MAKATI STOCK EXCHANGE, INC.

, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION
respondents.

and

MANILA

STOCK

EXCHANGE,

Hermenegildo B. Reyes for petitioner.

Office of the Solicitor General for respondent Securities and Exchange Commission.
Norberto J. Quisumbing and Emma Quisumbing-Fernando for respondent Manila Stock
Exchange.
BENGZON, C.J.:
This is a review of the resolution of the Securities and Exchange
Commission which would deny the Makati Stock Exchange, Inc., permission
to operate a stock exchange unless it agreed not to list for trading on its
board, securities already listed in the Manila Stock Exchange.
Objecting to the requirement, Makati Stock Exchange, Inc. contends that the
Commission has no power to impose it and that, anyway, it is illegal,
discriminatory and unjust.
Under the law, no stock exchange may do business in the Philippines unless it is
previously registered with the Commission by filing a statement containing the
information described in Sec. 17 of the Securities Act (Commonwealth Act 83, as
amended).
It is assumed that the Commission may permit registration if the section is complied
with; if not, it may refuse. And there is now no question that the section has been
complied with, or would be complied with, except that the Makati Stock Exchange,
upon challenging this particular requirement of the Commission (rule against
double listing) may be deemed to have shown inability or refusal to abide by its
rules, and thereby to have given ground for denying registration. [Sec. 17 (a) (1) and
(d)].
Such rule provides: "... nor shall a security already listed in any securities exchange
be listed anew in any other securities exchange ... ."
The objection of Makati Stock Exchange, Inc., to this rule is understandable. There is
actually only one securities exchange The Manila Stock Exchange that has been
operating alone for the past 25 years; and all or presumably all available or
worthwhile securities for trading in the market are now listed there. In effect, the
Commission permits the Makati Stock Exchange, Inc., to deal only with other
securities. Which is tantamount to permitting a store to open provided it sells only
those goods not sold in other stores. And if there's only one existing store, 1 the
result is a monopoly.
It is not farfetched to assert as petitioner does 2 that for all practical purposes, the
Commission's order or resolution would make it impossible for the Makati Stock
Exchange to operate. So, its "permission" amounted to a "prohibition."
Apparently, the Commission acted "in the public interest." 3 Hence, it is pertinent
to inquire whether the Commission may "in the public interest" prohibit (or
make impossible) the establishment of another stock exchange (besides
the Manila Stock Exchange), on the ground that the operation of two or
more exchanges adversely affects the public interest.

At first glance, the answer should be in the negative, because the law itself
contemplated, and, therefore, tacitly permitted or tolerated at least, the operation of
two or more exchanges.
Wherever two or more exchanges exist, the Commission, by order, shall require and
enforce uniformity of trading regulations in and/or between said exchanges.
[Emphasis Ours] (Sec. 28b-13, Securities Act.)
In fact, as admitted by respondents, there were five stock exchanges in Manila,
before the Pacific War (p. 10, brief), when the Securities Act was approved or
amended. (Respondent Commission even admits that dual listing was practiced
then.) So if the existence of more than one exchange were contrary to public interest,
it is strange that the Congress having from time to time enacted legislation amending
the Securities Act, 4 has not barred multiplicity of exchanges.
Forgetting for the moment the monopolistic aspect of the Commission's resolution,
let us examine the authority of the Commission to promulgate and implement the
rule in question.
It is fundamental that an administrative officer has only such powers as are expressly
granted to him by the statute, and those necessarily implied in the exercise thereof.
In its brief and its resolution now subject to review, the Commission cites no provision
expressly supporting its rule. Nevertheless, it suggests that the power is "necessary
for the execution of the functions vested in it"; but it makes no explanation, perhaps
relying on the reasons advanced in support of its position that trading of the same
securities in two or more stock exchanges, fails to give protection to the investors,
besides contravening public interest. (Of this, we shall treat later) .
On the legality of its rule, the Commission's argument is that: (a) it was approved by
the Department Head before the War; and (b) it is not in conflict with the
provisions of the Securities Act. In our opinion, the approval of the Department, 5 by
itself, adds no weight in a judicial litigation; and the test is not whether the Act
forbids the Commission from imposing a prohibition, but whether it empowers the
Commission to prohibit. No specific portion of the statute has been cited to uphold
this power. It is not found in sec. 28 (of the Securities Act), which is entitled "Powers
(of the Commission) with Respect to Exchanges and Securities." 6
According to many court precedents, the general power to "regulate" which the
Commission has (Sec. 33) does not imply authority to prohibit." 7
The Manila Stock Exchange, obviously the beneficiary of the disputed rule, contends
that the power may be inferred from the express power of the Commission to
suspend trading in a security, under said sec. 28 which reads partly:
And if in its opinion, the public interest so requires, summarily to suspend trading in
any registered security on any securities exchange ... . (Sec. 28[3], Securities Act.)
However, the Commission has not acted nor claimed to have acted in pursuance
of such authority, for the simple reason that suspension under it may only be for ten
days. Indeed, this section, if applicable, precisely argues against the position of the
Commission because the "suspension," if it is, and as applied to Makati Stock
Exchange, continues for an indefinite period, if not forever; whereas this Section 28
authorizes suspension for ten days only. Besides, the suspension of trading in the

security should not be on one exchange only, but on all exchanges; bearing in mind
that suspension should be ordered "for the protection of investors" (first par., sec. 28)
in all exchanges, naturally, and if "the public interest so requires" [sec. 28(3)].
This brings up the Commission's principal conclusions underlying its determination
viz.: (a) that the establishment of another exchange in the environs of Manila would
be inimical to the public interest; and (b) that double or multiple listing of securities
should be prohibited for the "protection of the investors."
(a) Public Interest Having already adverted to this aspect of the matter, and the
emerging monopoly of the Manila Stock Exchange, we may, at this juncture,
emphasize that by restricting free competition in the marketing of stocks, and
depriving the public of the advantages thereof the Commission all but permits what
the law punishes as monopolies as "crimes against public interest." 8
"A stock exchange is essentially monopolistic," the Commission states in its
resolution (p. 14-a, Appendix, Brief for Petitioner). This reveals the basic foundation of
the Commission's process of reasoning. And yet, a few pages afterwards, it recalls
the benefits to be derived "from the existence of two or more exchanges," and the
desirability of "a healthy and fair competition in the securities market," even as it
expresses the belief that "a fair field of competition among stock exchanges should
be encouraged only to resolve, paradoxically enough, that Manila Stock Exchange
shall, in effect, continue to be the only stock exchange in Manila or in the Philippines.
"Double listing of a security," explains the Commission, "divides the sellers and the
buyers, thus destroying the essence of a stock exchange as a two-way auction
market for the securities, where all the buyers and sellers in one geographical area
converge in one defined place, and the bidders compete with each other to purchase
the security at the lowest possible price and those seeking to sell it compete with
each other to get the highest price therefor. In this sense, a stock exchange is
essentially monopolistic."
Inconclusive premises, for sure. For it is debatable whether the buyer of stock may
get the lowest price where all the sellers assemble in only one place. The price there,
in one sale, will tend to fix the price for the succeeding, sales, and he has no chance
to get a lower price except at another stock exchange. Therefore, the arrangement
desired by the Commission may, at most, be beneficial to sellers of stock not to
buyers although what applies to buyers should obtain equally as to sellers (looking
for higher prices). Besides, there is the brokerage fee which must be considered. Not
to mention the personality of the broker.
(b) Protection of investors. At any rate, supposing the arrangement
contemplated is beneficial to investors (as the Commission says), it is to be
doubted whether it is "necessary" for their "protection" within the purview
of the Securities Act. As the purpose of the Act is to give adequate and
effective
protection
to
the
investing
public
against
fraudulent
representations, or false promises and the imposition of worthless
ventures, 9 it is hard to see how the proposed concentration of the market
has a necessary bearing to the prevention of deceptive devices or unlawful
practices. For it is not mere semantics to declare that acts for the
protection of investors are necessarily beneficial to them; but not
everything beneficial to them is necessary for their protection.
And yet, the Commission realizes that if there were two or more exchanges "the
same security may sell for more in one exchange and sell for less in the other.

Variance in price of the same security would be the rule ... ." Needless to add, the
brokerage rates will also differ.
This, precisely, strengthens the objection to the Commission's ruling. Such difference
in prices and rates gives the buyer of shares alternative options, with the opportunity
to invest at lower expense; and the seller, to dispose at higher prices. Consequently,
for the investors' benefit (protection is not the word), quality of listing 10 should be
permitted, nay, encouraged, and other exchanges allowed to operate. The
circumstance that some people "made a lot of money due to the difference in prices
of securities traded in the stock exchanges of Manila before the war" as the
Commission noted, furnishes no sufficient reason to let one exchange corner the
market. If there was undue manipulation or unfair advantage in exchange trading the
Commission should have other means to correct the specific abuses.
Granted that, as the Commission observes, "what the country needs is not another"
market for securities already listed on the Manila Stock Exchange, but "one that
would focus its attention and energies on the listing of new securities and thus
effectively help in raising capital sorely needed by our ... unlisted industries and
enterprises."
Nonetheless, we discover no legal authority for it to shore up (and stifle) free
enterprise and individual liberty along channels leading to that economic
desideratum. 11
The Legislature has specified the conditions under which a stock exchange may
legally obtain a permit (sec. 17, Securities Act); it is not for the Commission to
impose others. If the existence of two competing exchanges jeopardizes public
interest which is doubtful let the Congress speak. 12 Undoubtedly, the opinion
and recommendation of the Commission will be given weight by the Legislature, in
judging whether or not to restrict individual enterprise and business opportunities.
But until otherwise directed by law, the operation of exchanges should not be so
regulated as practically to create a monopoly by preventing the establishment of
other stock exchanges and thereby contravening:
(a) the organizers' (Makati's) Constitutional right to equality before the law;
(b) their guaranteed civil liberty to pursue any lawful employment or trade; and
(c) the investor's right to choose where to buy or to sell, and his privilege to select
the brokers in his employment. 13
And no extended elucidation is needed to conclude that for a licensing officer to deny
license solely on the basis of what he believes is best for the economy of the country
may amount to regimentation or, in this instance, the exercise of undelegated
legislative powers and discretion.
Thus, it has been held that where the licensing statute does not expressly or
impliedly authorize the officer in charge, he may not refuse to grant a license simply
on the ground that a sufficient number of licenses to serve the needs of the public
have already been issued. (53 C.J.S. p. 636.)
Concerning res judicata. Calling attention to the Commission's order of May 27,
1963, which Makati Stock did not appeal, the Manila Stock Exchange pleads the
doctrine of res judicata. 14 (The order now reviewed is dated May 7, 1964.)

It appears that when Makati Stock Exchange, Inc. presented its articles of
incorporation to the Commission, the latter, after making some inquiries, issued on
May 27, 1963, an order reading as follows.
Let the certificate of incorporation of the MAKATI STOCK EXCHANGE be issued, and if
the organizers thereof are willing to abide by the foregoing conditions, they may file
the proper application for the registration and licensing of the said Exchange.
In that order, the Commission advanced the opinion that "it would permit the
establishment and operation of the proposed Makati Stock Exchange, provided ... it
shall not list for trading on its board, securities already listed in the Manila Stock
Exchange ... ."
Admittedly, Makati Stock Exchange, Inc. has not appealed from that order of May 27,
1963. Now, Manila Stock insists on res judicata.
Why should Makati have appealed? It got the certificate of incorporation which it
wanted. The condition or proviso mentioned would only apply if and when it
subsequently filed the application for registration as stock exchange. It had not yet
applied. It was not the time to question the condition; 15 Makati was still exploring
the convenience of soliciting the permit to operate subject to that condition. And it
could have logically thought that, since the condition did not affect its articles of
incorporation, it should not appeal the order (of May 27, 1963) which after all,
granted the certificate of incorporation (corporate existence) it wanted at that time.
And when the Makati Stock Exchange finally found that it could not successfully
operate with the condition attached, it took the issue by the horns, and expressing its
desire for registration and license, it requested that the condition (against double
listing) be dispensed with. The order of the Commission denying, such request is
dated May 7, 1964, and is now under, review.
Indeed, there can be no valid objection to the discussion of this issue of double listing
now, 16 because even if the Makati Stock Exchange, Inc. may be held to have
accepted the permission to operate with the condition against double listing (for
having failed to appeal the order of May 27, 1963), still it was not precluded from
afterwards contesting 17 the validity of such condition or rule:
(1) An agreement (which shall not be construed as a waiver of any constitutional
right or any right to contest the validity of any rule or regulation) to comply and to
enforce so far as is within its powers, compliance by its members, with the provisions
of this Act, and any amendment thereto, and any rule or regulation made or to be
made thereunder. (See. 17-a-1, Securities Act [Emphasis Ours].)
2. People vs fernandez
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
VICENTE T. FERNANDEZ and JOAQUIN TRINIDAD, defendants-appellants.
Feria and La O and Pastor L. de Guzman for appellants.
Office of the Solicitor-General Tuason for appellee.
CONCEPCION, J.:
This case involves the meaning and interpretation of "speculative securities"

under the provisions of Act No. 2581. The defendants were charged with a
violation of said statute and were tried and convicted in the Court of First
Instance of Manila from whose judgment they appealed.
It was established by the prosecution and admitted by the appellants that they,
together with other persons, organized a corporation which was registered in
the Bureau of Commerce on January 7, 1936 under the name of Philippine Mutual
Cooperative Society, Inc. The purposes of this association, according to its
articles of incorporation and by-laws, are to promote the social, moral and
economic well-being of its members by extending to them aid in the form of
benefit payments or in any other form allowed by the laws of the
Philippines. An attempt has been made to show that the object is purely
cooperative by relieving and helping the unemployed, the needy, and people of
moderate means in particular and all those who need material aid in general.
In order to carry out these purposes, the corporation has established and admitted
two classes of members, namely, class O and class S. Each member in O must
pay a due of P5 which entitled him to a regular benefit aid of P40. The
payment of all and each of these benefit aids should be made whenever 16 new
members had been admitted. The second member would receive said aid of after 12
new members had been admitted. The third member and each of those following
would receive their respective benefit aids of P40 after the admission of each group
of eleven new members. Those of class S had to pay a due of P2 each, which
was later increased to P2.50, and they would be entitled to a benefit aid of
P12, which was subsequently increased to P20 as soon as sixteen new
members were admitted. The second member and each of those following would
receive their corresponding benefit aids after the admission of every group of ten
new members. The members of both classes, who may have received the benefit
aids of the corporation, were bound to renew their subscriptions by paying every time
they received said aid the amount of p5 or P2.50, according to the class to which
they belonged. The corporation would and did issue to each member a certificate of
membership which specified the class to which he belonged. The benefit aids were
due and payable to the members strictly by turns according to the respective dates
of their enrollment. If after two years from the date of his admission, no benefit aid
had been paid a member, the corporation promised to refund him, on demand, the
dues paid by him plus 25 per cent of the same. In order to obtain more members and
carry out its purpose, the corporation offered to each member, who secured new
members, a commission of 10 per cent for each new member, which was payable
from the dues collected from the new members. Said commission was later reduced
to 5 per cent, but an additional 5 per cent for traveling expenses was allowed.
To prevent a shortage in the funds of the corporation due to its expenditures and the
fact that the benefit aids paid by it were larger than the membership dues, it would
hold public literary contests, etc., and other benefit performances, the net proceeds
of which would be exclusively devoted to the payment of benefit aids. The cost of
holding these performances would be paid from the allotment of the association for
expenses in order not to disturb the reserve funds devoted to the payment of benefit
aids.
From November 28, 1935, or prior to its incorporation, up to January 11,
1936, the corporation, without having previously obtained a license from
the Insular Treasurer as required by law and through the distribution of
20,000 prospectuses, known as Exhibit V, to the public, secured and
admitted 477 members of class O and 278 members of class S. Of these 32
and 29, respectively, received benefit aids, and from January 12, 1936 to

the date of trial, the corporation admitted 18,294 members of class O and
4,351 members of class S, of whom 1,399 and 323, respectively, received
benefit aids. Between November 28, 1935 and May 31, 1936, the corporation
received dues from its members in the amount of P103,514; and after deducting
commissions (P4,765), traveling expenses (P4,765), operating and general expenses
(P7,066.66), administrative and management fees (P4,400), sundry accounts
(P1,002.94), and benefit aids (P63,052), there only remained as cash account the
sum of P18,461.45 (Exhibit W-1); and on May 12, 1936, the receipts amounted to
P97,780.23, and deducting therefrom the disbursements amounting to P77,628.25,
there was a cash balance of P20,151.98 (Exhibit W).
The lower court having found the certificates of membership issued by the
corporation as speculative securities, convicted Vicente T. Fernandez and
Joaquin Trinidad, president and general manager, respectively, of the
Philippine Mutual Cooperative Society, Inc., of a violation of section 2 of Act
No. 2581, and sentenced each to pay a fine of P5,000, with the
corresponding subsidiary imprisonment in case of insolvency, and the costs.
Appellants assign in their brief five errors which the trial court is alleged to
have committed: First, in declaring that the membership certificates issued
by the Philippine Mutual Cooperative Society, Inc., are securities with the
meaning of Act No. 2581; second, in holding that they are speculative;
third, in not holding Act No. 2581 unconstitutional because it is vague and
because it confers legislative and judicial powers upon the Insular
Treasurer; fourth and fifth, in not interpreting the law strictly in favor of
the accused and dismissing the charge against them.
Act No. 2581, better known as the Blue Sky Law, is patterned after similar
laws enacted in various states of the Union, one of the oldest of which, if
not the oldest, is that of the State of Kansas, which was amended in 1913
and 1915 (Fletcher, vol. 7 [1919], p. 7714). The purpose of these laws, as
was said by Justice Mckenna, is to protect the public against the imposition
of unsubstantial schemes and the securities based thereon. It is said that
the name given the law indicates the evil against which it is directed,
namely, speculative schemes which have no more basis than a few feet of
the blue sky (Fletcher, supra).
Section 1 of Act No. 2581, as amended by Act No. 2817 (which amendment does not
affect the present case), provides:
SECTION 1. Terms defined. The term "securities" as used in this Act shall be taken
to mean stock certificates, shares, bonds, debentures, certificates of participation,
contracts, contracts or bonds for the sale and conveyance of lands on deferred
payments or on the installment plan, or other instruments in the nature thereof, by
whatsoever name known or called. The term "speculative securities" as used in
this Act shall be deemed to mean and include:
(a) All securities to promote or induce the sale of which profit, gain, or
advantage unusual in the ordinary course of legitimate business is in any
way advertized or promised;
(b) All securities the value of which materially depends upon proposed or
promised future promotion or development rather than on present tangible
assets and conditions;

(c) All securities for promoting the sale of which a commission of more than
five per cent is offered or paid;
(d) The securities of any enterprise or corporation which has included, or
proposes to include in its assets as a material part thereof patents,
formulae, good-will, promotion or other intangible assets, or which has
issued or proposes to issue a material part of its securities in payment for
patents, formulae, good-will, promotion or other intangible assets.
The certificates of membership issued by the Philippine Mutual Cooperative Society,
Inc., are truly speculative securities within the meaning of Act No. 2581.
First. In order to encourage and induce their sale, profit unusual in the ordinary
course of business has been advertised or promised, for through the
payment of the sum of P5 by a member appertaining to class O, or that of
P2.50 by a member belonging to class S, each will receive profits of P40 and P20,
respectively, which represent the fabulous and extraordinary gain of 800 per cent.
Second. The speculative character of said certificates is also shown by the fact that
such profit or advantage of 800 per cent does not depend upon the actual
tangible assets or conditions of the corporation, but upon its growth and
development which would be attained through the admission of new groups of 16
or 12 members so that each original member could receive the benefit aids of P40 or
P20, as the case may be. Therefore, if there were no enrollment of 16 or 12 new
members, according to the class, a member of class O or class S would not receive
the corresponding benefit aid of P40 or P20, respectively.
Third. Another proof of their speculative nature is that even if a member of class O or
class S should be able to secure a group of 16 or 12 new members, as the case may
be, this fact would not necessarily entitle him to receive immediately the
benefit aid of P40 or P20, respectively, for according to the by-laws of the
corporation, he would have to wait for his turn before he could receive his
benefit aid. And it is possible that his turn may never come because
notwithstanding the admission of 16 or 12 members, according to the class, there
may be no funds with which to pay his benefit aid, for before the coming of his
turn, the funds of the corporation might have been exhausted by the payment of the
dues of the old members in accordance with the strict rotation, while no new
members may have been admitted in the meantime.
Fourth. The certificates of membership in question also come within the purview of
paragraph (c) of section 1 of Act No. 2581 because to promote their sale, the
corporation has offered and paid a commission of 10 per cent which, though
later on reduced to 5 per cent, was in fact more than 5 per cent because the
corporation has paid another 5 per cent for traveling expenses.
Fifth. The speculative character of the member certificates issued by the corporation
is also shown by the fact that when a member, whether belonging to class O or to
class S, had not received his benefit aid after two years from the date of his
enrollment, he cannot expect anything more than the refund of the dues
paid by him plus 25 per cent of the same. But it is possible, as they by-laws of
the corporation themselves provide, that there are no funds with which to reimburse
the member or members, who have not been able to collect any benefit aid, the dues
paid by them. To avoid such an eventuality, it is provided that the corporationIt may,
however, happen that, even by these means, the corporation will not be able to raise
the necessary funds to pay the members, who ask for reimbursement of their dues,

as would undoubtedly occur should no new members enroll in the corporation.

The following decisions show the various and distinguishing features which may be
found in the membership certificates in question:
In re Lamb ([1923]), 61 Cal. App., 321; 215 Pac., 109), the court said: 'The
"securities" which may not be issued or sold without the permission of the
corporation commissioner are . . . "any instrument issued or offered to the
public by any company", evidencing any right to participate in the profits or
earnings or the distributions of assets of any business carried on for profit
by the company . . .
"Certificates" providing "that, in consideration of the certificate holder's promise to
render such assistance and in further consideration of $50 paid by him, defendant
will divide pro rata among all the holders of like certificates who reside at a specified
place, 10 per cent of the net price of such tires and tubes as may be sold by
defendant's representative at such place, such division to be made quarterly for the
period of twenty years; that the holder is entitled to a discount of 10 per cent on all
its goods which he may purchase for defendant for his personal use, and that
defendant will annually set aside as a bonus to certificate holders all of its excess
earning after paying operating expenses, fixed charges, and dividends to
stockholders, the same to be distributed at its option in the form of preferred stock,"
have been held to be security within the meaning of the Minnesota Blue Sky Law,
where the certificates were transferable on notice to the company, although they
contained a clause stating that they were not to be construed to be certificates of
stock, or security or investment contracts. (State vs. Gopher Tire & Rubber Co.
[1920], 146 Minn., 52; 177 N.W., 937.)
Speculative securities include those the value of which materially depends
on proposed or promised future promotion or development, rather than on
present tangible assets or conditions. (Moos vs. Landowners Oil Asso. [1932],
136 Kan., 424; 15 Pac. [2d], 1073.)
"Investment contract", within the meaning of the Blue Sky Law, includes certificates
issue in consideration of cash and services entitling the holder to share in the profits
of the business. (State vs. Gopher Tire & Rubber Co., supra.)
Certificate of membership in corporation selling sick and death benefit insurance is a
"security" within the meaning of Blue Sky Law. (Stevens vs. Atlantic & Security Mut.
Ass'ns., 116 N. J. Eq., 584; 174 Atl., 744.)
The appellants contends that the Philippine Mutual Cooperative Society, Inc., is
purely a civic association and does not engage in business. The truth is that the
members pay dues and the association gives them benefit aids which represent a
profit of 800 per cent. Do ut des.
They further point out that the membership certificates issued by the corporation are
not contracts, nor certificates of participation, bonds, debentures, etc. The fact,
however, is that said certificates represent obligations to pay a sum of
money or securities of payment so that they are in reality investment
contracts. It is not true that one becomes a member without any
expectation of gain. In fact, the contrary is evident, and the association
itself admits members with a like intention to gain.
The appellants argue that the Blue Sky Law is unconstitutional on two grounds: First,

because it is vague and indefinite: and second, because it delegates legislative and
judicial powers to the Insular Treasurer. The ambiguity of the statute the appellants
insist is shown by the inability of both the City Fiscal's and Insular Treasurer's office
to determine within a reasonable time whether the scheme of the corporation comes
under Act No. 2581. We find no merit in this contention.
The argument that the statute delegates legislative and judicial powers to the Insular
Treasurer is founded on the fact that, according to the appellants, the law vests
authority in the Insular Treasurer to cancel a permit granted a person or corporation
to enter into transactions without establishing any fixed rule or guide in the exercise
of such discretion. In the first place, the question involved herein is whether or not
the Philippine Mutual Cooperative Society, Inc., should have applied for a permit from
the Insular Treasurer to issue and sell certificates of its membership. It is, therefore,
immaterial whether the Insular Treasurer can withdraw a permit which he may have
already given. In the second place, the purpose of the law being to avoid ruinous
speculations, it is obvious that the public interest is and should be the reason on
which the Insular Treasurer should base his decisions.
It has, nevertheless, been proved that Attorney Jose Moreno, on behalf of the
Philippine Mutual Cooperative Society, Inc., consulted the offices of the City Fiscal
and the Insular Treasurer for the purpose of obtaining a statement as to the legality
of the schemes of the association and whether they came within the scope of Act No.
2581. He began his inquiry in November, 1935, and it was while expecting the
decision of said offices that the information in this case was filed in May, 1936
without any previous notice or answer to said inquiry. Good faith and lack of intention
to violate the law may, in this case, be considered as mitigating circumstances in the
imposition of the penalty; but they do not constitute a valid defense. (People vs.
McCalla [1923], 63 Cal. App., 783; 220 Pac., 436.) The same may be said of the
argument that the members, who had the right to the benefit aids of P40 or P20, as
the case may be, did receive such aids, and that it has not been proved that the
association has committed any fraud, or is in imminent danger of insolvency.
Wherefore, the appealed judgment is modified and the accused are sentenced each
to pay a fine of P100 or suffer the corresponding subsidiary imprisonment prescribed
by law, in case of insolvency, and to pay the costs. So ordered.
3. SEC vs Prosperity.com
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.
Held: Not an investment contract. The Securities Regulation Code treats investment
contracts as securities that have to be registered with the SEC before they can be
distributed and sold. An investment contract is a contract, transaction, or scheme
where a person invests his money in a common enterprise and is led to expect profits
primarily from the efforts of others.
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.

4. SEC vs Santos
Soon thereafter, the SEC, through its Compliance and Endorsement Division, filed a
complaintaffidavit for violation of Sections 8,4 265 and 286 of the Securities
Regulation Code before the Department of Justice which was docketed as I.S. No.
20071054.
Lorenzo's affidavit:
x x x [D]ue to the inducements and solicitations of the PIPC corporations
directors, officers and employees/agents/brokers, the former were enticed
to invest their hardearned money, the minimum amount of which must be
US$40,000.00, with PIPCBVI, with a promise of higher income potential of
an interest of 12 to 18 percentum (%) per annum at relatively lowrisk
investment program. The private complainants also claimed that they were made
to believe that PIPC Corporation refers to Performance Investment Product
Corporation, the Philippine office or branch of PIPCBVI, which is an entity engaged in
FOREIGN CURRENCY TRADING, and not Philippine International Planning Center
Corporation.
On the whole, Lorenzo and Sy charge Santos in her capacity as investment
consultant of PIPC Corporation who actively engaged in the solicitation and
recruitment of investors. Private complainants maintain that Santos, apart from
being PIPC Corporations employee, acted as PIPC Corporations agent and made
representations regarding its investment products and that of the supposed global
corporation PIPCBVI.
Facilitating Lorenzos and Sys investment with PIPC
Corporation, Santos represented to the two that investing with PIPC Corporation, an
affiliate of PIPCBVI, would be safe and fullproof.
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
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.
5. PSE vs CA
Multiple claims
Puerto Azul Land, Inc. (PALI) is a corporation engaged in the real estate business. PALI

was granted permission by the Securities and Exchange Commission (SEC) to sell its
shares to the public in order for PALI to develop its properties.
PALI then asked the Philippine Stock Exchange (PSE) to list PALIs stocks/shares to
facilitate exchange. The PSE Board of Governors denied PALIs application on the
ground that there were multiple claims on the assets of PALI. Apparently, the
Marcoses, Rebecco Panlilio (trustee of the Marcoses), and some other corporations
were claiming assets if not ownership over PALI.
PALI then wrote a letter to the SEC asking the latter to review PSEs decision. The SEC
reversed PSEs decisions and ordered the latter to cause the listing of PALI shares in
the Exchange.
WHEREFORE, premises considered, the Commission finds no compelling reason to
consider its order dated April 24, 1996, and in the light of recent developments on
the adverse claim against the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the investing public. In this
regard, PALI is hereby ordered to amend its registration statements filed with the
Commission to incorporate the full disclosure of these material facts and
information.
Held: he question as to what policy is, or should be relied upon in approving the
registration and sale of securities in the SEC is not for the Court to determine, but is
left to the sound discretion of the Securities and Exchange Commission.
In
mandating the SEC to administer the Revised Securities Act, and in performing its
other functions under pertinent laws, the Revised Securities Act, under Section 3
thereof, gives the SEC the power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement of the said laws.
If any of these claims is established to be true, the certificates of title over the
subject properties now held by PALI may be disregarded, as it is an established rule
that a registration of a certificate of title does not confer ownership over the
properties described therein to the person named as owner. The inscription in the
registry, to be effective, must be made in good faith. The defense of indefeasibility of
a Torrens Title does not extend to a transferee who takes the certificate of title with
notice of a flaw.
6. Unionbank vs SEC
Union Bank sought the opinion of SEC as to the applicability and coverage of the
Full Material Disclosure Rule on banks, contending that said rules, in effect,
amend Section 5 (a) (3) of the Revised Securities Act which exempts
securities issued or guaranteed by banking institutions from the
registration requirement.

Because its securities are exempt from the registration requirements under
Section 5(a)(3) of the Revised Securities Act, petitioner argues that it is not
covered by RSA Implementing Rulels:
o
Rule 11(a)-1, which requires the filing of annual, quarterly, current
predecessor and successor reports;
o
Rule 34(a)-1, which mandates the filing of proxy statements and forms of
proxy;
o Rule 34(c)-1, which obligates the submission of information statements.

SECs reply: While the requirements of registration do not apply to

securities of banks, banks with a class of securities listed for trading on the
Philippine Stock Exchange, Inc. are covered by certain Revised Securities
Act Rules governing the filing of various reports.

Unionbank was fined for failure for failure to file SEC Form 11-A.

CA affirmed the decision of SEC.

Issues:

WON the RSA Implementing Rules 11(a)-1, 34(a)-1 and 34(c)-1 applies to Union
Bank (YES)
Ruling:

petitioner is not exempted from the RSA implementing rules.

Section 5(a)(3) of RSA exempts from registration the securities issued by

banking or financial institutions. Nowhere does it state or even imply that
petitioner, as a listed corporation, is exempt from complying with the
reports required by the assailed RSA Implementing Rules.

The exemption from the registration requirement enjoyed by petitioner does

not necessarily connote that [it is] exempted from the other reportorial
requirements.

The full disclosure Rules do not amend Section 5(a)(3) of the Revised Securities
Act, because they do not revoke or amend the exemption from registration of the
securities enumerated. They are reasonable regulations imposed upon
petitioner as a banking corporation trading its securities in the stock
market. #fluffypeaches

The mere fact that in regard to its banking functions, petitioner is already
subject to the supervision of the BSP does not exempt the former from reasonable
disclosure regulations issued by the SEC. These regulations are meant to assure full,
fair and accurate disclosure of information for the protection of investors in the stock
market. Imposing such regulations is a function within the jurisdiction of the SEC.
7. Nestle vs CA
Sometime in February 1983, the authorized capital stock of petitioner Nestle
Philippines Inc. ("Nestle") was increased from P300 million divided into 3 million
shares with a par value of P100.00 per share, to P600 million divided into 6 million
shares with a par value of P100.00 per share. Nestle underwent the necessary
procedures involving Board and stockholders approvals and effected the necessary
filings to secure the approval of the increase of authorized capital stock by
respondent Securities and Exchange Commission ("SEC"), which approval was in fact
granted. Nestle also paid to the SEC the amount of P50,000.00 as filing fee in
accordance with the Schedule of Fees and Charges being implemented by the SEC
under the Corporation Code. 1
Nestle has only two (2) principal stockholders: San Miguel Corporation and
Nestle S.A. The other stockholders, who are individual natural persons, own
only one (1) share each, for qualifying purposes, i.e., to qualify them as members of
the Board of Directors being elected thereto on the strength of the votes of one or
the other principal shareholder.
On 16 December 1983, the Board of Directors and stockholders of Nestle
approved resolutions authorizing the issuance of 344,500 shares out of the
previously authorized but unissued capital stock of Nestle, exclusively to
San Miguel Corporation and to Nestle S.A. San Miguel Corporation subscribed to
and completely paid up 168,800 shares, while Nestle S.A. subscribed to and paid up
the balance of 175,700 shares of stock.
On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate
Secretary, M.L. Antonio, with the SEC seeking exemption of its proposed
issuance of additional shares to its existing principal shareholders, from
the registration requirement of Section 4 of the Revised Securities Act and

from payment of the fee referred to in Section 6(c) of the same Act.
The principal, indeed the only, argument presented by Nestlewas that
Section 6(a) (4) of the Revised Securities Act which provides as follows:
"or the issuance of additional capital stock of a corporation sold or
distributed by it among its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or indirectly in
connection with the sale or distribution of such increased capital stock.
(Emphasis supplied)"
argued that embraces "not only an increase in the authorized capital stock
but also the issuance of additional shares to existing stockholders of the
unissued portion of the unissued capital stock"
8. Onapal vs CA
The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly
organized and existing corporation, was licensed as commission
merchant/broker by the SEC, to engage in commodity FUTURES TRADING in
Cebu City under Certificate of Registration No. CEB-182. On April 27, 1983,
petitioner and private respondent concluded a "Trading Contract". Like all
customers of the petitioner, private respondent was furnished regularly with
"Commodities Daily Quotations" showing daily movements of prices of
commodity FUTURES TRADED and of market reports indicating the volume
of trade in different future exchanges in Hongkong, Tokyo and other
centers. Every time a customer enters into a trading transaction with petitioner as
broker, the trading order is communicated by telex to its principal, Frankwell
Enterprises of Hongkong. If the transaction, either buying or selling
commodity futures, is consummated by the principal, the petitioner issues
a document known as "Confirmation of Contract and Balance Sheet" to the
customer. An order of a customer of the petitioner is supposed to be
transmitted from Cebu to petitioner's office in Manila. From Manila, it
should be forwarded to Hongkong and from there, transmitted to the
Commodity Futures Exchange in Japan.
The facts as disclosed by the evidence on record show that private respondent made
arrangements with Elizabeth Diaz, Account Executive of petitioner for her to see Mr.
Albert Chiam, petitioner's Branch Manager. The contract signed by private
respondent purports to be for the delivery of goods with the intention that
the difference between the price stipulated and the exchange or market
price at the time of the pretended delivery shall be paid by the loser to the
winner. We quote with approval the following findings of the trial court as cited in
the Court of Appeals decision:
The evidence of the plaintiff tend to show that in her transactions with the defendant,
the parties never intended to make or accept delivery of any particular commodity
but the parties merely made a speculation on the rise or fall in the market
of the contract price of the commodity, subject of the transaction, on the pretended
date of delivery so that if the forecast was correct, one party would make a profit, but
if the forecast was wrong, one party would lose money. Under this scheme, plaintiff
was only able to recover P470,000.00 out of her original and "additional" deposit of
P800,000.00 with the defendant.
Held: The transaction is not what the parties call it but what the law defines it to be.
15
After considering all the evidence in this case, it appears that petitioner and private
respondent did not intend, in the deals of purchasing and selling for future delivery,
the actual or constructive delivery of the goods/commodity, despite the payment of

the full price therefor. The contract between them falls under the definition of
what is called "futures". The payments made under said contract were
payments of difference in prices arising out of the rise or fall in the market
price above or below the contract price thus making it purely gambling and
declared null and void by law.
9.Palting vs San Jose Petroleum
In 1956, San Jose Petroleum, Inc. (SJP), a mining corporation organized under
the laws of Panama, was allowed by the Securities and Exchange
Commission (SEC) to sell its shares of stocks in the Philippines. Apparently,
the proceeds of such sale shall be invested in San Jose Oil Company, Inc.
(SJO), a domestic mining corporation. Pedro R. Palting and others, allegedly
prospective investors in the shares of SAN JOSE PETROLEUM, filed with the
Securities and Exchange Commission an opposition to registration and licensing of
the securities on the grounds thatt the said tie up between SJP and SJO is violative of
the constitution; that SJO is 90% owned by SJP; that the other 10% is owned by
another foreign corporation; that a mining corporation cannot be interested in
another mining corporation. SJP on the other hand invoked that under the parity
rights agreement (Laurel-Langley Agreement), SJP, a foreign corporation, is allowed
to invest in a domestic corporation.
Respondent raises the question of the personality of petitioner to bring this
appeal, contending that as a mere "prospective investor", he is not an
"Aggrieved" or "interested" person who may properly maintain the suit.
Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the
phrase "party aggrieved" used in the Securities Act3 and the Rules of
Court4 as having the right to appeal should refer only to issuers, dealers
and salesmen of securities.
Issue: Whether or not petitioner Pedro R. Palting, as a "prospective investor" in
respondent's securities, has personality to file the present petition for review of the
order of the Securities and Exchange Commission;
10. PVB vs Callangan
FACTS: Respondent Justina F. Callangan, the Director of the Corporation
Finance Department of theSecurities and Exchange Commission (SEC), sent
Philippine Veterans Bank (the Bank) a letter,informing it that it qualifies as
a "public company" under Section 17.2 of the Securities RegulationCode (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 Section17.1 of the SRC and The Bank responded
by explaining that it should not be considered a "publiccompany" because it
is a private company whose shares of stock are available only to a
limitedclass or sector, i.e., to World War II veterans, and not to the general public
but Director Callangan rejected the Banks explanation and assessed it a penalty for
failing to comply with the SRCreportorial requirements from 2001 to 2003. The Bank
moved for the reconsideration of theassessment, but Director Callangan denied the
motion. The Bank then filed a petition for reviewwith the Court of Appeals (CA) but
the CA dismissed the petition and affirmed the assailed SEC ruling. The CA also
denied the Banks motion for reconsideration, opening the way for the Banks petition
for review on certiorari filed with the Supreme Court but the Supreme Court denied
theBa nks petition for failure to show any reversible error in the assailed CA decision
and resolution.

Now the Supreme Court resolves the motion for reconsideration filed by petitioner
PhilippineVeterans Bank (the Bank).
ISSUE:
Whether or not the petitioner Philippines Veterans Bank is a Public Company
under theSecurities Regulation Code (SRC).
RULING:
Yes, the bank is a public company under the SRC.The Supreme Court DENIED the
motion for reconsiderationUnder the
Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the
SRC,whichdefines 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 havingtwo
hundred (200) or more holders, at least two hundred (200) of which are holding at
least onehundred (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 notlimited 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 assetsexceeding P50,000,000.00 and has
395,998 shareholders
. It is thus considered a public company that must comply with the reportorial
requirements set forth in Section 17.1 of the SRC.