedy.
The petition must be denied. The petitions have been rendered moot
by the 2005 amendment of the by-laws. The validity of the two (2)
year term provision and the calling of meeting for the election of
members of the board of directors to replace those holding a two (2)
year term should no longer be in issue.
4. SEC VS PROSPERITY COM. INC. (GR NO. 164197)
Facts: Prosperity.Com, Inc. (PCI) sold computer software and hosted
websites without providing internet service. To make a profit, PCI
devised a scheme in which, for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire from it an internet
website of a 15-Mega Byte (MB) capacity. At the same time, by
referring to PCI his own down-line buyers, a first-time buyer could
earn commissions, interest in real estate in the Philippines and in the
United States, and insurance coverage worth P50,000.00.
The SEC ruled that PCIs scheme constitutes an Investment contract
and, following the Securities Regulations Code, it should have first
registered such contract or securities with the SEC.
Issue: Whether the scheme involves an investment contract?
Held: No, the scheme is not an investment contract.
The Securities Regulation Code treats investment contracts as
securities that have to be registered with the SEC before they can be
distributed and sold. An investment contract is a contract, transaction,
or scheme where a person invests his money in a common enterprise
and is led to expect profits primarily from the efforts of others.
The United States Supreme Court held in Securities and Exchange
Commission v. W.J. Howey Co. that, for an investment contract to
exist, the following elements, referred to as the Howey test must
concur: (1) a contract, transaction, or scheme; (2) an investment of
money; (3) investment is made in a common enterprise; (4)
expectation of profits; and (5) profits arising primarily from the efforts
of others. Thus, to sustain the SEC position in this case, PCIs scheme
or contract with its buyers must have all these elements.
An example that comes to mind would be the long-term commercial
papers that large companies, like San Miguel Corporation (SMC), offer
to the public for raising funds that it needs for expansion. When an
investor buys these papers or securities, he invests his money,
together with others, in SMC with an expectation of profits arising from
the efforts of those who manage and operate that company. SMC has
to register these commercial papers with the SEC before offering them
to investors.
Here, PCIs clients do not make such investments. They buy a product
of some value to them: an Internet website of a 15-MB capacity. The
client can use this website to enable people to have internet access to
what he has to offer to them, say, some skin cream. The buyers of the
website do not invest money in PCI that it could use for running some
business that would generate profits for the investors. The price of
US$234.00 is what the buyer pays for the use of the website, a
tangible asset that PCI creates, using its computer facilities and
technical skills.
Actually, PCI appears to be engaged in network marketing, a scheme
adopted by companies for getting people to buy their products outside
the usual retail system where products are bought from the stores
shelf. Under this scheme, adopted by most health product distributors,
the buyer can become a down-line seller. The latter earns commissions
from purchases made by new buyers whom he refers to the person
who sold the product to him. The network goes down the line where
the orders to buy come.
5. PHIL. VETERAN’S BANK VS CALLANGAN, GR NO.
191995
Facts: Respondent Justina F. Callangan, the Director of the
Corporation Finance Department of the Securities and Exchange
Commission (SEC), sent the Bank a letter, informing it that it qualifies
as a public company under Section 17.2 of the Securities Regulation
Code (SRC) in relation with Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the SRC. The Bank is thus
required to comply with the reportorial requirements set forth in
Section 17.1 of the SRC.
The bank on the other hand claims that it is not a public company
because it is a private company whose shares of stock are available
only to a limited class or sector, i.e., to World War II veterans, and not
to the general public.
Issue: Whether the bank is a public company?
Held: Yes.
To determine whether the Bank is a public company burdened with the
reportorial requirements ordered by the SEC, we look to Subsections
17.1 and 17.2 of the SRC, which provide:
Section 17. Periodic and Other Reports of Issuers.
17.1. Every issuer satisfying the requirements in Subsection 17.2
hereof shall file with the Commission:
a) Within one hundred thirty-five (135) days, after the end of the
issuers fiscal year, or such other time as the Commission may
prescribe, an annual report which shall include, among others, a
balance sheet, profit and loss statement and statement of cash flows,
for such last fiscal year, certified by an independent certified public
accountant, and a management discussion and analysis of results of
operations; and
b) Such other periodical reports for interim fiscal periods and current
reports on significant developments of the issuer as the Commission
may prescribe as necessary to keep current information on the
operation of the business and financial condition of the issuer.
17.2. The reportorial requirements of Subsection 17.1 shall apply to
the following:
xxxx
c) An issuer with assets of at least Fifty million pesos (P50,000,000.00)
or such other amount as the Commission shall prescribe, and having
two hundred (200) or more holders each holding at least one hundred
(100) shares of a class of its equity securities: Provided, however, That
the obligation of such issuer to file reports shall be terminated ninety
(90) days after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100) shares is
reduced to less than one hundred (100).
We also cite Rule 3(1)(m) of the Amended Implementing Rules and
Regulations of the SRC, which defines a public company as any
corporation with a class of equity securities listed on an Exchange or
with assets in excess of Fifty Million Pesos (P50,000,000.00) and
having two hundred (200) or more holders, at least two hundred (200)
of which are holding at least one hundred (100) shares of a class of its
equity securities.
From these provisions, it is clear that a public company, as
contemplated by the SRC, is not limited to a company whose shares of
stock are publicly listed; even companies like the Bank, whose shares
are offered only to a specific group of people, are considered a public
company, provided they meet the requirements enumerated above.
The records establish, and the Bank does not dispute, that the Bank
has assets exceeding P50,000,000.00 and has 395,998 shareholders. It
is thus considered a public company that must comply with the
reportorial requirements set forth in Section 17.1 of the SRC.
6. POWER HOMES UNLIMITED CORP. VS SEC (GR NO.
164182)
Facts: Petitioner is a domestic corporation duly registered with public
respondent SEC. 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.
SEC found out that petitioner is involved in the offering to sell and
distribution of investment contracts, which, as a rule should be
registered with the SEC.
Issue: Whether the business of public respondent constitutes an
investment contract, which should be registered with the SEC?
Held: Yes, the case at hand involves an investment contract.
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.
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 company’s
referral program and who will ultimately purchase real property from
any accredited real estate developers and as such he is entitled to a
referral bonus/commission. Paragraph 5 of the same indicates that
there exists no employer/employee relationship between the BCO and
the Power Homes 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 petitioner’s accredited real estate developers.
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.
In this case, 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.
7. CEMCO HOLDINGS INC. VS NATIONAL LIFE
INSURANCE COMPANY OF THE PHILIPPINES (GR NO.
171815)
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 BCI informed the Philippine Stock Exchange (PSE)
that it and its subsidiary ACC had passed resolutions to sell to Cemco
BCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in UCHC
equivalent to 29.69%.
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 shares in UCHC 51%
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%
Respondent was aggrieved with the transaction saying that a
mandatory tender offer should have been made.
Issues:
a) Whether the SEC has jurisdiction over the case?
b) Whether the mandatory tender offer is required?
Held:

Whether the SEC has jurisdiction over the case?

Yes, SEC has jurisdiction.

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:

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.

Whether the mandatory tender offer is required?

Yes, a mandatory tender offer is required even if it involves an indirect

acquisition.

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. 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. 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. 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.

Under existing SEC Rules, 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.

The SEC was correct in ruling that the determination of mandatory

tender offer includes both the direct and indirect acquisitions.