CASE DIGEST PERTAINING TO SEC. 3, 8-10 OF R.A.

8799
“THE SECURITIES REGULATIONS CODE”

By

Jan Mikko Bollozos Dulcero

As final requirement for Securities and Exchange Commission

Subject

Submitted to

Atty. Jesell Ann Vega

January 2024
 A. Framework for Regulating of Securities Trading – Sec. 8-10, R.A. 8799

SECURITIES AND EXCHANGE COMMISSION vs. OUDINE SANTOS

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

Sometime in 2007, an investment scam was exposed with the disappearance of its primary
perpetrator, Michael H.K. Liew, a self-styled financial guru and Chairman of the Board of Directors of
Performance Investment Products Corporation (PIPC-BVI), a foreign corporation registered in the British
Virgin Islands. PIPC-BVI incorporated in the Philippines as Philippine International Planning Center
Corporation (PIPC).

Due to Liew’s disappearance along with the money and investments many complained to the SEC
for alleged violations of Sec. 28 of the SRC, among those included in the complaint is respondent Santos
in her capacity as investment consultant of PIPC. Soon after the SEC filed a complaint to the DOJ for
violation of Sec. 8, 26, and 28 of the SRC including respondent, private complainants specifically narrated
respondent’s participation in how they came to invest their money.

Santos' defense consisted in: (1) denying participation in the conspiracy and fraud perpetrated
against the investor-complainants 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 PIPC-BVI 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 PIPC-BVI; (5) Santos having dealt only with Sy and the latter, in
fact, deposited money directly into PIPC-BVI's account; and (6) on the whole, PIPC-BVI 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.

The DOJ in its resolution indicted Liew and Tuason for violation of Sec. 8 and 26 of the SRC and
respondent and 12 others for violation of Sec. 28 of the SRC. In further proceedings the DOJ Secretary
excluded respondent from the information. SEC appealed to the Court of Appeals whereby their petition
was dismissed and the DOJ decision affirmed, Hence this petition.

ISSUE/S:

Whether or not the exclusion of respondent Oudine Santos from the information for violation of
Sec. 28 of the SRC is proper.
RULING:

While Santos was not a signatory to the contracts on Sy's or Lorenzo's 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 PIPC-BVI
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 PIPC-BVI, acting as an ostensible agent of the
latter on the viability of PIPC Corporation as an investment company. At each point of Sy's and
Lorenzo's investment, Santos' participation thereon, even if not shown strictly on paper, was prima
facie established.
In all of the documents presented by Santos, she never alleged or pointed out that she did
not receive extra consideration for her simply providing information to Sy and Lorenzo about PIPC
Corporation and/or PIPC-BVI. Santos only claims that the monies invested by Sy and Lorenzo did not
pass through her hands. In short, Santos did not present in evidence her salaries as a supposed "mere
clerical employee or information provider" of PIPC-BVI. Such a presentation would have foreclosed all
questions on her status within PIPC Corporation and/or PIPC-BVI 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.
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. 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.
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. TDSICH
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 CA-G.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 Regulation
Code.
 SECURITIES AND EXCHANGE COMMISSION vs. G. COSMOS PHILIPPINES
G.R. No. 167435
April 20, 2015
FACTS:
Petitioner G. Cosmos Philippines, Inc., is a corporation duly registered with
the Securities and Exchange Commission, whose primary purpose, as stated in its
Articles of Incorporation is: To create advertising campaign plans that will transmit in an
effective manner as possible the message of the advertiser's products and services through the
utilization of print, television, radio, cinema and other various advertising media and to render
services in terms of and/or merchandizing public relations and marketing counsel, thereby
offering a complete marketing service.
Under its G. System, the petitioner invites sponsors (investors) who are willing to bear
the cost of advertising the sale of products of small manufacturers all over the world, to be
marketed and sold in Japan by way of the mail order sales system. In return, the sponsors are
entitled to receive, as their gain 30% of the sales revenue of the products advertised and sold.
Upon two complaint-letters received by the SEC from Telford Rizarri and Ruperto Garcia
requesting the said Commission to conduct an investigation of G. Cosmos Philippines, Inc., the
SEC created a team to determine compliance with the provisions of RA 8799, otherwise known
as the Securities Regulation Code. The petitioner was found to have violated the
provision of Section 8.1 of the Securities Regulation Code, which states that:
Section8. 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.
Respondent SEC contends that the petitioner's scheme of collecting from its members
the advertising costs for its mail order sales in Japan falls within the purview of an investment
contract which is included in the definition of securities.
Respondent was issued a cease-and-desist order by the SEC and a fine of
P51,780,000.00 was burdened upon them. Upon appeal to the CA, the CA affirmed the SEC
decision with modification that the fine be reduced to P1,000,000.00.

ISSUE/S:
a. Whether or not the CA erred in saying that the fine imposed by the SEC was excessive.
b. Whether or not the CA erred in reducing the penalty to P1,000,000.00
RULING:
The resolution of the appeal hinges on the proper interpretation and implementation of the
following pertinent provisions of the Securities Regulation Code, thus:
Section 54. Administrative Sanctions. — 54.1. If, after due notice and hearing, the
Commission finds that: (a) There is a violation of this Code, its rules, or its orders; (b) Any
registered broker or dealer, associated person thereof has failed reasonably to supervise, with
a view to preventing violations, another person subject to supervision who commits any such
violation; (c) Any registrant or other person has, in a registration statement or in other reports,
applications, accounts, records or documents required by law or rules to be filed with the
Commission, made any untrue statement of a material fact, or omitted to state any material
fact required to be stated therein or necessary to make the statements therein not misleading;
or, in the case of an underwriter, has failed to conduct an inquiry with reasonable diligence to
insure that a registration statement is accurate and complete in all material respects; or (d) Any
person has refused to permit any lawful examinations into its affairs, it shall, in its discretion,
and subject only to the limitations hereinafter prescribed, impose any or all of the following
sanctions as may be appropriate in light of the facts and circumstances;
(i) Suspension, or revocation of any registration for the offering of securities;
(ii) A fine of not less than Ten thousand pesos (P10,000.00) nor more than One
million pesos (P1,000,000.00) plus not more than Two thousand pesos
(P2,000.00) for each day of continuing violation;
Hence, sub-item (a) of Section 54.1 must be read together with sub-items (b) to
(d) of the section. These items show that Section 54.1 penalizes the continuing acts of brokers
or dealers, registrants or any other persons in failing to supervise and prevent the
violation of the Securities Regulation Code; in making untrue statements or omitting to state
material statements, or failing to conduct inquiry to ensure that the statements are accurate or
complete; and, finally, in refusing to permit lawful examination into their affairs. As such, sub-
item (a) must be taken to mean that the violation of the Securities Regulation Code, rules and
orders is a continuing act. We cannot consider each occasion of a violation of sub-item (a) as an
act warranting the imposition of a sanction for each violation, for to do so is to read Section
54.1 in truncated parts that are detached or isolated from each other, which will run counter to
the pronouncement in Philippine International Trading Corporation v. Commission on Audit,
supra. Thereby, such a reading would penalize its violation every single time notwithstanding
that Section 54.1 punishes a single continuing act.
The addition of a fine of not more than P2,000.00 for each day of a continuing violation
supports the ruling of the CA that the SEC exceeded the intendment of the law. Indeed, imposing a
fine of at least P10,000.00 per sale or per offer to sell will contravene such intendment of the law
because otherwise the imposition of fine of not more than P2,000.00 for each day of a continuing
violation will then not have a logical meaning or purpose. The SEC's argument is inconsistent with such
intendment and results in the absurd interpretation of the law. It is logical to hold, instead, that Section
54.1 penalizes a continuing act, resulting in the one-time imposition of a fine that is not to be less than
P10,000.00 but not to be more than P1,000,000.00, plus an incremental fine of not less than P2,000.00
for each day the violator continues to violate the Securities Regulation Code.
The records further show that the SEC specifically found the respondent to have violated
Section 8 of the Securities Regulation Code, viz.:
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. (Emphasis supplied) CAacTH
This legal provision specifically penalizes the sale or offer for sale of securities within the
Philippines "without a registration duly filed with and approved by the Commission." Thus, in acting on
the letters-complaint from Telford Rizarri and Ruperto Garcia, the SEC concluded that the respondent
had violated the Securities Regulation Code by selling unregistered securities. 11 As long as the
respondent continued to sell or to offer to sell unregistered securities, the SEC could validly impose the
incremental daily fine of not more than P2,000.00 in addition to the main fine of not less than
P10,000.00 nor more than P1,000,000.00.
WHEREFORE, the Court AFFIRMS the challenged decision of the Court of Appeals in C.A.-G.R.
SP No. 69966 promulgated on July 22, 2004.

|||
 RICO PUERTO v PEOPLE OF THE PHILIPPINES
G.R. No. 209655-60
January 14, 2015
FACTS:

Tibayan Group Investment Company,Inc. (TGICI) is an open-end investment company

registered with the Securities and Exchange Commission (SEC) on September 21, 2001. Sometime
in 2002, the SEC conducted an investigation on TGICI and its subsidiaries. In the course thereof, it
discovered that TGICI was selling securities to the public without a registration statement in
violation of Republic Act No. 8799, otherwise known as "The Securities Regulation Code," and
that TGICI submitted a fraudulent Treasurer’s Affidavit before the SEC. Resultantly, on October 21,
2003, the SEC revoked TGICI’s corporate registration for being fraudulently procured.The
foregoing led to the filing of multiple criminal cases for Syndicated Estafa against the
incorporators and directors of TGICI, namely, Jesus Tibayan, Ezekiel D. Martinez, Liborio E. Elacio,
Jimmy C. Catigan, Nelda B. Baran, and herein accused-appellants. Consequently, warrants of
arrest were issued against all of them; however, only accusedappellants were arrested, while the
others remained at large.

Petitioner was charged with violation of Section 8.1, in relation to Section 73, of Republic Act
(R.A.) No. 8799, otherwise known as the Securities Regulation Code, for selling securities without a
registration statement duly filed with and approved by the Securities and Exchange Commission (SEC).
Section 8.1 of R.A. No. 8799 provides:
Section 8. Requirement of Registration of Securities. — 8.1. Securities shall
not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Commission. Prior to such
sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.
Section 3.1 of the same law defines securities as follows:
Section 3. Definition of Terms. — 3.1. "Securities" are shares, participation or
interests 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: HEITAD
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certifies [sic] of deposit
for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
 (d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar instruments;
(f) Proprietary or nonproprietary membership certificates in
corporations; and
(g) Other instruments as may in the future be determined by
the Commission. (Emphasis supplied)

|||

According to the prosecution, private complainants Hector H. Alvarez, Milagros Alvarez,

Clarita P. Gacayan, Irma T. Ador, Emelyn Gomez, Yolanda Zimmer, Nonito Garlan, Judy C. Rillon,
Leonida D. Jarina, Reynaldo A. Dacon, Cristina DelaPeña, and Rodney E. Villareal (private
complainants) were enticed to invest in TGICI due to the offer of high interest rates, as well as the
assurance that they will recover their investments. After giving their money to TGICI, private
complainants received a Certificate of Share and post-dated checks, representing the amount of
the principal investment and the monthly interest earnings, respectively. Upon encashment, the
checks were dishonored, as the account was already closed, prompting private complainants to
bring the bounced checks to the TGICI office to demand payment. At the office, the TGICI
employees took the said checks, gave private complainants acknowledgement receipts, and
reassured that their investments, as well as the interests, would be paid. However, the TGICI office
closed down without private complainants having been paid and, thus, they were constrained to
file criminal complaints against the incorporators and directors of TGICI.

In their defense, accused-appellants denied having conspired with the other TGICI
incorporators to defraud private complainants. Particularly, Puerto claimed that his signature in
the Articles of Incorporation of TGICI was forged and that since January 2002, he was no longer a
director of TGICI. For her part, Tibayan also claimed that her signature in the TGICI’s Articles of
Incorporation was a forgery,as she was neither an incorporator nor a director of TGICI.

RTC convicted Tibayan and Puerto for Estafa

On appeal CA modified the accused-appellants conviction to Syndicated Estafa and

increased their respective penalties to life imprisonment for each count.

ISSUE/S:

Whether or not accused-appellants are guilty beyond reasonable doubt of the crime of
syndicated estafa.

RULING:

The court sustains the conviction.

 The elements of Estafa by means of deceit under this provision are the following: (a) that there
must be a false pretense or fraudulent representation as to his power, influence, qualifications, property,
credit, agency, business or imaginary transactions; (b) that such false pretense or fraudulent
representation was made or executed prior to or simultaneously with the commission of the fraud; (c) that
the offended party relied on the false pretense, fraudulent act, or fraudulent means and was induced to
part with his money or property; and (d) that, as a result thereof, the offended party suffered damage.

In relation thereto, Section 1 of PD 1689 defines Syndicated Estafa as follows:

Section 1. Any person or persons who shall commit estafa or other forms of swindling as defined
in Articles 315 and 316 of the Revised Penal Code, as amended, shall be punished by life imprisonment to
death if the swindling (estafa) is committed by a syndicate consisting of five or more persons formed with
the intention of carrying out the unlawful or illegal act, transaction, enterprise or scheme, and the
defraudation results in the misappropriation of moneys contributed by stockholders, or members of rural
banks, cooperatives, "samahang nayon(s)," or farmers’ associations, or funds solicited by
corporations/associations from the general public.

Thus, the elements of Syndicated Estafa are: (a) Estafa or other forms of swindling, as defined in
Articles 315 and 316 of the RPC, is committed; (b) the Estafa or swindling is committed by a syndicate of
five (5) or more persons; and (c) defraudation results in the misappropriation of moneys contributed by
stockholders, or members of rural banks, cooperative, "samahang nayon(s)," or farmers’ associations, or
of funds solicited by corporations/associations from the general public.

In this case, a judicious review of the records reveals TGICI’s modus operandiof inducing the public
to invest in it on the undertaking that their investment would be returned with a very high monthly interest
rate ranging from three to five and a half percent (3%-5.5%). Under such lucrative promise, the investing
public are enticed to infuse funds into TGICI. However, as the directors/incorporators of TGICI knew from
the start that TGICI is operating withoutany paid-up capital and has no clear trade by which it can pay the
assured profits to its investors, they cannot comply with their guarantee and had to simply abscond with
their investors’ money. Thus, the CA correctly held that accused-appellants, along with the other accused
who are still at large, used TGICI to engage ina Ponzi scheme, resulting in the defraudation of the TGICI
investors.

To be sure, a Ponzi scheme is a typeof investment fraud that involves the payment of purported
returns to existing investors from funds contributed by new investors. Its organizers often solicit new
investors by promising to invest funds in opportunities claimed to generate high returns with little or no
risk. In many Ponzi schemes, the perpetrators focus on attracting new money to make promised payments
to earlier-stage investors to create the false appearance that investors are profiting from a legitimate
business. It is not an investment strategy but a gullibility scheme, which works only as long as there is an
ever increasing number of new investors joining the scheme. It is difficult to sustain the scheme over a
long period of time because the operator needs an ever larger pool of later investors to continue paying
the promised profits toearly investors. The idea behind this type of swindle is that the "con-man" collects
his money from his second or third round of investors and then absconds before anyone else shows up to
collect. Necessarily, Ponzi schemes only last weeks, or months at the most.
 In this light, it is clear that all the elements of Syndicated Esta/a, committed through a Ponzi scheme,
are present in this case, considering that: (a) the incorporators/directors of TGICI comprising more than
five (5) people, including herein accused-appellants, made false pretenses and representations to the
investing public - in this case, the private complainants - regarding a supposed lucrative investment
opportunity with TGICI in order to solicit money from them; (b) the said false pretenses and
representations were made prior to or simultaneous with the commission of fraud; (c) relying on the same,
private complainants invested their hard earned money into TGICI; and (d) the incorporators/directors of
TGICI ended up running away with the private complainants' investments, obviously to the latter's
prejudice.
 CITIBANK vs JOSE PUA
G.R. No. 234728
April 23, 2018
FACTS:

At a function organized by Citibank, N.A.'s (petitioner) Binondo Branch (Binondo Branch) for
its selected clients, respondent Jose was introduced by Binondo Branch Manager, Angelina Guada Ang
(Ang), to Ching Yee Yau (Yau), an officer of petitioner's Hong Kong Branch (Hong Kong Branch).
Subsequently, Ang and another employee of the Binondo Branch were able to persuade respondents
to meet Yau at their office where Yau offered to them investment products of the Hong Kong Branch.
Thereafter, on three separate occasions, Yau offered and sold to respondents, securities issued by
public limited companies established in Jersey, Channel Islands. Petitioner assured respondents that
the securities were investment grade.
As a precondition to the sale, respondents opened an account with the Hong Kong Branch
(bank account). Jose was also required to sign an undated document known as the Terms and
Conditions for Credit Services-Individual.
Respondents averred that petitioner then made it appear that they obtained loans from the
bank and used these loans and the cash in Jose's bank account to pay unto itself the purchase price
of the first two subscriptions. The last subscription was fully paid with money from respondents' bank
account.
||| Respondents later discovered that the aforesaid securities, the Subscription Agreements
and the "Terms and Conditions for Credit Services-Individual" were not registered with the Securities
and Exchange Commission (SEC), in violation of the Securities Regulation Code. Respondents also
averred that the securities turned out to be worthless, and despite their demands, petitioner refused
to credit the money previously debited from their bank account and to release US$309,723.59 from
their Time Deposit Account with the Hong Kong Branch. Consequently, on December 2, 2002, they
filed a Complaint for Declaration of Nullity of Contracts and Sums of Money with Damages against
petitioner.
Petitioner moved to dismiss the Complaint for failure to state a cause of action, pari
delicto, forum non conveniens and improper venue. When the RTC denied the motion, petitioner filed
its Answer ad cautelam but assailed the RTC's denial before the CA. Trial ensued but was suspended
in 2007 when the CA dismissed the complaint. The case was later reinstated by this Court in 2013.
RTC decided in favor of Pua declaring the subscription agreements and sale as null and void
ab initio for being contrary to law and public policy
When appealed the CA affirmed the decision of the RTC.
ISSUE/S:
Whether or not the CA erred in affirming the decision of the RTC.
RULING:
Settled is the rule that only questions of law should be raised in petitions filed under
Rule 45. "This [C]ourt is not a trier of facts." "Factual findings of trial courts, especially when
affirmed by the [CA], as in this case, are binding on the Supreme Court." None of the exceptions
to this rule apply in this case.
Contrary to petitioner's claim, it was not denied due process. Records show that
petitioner was given every opportunity to present its case. Petitioner was granted a 15-day
extension to file a responsive pleading. When its Motion to Dismiss was denied, it was granted
a 30-day extension to file its Answer.
There was a total of 14 scheduled hearings during which petitioner could have
presented its evidence. Despite these settings, spanning a period of nine years from 2006 to
2014, petitioner was able to present only the testimony of its counsel of record, who testified
on its attorney's fees, and the deposition upon oral examination of its Country Counsel, both in
2014. Scheduled hearings were cancelled on petitioner's motion because its counsel was not
ready for trial or had a trip abroad, or because it sought appellate review of the denial of its
motion to dismiss albeit no injunction or restraining order had been issued by the appellate
court. The RTC showed leniency and allowed the resetting of hearings even over respondents'
vigorous objections.
That petitioner was allegedly preparing notices to take the deposition of its other
witnesses and making arrangements for the deposition-taking, will not excuse its lapses.
Petitioner had more than a decade since it filed its Answer in 2003 to prepare for any
deposition-taking but it chose to make arrangements only in 2014. Note that under Rule 23 of
the Rules of Court, deposition upon oral examination may be taken even without leave of court
after the answer has been filed. Furthermore, at the pre-trial of the case in 2004, the parties
already agreed to avail the modes of discovery.
In this case, petitioner, despite the RTC's inquiry, made no averment as to the names of
its witnesses/deponents and the nature and materiality of their testimonies.
As the RTC and the CA found, petitioner indeed offered to sell and sold foreign securities
to respondents in violation of Philippine securities laws.
Under Section 4 (a) of Batas Pambansa Blg. 178, and Sections 8, 9 and 10 of Republic
Act No. 8799, also known as the Securities Regulation Code, all securities sold or offered for
sale or distribution in the Philippines must be registered, unless they are exempt from
registration. This is for the protection of investors as securities transactions are imbued with
public interest, thus, subject to regulation. As the CA found, the subject securities do not
classify as exempt transactions under Philippine securities laws.
There is no dispute that the subject securities were not registered with the SEC.
Furthermore, Justina Callangan, Director of the Corporation Finance Department of the SEC,
which is tasked with processing applications for registration of securities, certified that the
subject securities were not registered with the SEC.
The CA aptly pointed out that SEC Director Callangan testified that the instruments
offered to respondents were actually securities which require prior registration before they are
sold or offered for sale in the Philippines.
 Petitioner cannot use its alleged separate personality from Citibank Hong Kong to
disown its participation in the transaction. Likewise, petitioner cannot claim that the subject
transactions are outside the operation of Philippine securities laws because they were allegedly
perfected outside the Philippines. Petitioner's actions prior to, during and after the transactions
showed that it actively participated therein.
Petitioner hosted the dinner party to selected clients, including Jose, for the purpose of
presenting investment products from its Hong Kong Branch. It was during this function that
Jose was introduced to Yau who later offered and sold to him the subject securities. After said
function, petitioner's Binondo Branch Manager persuaded respondents to meet Yau at the
Binondo Branch. Petitioner made use of its entire web of departments to convince and make
respondents agree to the sale of the subject securities. All papers for the opening of
respondents' bank account in Hong Kong and all documents related to the sale of the subject
securities were prepared, accomplished and executed in petitioner's Binondo Branch.
Respondents had never been to Hong Kong to seal the deal.
In executing the Subscription Agreements, petitioner even readily offered its Binondo
Branch as respondents' mailing address. Evidence showed that petitioner had been aggressive
in tapping potential investors from the Philippines, launching for this purpose its enhanced
referral program which promises a referral pay-out of US$1,000 for each referral resulting in
booked business. Through this program, petitioner provided its high net worth clients with
seminars, workshops and other materials relating to wealth enhancement, and through its
"Citigold Executives," it actively looked for potential buyers of investment products. It was a
Citigold Executive who referred respondents to Yau who then sold the subject securities to the
latter with full support of the Binondo Branch. During the transactions, petitioner made it
appear that all its dealings are those of Citibank as a single unit.
Under Article 5 of the Civil Code provides that acts executed against the provisions of
mandatory or prohibitory laws shall be void except when the law itself authorizes their validity.
In addition, Article 1409 of the Civil Code also provides that contracts expressly prohibited by
law are inexistent and void from the beginning. Thus, the subject sale transactions, which are
prohibited under the Philippine securities laws, are void ab initio. Accordingly, respondents
should be able to recover what they had paid with legal interest. Notably, as regards the
subscriptions, the assailed decision only required the recovery of amounts debited from
respondents' own bank account.
Petitioner has proffered no evidence to substantiate its claim of income earned on the
securities. Petitioner likewise failed to adduce evidence of outstanding loans from respondents
which petitioner sought to offset against respondent's US$309,723.59 Time Deposit.
Petitioner's claim of prescription was not assigned as an error in its appeal before the
CA. 34 "Issues not raised in the pleadings, as opposed to ordinary appeal of criminal cases
where the whole case is opened for review, are deemed waived or abandoned. Essentially, to
warrant consideration on appeal, there must be discussion of the error assigned, else, the error
will be deemed abandoned or waived." In any event, Article 1410 of the Civil Code provides
that "[t]he action or defense for the declaration of the inexistence of a contract does not
prescribe."
 In case of sale of unregistered securities, Section 63 of the Securities Regulation Code
authorizes the award of damages in an amount not exceeding triple the amount of the
transaction plus actual damages. The RTC's award of US$1Million as damages in relation to the
US$500,000 Palmyra subscription is, thus, in order.
 B. Concept of Securities; Howey Test – Sec. 3, R.A. 8799

SECURITIES AND EXCHANGE COMMISSION vs. PROSPERITY.COM, INC.

G.R. No. 161497
January 25, 2012
FACTS:

Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet
service. To make a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire from it an internet website of a 15-Mega Byte (MB) capacity.
At the same time, by referring to PCI his own down-line buyers, a first-time buyer could earn commissions,
interest in real estate in the Philippines and in the United States, and insurance coverage worth
₱50,000.00.

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 PCI’s actual
operations.

In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the
latter had taken over GVI’s operations. After hearing the SEC, through its Compliance and Enforcement
unit, issued a CDO against PCI. The SEC ruled that PCI’s scheme constitutes an Investment contract and,
following the Securities Regulations Code 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 PCI’s action before the SEC, however, the CA issued a TRO, enjoining the
enforcement of the CDO. In response, the SEC filed with the CA a motion to dismiss the petition on ground
of forum shopping. In a Resolution, the CA initially dismissed the petition, finding PCI guilty of forum
shopping. But on PCI’s motion, the CA reversed itself and reinstated the petition.
 In a joint resolution, 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 PCI’s petition and setting aside the
SEC-issued CDO. The CA ruled that, following the Howey test, PCI’s scheme did not constitute an
investment contract that needs registration pursuant to R.A. 8799, hence, this petition.

ISSUE/S:

Whether or not PCI’s scheme constitutes an investment contract that requires registration under
R.A. 8799.

RULING:

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.

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
court’s rulings, while not binding in the Philippines, enjoy some degree of persuasiveness insofar as they
are logical and consistent with the country’s best interests.

The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey
Co. that, for an investment contract to exist, the following elements, referred to as the Howey test must
concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a
common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of
others. Thus, to sustain the SEC position in this case, PCI’s 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, PCI’s 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.

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 store’s
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 ₱50,000.00 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.
 ROBERTO L. YUPANGCO VS. O.J. DEVELOPMENT AND TRADING CORPORATION
G.R. No. 242074
November 10, 2021
FACTS:

In their Complaint, petitioners alleged that OJDTC and Oscar maintained a dollar exchange
business with Grace Foreign Exchange (Grace), a company organized and existing under the laws of
California, United States (US). Grace is engaged in remitting dollars from Overseas Filipino Workers in the
US to recipients in the Philippines. Upon the instruction of the clients of Grace to remit specific sums to
the designated recipients in the Philippines, OJDTC and Oscar would deliver to said recipients the peso
equivalent of the dollar remittances that Grace received. Sometime in 1985, petitioners started buying US
dollars from OJDTC and Oscar. In effect, the former advanced the peso equivalent of the dollar remittances
to be delivered by the latter to the named beneficiary. In turn, OJDTC and Oscar would deliver to
petitioners the payment for the dollars purchased one week from the transaction. The foregoing
arrangement continued through the years until it was terminated sometime in February 2002 when OJDTC
and Oscar could no longer pay the full amount of the US dollars that petitioners purchased. By then, the
unpaid obligation of OJDTC and Oscar amounted to US$1.9 million

Petitioners claimed that Oscar induced them to loan the undelivered US$ 1.9 million to Grace on
the pretext that the company needed a capital infusion for its expansion in California. Hence, in February
2002, petitioners, representing the Yupangco family, and Oscar, representing the Jesena family, executed
an undated Memorandum of Agreement Prior to IPO (First MOA), which provided that,
petitioners' "existing investment of $1.3 million plus $600,000" with Grace shall be secured with a blank
deed of sale over certain parcels of land stated therein. Subsequently, on March 11, 2002, Oscar, in his
capacity as the President of OJDTC, executed a Promissory Note for Existing Investment (Promissory Note)
in petitioners' favor

As the proposed joint venture and IPO of Grace failed to materialize, Oscar, in his personal capacity
and in his capacity as President of OJDTC, entered into a second Memorandum of Agreement (Second
MOA) with petitioners, representing the Yupangco Family, on December 11, 2003. He acknowledged his
and OJDTC's outstanding obligation to petitioners in the amount of US$1,242,229.77

RTC dismissed the petition for want of cause of action

Consequently, the CA agreed with the RTC that what impelled Oscar to sign the MOAs and the
Promissory Note was his desire to help his best friend, petitioner Roberto, and his desire to recognize his
debt of gratitude to Nita Yupangco, Roberto's mother, who helped him when he was just starting his
business. Without the Yupangcos help, Oscar would not be able to set-up his business in America. The CA
noted that the business of foreign exchange is a very risky business given the fluctuation of the US
dollars vis-a-vis the Philippine peso. When the US dollar is strong, the Yupangcos lost in the exchange, but
if the dollar is weak, they will earn more profit. The CA concluded that petitioners failed to prove by a
preponderance of evidence and by their own admissions in open court that OJDTC and Oscar had a loan
obligation and that there was a remaining amount still unpaid.
ISSUE/S:

Whether the Second MOA entered into by the parties involved a loan obligation.

RULING:

The Complaint based its cause of action on the Second MOA. The RTC, as affirmed by the CA,
found that the Second MOA involves an investment and not a loan obligation. As such, Oscar and OJDTC
are under no obligation to return the invested money as all the parties share the risk involved in the
business. We disagree.

For a better understanding, we shall restate the undisputed facts of the case as found by the
courts a quo. Petitioners, OJDTC, and Oscar are engaged in the buying and selling of US Dollars. Grace
would receive the dollar remittances of the OFWs in the US, while OJDTC and Oscar would deliver the
peso equivalent of the dollar remittances to the OFWs' designated beneficiaries in the Philippines.
Petitioners advance the peso equivalent of the dollar remittances by issuing checks in Philippine Pesos
to OJDTC and Oscar, who upon encashment shall deliver it to the named beneficiaries. OJDTC and Oscar
would pay the corresponding amount in dollars to petitioners upon receipt of the actual remittance
from Grace. This arrangement went on from 1985 to 2002. During these years, OJDTC and Oscar
accumulated an unpaid balance to petitioners in the amount of US$1.9 million, which amount was rolled
over as investment or additional capital to Grace. Since there was a remaining balance of
US$1,227,451.26 despite the payment made by OJDTC and Oscar, petitioners filed the present collection
suit.

To Our mind, the Second MOA partakes the nature of a loan obligation and not an investment.

We differentiate between an investment contract and a loan. On one hand, an investment

contract refers to a contract, transaction, or scheme whereby a person invests his/her money in a
common enterprise and is led to expect profits primarily from the efforts of others. It is presumed to
exist whenever a person seeks to use the money or property of others on the promise of profits. In our
jurisdiction, the "Howey Test" is employed to determine whether an agreement is an investment
contract. It requires the concurrence of the following for an investment contract to exists: (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. On the other hand,
Article 1933 of the New Civil Code states that, "[b]y the contract of loan, one of the parties delivers to
another x x x money or other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan or mutuum." Simple loan
may be gratuitous or with a stipulation to pay interest.
 RICO PUERTO v PEOPLE OF THE PHILIPPINES
G.R. No. 209655-60
January 14, 2015
FACTS:

Tibayan Group Investment Company,Inc. (TGICI) is an open-end investment company

registered with the Securities and Exchange Commission (SEC) on September 21, 2001. Sometime
in 2002, the SEC conducted an investigation on TGICI and its subsidiaries. In the course thereof, it
discovered that TGICI was selling securities to the public without a registration statement in
violation of Republic Act No. 8799, otherwise known as "The Securities Regulation Code," and
that TGICI submitted a fraudulent Treasurer’s Affidavit before the SEC. Resultantly, on October 21,
2003, the SEC revoked TGICI’s corporate registration for being fraudulently procured.The
foregoing led to the filing of multiple criminal cases for Syndicated Estafa against the
incorporators and directors of TGICI, namely, Jesus Tibayan, Ezekiel D. Martinez, Liborio E. Elacio,
Jimmy C. Catigan, Nelda B. Baran, and herein accused-appellants. Consequently, warrants of
arrest were issued against all of them; however, only accusedappellants were arrested, while the
others remained at large.

Petitioner was charged with violation of Section 8.1, in relation to Section 73, of Republic Act
(R.A.) No. 8799, otherwise known as the Securities Regulation Code, for selling securities without a
registration statement duly filed with and approved by the Securities and Exchange Commission (SEC).
Section 8.1 of R.A. No. 8799 provides:
Section 8. Requirement of Registration of Securities. — 8.1. Securities shall
not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Commission. Prior to such
sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.
Section 3.1 of the same law defines securities as follows:
Section 3. Definition of Terms. — 3.1. "Securities" are shares, participation or
interests 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: HEITAD
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certifies [sic] of deposit
for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
 (d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar instruments;
(f) Proprietary or nonproprietary membership certificates in
corporations; and
(g) Other instruments as may in the future be determined by
the Commission. (Emphasis supplied)

|||

According to the prosecution, private complainants Hector H. Alvarez, Milagros Alvarez,

Clarita P. Gacayan, Irma T. Ador, Emelyn Gomez, Yolanda Zimmer, Nonito Garlan, Judy C. Rillon,
Leonida D. Jarina, Reynaldo A. Dacon, Cristina DelaPeña, and Rodney E. Villareal (private
complainants) were enticed to invest in TGICI due to the offer of high interest rates, as well as the
assurance that they will recover their investments. After giving their money to TGICI, private
complainants received a Certificate of Share and post-dated checks, representing the amount of
the principal investment and the monthly interest earnings, respectively. Upon encashment, the
checks were dishonored, as the account was already closed, prompting private complainants to
bring the bounced checks to the TGICI office to demand payment. At the office, the TGICI
employees took the said checks, gave private complainants acknowledgement receipts, and
reassured that their investments, as well as the interests, would be paid. However, the TGICI office
closed down without private complainants having been paid and, thus, they were constrained to
file criminal complaints against the incorporators and directors of TGICI.

In their defense, accused-appellants denied having conspired with the other TGICI
incorporators to defraud private complainants. Particularly, Puerto claimed that his signature in
the Articles of Incorporation of TGICI was forged and that since January 2002, he was no longer a
director of TGICI. For her part, Tibayan also claimed that her signature in the TGICI’s Articles of
Incorporation was a forgery,as she was neither an incorporator nor a director of TGICI.

RTC convicted Tibayan and Puerto for Estafa

On appeal CA modified the accused-appellants conviction to Syndicated Estafa and

increased their respective penalties to life imprisonment for each count.

ISSUE/S:

Whether or not accused-appellants are guilty beyond reasonable doubt of the crime of
syndicated estafa.

RULING:

The court sustains the conviction.

 The elements of Estafa by means of deceit under this provision are the following: (a) that there
must be a false pretense or fraudulent representation as to his power, influence, qualifications, property,
credit, agency, business or imaginary transactions; (b) that such false pretense or fraudulent
representation was made or executed prior to or simultaneously with the commission of the fraud; (c) that
the offended party relied on the false pretense, fraudulent act, or fraudulent means and was induced to
part with his money or property; and (d) that, as a result thereof, the offended party suffered damage.

In relation thereto, Section 1 of PD 1689 defines Syndicated Estafa as follows:

Section 1. Any person or persons who shall commit estafa or other forms of swindling as defined
in Articles 315 and 316 of the Revised Penal Code, as amended, shall be punished by life imprisonment to
death if the swindling (estafa) is committed by a syndicate consisting of five or more persons formed with
the intention of carrying out the unlawful or illegal act, transaction, enterprise or scheme, and the
defraudation results in the misappropriation of moneys contributed by stockholders, or members of rural
banks, cooperatives, "samahang nayon(s)," or farmers’ associations, or funds solicited by
corporations/associations from the general public.

Thus, the elements of Syndicated Estafa are: (a) Estafa or other forms of swindling, as defined in
Articles 315 and 316 of the RPC, is committed; (b) the Estafa or swindling is committed by a syndicate of
five (5) or more persons; and (c) defraudation results in the misappropriation of moneys contributed by
stockholders, or members of rural banks, cooperative, "samahang nayon(s)," or farmers’ associations, or
of funds solicited by corporations/associations from the general public.

In this case, a judicious review of the records reveals TGICI’s modus operandiof inducing the public
to invest in it on the undertaking that their investment would be returned with a very high monthly interest
rate ranging from three to five and a half percent (3%-5.5%). Under such lucrative promise, the investing
public are enticed to infuse funds into TGICI. However, as the directors/incorporators of TGICI knew from
the start that TGICI is operating withoutany paid-up capital and has no clear trade by which it can pay the
assured profits to its investors, they cannot comply with their guarantee and had to simply abscond with
their investors’ money. Thus, the CA correctly held that accused-appellants, along with the other accused
who are still at large, used TGICI to engage ina Ponzi scheme, resulting in the defraudation of the TGICI
investors.

To be sure, a Ponzi scheme is a typeof investment fraud that involves the payment of purported
returns to existing investors from funds contributed by new investors. Its organizers often solicit new
investors by promising to invest funds in opportunities claimed to generate high returns with little or no
risk. In many Ponzi schemes, the perpetrators focus on attracting new money to make promised payments
to earlier-stage investors to create the false appearance that investors are profiting from a legitimate
business. It is not an investment strategy but a gullibility scheme, which works only as long as there is an
ever increasing number of new investors joining the scheme. It is difficult to sustain the scheme over a
long period of time because the operator needs an ever larger pool of later investors to continue paying
the promised profits toearly investors. The idea behind this type of swindle is that the "con-man" collects
his money from his second or third round of investors and then absconds before anyone else shows up to
collect. Necessarily, Ponzi schemes only last weeks, or months at the most.
 In this light, it is clear that all the elements of Syndicated Esta/a, committed through a Ponzi scheme,
are present in this case, considering that: (a) the incorporators/directors of TGICI comprising more than
five (5) people, including herein accused-appellants, made false pretenses and representations to the
investing public - in this case, the private complainants - regarding a supposed lucrative investment
opportunity with TGICI in order to solicit money from them; (b) the said false pretenses and
representations were made prior to or simultaneous with the commission of fraud; (c) relying on the same,
private complainants invested their hard earned money into TGICI; and (d) the incorporators/directors of
TGICI ended up running away with the private complainants' investments, obviously to the latter's
prejudice.
 POWER HOMES UNLIMITED CORPORATION vs. SECURITIES AND EXCHANGE
COMMISSION AND NOEL MANERO
G.R. No. 164182
February 26, 2008

FACTS:

Petitioner is a domestic corporation duly registered with public respondent SEC on October 13,
2000. Its primary purpose is:

To engage in the transaction of promoting, acquiring, managing, leasing, obtaining

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

On October 27, 2000, respondent Noel Manero requested public respondent SEC to investigate
petitioner’s business. He claimed that he attended a seminar conducted by petitioner where the latter
claimed to sell properties that were inexistent and without any broker’s license. Romulo E. Munsayac, Jr.
inquired from public respondent SEC whether petitioner’s business involves "legitimate network
marketing."

On the bases of the letters of respondent Manero and Munsayac, public respondent SEC held a
conference that was attended by petitioner’s incorporators. The attendees were requested to submit
copies of petitioner’s marketing scheme and list of its members with addresses. The following day
petitioner submitted to public respondent SEC copies of its marketing course module and letters of
accreditation/authority.

After finding petitioner to be engaged in the sale or offer for sale or distribution of investment
contracts, which are considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The Securities
Regulation Code), but failed to register them in violation of Sec. 8.1 of the same Act, public respondent
SEC issued a CDO. Petitioner moved for the lifting of the CDO, which public respondent SEC denied for lack
of merit.

Petitioner went to the CA imputing grave abuse of discretion amounting to lack or excess of
jurisdiction on public respondent SEC for issuing the order. It also applied for a temporary restraining order,
which the appellate court granted.

Petitioner filed in the CA a Motion for the Issuance of a Writ of Preliminary Injunction and the
motion was heard.
 Public respondent SEC moved for reconsideration, which was not resolved by the CA. It was
denied.

ISSUE/S:

Whether or not public respondent SEC followed due process in the issuance of the assailed CDO; and

Whether or not petitioner’s business constitutes an investment contract which should be registered
with public respondent SEC before its sale or offer for sale or distribution to the public.

RULING:

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

Public respondent SEC found the petitioner "as a marketing company that promotes and facilitates
sales of real properties and other related products of real estate developers through effective leverage
marketing."

An investment contract is defined in the Amended Implementing Rules and Regulations of R.A.
No. 8799 as a "contract, transaction or scheme (collectively ‘contract’) whereby a person invests his money
in a common enterprise and is led to expect profits primarily from the efforts of others."

It behooves the court to trace the history of the concept of an investment contract under R.A. No.
8799. The US Supreme Court, recognizing that the term "investment contract" was not defined by the Act
or illumined by any legislative report, held that "Congress was using a term whose meaning had been
crystallized" under the state’s "blue sky" laws in existence prior to the adoption of the Securities Act. Thus,
it ruled that the use of the catch-all term "investment contract" indicated a congressional intent to cover
a wide range of investment transactions. It established a test to determine whether a transaction falls
within the scope of an "investment contract." Known as the Howey Test, it requires a transaction, contract,
or scheme whereby a person (a) makes an investment of money, (b) in a common enterprise, (c) with the
expectation of profits, (d) to be derived solely from the efforts of others. Although the proponents must
establish all four elements, the US Supreme Court stressed that the Howey Test "embodies a flexible rather
than a static principle, one that is capable of adaptation to meet the countless and variable schemes
devised by those who seek the use of the money of others on the promise of profits." Needless to state,
any investment contract covered by the Howey Test must be registered under the Securities Act, regardless
of whether its issuer was engaged in fraudulent practices.
 Prescinding from these premises, the court affirms the ruling of the public respondent SEC and
the Court of Appeals that the petitioner was engaged in the sale or distribution of an investment contract.

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

The petition is DENIED. The July 31, 2003 Decision of the Court of Appeals, affirming the January
26, 2001 Cease and Desist Order issued by public respondent Securities and Exchange Commission against
petitioner Power Homes Unlimited Corporation, and its June 18, 2004 Resolution denying petitioner’s
Motion for Reconsideration are AFFIRMED.
 LUIS VIRATA vs ALEJANDRO WEE
G.R. No. 220926
July 5, 2017

FACTS:

Ng Wee is a client of Westmont Bank. He was persuaded by the bank manager to make money
placements with Westmont Investment Corporation (Wincorp), a domestic corporation organized and
licensed to operate as an investment house, and one of the bank’s affiliates.

The bank manager offered him “sans recourse” transactions with the following mechanics: A
corporate borrower who needs financial assistance to run its business is screened by Wincorp. That
when qualified after the screening, Wincorp will enter into a Credit Line Agreement for a specific
amount with the corporation which the latter can draw upon in a series of availments over a period of
time.

Because of the assurance in the representations that the “sans recourse” transactions are safe,
stable, high-yielding, and involve little to no risk, Ng Wee placed investments. His initial investments
were matched with Hottick Holdings Corporation (Hottick). Hottick was extended a credit facility with a
maximum drawdown of P1.5 billion. Hottick fully availed of the loan facility but it defaulted in paying its
outstanding obligations when the Asian financial crisis struck.

As a result, Wincorp filed a collection suit. Virata offered to guarantee the full payment of the
loan embodied in the Memorandum of Agreement between him and Wincorp to make the parties
settle.

Wincorp then executed a Waiver and Quitclaim in favor of Virata, releasing the latter from any
obligation, except for his obligation to transfer 40% equity of UEM Development Philippines, Inc. (UDPI)
and forty percent (40%) of UDPI’s interest in the tollway project to Wincorp.

Ng Wee was alarmed by the news of Hottick’s default and financial distress which made him
confront Wincorp and asked about the status of his investments. Wincorp assured him that the losses
from the Hottick account will be absorbed by the company and that his investments would be
transferred instead to a new borrower account. Thus, Ng Wee continued making money placements,
rolling over his previous investments in Hottick and even increased his stakes in the new borrower
account Power Merge. Virata is the majority stockholder of said corporation.

Ng Wee, however, file a complaint claiming that he fell prey to the intricate scheme of fraud and
deceit that was hatched by Wincorp and Power Merge. As he later discovered, Power Merge’s default
was inevitable from the very start since it only had subscribed capital in the amount of P37.5 million, of
which only P9.375 million is actually paid up. He then attributed gross negligence, if not fraud and bad
faith, on the part of Wincorp and its directors for approving Power Merge’s credit line application and its
subsequent increase to the amount of P2.5 billion despite its glaring inability to pay.

Wincorp directors argued that they can only be held liable under Section 31 of the Corporation
Code, if they assented to a patently unlawful act, or are guilty of either gross negligence or bad faith in
directing the affairs of the corporation. They explained that the provision is inapplicable since the
approval of Power Merge’s credit line application was done in good faith and that they merely relied on
the vetting done by the various departments of the company.

ISSUE/S:

Whether or not Ng Wee was able to establish his cause/s of action against Wincorp and Power
Merge;

RULING:

There is more to the "sans recourse" transactions than meets the eye, so much so that the
operations of Wincorp cannot be oversimplified as mere brokering of loans. As discovered by the SEC in
PED Case No. 20-2378, and as ruled by the CA, Wincorp was, in reality, selling to the public securities, i.e.,
shares in the Power Merge credit in the form of investment contracts.

Securities are shares, participation or interests in a corporation or in a commercial enterprise or

profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic
in character. As a general rule, securities are not to be sold or offered for sale or distribution without due
registration, and provided that information on the securities shall be made available to prospective
purchasers.

Included in the list of securities that require registration prior to offer, sale, or distribution are
investment contracts. An investment contract refers to a contract, transaction or scheme whereby a
person invests his money in a common enterprise and is led to expect profits primarily from the efforts of
others. It is presumed to exist whenever a person seeks to use the money or property of others on the
promise of profits.

In this jurisdiction, the Court employs the Howey test, named after the landmark case of Securities
and Exchange Commission v. W.J. Howey Co., to determine whether or not the security being offered
takes the form of an investment contract. The case served as the foundation for the domestic definition
of the said security.

Under the Howey test, the following must concur for an investment contract to exist: (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.
Indubitably, all of the elements are present in the extant case.

First, Wincorp offered what it purported to be "sans recourse" transactions wherein the
investment house would allegedly match investors with pre-screened corporate borrowers in need of
financial assistance.

Second, Ng Wee invested the aggregate amount of ₱213,290,410.36 in the "sans recourse"
transactions through his trustees, as embodied in the Confirmation Advices.
 Third, prior to being matched with a corporate borrower, all the monies infused by the investors
are pooled in an account maintained by Wincorp. This ensures that there are enough funds to meet large
drawdowns by single borrowers.

Fourth, the investors were induced to invest by Wincorp with promises of high yield. In Ng Wee's
case, his Confirmation Advices reveal that his funds were supposed to earn 13.5% at their respective
maturity dates.

Fifth, the profitability of the enterprise depended largely on whether or not Wincorp, on best
effort basis, would be able to match the investors with their approved corporate borrowers.

Apparent then is that the factual milieu of the case at bar sufficiently satisfies the Howey test. The
"sans recourse" transactions are, in actuality, investment contracts wherein investors pool their resources
to meet the financial needs of a borrowing company. This does not stray far from the illustration given by
former Associate Justice Roberto A. Abad in Securities and Exchange Commission v. Prosperity.com, Inc.,
to wit:

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.

Likewise, in SEC Admin Case No. 09-07-88 entitled In Re: D 1st Cell Pawnshop, Inc., the SEC ruled
that by soliciting investments from ₱50,000.00 up to ₱300,000.00 and promising a return of four percent
(4%) per month, D 1st Cell Pawnshop offered investment contracts to the public.

No error can then be attributed to the CA when it designated the "sans recourse" transactions as
investment contracts. No fault can also be ascribed to the appellate court in finding that Wincorp virtually
purchased and resold securities, and not just brokered a loan. The most telling circumstance that negate
Wincorp's claim of mere brokerage, as mentioned earlier, is the fact that it paid for the interest payments
due from the corporate borrowers that defaulted. This effectively estopped Wincorp from denying liability
from its investors in this case.

Wincorp cannot hide behind its license to operate as an investment house when it offered the
"sans recourse" transactions to the public.