Professional Documents
Culture Documents
COMMISSION,
Petitioner,
- versus -
PROSPERITY.COM, INC.,
Respondent.
Promulgated:
could earn commissions, interest in real estate in the Philippines and in the
United States, and insurance coverage worthP50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at least
two other buyers as his own down-lines. These second tier of buyers could in
turn build up their own down-lines. For each pair of down-lines, the buyersponsor received a US$92.00 commission. But referrals in a day by the buyersponsor should not exceed 16 since the commissions due from excess referrals
inure to PCI, not to the buyer-sponsor.
DECISION
ABAD, J.:
Exchange Commission (SEC) issued a cease and desist order (CDO) against it. As
it later on turned out, the same persons who ran the affairs of GVI directed
PCIs actual operations.
against PCI. The SEC ruled that PCIs scheme constitutes an Investment
contract and, following the Securities Regulations Code,[2] it should have first
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
the same time, by referring to PCI his own down-line buyers, a first-time buyer
request to lift the CDO. On the following day, February 1, 2001, PCI moved to
person invests his money in a common enterprise and is led to expect profits
withdraw its petition before the CA to avoid possible forum shopping violation.
During the pendency of PCIs action before the SEC, however, the CA
Apart from the definition, which the Implementing Rules and Regulations
issued a TRO, enjoining the enforcement of the CDO.[3] In response, the SEC
provide, Philippine jurisprudence has so far not done more to add to the
same. Of course, the United States Supreme Court, grappling with the
guilty of forum shopping. But on PCIs motion, the CA reversed itself and
contracts. That courts rulings, while not binding in the Philippines, enjoy some
degree of persuasiveness insofar as they are logical and consistent with the
countrys best interests.[9]
64487 that raised the same issues. On July 31, 2003 the CA rendered a
Commission v. W.J. Howey Co.[10] that, for an investment contract to exist, the
decision, granting PCIs petition and setting aside the SEC-issued CDO.[7] The CA
following elements, referred to as the Howey test must concur: (1) a contract,
ruled that, following the Howey test, PCIs scheme did not constitute an
investment contract that needs registration pursuant to R.A. 8799, hence, this
a common enterprise; (4) expectation of profits; and (5) profits arising primarily
petition.
from the efforts of others. [11] Thus, to sustain the SEC position in this case,
PCIs scheme or contract with its buyers must have all these elements.
The Issue Presented
The sole issue presented before the Court is whether or not PCIs scheme
constitutes an investment contract that requires registration under R.A. 8799.
The Ruling of the Court
public for raising funds that it needs for expansion. When an investor buys
these papers or securities, he invests his money, together with others, in SMC
with an expectation of profits arising from the efforts of those who manage
and operate that company. SMC has to register these commercial papers with
that have to be registered with the SEC before they can be distributed and
Here, PCIs clients do not make such investments. They buy a product of
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
Present:
money in PCI that it could use for running some business that would generate
profits for the investors. The price of US$234.00 is what the buyer pays for the
use of the website, a tangible asset that PCI creates, using its computer
- versus -
adopted by companies for getting people to buy their products outside the
usual retail system where products are bought from the stores shelf. Under
this scheme, adopted by most health product distributors, the buyer can
become a down-line seller. The latter earns commissions from purchases made
by new buyers whom he refers to the person who sold the product to him. The
network goes down the line where the orders to buy come.
The commissions, interest in real estate, and insurance coverage
worth P50,000.00 are incentives to down-line sellers to bring in other
customers. These can hardly be regarded as profits from investment of money
under the Howey test.
February 26,
x-------------------------------------------------x
DECISION
The CA is right in ruling that the last requisite in the Howey test is lacking
in the marketing scheme that PCI has adopted. Evidently, it is PCI that expects
Promulgated:
PUNO, C.J.:
profit from the network marketing of its products. PCI is correct in saying that
the US$234 it gets from its clients is merely a consideration for the sale of the
websites that it provides.
This petition for review seeks the reversal and setting aside of the July
31, 2003 Decision[1] of the Court of Appeals that affirmed the January 26, 2001
WHEREFORE, the Court DENIES the petition and AFFIRMS the decision
Cease and Desist Order (CDO)[2] of public respondent Securities and Exchange
dated July 31, 2003 and the resolution dated June 18, 2004 of the Court of
(petitioner) officers, directors, agents, representatives and any and all persons
claiming and acting under their authority, from further engaging in the sale,
offer for sale or distribution of securities; and its June 18, 2004
Resolution[3] which denied petitioners motion for reconsideration.
public respondent SEC copies of its marketing course module and letters of
respondent
SEC
on October
13,
2000 under
SEC
Reg.
No.
On February 5, 2001, petitioner moved for the lifting of the CDO, which
public respondent SEC denied for lack of merit on February 22, 2001.
Aggrieved, petitioner went to the Court of Appeals imputing grave
abuse of discretion amounting to lack or excess of jurisdiction on public
respondent SEC for issuing the order. It also applied for a temporary
restraining order, which the appellate court granted.
On July 31, 2003, the Court of Appeals issued its Consolidated Decision.
The disposition pertinent to petitioner reads:[9]
WHEREFORE, x x x x the petition for certiorari and
prohibition filed by the other petitioner Powerhomes Unlimited
Corporation is hereby DENIED for lack of merit and the
questioned Cease and Desist Order issued by public respondent
against it is accordingly AFFIRMED IN TOTO.
On June 18, 2004, the Court of Appeals denied petitioners motion for
reconsideration;[10] hence, this petition for review.
The issues for determination are: (1) whether public respondent SEC
followed due process in the issuance of the assailed CDO; and (2) whether
petitioners business constitutes an investment contract which should be
registered with public respondent SEC before its sale or offer for sale or
distribution to the public.
We hold that petitioner was not denied due process. The records reveal
that public respondent SEC properly examined petitioners business operations
when it (1) called into conference three of petitioners incorporators, (2)
requested information from the incorporators regarding the nature of
petitioners business operations, (3) asked them to submit documents
pertinent thereto, and (4) visited petitioners business premises and gathered
information thereat. All these were done before the CDO was issued by the
public respondent SEC. Trite to state, a formal trial or hearing is not necessary
to comply with the requirements of due process. Its essence is simply the
opportunity to explain ones position. Public respondent SEC abundantly
allowed petitioner to prove its side.
The second issue is whether the business of petitioner involves an
investment contract that is considered security[11] and thus, must be registered
prior to sale or offer for sale or distribution to the public pursuant to Section
8.1 of R.A. No. 8799, viz:
Section 8. Requirement of Registration of Securities.
8.1. Securities shall not be sold or offered for sale or distribution
any legislative report,[16] held that Congress was using a term whose meaning
scheme
had been crystallized[17] under the states blue sky laws[18] in existence prior
to the adoption of the Securities Act.[19] Thus, it ruled that the use of the catch-
ofits not solely but primarily from the efforts of others. Thus, to be a security
(collectively
contract)
whereby
enterprise, (3) with expectation of profits, (4) primarily from efforts of others.
respondent SEC and the Court of Appeals that the petitioner was engaged in
entitles him to recruit two (2) investors who pay US$234 each and out of which
of SEC v. Turner[25] are similar to the case at bar. In Turner, the SEC brought a
these two (2) recruits, who then recruit at least two (2) each, entitles the
The Facts
premise that the capital markets depend on the investing publics level of
confidence in the system.
IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003 Decision
of the Court of Appeals, affirming the January 26, 2001 Cease and Desist Order
issued by public respondent Securities and Exchange Commission against
petitioner Power Homes Unlimited Corporation, and its June 18, 2004
Resolution denying petitioners Motion for Reconsideration are AFFIRMED. No
costs.
Cemco holdings, inc. vs. National Life insurance company of the philippines
DECISION
In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was
stated that as a result of petitioner Cemcos acquisition of BCI and ACCs shares
in UCHC, petitioners total beneficial ownership, direct and indirect, in UCC has
increased by 36% and amounted to at least 53% of the shares of UCC, to wit [4]:
CHICO-NAZARIO, J.:
This Petition for Review under Rule 45 of the Rules of Court seeks to
reverse and set aside the 24 October 2005 Decision[1] and the 6 March 2006
[2]
Particulars
Existing shares of Cemco in UCHC
Acquisition by Cemco of BCIs and ACCs shares in
UCHC
Total stocks of Cemco in UCHC
Percentage of UCHC ownership in UCC
Indirect ownership of Cemco in UCC
Direct ownership of Cemco in UCC
Total ownership of Cemco in UCC
Percentage
9%
51%
60%
60%
36%
17%
53%
company and did not extend to an indirect acquisition arising from the
Corporate Finance Department responded to the query of the PSE that while it
respondent by reversing and setting aside its 27 July 2004 Resolution and
was the stance of the department that the tender offer rule was not applicable,
and other holders of UCC shares similar to the class held by UCHC in
accordance with Section 9(E), Rule 19 of the Securities Regulation Code.
Thereafter,
in
subsequent
letter
dated 27
July
2004,
Director Callangan confirmed that the SEC en banc had resolved that
the Cemco transaction was not covered by the tender offer rule.
that the tender offer rule does not apply, or that the SECs re-interpretation of
the rule could not be made to retroactively apply to Cemcos purchase of UCHC
of UCC, sent a letter to Cemco demanding the latter to comply with the rule on
shares.
SEC. It ruled that the SEC has jurisdiction to render the questioned decision
and, in any event,Cemco was barred by estoppel from questioning the SECs
jurisdiction. It, likewise, held that the tender offer requirement under the
Securities
Regulation
Code
and
its
Implementing
Rules
applies
to Cemcos purchase of UCHC stocks. The decretal portion of the said Decision
On 19 August 2004, respondent National Life Insurance Company of the
reads:
Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July
2004Resolution and to declare the purchase agreement of Cemco void and
praying that the mandatory tender offer rule be applied to its UCC
shares. Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC,
which were then required by the SEC to file their respective comment on the
complaint. In their comments, they were uniform in arguing that the tender
offer rule applied only to a direct acquisition of the shares of the listed
2.
3.
On the first issue, petitioner Cemco contends that while the SEC can
take cognizance of respondents complaint on the alleged violation by
petitioner Cemco of the mandatory tender offer requirement under Section 19
of Republic Act No. 8799, the same statute does not vest the SEC with
jurisdiction to adjudicate and determine the rights and obligations of the
parties since, under the same statute, the SECs authority is purely
administrative. Having been vested with purely administrative authority, the
The foregoing provision bestows upon the SEC the general adjudicative
power which is implied from the express powers of the Commission or which is
incidental to, or reasonably necessary to carry out, the performance of the
administrative duties entrusted to it. As a regulatory agency, it has the
incidental power to conduct hearings and render decisions fixing the rights and
The foregoing rule emanates from the SECs power and authority to
regulate, investigate or supervise the activities of persons to ensure compliance
with the Securities Regulation Code, more specifically the provision on
mandatory tender offer under Section 19 thereof.[7]
Another provision of the statute, which provides the basis of Rule
19(13) of the Amended Implementing Rules and Regulations of the Securities
Regulation Code, is Section 5.1(n), viz:
[T]he Commission shall have, among others, the following
powers and functions:
xxxx
(n) Exercise such other powers as may be provided by
law as well as those which may be implied from, or which are
necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and
purposes of these laws.
obligations of the parties. In fact, to deprive the SEC of this power would
render the agency inutile, because it would become powerless to regulate and
implement the law. As correctly held by the Court of Appeals:
We are nonetheless convinced that the SEC has the
competence to render the particular decision it made in this
case. A definite inference may be drawn from the provisions of
the SRC that the SEC has the authority not only to investigate
complaints of violations of the tender offer rule, but to
adjudicate certain rights and obligations of the contending
parties and grant appropriate reliefsin the exercise of its
regulatory functions under the SRC. Section 5.1 of the SRC
allows a general grant of adjudicative powers to the SEC which
may be implied from or are necessary or incidental to the
carrying out of its express powers to achieve the objectives and
purposes of the SRC. We must bear in mind in interpreting the
powers and functions of the SEC that the law has made the SEC
primarily a regulatory body with the incidental power to conduct
administrative hearings and make decisions. A regulatory body
like the SEC may conduct hearings in the exercise of its
regulatory powers, and if the case involves violations or conflicts
in connection with the performance of its regulatory functions, it
will have the duty and authority to resolve the dispute for the
best interests of the public.[8]
For sure, the SEC has the authority to promulgate rules and regulations,
subject to the limitation that the same are consistent with the declared policy
of the Code. Among them is the protection of the investors and the
The power conferred upon the SEC to promulgate rules and regulations
is a legislative recognition of the complexity and the constantly-fluctuating
nature of the market and the impossibility of foreseeing all the possible
Petitioner did not question the jurisdiction of the SEC when it rendered
an opinion favorable to it, such as the 27 July 2004 Resolution, where the SEC
opined that theCemco transaction was not covered by the mandatory tender
offer rule. It was only when the case was before the Court of Appeals and after
the SEC rendered an unfavorable judgment against it that petitioner challenged
the SECs competence. As articulated in Ceroferr Realty Corporation v. Court of
Appeals[11]:
While the lack of jurisdiction of a court may be raised at
any stage of an action, nevertheless, the party raising such
question may be estopped if he has actively taken part in the
very proceedings which he questions and he only objects to the
courts jurisdiction because the judgment or the order
subsequently rendered is adverse to him.
On the second issue, petitioner asserts that the mandatory tender offer
rule applies only to direct acquisition of shares in the public company.
This contention is not meritorious.
Tender offer is a publicly announced intention by a person acting alone
or in concert with other persons to acquire equity securities of a public
company.[12] A public company is defined as a corporation which is listed on an
exchange, or a corporation with assets exceeding P50,000,000.00 and with 200
or more stockholders, at least 200 of them holding not less than 100 shares of
company under reasonable terms, giving them the opportunity to sell their
shares at the same price as those of the majority shareholders.[15]
Under Section 19 of Republic Act No. 8799, it is stated:
Tender Offers. 19.1. (a) Any person or group of persons
acting in concert who intends to acquire at least fifteen percent
(15%) of any class of any equity security of a listed corporation
or of any class of any equity security of a corporation with assets
of at least Fifty million pesos (P50,000,000.00) and having two
hundred (200) or more stockholders with at least one hundred
(100) shares each or who intends to acquire at least thirty
percent (30%) of such equity over a period of twelve (12)
months shall make a tender offer to stockholders by filing with
the Commission a declaration to that effect; and furnish the
issuer, a statement containing such of the information required
in Section 17 of this Code as the Commission may
prescribe. Such person or group of persons shall publish all
requests or invitations for tender, or materials making a tender
offer or requesting or inviting letters of such a security. Copies
of any additional material soliciting or requesting such tender
offers subsequent to the initial solicitation or request shall
contain such information as the Commission may prescribe, and
shall be filed with the Commission and sent to the issuer not
later than the time copies of such materials are first published or
sent or given to security holders.
Under existing SEC Rules,[16] the 15% and 30% threshold acquisition of
shares under the foregoing provision was increased to thirty-five percent
(35%). It is further provided therein that mandatory tender offer is still
applicable even if the acquisition is less than 35% when the purchase would
result in ownership of over 51% of the total outstanding equity securities of the
public company.[17]
The SEC and the Court of Appeals ruled that the indirect acquisition by
petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC
shares is covered by the mandatory tender offer rule.
This interpretation given by the SEC and the Court of Appeals must be
sustained.
The rule in this jurisdiction is that the construction given to a statute by
an administrative agency charged with the interpretation and application of
that statute is entitled to great weight by the courts, unless such construction is
clearly shown to be in sharp contrast with the governing law or statute.[18] The
rationale for this rule relates not only to the emergence of the multifarious
needs of a modern or modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying those needs; it also
relates to accumulation of experience and growth of specialized capabilities by
the administrative agency charged with implementing a particular statute.
[19]
The SEC and the Court of Appeals accurately pointed out that the
coverage of the mandatory tender offer rule covers not only direct acquisition
SEN.
S.
OSMEA. Eto ang mangyayari diyan,
eh. Somebody controls 67% of the Company. Of course, he will
pay
a
premium
for
the
first
67%. Control yan,
eh. Eh, kawawa yungmga maiiwan, ang 33% because the value
of the stock market could go down, could go down after that,
because
there
will
(p.
41)
be
no
more
market. Wala nang gustong bumenta. Wala nang
I
mean maraming gustong bumenta, walang gustong bumili kung
hindi yung majority owner. And they will not buy. They already
have 67%. They already have control. And this protects the
minority. And we have had a case in Cebu wherein Ayala A who
already owned 40% of Ayala B made an offer for another 40%
of Ayala
B
without
offering
the
20%. Kawawa naman yungnakahawak ngayon ng 20%. Ang bab
a ng share sa market. But we did not have a law protecting
them at that time.
CHAIRMAN ROCO. So what is it that you want to
achieve?
SEN. S. OSMEA. That if a certain group achieves a
certain amount of ownership in a corporation, yeah, he is
obligated to buy anybody who wants to sell.
CHAIRMAN ROCO. Pro-rata lang. (p. 42).
xxxx
REP. TEODORO. As long as it reaches 30, ayan na. Any
type of acquisition just as long as it will result in 30 (p.50)
reaches 30, ayan na. Any type of acquisition just as long as it
will result in 30, general tender, pro-rata.[20] (Emphasis
supplied.)
but also indirect acquisition or any type of acquisition. This is clear from the
discussions of the Bicameral Conference Committee on the Securities Act of
2000, on 17 July 2000.
that the proposed acquisition of the UCHC shares was not covered by the
avers that it did not directly acquire the shares in UCC and the incidental
benefit of having acquired the control of the said public company must not be
taken against it.
listed company and for the purpose of protecting the minority stockholders of a
respondent, the letter dated 27 July 2004 of the SEC was nothing but an
approval of the draft letter prepared by Director Callanga. There was no public
hearing where interested parties could have been heard. Hence, it was not
issued upon a definite and concrete controversy affecting the legal relations of
parties thereby making it a judgment conclusive on all the parties. Said letter
tender offer rule by the SEC and the Court of Appeals should not have
retroactive effect or be made to apply to its purchase of the UCHC shares as it
relied in good faith on the letter dated 27 July 2004 of the SEC which opined
A reading of the above ruling of the SEC reveals that the same is
complete. It orders the conduct of a mandatory tender offer pursuant to the
procedure provided for under Rule 19(E) of the Amended Implementing Rules
and Regulations of the Securities Regulation Code for the highest price paid for
the beneficial ownership of UCC shares. The price, on the basis of the SEC
decision, is determinable. Moreover, the implementing rules and regulations
of the Code are sufficient to inform and guide the parties on how to proceed
with the mandatory tender offer.
Indeed,
when
the
Court
formulated
the Wenphil doctrine, which we reversed in this case, the Court
did not defer application of the rule laid down imposing a fine on
the employer for failure to give notice in a case of dismissal for
cause. To the contrary, the new rule was applied right then and
there. x x x.
Lastly, petitioner alleges that the decision of the SEC dated 14 February
2005 is incomplete and produces no effect.
This contention is baseless.
The decretal portion of the SEC decision states:
interest, and are thus subject to public regulation. In particular, the laws and
regulations requiring payment of traded shares within specified periods are
meant to protect the economy from excessive stock market speculations, and
are thus mandatory.
In the present case, respondent cannot escape payment of stocks validly traded
by petitioner on his behalf. These transactions took place before both parties
violated the trading law and rules. Hence, they fall outside the purview of
the pari delicto rule.
The Case
Before the Court is a Petition for Review 1 under Rule 45 of the Rules of Court,
challenging the March 21, 2003 Decision 2 and the September 19, 2003
Resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 68273. The assailed
Decision disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is
hereby DISMISSED. With costs." 4
The CA denied reconsideration in its September 19, 2003 Resolution.
The Facts
The factual antecedents were summarized by the trial court (and reproduced
by the CA in its assailed Decision) in this wise:
"Evidence adduced by the [petitioner] has established the fact
that [petitioner] is engaged in business as a broker and dealer
of securities of listed companies at the Philippine Stock
Exchange Center.
"Sometime in April 1997, [respondent] opened a cash or
regular account with [petitioner] for the purpose of buying and
selling securities as evidenced by the Account Application
Form. The parties' business relationship was governed by the
terms and conditions [stated therein] . . . .
"Since April 10, 1997, [respondent] actively traded his account,
and as a result of such trading activities, he accumulated an
outstanding obligation in favor of [petitioner] in the principal
sum of P6,617,036.22 as of April 30, 1997. HSIADc
"Despite the lapse of the period within which to pay his
account as well as sufficient time given by [petitioner] for
[respondent] to comply with his proposal to settle his account,
the latter failed to do so. Such that [petitioner] thereafter sold
At that time, there was no violation of the RSA yet. Petitioner's fault arose only
when it failed to: 1) liquidate the transactions on the fourth day following the
stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation no
later than ten days thereafter, applying the proceeds thereof as payment for
respondent's outstanding obligation. 33
Elucidating further, since the buyer was not able to pay for the transactions
that took place on April 10 and 11, that is at T+4, the broker was duty-bound to
advance the payment to the settlement banks without prejudice to the right of
the broker to collect later from the client. 34
In securities trading, the brokers are essentially the counterparties to the stock
transactions at the Exchange. 35Since the principals of the broker are generally
undisclosed, the broker is personally liable for the contracts thus
made. 36 Hence, petitioner had to advance the payments for respondent's
trades. Brokers have a right to be reimbursed for sums advanced by them with
the express or implied authorization of the principal, 37 in this case,
respondent.
It should be clear that Congress imposed the margin requirements to protect
the general economy, not to give the customer a free ride at the expense of the
broker. 38 Not to require respondent to pay for his April 10 and 11 trades
would put a premium on his circumvention of the laws and would enable him
to enrich himself unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms and
conditions of its Agreement with respondent, specifically paragraph 8 thereof,
purportedly acting on the plea 39 of respondent to give him time to raise funds
therefor. These stipulations, in relation to paragraph 4, 40 constituted faithful
compliance with the RSA. By failing to ensure respondent's payment of his first
purchase transaction within the period prescribed by law, thereby allowing him
to make subsequent purchases, petitioner effectively converted respondent's
cash account into a credit account. However, extension or maintenance of
credits on nonmargin transactions, are specifically prohibited under Section
23(b). Thus, petitioner was remiss in its duty and cannot be said to have come
to court with "clean hands" insofar as it intended to collect on
transactions subsequent to the initial trades of April 10 and 11, 1997.
Respondent
Equally
Guilty
for Subsequent Trades
On the other hand, we find respondent equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an "innocent victim" in all the
transactions. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large
profits with low or no capital outlay, as he pictures himself to be. Rather,
he is an experienced and knowledgeable trader who is well versed in
the securities market and who made his own investment decisions. In fact, in
the Account Opening Form (AOF), he indicated that he had excellent
knowledge of stock investments; had experience in stocks trading, considering
that he had similar accounts with other firms. 41Obviously, he knowingly
speculated on the market, by taking advantage of the "no-cash-out"
arrangement extended to him by petitioner.
We note that it was respondent who repeatedly asked for some time to pay his
obligations for his stock transactions. Petitioner acceded to his requests. It is
only when sued upon his indebtedness that respondent raised as a defense the
invalidity of the transactions due to alleged violations of the RSA. It was
respondent's privilege to gamble or speculate, as he apparently did so by asking
for extensions of time and refraining from giving orders to his broker to sell, in
the hope that the prices would rise. Sustaining his argument now would
amount to relieving him of the risk and consequences of his own speculation
and saddling them on the petitioner after the result was known to be
unfavorable. 42 Such contention finds no legal or even moral justification and
must necessarily be overruled. Respondent's conduct is precisely the behavior
of an investor deplored by the law. DEcSaI
In the final analysis, both parties acted in violation of the law and did not come
to court with clean hands with regard to transactions subsequent to the initial
trades made on April 10 and 11, 1997. Thus, the peculiar facts of the present
case bar the application of the pari delicto rule expressed in the maxims "Ex
dolo malo non oritur action" and "In pari delicto potior est conditio defendentis"
to all the transactions entered into by the parties. The pari delecto rule
refuses legal remedy to either party to an illegal agreement and leaves them
where they were. 43 In this case, the pari delicto rule applies only to
transactions entered into after the initial trades made on April 10 and 11, 1997.
Since the initial trades are valid and subsisting obligations, respondent is liable
for them. Justice and good conscience require all persons to satisfy their debts.
Ours are courts of both law and equity; they compel fair dealing; they do not
abet clever attempts to escape just obligations. Ineludibly, this Court would not
hesitate to grant relief in accordance with good faith and conscience.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction
(sold the stocks) on the fourth day following the transaction (T+4) and
completed its liquidation not later than ten days following the last day for the
customer to pay (effectively T+14). Respondent's outstanding obligation is
therefore to be determined by using the closing prices of the stocks purchased
at T+14 as basis.
We consider the foregoing formula to be just and fair under the circumstances.
When petitioner tolerated thesubsequent purchases of respondent without
performing its obligation to liquidate the first failed transaction, and without
requiring respondent to deposit cash before embarking on trading stocks any
further, petitioner, as the broker, violated the law at its own peril. Hence, it
cannot now complain for failing to obtain the full amount of its claim for
these latter transactions.
On the other hand, with respect to respondent's counterclaim for damages for
having been allegedly induced by petitioner to generate additional purchases
despite his outstanding obligations, we hold that he deserves no legal or
equitable relief consistent with our foregoing finding that he was not an
innocent investor as he presented himself to be.
Second
Issue:
Jurisdiction
It is axiomatic that the allegations in the complaint, not the defenses set up in
the answer or in the motion to dismiss determine which court has jurisdiction
over an action. 44 Were we to be governed by the latter rule, the question of
jurisdiction would depend almost entirely upon the defendant. 45
The instant controversy is an ordinary civil case seeking to enforce rights arising
from the Agreement (AOF) between petitioner and respondent. It relates to
acts committed by the parties in the course of their business relationship. The
purpose of the suit is to collect respondent's alleged outstanding debt to
petitioner for stock purchases.
To be sure, the RSA and its Rules are to be read into the Agreement entered
into between petitioner and respondent. Compliance with the terms of the AOF
necessarily means compliance with the laws. Thus, to determine whether the
parties fulfilled their obligations in the AOF, this Court had to pass upon their
compliance with the RSA and its Rules. This, in no way, deprived
the Securities and Exchange Commission (SEC) of its authority to determine