SWAN, CULBERTSON & FRITZ, PETITIONER, VS. THE SECURITIES AND EXCHANGE COMMISSION AND VICENTE GALIAN, RESPONDENTS.

On
April 10, 1937, Vicente Galian, desiring to sell 20,000 shares of
Gumaus Goldfields, Inc., of which he was the absolute owner, placed in
the hands of the petitioner, a broker, certificate No. 3818 of said
corporation, representing the 20,000 shares in question. He then gave
said broker the necessary authority, agreed between them to be valid
until cancelled, to sell the shares at P0.185 per share. Upon learning
on the 13th of said month and year that said shares had not been sold
to that date, Vicente Galian cancelled its authority. Instead of
returning his original certificate, the petitioner, on that same date,
turned over to him certificates Nos. 3789 and 3554, each representing
10,000 shares also of Gumaus Gold fields, Inc., issued in the names of
Mackay & McCormick, and Leo Schnurmacher, Inc., respectively. This
was done by the petitioner because, shortly before, it had caused the
former certificate to be exchanged in the clearing house of the Manila
Stock Exchange for the two certificates above-mentioned, which are
called street certificates in the stock market, claiming that it would
make them more rapidly negotiable.

Before the petitioner
accepted Vicente Galian’s order, the latter executed in its favor the
document containing, among others, the following clauses:

“Only
actual purchases or sales are contemplated and all orders shall be
executed subject in all respects to the regulations and usages of the
New York Stock Exchange or other exchange or market where executed;

* * * * * * *

“All
securities or commodities, contracts for commodities or other
contracts, now held or hereafter purchased by the brokers for, or now
or hereafter deposited with the said brokers by the customer, are to be
held by the brokers as security for the payment of all liabilities of
the customer to the brokers however and whenever arising, and the
brokers are hereby authorized, without further notice to the customer
and without regard to whether the brokers have in their possession or
subject to their control at the time thereof other securities,
commodities or contracts for commodities of the same kind and amount,
in the usual course of business, to repledge, rehypothecate (either for
the amount due to the brokers from the customer, or for a greater sum)
and loan the same from time to time, separately or together with other
securities; and the brokers shall not be required to deliver to the
customer the same certificates or securities deposited or received but
only certificates or securities of the same kind and amount.”

At that time Vicente Galian owed nothing to the petitioner in
connection with said certificate of shares No. 3818 of the Gumaus
Goldfieds, Inc., which was delivered by him to said petitioner for the
above-stated purpose, that is, to be sold, and said certificate was not
subject to any obligation, it being therefore an absolutely free
certificate. Notwithstanding the fact that Galian had accepted from the
petitioner, without protest, the two street certificates in question in
lieu of his own (certificate No. 3818), on the occasion and under the
circumstances above-stated, he filed with the Securities and Exchange
Commissioner, on April 19, 1937, a complaint against the petitioner,
charging it with having violated Rule A-6 of the provisional rules and
regulations of the Securities and Exchange Commission, which reads as
follows:

“Securities in which a broker has
not extended any credit to a customer shall be kept separate for the
particular customer who owns them and, except with the written consent
of the latter, shall not be loaned, pledged, or commingled with other
securities owned by the broker himself or by other customers, or
otherwise disposed of as his own. In case they should be loaned,
pledged, or otherwise disposed of as his own by the broker, by virtue
of the customer’s written consent, the broker shall report it to the
latter, stating the name of the person or persons to whom they were
loaned or pledged or disposed of, and the amount for which they were
disposed of, and the date of maturity of the loan.”

The Securities and Exchange Commissioner, after having heard and
considered the reasons which Vicente Galian and the petitioner deemed
convenient to adduce in support of their respective claims, decided the
question against the petitioner, finding it guilty of having violated,
at least, the last part of said Rule A-6. The pertinent portion of the
dispositive part of the decision of the commissioner reads as follows:

“In
the present case, considering that the violation committed by the
respondent is its first offense, and neither the complainant’s
interests nor that of the public has been damaged thereby, the
commission is of the opinion that the respondent should merely be given
a warning. The respondent is, therefore, hereby warned that a
repetition of this offense or any other offense in the future would be
punished with much greater severity.”

The
petitioner asked for reconsideration of the decision, and as the
commissioner refused to reconsider the same, it interposed this appeal,
alleging now that said commissioner committed the four errors assigned
by it in its brief, which are substantially as follows:

“I.
The respondent commission erred in holding that in changing Gumaus
Goldfields certificate No. 3818, issued in the name of respondent
Vicente Galian, into ‘street’ certificates of the same company and
representing the same number of shares, the petitioner thereby disposed
of said certificate as its own within the meaning of Rule A-6 of the
provisional rules and regulations promulgated by said respondent
commission.

“II. The respondent commission erred in holding
that the petitioner was required by the above-mentioned Rule A-6 to
report to its customer, the respondent Vicente Galian, the changing of
said Gumaus Goldfields certificate No. 3818 into ‘street’ certificates,
in spite of the fact that said respondent Vicente Galian had accepted
without protest, when delivered to him, the said ‘street’ certificates
in lieu of his certificate No. 3818, thus terminating any relationship
of customer and broker that might have existed between said respondent
Vicente Galian and the petitioner, in spite of the fact that no damage
of any kind was sustained by respondent Vicente Galian, as expressly
admitted by him and as declared by the commission, and notwithstanding
the fact that upon the face of said Rule A-6, such report is only
required when a certificate is ‘loaned, pledged, or otherwise disposed
of by the broker as his own,’ and when the relation of broker and
customer still remains and there is some account to be settled between
them.

“III. The respondent commission erred and grossly
abused its discretion in taking for granted, in its decision, certain
facts which have not been admitted or agreed upon by the parties, and
in ignoring certain facts that are apparent from the letters of the
parties attached to the records of the case.

“IV. The
respondent commission erred and grossly abused its discretion in not
making a finding on certain material facts affecting the transaction,
and in refusing to allow the petitioner a hearing to establish said
facts, inasmuch as it had no knowledge of them and it was duty bound to
know them in order to better act and render its decision.”

1. From the time the petitioner had the certificate in question changed
   for those of Mackay & McCormick, and Leo Schnurmacher, Inc.,
   nothing more has been heard about it. It may have been transferred to
   another or most probably, it may have been cancelled. Whatever may have
   been done, the fact is that it has ceased to be of any benefit to
   Galian, the original owner thereof. Galian was not able and could not
   have been able to avail himself of the advantages accruing to him as
   owner from the time the exchange was made, because it was the
   existence, or rather, the continuation of said certificate in his name
   in the books of the Gumaus Goldfields, Inc., that entitled him to said
   advantages or privileges. Had there been dividends to be distributed
   among the stockholders, he would not have thereafter received any and
   would not have been entitled to claim those which otherwise would have
   belonged to him. Had meetings of stockholders been held, or had reports
   or memoranda for the benefit of said stockholders been drafted, he not
   only would not have been able to vote at said meetings either in person
   or by proxy, but he would not have been able even to take part in the
   deliberations.

   Neither would he have received copies of
   such reports or memoranda nor could he have had access to the books of
   the corporation, a privilege enjoyed by every stockholder by the mere
   fact of being such a stockholder, and he would not have been notified
   of any of said proceedings, even if he had requested it, because he
   lacked the condition or the necessary and indispensable means of
   establishing his right to claim said advantages or privileges. It is
   inferred from the foregoing that the petitioner really disposed of the
   certificate in question in the sense of Rule A-6 of the Securities and
   Exchange Commission, because to dispose of a thing, or using the same
   phrase employed in said rule, “otherwise disposed of,” is neither more
   or less than “(a) to determine the fate of; to fix the condition, employment, etc. of; (b) to get rid of; to put out of the way; to finish with; as, to dispose of rubbish; * * * (c)
   to transfer to the control of some one else, as by selling; to
   alienate; to part with; to relinquish; to bargain away” (Webster’s New
   International Dictionary, 1934 ed., page 644); or “to exercise finally
   a person’s powers of control over; * * * to pass over into the control
   of another; * * * to alienate or direct the ownership of property; to
   barter; to convey; * * * to exchange for other property; * * * to part
   with the right to or ownership of property, in other words, a change of
   property; to put into the hands of another; to put into another’s power
   and control; * * * to transfer to any person, * * *” 18 C. J., 1280,
   1281), in all of which senses the act performed by the petitioner
   perfectly fits, all the more so because, as the above-stated phrase
   “otherwise disposed of” used in the rule under consideration is
   preceded by the phrases: “shall not be loaned”, “pledged” and
   “commingled with other securities”, it necessarily means that it should
   be given an interpretation or meaning not confined to the strict
   meanings of said phrases “loaned”, “pledged” and “commingled”, it not
   being a synonym or even a periphrasis thereof. If not, the adverb
   “otherwise”, which accompanies the verb “dispose of not for any
   meaningless purpose but precisely to qualify and give it a greater and
   wider scope, would be completely nullified.

2. The next question raised, which this court, by resolution of August 12,
   1938, ordered the parties to discuss—which they did—because of its
   importance, although the Securities and Exchange Commissioner, rather
   than overlooked it, took it for granted, is whether or not the power
   given by Galian to the petitioner under the contract, some of the
   clauses of which already appear quoted on pages 2 and 3 of this
   decision, authorized it to change the original certificate in question
   for the street certificates Nos. 3789 and 3554 of Mackay &
   McCormick, and Leo Schnurmacher, Inc., respectively.

   The petitioner claims the affirmative and cites in its support that
   part or clause of said contract which reads: ‘the broken shall not be
   required to deliver to the customer the same certificates or securities
   deposited or received but only certificates or securities of the same
   kind and amount.” The petitioner, together with the Securities and
   Exchange Commissioner, claims that under said clause, the former was
   authorized to make the change or substitution in the manner done by it,
   because the authority granted it to sell, rehypothecate, or repledge
   Galian’s certificate of shares in its possession was not confined to
   those certificates on which it had a lien of some kind for advances or
   loans made to him, or for any other credit, but it extended even to
   those that were entirely free, emphasizing the fact that the clause in
   question is in itself independent of the others, with no substantial
   relation whatsoever to them. It further contends that, even without
   said authority, it would have been lawful for it to do what it did
   because, according to it, it did not dispose of Galian’s certificate of
   shares, but merely confined itself to changing it for two certificates
   of the same kind and for the same number of shares. It cites in its
   support the case of Drake-Jones Co. vs.
   Grogseth (188 Minn., 133; 246 N. W., 684, cited in volume 2, page 130,
   of Meyers book entitled “The Law of Stock Brokers and Stock
   Exchanges”), wherein it was really stated that: “In the absence of an
   agreement to the contrary, a custom permitting the broker to make
   delivery to the customer in a ‘street name’ would control.” It forgets,
   however, that the practice followed in the Philippines is different, it
   being precisely that prescribed in Rule A-6 above-stated. Said rule
   prohibits not only the lending or hypothecating of a certificate of
   shares without the written consent of the owner, but also the
   commingling thereof with other securities belonging to the broker or to
   other persons. If this is so, therefore, it should be understood that
   it is prohibited to change or substitute a free certificate for street
   certificates issued in the names of other persons, without the consent
   of the owner thereof, because if something less is prohibited, the
   greater should be so with more reason. The authority granted the
   petitioner was not as general and absolute as it claims. It was
   confined to those certificates of shares belonging to Galian, which,
   being in some way subject to an obligation he had with the petitioner
   by reason of some loan, advance or commission, or any other credit,
   might have been delivered to it for sale in its name. It did not extend
   to the certificate in question (No. 3818) which was absolutely free,
   and was exclusively owned outright by Galian. Of this there would be no
   doubt, if it is taken into consideration that in the power of attorney
   granted the petitioner, it is stated that it may rehypothecate or
   repledge Galian’s certificate, because to rehypothecate and repledge
   are acts which necessarily imply that the certificate to be
   rehypothecated or repledged is previously hypothecated or pledged to
   other persons, and the certificate under consideration was not so at
   all.

   The Supreme Court of Massachusetts, in the case of Parsons vs. Martin (11 Gray, 111-118), which was reaffirmed in that of Somerville National Bank vs. Hornblower (199 N. E., 918-921), held that:

   “A broker, to whom a certificate of shares in a corporation has been
   intrusted by their owner, with written directions to sell under
   circumstances specified, has no right to transfer the shares for any
   other purpose to the name of another person or to his own name * * *.”

   And the author, Meyer, in his book entitled “The Law of Stock Brokers and Stock Exchanges” states as follows:

   “The right to substitute certificates does not exist with respect to
   securities which the customer owns outright, and which have been
   deposited by him with the broker for the purpose of safekeeping, or for
   the purpose of securing a marginal account which the customer expects
   to open but does not in fact open. Stocks and bonds do not lose their
   earmark and become fungibles until they become collateral for marginal
   transactions. And if they have never become such collateral, they may
   be recovered by their true owner either from the broker or from third
   parties who are not bona fide holders for value.” (Vol. I, page 823,
   paragraph 67.)

   “Securities which are owned outright by a customer and which have not
   been deposited with the broker as margin may not be hypothecated by the
   broker at all. This principle applies to securities which have been
   bought through the broker and for which he has been paid in full; to
   securities which have been deposited by the customer with the broker
   for safekeeping; and to securities which have been deposited with the
   broker by a customer who contemplates making marginal commitments but
   who has not yet done so. The hypothecation of any of such securities
   constitutes a conversion.

   “If the broker has rightfully repledged securities which he is carrying
   for a customer on margin he must withdraw them from the repledge
   whenever the customer’s indebtedness to him has been paid in lull. The
   repledge, although rightful in the first instance, becomes wrongful if
   continued after the customer’s debt has been satisfied, and the
   continuation of the repledge constitutes a conversion.” (Vol. I, pages
   343, 344, paragraph 74.)

   All the foregoing seems to warrant the conclusion that the only
   authority granted the petitioner in the case under consideration was to
   sell Galian’s shares at the price fixed, and not to change them for
   other certificates registered in the names of other persons.

   The petitioner, to insist in its allegation that in exchanging Galian’s
   certificate for those of Mackay & McCormick, and Leo Schnurmacher,
   Inc., it acted under the authority granted it, and that it did not
   dispose of said certificate in the sense of Rule A-6 of the office of
   the Securities and Exchange Commissioner, invokes, among others, the
   cases of Cleminshaw vs. Meehan (236 App. Div., 185; 258 N. Y. Supp., 225; Stewart vs. Drake, 46 N. Y., 449, 453; Horton vs. Morgan, 19 N. Y., 170, 173; Sprague vs. Currie, 133 App. Div., 18, 20; Richardson vs. Shaw, 209 U. S., 365, 378, 379; and McBride vs.
   Chisholm 144 Misc., 447; 258 N. Y. Supp., 225). The foregoing
   citations, however, with the exception of the first one, are not
   applicable to the case under consideration because they refer to cases
   wherein the certificates exchanged for or substituted by others were
   not free, they having been in some way subject to an obligation
   previously contracted by the owners thereof with the brokers to whom
   they had been delivered. In the case of Cleminshaw vs. Meehan, supra,
   it was really held that to transfer a free certificate to street
   certificates, for the purpose of insuring immediate delivery in case of
   sale, is not a pledging or disposing of said certificate, but then the
   court was merely trying to determine whether or not what Meehan and his
   co-accused had done constituted an act punishable under the provisions
   of section 956, subdivision 1, of the Penal Law of New York, arriving
   at the conclusion that if they made the transfer of the certificate
   delivered to them with the request to sell it upon receipt of an order
   to that effect from the owner thereof, it was because they were of the
   opinion that in doing so they would be in a better position to comply
   with the instructions of their client; and it was not proven, on the
   other hand, that in making the transfer, they did so with a malicious
   intent, or that they have obtained thereby any benefit for themselves.
   In the same case of Cleminshaw vs. Meehan the case of Parsons vs. Martin, supra, has been cited with certain approval, the court having expressed itself therein as follows:

   “We find no stipulated facts showing that defendants converted the
   certificate to their own use, or that they did any act with a wrongful
   intent. (26 R. C. L., p. 1111, par. 21; Rogers vs.
   Huie, 2 Cal., 571; 56 Am. Dec, 363.) The broker is bound to obey his
   client’s instructions, and is responsible for any loss resulting from a
   breach of duty. In 9 C. J., p. 528, sec. 29, are cited Picard vs. Beers (195 Mass., 419; 81 N. E., 246); Day vs. Holmes (103 Mass., 306); Parsons vs.
   Martin (11 Gray [Mass.], 111), as holding that a broker to whom a
   certificate of shares has been intrusted by the owner with written
   directions to sell under specified circumstances has no right to
   transfer the shares for any other purpose to the name of another person
   or to his own name. We do not think those authorities apply to the
   instant case. Here the transfers were made by the brokers to facilitate
   as they understood the direction of the client.”

   For the
   foregoing reasons, this court holds that the contract entered into
   between the petitioner and the respondent Vicente Galian did not
   authorize the former to change Galian’s original certificate No. 3818
   for the street certificates Nos. 3789 and 3554 of Mackay &
   McCormick, and Leo Schnurmacher, Inc., respectively.

3. As to the question whether or not the petitioner complied with the
   provisions of the second part of Rule A-6 of the office of the
   Securities and Exchange Commissioner by informing Vicente Galian of the
   name of the person or persons to whom it had disposed of his
   certificate of shares (certificate No. 3818), and the amount for which
   it had disposed of said certificate, or the date of maturity of the
   loan in case it had loaned the same, the established facts show that
   the petitioner substantially did so, because on the same date on which
   it substituted said certificate for the street certificates of Mackay
   & McCormick, and Leo Schnurmacher, Inc., Vicente Galian asked for
   the return thereof and the petitioner turned over to him the two street
   certificates in question, without any protest on his part. Under said
   circumstances, it was not necessary for it to supply him the data
   enumerated by the rule, inasmuch as Galian then had them before him and
   had knowledge of them by means of said two certificates accepted by him
   without the least protest.

4. Having
   arrived at the foregoing conclusions, this court deems it unnecessary
   to discuss the other assignments of error made by the petitioner, the
   questions raised therein being of no importance and the same having
   been satisfactorily decided in the resolution of the Securities and
   Exchange Commissioner of October 13, 1937, denying said petitioner’s
   motion for reconsideration. This court makes its own the reasons then
   taken into account and stated by the commissioner in its resolution in
   question.

In resume, this court holds that the
petitioner violated the first part of Rule A-6 of the office of the
Securities and Exchange Commissioner and that the warning given it is
sufficient correction for its act, being its first offense. It cannot
be said that it is improper for this court to affirm a decision upon a
ground distinct from that taken into consideration by the lower court
(the Securities and Exchange Commissioner in this case), because on
appeal this court may correct any error that may be discovered after
considering a question from all angles.

The appealed decision is affirmed, with the costs to the petitioner. So ordered.

Avanceña, C. J., Villa-Real, Abad Santos, Imperial, Laurel, and Concepcion, JJ., concur.