B.H. Chua Securities, Corp. v.

Johnston Sia-Uy and SEC

February 22, 2017 | Rules on proxy solicitation – Sec 20.1; Rule 20.4 | JPS

DOCTRINE: The Margin Rule requires that whenever there is an insufficiency of margin, a call for additional margin shall be
issued promptly by the broker dealer to the customer.
SUMMARY: Sia-Uy opened a Marginal Account with BH Chua Securities Corp. (In this type of trading, the investor borrows
money from the stock broker to purchase securities. The purchased securities, in turn, serve as collateral for the loan from
the broker. However, since the value of stocks change, the broker sets a “marginal amount”. When the value of the securities
drops below this marginal amount, then the broker can make a margin call, requiring the investor to make up for the
difference between the actual value of his security and the marginal amount). Under their Margin Account Agreement, Sia-
Uy’s collateral should not fall below 10% below the marginal amount; when it does, then BH shall make a margin call,
notifying Sia-Uy about the same. However, in this case, BH’s General Manager Lito Go was the one who entered into
transaction with Sia-Uy. Go required Sia-Uy to issue postdated checks. In several months, the value of Sia-Uy’s collateral fell
below the 10% of marginal amount. Instead of issuing a marginal call, BH deposited the postdated checks to cover the
deficit. Sia-Uy assailed the validity of their arrangement and sought the refund of the value of the postdated checks. SC ruled
in favor of Sia-Uy, holding that the Marginal account was null & void for being contrary to law, in particular, SRC.

FACTS:
● B.H. Chua Securities Corp. is a brokerage firm registered with the SEC
● In January 1997, Johnston Sia-Uy (private respondent) opened a Marginal Account 1 with BH.
● The Margin Account Agreement provided for a ratio of 1:5 and contained the following pertinent terms and
conditions:

Marginal Limit P1,000,000.00

Ratio/Leverage 1:5

Initial Collateral P200,000.00

Commission Rate 1/2%

Interest Rate 18%

Conditions:
- 6. The client's collateral should not fall below the 10% of the marginal amount. (The percentage limit was derived
by dividing the valuated market position over the margin balance.)
- 7. A margin call would be initiated once the percentage limit falls below the 10% requirement. An additional collateral
in terms of cash or stocks would be collected from the client to cover at least the 20% of the margin limit.
- 8. B.H. Chua Securities Corp. will notify the client of his/her margin call through writing and the client has five (5)
working days to submit his/her additional collateral.
- 9. The client can withdraw any proceeds from his/her account provided that the percentage limit exceeds the
ratio/leverage.
- 10. B.H. Chua Securities Corp. reserves the right to liquidate the client's position once the client was not able to comply
with above-mentioned requirements.
● Go Tak Lee, also known as Lito Go (Go), BH's General Manager, represented and signed for BH.
● Sia-Uy alleged that Go required him to issue postdated checks as security for any liability Sia-Uy may incur.
Sia-Uy issued postdated checks on the condition that they will not be deposited and shall be returned to him upon his
instructions.
● Sia-Uy's account failed to meet the required margin rate in May 1997, June, August, and September 2008. Instead of
issuing a margin call, BH deposited the postdated checks to cover the deficit for those months.
● Sia-Uy filed with the SEC a letter-complaint urging the SEC to conduct an investigation to determine any violations BH
and Go committed in the handling of Sia-Uy’s account. Sia-uy filed with the SEC another letter alleging that Go
committed misrepresentation and deceit in handling and managing Sia-Uy’s account.
● SEC penalized BH with a fine of P10,000.00 for violating the "Margin Rule" under the Revised Securities Act (RSA)
Rule 23(b)-1, now Rule 48.1.3 of the IRR of SRC. The Margin Rule requires that whenever there is an
insufficiency of margin, a call for additional margin shall be issued promptly by the broker dealer to the
customer.

1 (from Investopedia): Margin accounts allow you to borrow money against the value of the securities in your account.
 ○ SEC found that BH eliminated the need for a margin call when it required Sia-Uy to issue postdated
checks which will be deposited in case the balance of Sia-Uy's account became insufficient to maintain
the required margin.
● The director of the Market Regulation Department of the SEC, absolved BH from any liability.
● Sia-Uy appealed to the Office of the General Counsel of the SEC. Sia-Uy filed a manifestation and prayed that: (1) the
investment contracts entered into by him and BH be declared null and void; and (2) BH be held liable for the refund of
the investments Sia-Uy made as well as any accrued income.
● SEC En Banc granted Sia-Uy's appeal. It held that: (1) Go acted as a salesman of securities without the necessary
license as required by Section 19 of the RSA; (2) Go failed to comply with Sia-Uy's instruction to dispose or sell his
Interport shares in October 1999; (3) the transactions entered into by Sia-Uy with BH should be annulled and the full
amount of investments recovered by Sia-Uy.
● CA affirmed in toto the findings of the SEC.

ISSUE: W/N the transactions between BH and Sia-Uy are void under the RSA and therefore Sia-Uy is entitled to refund. -YES

RULING:

Procedural
● Petitioner avers that that the letter-complaint private respondent filed before the SEC and his letter-appeal before the
SEC En Banc did not conform with the prescribed form under the SEC's 2006 Rules of Procedure; thus, they should not
have been acted upon.
● We point out that this is the first time petitioner raised the alleged defects in private respondent's letter-complaint
and letter-appeal filed with the SEC. Issues raised for the first time on appeal and not raised in the proceedings in the
lower court are barred by estoppel.
Substantive
● We sustain the findings of the SEC En Banc that the transactions between BH and Sia-Uy are void pursuant to Section
53 (b) in relation to Section 19 of the RSA.
● Go acted as a salesman of securities without the necessary license as required by Section 19 of the RSA.
● Regarding the refund of the total value of the 26 postdated checks, as earlier narrated and contrary to BH's assertion,
the record shows that Sia-Uy filed a manifestation and motion praying that the investment contracts between him and
petitioner be declared void and that his investments be returned to him.
● More importantly, we rule that refund of the amounts invested by Sia-Uy is a necessary consequence of the
nullity of the Marginal Account executed between BH and Sia-Uy. A void or inexistent contract has no force
and effect from the very beginning. A void contract is equivalent to nothing and is absolutely wanting in civil
effects.
● Thus, if a void contract has already been performed, the restoration of what has been given is in order. This principle
springs from Article 22 of the New Civil Code which states that "every person who through an act of performance by
another, or any other means, acquires or comes into possession of something at the expense of the latter without just
or legal ground, shall return the same x x x." Hence, the restitution of what each party has given is a consequence of a
void and inexistent contract.

DISPOSITION: Petition dismissed.