I.SHORT TITLE: GABIONZA V.

CA

II. FULL TITLE: Betty Gabionza and Isabelita Tan versus Court of Appeals, Luke Roxas
and Evelyn Nolasco - G.R. No. 161057,
September 12, 2008, J. Tinga

III. TOPIC: Securities Regulation Code – Securities Required to be Registered

IV. STATEMENT OF FACTS:

Respondent Roxas was the president of ASB Holdings, Inc. while respondent Nolasco was the
senior vice president.

ASB was incorporated in 1996 with authorized capital stock of P500,000.

The petitioners placed monetary investment with Bank of Southeast Asia. They allege that
between 1996 and 1997, they were convinced by the respondents to lend and deposit money with
ASBHI. Around 700 investors were urged to lend, invest, or deposit money with ASBHI. In
return, ASBHI agreed to send checks to the investors for the same amount lent, invested or
deposited.

Initially, they were issued receipts with the name “ASB Realty Development” which they were
told was the same entity as BSA or was “connected therewith”. Beginning March 1998, they
were issued in the name of ASBHI. They allege that they were told that ASBHI was the same
institution they had previously dealt with.

The checks were drawn against DBS Bank. In the first quarter of 2000, DBS bank refused to pay
for the checks by virtue of “stop payment” orders from ASBHI. Consequently, ASBHI filed a
petition for rehabilitation and receivership with the SEC and was able to obtain an order
enjoining it from paying its outstanding liabilities.

V. STATEMENT OF THE CASE:

Aggrieved, petitioners and other investors filed several complaints with the DOJ for estafa
through deceit and violation of Section 4 of Revised Securities Act.

Task Force on Financial Fraud was created by the DOJ to investigate the several complaints
against ASBHI. The said task force dismissed the complaints and denied the subsequent motions
for reconsideration. It concluded:
a. that the transactions complained of were loans which gave rise only to civil liability;
b. that the petitioners were satisfied with the arrangement from 1996 to 2000;
c. that petitioners never directly dealt with the respondents; and
d. that a check is not a security as contemplated by the Revised Securities Act.
Petitioners filed a joint petition for review with the Secretary of Justice. The SOJ, in a resolution,
partially reversed the Task Force and directed the filing of 5 informations for estafa and an
information for violation of Section 4 in relation to Section 56 of the Revised Securities Act.
Respondents’ motions for reconsideration were denied.
The respondents then filed a petition for certiorari with the Court of Appeals to assail the DOJ
resolution.

The appellate court reversed the DOJ and ordered the dismissal of the criminal cases. It held that
the postdated checks issued by ASBHI did not constitute a security under Revised Securities Act.
It cited the general definition of a check as a “bill of exchange drawn on a bank and payable on
demand” and declared that the issuance of checks for purpose of securing a loan to finance the
activities of the corporation is well within the ambit of a valid corporate act. As such, it need no
prior registration with the SEC in order to issue a check.

Hence, this petition.

VI. ISSUE:
Whether or not there is probable cause to file an information for violation of the Revised
Securities Act against respondents.

VII. RULING:

YES.

The Court of Appeals deviated from the general rule that accords respect to the discretion of the
DOJ in the determination of probable cause. This Court consistently adheres to the policy of non-
interference in the conduct of preliminary investigations, and to leave the investigating
prosecutor sufficient latitude of discretion in the determination of what constitutes sufficient
evidence to establish probable cause.

Section 4 of BP 176 or the Revised Securities Act generally requires registration of securities
and prohibits the sale and distribution of unregistered securities. In its Resolution, the DOJ
concluded that respondents are liable for violating such provision. It opined that when ASBHI
borrowed funds of about 700 investors amounting to P4 Billion on recurring, short-term basis of
usually 30 or 45 days, promising high interest yields and issuing mere postdated checks, such
checks assumed the character of “evidence of indebtedness” which are among the
“securities” mentioned under the Revised Securities Act. It bolstered its findings by stating
that “securities” embodies a flexible principle, one that is capable of adaptation to meet the
countless and variable schemes devised by those who seek to use the money of others on the
promise of profits. It held that checks of a debtor received and held by the lender also are
evidences of indebtedness and therefore, within the purview of “securities” citing the American
case of United States v. Attaway.

Furthermore, the DOJ held that ASBHI, in a clever attempt to remove the case from the coverage
of the Revised Securities Act which required registration and license to sell or deal in securities,
issued postdated checks in lieu of securities enumerated in such law. Such scheme was designed
to circumvent the law.

DOJ stated that “checks constitute mere substitutes for cash if so issued in payment of
obligations in ordinary course of business transactions but when they are issued in exchange for
a big number of individual non-personalized loans, solicited from the public, the checks cease to
be such.” In such circumstance, the checks assume the character of evidence of indebtedness.
This is especially so where the individual loans were not even evidenced by appropriate debt
instruments such as promissory notes, or loan agreements. A different rule would open to
floodgates for a similar scheme.

The Supreme Court held that the analysis of the appellate court is highly myopic and ignorant of
the bigger picture. It is one thing for a corporation to issue checks to satisfy isolated individual
obligations, and another for a corporation to execute an elaborate scheme where it would
comport itself to the public as a pseudo-investment house and issue postdated checks instead of
stocks or traditional securities to evidence the investments of its patrons. The DOJ duly noted
that such scheme was adopted by ASBHI to circumvent the Revised Securities Act.

Such finding of the DOJ that there was a prima facie case that can sustain prosecution is highly
persuasive. DOJ cited American authorities to support its conclusion. Moreover, the definition of
“securities” in Section 2 of the Revised Securities Act includes commercial papers evidencing
indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another. A check is a commercial paper
evidencing indebtedness of any person, financial or non-financial entity.

However, the question of whether such postdated checks is to be considered as “securities” under
the law still depends on a full-blown trial were the parties are free to raise their arguments before
the trial court. At the very least, the DOJ Resolution has established a prima facie case for
prosecuting private respondents for such offense.

The Court of Appeals clearly erred in dismissing such finding so perfunctorily and on such
flimsy grounds that do not consider grave consequences. CA’s conclusion would be agreeable if
it was undisputed that the activities of ASBHI are legal in the first place, but the DOJ has
established a legitimate theory that the entire modus operandi of ASBHI is illegal under the
Revised Securities Act.

VIII. DISPOSITIVE PORTION:

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of
Appeals dated 18 July 2003 and 28 November 2003 are REVERSED and SET ASIDE. The
Resolutions of the Department of Justice in I.S. Nos. 2000-1418 to 1422 dated 15 October 2001
and 3 July 2002 are REINSTATED. Costs against private respondents.

SO ORDERED.

IX. PREPARED BY: Ian Joshua P. Romasanta