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SECURITIES AND EXCHANGE

COMMISSION,
Petitioner,

G.R. No. 164197


Present:
VELASCO, JR., J., Chairperson,
PERALTA,
ABAD,
MENDOZA, and
PERLAS-BERNABE, JJ.

- versus -

PROSPERITY.COM, INC.,
Respondent.

Promulgated:

could earn commissions, interest in real estate in the Philippines and in the
United States, and insurance coverage worthP50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at least
two other buyers as his own down-lines. These second tier of buyers could in
turn build up their own down-lines. For each pair of down-lines, the buyersponsor received a US$92.00 commission. But referrals in a day by the buyersponsor should not exceed 16 since the commissions due from excess referrals
inure to PCI, not to the buyer-sponsor.

January 25, 2012


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

Apparently, PCI patterned its scheme from that of Golconda Ventures,


Inc. (GVI), which company stopped operations after the Securities and

DECISION
ABAD, J.:

Exchange Commission (SEC) issued a cease and desist order (CDO) against it. As
it later on turned out, the same persons who ran the affairs of GVI directed
PCIs actual operations.

This case involves the application of the Howey test in order to


determine if a particular transaction is an investment contract.

In 2001, disgruntled elements of GVI filed a complaint with the SEC


against PCI, alleging that the latter had taken over GVIs operations. After
hearing,[1] the SEC, through its Compliance and Enforcement unit, issued a CDO

The Facts and the Case

against PCI. The SEC ruled that PCIs scheme constitutes an Investment
contract and, following the Securities Regulations Code,[2] it should have first

Prosperity.Com, Inc. (PCI) sold computer software and hosted websites

registered such contract or securities with the SEC.

without providing internet service. To make a profit, PCI devised a scheme in

Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of

which, for the price of US$234.00 (subsequently increased to US$294), a buyer

Republic Act (R.A.) 8799, PCI filed with the Court of Appeals (CA) a petition

could acquire from it an internet website of a 15-Mega Byte (MB) capacity. At

forcertiorari against the SEC with an application for a temporary restraining

the same time, by referring to PCI his own down-line buyers, a first-time buyer

order (TRO) and preliminary injunction in CA-G.R. SP 62890. Because the CA


did not act promptly on this application for TRO, on January 31, 2001 PCI
returned to the SEC and filed with it before the lapse of the five-day period a

request to lift the CDO. On the following day, February 1, 2001, PCI moved to

person invests his money in a common enterprise and is led to expect profits

withdraw its petition before the CA to avoid possible forum shopping violation.

primarily from the efforts of others.[8]

During the pendency of PCIs action before the SEC, however, the CA

Apart from the definition, which the Implementing Rules and Regulations

issued a TRO, enjoining the enforcement of the CDO.[3] In response, the SEC

provide, Philippine jurisprudence has so far not done more to add to the

filed with the CA a motion to dismiss the petition on ground of forum

same. Of course, the United States Supreme Court, grappling with the

shopping. In a Resolution,[4] the CA initially dismissed the petition, finding PCI

problem, has on several occasions discussed the nature of investment

guilty of forum shopping. But on PCIs motion, the CA reversed itself and

contracts. That courts rulings, while not binding in the Philippines, enjoy some

reinstated the petition.[5]

degree of persuasiveness insofar as they are logical and consistent with the
countrys best interests.[9]

In a joint resolution,[6] CA-G.R. SP 62890 was consolidated with CA-G.R. SP

The United States Supreme Court held in Securities and Exchange

64487 that raised the same issues. On July 31, 2003 the CA rendered a

Commission v. W.J. Howey Co.[10] that, for an investment contract to exist, the

decision, granting PCIs petition and setting aside the SEC-issued CDO.[7] The CA

following elements, referred to as the Howey test must concur: (1) a contract,

ruled that, following the Howey test, PCIs scheme did not constitute an

transaction, or scheme; (2) an investment of money; (3) investment is made in

investment contract that needs registration pursuant to R.A. 8799, hence, this

a common enterprise; (4) expectation of profits; and (5) profits arising primarily

petition.

from the efforts of others. [11] Thus, to sustain the SEC position in this case,
PCIs scheme or contract with its buyers must have all these elements.
The Issue Presented

An example that comes to mind would be the long-term commercial


papers that large companies, like San Miguel Corporation (SMC), offer to the

The sole issue presented before the Court is whether or not PCIs scheme
constitutes an investment contract that requires registration under R.A. 8799.
The Ruling of the Court

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 Securities Regulation Code treats investment contracts as securities

the SEC before offering them to investors.

that have to be registered with the SEC before they can be distributed and

Here, PCIs clients do not make such investments. They buy a product of

sold. An investment contract is a contract, transaction, or scheme where a

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

POWER HOMES UNLIMITED


CORPORATION,
Petitioner,

Present:

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

G.R. No. 164182

- versus -

facilities and technical skills.


Actually, PCI appears to be engaged in network marketing, a scheme

PUNO, C.J., Chairperson,


SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
LEONARDO-DE
CASTRO, JJ.

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.
The commissions, interest in real estate, and insurance coverage
worth P50,000.00 are incentives to down-line sellers to bring in other
customers. These can hardly be regarded as profits from investment of money
under the Howey test.

SECURITIES AND EXCHANGE


COMMISSION AND NOEL
MANERO,
Respondents.
2008

February 26,

x-------------------------------------------------x
DECISION

The CA is right in ruling that the last requisite in the Howey test is lacking
in the marketing scheme that PCI has adopted. Evidently, it is PCI that expects

Promulgated:

PUNO, C.J.:

profit from the network marketing of its products. PCI is correct in saying that
the US$234 it gets from its clients is merely a consideration for the sale of the
websites that it provides.

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

WHEREFORE, the Court DENIES the petition and AFFIRMS the decision

Cease and Desist Order (CDO)[2] of public respondent Securities and Exchange

dated July 31, 2003 and the resolution dated June 18, 2004 of the Court of

Commission (SEC) enjoining petitioner Power Homes Unlimited Corporations

Appeals in CA-G.R. SP 62890.SO ORDERED.

(petitioner) officers, directors, agents, representatives and any and all persons

attendees were requested to submit copies of petitioners marketing scheme

claiming and acting under their authority, from further engaging in the sale,

and list of its members with addresses.

offer for sale or distribution of securities; and its June 18, 2004
Resolution[3] which denied petitioners motion for reconsideration.

public respondent SEC copies of its marketing course module and letters of

The facts: Petitioner is a domestic corporation duly registered with


public

respondent

SEC

on October

13,

2000 under

SEC

The following day or on December 14, 2000, petitioner submitted to

Reg.

No.

accreditation/authority or confirmation from Crown Asia, Fil-Estate Network


and Pioneer 29 Realty Corporation.

A200016113. Its primary purpose is:


On January 26, 2001, public respondent SEC visited the business
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]

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 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

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

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]

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

On August 8, 2001, public respondent SEC moved for reconsideration,


which was not resolved by the Court of Appeals.

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. OnJuly 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

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.

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

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

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]

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

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

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

any legislative report,[16] held that Congress was using a term whose meaning

scheme

had been crystallized[17] under the states blue sky laws[18] in existence prior

person invests his money in a common enterprise and is led to expect pr

to the adoption of the Securities Act.[19] Thus, it ruled that the use of the catch-

ofits not solely but primarily from the efforts of others. Thus, to be a security

all term investment contract indicated a congressional intent to cover a wide

(collectively

contract)

whereby

subject to regulation by the SEC, an investment contract in our jurisdiction

range of investment transactions.[20] It established a test to determine whether

must be proved to be: (1) an investment of money, (2) in a common

a transaction falls within the scope of an investment contract.[21] Known as

enterprise, (3) with expectation of profits, (4) primarily from efforts of others.

Prescinding from these premises, we affirm the ruling of the public

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

respondent SEC and the Court of Appeals that the petitioner was engaged in

similar. An investor enrolls in petitioners program by paying US$234. This

the sale or distribution of an investment contract. Interestingly, the facts

entitles him to recruit two (2) investors who pay US$234 each and out of which

of SEC v. Turner[25] are similar to the case at bar. In Turner, the SEC brought a

amount he receives US$92. A minimum recruitment of four (4) investors by

suit to enjoin the violation of federal securities laws by a company offering to

these two (2) recruits, who then recruit at least two (2) each, entitles the

sell to the public contracts characterized as self-improvement courses. On

principal investor to US$184 and the pyramid goes 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:

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.

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.

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

The Facts

premise that the capital markets depend on the investing publics level of
confidence in the system.

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

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

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.

petitioner Power Homes Unlimited Corporation, and its June 18, 2004
Resolution denying petitioners Motion for Reconsideration are AFFIRMED. No

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

costs.

sell to CemcoBCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in


UCHC equivalent to 29.69%.
SO ORDERED.

Cemco holdings, inc. vs. National Life insurance company of the philippines
DECISION

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]:

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
[2]

Resolution 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,

Particulars
Existing shares of Cemco in UCHC
Acquisition by Cemco of BCIs and ACCs shares in
UCHC
Total stocks of Cemco in UCHC
Percentage of UCHC ownership in UCC
Indirect ownership of Cemco in UCC
Direct ownership of Cemco in UCC
Total ownership of Cemco in UCC

Percentage
9%
51%
60%
60%
36%
17%
53%

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.

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

company and did not extend to an indirect acquisition arising from the

the purchase by petitioner of the majority of shares of UCC.

purchase of the shares of a holding company of the listed firm.

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

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

Corporate Finance Department responded to the query of the PSE that while it

respondent by reversing and setting aside its 27 July 2004 Resolution and

was the stance of the department that the tender offer rule was not applicable,

directed petitionerCemco to make a tender offer for UCC shares to respondent

the matter must still have to be confirmed by the SEC en banc.

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.

Thereafter,

in

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.

Petitioner filed a petition with the Court of Appeals challenging the


SECs jurisdiction to take cognizance of respondents complaint and its
authority to require Cemcoto make a tender offer for UCC shares, and arguing

On 28 July 2004, feeling aggrieved by the transaction, respondent

that the tender offer rule does not apply, or that the SECs re-interpretation of

National Life Insurance Company of the Philippines, Inc., a minority stockholder

the rule could not be made to retroactively apply to Cemcos purchase of UCHC

of UCC, sent a letter to Cemco demanding the latter to comply with the rule on

shares.

mandatory tender offer. Cemco, however, refused.


The Court of Appeals rendered a decision affirming the ruling of the
On 5 August 2004, a Share Purchase Agreement was executed by ACC
and BCI, as sellers, and Cemco, as buyer.

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

On 12 August 2004, the transaction was consummated and closed.

Securities

Regulation

Code

and

its

Implementing

Rules

applies

to Cemcos purchase of UCHC stocks. The decretal portion of the said Decision
On 19 August 2004, respondent National Life Insurance Company of the

reads:

Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July
2004Resolution 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

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.

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.

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 REINTERPRETATION 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.

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

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.

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

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

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.

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 reliefsin 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

contingencies that cannot be addressed in advance. As enunciated

minimization, if not total elimination, of fraudulent and manipulative

in Victorias Milling Co., Inc. v. Social Security Commission[9]:

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

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]

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

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 theCemco 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

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

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 yungmga maiiwan, 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 yung 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 yungnakahawak ngayon ng 20%. Ang bab
a ng share 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.)

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.

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

that the proposed acquisition of the UCHC shares was not covered by the

avers that it did not directly acquire the shares in UCC and the incidental

mandatory offer rule.

benefit of having acquired the control of the said public company must not be
taken against it.

The argument is not persuasive.

These arguments are not convincing. The legislative intent of Section 19

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

of the Code is to regulate activities relating to acquisition of control of the

the Cemco transaction cannot be construed as passing merits or giving

listed company and for the purpose of protecting the minority stockholders of a

approval to the questioned transaction. As aptly pointed out by the

listed corporation. Whatever may be the method by which control of a public

respondent, the letter dated 27 July 2004 of the SEC was nothing but an

company is obtained, either through the direct purchase of its stocks or

approval of the draft letter prepared by Director Callanga. There was no public

through an indirect means, mandatory tender offer applies. As appropriately

hearing where interested parties could have been heard. Hence, it was not

held by the Court of Appeals:

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

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]

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

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

prospectively. Said postulation was ignored by the Court when it ruled:

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

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.

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.

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:

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.
ABACUS SECURITIES CORPORATION, petitioner, vs.
RUBEN
U. AMPIL, respondent.
DECISION
PANGANIBAN, C.J p:
Stock market transactions affect the general public and the national economy.
The rise and fall of stock market indices reflect to a considerable degree the
state of the economy. Trends in stock prices tend to herald changes in business
conditions. Consequently, securities transactions are impressed with public

interest, and are thus subject to public regulation. In particular, the laws and
regulations requiring payment of traded shares within specified periods are
meant to protect the economy from excessive stock market speculations, and
are thus mandatory.
In the present case, respondent cannot escape payment of stocks validly traded
by petitioner on his behalf. These transactions took place before both parties
violated the trading law and rules. Hence, they fall outside the purview of
the pari delicto rule.
The Case
Before the Court is a Petition for Review 1 under Rule 45 of the Rules of Court,
challenging the March 21, 2003 Decision 2 and the September 19, 2003
Resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 68273. The assailed
Decision disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is
hereby DISMISSED. With costs." 4
The CA denied reconsideration in its September 19, 2003 Resolution.
The Facts
The factual antecedents were summarized by the trial court (and reproduced
by the CA in its assailed Decision) in this wise:
"Evidence adduced by the [petitioner] has established the fact
that [petitioner] is engaged in business as a broker and dealer
of securities of listed companies at the Philippine Stock
Exchange Center.
"Sometime in April 1997, [respondent] opened a cash or
regular account with [petitioner] for the purpose of buying and
selling securities as evidenced by the Account Application
Form. The parties' business relationship was governed by the
terms and conditions [stated therein] . . . .
"Since April 10, 1997, [respondent] actively traded his account,
and as a result of such trading activities, he accumulated an
outstanding obligation in favor of [petitioner] in the principal
sum of P6,617,036.22 as of April 30, 1997. HSIADc
"Despite the lapse of the period within which to pay his
account as well as sufficient time given by [petitioner] for
[respondent] to comply with his proposal to settle his account,
the latter failed to do so. Such that [petitioner] thereafter sold

[respondent's] securities to set-off against his unsettled


obligations.
"After the sale of [respondent's] securities and application of
the proceeds thereof against his account, [respondent's]
remaining unsettled obligation to [petitioner] was
P3,364,313.56. [Petitioner] then referred the matter to its legal
counsel for collection purposes.
"In a letter dated August 15, 1997, [petitioner] through
counsel demanded that [respondent] settle his obligation plus
the agreed penalty charges accruing thereon equivalent to the
average 90-day Treasury Bill rate plus 2% per annum (200 basis
points).
"In a letter dated August [26], 1997, [respondent]
acknowledged receipt of [petitioner's] demand [letter] and
admitted his unpaid obligation and at the same time
request[ed] for 60 days to raise funds to pay the same, which
was granted by [petitioner].
"Despite said demand and the lapse of said requested
extension, [respondent] failed and/or refused to pay his
accountabilities to [petitioner].
"For his defense, [respondent] claims that he was induced to
trade in a stock security with [petitioner] because the latter
allowed offset settlements wherein he is not obliged to pay
the purchase price. Rather, it waits for the customer to sell.
And if there is a loss, [petitioner] only requires the payment of
the deficiency (i.e., the difference between the higher buying
price and the lower selling price). In addition, it charges a
commission for brokering the sale.
"However, if the customer sells and there is a profit,
[petitioner] deducts the purchase price and delivers only the
surplus after charging its commission.
"[Respondent] further claims that all his trades with
[petitioner] were not paid in full in cash at anytime after
purchase or within the T+4 [4 days subsequent to trading] and
none of these trades was cancelled by [petitioner] as required
in Exhibit 'A-1'. Neither did [petitioner] apply with either the
Philippine Stock Exchange or the SEC for an extension of time

for the payment or settlement of his cash purchases. This was


not brought to his attention by his broker and so with the
requirement of collaterals in margin account. Thus, his trade
under an offset transaction with [petitioner] is unlimited
subject only to the discretion of the broker. . . . [Had
petitioner] followed the provision under par. 8 of Exh. 'A-1'
which stipulated the liquidation within the T+3 [3 days
subsequent to trading], his net deficit would only be
P1,601,369.59. [Respondent] however affirmed that this is not
in accordance with RSA [Rule 25-1 par. C, which mandates that
if you do not pay for the first] order, you cannot subsequently
make any further order without depositing the cash price in
full. So, if RSA Rule 25-1, par. C, was applied, he was limited
only to the first transaction. That [petitioner] did not comply
with the T+4 mandated in cash transaction. When
[respondent] failed to comply with the T+3, [petitioner] did not
require him to put up a deposit before it executed its
subsequent orders. [Petitioner] did not likewise apply for
extension of the T+4 rule. Because of the offset transaction,
[respondent] was induced to [take a] risk which resulted [in]
the filing of the instant suit against him [because of which] he
suffered sleepless nights, lost appetite which if quantified in
money, would amount to P500,000.00 moral damages and
P100,000.00 exemplary damages." 5
In its Decision 6 dated June 26, 2000, the Regional Trial Court (RTC) of Makati
City (Branch 57) held that petitioner violated Sections 23 and 25 of the
Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing the Act
(RSA Rules) when it failed to: 1) require the respondent to pay for his stock
purchases within three (T+3) or four days (T+4) from trading; and 2) request
from the appropriate authority an extension of time for the payment of
respondent's cash purchases. The trial court noted that despite respondent's
non-payment within the required period, petitioner did not cancel the
purchases of respondent. Neither did it require him to deposit cash payments
before it executed the buy and/or sell orders subsequent to the first unsettled
transaction. According to the RTC, by allowing respondent to trade his account
actively without cash, petitioner effectively induced him to
purchasesecurities thereby incurring excessive credits. HSaIET

The trial court also found respondent to be equally at fault, by incurring


excessive credits and waiting to see how his investments turned out before
deciding to invoke the RSA. Thus, the RTC concluded that petitioner and
respondent were in pari delicto and therefore without recourse against each
other.
Ruling of the Court of Appeals
The CA upheld the lower court's finding that the parties were in pari delicto. It
castigated petitioner for allowing respondent to keep on trading despite the
latter's failure to pay his outstanding obligations. It explained that "the reason
[behind petitioner's act] is elemental in its simplicity. And it is not exactly
altruistic. Because whether [respondent's] trading transaction would result in a
surplus or deficit, he would still be liable to pay [petitioner] its commission.
[Petitioner's] cash register will keep on ringing to the sound of incoming
money, no matter what happened to [respondent]." 7
The CA debunked petitioner's contention that the trial court lacked jurisdiction
to determine violations of the RSA. The court a quo held that petitioner was
estopped from raising the question, because it had actively and voluntarily
participated in the assailed proceedings.
Hence, this Petition. 8
Issues
Petitioner submits the following issues for our consideration:
"I.
Whether or not the Court of Appeal's ruling that petitioner and
respondent are in pari delicto which allegedly bars any
recovery, is in accord with law and applicable jurisprudence
considering that respondent was the first one who violated the
terms of the Account Opening Form, [which was the]
agreement between the parties.
"II.
Whether or not the Court of Appeal's ruling that the petitioner
and respondent are in pari delicto is in accord with law and
applicable jurisprudence considering the Account Opening
Form is a valid agreement.
"III.
Whether or not the Court of Appeal's ruling that petitioner
cannot recover from respondent is in accord with law and
applicable jurisprudence since the evidence and admission of

respondent proves that he is liable to petitioner for his


outstanding obligations arising from the stock trading through
petitioner.
"IV.
Whether or not the Court of Appeal's ruling on petitioner's
alleged violation of the Revised Securities Act [is] in accord
with law and jurisprudence since the lower court has no
jurisdiction over violations of the RevisedSecurities Act." 9
Briefly, the issues are (1) whether the pari delicto rule is applicable in the
present case, and (2) whether the trial court had jurisdiction over the case.
The Court's Ruling
The Petition is partly meritorious.
Main
Issue:
Applicability
of
the
Pari Delicto Principle
In the present controversy, the following pertinent facts are undisputed: (1) on
April 8, 1997, respondent opened acash account with petitioner for his
transactions in securities; 10 (2) respondent's purchases were consistently
unpaid from April 10 to 30, 1997; 11 (3) respondent failed to pay in full, or even
just his deficiency, 12 for the transactions on April 10 and 11, 1997; 13 (4)
despite respondent's failure to cover his initial deficiency, petitioner
subsequently purchased and sold securities for respondent's account on April
25 and 29; 14 (5) petitioner did not cancel or liquidate a substantial amount of
respondent's stock transactions until May 6, 1997. 15
The provisions governing the above transactions are Sections 23 and 25 of the
RSA 16 and Rule 25-1 of the RSA Rules, which state as follows:
"SEC. 23.Margin Requirements.
xxx xxx xxx
(b)It shall be unlawful for any member of an exchange or any
broker or dealer, directly or indirectly, to extend or maintain
credit or arrange for the extension or maintenance of credit to
or for any customer
(1)On any security other than an exempted security, in
contravention of the rules and regulations which the
Commission shall prescribe under subsection (a) of this
Section; TDCaSE

(2)Without collateral or on any collateral other than securities,


except (i) to maintain a credit initially extended in conformity
with the rules and regulations of the Commission and (ii) in
cases where the extension or maintenance of credit is not for
the purpose of purchasing or carrying securities or of evading
or circumventing the provisions of subparagraph (1) of this
subsection.
xxx xxx xxx
"SEC. 25.Enforcement of margin requirements and restrictions
on borrowings. To prevent indirect violations of the margin
requirements under Section 23 hereof, the broker or dealer
shall require the customer in nonmargin transactions to pay
the price of the security purchased for his account within such
period as the Commission may prescribe, which shall in no
case exceed three trading days; otherwise, the broker shall sell
the security purchased starting on the next trading day but not
beyond ten trading days following the last day for the
customer to pay such purchase price, unless such sale cannot
be effected within said period for justifiable reasons. The sale
shall be without prejudice to the right of the broker or dealer
to recover any deficiency from the customer. . . . ."
"RSA RULE 25-1
"Purchases and Sales in Cash Account
"(a)Purchases by a customer in a cash account shall be paid in
full within three (3) business days after the trade date.
"(b)If full payment is not received within the required time
period, the broker or dealer shall cancel or otherwise liquidate
the transaction, or the unsettled portion thereof, starting on
the next business day but not beyond ten (10) business days
following the last day for the customer to pay, unless such sale
cannot be effected within said period for justifiable reasons.
"(c)If a transaction is cancelled or otherwise liquidated as a
result of non-payment by the customer, prior to any
subsequent purchase during the next ninety (90) days, the
customer shall be required to deposit sufficient funds in the
account to cover each purchase transaction prior to execution.
xxx xxx xxx

"(f)Written application for an extension of the period of time


required for payment under paragraph (a) be made by the
broker or dealer to the Philippine Stock Exchange, in the case
of a member of the Exchange, or to the Commission, in the
case of a non-member of the Exchange. Applications for the
extension must be based upon exceptional circumstances and
must be filed and acted upon before the expiration of the
original payment period or the expiration of any subsequent
extension."
Section 23(b) above the alleged violation of petitioner which provides the
basis for respondent's defense makes it unlawful for a broker to extend or
maintain credit on any securities other than in conformity with the rules and
regulations issued by Securities and Exchange Commission (SEC). Section 25
lays down the rules to prevent indirect violations of Section 23 by brokers or
dealers. RSA Rule 25-1 prescribes in detail the regulations
governingcash accounts.
The United States, from which our country's security policies are
patterned, 17 abound with authorities explaining the main purpose of the
above statute on margin 18 requirements. This purpose is to regulate the
volume of credit flow, by way of speculative transactions, into
the securities market and redirect resources into more productive uses.
Specifically, the main objective of the law on margins is explained in this wise:
"The main purpose of these margin provisions . . . is not to
increase the safety of security loans for lenders. Banks and
brokers normally require sufficient collateral to make
themselves safe without the help of law. Nor is the main
purpose even protection of the small speculator by making it
impossible for him to spread himself too thinly although
such a result will be achieved as a byproduct of the main
purpose. DaTEIc
xxx xxx xxx
"The main purpose is to give a [g]overnment credit agency an
effective method of reducing the aggregate amount of the
nation's credit resources which can be directed by speculation
into the stock market and out of other more desirable uses of
commerce and industry . . . ." 19

A related purpose of the governmental regulation of margins is the stabilization


of the economy. 20 Restrictions on margin percentages are imposed "in order
to achieve the objectives of the government with due regard for the promotion
of the economy and prevention of the use of excessive credit." 21
Otherwise stated, the margin requirements set out in the RSA are primarily
intended to achieve a macroeconomic purpose the protection of the overall
economy from excessive speculation in securities. Their recognized secondary
purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily
upon the brokers and dealers. 22Sections 23 and 25 and Rule 25-1, otherwise
known as the "mandatory close-out rule," 23 clearly vest upon petitioner the
obligation, not just the right, to cancel or otherwise liquidate a customer's
order, if payment is not received within three days from the date of purchase.
The word "shall" as opposed to the word "may," is imperative and operates to
impose a duty, which may be legally enforced. For transactions subsequent to
an unpaid order, the broker should require its customer to deposit funds into
the account sufficient to cover each purchase transaction prior to its execution.
These duties are imposed upon the broker to ensure faithful compliance with
the margin requirements of the law, which forbids a broker from extending
undue credit to a customer.
It will be noted that trading on credit (or "margin trading") allows investors to
buy more securities than their cash position would normally allow. 24 Investors
pay only a portion of the purchase price of the securities; their broker advances
for them the balance of the purchase price and keeps the securities as
collateral for the advance or loan.25 Brokers take these securities/stocks to
their bank and borrow the "balance" on it, since they have to pay in full for the
traded stock. Hence, increasing margins 26 i.e., decreasing the amounts which
brokers may lend for the speculative purchase and carrying of stocks is the
most direct and effective method of discouraging an abnormal attraction of
funds into the stock market and achieving a more balanced use of such
resources.
". . . [T]he . . . primary concern is the efficacy of security credit
controls in preventing speculative excesses that produce
dangerously large and rapid securities price rises and
accelerated declines in the prices of givensecurities issues and
in the general price level of securities. Losses to a given
investor resulting from price declines in thinly

margined securities are not of serious significance from a


regulatory point of view. When forced sales occur and put
pressures on securities prices, however, they may cause other
forced sales and the resultant snowballing effect may in turn
have a general adverse effect upon the entire market." 27
The nature of the stock brokerage business enables brokers, not the clients, to
verify, at any time, the status of the client's account. 28 Brokers, therefore, are
in the superior position to prevent the unlawful extension of credit. 29Because
of this awareness, the law imposes upon them the primary obligation to
enforce the margin requirements.
Right is one thing; obligation is quite another. A right may not be exercised; it
may even be waived. An obligation, however, must be performed; those who
do not discharge it prudently must necessarily face the consequence of their
dereliction or omission. 30
Respondent
Liable
for
the
First,
But Not for the Subsequent Trades
Nonetheless, these margin requirements are applicable only to transactions
entered into by the present partiessubsequent to the initial trades of April 10
and 11, 1997. Thus, we hold that petitioner can still collect from respondent to
the extent of the difference between the latter's outstanding obligation as of
April 11, 1997 less the proceeds from the mandatory sell out of the shares
pursuant to the RSA Rules. Petitioner's right to collect is justified under the
general law on obligations and contracts. 31
Article 1236 (second paragraph) of the Civil Code, provides:
"Whoever pays for another may demand from the debtor
what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor."
(Emphasis supplied) CIDTcH
Since a brokerage relationship is essentially a contract for the employment
of an agent, principles of contract law also govern the broker-principal
relationship. 32
The right to collect cannot be denied to petitioner as the initial transactions
were entered pursuant to the instructions of respondent. The obligation of
respondent for stock transactions made and entered into on April 10 and 11,
1997 remains outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these dates subsist.

At that time, there was no violation of the RSA yet. Petitioner's fault arose only
when it failed to: 1) liquidate the transactions on the fourth day following the
stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation no
later than ten days thereafter, applying the proceeds thereof as payment for
respondent's outstanding obligation. 33
Elucidating further, since the buyer was not able to pay for the transactions
that took place on April 10 and 11, that is at T+4, the broker was duty-bound to
advance the payment to the settlement banks without prejudice to the right of
the broker to collect later from the client. 34
In securities trading, the brokers are essentially the counterparties to the stock
transactions at the Exchange. 35Since the principals of the broker are generally
undisclosed, the broker is personally liable for the contracts thus
made. 36 Hence, petitioner had to advance the payments for respondent's
trades. Brokers have a right to be reimbursed for sums advanced by them with
the express or implied authorization of the principal, 37 in this case,
respondent.
It should be clear that Congress imposed the margin requirements to protect
the general economy, not to give the customer a free ride at the expense of the
broker. 38 Not to require respondent to pay for his April 10 and 11 trades
would put a premium on his circumvention of the laws and would enable him
to enrich himself unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms and
conditions of its Agreement with respondent, specifically paragraph 8 thereof,
purportedly acting on the plea 39 of respondent to give him time to raise funds
therefor. These stipulations, in relation to paragraph 4, 40 constituted faithful
compliance with the RSA. By failing to ensure respondent's payment of his first
purchase transaction within the period prescribed by law, thereby allowing him
to make subsequent purchases, petitioner effectively converted respondent's
cash account into a credit account. However, extension or maintenance of
credits on nonmargin transactions, are specifically prohibited under Section
23(b). Thus, petitioner was remiss in its duty and cannot be said to have come
to court with "clean hands" insofar as it intended to collect on
transactions subsequent to the initial trades of April 10 and 11, 1997.
Respondent
Equally
Guilty
for Subsequent Trades

On the other hand, we find respondent equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an "innocent victim" in all the
transactions. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large
profits with low or no capital outlay, as he pictures himself to be. Rather,
he is an experienced and knowledgeable trader who is well versed in
the securities market and who made his own investment decisions. In fact, in
the Account Opening Form (AOF), he indicated that he had excellent
knowledge of stock investments; had experience in stocks trading, considering
that he had similar accounts with other firms. 41Obviously, he knowingly
speculated on the market, by taking advantage of the "no-cash-out"
arrangement extended to him by petitioner.
We note that it was respondent who repeatedly asked for some time to pay his
obligations for his stock transactions. Petitioner acceded to his requests. It is
only when sued upon his indebtedness that respondent raised as a defense the
invalidity of the transactions due to alleged violations of the RSA. It was
respondent's privilege to gamble or speculate, as he apparently did so by asking
for extensions of time and refraining from giving orders to his broker to sell, in
the hope that the prices would rise. Sustaining his argument now would
amount to relieving him of the risk and consequences of his own speculation
and saddling them on the petitioner after the result was known to be
unfavorable. 42 Such contention finds no legal or even moral justification and
must necessarily be overruled. Respondent's conduct is precisely the behavior
of an investor deplored by the law. DEcSaI
In the final analysis, both parties acted in violation of the law and did not come
to court with clean hands with regard to transactions subsequent to the initial
trades made on April 10 and 11, 1997. Thus, the peculiar facts of the present
case bar the application of the pari delicto rule expressed in the maxims "Ex
dolo malo non oritur action" and "In pari delicto potior est conditio defendentis"
to all the transactions entered into by the parties. The pari delecto rule
refuses legal remedy to either party to an illegal agreement and leaves them
where they were. 43 In this case, the pari delicto rule applies only to
transactions entered into after the initial trades made on April 10 and 11, 1997.
Since the initial trades are valid and subsisting obligations, respondent is liable
for them. Justice and good conscience require all persons to satisfy their debts.
Ours are courts of both law and equity; they compel fair dealing; they do not

abet clever attempts to escape just obligations. Ineludibly, this Court would not
hesitate to grant relief in accordance with good faith and conscience.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction
(sold the stocks) on the fourth day following the transaction (T+4) and
completed its liquidation not later than ten days following the last day for the
customer to pay (effectively T+14). Respondent's outstanding obligation is
therefore to be determined by using the closing prices of the stocks purchased
at T+14 as basis.
We consider the foregoing formula to be just and fair under the circumstances.
When petitioner tolerated thesubsequent purchases of respondent without
performing its obligation to liquidate the first failed transaction, and without
requiring respondent to deposit cash before embarking on trading stocks any
further, petitioner, as the broker, violated the law at its own peril. Hence, it
cannot now complain for failing to obtain the full amount of its claim for
these latter transactions.
On the other hand, with respect to respondent's counterclaim for damages for
having been allegedly induced by petitioner to generate additional purchases
despite his outstanding obligations, we hold that he deserves no legal or
equitable relief consistent with our foregoing finding that he was not an
innocent investor as he presented himself to be.
Second
Issue:
Jurisdiction
It is axiomatic that the allegations in the complaint, not the defenses set up in
the answer or in the motion to dismiss determine which court has jurisdiction
over an action. 44 Were we to be governed by the latter rule, the question of
jurisdiction would depend almost entirely upon the defendant. 45
The instant controversy is an ordinary civil case seeking to enforce rights arising
from the Agreement (AOF) between petitioner and respondent. It relates to
acts committed by the parties in the course of their business relationship. The
purpose of the suit is to collect respondent's alleged outstanding debt to
petitioner for stock purchases.
To be sure, the RSA and its Rules are to be read into the Agreement entered
into between petitioner and respondent. Compliance with the terms of the AOF
necessarily means compliance with the laws. Thus, to determine whether the
parties fulfilled their obligations in the AOF, this Court had to pass upon their
compliance with the RSA and its Rules. This, in no way, deprived
the Securities and Exchange Commission (SEC) of its authority to determine

willful violations of the RSA and impose appropriate sanctions therefor, as


provided under Sections 45 and 46 of the Act.
Moreover, we uphold the SEC in its Opinion, thus:
"As to the issue of jurisdiction, it is settled that a party cannot
invoke the jurisdiction of a court to secure affirmative relief
against his opponent and after obtaining or failing to obtain
such
relief,
repudiate
or
question
that
same
jurisdiction. cHSIDa
"Indeed, after voluntarily submitting a cause and encountering
an adverse decision on the merits, it is too late for petitioner
to question the jurisdictional power of the court. It is not right
for a party who has affirmed and invoked the jurisdiction of a
court in a particular matter to secure an affirmative relief, to
afterwards deny that same jurisdiction to escape a
penalty." 46
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are
hereby MODIFIED. Respondent is ordered to pay petitioner the difference
between the former's outstanding obligation as of April 11, 1997 less the
proceeds from the mandatory sell out of shares pursuant to the RSA Rules, with
interest thereon at the legal rate until fully paid.
The RTC of Makati, Branch 57 is hereby directed to make a computation of
respondent's outstanding obligation using the closing prices of the stocks at
T+14 as basis counted from April 11, 1997 and to issue the proper order for
payment if warranted. It may hold trial and hear the parties to be able to make
this determination.
No finding as to costs in this instance.
SO ORDERED.