ABACUS SECURITIES G.R. No.

160016
CORPORATION,
Petitioner, Present:
Panganiban, CJ,
Chairman,
Ynares-Santiago,
- versus - Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ
Promulgated:
RUBEN U. AMPIL,
Respondent. February 27, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
DECISION
PANGANIBAN, CJ:
tock 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
S 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-GR 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] x x
x.
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.

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 [respondents] securities to set off against his unsettled
obligations.
After the sale of [respondents] securities and application of the proceeds
thereof against his account, [respondents] 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 [petitioners] 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. x x x [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 respondents cash purchases. The trial court noted that despite
respondents 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 purchase securities thereby incurring
excessive credits.

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 courts finding that the parties were in pari
delicto. It castigated petitioner for allowing respondent to keep on trading despite the
latters failure to pay his outstanding obligations. It explained that the reason [behind
petitioners act] is elemental in its simplicity. And it is not exactly altruistic.Because
whether [respondents] trading transaction would result in a surplus or deficit, he would
still be liable to pay [petitioner] its commission. [Petitioners] cash register will keep on
ringing to the sound of incoming money, no matter what happened to [respondent].[7]

The CA debunked petitioners 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 Appeals 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 Appeals 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 Appeals 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 Appeals ruling on petitioners 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 Revised Securities
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 Courts 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 a cash account with petitioner for his transactions in
securities;[10] (2) respondents 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 respondents failure to cover his
initial deficiency, petitioner subsequently purchased and sold securities for respondents
account on April 25 and 29;[14] (5) petitioner did not cancel or liquidate a substantial
amount of respondents 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.
xxxxxxxxx
(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;
(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.

xxxxxxxxx
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. x x x.
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.
xxxxxxxxx
(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
respondents 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 governing cash accounts.

The United States, from which our countrys 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 xxx 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.
xxxxxxxxx
The main purpose is to give a [g]overnment credit agency an effective
method of reducing the aggregate amount of the nations credit resources
which can be directed by speculation into the stock market and out of other
more desirable uses of commerce and industry x x x.[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.[22] Sections 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 customers 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.
x x x [T]he x x x 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 given securities
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 clients account.[28] Brokers, therefore, are in the superior
position to prevent the unlawful extension of credit.[29] Because 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 parties subsequent 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 latters outstanding obligation as of April 11, 1997 less the proceeds from the
mandatory sell out of the shares pursuant to the RSA Rules. Petitioners 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)

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. Petitioners 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 respondents 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.[35] Since 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 respondents 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 respondents payment of his first purchase transaction within the period
prescribed by law, thereby allowing him to make subsequent purchases, petitioner
effectively converted respondents 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.[41]Obviously, 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 respondents 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.Respondents conduct is precisely the behavior of an investor
deplored by the law.

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). Respondents 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 the subsequent 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 lattertransactions.

On the other hand, with respect to respondents 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 respondents 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.
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
formers 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 respondents

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.
BETTY GABIONZA and G.R. No. 161057

ISABELITA TAN,
Petitioners,
Present:
QUISUMBING, J.
Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
COURT OF APPEALS, LUKE BRION, JJ.
ROXAS and EVELYN NOLASCO,
Respondents. Promulgated:
September 12, 2008
x ---------------------------------------------------------------------------------x
DECISION
TINGA, J.:
On 21 August 2000, petitioners Betty Go Gabionza (Gabionza) and Isabelita Tan (Tan)
filed their respective Complaints-affidavit[1] charging private respondents Luke Roxas
(Roxas) and Evelyn Nolasco (Nolasco) with several criminal acts. Roxas was the
president of ASB Holdings, Inc. (ASBHI) while Nolasco was the senior vice president
and treasurer of the same corporation.
According to petitioners, ASBHI was incorporated in 1996 with its declared
primary purpose to invest in any and all real and personal properties of every kind or
otherwise acquire the stocks, bonds, and other securities or evidence of indebtedness of
any other corporation, and to hold or own, use, sell, deal in, dispose of, and turn to
account any such stocks.[2] ASBHI was organized with an authorized capital stock
of P500,000.00, a fact reflected in the corporations articles of incorporation, copies of
which were appended as annexes to the complaint.[3]
Both petitioners had previously placed monetary investment with the Bank of Southeast
Asia (BSA). They alleged that between 1996 and 1997, they were convinced by the

officers of ASBHI to lend or deposit money with the corporation. They and other
investors were urged to lend, invest or deposit money with ASBHI, and in return they
would receive checks from ASBHI for the amount so lent, invested or deposited. At first,
they were issued receipts reflecting the name ASB Realty Development which they were
told was the same entity as BSA or was connected therewith, but beginning in March
1998, the receipts were issued in the name of ASBHI. They claimed that they were told
that ASBHI was exactly the same institution that they had previously dealt with.[4]
ASBHI would issue two (2) postdated checks to its lenders, one representing the
principal amount and the other covering the interest thereon. The checks were drawn
against DBS Bank and would mature in 30 to 45 days. On the maturity of the checks, the
individual lenders would renew the loans, either collecting only the interest earnings or
rolling over the same with the principal amounts.[5]
In the first quarter of 2000, DBS Bank started to refuse to pay for the checks purportedly
by virtue of stop payment orders from ASBHI. In May of 2000, ASBHI filed a petition
for rehabilitation and receivership with the Securities and Exchange Commission (SEC),
and it was able to obtain an order enjoining it from paying its outstanding
liabilities.[6]This series of events led to the filing of the complaints by petitioners, together
with Christine Chua, Elizabeth Chan, Ando Sy and Antonio Villareal, against
ASBHI.[7] The complaints were for estafa under Article 315(2)(a) and (2)(d) of the Revised
Penal Code, estafa under Presidential Decree No. 1689, violation of the Revised
Securities Act and violation of the General Banking Act.
A special task force, the Task Force on Financial Fraud (Task Force), was created by the
Department of Justice (DOJ) to investigate the several complaints that were lodged in
relation to ASBHI.[8] The Task Force, dismissed the complaint on 19 October 2000, and
the dismissal was concurred in by the assistant chief state prosecutor and approved by
the chief state prosecutor.[9] Petitioners filed a motion for reconsideration but this was
denied in February 2001.[10] With respect to the charges of estafa under Article 315(2) of
the Revised Penal Code and of violation of the Revised Securities Act (which form the
crux of the issues before this Court), the Task Force concluded that the subject
transactions were loans which gave rise only to civil liability; that petitioners were
satisfied with the arrangement from 1996 to 2000; that petitioners never directly dealt

with Nolasco and Roxas; and that a check was not a security as contemplated by the
Revised Securities Act.
Petitioners then filed a joint petition for review with the Secretary of Justice. On 15
October 2001, then Secretary Hernando Perez issued a resolution which partially
reversed the Task Force and instead directed the filing of five (5) Informations for estafa
under Article 315(2)(a) of the Revised Penal Code on the complaints of Chan and
petitioners Gabionza and Tan, and an Information for violation of Section 4 in relation
to Section 56 of the Revised Securities Act.[11] Motions for reconsideration to this
Resolution were denied by the Department of Justice in a Resolution dated 3 July 2002.[12]
Even as the Informations were filed before the Regional Trial Court of Makati City,
private respondents assailed the DOJ Resolution by way of a certiorari petition with the
Court of Appeals. In its assailed Decision[13] dated 18 July 2003, the Court of Appeals
reversed the DOJ and ordered the dismissal of the criminal cases. The dismissal was
sustained by the appellate court when it denied petitioners motion for reconsideration
in a Resolution dated 28 November 2003.[14] Hence this petition filed by Gabionza and
Tan.
The Court of Appeals deviated from the general rule that accords respect to the
discretion of the DOJ in the determination of probable cause. This Court consistently
adheres to its policy of non-interference in the conduct of preliminary investigations,
and to leave to the investigating prosecutor sufficient latitude of discretion in the
determination of what constitutes sufficient evidence to establish probable cause for the
filing of an information against a supposed offender.[15]
At the outset, it is critical to set forth the key factual findings of the DOJ which led to the
conclusion that probable cause existed against the respondents. The DOJ Resolution
states, to wit:
The transactions in question appear to be mere renewals of the loans the
complainant-petitioners earlier granted to BSA. However, just after they
agreed to renew the loans, the ASB agents who dealt with them issued to
them receipts indicating that the borrower was ASB Realty, with the
representation that it was the same entity as BSA or connected therewith. On

the strength of this representation, along with other claims relating to the
status of ASB and its supposed financial capacity to meet obligations, the
complainant-petitioners acceded to lend the funds to ASB Realty instead. As
it turned out, however, ASB had in fact no financial capacity to repay the
loans as it had an authorized capital stock of only P500,000.00 and paid up
capital of only P125,000.00. Clearly, the representations regarding its
supposed financial capacity to meet its obligations to the complainantpetitioners were simply false. Had they known that ASB had in fact no such
financial capacity, they would not have invested millions of pesos. Indeed,
no person in his proper frame of mind would venture to lend millions of
pesos to a business entity having such a meager capitalization. The fact that
the complainant-petitioners might have benefited from its earlier dealings
with ASB, through interest earnings on their previous loans, is of no
moment, it appearing that they were not aware of the fraud at those times
they renewed the loans.
The false representations made by the ASB agents who dealt with the
complainant-petitioners and who inveigled them into investing their funds
in ASB are properly imputable to respondents Roxas and Nolasco, because
they, as ASBs president and senior vice president/treasurer, respectively, in
charge of its operations, directed its agents to make the false representations
to the public, including the complainant-petitioners, in order to convince
them to invest their moneys in ASB. It is difficult to make a different
conclusion, judging from the fact that respondents Roxas and Nolasco
authorized and accepted for ASB the fraud-induced loans. This makes them
liable for estafa under Article 315 (paragraph 2 [a]) of the Revised Penal
Code. They cannot escape criminal liability on the ground that they did not
personally deal with the complainant-petitioners in regard to the
transactions in question. Suffice it to state that to commit a crime,
inducement is as sufficient and effective as direct participation.[16]

Notably, neither the Court of Appeals decision nor the dissent raises any serious
disputation as to the occurrence of the facts as narrated in the above passage. They take
issue instead with the proposition that such facts should result in a prima facie case
against either Roxas or Nolasco, especially given that neither of them engaged in any
face-to-face dealings with petitioners. Leaving aside for the moment whether this
assumed remoteness of private respondents sufficiently insulates them from criminal
liability, let us first discern whether the above-stated findings do establish a prima

facie case that petitioners were indeed the victims of the crimes of estafa under Article
315(2)(a) of the Revised Penal Code and of violation of the Revised Securities Act.
Article 315(2)(a) of the Revised Penal Code states:
ART. 315. Swindling (estafa). Any person who shall defraud another
by any of the means mentioned herein below shall be punished by:
xxx xxx xxx
(2) By means of any of the following false pretenses or fraudulent acts
executed prior to or simultaneous with the commission of the fraud:
(a) By using a fictitious name, or falsely pretending to possess
power, influence, qualifications, property, credit, agency, business or
imaginary transactions, or by means of other similar deceits;
xxx xxx xxx

The elements of estafa by means of deceit as defined under Article 315(2)(a) of the
Revised Penal Code are as follows: (1) that there must be a false pretense, fraudulent act
or fraudulent means; (2) that such false pretense, fraudulent act or fraudulent means
must be made or executed prior to or simultaneously with the commission of the fraud;
(3) that the offended party must have relied on the false pretense, fraudulent act or
fraudulent means, that is, he was induced to part with his money or property because
of the false pretense, fraudulent act or fraudulent means; and (4) that as a result thereof,
the offended party suffered damage.[17]
Do the findings embodied in the DOJ Resolution align with the foregoing elements
of estafa by means of deceit?
First. The DOJ Resolution explicitly identified the false pretense, fraudulent act or
fraudulent means perpetrated upon the petitioners. It narrated that petitioners were
made to believe that ASBHI had the financial capacity to repay the loans it enticed
petitioners to extend, despite the fact that it had an authorized capital stock of
only P500,000.00 and paid up capital of only P125,000.00.[18] The deficient capitalization

of ASBHI is evinced by its articles of incorporation, the treasurers affidavit executed by

Nolasco, the audited financial statements of the corporation for 1998 and the general
information sheets for 1998 and 1999, all of which petitioners attached to their respective
affidavits.[19]
The Court of Appeals conceded the fact of insufficient capitalization, yet
discounted its impact by noting that ASBHI was able to make good its loans or
borrowings from 1998 until the first quarter of 2000.[20] The short-lived ability of ASBHI,
to repay its loans does not negate the fraudulent misrepresentation or inducement it has
undertaken to obtain the loans in the first place. The material question is not whether
ASBHI inspired exculpatory confidence in its investors by making good on its loans for
a while, but whether such investors would have extended the loans in the first place had
they known its true financial setup. The DOJ reasonably noted that no person in his
proper frame of mind would venture to lend millions of pesos to a business entity having
such a meager capitalization. In estafa under Article 315(2)(a), it is essential that such
false statement or false representation constitute the very cause or the only motive which
induces the complainant to part with the thing.[21]
Private respondents argue before this Court that the true capitalization of ASBHI
has always been a matter of public record, reflected as it is in several documents which
could be obtained by the petitioners from the SEC.[22] We are not convinced. The material
misrepresentations have been made by the agents or employees of ASBHI to petitioners,
to the effect that the corporation was structurally sound and financially able to
undertake the series of loan transactions that it induced petitioners to enter into. Even if
ASBHIs lack of financial and structural integrity is verifiable from the articles of
incorporation or other publicly available SEC records, it does not follow that the crime
of estafa through deceit would be beyond commission when precisely there are bending
representations that the company would be able to meet its obligations.
Moreover, respondents argument assumes that there is legal obligation on the part of
petitioners to undertake an investigation of ASBHI before agreeing to provide the
loans. There is no such obligation.It is unfair to expect a person to procure every
available public record concerning an applicant for credit to satisfy himself of the latters
financial standing. At least, that is not the way an average person takes care of his
concerns.

Second. The DOJ Resolution also made it clear that the false representations have
been made to petitioners prior to or simultaneously with the commission of the
fraud.The assurance given to them by ASBHI that it is a worthy credit partner occurred
before they parted with their money. Relevantly, ASBHI is not the entity with whom
petitioners initially transacted with, and they averred that they had to be convinced with
such representations that Roxas and the same group behind BSA were also involved
with ASBHI.

Third. As earlier stated, there was an explicit and reasonable conclusion drawn by
the DOJ that it was the representation of ASBHI to petitioners that it was creditworthy
and financially capable to pay that induced petitioners to extend the loans. Petitioners,
in their respective complaint-affidavits, alleged that they were enticed to extend the
loansupon the following representations: that ASBHI was into the very same activities
of ASB Realty Corp., ASB Development Corp. and ASB Land, Inc., or otherwise held
controlling interest therein; that ASB could legitimately solicit funds from the public for
investment/borrowing purposes; that ASB, by itself, or through the corporations
aforestated, owned real and personal properties which would support and justify its
borrowing program; that ASB was connected with and firmly backed by DBS Bank in
which Roxas held a substantial stake; and ASB would, upon maturity of the checks it
issued to its lenders, pay the same and that it had the necessary resources to do so.[23]
Fourth. The DOJ Resolution established that petitioners sustained damage as a
result
of
the
acts
perpetrated
against
them.
The
damage
is
considerable as to petitioners.Gabionza lost P12,160,583.32 whereas Tan lost
16,411,238.57.[24] In addition, the DOJ Resolution noted that neither Roxas nor Nolasco
disputed that ASBHI had borrowed funds from about 700 individual investors
amounting to close to P4B.[25]

To the benefit of private respondents, the Court of Appeals ruled, citing Sesbreno
v. Court of Appeals,[26] that the subject transactions are akin to money market placements

which partake the nature of a loan, the non-payment of which does not give rise to
criminal liability for estafa. The citation is woefully misplaced. Sesbreno affirmed that a
money market transaction partakes the nature of a loan and therefore nonpayment
thereof would not give rise to criminal liability for estafa through misappropriation or
conversion.[27] Estafa through misappropriation or conversion is punishable under
Article 315(1)(b), while the case at bar involves Article 315 (2)(a), a mode of estafa by
means of deceit. Indeed, Sesbreno explains: In money market placement, the investor is
a lender who loans his money to a borrower through a middleman or dealer. Petitioner
here loaned his money to a borrower through Philfinance. When the latter failed to
deliver back petitioner's placement with the corresponding interest earned at the
maturity date, the liability incurred by Philfinance was a civil one.[28] That rationale is
wholly irrelevant to the complaint at bar, which centers not on the inability of ASBHI to
repay petitioners but on the fraud and misrepresentation committed by ASBHI to induce
petitioners to part with their money.
To be clear, it is possible to hold the borrower in a money market placement liable
for estafa if the creditor was induced to extend a loan upon the false or fraudulent
misrepresentations of the borrower. Such estafa is one by means of deceit. The borrower
would not be generally liable for estafa through misappropriation if he or she fails to
repay the loan, since the liability in such instance is ordinarily civil in nature.
We can thus conclude that the DOJ Resolution clearly supports a prima facie finding
that the crime of estafa under Article 315 (2)(a) has been committed against petitioners.
Does it also establish a prima facie finding that there has been a violation of the thenRevised Securities Act, specifically Section 4 in relation to Section 56 thereof?
Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act, generally
requires the registration of securities and prohibits the sale or distribution of
unregistered securities.[29] The DOJ extensively concluded that private respondents are
liable for violating such prohibition against the sale of unregistered securities:
Respondents Roxas and Nolasco do not dispute that in 1998, ASB
borrowed funds about 700 individual investors amounting to close to P4
billion, on recurring, short-term basis, usually 30 or 45 days, promising high
interest yields, issuing therefore mere postdate checks. Under the
circumstances, the checks assumed the character of evidences of

indebtedness, which are among the securities mentioned under the Revised
Securities Act. The term securities embodies a flexible rather than static
principle, one that is capable of adaptation to meet the countless and variable
schemes devised by those who seek to use the money of others on the promise
of profits (69 Am Jur 2d, p. 604). Thus, it has been held that checks of a debtor
received and held by the lender also are evidences of indebtedness and
therefore securities under the Act, where the debtor agreed to pay interest on
a monthly basis so long as the principal checks remained uncashed, it being
said that such principal extent as would have promissory notes payable on
demand (Id., p. 606, citing Untied States v. Attaway (DC La) 211 F Supp
682). In the instant case, the checks were issued by ASB in lieu of the securities
enumerated under the Revised Securities Act in a clever attempt, or so they
thought, to take the case out of the purview of the law, which requires prior
license to sell or deal in securities and registration thereof. The scheme was
to designed to circumvent the law. Checks constitute mere substitutes for
cash if so issued in payment of obligations in the ordinary course of business
transactions. But when they are issued in exchange for a big number of
individual non-personalized loans solicited from the public, numbering
about 700 in this case, the checks cease to be such. In such a circumstance, the
checks assume the character of evidences of indebtedness. This is especially
so where the individual loans were not evidenced by appropriate debt
instruments, such as promissory notes, loan agreements, etc., as in this case.
Purportedly, the postdated checks themselves serve as the evidences of the
indebtedness. A different rule would open the floodgates for a similar
scheme, whereby companies without prior license or authority from the
SEC. This cannot be countenanced. The subsequent repeal of the Revised
Securities Act does not spare respondents Roxas and Nolasco from
prosecution thereunder, since the repealing law, Republic Act No. 8799
known as the Securities Regulation Code, continues to punish the same
offense (see Section 8 in relation to Section 73, R.A. No. 8799).[30]

The Court of Appeals however ruled that the postdated checks issued by ASBHI
did not constitute a security under the Revised Securities Act. To support this
conclusion, it cited the general definition of a check as a bill of exchange drawn on a
bank and payable on demand, and took cognizance of the fact that the issuance of checks
for the purpose of securing a loan to finance the activities of the corporation is well
within the ambit of a valid corporate act to note that a corporation does not need prior

registration with the SEC in order to be able to issue a check, which is a corporate
prerogative.
This analysis is highly myopic and ignorant of the bigger picture. It is one thing
for a corporation to issue checks to satisfy isolated individual obligations, and another
for a corporation to execute an elaborate scheme where it would comport itself to the
public as a pseudo-investment house and issue postdated checks instead of stocks or
traditional securities to evidence the investments of its patrons. The Revised Securities
Act was geared towards maintaining the stability of the national investment market
against activities such as those apparently engaged in by ASBHI. As the DOJ Resolution
noted, ASBHI adopted this scheme in an attempt to circumvent the Revised Securities
Act, which requires a prior license to sell or deal in securities. After all, if ASBHIs
activities were actually regulated by the SEC, it is hardly likely that the design it chose
to employ would have been permitted at all.

But was ASBHI able to successfully evade the requirements under the Revised
Securities Act? As found by the DOJ, there is ultimately a prima facie case that can at the
very least sustain prosecution of private respondents under that law. The DOJ
Resolution is persuasive in citing American authorities which countenance a flexible
definition of securities. Moreover, it bears pointing out that the definition of securities
set forth in Section 2 of the Revised Securities Act includes commercial papers
evidencing indebtedness of any person, financial or non-financial entity, irrespective of
maturity, issued, endorsed, sold, transferred or in any manner conveyed to another.[31] A
check is a commercial paper evidencing indebtedness of any person, financial or nonfinancial entity. Since the checks in this case were generally rolled over to augment the
creditors existing investment with ASBHI, they most definitely take on the attributes of
traditional stocks.

We should be clear that the question of whether the subject checks fall within the
classification of securities under the Revised Securities Act may still be the subject of
debate, but at the very least, the DOJ Resolution has established a prima facie case for
prosecuting private respondents for such offense. The thorough determination of such

issue is best left to a full-blown trial of the merits, where private respondents are free to
dispute the theories set forth in the DOJ Resolution. It is clear error on the part of the
Court of Appeals to dismiss such finding so perfunctorily and on such flimsy grounds
that do not consider the grave consequences. After all, as the DOJ Resolution correctly
pointed out: [T]he postdated checks themselves serve as the evidences of the
indebtedness. A different rule would open the floodgates for a similar scheme, whereby
companies without prior license or authority from the SEC. This cannot be
countenanced.[32]

This conclusion quells the stance of the Court of Appeals that the unfortunate
events befalling petitioners were ultimately benign, not malevolent, a consequence of
the economic crisis that beset the Philippines during that era.[33] That conclusion would
be agreeable only if it were undisputed that the activities of ASBHI are legal in the first
place, but the DOJ puts forth a legitimate theory that the entire modus operandi of ASBHI
is illegal under the Revised Securities Act and if that were so, the impact of the Asian
economic crisis would not obviate the criminal liability of private respondents.
Private respondents cannot make capital of the fact that when the DOJ Resolution
was issued, the Revised Securities Act had already been repealed by the Securities
Regulation Code of 2000.[34] As noted by the DOJ, the new Code does punish the same
offense alleged of petitioners, particularly Section 8 in relation to Section 73 thereof. The
complained acts occurred during the effectivity of the Revised Securities Act. Certainly,
the enactment of the new Code in lieu of the Revised Securities Act could not have
extinguished all criminal acts committed under the old law.
In 1909-1910, the Philippine and United States Supreme Courts affirmed the
principle that when the repealing act reenacts substantially the former law, and does not
increase the punishment of the accused, the right still exists to punish the accused for an
offense of which they were
convicted and sentenced before the passage of the later act.[35] This doctrine was
reaffirmed as recently as 2001, where the Court, through Justice Quisumbing, held
in Benedicto v. Court of Appeals[36] that an exception to the rule that the absolute repeal of
a penal law deprives the court of authority to punish a person charged with violating

the old law prior to its repeal is where the repealing act reenacts the former statute and
punishes the act previously penalized under the old law.[37] It is worth noting that both
the Revised Securities Act and the Securities Regulation Code of 2000 provide for exactly
the same penalty: a fine of not less than five thousand (P5,000.00) pesos nor more than
five hundred thousand (P500,000.00) pesos or imprisonment of not less than seven (7)
years nor more than twenty one (21) years, or both, in the discretion of the court.[38]
It is ineluctable that the DOJ Resolution established a prima facie case for violation
of Article 315 (2)(a) of the Revised Penal Code and Sections 4 in relation to 56 of the
Revised Securities Act. We now turn to the critical question of whether the same charges
can be pinned against Roxas and Nolasco likewise.
The DOJ Resolution did not consider it exculpatory that Roxas and Nolasco had
not themselves dealt directly with petitioners, observing that to commit a crime,
inducement is as sufficient and effective as direct participation.[39] This conclusion finds
textual support in Article 17[40] of the Revised Penal Code. The Court of Appeals was
unable to point to any definitive evidence that Roxas or Nolasco did not instruct or
induce the agents of ASBHI to make the false or misleading representations to the
investors, including petitioners. Instead, it sought to acquit Roxas and Nolasco of any
liability on the ground that the traders or employees of ASBHI who directly made the
dubious representations to petitioners were never identified or impleaded as
respondents.
It appears that the Court of Appeals was, without saying so, applying the rule in
civil cases that all indispensable parties must be impleaded in a civil action.[41] There is
no equivalent rule in criminal procedure, and certainly the Court of Appeals decision
failed to cite any statute, procedural rule or jurisprudence to support its position that the
failure to implead the traders who directly dealt with petitioners is indeed fatal to the
complaint.[42]
Assuming that the traders could be tagged as principals by direct participation in
tandem with Roxas and Nolasco the principals by inducement does it make sense to
compel that they be jointly charged in the same complaint to the extent that the exclusion
of one leads to the dismissal of the complaint? It does not. Unlike in civil cases, where

indispensable parties are required to be impleaded in order to allow for complete relief
once the case is adjudicated, the determination of criminal liability is individual to each
of the defendants. Even if the criminal court fails to acquire jurisdiction over one or some
participants to a crime, it still is able to try those accused over whom it acquired
jurisdiction. The criminal court will still be able to ascertain the individual liability of
those accused whom it could try, and hand down penalties based on the degree of their
participation in the crime. The absence of one or some of the accused may bear impact
on the available evidence for the prosecution or defense, but it does not deprive the trial
court to accordingly try the case based on the evidence that is actually available.
At bar, if it is established after trial that Roxas and Nolasco instructed all the
employees, agents and traders of ASBHI to represent the corporation as financially able
to engage in the challenged transactions and repay its investors, despite their knowledge
that ASBHI was not established to be in a position to do so, and that representatives of
ASBHI accordingly made such representations to petitioners, then private respondents
could be held liable for estafa. The failure to implead or try the employees, agents or
traders will not negate such potential criminal liability of Roxas and Nolasco. It is
possible that the non-participation of such traders or agents in the trial will affect the
ability of both petitioners and private respondents to adduce evidence during the trial,
but it cannot quell the existence of the crime even before trial is had. At the very least,
the non-identification or non-impleading of such traders or agents cannot negatively
impact the finding of probable cause.
The assailed ruling unfortunately creates a wide loophole, especially in this age of
call centers, that would create a nearly fool-proof scheme whereby well-organized
criminally-minded enterprises can evade prosecution for criminal fraud. Behind the veil
of the anonymous call center agent, such enterprises could induce the investing public
to invest in fictional or incapacitated corporations with fraudulent impossible promises
of definite returns on investment. The rule, as set forth by the Court of Appeals ruling,
will allow the masterminds and profiteers from the scheme to take the money and run
without fear of the law simply because the defrauded investor would be hard-pressed
to identify the anonymous call center agents who, reading aloud the script prepared for
them in mellifluous tones, directly enticed the investor to part with his or her money.

Is there sufficient basis then to establish probable cause against Roxas and
Nolasco? Taking into account the relative remoteness of private respondents to
petitioners, the DOJ still concluded that there was. To repeat:
The false representations made by the ASB agents who dealt with the
complainant-petitioners and who inveigled them into investing their funds
in ASB are properly imputable to respondents Roxas and Nolasco, because
they, as ASBs president and senior vice president/treasurer, respectively,
respectively, in charge of its operations, directed its agents to make the false
representations to the public, including the complainant-petitioners, in
order to convince them to invest their moneys in ASB. It is difficult to make
a different conclusion, judging from the fact that respondents Roxas and
Nolasco authorized and accepted for ASB the fraud-induced loans.[43]

Indeed, the facts as thus established cannot lead to a definite, exculpatory

conclusion that Roxas and Nolasco did not instruct, much less forbid, their agents from
making the misrepresentations to petitioners. They could of course pose that defense,
but such claim can only be established following a trial on the merits considering that
nothing in the record proves without doubt such law-abiding prudence
on their part. There is also the fact that ABSHI, their corporation, actually received the
alleged amounts of money from petitioners. It is especially curious that according to the
ASBHI balance sheets dated 31 December 1999, which petitioners attached to their
affidavit-complaints,[44] over five billion pesos were booked as advances to stockholder
when, according to the general information sheet for 1999, Roxas owned 124,996 of the
125,000 subscribed shares ofASBHI.[45] Considering that ASBHI had an authorized
capital stock of only P500,000 and a subscribed capital of P125,000, it can be
reasonably deduced that such large amounts booked as advances to stockholder could
have only come from the loans extended by over 700 investors to ASBHI.
It is true that there are exceptions that may warrant departure from the general
rule of non-interference with the determination of probable cause by the DOJ, yet such
exceptions do not lie in this case, and the justifications actually cited in the Court of
Appeals decision are exceptionally weak and ultimately erroneous. Worse, it too hastily
condoned the apparent evasion of liability by persons who seemingly profited at the
expense of investors who lost millions of pesos. The Courts conclusion is that the DOJS

decision to prosecute private respondents is founded on sufficient probable cause, and

the ultimate determination of guilt or acquittal is best made through a full trial on the
merits. Indeed, many of the points raised by private respondents before this Court,
related as they are to the factual context surrounding the subject transactions, deserve
the full assessment and verification only a trial on the merits can accord.

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of

the Court of Appeals dated 18 July 2003 and 28 November 2003 are REVERSED and SET
ASIDE. The Resolutions of the Department of Justice in I.S. Nos. 2000-1418 to 1422
dated 15 October 2001 and 3 July 2002 are REINSTATED. Costs against private
respondents.
SECURITIES AND EXCHANGE G.R. No. 164197
COMMISSION,
Petitioner, Present:
VELASCO, JR., J., Chairperson,
- versus - PERALTA,
ABAD,
MENDOZA, and
PERLAS-BERNABE, JJ.
PROSPERITY.COM, INC.,
Respondent. Promulgated:
January 25, 2012
x --------------------------------------------------------------------------------------- x
DECISION
ABAD, J.:

This case involves the application of the Howey test in order to determine if a
particular transaction is an investment contract.
The Facts and the Case
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.
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 buyer-sponsor received a US$92.00
commission. But referrals in a day by the buyer-sponsor should not exceed 16 since the
commissions due from excess referrals inure to PCI, not to the buyer-sponsor.
Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI), which
company stopped operations after the Securities and 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.
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 against PCI. The SEC ruled that PCIs
scheme constitutes an Investment contract and, following the Securities Regulations
Code,[2] it should have first registered such contract or securities with the SEC.
Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of Republic Act
(R.A.) 8799, PCI filed with the Court of Appeals (CA) a petition for certiorari against the
SEC with an application for a temporary restraining 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 withdraw its petition before the CA to avoid possible forum shopping
violation.
During the pendency of PCIs action before the SEC, however, the CA issued a TRO,
enjoining the enforcement of the CDO.[3] In response, the SEC filed with the CA a motion
to dismiss the petition on ground of forum shopping. In a Resolution,[4] the CA initially
dismissed the petition, finding PCI guilty of forum shopping. But on PCIs motion, the
CA reversed itself and reinstated the petition.[5]
In a joint resolution,[6] CA-G.R. SP 62890 was consolidated with CA-G.R. SP 64487 that
raised the same issues. On July 31, 2003 the CA rendered a decision, granting PCIs

petition and setting aside the SEC-issued CDO.[7] The CA ruled that, following
the Howey test, PCIs scheme did not constitute an investment contract that needs
registration pursuant to R.A. 8799, hence, this petition.
The Issue Presented
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
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.[8]
Apart from the definition, which the Implementing Rules and Regulations provide,
Philippine jurisprudence has so far not done more to add to the same. Of course, the
United States Supreme Court, grappling with the problem, has on several occasions
discussed the nature of investment contracts. That courts rulings, while not binding in
the Philippines, enjoy some degree of persuasiveness insofar as they are logical and
consistent with the countrys best interests.[9]
The United States Supreme Court held in Securities and Exchange Commission v. W.J.
Howey Co.[10] 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. [11] 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.
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.
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 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.
WHEREFORE, the Court DENIES the petition and AFFIRMS the decision dated
July 31, 2003 and the resolution dated June 18, 2004 of the Court of Appeals in CA-G.R.
SP 62890.
SO ORDERED.
SECURITIES AND EXCHANGE
COMMISSION,
Petitioner,

- versus -

G.R. No. 135808

Present:
PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,*
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
VELASCO, JR.,

NACHURA,**
REYES,
DE CASTRO, and
BRION,** JJ.

INTERPORT
RESOURCES
CORPORATION, MANUEL S.
RECTO, RENE S. VILLARICA,
PELAGIO
RICALDE,
ANTONIO
REINA,
FRANCISCO
ANONUEVO,
Promulgated:
JOSEPH SY and SANTIAGO
TANCHAN, JR.,
October 6, 2008
Respondents.
x-------------------------------------------------x
DECISION
CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing
the Decision,[1] dated 20 August 1998, rendered by the Court of Appeals in C.A.-G.R. SP
No. 37036, enjoining petitioner Securities and Exchange Commission (SEC) from taking
cognizance
of
or
initiating
any
action
against
the
respondent
corporation InterportResources Corporation (IRC) and members of its board of
directors, respondents Manuel S. Recto, Rene S. Villarica, Pelagio Ricalde,
Antonio Reina, Francisco Anonuevo, Joseph Sy and Santiago Tanchan, Jr., with respect
to Sections 8, 30 and 36 of the Revised Securities Act. In the same Decision of the
appellate court, all the proceedings taken against the respondents, including the assailed
SEC Omnibus Orders of 25 January 1995 and 30 March 1995, were declared void.
The antecedent facts of the present case are as follows.
On 6 August 1994, the Board of Directors of IRC approved a Memorandum of
Agreement with Ganda Holdings Berhad (GHB). Under the Memorandum of
Agreement, IRC acquired 100% or the entire capital stock of Ganda Energy Holdings,
Inc. (GEHI),[2] which would own and operate a 102 megawatt (MW) gas turbine powergenerating barge. The agreement also stipulates that GEHI would assume a five-year
power purchase contract with National Power Corporation. At that
time, GEHIs power-generating barge was 97% complete and would go on-line by midSeptember of 1994. In exchange, IRC will issue to GHB 55% of the expanded capital

stock of IRC amounting to 40.88 billion shares which had a total par value of P488.44
million.[3]
On the side, IRC would acquire 67% of the entire capital stock of Philippine
Racing Club, Inc. (PRCI). PRCI owns 25.724 hectares of real estate property
in Makati.Under the Agreement, GHB, a member of the Westmont Group of
Companies in Malaysia, shall extend or arrange a loan required to pay for the proposed
acquisition by IRC of PRCI.[4]
IRC alleged that on 8 August 1994, a press release announcing the approval of the
agreement was sent through facsimile transmission to the Philippine Stock Exchange
and the SEC, but that the facsimile machine of the SEC could not receive it. Upon the
advice of the SEC, the IRC sent the press release on the morning of 9 August 1994.[5]
The SEC averred that it received reports that IRC failed to make timely public
disclosures of its negotiations with GHB and that some of its directors, respondents
herein, heavily traded IRC shares utilizing this material insider information. On 16
August 1994, the SEC Chairman issued a directive requiring IRC to submit to the SEC
a copy of its aforesaid Memorandum of Agreement with GHB. The SEC Chairman
further directed all principal officers of IRC to appear at a hearing before the Brokers
and Exchanges Department (BED) of the SEC to explain IRCs failure to immediately
disclose the information as required by the Rules on Disclosure of Material Facts.[6]
In compliance with the SEC Chairmans directive, the IRC sent a letter dated 16 August
1994 to the SEC, attaching thereto copies of the Memorandum of Agreement. Its
directors, Manuel Recto, Rene Villarica and Pelagio Ricalde, also appeared before the
SEC on 22 August 1994 to explain IRCs alleged failure to immediately disclose material
information as required under the Rules on Disclosure of Material Facts.[7]
On 19 September 1994, the SEC Chairman issued an Order finding that IRC violated
the Rules on Disclosure of Material Facts, in connection with the Old Securities Act of
1936, when it failed to make timely disclosure of its negotiations with GHB. In addition,
the SEC pronounced that some of the officers and directors of IRC entered into
transactions involving IRC shares in violation of Section 30, in relation to Section 36, of
the Revised Securities Act.[8]
Respondents filed an Omnibus Motion, dated 21 September 1994, which was
superseded by an Amended Omnibus Motion, filed on 18 October 1994, alleging that
the SEC had no authority to investigate the subject matter, since under Section 8 of
Presidential Decree No. 902-A,[9] as amended by Presidential Decree No. 1758,

jurisdiction was conferred upon the Prosecution and Enforcement Department (PED)
of the SEC. Respondents also claimed that the SEC violated their right to due process
when it ordered that the respondents appear before the SEC and show cause why no
administrative, civil or criminal sanctions should be imposed on them, and, thus,
shifted the burden of proof to the respondents. Lastly, they sought to have their cases
tried jointly given the identical factual situations surrounding the alleged violation
committed by the respondents.[10]
Respondents also filed a Motion for Continuance of Proceedings on 24 October 1994,
wherein they moved for discontinuance of the investigations and the proceedings
before the SEC until the undue publicity had abated and the investigating officials had
become reasonably free from prejudice and public pressure.[11]
No formal hearings were conducted in connection with the aforementioned motions,
but on 25 January 1995, the SEC issued an Omnibus Order which thus disposed of the
same in this wise:[12]
WHEREFORE, premised on the foregoing considerations, the
Commission resolves and hereby rules:
1. To create a special investigating panel to hear and decide the instant case in
accordance with the Rules of Practice and Procedure Before the Prosecution
and Enforcement Department (PED), Securities and Exchange Commission,
to be composed of Attys. James K. Abugan, Medardo Devera (Prosecution and
Enforcement Department), and Jose Aquino (Brokers and Exchanges
Department), which is hereby directed to expeditiously resolve the case by
conducting continuous hearings, if possible.
2. To recall the show cause orders dated September 19, 1994 requiring the
respondents to appear and show cause why no administrative, civil or
criminal sanctions should be imposed on them.
3. To deny the Motion for Continuance for lack of merit.

Respondents filed an Omnibus Motion for Partial Reconsideration,[13] questioning the

creation of the special investigating panel to hear the case and the denial of the Motion
for Continuance. The SEC denied reconsideration in its Omnibus Order dated 30
March 1995.[14]

The respondents filed a petition before the Court of Appeals docketed as C.A.-G.R. SP
No. 37036, questioning the Omnibus Orders dated 25 January 1995 and 30 March
1995.[15] During the proceedings before the Court of Appeals, respondents filed a
Supplemental Motion[16] dated 16 May 1995, wherein they prayed for the issuance of a
writ of preliminary injunction enjoining the SEC and its agents from investigating and
proceeding with the hearing of the case against respondents herein. On 5 May 1995,
the Court of Appeals granted their motion and issued a writ of preliminary injunction,
which effectively enjoined the SEC from filing any criminal, civil or administrative case
against the respondents herein.[17]
On 23 October 1995, the SEC filed a Motion for Leave to Quash SEC Omnibus
Orders so that the case may be investigated by the PED in accordance with the SEC
Rules and Presidential Decree No. 902-A, and not by the special body whose creation
the SEC had earlier ordered.[18]
The Court of Appeals promulgated a Decision[19] on 20 August 1998. It
determined that there were no implementing rules and regulations regarding
disclosure, insider trading, or any of the provisions of the Revised Securities Acts
which the respondents allegedly violated. The Court of Appeals likewise noted that it
found no statutory authority for the SEC to initiate and file any suit for civil liability
under Sections 8, 30 and 36 of the Revised Securities Act. Thus, it ruled that no civil,
criminal or administrative proceedings may possibly be held against the respondents
without violating their rights to due process and equal protection. It further resolved
that absent any implementing rules, the SEC cannot be allowed to quash the assailed
Omnibus Orders for the sole purpose of re-filing the same case against the
respondents.[20]
The Court of Appeals further decided that the Rules of Practice and Procedure
Before the PED, which took effect on 14 April 1990, did not comply with the statutory
requirements contained in the Administrative Code of 1997. Section 8, Rule V of the
Rules of Practice and Procedure Before the PED affords a party the right to be present
but without the right to cross-examine witnesses presented against him, in violation of
Section 12(3), Chapter 3, Book VII of the Administrative Code. [21]
In the dispositive portion of its Decision, dated 20 August 1998, the Court of
Appeals ruled that[22]:
WHEREFORE, [herein petitioner SECs] Motion for Leave to Quash SEC
Omnibus Orders is hereby DENIED. The petition for certiorari, prohibition
and mandamus is GRANTED.Consequently, all proceedings taken against
[herein respondents] in this case, including the Omnibus Orders of January

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

The SEC filed a Motion for Reconsideration, which the Court of Appeals denied in
a Resolution[23] issued on 30 September 1998.
Hence, the present petition, which relies on the following grounds[24]:
I
THE COURT OF APPEALS ERRED WHEN IT DENIED PETITIONERS
MOTION FOR LEAVE TO QUASH THE ASSAILED SEC OMNIBUS
ORDERS DATED JANUARY 25 ANDMARCH 30, 1995.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS NO
STATUTORY AUTHORITY WHATSOEVER FOR PETITIONER SEC TO
INITIATE AND FILE ANY SUIT BE THEY CIVIL, CRIMINAL OR
ADMINISTRATIVE AGAINST RESPONDENT CORPORATION AND ITS
DIRECTORS WITH RESPECT TO SECTION 30 (INSIDERS DUTY TO
DISCOLSED [sic] WHEN TRADING) AND 36 (DIRECTORS OFFICERS
AND PRINCIPAL STOCKHOLDERS) OF THE REVISED SECURITIES ACT;
AND
III
THE COURT OF APPEALS ERRED WHEN IT RULED THAT RULES OF
PRACTICE AND PROSECUTION BEFORE THE PED AND THE SICD
RULES
OF
PROCEDURE
ON
ADMINISTRATIVE
[25]
ACTIONS/PROCEEDINGS ARE INVALID AS THEY FAIL TO COMPLY

WITH THE STATUTORY REQUIREMENTS CONTAINED IN THE

ADMINISTRATIVE CODE OF 1987.

The petition is impressed with merit.

Before discussing the merits of this case, it should be noted that while this case
was pending in this Court, Republic Act No. 8799, otherwise known as the Securities
Regulation Code, took effect on 8 August 2000. Section 8 of Presidential Decree No. 902A, as amended, which created the PED, was already repealed as provided for in Section
76 of the Securities Regulation Code:
SEC. 76.
Repealing Clause. The Revised Securities Act
(Batas Pambansa Blg. 178), as amended, in its entirety, and Sections 2, 4 and
8 of Presidential Decree 902-A, as amended, are hereby repealed. All other
laws, orders, rules and regulations, or parts thereof, inconsistent with any
provision of this Code are hereby repealed or modified accordingly.

Thus, under the new law, the PED has been abolished, and the Securities
Regulation Code has taken the place of the Revised Securities Act.
The Court now proceeds with a discussion of the present case.
I. Sctions 8, 30 and 36 of the Revised Securities Act do not
require the enactment of implementing rules to make
them binding and effective.
The Court of Appeals ruled that absent any implementing rules for Sections 8, 30
and 36 of the Revised Securities Act, no civil, criminal or administrative actions can
possibly be had against the respondents without violating their right to due process and
equal protection, citing as its basis the case Yick Wo v. Hopkins.[26] This is untenable.
In the absence of any constitutional or statutory infirmity, which may concern
Sections 30 and 36 of the Revised Securities Act, this Court upholds these provisions as
legal and binding. It is well settled that every law has in its favor the presumption of
validity. Unless and until a specific provision of the law is declared invalid and
unconstitutional, the same is valid and binding for all intents and purposes.[27] The mere
absence of implementing rules cannot effectively invalidate provisions of law, where a

reasonable construction that will support the law may be given. In People v.
Rosenthal,[28] this Court ruled that:
In this connection we cannot pretermit reference to the rule that legislation
should not be held invalid on the ground of uncertainty if susceptible of any
reasonable construction that will support and give it effect. An Act will not
be declared inoperative and ineffectual on the ground that it furnishes no
adequate means to secure the purpose for which it is passed, if men of
common sense and reason can devise and provide the means, and all the
instrumentalities necessary for its execution are within the reach of
those intrusted therewith. (25 R.C.L., pp. 810, 811)

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

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

The necessity for vesting administrative authorities with power to make rules and
regulations is based on the impracticability of lawmakers providing general regulations
for various and varying details of management.[30] To rule that the absence of
implementing rules can render ineffective an act of Congress, such as the Revised
Securities Act, would empower the administrative bodies to defeat the legislative will
by delaying the implementing rules. To assert that a law is less than a law, because it is
made to depend on a future event or act, is to rob the Legislature of the power to act
wisely for the public welfare whenever a law is passed relating to a state of affairs not
yet developed, or to things future and impossible to fully know.[31] It is well established
that administrative authorities have the power to promulgate rules and regulations to
implement a given statute and to effectuate its policies, provided such rules and
regulations conform to the terms and standards prescribed by the statute as well as

purport to carry into effect its general policies. Nevertheless, it is undisputable that the
rules and regulations cannot assert for themselves a more extensive prerogative or
deviate from the mandate of the statute.[32]Moreover, where the statute contains
sufficient standards and an unmistakable intent, as in the case of Sections 30 and 36 of
the Revised Securities Act, there should be no impediment to its implementation.
The reliance placed by the Court of Appeals in Yick Wo v. Hopkins[33] shows a
glaring error. In the cited case, this Court found unconstitutional an ordinance which
gave the board of supervisors authority to refuse permission to carry on laundries
located in buildings that were not made of brick and stone, because it violated the equal
protection clause and was highly discriminatory and hostile to Chinese residents and
not because the standards provided therein were vague or ambiguous.
This Court does not discern any vagueness or ambiguity in Sections 30 and 36 of
the Revised Securities Act, such that the acts proscribed and/or required would not be
understood by a person of ordinary intelligence.
Section 30 of the Revised Securities Act
Section 30 of the Revised Securities Act reads:
Sec. 30. Insiders duty to disclose when trading. (a) It shall be unlawful
for an insider to sell or buy a security of the issuer, if he knows a fact of
special significance with respect to the issuer or the security that is not
generally available, unless (1) the insider proves that the fact is generally
available or (2) if the other party to the transaction (or his agent) is identified,
(a) the insider proves that the other party knows it, or (b) that other party in
fact knows it from the insider or otherwise.
(b) Insider means (1) the issuer, (2) a director or officer of, or a person
controlling, controlled by, or under common control with, the issuer, (3) a
person whose relationship or former relationship to the issuer gives or gave
him access to a fact of special significance about the issuer or the security
that is not generally available, or (4) a person who learns such a fact from
any of the foregoing insiders as defined in this subsection, with knowledge
that the person from whom he learns the fact is such an insider.
(c) A fact is of special significance if (a) in addition to being material it
would be likely, on being made generally available, to affect the market price
of a security to a significant extent, or (b) a reasonable person would consider

it especially important under the circumstances in determining his course of

action in the light of such factors as the degree of its specificity, the extent of
its difference from information generally available previously, and its nature
and reliability.
(d) This section shall apply to an insider as defined in subsection (b)
(3) hereof only to the extent that he knows of a fact of special significance by
virtue of his being an insider.

The provision explains in simple terms that the insider's misuse of nonpublic and
undisclosed information is the gravamen of illegal conduct. The intent of the law is the
protection of investors against fraud, committed when an insider, using secret
information, takes advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from trading the shares of his
corporation. This duty to disclose or abstain is based on two factors: first, the existence
of a relationship giving access, directly or indirectly, to information intended to be
available only for a corporate purpose and not for the personal benefit of anyone; and
second, the inherent unfairness involved when a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing.[34]
In the United States (U.S.), the obligation to disclose or abstain has been
traditionally imposed on corporate insiders, particularly officers, directors, or
controlling stockholders, but that definition has since been expanded.[35] The term
insiders now includes persons whose relationship or former relationship to the issuer
gives or gave them access to a fact of special significance about the issuer or the security
that is not generally available, and one who learns such a fact from an insider knowing
that the person from whom he learns the fact is such an insider. Insiders have the duty
to disclose material facts which are known to them by virtue of their position but which
are not known to persons with whom they deal and which, if known, would affect their
investment judgment. In some cases, however, there may be valid corporate reasons for
the nondisclosure of material information. Where such reasons exist, an issuers decision
not to make any public disclosures is not ordinarily considered as a violation of insider
trading. At the same time, the undisclosed information should not be improperly used
for non-corporate purposes, particularly to disadvantage other persons with whom an
insider might transact, and therefore the insider must abstain from entering into
transactions involving such securities.[36]
Respondents further aver that under Section 30 of the Revised Securities Act, the
SEC still needed to define the following terms: material fact, reasonable person, nature

and reliability and generally available. [37] In determining whether or not these terms
are vague, these terms must be evaluated in the context of Section 30 of the
RevisedSecurties Act. To fully understand how the terms were used in the
aforementioned provision, a discussion of what the law recognizes as a fact of special
significance is required, since the duty to disclose such fact or to abstain from any
transaction is imposed on the insider only in connection with a fact of special significance.
Under the law, what is required to be disclosed is a fact of special
significance which may be (a) a material fact which would be likely, on being made
generally available, to affect the market price of a security to a significant extent, or (b)
one which a reasonable person would consider especially important in determining his
course of action with regard to the shares of stock.
(a) Material Fact The concept of a material fact is not a new one. As early as 1973,
the Rules Requiring Disclosure of Material Facts by Corporations Whose Securities Are
Listed In Any Stock Exchange or Registered/Licensed Under the Securities Act, issued
by the SEC on 29 January 1973, explained that [a] fact is material if it induces or tends to
induce or otherwise affect the sale or purchase of its securities. Thus, Section 30 of the
Revised Securities Act provides that if a fact affects the sale or purchase of securities, as
well as its price, then the insider would be required to disclose such information to the
other party to the transaction involving the securities. This is the first definition given to
a fact of special significance.
(b.1) Reasonable Person The second definition given to a fact of special significance
involves the judgment of a reasonable person. Contrary to the allegations of the
respondents, a reasonable person is not a problematic legal concept that needs to be
clarified for the purpose of giving effect to a statute; rather, it is the standard on which
most of our legal doctrines stand. The doctrine on negligence uses the discretion of the
reasonable man as the standard.[38] A purchaser in good faith must also take into account
facts which put a reasonable man on his guard.[39] In addition, it is the belief of the
reasonable and prudent man that an offense was committed that sets the criteria for
probable cause for a warrant of arrest.[40] This Court, in such cases, differentiated the
reasonable and prudent man from a person with training in the law such as a prosecutor
or a judge, and identified him as the average man on the street, who weighs facts and
circumstances without resorting to the calibrations of our technical rules of evidence of
which his knowledge is nil. Rather, he relies on the calculus of common sense of which
all reasonable men have in abundance.[41] In the same vein, the U.S. Supreme Court
similarly determined its standards by the actual significance in the deliberations of a
reasonable investor, when it ruled in TSC Industries, Inc. v. Northway, Inc.,[42] that the

determination of materiality requires delicate assessments of the inferences a reasonable

shareholder would draw from a given set of facts and the significance of those inferences
to him.
(b.2) Nature and Reliability The factors affecting the second definition of a fact of
special significance, which is of such importance that it is expected to affect the judgment
of a reasonable man, were substantially lifted from a test of materiality pronounced in
the case In the Matter of Investors Management Co., Inc.[43]:
Among the factors to be considered in determining whether information is
material under this test are the degree of its specificity, the extent to which
it differs from information previously publicly disseminated, and its
reliability in light of its nature and source and the circumstances under
which it was received.

It can be deduced from the foregoing that the nature and reliability of a significant fact
in determining the course of action a reasonable person takes regarding securities must
be clearly viewed in connection with the particular circumstances of a case. To
enumerate all circumstances that would render the nature and reliability of a fact to be
of special significance is close to impossible. Nevertheless, the proper adjudicative body
would undoubtedly be able to determine if facts of a certain nature and reliability can
influence a reasonable persons decision to retain, sell or buy securities, and thereafter
explain and justify its factual findings in its decision.
(c) Materiality Concept A discussion of the materiality concept would be relevant
to both a material fact which would affect the market price of a security to a significant
extent and/or a fact which a reasonable person would consider in determining his or
her cause of action with regard to the shares of stock. Significantly, what is referred to
in our laws as a fact of special significance is referred to in the U.S. as the materiality
concept and the latter is similarly not provided with a precise definition. In Basic v.
Levinson,[44]the U.S. Supreme Court cautioned against confining materiality to a rigid
formula, stating thus:
A bright-line rule indeed is easier to follow than a standard that requires the
exercise of judgment in the light of all the circumstances. But ease of
application alone is not an excuse for ignoring the purposes of the Securities
Act and Congress policy decisions. Any approach that designates a single
fact or occurrence as always determinative of an inherently fact-specific

finding
such
as
materiality,
be overinclusive or underinclusive.

must

necessarily

Moreover, materiality will depend at any given time upon a balancing of both the
indicated probability that the event will occur and the anticipated magnitude of the
event in light of the totality of the company activity.[45] In drafting the Securities Act of
1934, the U.S. Congress put emphasis on the limitations to the definition of materiality:
Although the Committee believes that ideally it would be desirable to have
absolute certainty in the application of the materiality concept, it is its view
that such a goal is illusory and unrealistic. The materiality concept is
judgmental in nature and it is not possible to translate this into a
numerical formula. The Committee's advice to the [SEC] is to avoid this
quest for certainty and to continue consideration of materiality on a caseby-case basis as disclosure problems are identified. House Committee on
Interstate and Foreign Commerce, Report of the Advisory Committee on
Corporate Disclosure to the Securities and Exchange Commission, 95th
Cong., 1st Sess., 327 (Comm.Print 1977). (Emphasis provided.)[46]

(d) Generally Available Section 30 of the Revised Securities Act allows the
insider the defense that in a transaction of securities, where the insider is in
possession of facts of special significance, such information is generally available to
the public. Whether information found in a newspaper, a specialized magazine, or
any cyberspace media be sufficient for the term generally available is a matter which
may be adjudged given the particular circumstances of the case. The standards
cannot remain at a standstill. A medium, which is widely used today was, at some
previous point in time, inaccessible to most. Furthermore, it would be difficult to
approximate how the rules may be applied to the instant case, where investigation
has not even been started. Respondents failed to allege that the negotiations of their
agreement with GHB were made known to the public through any form of media
for there to be a proper appreciation of the issue presented.
Section 36(a) of the Revised Securities Act
As regards Section 36(a) of the Revised Securities Act, respondents claim that the
term beneficial ownership is vague and that it requires implementing rules to give effect
to the law. Section 36(a) of the Revised Securities Act is a straightforward provision that
imposes upon (1) a beneficial owner of more than ten percent of any class of any equity

security or (2) a director or any officer of the issuer of such security, the obligation to
submit a statement indicating his or her ownership of the issuers securities and such
changes in his or her ownership thereof. The said provision reads:
Sec. 36. Directors, officers and principal stockholders. (a) Every person
who is directly or indirectly the beneficial owner of more than ten per
centum of any [class] of any equity security which is registered pursuant to
this Act, or who is [a] director or an officer of the issuer of such security, shall
file, at the time of the registration of such security on a securities exchange
or by the effective date of a registration statement or within ten days after he
becomes such a beneficial owner, director or officer, a statement with the
Commission and, if such security is registered on a securities exchange, also
with the exchange, of the amount of all equity securities of such issuer of
which he is the beneficial owner, and within ten days after the close of each
calendar month thereafter, if there has been a change in such ownership
during such month, shall file with the Commission, and if such security is
registered on a securities exchange, shall also file with the exchange, a
statement indicating his ownership at the close of the calendar month and
such changes in his ownership as have occurred during such calendar
month. (Emphasis provided.)

Section 36(a) refers to the beneficial owner. Beneficial owner has been defined in the
following manner:
[F]irst, to indicate the interest of a beneficiary in trust property (also called
equitable ownership); and second, to refer to the power of a corporate
shareholder to buy or sell the shares, though the shareholder is not
registered in the corporations books as the owner. Usually, beneficial
ownership is distinguished from naked ownership, which is the enjoyment
of all the benefits and privileges of ownership, as against possession of the
bare title to property.[47]
Even assuming that the term beneficial ownership was vague, it would not affect
respondents case, where the respondents are directors and/or officers of the
corporation, who are specifically required to comply with the reportorial requirements
under Section 36(a) of the Revised Securities Act. The validity of a statute may be
contested only by one who will sustain a direct injury as a result of its enforcement.[48]
Sections 30 and 36 of the Revised Securities Act were enacted to promote full
disclosure in the securities market and prevent unscrupulous individuals, who by their

positions obtain non-public information, from taking advantage of an uninformed

public. No individual would invest in a market which can be manipulated by a limited
number of corporate insiders. Such reaction would stifle, if not stunt, the growth of the
securities market. To avert the occurrence of such an event, Section 30 of the Revised
Securities Act prevented the unfair use of non-public information in securities
transactions, while Section 36 allowed the SEC to monitor the transactions entered into
by corporate officers and directors as regards the securities of their companies.
In the case In the Matter of Investors Management Co.,[49] it was cautioned that the
broad language of the anti-fraud provisions, which include the provisions on insider
trading, should not be circumscribed by fine distinctions and rigid classifications. The
ambit of anti-fraud provisions is necessarily broad so as to embrace the infinite variety
of deceptive conduct.[50]
In Tatad v. Secretary of Department of Energy,[51] this Court brushed aside a
contention, similar to that made by the respondents in this case, that certain words or
phrases used in a statute do not set determinate standards, declaring that:
Petitioners contend that the words as far as practicable, declining and stable
should have been defined in R.A. No. 8180 as they do not set determinate
and determinable standards. This stubborn submission deserves scant
consideration. The dictionary meanings of these words are well settled and
cannot confuse men of reasonable intelligence. x x x. The fear of petitioners
that these words will result in the exercise of executive discretion that will
run riot is thus groundless. To be sure, the Court has sustained the validity
of similar, if not more general standards in other cases.

Among the words or phrases that this Court upheld as valid standards were simplicity
and dignity,[52] public interest,[53] and interests of law and order.[54]
The Revised Securities Act was approved on 23 February 1982. The fact that the
Full Disclosure Rules were promulgated by the SEC only on 24 July 1996 does not render
ineffective in the meantime Section 36 of the Revised Securities Act. It is already
unequivocal that the Revised Securities Act requires full disclosure and the Full
Disclosure Rules were issued to make the enforcement of the law more consistent,
efficient and effective. It is equally reasonable to state that the disclosure forms later
provided by the SEC, do not, in any way imply that no compliance was required before
the forms were provided. The effectivity of a statute which imposes reportorial
requirements cannot be suspended by the issuance of specified forms, especially where

compliance therewith may be made even without such forms. The forms merely made
more efficient the processing of requirements already identified by the statute.
For the same reason, the Court of Appeals made an evident mistake when it ruled that
no civil, criminal or administrative actions can possibly be had against the respondents
in connection with Sections 8, 30 and 36 of the Revised Securities Act due to the absence
of implementing rules. These provisions are sufficiently clear and complete by
themselves.Their requirements are specifically set out, and the acts which are enjoined
are determinable. In particular, Section 8[55] of the Revised Securities Act is a
straightforward enumeration of the procedure for the registration of securities and the
particular matters which need to be reported in the registration statement thereof. The
Decision, dated 20 August 1998, provides no valid reason to exempt the respondent IRC
from such requirements. The lack of implementing rules cannot suspend
the effectivity of these provisions. Thus, this Court cannot find any cogent reason to
prevent the SEC from exercising its authority to investigate respondents for violation of
Section 8 of the Revised Securities Act.
II. The right to cross-examination is not absolute and
cannot be demanded during investigative
proceedings before the PED.
In its assailed Decision dated 20 August 1998, the Court of Appeals pronounced
that the PED Rules of Practice and Procedure was invalid since Section 8, Rule
V[56]thereof failed to provide for the parties right to cross-examination, in violation of the
Administrative Code of 1987 particularly Section 12(3), Chapter 3, Book VII thereof. This
ruling is incorrect.
Firstly, Section 4, Rule I of the PED Rules of Practice and Procedure, categorically
stated that the proceedings before the PED are summary in nature:
Section 4. Nature of Proceedings Subject to the requirements of due process,
proceedings before the PED shall be summary in nature not necessarily
adhering to or following the technical rules of evidence obtaining in the
courts of law. The Rules of Court may apply in said proceedings
in suppletory character whenever practicable.

Rule V of the PED Rules of Practice and Procedure further specified that:
Section 5. Submission of Documents During the preliminary
conference/hearing, or immediately thereafter, the Hearing Officer may

require the parties to simultaneously submit their respective verified

position papers accompanied by all supporting documents and the
affidavits of their witnesses, if any which shall take the place of their direct
testimony. The parties shall furnish each other with copies of the position
papers together with the supporting affidavits and documents submitted by
them.
Section 6. Determination of necessity of hearing. Immediately after the
submission by the parties of their position papers and supporting
documents, the Hearing Officer shall determine whether there is a need for
a formal hearing. At this stage, he may, in his discretion, and for the purpose
of making such determination, elicit pertinent facts or information,
including documentary evidence, if any, from any party or witness to
complete, as far as possible, the facts of the case. Facts or information so
elicited may serve as basis for his clarification or simplifications of the issues
in the case. Admissions and stipulation of facts to abbreviate the proceedings
shall be encouraged.
Section 7. Disposition of Case. If the Hearing Officer finds no necessity of
further hearing after the parties have submitted their position papers and
supporting documents, he shall so inform the parties stating the
reasons therefor and shall ask them to acknowledge the fact that they were
so informed by signing the minutes of the hearing and the case shall be
deemed submitted for resolution.

As such, the PED Rules provided that the Hearing Officer may require the parties to
submit their respective verified position papers, together with all supporting documents
and affidavits of witnesses. A formal hearing was not mandatory; it was within the
discretion of the Hearing Officer to determine whether there was a need for a formal
hearing.Since, according to the foregoing rules, the holding of a hearing before the PED
is discretionary, then the right to cross-examination could not have been demanded by
either party.
Secondly, it must be pointed out that Chapter 3, Book VII of the Administrative
Code, entitled Adjudication, does not affect the investigatory functions of the
agencies.The law creating the PED, Section 8 of Presidential Decree No. 902-A, as
amended, defines the authority granted to the PED, thus:

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

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

The law creating PED empowers it to investigate violations of the rules and regulations
promulgated by the SEC and to file and prosecute such cases. It fails to mention any
adjudicatory functions insofar as the PED is concerned. Thus, the PED Rules of Practice
and Procedure need not comply with the provisions of the Administrative Code on
adjudication, particularly Section 12(3), Chapter 3, Book VII.
In Cario v. Commission on Human Rights,[57] this Court sets out the distinction between
investigative and adjudicative functions, thus:
Investigate, commonly understood, means to examine, explore,
inquire or delve or probe into, research on, study. The dictionary definition
of investigate is to observe or study closely; inquire into systematically: to
search or inquire into xx to subject to an official probe xx: to conduct an
official inquiry. The purpose of an investigation, of course is to discover, to
find out, to learn, obtain information. Nowhere included or intimated is the
notion of settling, deciding or resolving a controversy involved in the facts
inquired into by application of the law to the facts established by the inquiry.
The legal meaning of investigate is essentially the same: (t)o follow up
step by step by patient inquiry or observation. To trace or track; to search
into; to examine and inquire into with care and accuracy; to find out by
careful inquisition; examination; the taking of evidence; a legal inquiry; to
inquire; to make an investigation, investigation being in turn described as
(a)n administrative function, the exercise of which ordinarily does not
require a hearing. 2 Am J2d Adm L Sec. 257; xx an inquiry, judicial or

otherwise, for the discovery and collection of facts concerning a certain

matter or matters.
Adjudicate, commonly or popularly understood, means to adjudge,
arbitrate, judge, decide, determine, resolve, rule on, settle. The dictionary
defines the term as to settle finally (the rights and duties of parties to a court
case) on the merits of issues raised: xx to pass judgment on: settle judicially:
xx act as judge. And adjudge means to decide or rule upon as a judge or with
judicial or quasi-judicial powers: xx to award or grant judicially in a case of
controversy x x x.
In a legal sense, adjudicate means: To settle in the exercise of judicial
authority. To determine finally. Synonymous with adjudge in its strictest
sense; and adjudge means: To pass on judicially, to decide, settle, or decree,
or to sentence or condemn. x x x Implies a judicial determination of a fact,
and the entry of a judgment.

There is no merit to the respondents averment that the sections under Chapter 3,
Book VII of the Administrative Code, do not distinguish between investigative and
adjudicatory functions. Chapter 3, Book VII of the Administrative Code, is
unequivocally entitled Adjudication.
Respondents insist that the PED performs adjudicative functions, as enumerated
under Section 1(h) and (j), Rule II; and Section 2(4), Rule VII of the PED Rules of Practice
and Procedure:
Section 1. Authority of the Prosecution and Enforcement Department
Pursuant to Presidential Decree No. 902-A, as amended by Presidential
Decree No. 1758, the Prosecution and Enforcement Department is primarily
charged with the following:
xxxx
(h) Suspends or revokes, after proper notice and hearing in accordance with
these Rules, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the following grounds:
1. Fraud in procuring its certificate of registration;

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

the great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of
its franchise;
xxxx
(j)

Imposes charges, fines and fees, which by law, it is authorized to collect;

xxxx
Section 2. Powers of the Hearing Officer. The Hearing Officer shall have the
following powers:
xxxx
4. To cite and/or declare any person in direct or indirect contempt in
accordance with pertinent provisions of the Rules of Court.

Even assuming that these are adjudicative functions, the PED, in the instant case,
exercised its investigative powers; thus, respondents do not have the requisite standing
to assail the validity of the rules on adjudication. A valid source of a statute or a rule can
only be contested by one who will sustain a direct injury as a result of its
enforcement.[58]In the instant case, respondents are only being investigated by the PED
for their alleged failure to disclose their negotiations with GHB and the transactions
entered into by its directors involving IRC shares. The respondents have not shown
themselves to be under any imminent danger of sustaining any personal injury
attributable to the exercise of adjudicative functions by the SEC. They are not being or
about to be subjected by the PED to charges, fees or fines; to citations for contempt; or
to the cancellation of their certificate of registration under Section 1(h), Rule II of the
PED Rules of Practice and Procedure.
To repeat, the only powers which the PED was likely to exercise over the
respondents were investigative in nature, to wit:
Section 1. Authority of the Prosecution and Enforcement Department
Pursuant to Presidential Decree No. 902-A, as amended by Presidential

Decree No. 1758, the Prosecution and Enforcement Department is primarily

charged with the following:
xxxx
b.

Initiates proper investigation of corporations and partnerships or

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

xxxx
e.

Files and prosecutes civil or criminal cases before the Commission and
other courts of justice involving violations of laws and decrees enforced
by
the
Commission
and
the
rules
and
regulations
promulgated thereunder;

f.

Prosecutes erring directors, officers and stockholders of corporations

and partnerships, commercial paper issuers or persons in accordance
with the pertinent rules on procedures;

The authority granted to the PED under Section 1(b), (e), and (f), Rule II of the PED Rules
of Practice and Procedure, need not comply with Section 12, Chapter 3, Rule VII of the
Administrative Code, which affects only the adjudicatory functions of administrative
bodies. Thus, the PED would still be able to investigate the respondents under its rules
for their alleged failure to disclose their negotiations with GHB and the transactions
entered into by its directors involving IRC shares.
This is not to say that administrative bodies performing adjudicative functions are
required to strictly comply with the requirements of Chapter 3, Rule VII of the
Administrative Code, particularly, the right to cross-examination. It should be noted
that under Section 2.2 of Executive Order No. 26, issued on 7 October 1992, abbreviated
proceedings are prescribed in the disposition of administrative cases:
2. Abbreviation of Proceedings. All administrative agencies are hereby directed
to adopt and include in their respective Rules of Procedure the following
provisions:
xxxx

2.2 Rules adopting, unless otherwise provided by special laws and without
prejudice to Section 12, Chapter 3, Book VII of the Administrative Code of
1987, the mandatory use of affidavits in lieu of direct testimonies and the
preferred use of depositions whenever practicable and convenient.

As a consequence, in proceedings before administrative or quasi-judicial bodies,

such as the National Labor Relations Commission and the Philippine Overseas
Employment Agency, created under laws which authorize summary proceedings,
decisions may be reached on the basis of position papers or other documentary evidence
only.They are not bound by technical rules of procedure and evidence. [59] In fact, the
hearings before such agencies do not connote full adversarial proceedings.[60] Thus, it is
not necessary for the rules to require affiants to appear and testify and to be crossexamined by the counsel of the adverse party. To require otherwise would negate the
summary nature of the administrative or quasi-judicial proceedings.[61] In Atlas
Consolidated Mining and Development Corporation v. Factoran, Jr.,[62] this Court stated that:
[I]t is sufficient that administrative findings of fact are supported by
evidence, or negatively stated, it is sufficient that findings of fact are not
shown to be unsupported by evidence. Substantial evidence is all that is
needed to support an administrative finding of fact, and substantial
evidence is such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion.

In order to comply with the requirements of due process, what is required, among other
things, is that every litigant be given reasonable opportunity to appear and defend his
right and to introduce relevant evidence in his favor.[63]
III. The Securities Regulations Code did not repeal
Sections 8, 30 and 36 of the Revised Securities Act
since said provisions were reenacted in the new law.

The Securities Regulations Code absolutely repealed the Revised Securities

Act. While the absolute repeal of a law generally deprives a court of its authority to
penalize the person charged with the violation of the old law prior to its appeal, an
exception to this rule comes about when the repealing law punishes the act previously
penalized under the old law. The Court, in Benedicto v. Court of Appeals, sets down the
rules in such instances:[64]

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

the court of its authority to punish a person charged with violation of the old
law prior to its repeal. This is because an unqualified repeal of a penal law
constitutes a legislative act of rendering legal what had been previously
declared as illegal, such that the offense no longer exists and it is as if the
person who committed it never did so. There are, however, exceptions to
the rule. One is the inclusion of a saving clause in the repealing statute that
provides that the repeal shall have no effect on pending actions. Another
exception is where the repealing act reenacts the former statute and
punishes the act previously penalized under the old law. In such instance,
the act committed before the reenactment continues to be an offense in the
statute books and pending cases are not affected, regardless of whether the
new penalty to be imposed is more favorable to the accused. (Emphasis
provided.)
In the present case, a criminal case may still be filed against the respondents
despite the repeal, since Sections 8, [65] 12,[66] 26,[67] 27[68] and 23[69] of the Securities
Regulations Code impose duties that are substantially similar to Sections 8, 30 and 36 of
the repealed Revised Securities Act.
Section 8 of the Revised Securities Act, which previously provided for the
registration of securities and the information that needs to be included in the registration
statements, was expanded under Section 12, in connection with Section 8 of the
Securities Regulations Code. Further details of the information required to be disclosed
by the registrant are explained in the Amended Implementing Rules and Regulations of
the Securities Regulations Code, issued on 30 December 2003, particularly Sections 8 and
12 thereof.
Section 30 of the Revised Securities Act has been reenacted as Section 27 of the
Securities Regulations Code, still penalizing an insiders misuse of material and nonpublic information about the issuer, for the purpose of protecting public
investors. Section 26 of the Securities Regulations Code even widens the coverage of
punishable acts, which intend to defraud public investors through various devices,
misinformation and omissions.
Section 23 of the Securities Regulations Code was practically lifted from Section
36(a) of the Revised Securities Act. Both provisions impose upon (1) a beneficial owner
of more than ten percent of any class of any equity security or (2) a director or any officer

of the issuer of such security, the obligation to submit a statement indicating his or her
ownership of the issuers securities and such changes in his or her ownership thereof.
Clearly, the legislature had not intended to deprive the courts of their authority to
punish a person charged with violation of the old law that was repealed; in this case, the
Revised Securities Act.
IV. The SEC retained the jurisdiction to investigate
violations of the Revised Securities Act, reenacted in
the Securities Regulations Code, despite the
abolition of the PED.
Section 53 of the Securities Regulations Code clearly provides that criminal
complaints for violations of rules and regulations enforced or administered by the SEC
shall be referred to the Department of Justice (DOJ) for preliminary investigation, while
the SEC nevertheless retains limited investigatory powers.[70] Additionally, the SEC may
still impose the appropriate administrative sanctions under Section 54 of the
aforementioned law.[71]
In Morato v. Court of Appeals,[72] the cases therein were still pending before the PED
for investigation and the SEC for resolution when the Securities Regulations Code was
enacted. The case before the SEC involved an intra-corporate dispute, while the subject
matter of the other case investigated by the PED involved the schemes, devices, and
violations of pertinent rules and laws of the companys board of directors. The enactment
of the Securities Regulations Code did not result in the dismissal of the cases; rather, this
Court ordered the transfer of one case to the proper regional trial court and the SEC to
continue with the investigation of the other case.
The case at bar is comparable to the aforecited case. In this case, the SEC already
commenced the investigative proceedings against respondents as early as
1994. Respondents were called to appear before the SEC and explain their failure to
disclose pertinent information on 14 August 1994. Thereafter, the SEC Chairman, having
already made initial findings that respondents failed to make timely disclosures of their
negotiations with GHB, ordered a special investigating panel to hear the case. The
investigative proceedings were interrupted only by the writ of preliminary injunction
issued by the Court of Appeals, which became permanent by virtue of the Decision,
dated 20 August 1998, in C.A.-G.R. SP No. 37036. During the pendency of this case, the
Securities Regulations Code repealed the Revised Securities Act. As in Morato v. Court of
Appeals, the repeal cannot deprive SEC of its jurisdiction to continue investigating the

case; or the regional trial court, to hear any case which may later be filed against the
respondents.
V. The instant case has not yet prescribed.
Respondents have taken the position that this case is moot and academic, since any
criminal complaint that may be filed against them resulting from the SECs investigation
of this case has already prescribed.[73] They point out that the prescription period
applicable to offenses punished under special laws, such as violations of the Revised
Securities Act, is twelve years under Section 1 of Act No. 3326, as amended by Act No.
3585 and Act No. 3763, entitled An Act to Establish Periods of Prescription for Violations
Penalized by Special Acts and Municipal Ordinances and to Provide When Prescription
Shall Begin to Act.[74] Since the offense was committed in 1994, they reasoned that
prescription set in as early as 2006 and rendered this case moot. Such position, however,
is incongruent with the factual circumstances of this case, as well as the applicable laws
and jurisprudence.
It is an established doctrine that a preliminary investigation interrupts the
prescription period.[75] A preliminary investigation is essentially a determination
whether an offense has been committed, and whether there is probable cause for the
accused to have committed an offense:
A preliminary investigation is merely inquisitorial, and it is often the only
means of discovering the persons who may be reasonably charged with a crime,
to enable the fiscal to prepare the complaint or information. It is not a trial of
the case on the merits and has no purpose except that of determining whether
a crime has been committed or whether there is probable cause to believe that
the accused is guilty thereof.[76]
Under Section 45 of the Revised Securities Act, which is entitled Investigations,
Injunctions and Prosecution of Offenses, the Securities Exchange Commission (SEC) has the
authority to make such investigations as it deems necessary to determine whether any
person has violated or is about to violate any provision of this Act XXX. After a finding
that a person has violated the Revised Securities Act, the SEC may refer the case to the
DOJ for preliminary investigation and prosecution.
While the SEC investigation serves the same purpose and entails substantially
similar duties as the preliminary investigation conducted by the DOJ, this process
cannot simply be disregarded. In Baviera v. Paglinawan,[77] this Court enunciated that a
criminal complaint is first filed with the SEC, which determines the existence

of probable cause, before a preliminary investigation can be commenced by the DOJ. In

the aforecited case, the complaint filed directly with the DOJ was dismissed on the
ground that it should have been filed first with the SEC. Similarly, the offense was a
violation of the Securities Regulations Code, wherein the procedure for criminal
prosecution was reproduced from Section 45 of the Revised Securities Act. [78] This Court
affirmed the dismissal, which it explained thus:

The Court of Appeals held that under the above provision, a criminal
complaint for violation of any law or rule administered by the SEC must first
be filed with the latter. If the Commission finds that there is probable cause,
then it should refer the case to the DOJ. Since petitioner failed to comply
with the foregoing procedural requirement, the DOJ did not gravely abuse
its discretion in dismissing his complaint in I.S. No. 2004-229.
A criminal charge for violation of the Securities Regulation Code is a
specialized dispute. Hence, it must first be referred to an administrative
agency of special competence, i.e., the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a controversy involving a question
within the jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion requiring the
specialized knowledge and expertise of said administrative tribunal to
determine technical and intricate matters of fact. The Securities Regulation
Code is a special law.
Its enforcement is particularly vested in the
SEC. Hence, all complaints for any violation of the Code and its
implementing rules and regulations should be filed with the SEC. Where
the complaint is criminal in nature, the SEC shall indorse the complaint to
the DOJ for preliminary investigation and prosecution as provided in
Section 53.1 earlier quoted.
We thus agree with the Court of Appeals that petitioner committed a
fatal procedural lapse when he filed his criminal complaint directly with the
DOJ. Verily, no grave abuse of discretion can be ascribed to the DOJ in
dismissing petitioners complaint.
The said case puts in perspective the nature of the investigation undertaken by the
SEC, which is a requisite before a criminal case may be referred to the DOJ. The Court
declared that it is imperative that the criminal prosecution be initiated before the SEC,
the administrative agency with the special competence.

It should be noted that the SEC started investigative proceedings against the
respondents as early as 1994. This investigation effectively interrupted the prescription
period.However, said proceedings were disrupted by a preliminary injunction issued
by the Court of Appeals on 5 May 1995, which effectively enjoined the SEC from filing
any criminal, civil, or administrative case against the respondents herein.[79] Thereafter,
on 20 August 1998, the appellate court issued the assailed Decision in C.A. G.R. SP. No.
37036 ordering that the writ of injunction be made permanent and prohibiting the SEC
from taking cognizance of and initiating any action against herein respondents. The SEC
was bound to comply with the aforementioned writ of preliminary injunction and writ
of injunction issued by the Court of Appeals enjoining it from continuing with the
investigation of respondents for 12 years. Any deviation by the SEC from the injunctive
writs would be sufficient ground for contempt. Moreover, any step the SEC takes in
defiance of such orders will be considered void for having been taken against an order
issued by a court of competent jurisdiction.
An investigation of the case by any other administrative or judicial body would
likewise be impossible pending the injunctive writs issued by the Court of
Appeals. Given the ruling of this Court in Baviera v. Paglinawan,[80] the DOJ itself could
not have taken cognizance of the case and conducted its preliminary investigation
without a prior determination of probable cause by the SEC. Thus, even presuming that
the DOJ was not enjoined by the Court of Appeals from conducting a preliminary
investigation, any preliminary investigation conducted by the DOJ would have been a
futile effort since the SEC had only started with its investigation when respondents
themselves applied for and were granted an injunction by the Court of Appeals.
Moreover, the DOJ could not have conducted a preliminary investigation or filed
a criminal case against the respondents during the time that issues on the effectivity of
Sections 8, 30 and 36 of the Revised Securities Act and the PED Rules of Practice and
Procedure were still pending before the Court of Appeals. After the Court of Appeals
declared the aforementioned statutory and regulatory provisions invalid and, thus, no
civil, criminal or administrative case may be filed against the respondents for violations
thereof, the DOJ would have been at a loss, as there was no statutory provision which
respondents could be accused of violating.
Accordingly, it is only after this Court corrects the erroneous ruling of the Court
of Appeals in its Decision dated 20 August 1998 that either the SEC or DOJ may properly
conduct any kind of investigation against the respondents for violations of Sections 8,
30 and 36 of the Revised Securities Act. Until then, the prescription period is deemed
interrupted.

To reiterate, the SEC must first conduct its investigations and make a finding of
probable cause in accordance with the doctrine pronounced in Baviera v. Paglinawan.[81]In
this case, the DOJ was precluded from initiating a preliminary investigation since the
SEC was halted by the Court of Appeals from continuing with its investigation. Such a
situation leaves the prosecution of the case at a standstill, and neither the SEC nor the
DOJ can conduct any investigation against the respondents, who, in the first place,
sought the injunction to prevent their prosecution. All that the SEC could do in order to
break the impasse was to have the Decision of the Court of Appeals overturned, as it
had done at the earliest opportunity in this case. Therefore, the period during which the
SEC was prevented from continuing with its investigation should not be counted against
it. The law on the prescription period was never intended to put the prosecuting bodies
in an impossible bind in which the prosecution of a case would be placed way beyond
their control; for even if they avail themselves of the proper remedy, they would still be
barred from investigating and prosecuting the case.
Indubitably, the prescription period is interrupted by commencing the
proceedings for the prosecution of the accused. In criminal cases, this is accomplished
by initiating the preliminary investigation. The prosecution of offenses punishable
under the Revised Securities Act and the Securities Regulations Code is initiated by the
filing of a complaint with the SEC or by an investigation conducted by the
SEC motu proprio. Only after a finding of probable cause is made by the SEC can the DOJ
instigate a preliminary investigation. Thus, the investigation that was commenced by
the SEC in 1995, soon after it discovered the questionable acts of the respondents,
effectively interrupted the prescription period. Given the nature and purpose of the
investigation conducted by the SEC, which is equivalent to the preliminary investigation
conducted by the DOJ in criminal cases, such investigation would surely interrupt the
prescription period.
VI. The Court of Appeals was justified in denying SECs
Motion for Leave to Quash SEC Omnibus Orders
dated 23 October 1995.
The SEC avers that the Court of Appeals erred when it denied its Motion for Leave
to Quash SEC Omnibus Orders, dated 23 October 1995, in the light of its admission that
the PED had the sole authority to investigate the present case. On this matter, this Court
cannot agree with the SEC.
In the assailed decision, the Court of Appeals denied the SECs Motion for Leave
to Quash SEC Omnibus Orders, since it found other issues that were more important
than whether or not the PED was the proper body to investigate the matter. Its refusal
was premised on its earlier finding that no criminal, civil, or administrative case may be

filed against the respondents under Sections 8, 30 and 36 of the Revised Securities Act,
due to the absence of any implementing rules and regulations. Moreover, the validity of
the PED Rules on Practice and Procedure was also raised as an issue. The Court of
Appeals, thus, reasoned that if the quashal of the orders was granted, then it would be
deprived of the opportunity to determine the validity of the aforementioned rules and
statutory provisions. In addition, the SEC would merely pursue the same case without
the Court of Appeals having determined whether or not it may do so in accordance with
due process requirements. Absent a determination of whether the SEC may file a case
against the respondents based on the assailed provisions of the Revised Securities Act,
it would have been improper for the Court of Appeals to grant the SECs Motion for
Leave to Quash SEC Omnibus Orders.
IN ALL, this Court rules that no implementing rules were needed to render
effective Sections 8, 30 and 36 of the Revised Securities Act; nor was the PED Rules of
Practice and Procedure invalid, prior to the enactment of the Securities Regulations
Code, for failure to provide parties with the right to cross-examine the witnesses
presented against them. Thus, the respondents may be investigated by the appropriate
authority under the proper rules of procedure of the Securities Regulations Code for
violations of Sections 8, 30, and 36 of the Revised Securities Act.[82]
IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This Court
hereby REVERSES the assailed Decision of the Court of Appeals promulgated on 20
August 1998 in CA-G.R. SP No. 37036 and LIFTS the permanent injunction issued
pursuant thereto. This Court further DECLARES that the investigation of the
respondents for violations of Sections 8, 30 and 36 of the Revised Securities Act may be
undertaken by the proper authorities in accordance with the Securities Regulations
Code. No costs.
SO ORDERED.
PHILIPPINE VETERANS BANK,
Petitioner,

G.R. No. 191995

Present:

- versus JUSTINA CALLANGAN, in her

capacity as Director of the
Corporation Finance Department of

CARPIO, J.,
Chairperson,
LEONARDO-DE CASTRO,*
BRION,
PEREZ, and
SERENO, JJ.

the Securities and Exchange

Commission and/or the SECURITIES
AND EXCHANGE COMMISSION,
Respondent.

Promulgated:
August 3, 2011

x------------------------------------------------------------------------------------x
RESOLUTION
BRION, J.:

We resolve the motion for reconsideration[1] filed by petitioner Philippine Veterans Bank
(the Bank) dated August 5, 2010, addressing our June 16, 2010 Resolution that denied the
Banks petition for review on certiorari.
Factual Antecedents
On March 17, 2004, 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.[2]
The Bank responded by explaining that it should not be considered 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.[3]
In a letter dated April 20, 2004, Director Callangan rejected the Banks explanation
and assessed it a total penalty of One Million Nine Hundred Thirty-Seven Thousand
Two Hundred Sixty-Two and 80/100 Pesos (P1,937,262.80) for failing to comply with
the SRC reportorial requirements from 2001 to 2003. The Bank moved for the
reconsideration of the assessment, but Director Callangan denied the motion in SECCFD Order No. 085, Series of 2005 dated July 26, 2005.[4] When the SEC En Banc also
dismissed the Banks appeal for lack of merit in its Order dated August 31, 2006,
prompting the Bank to file a petition for review with the Court of Appeals (CA).[5]

On March 6, 2008, the CA dismissed the petition and affirmed the assailed SEC
ruling, with the modification that the assessment of the penalty be recomputed from
May 31, 2004.[6]
The CA also denied the Banks motion for reconsideration,[7] opening the way for the
Banks petition for review on certiorari filed with this Court.[8]
On June 16, 2010, the Court denied the Banks petition for failure to show any reversible
error in the assailed CA decision and resolution.[9]
The Motion for Reconsideration
The Bank reiterates that it is not a public company subject to the reportorial
requirements under Section 17.1 of the SRC because its shares can be owned only by a
specific group of people, namely, World War II veterans and their widows, orphans and
compulsory heirs, and is not open to the investing public in general. The Bank also asks
the Court to take into consideration the financial impact to the cause of veteranism;
compliance with the reportorial requirements under the SRC, if the Bank would be
considered a public company, would compel the Bank to spend approximately P40
million just to reproduce and mail the Information Statement to its 400,000 shareholders
nationwide.
The Courts Ruling
We DENY the motion for reconsideration for lack of merit.
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). (emphases supplied)

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.[10] It is thus considered a public
company that must comply with the reportorial requirements set forth in Section 17.1 of
the SRC.

The Bank also argues that even assuming it is considered a public company
pursuant to Section 17 of the SRC, the Court should interpret the pertinent SRC
provisions in such a way that no financial prejudice is done to the thousands of veterans
who are stockholders of the Bank. Given that the legislature intended the SRC to apply
only to publicly traded companies, the Court should exempt the Bank from complying
with the reportorial requirements.
On this point, the Bank is apparently referring to the obligation set forth in
Subsections 17.5 and 17.6 of the SRC, which provide:
Section 17.5. Every issuer which has a class of equity securities
satisfying any of the requirements in Subsection 17.2 shall furnish to each
holder of such equity security an annual report in such form and containing
such information as the Commission shall prescribe.
Section 17.6. Within such period as the Commission may prescribe
preceding the annual meeting of the holders of any equity security of a class
entitled to vote at such meeting, the issuer shall transmit to such holders an
annual report in conformity with Subsection 17.5. (emphases supplied)

In making this argument, the Bank ignores the fact that the first and fundamental
duty of the Court is to apply the law.[11] Construction and interpretation come only after
a demonstration that the application of the law is impossible or inadequate unless
interpretation is resorted to.[12] In this case, we see the law to be very clear and free from
any doubt or ambiguity; thus, no room exists for construction or interpretation.
Additionally, and contrary to the Banks claim, the Banks obligation to provide its
stockholders with copies of its annual report is actually for the benefit of the veteransstockholders, as it gives these stockholders access to information on the Banks financial
status and operations, resulting in greater transparency on the part of the Bank. While
compliance with this requirement will undoubtedly cost the Bank money, the benefit
provided to the shareholders clearly outweighs the expense. For many stockholders,
these annual reports are the only means of keeping in touch with the state of health of
their investments; to them, these are invaluable and continuing links with the Bank that
immeasurably contribute to the transparency in public companies that the law
envisions.

WHEREFORE, premises considered, petitioner Philippine Veterans Banks motion

for reconsideration is hereby DENIED with finality.
SO ORDERED.
G.R. No. 180064

September 16, 2013

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

vs.
CITIBANK, N. A., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 21, 2007
and Resolution3 dated October 16, 2007 of the Court of Appeals (CA) in CA-G.R. SP
No. 79297, which reversed and set aside the Orders dated May 14, 20034 and July 16,
20035 of the Regional Trial Court of Cauayan City, Isabela, Branch 19 (RTC), dismissing
petitioners Jose(Jose) and Benjamin Hanben U. Pua's (petitioners) complaint against
respondent Citibank, N. A. (respondent).
The Facts
On December 2, 2002, petitioners filed before the RTC a Complaint6 for declaration of
nullity of contract and sums of money with damages against respondent,7 docketed as
Civil Case No. 19-1159.8 In their complaint, petitioners alleged that they had been
depositors of Citibank Binondo Branch (Citibank Binondo) since 1996. Sometime in
1999, Guada Ang, Citibank Binondos Branch Manager, invited Jose to a dinner party
at the Manila Hotel where he was introduced to several officers and employees of
Citibank Hongkong Branch (Citibank Hongkong).9 A few months after, Chingyee Yau
(Yau), Vice-President of Citibank Hongkong, came to the Philippines to sell securities
to Jose. They averred that Yau required Jose to open an account with Citibank
Hongkong as it is one of the conditions for the sale of the aforementioned
securities.10 After opening such account, Yau offered and sold to petitioners numerous
securities11 issued by various public limited companies established in Jersey, Channel I
sands. The offer, sale, and signing of the subscription agreements of said securities
were all made and perfected at Citibank Binondo in the presence of its officers and
employees.12 Later on, petitioners discovered that the securities sold to them were not
registered with the Securities and Exchange Commission (SEC)and that the terms and
conditions covering the subscription were not likewise submitted to the SEC for
evaluation, approval, and registration.13 Asserting that respondents actions are in

violation of Republic Act No.8799, entitled the "Securities Regulation Code" (SRC),
they assailed the validity of the subscription agreements and the terms and conditions
thereof for being contrary to law and/or public policy.14
For its part, respondent filed a motion to dismiss15 alleging, inter alia, that petitioners
complaint should be dismissed outright for violation of the doctrine of primary
jurisdiction. It pointed out that the merits of the case would largely depend on the
issue of whether or not there was a violation of the SRC, in particular, whether or not
there was a sale of unregistered securities. In this regard, respondent contended that
the SRC conferred upon the SEC jurisdiction to investigate compliance with its
provisions and thus, petitioners complaint should be first filed with the SEC and not
directly before the RTC.16
Petitioners opposed17 respondents motion to dismiss, maintaining that the RTC has
jurisdiction over their complaint. They asserted that Section 63of the SRC expressly
provides that the RTC has exclusive jurisdiction to hear and decide all suits to recover
damages pursuant to Sections 56 to 61 of the same law.18
The RTC Ruling
In an Order19 dated May 14, 2003, the RTC denied respondents motion to dismiss. It
noted that petitioners complaint is for declaration of nullity of contract and sums of
money with damages and, as such, it has jurisdiction to hear and decide upon the case
even if it involves the alleged sale of securities. It ratiocinated that the legal questions
or issues arising from petitioners causes of action against respondent are more
appropriate for the judiciary than for an administrative agency to resolve.20
Respondent filed an omnibus motion21 praying, among others, for there consideration
of the aforesaid ruling, which petitioners, in turn, opposed.22 In an Order23 dated July
16, 2003, the RTC denied respondents omnibus motion with respect to its prayer for
reconsideration. Dissatisfied, respondent filed a petition for certiorari before the CA.24
The CA Ruling
In a Decision25 dated May 21, 2007, the CA reversed and set aside the RTCs Orders
and dismissed petitioners complaint for violation of the doctrine of primary
jurisdiction. The CA agreed with respondents contention that since the case would
largely depend on the issue of whether or not the latter violated the provisions of the
SRC, the matter is within the special competence or knowledge of the SEC. Citing the
case of Baviera v. Paglinawan26(Baviera), the CA opined that all complaints involving
violations of the SRC should be first filed before the SEC.27

Aggrieved, petitioners moved for reconsideration,28 which was, however, denied by

the CA in a Resolution29dated October 16, 2007.Hence, this petition.
The Issue Before the Court
The essential issue in this case is whether or not petitioners action falls within the
primary jurisdiction of the SEC.
Petitioners reiterate their original position that the SRC itself provides that civil cases
for damages arising from violations of the same law fall within the exclusive
jurisdiction of the regional trial courts.30
On the contrary, respondent maintains that since petitioners complaint would
necessarily touch on the issue of whether or not the former violated certain provisions
of the SRC, then the said complaint should have been first filed with the SEC which
has the technical competence to resolve such dispute.31
The Courts Ruling
The petition is meritorious.
At the outset, the Court observes that respondent erroneously relied on the Baviera
ruling to support its position that all complaints involving purported violations of the
SRC should be first referred to the SEC. A careful reading of the Baviera case would
reveal that the same involves a criminal prosecution of a purported violator of the
SRC, and not a civil suit such as the case at bar. The pertinent portions of the Baviera
ruling thus read:
A criminal charge for violation of the Securities Regulation Code is a specialized
dispute. Hence, it must first be referred to an administrative agency of special
competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts will not
determine a controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of sound
administrative discretion requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate matters of fact. The
Securities Regulation Code is a special law. Its enforcement is particularly vested in the
SEC.
Hence, all complaints for any violation of the Code and its implementing rules and
regulations should be filed with the SEC. Where the complaint is criminal in nature,
the SEC shall indorse the complaint to the DOJ for preliminary investigation and
prosecution as provided in Section 53.1 earlier quoted.

We thus agree with the Court of Appeals that petitioner committed a fatal procedural
lapse when he filed his criminal complaint directly with the DOJ. Verily, no grave
abuse of discretion can be ascribed to the DOJ in dismissing petitioners
complaint.32 (Emphases and underscoring supplied)
Records show that petitioners complaint constitutes a civil suit for declaration of
nullity of contract and sums of money with damages, which stemmed from
respondents alleged sale of unregistered securities, in violation of the various
provisions of the SRC and not a criminal case such as that involved in Baviera.
In this light, when the Court ruled in Baviera that "all complaints for any violation of
the [SRC] x x x should be filed with the SEC,"33 it should be construed as to apply only
to criminal and not to civil suits such as petitioners complaint.
Moreover, it is a fundamental rule in procedural law that jurisdiction is conferred by
law;34 it cannot be inferred but must be explicitly stated therein. Thus, when Congress
confers exclusive jurisdiction to a judicial or quasi-judicial entity over certain matters
by law, this, absent any other indication to the contrary, evinces its intent to exclude
other bodies from exercising the same.
It is apparent that the SRC provisions governing criminal suits are separate and
distinct from those which pertain to civil suits. On the one hand, Section 53 of the SRC
governs criminal suits involving violations of the said law, viz.:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses.
53.1. The Commission may, in its discretion, make such investigations as it deems
necessary to determine whether any person has violated or is about to violate any
provision of this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency, other self-regulatory
organization, and may require or permit any person to file with it a statement in
writing, under oath or otherwise, as the Commission shall determine, as to all facts and
circumstances concerning the matter to be investigated. The Commission may publish
information concerning any such violations, and to investigate any fact, condition,
practice or matter which it may deem necessary or proper to aid in the enforcement of
the provisions of this Code, in the prescribing of rules and regulations thereunder, or
in securing information to serve as a basis for recommending further legislation
concerning the matters to which this Code relates: Provided, however, That any person
requested or subpoenaed to produce documents or testify in any investigation shall
simultaneously be notified in writing of the purpose of such investigation: Provided,
further, That all criminal complaints for violations of this Code, and the implementing
rules and regulations enforced or administered by the Commission shall be referred to

the Department of Justice for preliminary investigation and prosecution before the
proper court:
Provided, furthermore, That in instances where the law allows independent civil or
criminal proceedings of violations arising from the same act, the Commission shall
take appropriate action to implement the same: Provided, finally, That the
investigation, prosecution, and trial of such cases shall be given priority.
On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the SRC pertain to civil
suits involving violations of the same law. Among these, the applicable provisions to
this case are Sections 57.1 and 63.1 of the SRC which provide:
SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and
Reports.
57.1. Any person who:
(a) Offers to sell or sells a security in violation of Chapter III;
or
(b) Offers to sell or sells a security, whether or not exempted by the provisions of
this Code, by the use of any means or instruments of transportation or
communication, by means of a prospectus or other written or oral
communication, which includes an untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading (the purchaser not
knowing of such untruth or omission), and who shall fail in the burden of proof
that he did not know, and in the exercise of reasonable care could not have
known, of such untruth or omission, shall be liable to the person purchasing such
security from him, who may sue to recover the consideration paid for such
security with interest thereon, less the amount of any income received thereon,
upon the tender of such security, or for damages if he no longer owns the
security.
xxxx
SEC. 63. Amount of Damages to be Awarded. 63.1. All suits to recover damages
pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial
Court which shall have exclusive jurisdiction to hear and decide such suits. The Court
is hereby authorized to award damages in an amount not exceeding triple the amount
of the transaction plus actual damages.

x x x x (Emphases and underscoring supplied)

Based on the foregoing, it is clear that cases falling under Section 57of the SRC, which
pertain to civil liabilities arising from violations of the requirements for offers to sell or
the sale of securities, as well as other civil suits under Sections 56, 58, 59, 60, and 61 of
the SRC shall be exclusively brought before the regional trial courts. It is a well-settled
rule in statutory construction that the term "shall" is a word of command, and one
which has always or which must be given a compulsory meaning, and it is generally
imperative or mandatory.35 Likewise, it is equally revelatory that no SRC provision of
similar import is found in its sections governing criminal suits; quite the contrary, the
SRC states that criminal cases arising from violations of its provisions should be first
referred to the SEC.1wphi1
Therefore, based on these considerations, it stands to reason that civil suits falling
under the SRC are under the exclusive original jurisdiction of the regional trial courts
and hence, need not be first filed before the SEC, unlike criminal cases wherein the
latter body exercises primary jurisdiction.
All told, petitioners' filing of a civil suit against respondent for purported violations of
the SRC was properly filed directly before the RTC.
WHEREFORE, the petition is GRANTED. Accordingly, the Court of Appeals' Decision
dated May 21, 2007 and Resolution dated October 16,2007 in CA-G.R. SP No. 79297 are
hereby REVERSED and SET ASIDE. Let Civil Case No. 19-1159 be REINSTATED and
REMANDED to the Regional Trial Court of Cauayan City, Isabela, Branch 19 for
further proceedings.
SO ORDERED.
G.R. No. 195542, March 19, 2014
SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. OUDINE
SANTOS, Respondent.
DECISION
PEREZ, J.:
Before us is another cautionary tale of an investment arrangement which, at the outset,
appeared good, unraveling unhappily as a deal toogoodtobetrue.
This petition for review on certiorari under Rule 45 of the Rules of Court assails the
Decision1 of the Court of Appeals in CAG.R. SP No. 112781 affirming the

Resolutions2 of the Secretary of Justice in I.S. No. 20071054 which, among others,
dismissed the criminal complaint for violation of Section 28 of Republic Act No. 8799,
the Securities Regulation Code, filed by petitioner Securities and Exchange
Commission (SEC) against respondent Oudine Santos (Santos).
Sometime in 2007, yet another investment scam was exposed with the disappearance
of its primary perpetrator, Michael H.K. Liew (Liew), a selfstyled financial guru and
Chairman of the Board of Directors of Performance Investment Products Corporation
(PIPCBVI), a foreign corporation registered in the British Virgin Islands.
To do business in the Philippines, PIPCBVI incorporated herein as Philippine
International Planning Center Corporation (PIPC Corporation).
Because the head of PIPC Corporation had gone missing and with it the monies and
investment of a significant number of investors, the SEC was flooded with complaints
from thirtyone (31) individuals against PIPC Corporation, its directors, officers,
employees, agents and brokers for alleged violation of certain provisions of the
Securities Regulation Code, including Section 28 thereof. Santos was charged in the
complaints in her capacity as investment consultant of PIPC Corporation, who
supposedly induced private complainants Luisa Mercedes P. Lorenzo (Lorenzo) and
Ricky Albino P. Sy (Sy), to invest their monies in PIPC Corporation.
The common recital in the 31 complaints is that:chanRoblesvirtualLawlibrary
x x x [D]ue to the inducements and solicitations of the PIPC corporations directors,
officers and employees/agents/brokers, the former were enticed to invest their hard
earned money, the minimum amount of which must be US$40,000.00, with PIPCBVI,
with a promise of higher income potential of an interest of 12 to 18 percentum (%) per
annum at relatively lowrisk investment program. The private complainants also
claimed that they were made to believe that PIPC Corporation refers to Performance
Investment Product Corporation, the Philippine office or branch of PIPCBVI, which is
an entity engaged in foreign currency trading, and not Philippine International
Planning Center Corporation.3
Soon thereafter, the SEC, through its Compliance and Endorsement Division, filed a
complaintaffidavit for violation of Sections 8,4 265 and 286 of the Securities Regulation
Code before the Department of Justice which was docketed as I.S. No. 2007
1054. Among the respondents in the complaintaffidavit were the principal officers of
PIPC: Liew, Chairman and President; Cristina GonzalezTuason, Director and General
Manager; Ma. Cristina BautistaJurado, Director; and herein respondent Santos.

Private complainants, Lorenzo and Sy, in their affidavits annexed to SECs complaint
affidavit, respectively narrated Santos participation in how they came to invest their
monies in PIPC Corporation:chanRoblesvirtualLawlibrary
1. Lorenzos affidavit
xxxx
2. I heard about PIPC Corporation from my friend Derrick Santos during an informal
gathering sometime in March 2006. He said that the investments in PIPC Corporation
generated a return of 1820% p.a. every two (2) months. He then gave me the number
of his sister, Oudine Santos who worked for PIPC Philippines to discuss the
investment further.
3. I then met with Oudine Santos sometime during the first week of April 2006 at PIPC
Philippines lounge x x x. Oudine Santos conducted for my personal benefit a
presentation of the characteristics of their investment product called Performance
Managed Portfolio (PMP). The main points of her presentation are indicated in a
summary she gave me, x x x:chanRoblesvirtualLawlibrary
xxxx
4. I asked Oudine Santos who were the traders, she said their names were
confidential.
5. Oudine Santos also emphasized in that same meeting that I should keep this
transaction to myself because they were not allowed to conduct foreign currency
trading. However, she assured me that I should not worry because they have a lot of
big people backing them up. She also mentioned that they were applying for a seat
in the stock exchange.
6. I ultimately agreed to put in FORTY THOUSAND US DOLLARS (US$40,000.00) in
their investment product.
7. Oudine Santos then gave me instructions on how to place my money in PMP and
made me sign a Partnership Agreement. x x x.
xxxx
8. Soon thereafter, pursuant to the instructions Oudine Santos gave me, I remitted
US$40,000.00 to ABNAMRO Hong Kong.

9. Afterwards, I received a letter dated 17 April 2006, signed by Michael H.K. Liew,
welcoming my investment.
xxxx
10. Sometime on May 2006, I added another US$ 60,000.00 to my then subsisting
account #181372, thus totaling US$100,000.00. This amount, pursuant to the
instructions of Oudine Santos, was remitted to Standard Chartered Bank.
xxxx
14. Then sometime on May 2007, I planned to pull out my remaining US$100,000.00
investment in PIPC Philippines. On 22 May 2007, I met with Oudine Santos at the 15th
Floor of Citibank Tower in Makati City. I told her I wanted to terminate all my
investments.
15. Oudine Santos instead said that PIPC Philippines has a new product I might be
interested in. x x x She explained that this product had the following
characteristics:chanRoblesvirtualLawlibrary
xxxx
16. Oudine Santos reiterated these claims in an email she sent me on 22 May 2007. x x
x.
17. Enticed by these assurances and promises of large earnings, I put in FOUR
HUNDRED THOUSAND US DOLLARS (US$400,000.00) in PMP (RZB), which became
account # R149432.
18. Pursuant to the instructions Oudine Santos gave me, I remitted the amount of US$
400,000.00 to RZB Austria, Singapore Branch.
xxxx
22. I tried calling Oudine Santos and was finally able to reach her at around 7 in the
morning. She confirmed what Leah Caringal told me. I told her then that I want full
recovery of my investment in accordance with their 100% principal guarantee. To this
day[,] I have not received my principal investment.7
5. Sys affidavit

2. I have been a depositor of the Bank of the Philippine Islands (BPI) Pasong Tamo
branch for the past 15 years. Sometime in the last quarter of 2006, I was at BPI Pasong
Tamo to accomplish certain routine transactions. Being a client of long standing, the
bank manager[,] as a matter of courtesy, allowed me to wait in her cubicle. It was there
that the bank manager introduced me to another bank client, Ms. Oudine Santos. After
exchanging pleasantries, and in the course of a brief conversation, Ms. Santos told me
that she is a resident of Damarias Village and was working as an investment
consultant for a certain company, Performance Investment Products Corporation
[PIPC]. She told me that she wanted to invite me to her office at the Citibank Tower in
Makati so that she could explain the investment products that they are offering. I gave
her my contact number and finished my transaction with the bank for that day;
3. Ms. Santos texted me to confirm our meeting. A few days later, I met her at the
business lounge of [PIPC] located at the 15th Floor of Citibank Tower, Makati. During
the meeting, Ms. Santos enticed me to invest in their Performance Managed Portfolio
which she explained was a risk controlled investment program designed for
individuals like me who are looking for higher investment returns than bank deposits
while still having the advantage of security and liquidity. She told me that they were
engaged in foreign currency trading abroad and that they only employ professional
and experienced foreign exchange traders who specialize in trading the Japanese Yen,
Euro, British Pound, Swiss Francs and Australian Dollar. I then told her that I did not
have any experience in foreign currency trading and was quite conservative in
handling my money;
4. Ms. Santos quickly allayed my fears by emphasizing that the capital for any
investment with [PIPC] is secure. She then trumpeted [PIPCs] track record in the
Philippines, having successfully solicited investments from many wealthy and well
known individuals since 2001;
5. Ms. Santos convinced me to invest in Performance Management Portfolio I x x x
[which] features full protection for the principal investment and a 60%40% sharing of
the profit between the client and [PIPC] respectively;
6. In November of 2006, I decided to invest USD 40,000 specifically in Performance
Management Portfolio I x x x. After signing the Partnership Agreement, x x x, I was
instructed by Ms. Santos to deposit the amount by telegraphic transfer to [PIPCs]
account in ABN AMRO Bank Hong Kong. I did as instructed;
xxxx

8. Sometime January to March of 2007, [Santos] was convincing me to make an

additional investment under a second product, Performance Management Portfolio II
[PMP II] which provides a more limited guarantee for the principal investment of USD
100,000 and a 80%20% sharing of the profit between the client and [PIPC]
respectively. In both schemes, the clients participation will be limited to choosing two
currencies which will in turn be traded by professional traders abroad. Profit earned
from the transaction will then be remitted to the clients account every 8 weeks;
xxxx
10. After I made my USD 40,000 PMP I investment, Ms. Santos invited me to meet Mr.
Michael Liew in the business lounge some time during the first quarter of this year. My
impression was that he was quite unassuming considering that he was the head of an
international investment firm. x x x.8
On the whole, Lorenzo and Sy charge Santos in her capacity as investment consultant
of PIPC Corporation who actively engaged in the solicitation and recruitment of
investors. Private complainants maintain that Santos, apart from being PIPC
Corporations employee, acted as PIPC Corporations agent and made representations
regarding its investment products and that of the supposed global corporation PIPC
BVI. Facilitating Lorenzos and Sys investment with PIPC Corporation, Santos
represented to the two that investing with PIPC Corporation, an affiliate of PIPCBVI,
would be safe and fullproof.
In SECs complaintaffidavit, it charged the following:chanRoblesvirtualLawlibrary
xxxx
12. This case stems from the act of fraud and chicanery masterfully orchestrated and
executed by the officers and agents of PIPC Corp. against their unsuspecting
investors.The deception is founded on the basic fact that neither PIPC Corp. nor its officers,
employees and agents are registered brokers/dealers, making their numerous transactions of
buying and selling securities to the public a blatant violation of the provisions of the SRC,
specifically Sections 8 and 28 thereof. Their illegal offer/sale of securities in the form of
the Performance Management Partnership Agreement to the public was perpetrated
for about nine (9) years and would have continued were it not for the alleged, and
most probably, contrived and deliberate withdrawal of the entire funds of the
corporation by Michael H.K. Liew. The [scam] was masked by a supposed offshore
foreign currency trading scheme promising that the principal or capital infused will be
guaranteed or fully protected. Coupled with this [full] guarantee for the principal is
the prospect of profits at an annual rate of 12 to 18%. [One of] the other enticements

provided by the subject company were free use of its business either for personal or
business purposes, free subscription of imported magazines, [trips] abroad, and
insurance coverage, just to name a few. Fully convinced and enamored [by the]
thought of earning higher rates of interest along with the promise of a guaranteed
[capital] the investors placed and entrusted their money to PIPC Corp., only to find out
later [that they] had been deceived and taken for a ride.
xxxx
17. Sometime in 2006, an investigation was undertaken by the [Compliance and
Enforcement Division of the SEC] on the [account] of PIPC Corp. Per its Articles of
Incorporation, PIPC Corp. was authorized to engage [in the] dissemination of
information on the current flow of foreign exchange (forex) as x x x precious metals
such as gold, silver, and oil, and items traded in stock and securities/commodities
exchanges around the world. To be more specific, PIPC Corp. [was] authorized to act
only as a research arm of their foreign clients.
xxxx
22. x x x.
Name of
Investors

Broker Bank/Location Date

/
to which
Agent
funds were
transferred

xxxx
23. Luisa Oudine RZB Austria,
Mercedes Santos
Singapore
P. Lorenzo
Branch

June
2007

Account
Number

Amount of Bank/Location
Investment
xxx

R149432

US$500,000 Not provided

xxxx
32. Ricky Oudine ABNAMRO
9
0800287769 US$40,000
Albino P. Santos
Bank
October
Sy
Hongkong
2006

BPI Pasong
Tamo B9

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

a.
b.
c.
d.
e.

8 calendar week maturity period[,]

principal investment (minimum of USD 40,000) is protected[,]
investments maintained in strict confidentiality[,]
features: security, liquidity, short term commitment,
taxexemption status for offshore investments.

24. The investment flow is described as follows:

a. Investors funds will be placed into a fixed deposit account with a
PIPC designated bank and shall not be exposed for trading purposes.
The PIPC designated bank shall then extend a margin line request for
trading based on the deposit;
b. PIPC shall open a separate account which will contain an amount of
not more than 30% of its own funds to serve as a profit and loss
account;
c. Trading will commence with PIPC designated bank closely
monitoring the performance to ensure that if losses are incurred
trading will cease immediately should the 20% stop limit be hit;
d. Profits will be credited into the Profit and Loss account with PIPC
designated bank account. Losses will be debited from the same
account up to the controlled 20% limit;
e. Notice of withdrawals must be submitted two weeks prior to
schedule of maturity otherwise investment is automatically rolled
over to the next batch;
f. At maturity, profits accumulated in the settlement account shall be
distributed and deposited into each investors dollar bank account
within fourteen (14) banking days;
g. The funds of various investors are pooled, batched and deposited
with PIPC designated bank account acting as custodian bank, to form
a massive asset base. This account is separate and distinct from the
Profit and Loss Account. The line from this pooled fund is then
entrusted to full time professional and experienced foreign traders
who each specialize in the following currencies: Japanes Yen, Euro,
British Pound, Swiss Francs and Australian Dollar. Profits generated
from trading these major currencies is credited into the Profit and
Loss Account, which at the end of the eight calendar week lockin
period, will be distributed among the investors. Investors are

informed of their account status thru trading statements issued by

PIPC every time there is a trade made in their respective accounts.
xxxx
25. Furthermore, it was relayed by the officers and agents to complainantsinvestors
that PIPC Corp. is the Philippine office of the Performance Group of Companies
affiliates situated in different parts of the world, particularly China, Indonesia, Hong
Kong, Japan, Korea, Singapore, and the British Virgin Islands (BVI), even reaching
Switzerland. With such basic depiction of the legitimacy and stability of PIPC Corp.,
complainantsinvestors deduced that it was clothed with the authority to solicit, offer
[and] sell securities. As regards the officers and agents of [PIPC Corp.], they secured
proper individual licenses with the SEC as brokers/dealers of securities to enable to
solicit, offer and/or sell the same.
26. Official SEC documents would show that while PIPC Corp. is indeed registered
with the SEC, it having engaged in the solicitation and sale of securities was contrary
to the purpose for which it was established which is only to act as a financial research.
Corollarily, PIPC Corp.s officers, agents, and brokers were not licensed to solicit, offer
and sell securities to the public, a glaring violation of Sections 8 and 28 of the SRC.10
In refutation, Santos denied intentionally defrauding complainants Lorenzo and
Sy:chanRoblesvirtualLawlibrary
12. I cannot understand how I can be charged of forming, or even of being a part of, a
syndicate formed with the intention of carrying an unlawful or illegal act, transaction,
enterprise or scheme. If this charge has reference to PIPC Corp. then I certainly cannot
be held liable therefore. As I mentioned above, I joined PIPC Corp. only inApril
2005 and, by that time, the company was already in existence for over four years. I had
no participation whatsoever in its creation or formation, as I was not even connected
with PIPC Corp. at the time of its incorporation. In fact, I have never been a
stockholder, director, general manager or officer of PIPC Corp. Further, PIPC Corp.
was duly registered with the Securities and Exchange Commission and was organized
for a legitimate purpose, and certainly not for the purpose of perpetrating a fraud
against the public.
13. That I was an employee and, later on, an independent information provider of
PIPC Corp. is of little consequence. My duties as such were limited to providing
information about the corporate clients of PIPC Corp. that had been expressly
requested by interested individuals. I performed my assigned job without any criminal
intent or malice. In this regard, I have been advised that offenses penalized under the

RPC are intentional felonies for which criminal liability attaches only when it is shown
that the malefactors acted with criminal intent or malice. There can be no crime when
the criminal mind is wanting. In this case, I performed my task of providing requested
information about the clients of PIPC Corp. without any intent to violate the law. Thus,
there can be no criminal liability.
[14]. I have also been advised that under the law, the directors and officers of a
corporation who act for and in behalf of the corporation, who keep within the lawful
scope of their authority, and act in good faith, do not become liable, whether civilly or
otherwise, for the consequences of their acts, as these acts are properly attributed to the
corporation alone. The same principle should apply to individual, like myself, who
was only acting within the bounds of her assigned tasks and had absolutely no
decisionmaking power in the management and supervision of the company.
[15]. Neither can I be liable of forming a syndicate with respect to PIPCBVI. To
reiterate, at no time was I ever a stockholder, director, employee, officer or agent of
PIPCBVI. Said company is simply one of many companies serviced by PIPC Corp. I
had no participation whatsoever in its creation and/or in the direction of its dayto
day affairs.
xxxx
19. Further, I have been advised by counsel that conspiracy must be established by
positive and conclusive evidence. It cannot be based on mere conjecture but must be
established as a fact. In this case, no proof of conspiracy was presented against me. In
fact, it appears that I have been dragged in to this allegation based on the hearsay
statement of Felicia Tirona that I was one of the inhouse account executives or
work force of PIPCBVI and PIPC Corp. There was no allegation whatsoever of any
illegal act done by me to warrant the institution of criminal charges against me. If at
all, only Michael Liew should be held criminally liable, as he was clearly the one who
absconded with the money of the investors of PIPCBVI. Mr. Liew has since
disappeared and efforts to locate him have apparently proved to be futile to date.
xxxx
23. In the first place, I did not receive any money or property from any of the
complainants. As clearly shown by the documents submitted to this Honorable Office,
particularly, the Portfolio Management Partnership Agreement, Security Agreement,
Declaration of Trust, bank statements and acknowledgement receipts, complainants
delivered their money to PIPCBVI, not to PIPC Corp. Complainants deposited their
investment in PIPCBVIs bank account, and PIPCBVI would subsequently issue an

acknowledgement receipt. No part of the said money was ever delivered to PIPC Corp.
or to me.
24. Indeed, complainants own evidence show that the Portfolio Management
Partnership Agreement, Security Agreement and Declaration of Trust were executed
between PIPCBVI and the individual complainants. Further, paragraph 2 of the
Declaration of Trust explicitly stated that PIPCBVI hold the said amount of money
UPON TRUST for the Beneficiary Owner. The complainants cannot, therefore, hold
PIPC Corp., or any of its officers or employees, with misappropriating their money or
property when they were fully aware that they delivered their money to, and
transacted solely with, PIPCBVI, and not PIPC Corp.
25. It also bears stressing that of the twentyone (21) complainants in this case, only
complainant Ricky Albino Sy alleged that he had actually dealt with me. Complainant
Sy himself never alleged that he delivered or entrusted any money or property to
me. On the contrary, complainant Sy admitted that he deposited his investment of
U.S.$40,000.00 by bank transfer to PIPCBVIs account in the ABN Amro Bank. That
the money was delivered to PIPCBVI, and not to me, is shown by the fact that the
receipt was issued by PIPCBVI. I never signed or issued any acknowledgement
receipt, as I never received any such money. Neither did I ever gain physical or
juridical possession of the said money.11 (Emphasis and underscoring supplied).
Santos defense consisted in: (1) denying participation in the conspiracy and fraud
perpetrated against the investorcomplainants of PIPC Corporation, specifically Sy
and Lorenzo; (2) claiming that she was initially and merely an employee of, and
subsequently an independent information provider for, PIPC Corporation; (3) PIPC
Corporation being a separate entity from PIPCBVI of which Santos has never been a
part of in any capacity; (4) her not having received any money from Sy and Lorenzo,
the two having, in actuality, directly invested their money in PIPCBVI; (5) Santos
having dealt only with Sy and the latter, in fact, deposited money directly into PIPC
BVIs account; and (6) on the whole, PIPCBVI as the other party in the investment
contracts signed by Sy and Lorenzo, thus the only corporation liable to Sy and Lorenzo
and the other complainants.
On 18 April 2008, the DOJ, in I.S. No. 20071054, issued a Resolution signed by a panel
of three (3) prosecutors, with recommendation for approval of the Assistant Chief State
Prosecutor, and ultimately approved by Chief State Prosecutor Jovencito R. Zuo,
indicting: (a) Liew and GonzalezTuason for violation of Sections 8 and 26 of the
Securities Regulation Code; and (b) herein respondent Santos, along with Cristina
GonzalezTuason and 12 others for violation of Section 28 of the Securities Regulation
Code. The same Resolution likewise dismissed the complaint against 8 of the

respondents therein for insufficiency of evidence. In the 18 April 2008 Resolution, the
DOJ discussed at length the liability of PIPC Corporation and its officers, employees,
agents and all those acting on PIPC Corporations behalf, to
wit:chanRoblesvirtualLawlibrary
Firstly, complainant SEC filed the instant case for alleged violation by respondents
[therein, including herein respondent, Santos,] of Section 8 of the SRC.
Sec. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or
offered for sale or distribution within the Philippines, without a registration statement
duly filed with and approved by the Commission. Prior to such sale, information on
the securities, in such form and with such substance as the Commission may prescribe,
shall be made available to each prospective purchaser.
Based on the above provision of the law, complainant SEC is now accusing all
respondents [therein, including Santos,] for violating the same when they allegedly
sold and/or offered for sale unregistered securities.
However, Section 8.5 thereof provides that The Commission may audit the financial
statements, assets and other information of a firm applying for registration of its
securities whenever it deems the same necessary to insure full disclosure or to protect the
interest of the investors and the public in general.
The abovequoted provision is loud and clear and needs no further interpretation. It is
the firm through its authorized officers that is required to register its securities with
the SEC and not the individual persons allegedly selling and/or offering for sale said
unregistered securities. To do otherwise would open the floodgates to numerous
complaints against innocent individuals who have no hand in the control, decision
making and operations of said investment company.
Clearly, it is only the PIPC Corp. and respondents Michael H. Liew and Cristina
GonzalezTuason being the President and the General Manager respectively, of PIPC
Corp. who violated Section 8 of the SRC.
xxxx
Respondents Liew and Tuason are directors and officers of PIPC Corp. who exercise
power of control and supervision in the management of said corporation. Surely they
cannot claim having no knowledge of the operations of PIPC Corp. visvis its scope
of authority since they are the ones who actually created and manage the same. They
are well aware that PIPC Corp. is a mere financial research facility and has nothing to

do with selling or offering for sale securities to the general public. But despite
knowledge, they continue to recruit and deceive the general public by making it
appear that PIPC Corp. is a legitimate investment company.
Moreover, they cannot evade liability by hiding behind the veil of a corporate
fiction. x x x.
xxxx
In the case at bar, the investors were made to believe that PIPC Corp. and PIPCBVI is
one and the same corporation. There is nothing on record that would show that private
complainants were informed that PIPC Corp. and PIPCBVI are two entities distinct
and separate from one another. In fact, when they invested their money, they dealt
with PIPC Corp. and the people acting on its behalf but when they signed documents
they were provided with ones bearing the name of PIPCBVI. Clearly, this obvious
and intentional confusion of names of the two entities is designed to defraud and later
to avoid liabilities from their victims. Therefore, the defense of a corporate fiction is
unavailing in the instant case.
xxxx
Buying and selling of securities is an indispensable element that makes one a broker or
dealer. So if one is not engaged in the business of buying and selling of securities,
naturally he or she cannot be considered as a broker or dealer. However, a person may
be considered as an agent of another, juridical or natural person, if it can be inferred
that he or she acts as an agent of his or her principal as abovedefined. One can also be
an investor and agent at the same time.
An examination of the records and the evidence submitted by the parties, we have
observed that all respondents are investors of PIPCBVI, same with the private
complainants, they also lost thousands of dollars. We also noted the fact that most of
the private complainants and alleged brokers or agents are long time friends if not
blood related individuals. Notably also is the fact that most of them are highly
educated businessmen/businesswomen who are financially welloff. Hence, they are
regarded to be wiser and more prudent and expected to exercise due diligence of a
good father of a family in managing their finances as compared to those who are less
fortunate in life.
However, we still need to delve deeper into the facts and the [evidence] on record to
determine the degree of respondents participations and if on the basis of their actions,
it can be inferred that they acted as employeesagents or investoragents of PIPC

Corp. or PIPCBVI then are liable under Section 28 of the SRC otherwise, they cannot
be [blamed] for being mere employees or investors thereof.
xxxx
Oudine Santos. Investment Consultant of PIPC Corp. who allegedly invited,
convinced and assured private complainants Luisa Mercedes P. Lorenzo and Ricky
Albino P. Sy to invest in PIPC Corp. To prove their allegations, respondents attached
email exchanges with respondent Santos regarding the details in investing with PIPC
BVI. Respondent Santos failed to submit counteraffidavit despite subpoena.
xxxx
After painstakingly going over the record and the supporting documents attached
thereto and after carefully evaluating the respective claims and defenses raised by all
the parties, the undersigned panel of prosecutors has a reason to believe that Section 28
of the SRC has been violated and that the following respondents are probably guilty
thereof and should, therefore, be held for trial:
1. Cristina GonzalezTuason
2. x x x.
xxxx
13. Oudine Santos
The abovenamed respondents, aside from being officers, employees or investors,
clearly acted as agents of PIPC Corp. who made representations regarding PIPC Corp.
and PIPCBVI investment products. They assured their clients that investing with
PIPCBVI will be 100% guaranteed. In addition, they also facilitated their clients
investments with PIPCBVI and some, if not all, even received money investors as
evidenced by the acknowledgement receipts they signed and on behalf of PIPCBVI.
The documentary evidence submitted by witnesses and their categorical and positive
assertion of facts which, taken together corroborate one another, prevails over the
defense of denial raised by the abovenamed respondents which are mostly self
serving in nature.
A formal or written contract of agency between two or more persons is not necessary
for one to become an agent of the other for as long as it can be inferred from their
actions that there exists a principalagent relationship between them on the one hand
and the PIPC Corp. or PIPCBVI on the other hand, then, it is implied that a contract of
agency is created.

As to their contention that they are not officers or employees of PIPC Corp., the
Supreme Court ruled that one may be an agent of a domestic corporation although he
or she is not an officer thereto. x x x. The basis of agency is representation; the
question of whether an agency has been created is ordinarily a question which may be
established in the same way as any other fact, either by direct or substantial evidence;
though that fact or extent of authority of the agents may not, as a general rule, be
established from the declarations of the agents alone, if one professes to act as agent for
another, he or she is estopped to deny her agency both as against the asserted principal
and third persons interested in the transaction in which he or she is engaged.
Further, they cannot raise the defense of good faith for the simple reason that the SRC
is a special law where criminal intent is not an essential element. Mere violation of
which is punishable except in some provisions thereof where fraud is a condition sine
qua non such as Section 26 of the said law.
xxxx
WHEREFORE, the foregoing considered, it is respectfully recommended that this
resolution be APPROVED and that:
1. An information for violation of Section 8 of the SRC be filed against
respondent PIPC Corp., MICHAEL H. LIEW and CRISTINA GONZALEZ
TUASON;
2. An information for violation of Section 26 thereof be also filed against
respondents MICHAEL H. LIEW and CRISTINA GONZALEZTUASON;
and
3. An information for violation of Section 28 thereof be filed against
respondents CRISTINA GONZALEZTUASON, MA. CRISTINA
BAUTISTAJURADO, BARBARA GARCIA, ANTHONY KIERULF,
EUGENE GO, MICHAEL MELCHOR NUBLA, MA. PAMELA MORRIS,
LUIS JIMBO ARAGON, RENATO SARMIENTO, JR., VICTOR JOSE
VERGEL DE DIOS, NICOLINE AMORANTO MENDOZA, JOSE JAY
TENGCO III, [respondent] OUDINE SANTOS AND HERLEY JESUITAS;
and
4. The complaint against MAYENNE CARMONA, YEYE SAN PEDRO
CHOA, MIA LEGARDA, NICOLE ORTEGA, DAVID CHUAUNSU,
STANLEY CHUAUNSU, DEBORAH V. YABUT, CHRISTINE YU and
JONATHAN OCAMPO be dismissed for insufficiency of
evidence.12 (Emphasis supplied)

In sum, the DOJ panel based its finding of probable cause on the collective acts of the
majority of the respondents therein, including herein respondent Santos, which
consisted in their acting as employeesagent and/or investoragents of PIPC
Corporation and/or PIPCBVI. Specifically alluding to Santos as Investment
Consultant of PIPC Corporation, the DOJ found probable cause to indict her for
violation of Section 28 of the Securities Regulation Code for engaging in the business of
selling or offering for sale securities, on behalf of PIPC Corporation and/or PIPCBVI
(which were found to be an issuer13 of securities without the necessary registration
from the SEC) without Santos being registered as a broker, dealer, salesman or an
associated person.
On separate motions for reconsideration of the respondents therein, including herein
respondent Santos, the DOJ panel issued a Resolution dated 2 September 2008
modifying its previous ruling and excluding respondent Victor Jose Vergel de Dios
from prosecution for violation of Section 28 of the Securities Regulation Code,
thus:chanRoblesvirtualLawlibrary
After an assiduous reevaluation of the facts and the evidence submitted by the parties
in support of their respective positions, the undersigned panel finds x x x [that the] rest
of the respondents mainly rehashed their earlier arguments except for a few
respondents who, in one way or another, failed to participate in the preliminary
investigation; hence raising their respective defenses for the first time in their motions
for reconsideration.
xxxx
With respect to respondents Luis Jimbo Aragon and Oudine Santos who also
claimed to have not received subpoenas, this panel, after thoroughly evaluating their
respective defenses, finds them to be similarly situated with the other respondents
who acted as agents for and in behalf of PIPC Corp. and/or PIPCBVI; hence, their
inclusion in the information is affirmed.
xxxx
x x x As to the issue on whether or not PMPA is a security contract, we rule in the
affirmative, as supported by the herein below provisions of the SRC,
particularly:chanRoblesvirtualLawlibrary
Sec. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or
offered for sale or distribution within the Philippines, without registration statement

duly filed with and approved by the Commission. Prior to such sale, information on
the securities, in such form and with such substance as the Commission may prescribe,
shall be made available to each prospective purchaser.
Securities have been defined as shares, participation or interest in a corporation or in a
commercial enterprise or profit making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in character. It includes among
others, investment contracts, certificates of interest or participation in a profit sharing
agreement, certificates of deposit for a future subscription.
Under the SRCs Amended Implementing Rules and Regulations, specifically Rule 3,
par. 1 subpar. G, an investment contract has been defined as a contract, transaction or
scheme (collectively contract), whereby a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts of others. It is likewise
provided in the said provision that an investment contract is presumed to exist
whenever a person seeks to use the money or property of others on the promise of
profits and a common enterprise is deemed created when two (2) or more investors
pool their resources creating a common enterprise, even if the promoter receives
nothing more than a brokers commission. Undoubtedly, the PMPA is an investment
contract falling within the purview of the term securities as defined by law.
xxxx
It bears to emphasize that the purpose of a preliminary investigation and/or
confrontation between the partylitigants is for them to lay down all their cards on the
table to properly inform and apprise the other of the charges against him/her, to avoid
suprises and to afford the adverse party all the opportunity to defend himself/herself
based on the evidence submitted against him/her. Thus, failure on the part of the
defaulting party to submit evidence that was then available to him is deemed a waiver
on his part to submit it in the same proceedings against the same party for the same
issue.
WHEREFORE, the foregoing premises considered, the undersigned panel of
prosecutors respectfully recommends that the assailed resolution be modified by
dismissing the complaint against Victor Jose Vergel De Dios and that the Information
filed with the appropriate court for violation of Section 28 of the SRC be amended
accordingly.14
Respondent Santos filed a petition for review before the Office of the Secretary of the
DOJ assailing the Resolutions dated 18 April 2008 and 2 September 2008 and claiming
that she was a mere clerical employee/information provider who never solicited nor

recruited investors, in particular complainants Sy and Lorenzo, for PIPC Corporation

or PIPCBVI. Santos also claimed dearth of evidence indicating she was a
salesman/agent or an associated person of a broker or dealer, as defined under the
Securities Regulation Code.
The SEC filed its Comment opposing Santos petition for review. Thereafter, the Office
of the Secretary of the DOJ, through its then Undersecretary Ricardo R. Blancaflor,
issued a Resolution dated 1 October 2009 which, as previously adverted to, excluded
respondent Santos from prosecution for violation of Section 28 of the Securities
Regulation Code. For a complete picture, we quote in full the disquisition of the
Secretary of the DOJ:chanRoblesvirtualLawlibrary
[Santos] argues that while Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy
mentioned two (2) instances wherein she allegedly enticed them to invest, their own
pieces of evidence, particularly the Annex E series (several Details of Profit
distribution & Renewal of Partnership Agreement bearing different dates addressed
to Ricky Albino P. Sy with stamped signature for PIPCBVI), indicate that they
invested and reinvested their money with PIPCBVI repeatedly and even earned
profits from these transactions through direct dealing with PIPCBVI and without her
participation. In addition, she maintains that Luisa Mercedes P. Lorenzo and Ricky
Albino P. Sy had several opportunities to divest or withdraw their respective
investments but opted not to do so at their own volitions.
xxxx
The sole issue in this case is whether or not respondent Santos acted as agent of PIPC
Corp. or had enticed Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy to buy PIPC
Corp. or PIPCBVIs investment products.
We resolve in the negative.
Section 28 of the Securities Regulation Code (SRC) reads:
SEC. [28]. Registration of Brokers, Dealers, Salesmen and Associated Persons. 28.1.
No person shall engage in the business of buying or selling securities in the Philippines
as a broker or dealer unless registered as such with the Commission.
28.2. No registered broker or dealer shall employ any salesman or any associated
person, and no issuer shall employ any salesman, who is not registered as such with
the Commission.

Jurisprudence defines an agent as a business representative, whose function is to

bring about, modify, affect, accept performance of, or terminate contractual obligations
between principal and third persons. x x x On the other hand, the Implementing
Rules of the SRC simply provides that an agent or a salesman is a person employed
as such or as an agent, by the dealer, issuer or broker to buy and sell securities x x x.
A judicious examination of the records indicates the lack of evidence that respondent
Santos violated Section 28 of the SRC, or that she had acted as an agent for PIPC Corp.
or enticed Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy to buy PIPC Corp. or
PIPCBVIs investment products.
The annex D (Welcome to PMP Letter dated [17 April 2006] addressed to Luisa
Mercedes P. Lorenzo signed by Michael Liew as president of PIPCBVI), Annex E
(Fixed Deposit Advice Letter dated [26 June 2006] addressed to Luisa Mercedes P.
Lorenzo and stamped signature for PIPCBVI), and Annex H (Welcome to PMP
Letter dated [30 May 2007] addressed to Luisa Mercedes P. Lorenzo signed by Michael
Liew as President of PIPCBVI) of the complaintaffidavit dated [11 September 2007]
of Luisa Mercedes P. Lorenzo show that she directly dealt with PIPCBVI in placing
her investment. The same is true with regard to Annex A series (Portfolio
Management Partnership Agreement between Ricky Albino P. Sy and PIPCBVI,
Security Agreement between Ricky Albino P. Sy and PIPCBVI, and Declaration of
Trust between Ricky Albino P. Sy and PIPCBVI), Annex B (Official Receipt dated 09
November 2006 issued by PIPCBVI), Annex C (Welcome to PMP Letter dated [10
November 2006] addressed to Ricky Albino P. Sy and signed by Michael [Liew] as
President of PIPCBVI), and Annex D (Fixed Deposit Advice Letter dated [29
January 2007] addressed to Ricky Albino P. Sy with stamped signature for PIPCBVI)
of the complaintaffidavit dated [26 September 2007] of Ricky Albino P. Sy. These
documents categorically show that the parties therein, i.e., Luisa Mercedes P. Lorenzo
or Ricky Albino P. Sy and PIPCBVI, transacted with each other directly without any
participation from respondent Santos. These documents speak for themselves.
Moreover, it bears stressing that Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy
admit in their respective affidavits that they directly deposited their investments by
bank transfer to PIPCBVIs offshore bank account.
Annex B (Printed background of the PMP of [PIPC]BVI enumerating the features of
said product) and Annex C (Printed Procedures in PMP Account Opening
instructing the client what to do in placing his/her investment) of the complaint
affidavit of Luisa Mercedes P. Lorenzo actually supports the allegations of respondent
Santos that there were printed forms/brochures for distribution to persons requesting
the same. These printed/prepared handouts contain the assurances or guarantees of
PIPCBVI and the instructions on where and how to deposit the investors money.

Likewise, Luisa Mercedes P. Lorenzos Annex A (2006 GIS of PIPC Corp. listing the
stockholders, board of directors an[d] officers thereof), Annex F (Deposit
Confirmation dated [14 June 2006] from Standard Chartered Bank) and Annexes I to
L (SEC Certifications stating that PIPC Corp., PIPC, PIPCBVI and Performance
Investment Products Ltd., respectively, are not registered issuer of securities nor
licensed to offer or sell securities to the public) are not evidence against respondent
Santos. Her name is not even mentioned in any of these documents. If at all, these
documents are evidence against PIPC Corp. and its officers named therein.
Further, it is important to note that in the Request Form, one of the documents being
distributed by respondent Santos x x x, it is categorically stated therein that said
request shall not be taken as an investment solicitation x x x, but is mainly for the purpose of
providing me with information. Clearly, this document proves that respondent Santos
did not or was not involved in the solicitation of investments but merely shows that
she is an employee of PIPC Corp. In addition, the Information Dissemination
Agreement between her employer PIPC Corp. and PIPCBVI readably and
understandably provides that she is prohibited from soliciting investments in behalf of
PIPCBVI and her authority is limited only to providing interested persons with
thenecessary information regarding how to communicate directly with
PIPC.Parenthetically, the decision to sign the partnership Agreement with PIPCBVI
to invest and repeatedly reinvest their monies with PIPCBVI were made by Luisa
Mercedes P. Lorenzo and Ricky Albino P. Sy themselves without any inducement or
undue influence from respondent Santos.
xxxx
WHEREFORE, the assailed resolution is hereby MODIFIED, the Chief State Prosecutor
is directed to EXCLUDE respondent Oudine Santos from the Information for violation
of Section 28 of the Securities and Regulation Code, if any has been filed, and report
the action taken thereon within ten (10) days from receipt hereof.15
Expectedly, after the denial of the SECs motion for reconsideration before the
Secretary of the DOJ, the SEC filed a petition for certiorari before the Court of Appeals
seeking to annul the 1 October 2009 Resolution of the DOJ.
The Court of Appeals dismissed the SECs petition for certiorari and affirmed the 1
October 2009 Resolution of the Secretary of the DOJ:chanRoblesvirtualLawlibrary
Prescinding from the foregoing, a person must first and foremost be engaged in the
business of buying and selling securities in the Philippines before he can be considered

as a broker, a dealer or salesman within the coverage of the Securities Regulation

Code. The record in this case however is bereft of any showing that [Santos] was
engaged in the business of buying and selling securities in the Philippines, whether for
herself or in behalf of another person or entity. Apart from [SECs] sweeping allegation
that [Santos] enticed Sy and Lorenzo and solicited from them investments for PIPC
BVI without first being registered as broker, dealer or salesman with SEC, no evidence
had been adduced that shows [Santos] actual participation in the alleged offer and
sale of securities to the public, particularly to Sy and Lorenzo, within the Philippines.
There was likewise no exchange of funds between Sy and Lorenzo, on one hand, and
[Santos], on the other hand, as the price of certain securities offered by PIPCBVI.
There was even no specific proof that [Santos] misrepresented to Sy and Lorenzo that
she was a licensed broker, dealer or salesperson of securities, thereby inducing them to
invest and deliver their hardearned money with PIPCBVI. In fact, the Information
Dissemination Agreement between PIPC Corporation, [Santos employer], and PIPC
BVI clearly provides that [Santos] was prohibited from soliciting investments in behalf
of PIPCBVI and that her authority is limited only to providing prospective client with
the necessary information on how to communicate directly with PIPC. Thus, it is obvious
that the final decision of investing and reinvesting their money with PIPCBVI was
made solely by Sy and Lorenzo themselves.
xxxx
WHEREFORE, in view of the foregoing premises, the petition filed in this case is
herebyDENIED and, consequently, DISMISSED. The assailed Resolutions dated [1
October 2009] and [23 November 2009] of the Secretary of Justice in I.S. No. 20071054
are hereby AFFIRMED.16
Hence, this appeal by certiorari raising the sole error of Santos exclusion from the
Information for violation of Section 28 of the Securities Regulation Code.
Generally, at the preliminary investigation proper, the investigating prosecutor, and
ultimately, the Secretary of the DOJ, is afforded wide latitude of discretion in the
exercise of its power to determine probable cause to warrant criminal prosecution. The
determination of probable cause is an executive function where the prosecutor
determines merely that a crime has been committed and that the accused has
committed the same.17 The rules do not require that a prosecutor has moral certainty of
the guilt of a person simply for preliminary investigation purposes.
However, the authority of the prosecutor and the DOJ is not absolute; it cannot be
exercised arbitrarily or capriciously. Where the findings of the investigating
prosecutor or the Secretary of the DOJ as to the existence of probable cause are

equivalent to a gross misapprehension of facts,certiorari will lie to correct these errors.18

While it is our policy not to interfere in the conduct of preliminary investigations, we
have, on more than one occasion, adhered to some exceptions to the general
rule:chanRoblesvirtualLawlibrary
1. when necessary to afford adequate protection to the constitutional rights of
the accused;
2. when necessary for the orderly administration of justice or to avoid
oppression or multiplicity of actions;
3. when there is a prejudicial question which is sub judice;
4. when the acts of the officer are without or in excess of authority;
5. where the prosecution is under an invalid law, ordinance or regulation;
6. when double jeopardy is clearly apparent;
7. where the court has no jurisdiction over the offense;
8. where it is a case of persecution rather than prosecution;
9. where the charges are manifestly false and motivated by the lust for
vengeance;
10.when there is clearly no prima facie case against the accused and a motion
to quash on that ground has been denied.19 (Italics supplied).
In excluding Santos from the prosecution of the supposed violation of Section 28 of the
Securities Regulation Code, the Secretary of the DOJ, as affirmed by the appellate
court, debunked the DOJ panels finding that Santos was prima facie liable for either: (1)
selling securities in the Philippines as a broker or dealer, or (2) acting as a salesman, or
an associated person of any broker or dealer on behalf of PIPC Corporation and/or
PIPCBVI without being registered as such with the SEC.
To get to that conclusion, the Secretary of the DOJ and the appellate court ruled that no
evidence was adduced showing Santos actual participation in the final sale by PIPC
Corporation and/or PIPCBVI of unregistered securities since the very affidavits of
complainants Lorenzo and Sy proved that Santos had never signed, neither was she
mentioned in, any of the investment documents between Lorenzo and Sy, on one hand,
and PIPC Corporation and/or PIPCBVI, on the other hand.
The conclusions made by the Secretary of the DOJ and the appellate court are a myopic
view of the investment solicitations made by Santos on behalf of PIPC Corporation
and/or PIPCBVI while she was not licensed as a broker or dealer, or registered as a
salesman, or an associated person of a broker or dealer.

We sustain the DOJ panels findings which were not overruled by the Secretary of the
DOJ and the appellate court, that PIPC Corporation and/or PIPCBVI was: (1) an
issuer of securities without the necessary registration or license from the SEC, and (2)
engaged in the business of buying and selling securities. In connection therewith, we
look to Section 3 of the Securities Regulation Code for pertinent definitions of
terms:chanRoblesvirtualLawlibrary
Sec. 3. Definition of Terms. x x x.
xxxx
3.3. Broker is a person engaged in the business of buying and selling securities for
the account of others.
3.4. Dealer means [any] person who buys [and] sells securities for his/her own
account in the ordinary course of business.
3.5. Associated person of a broker or dealer is an employee thereof whom, directly
exercises control of supervisory authority, but does not include a salesman, or an agent
or a person whose functions are solely clerical or ministerial.
xxxx
3.13. Salesman is a natural person, employed as such [or] as an agent, by a dealer,
issuer or broker to buy and sell securities.
To determine whether the DOJ Secretarys Resolution was tainted with grave abuse of
discretion, we pass upon the elements for violation of Section 28 of the Securities
Regulation Code: (a) engaging in the business of buying or selling securities in the
Philippines as a broker or dealer; or (b) acting as a salesman; or (c) acting as an
associated person of any broker or dealer, unless registered as such with the SEC.
Tying it all in, there is no quarrel that Santos was in the employ of PIPC Corporation
and/or PIPCBVI, a corporation which sold or offered for sale unregistered securities
in the Philippines. To escape probable culpability, Santos claims that she was a mere
clerical employee of PIPC Corporation and/or PIPCBVI and was never an agent or
salesman who actually solicited the sale of or sold unregistered securities issued by
PIPC Corporation and/or PIPCBVI.
Solicitation is the act of seeking or asking for business or information; it is not a
commitment to an agreement.20

Santos, by the very nature of her function as what she now unaffectedly calls an
information provider, brought about the sale of securities made by PIPC Corporation
and/or PIPCBVI to certain individuals, specifically private complainants Sy and
Lorenzo by providing information on the investment products of PIPC Corporation
and/or PIPCBVI with the end in view of PIPC Corporation closing a sale.
While Santos was not a signatory to the contracts on Sys or Lorenzos investments,
Santos procured the sale of these unregistered securities to the two (2) complainants by
providing information on the investment products being offered for sale by PIPC
Corporation and/or PIPCBVI and convincing them to invest therein.
No matter Santos strenuous objections, it is apparent that she connected the probable
investors, Sy and Lorenzo, to PIPC Corporation and/or PIPCBVI, acting as an
ostensible agent of the latter on the viability of PIPC Corporation as an investment
company. At each point of Sys and Lorenzos investment, Santos participation
thereon, even if not shown strictly on paper, was prima facieestablished.
In all of the documents presented by Santos, she never alleged or pointed out that she
did not receive extra consideration for her simply providing information to Sy and
Lorenzo about PIPC Corporation and/or PIPCBVI. Santos only claims that the
monies invested by Sy and Lorenzo did not pass through her hands. In short, Santos
did not present in evidence her salaries as a supposed mere clerical employee or
information provider of PIPCBVI. Such presentation would have foreclosed all
questions on her status within PIPC Corporation and/or PIPCBVI at the lowest rung
of the ladder who only provided information and who did not use her discretion in
any capacity.
We cannot overemphasize that the very information provided by Santos locked the
deal on unregistered securities with Sy and Lorenzo.
In fact, Sy alleged in his affidavit, which allegation was not refuted by Santos, that he
was introduced to Santos while he performed routine transactions at his
bank:chanRoblesvirtualLawlibrary
2. I have been a depositor of the Bank of the Philippine Islands (BPI) Pasong Tamo
branch for the past 15 years. Sometime in the last quarter of 2006, I was at BPI Pasong
Tamo to accomplish certain routine transactions. Being a client of long standing, the
bank manager[,] as a matter of courtesy, allowed me to wait in her cubicle. It was there
that the bank manager introduced me to another bank client, Ms. Oudine Santos. After
exchanging pleasantries, and in the course of a brief conversation, Ms. Santos told me

that she is a resident of Damarias Village and was working as an investment

consultant for a certain company, Performance Investment Products Corporation
[PIPC]. She told me that she wanted to invite me to her office at the Citibank Tower in
Makati so that she could explain the investment products that they are offering. I gave
her my contact number and finished my transaction with the bank for that day;
3. Ms. Santos texted me to confirm our meeting. A few days later, I met her at the
business lounge of [PIPC] located at the 15th Floor of Citibank Tower, Makati. During
the meeting, Ms. Santos enticed me to invest in their Performance Managed Portfolio
which she explained was a risk controlled investment program designed for
individuals like me who are looking for higher investment returns than bank deposits
while still having the advantage of security and liquidity. She told me that they were
engaged in foreign currency trading abroad and that they only employ professional
and experienced foreign exchange traders who specialize in trading the Japanese Yen,
Euro, British Pound, Swiss Francs and Australian Dollar. I then told her that I did not
have any experience in foreign currency trading and was quite conservative in
handling my money;21
Santos countered that:chanRoblesvirtualLawlibrary
28. I also categorically deny complainant Sys allegation that I enticed him to enter
into a Partnership Agreement with PIPCBVI. In the first place, I came to know
complainant Sy only when he was referred to me by a mutual acquaintance, Ms. Ana
Liliosa Santos, who was then the Manager of the Bank of the Philippine Islands,
Pasong Tamo Branch. Ms. Ana Santos set up a meeting between complainant Sy and
me because complainant Sy wanted to know more about PIPCBVI. As with the other
individuals who expressed interest in PIPC Corp.s client companies, I then provided
complainant Sy with additional information about PIPCBVI. The decision to enter
into the aforementioned Partnership Agreement with PIPCBVI was made by
complainant Sy alone without any inducement or undue influence from me, as in fact I
only met him twice the first one was on the meeting set up by Ms. Ana Santos and
the second one was to introduce him to Michael Liew. Indeed, complainant Sy
appears to be a welleducated person with years of experience as a businessman. It is
reasonable to assume that before entering into the said Partnership Agreement with
PIPCBVI, complainant Sy had fully understood the nature of the agreement and that
in entering thereto, he had been motivated by a desire to earn a profit and had
believed, as I myself have been led to believe, that PIPCBVI was a legitimate business
concern which offered a reasonable return on investment, Moreover, complainant Sy
could have withdrawn his initial investment of US$40,000.00 on its date of maturity,
i.e., 26 January 2007, as indicated in the PIPCBVIs letter dated 10 November 2006, a
copy of which is attached to complainant Sys Sworn Statement. Complainant Sy,

however, obviously decided on his own volition to keep his investment with PIPCBVI
presumably because he wanted to gain more profit therefrom. Complainant Sy in fact
admitted that he received monetary returns from PIPCBVI in the total amount of
US$2,439.12.22
What is palpable from the foregoing is that Sy and Lorenzo did not go directly to Liew
or any of PIPC Corporations and/or PIPCBVIs principal officers before making their
investment or renewing their prior investment. However, undeniably, Santos actively
recruited and referred possible investors to PIPC Corporation and/or PIPCBVI and
acted as the gobetween on behalf of PIPC Corporation and/or PIPCBVI.
The DOJs and Court of Appeals reasoning that Santos did not sign the investment
contracts of Sy and Lorenzo is specious. The contracts merely document the act
performed by Santos.
Individual complainants and the SEC have categorically alleged that Liew and PIPC
Corporation and/or PIPCBVI is not a legitimate investment company but a company
which perpetrated a scam on 31 individuals where the president, a foreign national,
Liew, ran away with their money. Liews absconding with the monies of 31 individuals
and that PIPC Corporation and/or PIPCBVI were not licensed by the SEC to sell
securities are uncontroverted facts.
The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment
contract or participation in a profit sharing agreement that falls within the definition of
the law. When the investor is relatively uninformed and turns over his money to
others, essentially depending upon their representations and their honesty and skill in
managing it, the transaction generally is considered to be an investment contract.23 The
touchstone is the presence of an investment in a common venture premised on a
reasonable expectation of profits to be derived from the entrepreneurial or managerial
efforts of others.24
At bottom, the exculpation of Santos cannot be preliminarily established simply by
asserting that she did not sign the investment contracts, as the facts alleged in this case
constitute fraud perpetrated on the public. Specially so because the absence of Santos
signature in the contract is, likewise, indicative of a scheme to circumvent and evade
liability should the pyramid fall apart.
Lastly, we clarify that we are only dealing herein with the preliminary investigation
aspect of this case. We do not adjudge respondents guilt or the lack thereof. Santos
defense of being a mere employee or simply an information provider is best raised and
threshed out during trial of the case.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in

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