Securities and Exchange Commission vs.

Performance Foreign Exchange Corporation

FALL GR No. 154131, July 20, 2006
Germaine Suzette C. Austero
Case No. 96 - Corporation Law

FACTS:

Performance Foreign Exchange Corporation (respondent) is a domestic corporation duly

registered under the SEC with the primary purpose of operating as broker/agent in
transactions involving foreign exchange, deposits, interest rate instruments, . . . and other
related, similar, or derivative products; and with the secondary purpose of engaged in
money changer or exchanging foreign currencies into domestic currency and vice versa.

After 2 years of operation, the respondent received a letter requiring it to appear before
the SEC’s Compliance Enforcement Department (CED) for a clarificatory conference
regarding its business operations. The respondent officers complied and explained before
the CED the nature of their business.

On 2001, Emilio Aquino, the Director of CED, issued a Cease and Desist Order for POSSIBLE
VIOLATION of RA 8799 (The Securities Regulation Code); that the outcome of their inquiry
shows that the respondent corporation is engaged in the trading of foreign currency future
contracts in behalf of its clients without the necessary license.

The respondent filed a motion praying for the lifting of the Cease and Desist Order before
the SEC and averred that it has not engaged in currency futures contracts trading and its
business involves spot currency trading which is not a form of currency futures transaction.

The SEC Chairman Lilia bautista, in her desire to know with certainty the nature of the
respondent’s business, sent a letter to BSP, requesting a definitive statement that the
respondent’s business transactions are a form of financial derivatives, and, therefore, can
only be undertaken by banks or non-bank financial intermediaries performing
quasi-banking functions.

Without waiting for the BSP’s determination, SEC issued an order denying the respondent’s
motion to lift the Cease and Desist Order and directed that the order stays until the
respondent shall have submitted the appropriate endorsement from BSP that it can
engage in financial derivative transactions.

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In April 2001, the SEC issued an Order making the Cease and Desist Order PERMANENT. In
response, the respondent filed a motion praying that the Order be set aside. The
petitioner, however, did not act on the motion, thus, prompting the respondent to file with
the CA a Petition for Certiorari.

The respondent alleged that SEC acted without or in excess of its jurisdiction or with grave
abuse of discretion when it issued the questioned order and the subsequent order making
the same permanent without waiting for the BSP’s determination of the real nature of its
business operations. (Quiz Question)

Meanwhile, in August, the BSP, in answer to SEC Chairman Bautista’s letter-request, stated
that the respondent’s activity does not fall under the category of futures trading and
cannot be classified as financial derivatives transactions.

CA’s Decision: The CA rendered a decision in favor of the respondent. The CA ruled that
the petitioner acted with grave abuse of discretion when it issued its challenged orders
without a positive factual finding.

Hence the instant Petition for Review on Certiorari.

Petitioner’s Contention: The CA erred in not applying the rule that factual findings of
quasi-judicial bodies like SEC, are generally accorded not only respect but even with finality.

ISSUE:
WON the SEC acted with grave abuse of discretion in issuing the Cease and Desist Order
and its subsequent Order making it permanent. (YES)

RULING:
Sec. 46 of RA 8799 provides that The Commission, AFTER PROPER INVESTIGATION OR
VERIFICATION, MOTU PROPRIO, or upon verified complaint by any aggrieved party, may
issue a cease and desist order without the necessity of a prior hearing if in its judgment the
ACT OR PRACTICE WILL OPERATE AS FRAUD ON INVESTORS OR IS OTHERWISE LIKELY TO
CAUSE GRAVE OR IRREPARABLE INJURY OR PREJUDICE TO THE INVESTING PUBLIC.

Under the above provision, there are two essential requirements that must be complied
with by the SEC before it may issues a cease and desist order:

1. Conduct of proper investigation or verification

The first requirement is not present. The SEC did not conduct proper
investigation or verification before it issued the challenged orders. The
clarificatory conference cannot be considered as a proper investigation or
verification process to justify the issuance of the Order because it was merely
an initial stage of such process.

Moreover, the SEC’s act of referring the matter to the BSP is an essential part
of the investigation and verification process. However, it bears stressing that
such investigation and verification, to be proper, must be conducted BEFORE,

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 and not after, issuing the Cease and Desist Order in question. Worse, It even
denied the respondent’s motion despite its admission that it cannot
determine certain material facts involving the respondent’s transactions.
Worst, without waiting for the BSP’s action, it proceeded to issue its Order
making the Cease and Desist Order permanent.

2. A finding that the act or practice, unless restrained, will operate as a fraud on
investors, or is otherwise likely to cause grave or irreparable injury or prejudice to
the investing public.

Before a cease and desist order may be issued by the SEC, there must be a
showing that the act or practice sought to be restrained will operate as fraud
on investors or is likely to cause grave, irreparable injury or prejudice to the
investing public. However, there is nothing in the questions Orders that show
how the public is greatly prejudiced or damaged by the respondent’s
business operation.

In sum, the Court found no reversible error committed by the CA.

The Petition is DENIED.