In re ICS Exports, Inc.

September 9, 2010 SEC ADMINISTRATIVE CASE NO. 10-03-73 (CED Case No. 02-2726) IN THE MATTER OF ICS EXPORTS, INC. COMPLIANCE AND ENFORCEMENT DEPARTMENT , petitioner . FOR : Revocation of Certificate of Registration DECISION For consideration of the Commission En Banc is the Petition for Revocation of Corporate Registration of ICS Exports, Inc. ("ICS" for brevity) dated 14 October 2003, filed by the Compliance and Prosecution Department 1 ("CED" for brevity) on the ground of offering, selling and distributing to the public securities, which were not covered by a registration statement duly filed with and approved by the Commission, in violation of Section 8.1 of the Securities Regulation Code ("SRC"). 2 Facts of the Case Petitioner CED is the department of the SEC mandated to file petitions for revocation of certificates of registration for violation of the Securities Regulation Code, the Corporation Code, 3 P.D. 902-A, as amended, including their Implementing Rules and Regulations, and such other relevant laws enforced by the Commission. ICS is a domestic stock corporation duly registered with the Commission on 27 July 2000 under SEC Registration No. A200011592 4 with principal place of business at 2nd Floor, Valdez-Rufon Condominium, Building 11, 469 Boni Serrano Road corner 15th Avenue, Quezon City. 5 ICS's Articles of Incorporation ("AOI") 6 provide that its primary purpose is "to engage in the business of trading and exporting of goods such as garden decor, agricultural products, leather fashion accessories, and food supplements on wholesale and retail basis." Petitioner averred that on 11 July 2002, a certain Francisco R. Morrondoz and Eglicerio C. Navarro came to its Office to report a company named ICS Exports, Inc.,and its suspicious activities and transactions. According to them, ICS borrows money from the public as investments for its several "income-generating activities." To induce possible creditors/investors, ICS offers high interest rates of return, ranging from 2.5% to 15% per month. STaIHc Starting April 2002, however, ICS failed to meet its obligations to its creditors. The checks which ICS issued to its creditors/investors bounced due to insufficiency of funds. As proof of ICS's alleged investment scheme, Morrondoz and Navarro submitted to petitioner various documents such as: 1) copies of Contracts of Loan/Promissory notes, 7 2) complaint-affidavits of several investors, and 3) acknowledgement receipts by ICS of the amount placed by each investor. Upon verification by the CED, it was found out that the office corresponding to the principal address of ICS was already closed. A certain Zenaida V. Rufon, owner and administrator of the building, confirmed that ICS has since vacated the office on 01 July 2002. 8 On 21 August 2002, petitioner received from a certain Atty. Edgardo O. Era copies of complaints for Estafa filed by several creditors/investors against Emilia Sison, President and General Manager of ICS. Attached to the complaints are several copies of similar contracts of loan/promissory notes 9 entered into by complainant-investors with ICS. On 11 December 2002, the CED received a copy of a Resolution dated 26 November 2002, by the Prosecution Office of the Department of Justice, approving the filing of criminal cases for violations of: 1) Section 8.1, in relation to Sections 3 and 73 of the SRC, and 2) Article 315 of the Revised Penal Code in relation to P.D. 1689, against the Board of Directors and officers of ICS. 10 On 16 October 2003, the CED, on the basis of its own findings, filed the instant petition. On 21 October 2003, the Commission issued a Summons directing ICS to file its answer to the petition and to show cause, why its certificate of registration should not be revoked, within fifteen (15) days from receipt of the Summons. However, the Summons was not served due to the fact that ICS no longer holds office at its last known business address. Thus, petitioner prayed that Summons by Publication be effected to acquire jurisdiction over the parties. On 14 July 2005, an Order was issued directing the CED to cause the publication of the said Order together with the Summons and a copy of the Petition, once in a newspaper of general circulation. On 15 May 2006, the CED filed a Motion praying that a judgment be rendered declaring respondent ICS in default and accordingly revoking its Certificate of Registration, on the ground that ICS has yet to file its Answer to the Petition despite the lapse of more than thirty (30) days from the date of publication. Attached to the said Motion is an Affidavit of Publication 11 executed by Lourdes C. Diaz, Classified Ads Manager of the Philippine Daily Inquirer ("PDI"),stating that the Summons by Publication and the Order both dated 14 July 2005 were published in the 15 March 2006 issue of the PDI. CDEaAI Issue The sole issue to be resolved in this case is whether or not there is a sufficient ground to revoke ICS's certificate of registration. Discussion Upon the publication of the Order of the Commission for ICS to file its Answer to the Petition, ICS has yet to file the same. Thus, pursuant to Section 3-12 12 of the 2006 Rules of Procedure of the Commission, ICS shall be considered as in default. As a consequence, the Commission shall render judgment on the basis of the petition. We now resolve the case on its merits. Section 8.1 of the SRC provides: "SEC. 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser." To determine whether the "contract" entered into between ICS and its creditors/investors can be classified as securities, it is imperative to consider the definition of "securities" under Section 3.1 of the SRC, which reads: "Sec. 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: a) Shares of stock, bonds, debentures, notes, evidence of indebtedness, asset-backed securities; b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; xxx xxx xxx" (emphasis supplied) The "Contract" is an evidence of indebtedness. Except for "shares of stock," all the other securities enumerated in SRC Section 3.1 (a) are debt instruments covered by the generic term "evidence of indebtedness." For such evidence of indebtedness to be considered as "securities" meant to be regulated by the SRC, they must conform to the general definition of securities under Section 3.1, which states that securities are shares, participation or interest in a corporation or in a commercial enterprise or profit-making venture. HcSETI From the foregoing, the questioned "contract" is clearly an evidence of indebtedness, in the form of a promissory note. A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. 13 A careful scrutiny of the wordings of the contract reveals that it is in the form of a promissory note, as indicated by the words, "FOR VALUE RECEIVED, ICS Exports, Inc.,(Borrower) ...hereby promise to pay to the order of ____________ (Lender) ...the principal amount of _________________ (Philippine Currency) together with interest payable ...." The "Contract" is in the nature of an investment contract. In the landmark case of SEC vs. W.J. Howey Co., 14 the Court established the tripartite test to determine whether a particular financial instrument constitutes an investment contract, namely: (1) the investment of money, (2) in a common enterprise, and (3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party. In this case, all the elements of an investment contract are present. The said contracts involve the investment of money in a common enterprise, as ICS received monetary considerations from the creditors to use for its "income-generating" activities. In turn, the creditors expect to derive profits from such activities, which ICS promised to yield a significant rate of return. The participation of the creditors/investors is limited only to the placing of their investments. Thus, the expectation of profits is derived solely from the efforts of ICS. Verily, the foregoing established the fact that the "contracts" are: (1) evidence of indebtedness, and (2) in the nature of investment contracts. Since these investment contracts are deemed participation or interest in a corporation or in a commercial enterprise or profit-making venture, and such constitutes transactions affecting public interest, they shall be considered as securities under Section 3.1 of the SRC. Thus, ICS violated Section 8.1 of the SRC when it offered and distributed securities without the necessary registration statement duly filed with and approved by the Commission. More so, in engaging in the business of selling and distributing securities to the public when it is not authorized to do so under the purpose clause of its AOI, ICS committed serious misrepresentation as to what the corporation could do or was doing, to the great prejudice of the public. Such serious misrepresentation may be a ground for the revocation of corporate registration under Section 6 (l) (2) of P.D. 902-A, as amended, which reads: "SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: xxx xxx xxx (l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: IAEcCa xxx xxx xxx 2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public ; xxx xxx xxx" (emphasis supplied) Hence, considering the foregoing evidence, it is undoubtedly established that ICS: (1) sold and offered securities without a registration statement duly filed and approved by the Commission, in violation of Section 8.1 of the SRC, and (2) committed acts amounting to serious misrepresentation to the great prejudice of or damage to the general public, in violation of Section 6 (l) (2) of Presidential Decree 902-A, as amended. WHEREFORE, premises considered, the Petition is hereby GRANTED. The corporate registration of ICS Exports, Inc. is hereby REVOKED. Let a copy of this Decision be furnished to the Company Registration and Monitoring Department for its appropriate action, as well as to the Economic Research and Information Department and the Commission's extension offices for dissemination to the general public. SO ORDERED. Mandaluyong City, September 9, 2010. (SGD.) FE B. BARIN Chairperson (SGD.) MA. JUANITA E. CUETO Commissioner (SGD.) RAUL J. PALABRICA Commissioner (SGD.) MANUEL HUBERTO B. GAITE Commissioner (SGD.) ELADIO M. JALA Commissioner Footnotes 1. Now known as the Enforcement and Prosecution Department. 2. Republic Act No. 8799 (2000). 3. Batas Pambansa Blg. 68 (1980). 4. ICS's Certificate of Incorporation, Annex A of CED's Petition. 5. ICS' Articles of Incorporation, Annex B of CED's Petition. 6. Id. ,Second Article. 7. CED's Petition, Annexes G to G-24. 8. Id. ,Annex H, Affidavit dated 14 August 2002, executed by Romulo V. Arugay. 9. Id. ,Annexes I to I-25. 10. Id. ,Annex J. 11. Dated 27 March 2006. 12. SEC. 3-12. Effect of Failure to Answer. If the respondent fails to answer the complaint within the abovestated period, he shall be considered as in default. The Hearing Panel or Officer shall, motu proprio, proceed to render judgment granting the complainant such relief as the complaint may warrant, unless the Hearing Panel or Officer determines that the complainant should be required to submit ex parte additional evidence. 13. SEC. 184, Negotiable Instruments Law. 14. 328 U.S. 293 (1946).