TOPIC: Securities

11. Carolina Industries Inc. vs. CMS Stock Brokerage, Inc.

G.R. No. L-46908| May 17, 1980
Digest By: Asuncion
Ponente: J. Antonio

FACTS:
Parties Involved:
 CMS STOCK BROKERAGE: Engaged in the business of buying and selling stocks and
securities for and in behalf of its investors.
 CAROLINA INDUSTRIES: Investor of CMS STOCK BROKERAGE
 CARLOS MORAN SISON: President and major stockholder of CMS
 MARIANO LIM: Treasurer of Carolina

How the case started:

 CMS extended loans or credit in favor of Carolina in the purchasing and carrying of securities
under Margin Account Agreement. The loans were secured by collaterals consisting of registered
securities which were purchased thru CMS. The following terms were agreed upon by the parties:
 PARAGRAPH 1: All transactions under the Agreement shall be subject to the rules of
the Makati Stock Exchange and the provisions of Securities Act and regulations of SEC
 PARAGRAPH 5: Carolina will at all times maintain such margins as CMS may require
from time to time and will pay on demand any debit balance of Carolina’s account with
CMS Stock Brokerage
 In the event Carolina’s debt balance on margin account exceeds 50% ceiling and the
undermargin continues longer than the period of credit stipulated in the agreement, CMS
may sell so much securities deposited as would cover the undermargin, or as would be
necessary to liquidate the debt balnce.
 PARAGRAPH 7: Carolina will trade in securities with a volume of at least 150% of
margin line within a period of 90 days. Should the volume of transaction be less, CMS is
authorized, without notice, to effect the sale and repurchase, at the same price
 Carolina deposited with CMS Stock Brokerage various cash amounts totaling 586,796 pesos as
partial payments to the debit balance, and securities valued at 48,000 consisting of 400 shares of
Benguet Consolidated.
 As of September 12, 1969, Carolina’s account had a debit balance of 804,179 against a security
deposit with market value of little over a million pesos. Such debit balance was over 70% of its
security deposit or more that 20% over the 50% ceiling set the Sec. 18 of Securities Act.
 Later on, CMS purchased for Carolina a total of 14,235 Marinduque shares on September 15 and
16, 1969 at a total price of 2,659,521.19, thereby increasing Carolina’s liability in favor of CMS
to 3,463,700.88. [CONTROVERSIAL SALE]
 Three days after such purchase, Carolina issued and delivered to CMS 3 Metrobank checks
amounting to 500,000 in order to place Carolina’s margin account in proper order for it was
undermargin at that time. However, CMS considered such money as Carolina’s payment to the
Marinduque shares.
 As CMS’s recourse, CMS liquidated Carolina’s margin account with the sale of all securities
given by Carolina as collaterals.
ISSUES:
 WON CMS act of allowing Carolina to exceed its undermargin was committed by inadvertent
mistake. [NO]
 WON the purchase of Marinduque shares made by CMS was valid despite the order to buy was
made verbally. [NO]
 WON the 500k checks issued by Carolina are intended as payment for Marinduque shares
purchased by CMS in behalf of Carolina. [NO]

RULINGS:
AS TO FIRST ISSUE: NO. CMS’ ACT OF ALLOWING EXCESSIVE UNDERMAGIN IS NOT AN
INADVERTENT MISTAKE.
 Despite the failure of Carolina to cover its deficiency after being notified, CMS still bought for
the account of Carolina the Marinduque shares amounting to 2.6M and Atlas and Lepanto shares
for 1M, at the time when Carolina’s margin account was admittedly undermargin.
 This excessive extension of credit by the broker cannot be considered innocent or inadvertent
mistake.

AS TO SECOND ISSUE: NO. THE ORDER TO BUY WAS INVALID.

 RULE: Under Rule B-7 of SEC Implementing Rules and Regulations, buying and selling orders
must be on purchase forms and time-stamped upon receipt.
 IN THIS CASE: The alleged verbal orders made by Carolina for the purchase of Marinduque
shares were not recorded in accordance with the mandatory requirements under Rule B-7.
- It the order were a true purchase order, it is unusual why the 15,000 Marinduque shares were
not placed in writing, not entered in buying order form, or time-stamped to indicate the date
and tome of the order
- The excuse of CMS of their non-compliance with the requirement was due to stock market
boom and rush of trading which resulted in near impossibility of compliance fails to convince
the Court since there was no proof presented showing the official suspension by SEC of the
said SEC IRR

AS TO THIRD ISSUE: NO. 500K CHECKS ARE NOT INTENDED AS PAYMENT FOR
MARINDUQUE SHARES.
 SC viewed that it is hard to believe that knowing that Carolina’s account was substantially
undermargin and incapable of updating it, would it be willing to purchase worth 2.6M on spot
cash basis.
 It appears that at the time the alleged order for Marinduque shares was executed, there was
substantial unloading of Marinduque shares at the Exchange and very few were buying the same.

FALLO: The purchase of Marinduque shares is VOID. As a result, Carolina is entitled to the return of its
money deposited with CMS.