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Tuesday, June 1, 2010

PERSONAL PICK: My Book On Securities Cited By Supreme Court In A 2006 Case


I got a request for legal advice on Facebook from a girl whom I do not know. She said in her email that she found my name through the internet search engine. I find it interesting and I became curious what I would find if I do search for my name. And curiosity killed the cat!

There were 72,200 matches for mary ann l.ojeda in (0.16 seconds). Lotza stuff huh! One thing that I find interesting was the citation by no less than the Supreme Court of my book "Securities and Regulation Code With Annotations" in a case entitled " ABACUS SECURITIES CORPORATION versus RUBEN U. AMPIL docketed as G.R. No. 160016 promulgated last February 27, 2006. The decision was penned by then Chief Justice Artemio V. Panganiban.


The Facts:


Petitioner - Abacus Securities Corporation ("Abacus') 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 Ruben Ampil (1) opened a cash account with Abacus for his transactions in securities;[10] (2) Ampil’s purchases were consistently unpaid from April 10 to 30, 1997;[11] (3) Ampil failed to pay in full, or even just his deficiency,[12] for the transactions on April 10 and 11, 1997;[13] (4) despite Ampil’s failure to cover his initial deficiency, Abacus subsequently purchased and sold securities for Ampil’s account on April 25 and 29;[14] (5) Abacus did not cancel or liquidate a substantial amount of respondent’s stock transactions until May 6, 1997.[15]


Issues:

1) Whether the pari delicto rule is applicable in the present case, and
2) Whether the trial court had jurisdiction over Abacus alleged violation of the Revised Securities Act.

Ruling: (copied exactly from the decision to show the citations which are highlighted)


The Petition is partly meritorious.


Main Issue:Applicability of the Pari Delicto Principle


The provisions governing the above transactions are Sections 23 and 25 of the RSA[16] and Rule 25-1 of the RSA Rules, which state as follows:


“SEC. 23. Margin Requirements. –

x x x x x x x x x

(b)It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer –


(1)On any security other than an exempted security, in contravention of the rules and regulations which the Commission shall prescribe under subsection (a) of this Section;

(2)Without collateral or on any collateral other than securities, except (i) to maintain a credit initially extended in conformity with the rules and regulations of the Commission and (ii) in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circumventing the provisions of subparagraph (1) of this subsection.
x x x x x x x x x”

“SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect violations of the margin requirements under Section 23 hereof, the broker or dealer shall require the customer in non margin transactions to pay the price of the security purchased for his account within such period as the Commission may prescribe, which shall in no case exceed three trading days; otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten trading days following the last day for the customer to pay such purchase price, unless such sale cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer to recover any deficiency from the customer. x x x.”


xxx. The law places the burden of compliance with margin requirements primarily upon the brokers and dealers.[22] Sections 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,”[23] clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three days from the date of purchase. The word “shall” as 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 cover each purchase transaction prior to its execution. These duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the law, which forbids a broker from extending undue credit to a customer.


“The main purpose is to give a [g]overnment 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.”[19]


A related purpose of the governmental regulation of margins is the stabilization of the economy.[20] Restrictions on margin percentages are imposed “in order to achieve the objectives of the government with due regard for the promotion of the economy and prevention of the use of excessive credit.”[21]


Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve a macroeconomic purpose -- the protection of the overall economy from excessive speculation in securities. Their recognized secondary purpose is to protect small investors.


The law places the burden of compliance with margin requirements primarily upon the brokers and dealers.[22] Sections 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,”[23] clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three days from the date of purchase. The word “shall” as 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 cover each purchase transaction prior to its execution. These duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the law, which forbids a broker from extending undue credit to a customer.


It will be noted that trading on credit (or “margin trading”) allows investors to buy more securities than their cash position would normally allow.[24] Investors pay only a portion of the purchase price of the securities; their broker advances for them the balance of the purchase price and keeps the securities as collateral for the advance or loan.[25] Brokers take these securities/stocks to their bank and borrow the “balance” on it, since they have to pay in full for the traded stock. Hence, increasing margins[26] i.e., decreasing the amounts which brokers may lend for the speculative purchase and carrying of stocks is the most direct and effective method of discouraging an abnormal attraction of funds into the stock market and achieving a more balanced use of such resources.


“x x x [T]he x x x primary concern is the efficacy of security credit controls in preventing speculative excesses that produce dangerously large and rapid securities price rises and accelerated declines in the prices of given securities issues and in the general price level of securities. Losses to a given investor resulting from price declines in thinly margined securities are not of serious significance from a regulatory point of view. When forced sales occur and put 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 entire market.”[27]


The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time, the status of the client’s account.[28] Brokers, therefore, are in the superior position to prevent the unlawful extension of credit.[29] Because of this awareness, the law imposes upon them the primary obligation to enforce the margin requirements.


In securities trading, the brokers are essentially the counterparties to the stock transactions at the Exchange.[35] Since 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.


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.


The Citations:


[20]Mary Ann L. Ojeda, Securities Regulation Code with Annotations, 2002, p. 92.


[26]Margin refers to the percentage of the value which must be paid in cash by the purchaser. (Ojeda, supra at note 20).


The citation of my book Securities Regulation Code With Annotations and the "few" original ideas expressed therein by the Supreme Court makes me feel like I am an authority on the subject. And why am I surprised? it is worth sharing how the Book came about which will be in another blog entry.