SEC En Banc Case No. 01-13-283 Diversified Securities, Inc. vs. Capital Markets Integrity Corporation, et.al

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1936 SEC Bldg., EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission Republic of the Philippines Department of Finance

DIVERSIFIED SECURITIES,INC., Appellant,

- versus - SEC En Banc Case No.01-13-283

CORPORATION, CAPITAL MARKETS 3G INTEGRITY HOLDINGS

CORPORATION, INDUSTRIES OF LMG CHEMICALS CORPORATION, CORPORATION, THE A2K CORPORATION, CHEMHOLDINGS PHILIPPINES, CHEMICAL HOLDINGS

RICARDO CARLOS L. GONZALES, AND KHO CING SIONG

Appellees.

DECISION

Decision dated 3 January 2013, per CMIC Board Resolution No. 41, Series of 2012, the Capital Markets Integrity Corporation (CMIC) dated 24 September 2012 and the filed by Diversified Securities, Inc.(DSI) on 28 January 2013 assailing the Decision of which denied DSI's request for reconsideration of, and affirmed, the Decision of the CMIC dated 24 September 2012 rendered in favor of appelllees 3G Holdings Corporation (3G), A2K Holdings Corporation (A2K), Chemholdings Corporation (Chemholdings) For the consideration of the Commission En Banc is the Memorandum of Appeal

Ricardo Carlos L. Gonzales and Kho Cing Siong. The assailed Decision dated 24 Chemical Industries of the Philippines (CIP), LMG Chemicals Corporation (LMG)

September 2012 imposed the following penalties against DSI:

1. Monetary penalty of Php 200,000.00 for a first violation of Section 1(h), Article X-B of the Amended Market Regulation Rules (PSE-

securities entrusted to it in the course of its trading business: MRD Rules) for having engaged in the unauthorized disposition of

2. 3 Written Reprimand for a first violation of Section 10, Article VI of the PSE-MRD Rules on Short Selling; Written Reprimand for a first violation of Section 1, Article V of the

4 To return the shares to herein appellees that were disposed of in PSE-MRD Rules on Ethical Standards; and

violation of their written instructions, or the value thereof, at the time

DiversifiedSecurities,Inc. V. Capital

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of the unauthorized disposition, less any amount due to DSI as fees and charges.

Registration No. 174269. DSI is duly licensed by the Commission to open, operate and maintain a stock brokerage house, to act as a dealer, underwrite and distribute securities, bonds, debentures, products, commodities, and any and all other kinds of properties, either in the Philippines or in any foreign country. DSI is a domestic corporation registered with the Commission under SEC

Regulatory Organization (SRO) and registered with the Commission on 14 March 2011 (PSE-MRD), is an independent entity allowed by the Commission to operate as a Self CMIC, formerly the Market Regulation Division of the Philippine Stock Market

with SEC Registration No. CS201104274.

"Chemphil Group", are domestic corporations registered with the Commission. CIP and LMG are listed companies in the Philippine Stock Exchange (PSE). 3G,4 A2K,5 Chemholdings, CIp7 and LMG8, collectively known as the

DSI, in order to comply with the Minimum Public Ownership Rule of the PSE. stockholders of CIP and LMG, as the case may be, lodged their stock certificates with On 30 November 2011, some of the companies in the Chemphil Group, who are

follows: DSI to effect the assignment of shares via cross-sale to Mr. Gonzales and Mr. Siong as On 15 December 2011, each of said stockholders gave written instructions1 to

3G Chemholdings A2K CIP Stockholder- Seller 8,336,772 shares of LMG 791,215 shares of CIP 238,445 shares of CIP 11,017,696 shares of LMG Shares Mr. Gonzales Mr. Siong Mr. Gonzales Mr. Siong Buyer

9 Stockholders of CIP: (1) Chemholdings with stock certificate no.769 covering 1,027,432 shares lodged 1o Reply Memorandum of CMIC, Annex "1" (Letter of Complaint of Chemphil Group, pp. 1-2). SEC Registration No.A200118730. Decision of the CMIC dated 24 September 2012, p. 2 SEC Registration No. 42020. Certificate of Registration of CMIC SEC Registration No. 14812. SEC Registration No. CS200340714. SEC Registration No. 0000178074. Second Article of the DSI's Amended Articles of Incorporation. with the DSI ; and (2) A2K with stock certificate no. 1221 covering 1,860,039 shares with the DSI Stockholders of LMG: (1) CIP with stock certificate no. 1722 covering 143,163,154 shares lodged with the DSI; and (2) 3G with stock certificate no. 1721 covering 50,086,766 shares lodged with the DSI Decision of the CMIC dated 24 September 2012,p.3

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Mr. Siong and Gonzalez were for a valuable consideration. DSI alleged that the Chemphil group represented that the assignment to the buyers

the purchase price of the shares within the above-mentioned period. 12 was implemented by DSI on 28 December 2011. DSI claimed that, as a consequence, Mr. Siong and Mr. Gonzales had the obligation to pay the purchase price of the shares to the former within three (3) business days pursuant to Section 5 of Article VI of the PSE- MRD Rules.However, DSI alleged that Mr. Siong and Mr. Gonzales failed to pay DSI The above-mentioned cross sale transaction as instructed by the Chemphil Group

The Chemphil Group alleged that it verbally informed DSI that it had agreed to

January. However, the attempt to settle the cross sale transaction failed since Ramon M. Garcia, who is a stockholder and director of Chemphil Manufacturing Corporation settle the cross sale transaction with Mr. Gonzales and Mr. Siong in the first week of

(CMC),opposed the plan of CMC to lend money to Mr.Gonzales and Mr.Siong.

Ssettle the cross sale transaction on or before 29 February 2012.15 On the other hand, Mr. Gonzales alleged that he,A2K, and 3G had agreed to

However, DSI denied that the parties to the cross sale transaction informed it that

Was given to it. Ie they had agreed to settle at a later date and that no letter or communication to this effect

On 1 February 2012, the Chemphil Group alleged that they reiterated to DSI their

Mr. Gonzales.17 instructions that DSI was only authorized to sell their respective shares to Mr. Siong and

Gonzalez and Mr. Siong failed to pay their accounts within three (3) days after the transaction date (T+3). The substitute buyers paid on 7 February 2012 the subject shares On 3 February 2012, DSI liquidated the shares with substitute buyers since Mr

at the same price when they were cross traded.

Chemholdings and 3G, representing proceeds of the liquidated shares: On February 9, 2012, DSI delivered the following check payments19 to A2K.

13 Decision of the CMIC dated 24 September 2012, p. 3. 14 Memorandum on Appeal, par. 3.6. 17 Id, p. 3 18 Id., p. 7. Reply Memorandum, Annex 1(AnnexH,H-1andH-2of the Complaint of the Chemphil Group " Memorandum on Appeal, par. 3.1. 12 Id., pars. 3.3 and 3.5. 15 Reply Memorandum, Annex 2 (Letter-Complaint of Mr. Gonzales dated 14 February 2012) 16 Decision of the CMIC dated 24 September 2012, pp. 5-6. referring to Checks payable to Chemholdings, A2K and 3G).

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P9,823,510.29 P32,198,057.25 P9,713,379.86 Check Payment 8,336,722 LMG shares 238,445 CIP shares 791,215 CIP shares Shares 3G A2K Chemholdings Seller

No payment was delivered for the 11,017,696 LMG shares sold by CIP as DSI

by the Regional Trial Court of Makati, Branch 61 against CIp.20 claimed that the proceeds for those shares are the subject of a Writ of Attachment issued

mentioned check payments from DS1.21 However, DSI claimed that the Chemphil Group refused to accept the above

offered by them and Mr. Siong and Mr. Gonzales.23 respective shareholdings in CIP and LMG without any written instructions from them. Chemphil Group alleging that DSI, as their broker, exceeded its authority in selling their liquidated and to effect the cross-sale transactions as well as to accept the settlement The Chemphil Group prayed, among others, that DSI return the shares that the latter On 13 February 2012, the PSE-MRD received a Letter-Complaint of the

Moreover, a Letter-Complaint of Mr. Gonzales dated 14 February 2012 was sent to the PSE-MRD alleging that he, A2K and 3G agreed to settle the cross sale transaction on or before 29 February 2012 and, as such, he sent the settlement checks to them on 9 February 2012. He alleges, further, that he informed DSI of the settlement on the same date he sent the settlement checks. He claims that DSI exceeded its authority since the

shares will be "confiscated".24 Chemphil Group was to sell to him only and did not receive notice from DSI that his

within three (3) days from the date the cross sale transaction was implemented. DSI Article VI of the PSE-MRD Rules because Mr. Gonzales and Mr. Siong failed to pay In response, DSI stated that it had to liquidate the shares pursuant to Section 5(a),

and Mr. Siong but the plan failed to materialize.25 further alleged that the Chemphil Group requested CMC to lend money to Mr. Gonzales

liquidation of shares by DSI.He claimed that he was in negotiations regarding the Gonzales,26 Mr. Siong filed his Letter-Complaint on 15 May 2012 assailing the After an exchange of pleadings between the Chemphil Group, DSI and Mr.

26 Chemphil Group's Reply to Answer filed on 21 March 2012; Mr. Gonzales' Reply to Answer filed on 21 Memorandum on Appeal, par. 3.13. 23 Reply Memorandum, Annex "1" (Letter-Complaint of the Chemphil group). 24 Memorandum on Appeal, Annex "D (Letter-Complaint of the Mr. Gonzales). 25 Id., par. 3.16. 20 Decision of the CMIC dated 24 September 2012, p. 14. 22 Id., par. 3.14. March 2012; DSI's Rejoinder filed on 12 April 2012.

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Shares. He prayed that the shares be transferred to him.27 In response, DSI, in its Answer to Letter-Complaint of Mr. Siong dated 15 June 2012, claimed that the said Letter Complaint should be dismissed since it was filed at the tail end of the proceedings. Thereafter, the parties submitted their responsive pleadings.2

following: (1) the Letter-Complaint of the complainants-appellees need not be verified contrary to the claim of DSI; (2) DSI violated Article X-B, Section 1(h) of the PSE-MRD The CMIC rendered the assailed Decision dated 24 September 2012 holding the

Rules for the unauthorized use or disposition of funds or securities entrusted by a client; (3) DSI violated Article VI, Section 10 of the PSE-MRD Rules on Short Selling since RG Holdings, one of DSI's substitute buyers, sold 80,000 LMG shares on 28 December 2011 which was covered by DSI only on February .2012 or a total of twentv six (26) days after settlement date; and (4) DSI violated the rules of ethical standards for failing to act honestly and fairly, with due skill, care and diligence, and in the best interest of its client, when it failed to notify the Chemphil Group of the liquidation of their shares despite regular communications with each other.

reconsideration of its Decision dated 24 September 2012.31 However, the CMIC denied DSI's request for reconsideration in its Decision dated 3 January 2013.32 A Letter dated 7 October 2012 was filed by DSI with the CMIC requesting

Hence this appeal.

In its Memorandum on Appeal, DSI argues the following: (1) the CMIC erred in failing to dismiss the Letter-Complaints since it did not complete the investigation and resolution within sixty (60) days from receipt thereof which was mandated by the PSE- MRD Rules; (2) the CMIC erred in ordering the return of the shares or the value thereof to Mr. Gonzales and Mr. Siong because they never paid for the shares; (3) the CMIC exceeded its jurisdiction in passing upon the issue of ownership of the shares which falls within the exclusive jurisdiction of the courts; (4) the CMIC erred in holding DSI liable under Section 1 (h), Article X-B of the PSE-MRD Rules for the latter's unauthorized use or disposition of funds or securities entrusted by a client; (5) the CMIC erred in holding DSI liable for short selling since there was no sale of LMG shares on 28 December 2012;

the CMIC erred in holding that Letter-Complaints are not required to be verified under (6) the CMIC erred in holding DSI in violation of the rules on ethical standards; and (7) the PSE-MRD Rules.

27 Memorandum on Appeal, Annex "K" (Letter-Complaint of Mr. Siong). 31 Memorandum on Appeal, Annex "O" (Letter requesting reconsideration dated 7 October 2014). 28 Id., Annex M"(Answer to Complaint of Mr. Kho) 29 Chemphil Group's comment on DSI's Answer to Letter-Complaint of Mr. Siong dated 9 July 2012; 32 Id., Annex B (Decision of the CMIC dated 3 January 2013. 3 Decision of the CMIC dated 24 September 2012, pp. 19, 21 and 23 DSI's Opposition dated 9 July 2012;

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jurisdiction since it did not pass upon the issue of ownership; (4) it did not err in holding Letter-Complaints on the ground that it did not complete the investigation and resolution within sixty (60) days from receipt thereof; (2) it did not err when it ordered DSI to return the shares or value thereof to Mr. Gonzales and Mr. Siong; (3) it did not exceed its DSI liable for Article X-B, Section 1(h) of the PSE-MRD Rules for the latter's unauthorized use or disposition of funds or securities entrusted by a client; (5) it did not err in holding DSI liable for short selling; (6) it did not err in holding DSI in violation of the rules on ethical standards; and (7) it did not err in holding that the Letter-Complaints are not required to be verified. In response, CMIC claims the following: (1 it did not err in not dismissing the

have dismissed the Letter-Complaints since it did not complete the investigation and resolution within sixty (60) days from receipt thereof pursuant to Section 4, Article II of the PSE-MRD Rules. We will begin discussing the procedural issues. DSI argues that CMIC should

PSE-MRD, now the CMIC, to do so shall be a ground for the dismissal of the case, unless resolution of a complaint must be completed within sixty (60) days from receipt thereof. However, Article II,Section 8 of the PSE-MRD Rules also provides that failure of the Section 4, Article II of the PSE-MRD Rules provides that the investigation and

such failure was not due to its fault or complainants-appellees' fault.

to file the required responsive pleadings or documents which were all granted by the day period was not due to its fault since DSI filed several requests for extension of time CMIC.33 Thus, the Letter-Complaints should not be dismissed on this ground. In which case, the failure of the CMIC to resolve the matter within the sixty (60)

Rules allows investigations to proceed based on mere reports of Trading-related Article II of the PSE-MRD Rules34 reveals that although the rules define and mention a proceed. The PSE-MRD is given discretion to determine whether the complaint is required to be verified under the PSE-MRD Rules. However, a reading of Section 4 sworn complaint, it is not mandatory that the complaint be sworn for the investigation to sufficient in form and in substance to justify an investigation. Moreover, the PSE-MRD As to the next procedural issue, DSI claims that the Letter-Complaints are

33 The following were the DSI's requests for extension of time to file its responsive pleading or documents: (1) on 28 February 2012, DSI requested for extension of 10 days to submit its Answer; (2) on 27 March 2012,DSI requested for an extension of five(5) days to submit its Rejoinder3 on 22 May 2012,DSI

34 Article II, Section 4 of the PSE-MRD Rules provides that an aggrieved or interested party (the to be sufficient in form and substance to justify an investigation under these Rules, the [PSE-]MRD shall June 2012, DSI requested for extension of time until 16 June 2012 to file an Answer to the letter- proceed with the investigation of the Complaint x x x(Emphasis ours) 2012,DSI requested for an extension of time to submit its documents required by CMIC; and (5) on 9 complaint of Mr. Siong complainant') may file a sworn Complaint with the [PSE-]MRD against any Trading Participant and, in requested for an extension of ten(10 days to submit its documents required by the CMIC;(4 on 31 May a proper cas se, against an Issuer (the Respondent") x x x. If the [PSE-]MRD determines the Complaint

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irregularities or unusual trading activities as well as on referrals by the Commission, the PSE Board, the Market Integrity Board (MIB), the PSE President and the Disclosure Department of the PSE. The said rules even allow the PSE-MRD to act on anonymous complaints or referrals. Thus, the alleged defect in the Letter-Complaints for not being sworn under oath is not sufficient to warrant their dismissal.

Section 1(h), Article X-B of the PSE-MRD Rules for its alleged unauthorized use or the PSE-MRD Rules on Ethical Standards. disposition of funds or securities entrusted by a client, and under Section 1, Article V of We can now go into the issue as to whether DSI should be held liable under

In its Decision dated 24 September 2012, the CMIC stated that a substitution or liquidation was executed by DSI on 3 February 2012 despite written instructions on 1 February 2012 stating that DSI was authorized to sell the shares only to Mr. Siong and Mr. Gonzales. Further, the PSE-MRD Rules on the settlement of shares within three (3)

purchase is made by the customer with the understanding that payment is to be made upon delivery". A similar instance includes where the buyer and seller may agree to a days after the trade date is not absolute since there is an exception, which states "where

settle at a later date, thus negating DSI's argument that it was justified in liquidating the shares, pursuant to the PSE-MRD Rules.Lastly, even assuming that DSI is allowed to liquidate the shares, it did not liquidate the shares within ten (10) days after the last day Article VI of the PSE-MRD Rules.35 Thus, as a consequence, CMIC imposed a monetary penalty for violation of Section 1(h), Article X-B of the PSE-MRD Rules for DSI's liquidation of the shares. Moreover, a Written Reprimand for violation of Section 1, within which Mr. Gonzales and Mr. Siong should pay as mandated under Section 5(b),

Article V of the PSE-MRD Rules on Ethical Standards was imposed on DSI for failing to act honestly and fairly, with due skill, care and diligence and in the best interest of its clients when it failed to notify the Chemphil Group of the liquidation of their shares for failure to settle within T+3.

December 2011 and Mr. Siong and Mr. Gonzales had the obligation to pay the purchase PSE-MRD Rules. However, Mr. Siong and Mr. Gonzales failed to pay the purchase price of the shares within three (3) days from 28 December 2011; thus DSI had to liquidate the price of the shares to DSI within three (3) days pursuant to Section 5(a), Article VI of the shares in order to comply with the PSE-MRD Rules and to maintain its proper standing On the other hand, DSI argues that the cross sale transaction was executed on 28

with the PSE. Moreover, DSI denies that there was an agreement to pay at a later date

the requests of the appellees to be given additional time to raise the funds to pay for the and that it was furnished or informed about it. Lastly, DSI claims that there were justifiable reasons for the shares to be liquidated beyond the ten(10 day period due to

purchase price.

35 Decision of the CMIC dated 24 September 2012, pp. 21-22.

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Regulations (IRR), which state as follows: Securities Regulation Code (SRC3 and SRC Rule 50 of its Implementing Rules and The provisions governing the above transactions are Sections 48.2 and 50 of the

"Section 48. Margin Requirements.

X X X

48.2. No member of an Exchange or broker or dealer shall, directly or indirectly. maintenance of credit to or for any customer: extend or maintain credit or arrange for the extension or

a) On any security unless such credit is extended and maintained in

prescribe under this Section including rules setting credit in relation to net accordance with the rules and regulations which the Commission shall capital of such member, broker or dealer; and

circumventing the provisions of paragraph (a) of this subsection. b) Without collateral or any collateral other than securities, except (i) to maintain 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 a credit initially extended in conformity with rules and regulations of the

X X x

Section 48, the broker or dealer shall require the customer in non-margin transactions to pay the price of the security purchased for his account within "Section 50.Enforcement of Margin Requirement and Restrictions on Borrowing. -- To prevent indirect violations of the margin requirements under

such period as the Commission may prescribe, which shall in no case exceed

days following the last day for the customer to pay such purchase price. purchased starting on the next trading day but not beyond ten (10) trading unless such sale cannot be effected within said period for justifiable reasons. the prescribed settlement date. Otherwise, the broker shall sell the security XXX

:SRC Rule 50 - Purchase and Sales in Cash Account [formerly SRC Rule 50.1]

1. Purchases by a customer in a cash account shall be paid in full within three (3) business days after the trade date.

Dealer shall cancel or otherwise LIQUIDATE the transaction, or the 2. If full payment is not received within the required time period, the Broker 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

36 Republic Act 8799 (2000))

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such sale cannot be effected within such period for justifiable reasons in which case, notification in writing shall be made to the Exchange and the Commission.

X X X

5. Exceptions to paragraphs 1, 2 and 3 include when the security purchased is unissued or where purchase is made by the customer with the understanding that payment is to be made upon delivery.

6. Written application for an extension of the period of time required for non-member of the Exchange. Applications for the extension must be based on exceptional circumstances and must be filed and acted upon before the expiration of the original payment period or the expiration of any subsequent extension. payment under paragraph 1 may be made by the Broker Dealer to the Exchange in the case of that Exchange or to the Commission, in the case of a (Emphasis ours)

credit on any securities other than in conformity with the rules and regulations issued by the Commission. Section 50 lays down the rules to prevent indirect violations of Section Section 48.2 above makes it unlawful for a broker or dealer to extend or maintain

48.2 by brokers or dealers. SRC Rule 50 prescribes in detail the regulations governing

must be made within three [3] days) which includes a situation "where the purchase is made by the customer with the understanding that payment is to be made upon delivery" cash accounts37 and lays down the exceptions to the general rule (i.e., that full payment

in which case, a written application for an extension may be made by the broker or dealer.It must be noted that SRC Rule 50(1),(2), and (5) mirror Sections 5a), (b), and

has been omitted from the PSE-MRD Rules. 38 (e), Article VI of the PSE-MRD Rules which is cited by DSI although SRC Rule 50(6)

the occasion to discuss the general rule and the purpose of margin requirements, to wit: The Supreme Court in the case of Abacus Securities Corporation v. Ampil39 had

patterned, abound with authorities explaining the main purpose of the above statute on margin requirements. [The main purpose of the statute] is to "The United States, from which our country's security policies are

37 Abacus Securities Corporation v. Ampil, G.R. No. 160016, 27 February 2006. 38 Sections 5(a) and (b), Article VI of the PSE-MRD Rules provides, to wit:

39 See Note 26. paid in full within three (3) business days after the trade date. (b) If full payment is not received within purchase is made by the customer with the understanding that payment is to be made upon delivery. the required period, the Trading Participant 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. x x x (e) exceptions to paragraphs (a), (b), and (c include instances x x x where the "Section 5. Purchases and Sales in Cash Account. (a) Purchases by a customer in a cash account shall be

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the securities market and redirect resources into more productive uses. regulate the volume of credit flow, by way of speculative transactions, into Specifically, the main objective of the law on margins is explained in this wise:

The main purpose of these margin provisions x x x is not to increase the safety of security loans for lenders. Banks and brokers normally require sufficient collateral to make themselves safe without the help of law. Nor is the main byproduct of the main purpose. purpose even protection of the small speculator by making it impossible for him to spread himself too thinly -- although such a result will be achieved as a X X X

The main purpose is to give a [glovernment credit agency an effective method of reducing the aggregate amount of the nation's credit resources which can be directed by speculation into the stock market and out of other more desirable uses of commerce and industry x x x.

A related purpose of the governmental regulation of margins is the stabilization of the economy. Restrictions on margin percentages are imposed promotion of the economy and prevention of the use of excessive credit. in order to achieve the objectives of the government with due regard for the

Otherwise stated, the margin requirements set out in the [SRC] 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.

of the law, which forbids a broker from extending undue credit to a upon the brokers and dealers. [Sections 48.2 and 50 of the SRC and SRC Rule 50], otherwise known as the "mandatory close-out rule,' clearly vest otherwise LIQUIDATE a customer's order, if payment is NOT RECEIVED opposed to the word "may," is imperative and operates to impose a duty, which may be legally enforced. For transactions subsequent to an unpaid order, the broker should require its customer to deposit funds into the account sufficient to upon the broker to ensure faithful compliance with the margin requirements customer. The law places the burden of compliance with margin requirements primarily upon petitioner the OBLIGATION, not just the right, TO CANCEL or WITHIN THREE DAYS from the date of purchase. The word "shall" as cover each purchase transaction prior to its execution.These duties are imposed

the traded stock. Hence, increasing margins i.e., decreasing the amounts advances for them the balance of the purchase price and keeps the securities It will be noted that trading on credit (or 'margin trading') allows investors to buy more securities than their cash position would normally allow. Investors pay only a portion of the purchase price of the securities; their broker as collateral for the advance or loan. Brokers take these securities/stocks to their bank and borrow the balance' on it, since they have to pay in full for

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attraction of funds into the stock market and achieving a more balanced use is the most direct and effective method of discouraging an abnormal of such resources. which brokers may lend for the speculative purchase and carrying of stocks

resulting from price declines in thinly margined securities are not of serious pressures on securities prices, however, they may cause other forced sales and the resultant snowballing effect may in turn have a general adverse effect upon the preventing speculative excesses that produce dangerously large and rapid issues and in the general price level of securities. Losses to a given investor significance from a regulatory point of view. When forced sales occur and put x x x [T]he x x x primary concern is the efficacy of security credit controls in securities price rises and accelerated declines in the prices of given securities entire market.

to verify, at any time, the status of the client's account. Brokers, therefore, are in the superior position to prevent the unlawful extension of credit. The nature of the stock brokerage business enables brokers, not the clients,

Because of this awareness, the law imposes upon them the primary obligation to enforce the margin requirements.

may even be waived. An obligation, however, must be performed; those who do not discharge it prudently must necessarily face the consequence of their Right is one thing; obligation is quite another. A right may not be exercised; it dereliction or omission." (Emphasis ours)

As can be gleaned from the case of Abacus, the purpose of the general rule is to

investor, as in this case, when the shares were purchased by Mr. Gonzales and Mr. Siong. regulate the credit flow in the securities market when shares of stock are purchased by an order, if payment is not received within three (3) days from the date of purchase. An exception to this rule is a situation where purchase is made by the customer with the As a consequence, brokers and dealers are forbidden from extending credit under Section 48.2 of the SRC,and SRC Rule 50(1) of the IRR obligates them to liquidate a customer's

who obliged to protect the integrity of the capital markets from abusive sellers and understanding that payment is to be made upon delivery" under SRC Rule 50(5) of the IRR. It must be noted that the rules are also intended to protect the broker and dealer

buyers.

In its Decision dated 24 September 2012, the CMIC stated that the settlement of shares within three (3) days or T+3 Rule is not absolute since an exception includes "where purchase is made by the customer with the understanding that payment is to be made upon delivery", and that a similar instance includes a situation where the buyer and seller may agree to settle at a later date.

between the broker, dealer or trading participant (i.e. DSI AND buyers (i.e., Mr. The CMIC misconstrued the exception. The exception only covers arrangements

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Gonzales and Mr. Siong), not those between principal/sellers (i.e., Chemphil Group) and the buyers (i.e., Mr. Gonzales and Mr. Siong).

"market intermediary", is the only entity allowed to enter a sell order and/or a buy order transaction in the exchange. The delivery of the securities by the seller is coursed It is basic in stock market trading that the broker or dealer also known as the

by the buyer is coursed through the broker or dealer, who then delivers the payment to through the broker or dealer, who then delivers the securities to the buyer, while payment

settled within three (3) days from the trade date otherwise known as the T+3 Rule. the seller net of broker's fees and commission. This simple trade transaction should be

The exception for buyers not to settle within the T+3 Rule particularly where purchase is made by the customer with the understanding that payment is to be made upon delivery", is an arrangement only between the broker or dealer and buyer since the

SRC Rule 50(6), it also states that the broker or dealer should file for an extension of former is the one who will effect delivery of the shares upon payment. In fact, under

period of time, if the same is necessary. Moreover, the principal/seller is not mentioned in the procedure for the request for such extension. Clearly, the understanding or agreement is only between the broker or dealer and buyer.

Moreover, the phrase "payment upon delivery" cannot be stretched to include an arrangement for the "payment at a later date" as alluded to by the CMIC since payment at apply, the payment must be made simultaneously with delivery. Otherwise, the broker or as above-stated, is prohibited under Section 48.2 of the SRC. a later date presupposes payment will happen after delivery. In order for the exception to dealer will be deemed to be extending or maintaining credit to or for any customer which,

or agreement (i.e., that payment is to be made upon delivery) is perfected by the broker or dealer and the buyer at the transaction date or T+0 and not any time thereafter. The Lastly, the exception to the T+3 Rule is applicable only when such understanding

the exception indicates that the purchase by the customer on the transaction date or T+o must be accompanied by the understanding or agreement that payment is to be made upon delivery. This is consistent with the rule that all terms of the transaction must be agreed upon in order for the same to be perfected. Moreover, the Exchange and other market participants, such as the Securities Clearing Corporation of the Philippines reason is that SRC Rule 50(5) provides "where purchase is made by the customer with the understanding that payment is to be made upon delivery". Here, the word "with" in

(SCCP), need to be informed on the trans transaction and other information order ction date or T+0 of all definite terms of the commence with processing of the

delivery may be agreed upon by the broker or dealer and buyer to happen beyond T+3. made upon delivery cannot be perfected beyond the settlement date or T+3 since such settlement will be deemed to have failed and the broker or dealer must liquidate the shares after the settlement date or T+3. In short, while the simultaneous payment and documents in relation to the purchase order, and such other activities that they do in the usual course of business. Further, such understanding or agreement that payment is to be

SEC En Banc Case No. 01-13-283 Diversified Securities, Inc.V.Capital Markets Integrity Corp. Page 13 of 16

otherwise the exception will not apply. such an understanding or agreement must be perfected at the transaction date or T+o;

simultaneously deliver and pay, at a date later than T+3.40 was an agreement between DSI and the buyers perfected on the transaction date or T+O to understanding executed on T+0 between the broker, DSI, and the buyers, Mr. Gonzales and Mr. Siong, that payment is to made upon delivery,which may happen at a later date than T+3. Records of the case show that there is no allegation, much less proof, that there Here, the exception to the T+3 Rule does not apply since there is no agreement or

Section 5(b), Article VI of the PSE-MRD Rules since Mr. Gonzales and Mr. Siong failed Thus, DSI was justified in liquidating the shares pursuant to SRC Rule 50(2) and

to tender in full the payment of the shares within three (3) business days from the transaction date. DSI had the clear obligation to liquidate the shares of stock in CIP and

business days. The reason for the liquidation, as earlier stated, is that DSI is forbidden LMG on the next business day from the settlement date or T+3 but not beyond ten (10)

Siong on the CIP and LMG shares pursuant to the margin requirements under Section 48 from extending or arranging for the extension of credit to or for Mr. Gonzales and Mr.

productive uses. excess stock market speculations and to regulate the volume of credit flow, by way of of the SRC. The purpose of the margin requirements is to protect the economy from speculative transactions, into the securities market and redirect resources into more

40 Letters dated 15 December 2011 of 3G, A2K, Chemholdings and CIP addressed to DSI to effect cross sale transaction (Reply Memorandum, Annex 1" [Letter-Complaint of the Chemphil Group filed with meeting with DSI to discuss cross sale transaction (Memorandum on Appeal, par. 3.8.1); Meeting at CIP former requested for a few more days prior to remittance of payment (Memorandum on Appeal, par. 3.8.2); Email dated 5 January 2012 of the Chemphil Group addressed to DSI attaching unsigned Loan the PSE-MRDAnnexesBB-1B-2andB-3D;Request by CIPon 2 January 2012 for a office on 4 January 2012 in which it was mentioned to DSI that there are no funds available and the Agreement between Mr. Gonzales and CMC (Reply Memorandum, Annex "E" [Answer of DSI filed with the PSE-MRD,Annex 1D;A follow up for the payment by DSI with Alexandra Garcia,the Chief

Operating Officer of the Chemphil Group,on 6 January 2012;Email dated 31 January2012 of Alexandra

the latter is only authorized to sell to Mr. Gonzales and Mr. Siong (Reply Memorandum, Annex 1 [Rejoinder, Annex 1]; Letter dated 1 February 2012 of Chemphil Group addressed to DSI stating that [Letter-Complaint of the Chemphil Group filed with the PSE-MRD,Annex D);On 2 February 2012,a Garcia addressed to DSI with a plan for the payment of the shares (Memorandum on Appeal, Annex G

41 Abacus case. communications with the Chemphil Group (Memorandum on Appeal, Annex "J-1"). of Mr. Gonzalez, Annexes C and D"]); Informal Conference (Memorandum on Appeal, Annexes "I"and "I-1"); and Letter dated 31 May 2012 of DSI attaching additional correspondences and request for meeting by CIP with DSI to deliver check payments of Mr.Gonzales and Mr. Siong on kaliwaan basis";Letters dated 3 February 2012 of 3G,Chemphil Group, A2K and Chemholdings addressed to DSI requesting for upliftment of shares and for the ledgers of accounts (Reply Memorandum, Annex 1 [Letter-Complaint of the Chemphil Group filed with the PSE-MRD, Annexes "E", "E-1", "E-2" and "E-3"]; Letters dated 9 February 2012 of Mr. Gonzales addressed to DSI alleging that he has paid 3G and A2K for the shares of stock (Reply Memorandum, Annex2[Letter Complaint

Diversified Securities,Inc.v.Capital SEC En Banc Case No. 01-13-283 Markets Integrity Corp

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not notifying the Chemphil Group of the liquidation since they were, and should be, well well as Mr. Gonzales and Mr. Siong executed a Customer Account Opening Form, which informs them of the consequences of the failure to pay, to wit: aware of the consequences of the failure to pay within three (3) days from the transaction date or T+3. Each of the representatives of the corporations of the Chemphil group as Moreover, there was no violation of Section 1, Article V on Ethical Standards in

" 8. All accounts are considered cash accounts, reguiring the amount needed to purchase will be (sic) delivered to the broker before any actual purchase of allows a short terms credit facility separate from a margin account, IWe shall securities or any other financial instrument may be purchase. If the broker

deliver the full pavment of the purchase price of any securities including

day from the day of purchase. commission (inclusive of VAT), transfer fees, documentary stamp taxes, SEC fees. PCD fees and charges and other levies and duties on or before the 3r" working

protection, or in the event of my/ death, I hereby specifically authorize and provided and that I/ We shall remain liable for any deficiency remaining in any unpaid balances shall commence on the fifth day after date of purchase and shall other charges) are settled. "42 (Emphasis ours) empower the broker TO SELL WITHOUT PRIOR NOTICE TO ME OR US securities in my account(s) (whether carried individually or jointly with others) and herein pledge as collateral for payment of any liability to the broker in said account, to buy and sell securities to cover any short selling in such account(s); to transfer moneys or securities from any one of my account(s) to another and to close any and all outstanding obligation. It is hereby agreed and understood that such account(s) in the event of Liquidation. Unless otherwise agreed to in writing, any of mylour unpaid accounts shall bear interest at rates indicated in continue to take effect until all obligations (unpaid balance plus interest and "12. Whenever in its sole discretion, the broker considers it necessary for its own I/We shall at all times be liable for the payment of indebtedness on unpaid balances owing, in any of my accounts together with interest, other acts herein Customer Agreement form 1-B per annum without need of demand. Interest on

Clearly, the parties to the cross sale transaction were well aware of the consequences of non-payment within three (3) days or T+3. In fact, SRC Rule 50 and Section 5, Article VI of the PSE Rules are clear and they cannot claim ignorance thereof.

Article VI of the PSE-MRD Rules mandates that the shares be liquidated by DSI within As to the period of the liquidation of shares, SRC Rule 502) and Section 5(b

ten (10) business days from the settlement date unless such sale cannot be effected within such period for justifiable reasons", in which case notification in writing shall be made to the Exchange and the Commission.Here, as correctly pointed out by CMIC, DSI liquidated the CIP and LMG shares after twenty six (26) days from the transaction date,

42 Memorandum on Appeal, Annex "J-2" (Customer Opening Account Forms attached to the Letter of DSI dated 6 June 2012 in compliance with the order of the CMIC to furnish certain documents).

DiversifiedSecurities,Inc.V. Markets Integrity Corp. SEC En Banc Case No. 01-13-283 Capital

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or on 3 February 2012, which is well beyond the ten (10) day period.43 DSI argues that there were justifiable reasonsfor the delay in the liquidation because of the requests of

price. However, despite such reason, DSI did not notify the Exchange or the Commission of its reason for the delay in the liquidation of the shares. the appellees that they be given additional time to raise the funds to pay for the purchase As a consequence, DSI is liable for violation of SRC Rule 50(2) and Section 5(b), Article VI of the PSE-MRD Rules for not liquidating the shares within the required period.

CMIC erred in ordering the return of the shares or the value thereof to Mr. Gonzales and Mr. Siong which would constitute unjust enrichment since they never paid for the As for the directive to return the shares or value thereof, DSI argues that the

Mr. Gonzales and Mr. Siong and what was ordered was the return of the shares to the complainants, not to Mr. Gonzales and Mr. Siong only.45 However, the Chemphil Group, Mr. Gonzales and Mr. Siong are not entitled to the return of the shares of stocks since, as shares.44 On the other hand, CMIC argues that it did not order the return of the shares to

above-stated, DSI was mandated under SRC Rule 50(2) to liquidate the shares. Moreover, as to the proceeds of the liquidation or its value, the Chemphil Group refused to accept the check payments representing the proceeds of the liquidation from DSI.

As to short selling, DSI argues that CMIC erred in holding DSI liable under Section 10, Article VI of the PSE-MRD Rules for short selling and claimed that there was merely a trader's error and that the shares were bought, not sold on 28 December 2011 On the other hand, CMIC claims that DSI's client and one of the substitute buyers, RG Holdings, engaged in the short selling of the said LMG shares to be covered by assignment of the subject shares on 3 February 2012, or a total of twenty-six (26) days after the settlement date in violation of Section 10, Article VI of the PSE-MRD Rules.

The contention of DSI is without merit.As found by the Trading Participants

by the subject shares on 3 February 2012, or a total of 26 days after settlement date or Regulation Department of the PSE (PSE-MRD-TPRD) in its Special Audit Report of DSI, RG Holdings sold 80,000 LMG shares on 28 December 2011. These were covered T+26. Given that the Special Audit Report was based on the Account Ledgers of the Sellers and Buyers covering the period 1 December 2011 to 7 February 2012, we cannot CMIC's imposition of the penalty of Reprimand for violation Article VI, Section 10 of give due course to DSI's assertion absent any proof to the contrary. Thus, we find the

the PSE-MRD Rules in order under these circumstances.

the Capital Markets Integrity Corporation is hereby MODIFIED as follows: WHEREFORE, premises considered, the Decision dated 24 September 2011 of

43 Decision of the CMIC dated 24 September 2012, p. 22; Reply Memorandum, par. 77. 45 Reply Memorandum, par. 57. 44 Memorandum on Appeal, p. 15.

DiversifiedSecurities,Inc. V. Capital Markets Integrity Corp. SEC En Banc Case No. 01-13-283 Page 16 of 16

1. The monetary penalty imposed against Diversified Securities, Inc. for its alleged violation of Section 1(h), Article X-B of the PSE-MRD Rules is SET ASIDE for lack of legal basis;

2 The written Reprimand for violation of Section l, Article V of the

PSE-MRD Rules on Ethical Standards for failure to notify appellees 3G Holdings Corporation, A2K Holdings Corporation, Chemholdings liquidation of LMG and CIP shares is SET ASIDE for lack of merit; Corporation, and Chemical Industries of the Philippines of the

3.The order directing Diversified Securities, Inc. to return the shares to herein appellees that were disposed of in violation of their written

ASIDE for lack of merit; instructions, or the value thereof at the time of the unauthorized disposition, less any amount due to DSI as fees and charges is SET

4.The written Reprimand for violation of Section 10, Article VI of the

PSE-MRD Rules on short selling is AFFIRMED;and

5 A written Reprimand shall now be IMPOSED on Diversified

Securities, Inc. for violation of SRC Rule 50(2) and Sections 5(b) Article VI of the PSE-MRD Rules for failure to liquidate the LMG and CIP shares within ten (10) business days from the settlement date

Department for its information and appropriate action. Let a copy of this Decision be furnished to the Markets and Securities Regulation

SO ORDERED.

Mandaluyong, Philippines; 3 June 2014

TERESITA J.HERBOSA*

Chairperson

MA. UANITA Z.CUETO MANUEL HUB GAITE

Commissioner Commissioner

AWW ANTONIETA F.IBE * Commissioner EPHYRO LUIS B.AMATONG Commissioner

* Away On Official Business

E