CASE DIGEST : Securities and Exchange Commission v. Performance Foreign Exchange Corporation G.R. No. 154131, July 20, 2006 Second Division — Sandoval-Gutierrez, J.

 

FACTS

Performance Foreign Exchange Corporation (Performance) was a domestic corporation registered with the Securities and Exchange Commission (SEC) on June 23, 1998. Its primary purpose was to operate as a broker or agent between market participants in transactions involving, among others, foreign exchange, deposits, interest-rate instruments, fixed-income securities, bonds and bills, repurchase agreements, certificates of deposit, bankers' acceptances, bills of exchange, over-the-counter options, and related or derivative products. Its secondary purpose was to engage in money-changing activities.

After about two years of operation, the SEC required Performance's officers to appear before its Compliance and Enforcement Department (CED) for a clarificatory conference concerning the corporation's business activities. After the conference, the CED Director issued a Cease and Desist Order (CDO) on January 16, 2001. The SEC alleged that Performance was engaged in the trading of foreign currency futures contracts for its clients without the necessary license, allegedly in violation of Section 11 of Republic Act No. 8799, or the Securities Regulation Code, and its implementing rules.

Performance filed a motion with the SEC seeking to lift the CDO. It denied violating any law and maintained that it had been operating according to its SEC-approved corporate purposes. More importantly, Performance denied engaging in currency futures transactions and asserted that its business consisted of spot currency trading, which it claimed was different from currency futures trading. SEC Chairperson Lilia R. Bautista subsequently sought clarification from the Bangko Sentral ng Pilipinas (BSP) regarding the nature of Performance's transactions.

The SEC eventually denied Performance's motion and maintained the CDO. Performance then filed a petition before the Court of Appeals. The Court of Appeals ruled in favor of Performance and annulled the SEC's orders. The SEC thereafter elevated the matter to the Supreme Court, arguing that it had authority under Section 64 of R.A. No. 8799 to issue the CDO against Performance.

ISSUE

The issue was whether the SEC validly issued the Cease and Desist Order against Performance Foreign Exchange Corporation under Section 64 of R.A. No. 8799. Specifically, the Court had to determine whether the statutory requirements for the issuance of a CDO had been satisfied.

The Court also had to determine whether the SEC had first conducted the proper investigation and verification required before issuing a CDO and whether there was a sufficient finding that Performance's acts or practices would operate as a fraud on investors or were otherwise likely to cause grave or irreparable injury or prejudice to the investing public, as required by Section 64 of the Securities Regulation Code.

HELD

The Supreme Court DENIED the petition of the SEC and AFFIRMED the decision of the Court of Appeals. The Court held that the SEC failed to comply with the requirements of Section 64 of R.A. No. 8799 before issuing the challenged Cease and Desist Order against Performance. Consequently, the CDO could not be sustained.

The Court explained that Section 64 of R.A. No. 8799 gives the SEC the authority to issue a cease and desist order when it finds that an act or practice, unless restrained, would operate as a fraud on investors or would otherwise be likely to cause grave or irreparable injury or prejudice to the investing public. The Court held that this authority is not unlimited. Before issuing a CDO, the SEC must first comply with the requirements established by the law.

The Court found that the SEC had not conducted the proper investigation or verification necessary to determine the actual nature of Performance's business activities before issuing the CDO. Performance consistently maintained that it was engaged in spot currency trading and not foreign currency futures trading. The SEC itself sought clarification from the BSP regarding the nature of Performance's transactions, showing that the SEC had not yet definitively determined what type of transactions Performance was actually conducting when it issued the CDO.

The Court further held that the SEC failed to make the required finding that Performance's acts or practices constituted a fraud on investors or were otherwise likely to cause grave or irreparable injury or prejudice to the investing public. The CDO merely stated that Performance was allegedly engaging in foreign currency futures trading without the necessary license, but the SEC did not sufficiently establish the statutory circumstances required for the extraordinary remedy of a cease and desist order. The Supreme Court therefore affirmed the annulment of the CDO and the SEC's subsequent orders.