Klikmart Shopping Club Corp. and Klikmart Dragon, Inc. (also known as "Klikmart Rewards")

SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission Republic of the Philippines Department of Finance In the matter of: KLIKMART SHOPPING CLUB CORP.and KLIKMART DRAGON, INC. (also known as "KLIKMART REWARDS?) SEC CDO Case No. 09-15-023 PROTECTION DEPARTMENT, ENFORCEMENT AND INVESTOR Movant. X RESOLUTION DRAGON INC. (for brevity "Respondents") praying that the Commission lift its portion reads as follows: on 30 October 2015 by the KLIKMART SHOPPING CLUB CORP.and KLIKMART Cease and Desist Order dated 16 October 2015 (Assailed CDO), the dispositive This resolves the Motion to Lift Cease and Desist Order'(Motion to Lift) filed "WHEREFORE, premises considered, KLIKMART SHOPPING CLUB CORPORATION, MARKETING SERVICES, their partners, officers, directors, agents, representatives, conduits, assigns, AND ANY AND ALL PERSONS CONTEMPT, from engaging in activities of selling and/or offering for sale securities in the form of investment contracts or any others of the corresponding to offer/sell is issued. KLIKMART REWARDS,KLIKMARTDISTRIBUTIONAND CLAIMING AND ACTING FOR AND IN THEIR BEHALF are hereby ordered to IMMEDIATELY CEASE AND DESIST, UNDER PAIN OF same nature, as discussed in this Order, until the requisite registration statement is duly filed with and approved by the Commission and the KLIKMART DRAGON CORPORATION Furthermore, the subject corporations are directed to cease its internet subject corporations." any persons or entities found to act as solicitors, information providers. salesmen, agents, brokers, dealers or the like for and in behalf of the presence relating to above-stated investment activities. The Commission will institute the appropriate administrative and criminal action against I Dated 26 October 2015. In re: KLIKMART DRAGON,INC.and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also known as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 2 of 9 The facts of the case are as follows: Commission on 31 March 2015 with Company Registration No. CS201506576. Its Kamuning, Quezon City. It is engaged in the business of marketing and distribution of goods2. On the other hand, Klikmart Dragon Inc. is a stock corporation registered with the Commission on 05 February 2015 with Company Registration No. CS201502022] Balibago, Sta. Rosa, Laguna. It is engaged in the business of buying and selling of principal office is located at Unit 1B, Forab Building, Kamuning Road, Brgy. Its principal office is located at Unit II, Pearl Road, Balibago Complex, Brgy. goods3 Klikmart Shopping Club Corp. is a stock corporation registered with the Assailed CDO4. Then, on 30 October 2015, they filed a Motion to Lift alleging among others, the following: On 21 October 2015, Respondents received a copy of the Commission's 1. There is no substantial evidence to conclude that Respondents are 2. 3. 4 That as part of Respondents' strategy, they created a sales scheme of They are multi-level marketing companies engaged in giving engaged in investment contracts. The results of the Commission's strategies of their members who do not have the proper training.: bonuses, incentives, commission, and product formulation: selling bulk products to each member which was called "Entry Package". By placing the amount of Php 1,500.00, a member receives two (2) boxes of organic coffee (299/box) and one (l) premium beauty soap (199/bar). This package only signifies that That the Bureau of Food and Drugs (BFAD) directed Respondents to investigation is not Respondents' marketing strategies but individual every member must avail of such products to be a legitimate member of the company7; in a mere money-making scheme and not legitimate shopping first secure a license before they distribute food products. For this reason, Respondents did not distribute products from March to September 2015. Thus, it was assumed that Respondents are engaged companies: 6 Paragraph 4 of the Motion to Lift. 8 Paragraph 6 of the Motion to Lift. 3 Klikmart Dragon Inc's primary purpose is "To engage in, conduct and carry on the business of buying. selling. distributing, marketing at retail and wholesale insofar as may be permitted by law, all kinds of goods, wares and sale at manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents upon as stock broker or dealer in securities, government securities eligible dealer (GSED), investment house, transfer agent, 5 Paragraph 3 of the Motion to Lift. 7 Paragraph 5 of the Motion to Lift. 2 Klikmart Shopping Club Corp.'s primary purpose as but not limited to soap and perfumes, wares and merchandise of every kind and description in wholesale and retail basis." merchandise of every kind and description; to enter into all kinds of contracts for the export, import, purchase, acquisition, consignment of all kinds of goods, equipments, wares, merchandise or products whether natural or artificial without acting commodity/financial futures exchange/broker/merchant, financing company, and time shares/club shares/membership certificate issuers or selling agents thereof. 4 Paragraph 1 of the Motion to Lift. - "To engage in the business of marketing and distribution of goods, such In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also knoWn as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 3 of 9 5. That Respondents admit that there was negligence on their part in 1 That Respondents' scheme is that the bonus awarded to a guiding their members but they did not tolerate the alleged investment activities; I member is based on sales output of a member in a 2:1 sales matrix system. This only means that Respondents should not release bit confusing to the new members on how their packages worth Php No definite promises, no particular dates, no percentages and interest promised. This marketing strategy is often misunderstood by some That Respondents are not engaged in investment contract since the a bonus unless and until the member has recorded sales. Although a 1,500.00 is equivalent to rebates worth Php 2,000.00, the scheme is a plain membership store that helps members earn rebates in selling products. Thus, for two packages sold, the member is entitled to receive sales package rebates or a cash bonus worth Php 2,000.00. members especially those who lack proper training and experiencelo: 8. That Respondents' present motion is supported by one hundred thirty elements of such is not present in the instant case. One, the money invested by the members does not subject them to financial loss since there is a product involved. Two, the investment was returned already in the form of products. Three, the profits expected by because of the outcome of their sales and not solely from the of the outcome in the sales of products/packages1: two (132) of their members. the members are given to the in a form of rewards or bonuses efforts of others. In fact, the return on investment was given because Department (EIPD) was given fifteen (15) days to file its Comment. Then, Respondents were also given the same period to file their Reply/Rejoinder. 2015, Respondents reiterated the grounds alleged in their Motion to Lift. After the parties' oral arguments, the Commission's Enforcement and Investor Protection At the hearing of Respondents' Motion to Lift, which was set on 13 November Motion to Lift, arguing, among others: On 27 November 2015, EIPD filed its Comment/Opposition12 to Respondents' 1. That Respondents have been operating since November 2014 and 2 That Respondents admitted that they were not distributing products they have been receiving benefits from all the investments pouring in through the sales strategies of their member-employees. In fact, Mr. who conducted the seminar attended by the EIPD investigating Athos Garganera, one of Respondents' incorporators, was the one team13 from March to September of 2015. Respondents' non-distribution of 1 Paragraph 7 of the Motion to Lift. :0 Paragraph 8 of the Motion to Lift. 12 Dated 25 November 2015. 13 Page 3 of EIPD's Comment. I Paragraph 9 of the Motion to Lift. In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also knoWn as "KLIKMART REWARDS" SEC CDO Case No. 09-15-023 Page 4 of 9 3. 4 products only _proves_that_ the promised interest for the money That the elements of an investment contract is present in the instant since, as already admitted in Respondents' motion, there was no That the promised return on investment was derived from the invested does not depend on the outcome of the sales of the products product ever distributed to the investors14; investments of the new investors rather than from the income earned through the sale of the products15: profits from the entrepreneurial and managerial efforts of others1 case. There is a placement of money consisting of a minimum of P1,500.00 where the investor is promised to earn 33% of the totall money invested or a payout exit of P2,000.00. The money invested is placed in a common enterprise and the investor expects to derive profits as they are primarily attracted to join Respondents by the prospects of return on their investment. The investor expects to earn Comment/Opposition, alleging, among others: On 10 December 2015, Respondents filed their Reply7, to EIPD 1. That Respondents are not engaged in selling/offering investment 2 3. That Respondents have fourteen (14) stores nationwide in which contracts. Respondents give each of their member one (1) package That the training attended by EIPD was conducted by an Respondents' stores for a minimum amount of Php 500.00 per month to be entitled to rebates or bonuses18: redeemable points. Products for new members are available in of different products. Members should also purchase products from products are displayed in every store and are ready for purchase by anyone. Members may purchase products anytime and they earn Respondents' warehouse as early as May 2015. The return on investment did not come from efforts of others but from the members themselves by buying packages and accumulating_points_through purchases19: 4. That the internet advertisement, which was examined as part of the Respondents' authorized trainer and did not use the Board-approved unauthorized personnel, Mr. Athos Garganera, who is not presentation20: Facebook page (KLIKMART REWARDS) and an official website investigation, did not come from Respondents. They maintain one (www.klikmartrewards.com) but these web advertisement were shut down because of the Assailed CDO21 20 Paragraph 8 of Respondent's Reply. 21 Paragraph 9 of Respondent's Reply. 18 Paragraphs 3-4 of Respondent's Reply. 1? Paragraphs 5-7 of Respondent's Reply. 14 Page 4 of EIPD's Comment. 15 Page 5 of EIPD's Comment. 16 Page 8 of EIPD's Comment. 17 Dated 05 August 2015. In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also knoWn as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 5 of 9 Rejoinder22, alleging among others, the following: In response to Respondents' Reply, EIPD on 22 December 2015 filed a 1.That Respondents did not in any way controvert the findings in the 2. That Respondents admitted that they were not distributing their 3. That Respondents' denial of Mr. Athos Garganera's authority to Commission's CDO; distribution of products only proves that the promised interest for the products to their members prior to the issuance of BFAD license but still solicited and accepted investments from the public. Their non. money invested does not depend on the outcome of the sales of the conduct seminar is illogical since the latter is one of the owners and actively spreading Respondents' business scheme24 products23. Dominique Nadela, a poseur-investor in a National Bureau of Investigation (NBI) under-cover surveillance operation in Respondents' Tagbilaran, Bohol Branch on 03 September 201525. EIPD also attached in said Rejoinder a copy of the statement of Mark clarified, the hearing on the Motion to Lift is terminated and submitted for resolution. With the submission of EIPD's Rejoinder and with no remaining issues to be Commission's Cease and Desist Order". Respondents presented sufficient grounds to overcome the findings in the The issue to be resolved can be summarized as follows: "Whether or not We find the instant Motion to Lift bereft of merit. the amount of Php 1,500.00 to Php 15,000.00 with a promised return of 33% of provide a reward system for recruiting other investors. investment within a period of 21 days to 1 month (Membership Bonus). Also, they are offering/selling investment contracts. Respondents require their investors to invest The Assailed CDO was based on the Commission's findings that Respondents (MSRD) and Corporate Governance and Finance Department (CGFD) certifying that gathered in three (3) surveillance and ocular inspections showing that Respondents Certifications from the Commission's Market Securities Regulation Department Respondents are not licensed to offer/sell securities; 2.) Documents and statements EIPD presented the following evidence in support of its motion: 1. 25 Annex "A" of EIPD's Rejoinder. 22 Dated 17 December 2015. 23 Page 2 of EIPD's Rejoinder. 24 Page 4 of EIPD's Rejoinder. In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also known as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 6 of 9 enticed investors to place money in a common enterprise and led to expect profits from the business scheme which Respondents primarily develop and operate. Level Marketing (MLM) companies is unmeritorious. In a multilevel or network marketing, individuals sell products to the public -- often by word of mouth and also for sales made by the people they recruit26. Assuming that Respondents are MLM companies, this does not rebut EIPD's findings that investment-taking is still present in their business scheme, particularly the promise of 33% return on investment after 21 days to l month. This is because members earn profits without the need for selling direct sales. Typically, distributors earn commissions, not only for their own sales, but Mr. Mark Dominique Nadela, a poseur-investor in a NBI under-cover surveillance operation in Tagbilaran, Bohol. Mr. Nadela personally invested Php 1,500.00 in Respondents' business enticed by the promised return of 33% on his investment products or recruiting members. Additionally, EIPD presented a sworn statement27 of within a short period of one month or less. Respondents' argument in their Motion to Lift that they are legitimate Multi- Interplanetary Inc.29, a four (4) part test was formulated to determine whether an MLM business is a pyramid scheme. This is known as the "Koscot test" which comprises of the following: 1.) payment of money to the company; 2.) the participant receives the right to sell a product [or service]; 3.) the participant receives compensation for recruiting others into the program; 4.) the compensation is unrelated to the sale of products [or services] to the ultimate user. exploited to disguise pyramiding schemes28. Thus, in the US Case of FTC vs. Koscot It should be emphasized that on numerous occasions the concept of MLM is they claim to be a MLM company, which awarded rebates or bonuses based on sales They require their new members to place the amount of Php 1,500.00 to Php receives the right to sell their products. In fact, Respondents admit this scheme when of their members30. Further, members receive additional compensation when they recruit new investors, through the rewards system [Infinite Direct Referrals or Customer Finder Fee 31, Unilevel Bonus (Power of Piso)32 and Royalty Raffle Bonus 15,000.00 to gain entry in their business scheme. After placement, a new member In the instant case, Respondents' business model satisfies the Koscot test. 31 The investor will get P50.00 for every direct referral who will nvest a minimum of P1,50.00. The corporation be purchased by his referrals, When referrals or down line of an investor reach the 20th level, then, he will earn more than 26 https:/www.ftc.gov/tips-advice/business-center/guidance/multilevel-marketing, last accessed on 26 January 2016. 27 Annex "A" of EIPD's Rejoinder. 28 People v. Balasa, G.R. Nos. 108601-2 (1998), in citing the Consumer Act of the Philippines (RA 7394), defines a pyramid 30 Paragraph 4 of Respondents' Motion to Lift. 29 86 F.T.C. 11106 (1975) imposed no limit as to the number of referrals, page 5 of the Assailed CDO. 32 An investor will earn P1.00 for every product (i.e. coffee-P195.00/box, soap-P160.00/piece, rice-P45.00/kilo) that will scheme as a sales devices whereby a person, upon condition that he makes an investment, is granted by the manufacturer or his representative a right to recruit for profit one or more additional persons who will also be granted such right to recruit upon condition of making similar investments: Provided, That, the profits of the person employing such a plan are derived primarily from the recr change the nature of the plan consum Cro ducts, services and credit; Provided, further, That the limitation on the number of participants does not ruitment of other persons into the plan rather than from the sale of In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also known as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 7 of 9 (Balato)3334. Finally, rewards system for recruitment is completely unrelated to the sales of Respondents' products. from selling of their products. Stated otherwise, the rewards emphasize on recruitment over retail sales. Thus, Respondents offer more rewards/benefits from recruitment rather than on individual members' strategies who lack of proper training. However, it should be emphasized that it was Mr. Garganera, an incorporator and director, who presented Respondents' business scheme to EIPD investigators. In short, it is apparent that Respondent's argument impliedly admitted the fact that investment-taking is present in Mr. Garganera's presentation that Respondents promise 33% return of investment September 2015 but are soliciting/collecting investments with a promise of high after 21 days. It is also evident that they are not selling products from March to return. Respondents themselves admitted that they did not distribute their products words, Respondents' products are merely inconsequential to very design and intent of their business model which is solicitation of investments. Obviously, the promised returns comes from the investment of new members since there is no sale of products. since the start of their business. Assuming further that there are products to be distributed, they still promoted their investment scheme and accepted monies from their members despite knowing that they could not distribute their products. In other In their Motion to Lift, Respondents also argue that EIPD's findings are based names and signatures of Respondent's members35 to support their claim does not hundred thirty two (132) members, such is untenable. The photocopy of a list of indicate that the persons stated therein are Respondents' members, nor show that they are supporting Respondents' position in the instant case. Thus, it has no relation to alleged expression of support. Finally, as to the Respondents' claim that their position is supported by one through its investigation, that Respondents offer/sell securities in the form of non-registration of the same. In fact, Respondents' arguments show that they have adopted a pyramiding scheme when they offer/sell these investment contracts. investment contracts. EIPD proved the elements of an investment contract and the Comparing the evidence presented, EIPD was able to adequately establish, 10% royalty bonus, then, all persons Finder Fee" is similar to EIPD's findings on "Infinite Direct Referrals"; Respondents' "Cashback Bonus (Php1.00)" is similar to EIPD's findings on "Unilevel Bonus (Power of Piso)"; 3.) Respondents" "Raffle Winner's Royalty Bonus" is similar to EIPD's findings on "Royalty Raffle Bonus (Balato)". 35 Annex "E" of Respondents' Reply. 2 million Pesos. However, in order for an investor to claim his money, he must first purchase one product from the Respondents, page 6 of the Assailed CDO. 33 Respondents has the option to choose how much percentage will be given as a bonus or "balato". If the primary investor loses in the raffle bonus and the 15th person in his down line wins, then, the 14th person in the down line all the way up to the primary investor will be given a "Balato". If the prize won is P1 million and Respondents decides to give Respondents presented their Board-approve Power Point preser EIPD's version and Respondent's Board-approved presentation, we find similarities to wit: 1.) Respondents' "Customer EIPD investigators witnessed rewards schemes employed by Respondents during Mr. Garganera's seminar. Likewise. saaA the winner will be given P100,000.00 each, page 6 of the Assailed Order itation illustrating their earning schemes. Comparing In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also knoWn as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 8 of 9 Moreover, Respondents' evidence failed to overcome EIPD's findings that indeed Respondents are selling/offering securities in the form of investment contracts to the public without the necessary license from the Commission. Thus, Respondents arguments and evidence lack merit. in a commercial enterprise or profit-making venture and evidenced by a certificate. contract, instruments, whether written or electronic in character. One of the types of securities are investment contracts36. As a rule, all 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 Commission37 To reiterate, securities are shares, participation or interests in a corporation or Commission38, the Supreme Court ruled that: Additionally, in Primanila Plans, Inc. vs. Securities and Exchange by the SEC motu proprio, it being unnecessary that it results from a required whenever the Commission finds it appropriate to issue a cease verified complaint from an aggrieved party. A prior hearing is also not and desist order that aims to curtail fraud or grave or irreparable injury to investors. There is good reason for this provision, as any delay in the injury to the public that the SEC is obliged to protect." -"The law is clear on the point that a cease and desist order may be issued restraint of acts that yield such results can only generate further Finally, it is declared in Section 2 of the SRC, that: "Section 2. Declaration of State Policy. -- The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of these ends, this Securities Regulation Code is hereby enacted. wealth, promote the development of the capital market, protect investors. ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. To achieve directors, agents, representatives, conduits, assigns, and any and all persons/entities claiming and acting for and in behalf and under their authority, is hereby MADE Order dated 16 October 2015 filed by KLIKMART SHOPPING CLUB CORP. and AND DESIST ORDER issued against the subject corporations, their officers, PERMANENT KLIKMART DRAGON,INC. is hereby DENIED for lack of merit. The CEASE WHEREFORE, premises considered, the Motion to Lift Cease and Desist 38 G.R. No. 193791, August 6, 2014. 36 Section 3, (b) of the Securities Regulation Code (SRC). 37 Section 8.1 of the SRC. In re: KLIKMART DRAGON, INC. and KLIKMART SHOPPING CLUB CORP Enforcement and Investor Protection Department (also knoWn as "KLIKMART REWARDS") SEC CDO Case No. 09-15-023 Page 9 of 9 to: (a) serve this Resolution to the President, General Manager, Corporate Secretary, KLIKMART DRAGON INC. and (b) post copies of the Resolution at the entrance of the main offices and/or branches, if any, of KLIKMART SHOPPING CLUB CORP. and KLIKMART DRAGON INC. Treasurer or In-House Counsel of KLIKMART SHOPPING CLUB CORP. and The Enforcement and Investor Protection Department is hereby DIRECTED departments and offices of the Commission for their information and appropriate published in a national newspaper of general circulation and furnished to all operating action. Let a copy of this Resolution be also posted in the Commission's website; and DIRECTED to submit a formal compliance report, by way of a pleading, to the Commission En Banc WITHIN TEN (10) DAYS from receipt of this Resolution. EIPD, in coordination with other concerned departments, is FURTHER SO ORDERED Mandaluyong City; 05 April 2016. a TERESITA J. HERBOSA Chairperson MANUEL HUBERTO B. GAITE Commissioner ANTONIETA F. IBE Commissioner melo taa EPHYRO LUIS B. AMATONG Commissioner BIAS JAMES G:VITERBO Conlmissioner *On Official Business.