case digests

ABACUS VS. AMPIL DIGEST

vbdiaz

3 years ago

ABACUS SECURITIES CORPORATION, Petitioner, vs. RUBEN U. AMPIL, Respondent.

G.R. No. 160016

February 27, 2006

FACTS:

In April 1997, respondent opened a cash or regular account with petitioner for buying and selling
securities as evidenced by the Account Application Form. The parties’ business relationship was
governed by the terms and conditions stated therein.

Since April 10, 1997, respondent actively traded his account, and as a result of such trading activities, he
accumulated an outstanding obligation in favor of petitioner in the sum of P6,617,036.22 as of April 30,
1997. Respondent failed to pay petitioner his liabilities. Petitioner sold respondent’s securities to set off
against his unsettled obligations.

After the sale of respondent’s securities and application of the proceeds thereof against his account,
respondent’s remaining unsettled obligation to petitioner was P3,364,313.56.

Petitioner demanded that respondent settle his obligation plus the agreed penalty charges accruing
thereon equivalent to the average 90-day Treasury Bill rate plus 2% per annum. Despite said demand and
the lapse of said requested extension, respondent failed and/or refused to pay his accountabilities to
petitioner. Respondent claims that he was induced to trade in a stock security with petitioner because
the latter allowed offset settlements wherein he is not obliged to pay the purchase price. Rather, it waits
for the customer to sell. And if there is a loss, petitioner only requires the payment of the deficiency (i.e.,
the difference between the higher buying price and the lower selling price). In addition, it charges a
commission for brokering the sale. However, if the customer sells and there is a profit, petitioner deducts
the purchase price and delivers only the surplus – after charging its commission.

RTC- Makati City held that petitioner and respondent were in pari delicto and therefore without recourse
against each other. CA upheld the lower court’s finding that the parties were in pari delicto. It castigated
petitioner for allowing respondent to keep on trading despite the latter’s failure to pay his outstanding
obligations. It explained that “the reason behind petitioner’s act is because whether respondent’s
trading transaction would result in a surplus or deficit, he would still be liable to pay petitioner its
commission. Hence, this Petition.

ISSUES: What is margin requirement.

RULING:

The main purpose of the statute on margin requirements is to regulate the volume of credit flow, by way
of speculative transactions, into the securities market and redirect resources into more productive uses.
It is also to give a government credit agency an effective method of reducing the aggregate amount of
the nation’s credit resources which can be directed by speculation into the stock market and out of other
more desirable uses of commerce and industry.

It is for the stabilization of the economy. Restrictions on margin percentages are imposed “in order to
achieve the objectives of the government with due regard for the promotion of the economy and
prevention of the use of excessive credit.” Otherwise stated, the margin requirements set out in the RSA
are primarily intended to achieve a macroeconomic purpose — the protection of the overall economy
from excessive speculation in securities. Their recognized secondary purpose is to protect small
investors.

The law places the burden of compliance with margin requirements primarily upon the brokers and
dealers. Sections 23 and 25 and Rule 25-1 (NOTE: please read RSA, ang haba kasi if isa-cite ko pa) ,
otherwise known as the “mandatory close-out rule,” clearly vest upon petitioner the obligation, not just
the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three
days from the date of purchase. For transactions subsequent to an unpaid order, the broker should
require its customer to deposit funds into the account sufficient to cover each purchase transaction prior
to its execution. These duties are imposed upon the broker to ensure faithful compliance with the
margin requirements of the law, which forbids a broker from extending undue credit to a customer.

It will be noted that trading on credit (or “margin trading”) allows investors to buy more securities than
their cash position would normally allow. Investors pay only a portion of the purchase price of the
securities; their broker advances for them the balance of the purchase price and keeps the securities as
collateral for the advance or loan. Brokers take these securities/stocks to their bank and borrow the
“balance” on it, since they have to pay in full for the traded stock. Hence, increasing margins i.e.,
decreasing the amounts which brokers may lend for the speculative purchase and carrying of stocks is
the most direct and effective method of discouraging an abnormal attraction of funds into the stock
market and achieving a more balanced use of such resources.

The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time, the
status of the client’s account. Brokers are in the superior position to prevent the unlawful extension of
credit. Because of this awareness, the law imposes upon them the primary obligation to enforce the
margin requirements.

Nonetheless, these margin requirements are applicable only to transactions entered into by the present
parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that petitioner can still
collect from respondent to the extent of the difference between the latter’s outstanding obligation as of
April 11, 1997 less the proceeds from the mandatory sell out of the shares pursuant to the RSA Rules.
Petitioner’s right to collect is justified under the general law on obligations and contracts.

The right to collect cannot be denied to petitioner as the initial transactions were entered pursuant to
the instructions of respondent. The obligation of respondent for stock transactions made and entered
into on April 10 and 11, 1997 remains outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these dates subsist. At that time, there was no
violation of the RSA yet. Petitioner’s fault arose only when it failed to: 1) liquidate the transactions on
the fourth day following the stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation
no later than ten days thereafter, applying the proceeds thereof as payment for respondent’s
outstanding obligation.

Since the buyer was not able to pay for the transactions that took place on April 10 and 11, the broker
was duty-bound to advance the payment to the settlement banks without prejudice to the right of the
broker to collect later from the client.
In securities trading, the brokers are essentially the counterparties to the stock transactions at the
Exchange. Since the principals of the broker are generally undisclosed, the broker is personally liable for
the contracts thus made. Hence, petitioner had to advance the payments for respondent’s trades.
Brokers have a right to be reimbursed for sums advanced by them with the express or implied
authorization of the principal, in this case, respondent. Not to require respondent to pay for his April 10
and 11 trades would put a premium on his circumvention of the laws and would enable him to enrich
himself unjustly at the expense of petitioner.

In the present case, petitioner failed to enforce the terms and conditions of its Agreement with
respondent, specifically paragraph 8 thereof, purportedly acting on the plea of respondent to give him
time to raise funds therefor. By failing to ensure respondent’s payment of his first purchase transaction
within the period prescribed by law, thereby allowing him to make subsequent purchases, petitioner
effectively converted respondent’s cash account into a credit account. However, extension or
maintenance of credits on non-margin transactions, are specifically prohibited under Section 23(b). Thus,
petitioner was remiss in its duty and cannot be said to have come to court with “clean hands” insofar as
it intended to collect on transactions subsequent to the initial trades of April 10 and 11, 1997.

On the other hand, respondent is equally guilty in entering into the transactions in violation of the RSA
and RSA Rules. Respondent is an experienced and knowledgeable trader who is well versed in the
securities market and who made his own investment decisions. In fact, in the Account Opening Form, he
indicated that he had excellent knowledge of stock investments; had experience in stocks trading,
considering that he had similar accounts with other firms. He knowingly speculated on the market, by
taking advantage of the “no-cash-out” arrangement extended to him by petitioner.

Both parties acted in violation of the law and did not come to court with clean hands with regard to
transactions subsequent to the initial trades made on April 10 and 11, 1997.

Since the initial trades (April 10 and 11) are valid and subsisting obligations, respondent is liable for
them. Justice and good conscience require all persons to satisfy their debts. Ours are courts of both law
and equity; they compel fair dealing; they do not abet clever attempts to escape just obligations.

Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction (sold the stocks) on the
fourth day following the transaction (T+4) and completed its liquidation not later than ten days following
the last day for the customer to pay (effectively T+14). Respondent’s outstanding obligation is therefore
to be determined by using the closing prices of the stocks purchased at T+14 as basis.

We consider the foregoing formula to be just and fair under the circumstances. When petitioner
tolerated the subsequent purchases of respondent without performing its obligation to liquidate the first
failed transaction, and without requiring respondent to deposit cash before embarking on trading stocks
any further, petitioner, as the broker, violated the law at its own peril.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby MODIFIED.

Categories: SPECIAL COMMERCIAL LAWS

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The Facts:

Petitioner - Abacus Securities Corporation ("Abacus') is engaged in business as a broker and dealer of
securities of listed companies at the Philippine Stock Exchange Center.Sometime in April 1997,
Respondent Ruben Ampil (1) opened a cash account with Abacus for his transactions in securities;[10]
(2) Ampil’s purchases were consistently unpaid from April 10 to 30, 1997;[11] (3) Ampil failed to pay in
full, or even just his deficiency,[12] for the transactions on April 10 and 11, 1997;[13] (4) despite Ampil’s
failure to cover his initial deficiency, Abacus subsequently purchased and sold securities for Ampil’s
account on April 25 and 29;[14] (5) Abacus did not cancel or liquidate a substantial amount of
respondent’s stock transactions until May 6, 1997.[15]

Issues:

1) Whether the pari delicto rule is applicable in the present case, and

2) Whether the trial court had jurisdiction over Abacus alleged violation of the Revised Securities Act.
Ruling: (copied exactly from the decision to show the citations which are highlighted)

The Petition is partly meritorious.

Main Issue:Applicability of the Pari Delicto Principle

The provisions governing the above transactions are Sections 23 and 25 of the RSA[16] and Rule 25-1 of
the RSA Rules, which state as follows:

“SEC. 23. Margin Requirements. –

xxxxxxxxx

(b)It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to
extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer –

(1)On any security other than an exempted security, in contravention of the rules and regulations which
the Commission shall prescribe under subsection (a) of this Section;

(2)Without collateral or on any collateral other than securities, except (i) to maintain a credit initially
extended in conformity with the rules and regulations of the Commission and (ii) in cases where the
extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of
evading or circumventing the provisions of subparagraph (1) of this subsection.

x x x x x x x x x”

“SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect
violations of the margin requirements under Section 23 hereof, the broker or dealer shall require the
customer in non margin transactions to pay the price of the security purchased for his account within
such period as the Commission may prescribe, which shall in no case exceed three trading days;
otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond
ten trading days following the last day for the customer to pay such purchase price, unless such sale
cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the
right of the broker or dealer to recover any deficiency from the customer. x x x.”
xxx. The law places the burden of compliance with margin requirements primarily upon the brokers and
dealers.[22] Sections 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,”[23]
clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a
customer’s order, if payment is not received within three days from the date of purchase. The word
“shall” as opposed to the word “may,” is imperative and operates to impose a duty, which may be legally
enforced. For transactions subsequent to an unpaid order, the broker should require its customer to
deposit funds into the account sufficient to cover each purchase transaction prior to its execution. These
duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the
law, which forbids a broker from extending undue credit to a customer.

“The main purpose is to give a [g]overnment credit agency an effective method of reducing the
aggregate amount of the nation’s credit resources which can be directed by speculation into the stock
market and out of other more desirable uses of commerce and industry x x x.”[19]

A related purpose of the governmental regulation of margins is the stabilization of the economy.[20]
Restrictions on margin percentages are imposed “in order to achieve the objectives of the government
with due regard for the promotion of the economy and prevention of the use of excessive credit.”[21]

Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve a
macroeconomic purpose -- the protection of the overall economy from excessive speculation in
securities. Their recognized secondary purpose is to protect small investors.

The law places the burden of compliance with margin requirements primarily upon the brokers and
dealers.[22] Sections 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,”[23]
clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a
customer’s order, if payment is not received within three days from the date of purchase. The word
“shall” as opposed to the word “may,” is imperative and operates to impose a duty, which may be legally
enforced. For transactions subsequent to an unpaid order, the broker should require its customer to
deposit funds into the account sufficient to cover each purchase transaction prior to its execution. These
duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the
law, which forbids a broker from extending undue credit to a customer.
It will be noted that trading on credit (or “margin trading”) allows investors to buy more securities than
their cash position would normally allow.[24] Investors pay only a portion of the purchase price of the
securities; their broker advances for them the balance of the purchase price and keeps the securities as
collateral for the advance or loan.[25] Brokers take these securities/stocks to their bank and borrow the
“balance” on it, since they have to pay in full for the traded stock. Hence, increasing margins[26] i.e.,
decreasing the amounts which brokers may lend for the speculative purchase and carrying of stocks is
the most direct and effective method of discouraging an abnormal attraction of funds into the stock
market and achieving a more balanced use of such resources.

“x x x [T]he x x x primary concern is the efficacy of security credit controls in preventing speculative
excesses that produce dangerously large and rapid securities price rises and accelerated declines in the
prices of given securities issues and in the general price level of securities. Losses to a given investor
resulting from price declines in thinly margined securities are not of serious significance from a
regulatory point of view. When forced sales occur and put pressures on securities prices, however, they
may cause other forced sales and the resultant snowballing effect may in turn have a general adverse
effect upon the entire market.”[27]

The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time, the
status of the client’s account.[28] Brokers, therefore, are in the superior position to prevent the unlawful
extension of credit.[29] Because of this awareness, the law imposes upon them the primary obligation to
enforce the margin requirements.

In securities trading, the brokers are essentially the counterparties to the stock transactions at the
Exchange.[35] Since the principals of the broker are generally undisclosed, the broker is personally liable
for the contracts thus made.[36] Hence, petitioner had to advance the payments for respondent’s
trades. Brokers have a right to be reimbursed for sums advanced by them with the express or implied
authorization of the principal,[37] in this case, respondent.

It should be clear that Congress imposed the margin requirements to protect the general economy, not
to give the customer a free ride at the expense of the broker.[38] Not to require respondent to pay for
his April 10 and 11 trades would put a premium on his circumvention of the laws and would enable him
to enrich himself unjustly at the expense of petitioner.

-------------

What is the mandatory close out rule in margin trading?

A: The law places the burden of compliance with margin requirements
primarily upon the brokers and dealers. Sections 23 & 25 and Rule 25-
1, otherwise known as the “mandatory close-out rule,” clearly vest upon
petitioner the obligation, not just the right, to cancel or otherwise
liquidate a customer’s order, if payment is not received within three days
from the date of purchase. For transactions subsequent to an unpaid
order, the broker should require its customers to deposit funds into
the account sufficient to cover each purchase transaction prior to its
execution. These duties are imposed upon the broker to ensure faithful
compliance with the margin requirements of the law, which forbids a
broker from extending undue credit to a customer.

Q: What is the macroeconomic purpose of the margin trading rule?

A: The margin requirements set out in the RSA are primarily intended to
achieve a macro-economic purpose the protection of the overall economy from
excessive speculation in securities. Their recognized secondary purpose is to
protect small investors.

.Second Issue:

Jurisdiction

It is axiomatic that the allegations in the complaint, not the defenses set up in the answer or in the
motion to dismiss determine which court has jurisdiction over an action.[44] Were we to be governed by
the latter rule, the question of jurisdiction would depend almost entirely upon the defendant.[45]

The instant controversy is an ordinary civil case seeking to enforce rights arising from the Agreement
(AOF) between petitioner and respondent. It relates to acts committed by the parties in the course of
their business relationship. The purpose of the suit is to collect respondent’s alleged outstanding debt to
petitioner for stock purchases.