SECURITIES AND EXCHANGE COMMISSION, PETITIONER, VS. PERFORMANCE FOREIGN EXCHANGE CORPORATION, RESPONDENT.

Securities and Exchange Commission versus Performance Foreign Exchange Corporation

The Case

This is a petition for review on certiorari brought by the Securities and Exchange Commission against Performance Foreign Exchange Corporation, a domestic corporation engaged in foreign exchange trading. The Commission had issued a cease and desist order and later made it permanent, and the corporation challenged those orders before the Court of Appeals on the ground of grave abuse of discretion. The case matters because it fixes the two essential requirements that the Commission must satisfy before it may issue a cease and desist order under the Securities Regulation Code, and it teaches that investigation and verification must come before the order, never after it.

Procedural History

The corporation filed with the Court of Appeals a petition for certiorari with a prayer for a temporary restraining order and preliminary injunction, alleging that the Commission acted without or in excess of jurisdiction and with grave abuse of discretion, and that its orders violated the corporation's right to due process. The Court of Appeals granted the petition and set aside the Commission's orders, ruling that the Commission acted with grave abuse of discretion when it issued the challenged orders without a positive factual finding that the corporation had violated the Securities Regulation Code. The Commission moved for reconsideration, but the appellate court denied the motion. The Commission then elevated the matter to the Supreme Court through a petition for review on certiorari.

Facts

Performance Foreign Exchange Corporation was registered with the Securities and Exchange Commission in June 1998. Its primary purpose was to operate as a broker or agent between market participants in transactions involving foreign exchange and related instruments, expressly other than acting as a broker for the trading of securities under the Revised Securities Act. Its secondary purpose was to engage in money changing.

After two years of operation, the corporation received a letter from the Commission requiring it to appear before the Compliance and Enforcement Department for a clarificatory conference on its business operations. Its officers complied and explained the nature of their business. In January 2001, the Director of the Compliance and Enforcement Department issued a cease and desist order, stating that an inquiry showed the corporation was trading foreign currency futures contracts for its clients without the necessary license, a violation of Section 11 of the Securities Regulation Code, and ordering it to cease and desist from soliciting funds for foreign currency trading and from operating as a foreign currency futures merchant or broker.

The corporation moved to lift the order, insisting that its business was spot currency trading, not currency futures trading. The Commission's Chairman then wrote the Bangko Sentral ng Pilipinas requesting a definitive statement on the nature of the corporation's transactions. Without waiting for the reply, the Commission denied the motion the very next day and directed that the order stay until the corporation submitted an endorsement from the Bangko Sentral that it could engage in financial derivative transactions. In April 2001, the Commission made the cease and desist order permanent and directed the corporation to show cause why its certificate of registration should not be revoked. Only in August 2001 did the Bangko Sentral reply, stating that the activity did not fall under futures trading and could not be classified as financial derivatives transactions.

Issues

• Whether or not the Securities and Exchange Commission acted with grave abuse of discretion in issuing the cease and desist order and its subsequent order making it permanent.

Applicable Provisions

Section 64 of the Securities Regulation Code provides:

Section 64. Cease and Desist Order. 64.1. 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, 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.

This is the very provision the Court construes, and it supplies the two essential requirements the Commission must meet before issuing the order.

Ruling

The Court denied the petition and held that the Commission acted with grave abuse of discretion. Under Section 64, there are two essential requirements before a cease and desist order may issue: first, the Commission must conduct a proper investigation or verification; and second, there must be 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.

On the first requirement, the Court found it absent. The clarificatory conference was merely an initial stage of the process, because after issuing the order the Commission still sought verification from the Bangko Sentral on the nature of the business. The Court stressed that the investigation and verification must be conducted before, not after, issuing the cease and desist order. The Commission even admitted in its own order that it could not determine certain material facts and that the matter had to be endorsed to the Bangko Sentral, yet it denied the motion to lift and later made the order permanent without waiting for the Bangko Sentral's reply.

On the second requirement, the Court held that the act to be restrained can only be determined after the Bangko Sentral shall have submitted its findings, and that nothing in the questioned orders showed how the public was greatly prejudiced or damaged by the corporation's business operation. Without that determination, there was no factual and legal basis to justify the orders.

Doctrine

Before the Securities and Exchange Commission may issue a cease and desist order under Section 64 of the Securities Regulation Code, two essential requirements must concur: a proper investigation or verification, and 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. The investigation and verification must be conducted before the order is issued; an order issued before the investigation is finished contravenes the statute. A clarificatory conference that is followed by a referral to another agency for verification is not a proper investigation. Absent the required finding, the order rests on no factual and legal basis and amounts to grave abuse of discretion.

Disposition

The Supreme Court denied the petition and affirmed the decision and resolution of the Court of Appeals, which had set aside the Commission's orders. The corporation prevailed.

Remember This

Memorize the two requirements of Section 64: proper investigation or verification first, and a finding of fraud or grave or irreparable injury to the investing public second. Examiners use this case to test the scope of the Commission's cease and desist power and the timing rule that investigation must precede the order.