RA 8799 (2000)
LICENSING OF BROKERS
NICOLAS vs. CA G.R. No. 122857 27 March 1998
RTC granted. CA dismissed.
February 19, 1987 Nicolas and Buan entered into a Portfolio Management Agreement g Nicolas will manage Buan’s stock transactions for 3 months, with an automatic renewal clause.
August 19, 1987 Buan sought termination of the Agreement and requested an accounting from Nicolas.
Three weeks after, Nicolas demanded management fees of P68,263.67 for June 30, July 31 and August 19, 1987 as stated in the Agreement. g Ignored.
Nicolas filed in RTC a complaint for collection of sum of money.
Buan’s answer: Not entitled – Nicolas mismanaged his transactions resulting in losses.
RTC: Granted – Buan should pay Nicolas’
management fees.
CA reversed and dismissed: Sweeping statement [that profits were generated by Nicolas’ transactions] were unsubstantiated [Nicolas’ profit and loss statements were relevant and admissible, but they are not credible because self-serving].
Anchor Hocking Glass Corp. vs. White Cap.: The statements simply tabulate the number of shares acquired from each company, a column for profit and the last column for loss. The statements were not authenticated by an auditor, nor by the person who caused the preparation of the same.
Sample Statement submitted by Nicolas:
“Profit & Loss Statement of Atty. Blesilo Buan for the Period Ended June 30, 1987
Shares Issue Profit Loss 1,500 PLDT P 7,265.62”
“The ledger of accounts as proof of the transactions entered into only shows the following data:
(1) dates in which the stocks were acquired;
(2) classified the acquired stocks to be in long or short term trading;
(3) the price of each stock;
(4) which company's stocks were acquired; and, (5) the total amount paid for each stock.
It does not show how much profit was realized from each transaction."
SC: CA affirmed.
Portfolio Management Agreement states that Buan would pay Nicolas 20% of all realized profits every end of the month as his management fees.
"Profits" = "excess of return over expenditure in a transaction or series of transactions" or
"series of an amount received over the amount paid for goods and services."
Nicolas bears burden of proving that the transaction realized gains or profits.
Yes, stock brokers are entitled to commercial fees or compensation:
"Revised Securities Act Rule 19-13. Charges for Services Performed.
Charges by brokers or dealers…shall be reasonable and not unfairly discriminatory between customers."
Bauer & Cie vs. O'Donnel: Any fee or commission must be with due regard to relevant circumstances.
But here, the statements are incomplete, yielding easily to the inclusion or deletion of certain matters.. There are no concrete bases or specifics as to the method of arriving at the amounts indicated. It does not state when the stocks were purchased, the type of stocks (whether Class "A" or "B" or common or preferred) bought, when the stocks were sold, the acquisition and selling price of each stock, when the profits, if any, were delivered to the private respondent, the cost of safekeeping or custody of the stocks, as well as the taxes paid for each transaction.
Bauer & Cie vs. O'Donne: Where a profit or loss statement shows a loss, the statement must show income and items of expense to explain the method of determining such loss.
There were no credible documentary evidence (e.g. receipts of the transactions, order ticket,
certificate of deposit; whether the stock certificates were deposited in a bank or professional custodian, and others) to support his claim that profits were indeed realized.
Nicolas's complaint is similar to an action for damages. The recoverable damage not only be capable of proof but must actually be proved with a reasonable degree of certainty. The awarding court must posit specific facts as sufficient basis for measuring compensatory or actual damages.
Lastly, Nicolas can’t recover because he traded securities for the account of others without the necessary license from the Securities and Exchange Commission (SEC), violating SEC 19 of the Revised Securities Act.
Agbayani: Purpose = protect the public and strengthen the securities mechanism.
Am Jur: ". . ., an unlicensed person may not recover compensation for services as a broker where a statute or ordinance requiring a license is applicable and such statute or ordinance is of a regulatory nature, was enacted in the exercise of the police power for the purpose of protecting the public, requires a license as evidence of qualification and fitness, and expressly precludes an unlicensed person from recovering compensation by suit, or at least manifests an intent to prohibit and render unlawful the transaction of business by an unlicensed person."
WHERE BOTH PARTIES ARE EQUALLY AT FAULT, NEITHER
ONE COULD HAVE RECOURSE AGAINST THE OTHER
ABACUS SECURITIES CORPORATION vs.
AMPIL
G.R. No. 160016 27 February 2006 Facts:
Abacus is engaged in business as a broker and dealer of securities of listed companies at the Philippine Stock Exchange Center.
On April 8, 1997, Ampil opened a cash account with Abacus for his transactions in securities;
Ampil’s purchases were consistently unpaid from April 10 to 30, 1997;
Ampil failed to pay in full, or even just his deficiency, for the transactions on April 10 and 11, 1997;
Despite Ampil’s failure to cover his initial deficiency, Abacus subsequently purchased and sold securities for Ampil’s account on April 25 and 29;
Abacus did not cancel or liquidate a substantial amount of Ampil’s stock transactions until May 6, 1997.
RTC RULING: RTC held that Abacus violated SECs 23 and 25 of the Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing the Act (RSA Rules) when it failed to: 1) require the Ampil to pay for his stock purchases within three or four days from trading; and 2) request from the appropriate authority an extension of time for the payment of Ampil’s cash purchases. RTC noted that despite Ampil’s non-payment within the required period, Abacus did not cancel the purchases of Ampil. Neither did it require him to deposit cash payments before it executed the buy and/or sell orders subsequent to the first unsettled transaction.
According to the RTC, by allowing Ampil to trade his account actively without cash, Abacus effectively induced him to purchase securities thereby incurring excessive credits.
RTC also found Ampil to be equally at fault, by incurring excessive credits and waiting to see how his investments turned out before deciding to invoke the RSA. Thus, the RTC concluded that Abacus and Ampil were in pari delicto and therefore without recourse against each other.
CA RULING: CA upheld the lower court’s finding that the parties were in pari delicto. It castigated Abacus for allowing Ampil to keep on trading despite the latter’s failure to pay his outstanding obligations. It explained that “the reason [behind Abacus’s act] is elemental in its simplicity. And it is not exactly altruistic.
Because whether [Ampil’s] trading transaction would result in a surplus or deficit, he would still be liable to pay Abacus its commission.
[Abacus’s] cash register will keep on ringing to the sound of incoming money, no matter what happened to Ampil.”
Hence, this Petition.
Issue: WON the pari delicto rule is applicable in the present case.
Held: In Pari Delicto rule applies only to transactions entered into AFTER the initial trades made on April 10 and 11, 1997.
Ratio:
The provisions governing the above transactions are SECs 23 and 25 of the RSA and Rule 25-1 of the RSA Rules, which state as follows:
SEC. 23. Margin Requirements. – xxx
(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer –
(1) On any security other than an exempted security, in contravention of the rules and regulations which the Commission shall prescribe under subSEC (a) of this SEC;
(2) Without collateral or on any collateral other than securities, except (i) to maintain a
credit initially extended in conformity with the rules and regulations of the Commission and (ii) in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circumventing the provisions of subparagraph (1) of this subSEC.
xxx
SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect violations of the margin requirements under SEC 23 hereof, the broker or dealer shall require the customer in nonmargin transactions to pay the price of the security purchased for his account within such period as the Commission may prescribe, which shall in no case exceed three trading days; otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten trading days following the last day for the customer to pay such purchase price, unless such sale cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer to recover any deficiency from the customer. x x x.”
RSA RULE 25-1
Purchases and Sales in Cash Account
(a) Purchases by a customer in a cash account shall be paid in full within three (3) business days after the trade date.
(b) If full payment is not received within the required time period, the broker or dealer shall cancel or otherwise liquidate the transaction, or the unsettled portion thereof, starting on the next business day but not beyond ten (10) business days following the last day for the customer to pay, unless such sale cannot be effected within said period for justifiable reasons.
(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the customer, prior to any subsequent purchase during the next ninety (90) days, the customer shall be required to deposit sufficient funds in the account to cover each purchase transaction prior to execution.
x x x x x x x x x
(f) Written application for an extension of the period of time required for payment under paragraph (a) be made by the broker or dealer to the Philippine Stock Exchange, in the case of a member of the Exchange, or to the Commission, in the case of a non-member of the Exchange. Applications for the extension must be based upon exceptional circumstances and must be filed and acted upon before the expiration of the original payment period or the expiration of any subsequent extension.”
SEC 23(b) above -- the alleged violation of Abacus which provides the basis for Ampil’s defense -- makes it unlawful for a broker to extend or maintain credit on any securities other than in conformity with the rules and regulations issued by Securities and Exchange Commission (SEC). SEC 25 lays down the rules to prevent indirect violations of SEC 23 by brokers or dealers. RSA Rule 25-1 prescribes in detail the regulations governing cash accounts.
The margin requirements set out in the RSA are primarily intended to achieve a macroeconomic purpose -- the protection of the overall economy from excessive speculation in securities. Their recognized secondary purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily upon the brokers and dealers. SECs 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,” clearly vest upon Abacus the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three days from the date of purchase.
Ampil is liable for the first, but not for the subsequent trades
Nonetheless, these margin requirements are applicable only to transactions entered into by the present parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that Abacus can still collect from Ampil to the extent of the difference between the latter’s outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of the shares pursuant to the RSA Rules. Abacus’s right to collect is justified under the general law on obligations and contracts.
The right to collect cannot be denied to Abacus as the initial transactions were entered pursuant to the instructions of Ampil. The obligation of Ampil for stock transactions made and entered into on April 10 and 11, 1997 remains outstanding. These transactions were valid and the obligations incurred by Ampil concerning his stock purchases on these dates subsist. At that time, there was no violation of the RSA yet. Abacus’s fault arose only when it failed to: 1) liquidate the transactions on the fourth day following the stock purchases, or on April 14 and 15, 1997;
and 2) complete its liquidation no later than ten days thereafter, applying the proceeds thereof as payment for Ampil’s outstanding obligation.
Elucidating further, since the buyer was not able to pay for the transactions that took place on April 10 and 11,, the broker was duty-bound to advance the payment to the settlement banks without prejudice to the right of the broker to collect later from the client.
In securities trading, the brokers are essentially the counterparties to the stock transactions at
the Exchange. Since the principals of the broker are generally undisclosed, the broker is personally liable for the contracts thus made.
Hence, Abacus had to advance the payments for Ampil’s trades. Brokers have a right to be reimbursed for sums advanced by them with the express or implied authorization of the principal (in this case, Ampil).
In the present case, Abacus obviously failed to enforce the terms and conditions of its Agreement with Ampil, purportedly acting on the plea of Ampil to give him time to raise funds therefor. By failing to ensure Ampil’s payment of his first purchase transaction within the period prescribed by law, thereby allowing him to make subsequent purchases, Abacus effectively converted Ampil’s cash account into a credit account. However, extension or maintenance of credits on nonmargin transactions, are specifically prohibited under SEC 23(b). Thus, Abacus was remiss in its duty and cannot be said to have come to court with
“clean hands” insofar as it intended to collect on transactions subsequent to the initial trades of April 10 and 11, 1997.
Ampil is equally guilty for subsequent trades
On the other hand, we find Ampil equally guilty in entering into the transactions in violation of the RSA and RSA Rules. We are not prepared to accept his self-serving assertions of being an
“innocent victim” in all the transactions. Rather, he is an experienced and knowledgeable trader who is well versed in the securities market and who made his own investment decisions.
We note that it was Ampil who repeatedly asked for some time to pay his obligations for his stock transactions. Abacus acceded to his requests. It is only when sued upon his indebtedness that Ampil raised as a defense the invalidity of the transactions due to alleged violations of the RSA. It was Ampil’s privilege to gamble or speculate, as he apparently did so by asking for extensions of time and refraining from giving orders to his broker to sell, in the hope that the prices would rise. Sustaining his argument now would amount to relieving him of the risk and consequences of his own speculation and saddling them on the Abacus after the result was known to be unfavorable.
In the final analysis, both parties acted in violation of the law and did not come to court with clean hands with regard to transactions subsequent to the initial trades made on April 10 and 11, 1997. Thus, the peculiar facts of the present case bar the application of the pari delicto rule -- expressed in the maxims
“Ex dolo malo non oritur action” and “In pari delicto potior est conditio defendentis” -- to all the transactions entered into by the parties.
The pari delecto rule refuses legal remedy to
either party to an illegal agreement and leaves them where they were.
In this case, the pari delicto rule applies only to transactions entered into AFTER the initial trades made on April 10 and 11, 1997.
Since the INITIAL trades are valid and subsisting obligations, Ampil is liable for them.
Dispositive: WHEREFORE, CA Decision and Resolution are MODIFIED. Ampil is ordered to pay Abacus the difference between the former’s outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of shares pursuant to the RSA Rules, with interest thereon at the legal rate until fully paid.
TENDER OFFER RULES APPLY TO INDIRECT ACQUISITION
OF SHARES
CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE COMPANY
G.R. 171815 7 August 2007 Facts:
Union Cement or “UCC” (publicly listed) has 2 principal SH (stockholders) – UCHC (non-listed) owning 60.51% and Cemco owning 17.03%.
Majority of UCHC’s stocks were owned by BCI (21.31%) and ACC (29.69%). Cemco owned 9%
of UCHC’s stocks.
5 July 2004: BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco all of the stocks of BCI and ACC in UCHC.
8 July 2004: In PSE Circular for Brokers No.
3146-2004 it was stated that as a result of Cemco’s acquisition of BCI and ACC’s shares in UCHC, its total beneficial ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC.
15 July 2004: As a consequence of this disclosure, the PSE, in a letter to the SEC inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to Cemco’s purchase of the majority of shares of UCC.
16 July 2004: Director Justina Callangan of the SEC’s Corporate Finance Department replied that it was the stance of the department that the tender offer rule was not applicable.
However, the matter must still have to be confirmed by the SEC en banc.
27 July 2004: In a subsequent letter, Director Callangan confirmed that the SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule.
28 July 2004, feeling aggrieved by the transaction, respondent National Life Insurance
Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer.
Cemco, however, refused.
5 August 2004: a Share Purchase Agreement was executed by ACC and BCI, as sellers, and Cemco, as buyer.
19 August 2004: Respondent National Life filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares.
Cemco, UCC, UCHC, BCI and ACC (all impleaded) filed their comments:
COMMON POINT: the tender offer rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect acquisition arising from the purchase of the shares of a holding company of the listed firm.
CEMCO: while the SEC can take cognizance of respondent’s complaint on the alleged violation by petitioner Cemco of the mandatory tender offer requirement under SEC 19 of Republic Act No. 8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties since, under the same statute, the SEC’s authority is purely administrative.
Having been vested with purely administrative authority, the SEC can only impose administrative sanctions such as the imposition
Having been vested with purely administrative authority, the SEC can only impose administrative sanctions such as the imposition