CJH Suites Corporation

r0& ,. . ~~'''j,''''''./ '/ ., ). - ",,,! Republic of the Philippines . Department of Finance In the Matter of: ClH DEVELOPMENT CORPORATION AND ClH SUITES CORPORATION, . SEC-CDO case No. 05-12-006 ENFORCEMENT AND PROSECUTION DEPARTMENT Petitioner. x-------------------------------------------x ORDER Pending' consideration by the Commission is a Motion for Issuance ora Cease and Desist Order (COO) dated 14 May 2012 by the Enforcement and Prosecution Oepartment'(EPO} of this Commission against ClH DEVELOPMENT CORPORATION and ClH SUITES CORPORATION (hereinafter ClHD and ClHS respectively). ' Respondent ClHD is a corporation registered with the SEC on 23 September 1996 under SEC Registration No. A1996066312 with its' primary purpose stated in its 1 Articles of Incorporation3 as follows: "To acquire by purchase, lease, donation or otherwise,' and/or to own, use, improve, subdivide, manage, sell, mortgage, exchange, ,lease, engage in high- rise development and construction and hold for investment or otherWise, and otherwise deal in or dispose 'of real estate of all kinds, classes, description and purpose, and/or any ,improvements thereon or any interest and right therein, whether as principal agent, or broker, and/or to manage, operate, equip, furnish, alter and otherwise deal in, or dispose of buildings, houses, apartments and other structures and immovable of whatever kind, class, description or purpose, together with their appurtenances whether as principal, agent or broker.,,4 1 Motion For Issuance of Cease and Desist Order, p. 1 and Annex "B". 2 ld., Annex "A". 3 ld., Annex "A". 4 ld., Annex "A". 223 .~.- \0 In re: CJH DEVELOPMEh. CORPORATION AND CJH SUITES CORPORATION SEC-COO Case No. 05-12-006 x----------------------------------------x On the other hand, RespondentCJHS was incorporated on 16 December 20025 under SEC Registration No. CS20026209S6and is a wholly-owned subsidiary of CJHD with its primary purpose as stated in its Articles of Incorporation] as follows: "To acquire, own, build, construct, maintain, operation and/or manage hotels, inns, apartments, private clubs, pension houses, convention halls, motor hotels, lodging houses, restaurants,.cocktail bars, and any or all other allied business as .. may be necessary or desirable in connection therewith, and to operate and . maintain. any and all services and .facilities inddent thereto, including the operation and maintenance of automobiles,buses and other vehicies of all kinds, motorboats, airplanes, warehouses, barbershops, beauty shops, stores, Turkish and sauna baths, golf courses, tennis courts, swimming pools and other recreational facilities." 8 According to the factual antecedents. as presented by the EPD.in. Its Motion, sometime .'n 1996~.the Bases Conversion and Development Authority (BCDA) entered into a Lease Agreement with OHD for the development of a 247 hectare property located in the John Hay Special EconomicZone (JHSEZ)wherein OHD shall sub-lease, . develop and manage the property for a maximum term of fifty (SO)years... , . .' ~. In this connection, OHD constructed two condotels .;..."The Manor" and "The Suites" ...;.and subsequently offered the units located in t~ese development sites for sale to the general publi~. Becauseof the eventual 'difficulty encountered by OHD in,paying the rentals due, to BCDAfQr the property located In the JHSEZ,the parties entered into an agreement for the restructuring of the said obligations. Further, through the said agreement, OHD transferred, among others, sixteen (16) units from "The Manor' and ten (10) units from "The Suites" to BCDAvia daclon en pagowith the proviso that these units were subject to a "leaseback" arrangement. . BCDAsubsequently discovered that OHD.and its wholly-owned subsidiary, OHS" have been actively offering the above-mentioned "leaseback" arrangement Including a "money-back guarantee" In'relation to the units of "The Manor" and "The Suites" to the, public. Believing' that the "leaseback" and. "money-back" arrangements were Investment contracts which fell under'the definition of a security under Republic Act No. 8799, the "Securities Regulation Codd' (SRC), BCDA requested, through a letter dated 5 Id., Annexes "C" and "0". ' 6 Id., Annex "C". ' 7 Id., Annex "C". BId., Annex "C". 222 J ••••(~ .", In re: CJH DEVELOPMEt-., ";ORPORATIONAND CJH SUITES CORPORATION , ,SEC-CDOcase No. 05-12-006 Page 3 of7 x----------------------------------------x 18 November 20119 addressed to 'ChairpersonTeresita J. Herbosa~that an investigation into the operations of OHD and OHS be conducted by the SEC. The EPD of the SEC, acting on BCDA'srequest, sent a team to investigate the operations of the OHD and OHS. The said team was able to gather information first hand on the "leaseback" and "money-back" arrangements throug~ their Interview with Mr. Frank,Delizo, the Director of Sales of OHD. The team was also' able to procure marketing materials utilized by both OHD and OHS in their dealings with the public in relation to these specific arrangements as well as samples of their "Contract to Sell", "Leaseback Agreement" and 'the "Deed of Absolute Sale".1o These, findings, were formalized' In a Field Investigation' Reportll submitted by the EPD,to Chairperson Herbosa on February 1, 2012. Further, the EPD also Invited several buyers of units of "The Manor", and 'The Suites" to separate conferences to give information regarding their transactions wlth' OHD and OHS. 'Through these' individuals, the EPD was able to compile correspondences12 and contracts13 between the said buyers and 'the respondents further confirming the existence of, the "Leaseback.AgreementS",and the manner in which these were formed and entered Into by the partJes.14 "', , " ,',',:, ' :' ,'," ,Based on the "leaseback" and/o'r "moneyback"arrangement, the buyer of the residential ,unit shall, after payment of the purchase price, surrender the management and possession of the same to either OHD or OHS. These corporations' shalf then ' consider these units as part of the pooled units in "The Manor" or in"l1Je Suites" offered for billeting. The arrangement shall be for a fifteen (15) year period renewable for another fifteen (15)' years or until' 2046. Buyers may use their units' for thirty days within a year and were exempt from paying the monthly dues and,utility fees. Buyers' will also be entitled to a proportionate share of seventy 'percent (70%) of the annual ' income derived from the hotel's' operation of the pooled rooms or a' guaranteed eight : percent (8%) return on their Investment. Lastly, for those buyers who availed of the "money-back" arrangement, they shall receive the p'urchase price they, paid for their units by 2046; 9 ld., Annex "E". 10 Id., par. 14, p. 6-8 and Annexes "F" to "J". 11 Id.;Annex "K". 12 ld., Annexes "Q", "Q-1", "Q-2", "Q-3", "R", "R-1", "R-2", "R-3". 13 Id., Annexes "N", "5", "T", "T-1", "U", "V". 14 Id., par. 17-20, p. 8-11. 221 '.. In re: CJH DEVELOPMEt\. ';ORPORATION AND OH SUITES CORPORATION . SEC-COO case No. 05-12-006 Page 4 of7 )(~------------------------------~--------x Upon request of the EPD, the Corporation Finance Department (CFD), issued a Certificate dated 07 February 2012 to the effect that neither CJHD nor OHS are .registered issuers of securities under Section 8 of the SRC.15 Also, on 23 April 2012, the .CFDissued a Memorandum16 classifying,the "LeasebackAgreements" of CJHDand CJHS as investment contracts and found sufficient evidence to show that these were marketed,.offered and'sold to the public. . Pursuant to Section 3.1(b) of the SRC,the term "securities" is defined as follows: "SEC. 3. Definition of Terms. - 3.1. "seCurities' are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced bya certificate, contract, Instrument, whether written or electronic in character. It Includes: xxx (b) Investment contracts, certificates of Interest or participation in .a profit sharing agreement, certificates of deposit for a future s~bscrlption; In this connection, an "investment contract" has been defined in Rule 3(G) of the Implementing Rules and Regulations of the SRCIn this wise: . "G. An 'Invesbnent contract means a contract, transaction or scheme (collectively "contract'') whereby a' person Invests his money In a common enterprise and Is led 'to e><pectProfits primarily from the efforts of others. . 1. An Investment contract is presumed to e><lstwhenever a person seeks to use the" money ,or . property .of others' on the promise of. profits .. 2. A common enterprise is deemed created when two (2) or more investors "pool" their resources, creating a common enterprise, everiif the promoter receives nothing more ,than a broker's commission." 15 Id, Annex "M". 16 IQ., Annex "W" •. ..2,20 '.. In re: CJH DEVELOPMEN. _ORPORATION AND OH SUITES CORPORATION SEC-COO case No. 05-12-006 x----------------------------------------x Also instructive is the case of ''Power Homes Unlimited Corporation v. Securities and Exchange Commission, ,17 in conjunction with ''Securities and Exchange Commission v. Prosperity.com,L8 where the Supreme Court held that an investment contract in our jurisdiction must be proved to be (1) an invesbnent of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others in order to be considered as a security properly subject to the registration under. and regulation of the SEC. Applying the above to the circumstancessurrounding the operations of CJHDand . CJHSin their sale of the residential units, It should be noted that, firstly, it i~ undeniable that the buyers of units in "The Manor" and "The Suites" entered into Deeds.of Absolute sale with accompanying "Leaseback Agreements" thus proving the. ~Istence of a contract, transaction or scheme to satisfy the first element. . .' .. secondly, after. payment of the purchase. price for the. residential units, the buyers shall cede control and management over the same to CJHDand CJHSwho will manage the said units together. with all the oth~r units under. leaseback agreements; This fulfills the element ofa common.ent~rprise. . .. . . Thirdly, as to the element of expectation of profits, the buyers.entered into these. "leaseback agreements" with .the view of receiving a share in the annual rental income. from CJHD'sand CJHS'hotel operations or a guaranteed return on their investment. .Lastly, with respect to the fourth element, it is cl~r that the management and operation of the hotel and the individual residential units shall rest with .CJHDand OHS and the unit buyers shall ~ave no participation in the same. In fact, the latter rely solely on the efforts of the respondents In order to generate any profit. In connection with the above, It is clear that the agreements entered.into by and. between CJHD or CJHS and the buyers .of residential units in "The Manor" and "The Suites" are investment contracts and, are, therefore, securities required to be registered with SEC.. . From the foregoing, there is ample evidence to show that CJHD andCJHS are engaged ..in the sale: of securities without proper registration.. .Also, from the investigation performed by the EPD,it is apparent that CJHDand CJHS.are,at present,. 17 G.R. No; 164182, 26 February 2008. 18 G.R. No. 164197, 25, January 2012. '..2:1-9 I' " . 'C .• In re: CJH DEVELOPMENl JRPORATION AND CJH SUITES CORPORATION SEC-COOcase No. 05-12-006 x--~-------------------------------------x still actively marketing and offering the units in their hotels under the "leaseback" and/or "moneyback" arrangement without securing the necessary license for such activity. The SRC is explicit that securities must be registered with the SEC before being offered or sold to the public in order to afford the latter protection from investing in worthless securities as is provided in Section 8 of the said law.19. . (The dispositive part follows in the next page] 19 "Sec. 8 - Requirements of Registration of Securities. - 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. x x x" (emphasis ours) 218 t b .• ' , C' .., In re: CJH DEVELOPMENT.•.•JRPORATIONAND CJH SUIlES CORPORATION SEC-COOcase No. 05-12-006 Page 70f7 x----------------------------------------x WHEREFORE, premises considered, there being a prima facie evidence that respondents CJH DEVELOPMENT CORPORATION and its wholly-owned subsidiary, CJH. SUITES CORPORATION, are enga ged in the business of selling securities without the proper registration issued by this Commission in violation Section 8 of the SRC, the respondents, their respective officers, directors, representatives, salesmen, agents and any and all persons claiming and acting for and in their behalf, are hereby ordered to immediately CEASE and DESIST20 from further engaging in the business of selling securities until they have complied with the requirements of law and .its implementing rules and regulations. Let copies of this Order be posted at the entrance of the. main office and/or branches, if any, of the respondents, published in a newspaper of general. circulation and posted in the Commission's internet website. FAIL NOT UNDER PENALTY OF LAW. SO ORDERED. Mandaluyong City, 07 June 2012. fi~~ TERESITAJ.HERBOSA Chairperson ~I ~~~~~c./' MA. \1UANITA E. Cl(fT0 . RAUL J•.PALABRICA Commissioner 20 SRC section 64. Cease and Desist Order. - 64.1. The Commission, after proper investigation or verification, motu proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in Its judgment the act or practice, unless restrained, will operate as a fraud on investors or Is otherwise Ii~ely to cause grave or irreparable injury or prejudice to the investing public.