In the Matter of The First Galleon Family Fund, Inc.

February 18, 2011 SEC ADMINISTRATIVE CASE NO. 12-10-125 IN THE MATTER OF THE FIRST GALLEON FAMILY FUND, INC.,THE FIRST GALLEON FUND MANAGEMENT CORP. AND EQUITABLE SECURITIES PHILIPPINES, INC. ENFORCEMENT AND PROSECUTION DEPARTMENT , petitioner . FOR : Petition for Revocation with Prayer for Issuance of a Cease and Desist Order ORDER For resolution of the Commission is the Motion to Lift Cease and Desist Order filed by The First Galleon Fund Management Corporation and Equitable Securities Philippines, Inc. dated 20 December 2010. The facts of the case as culled from the records are as follows: On 1 December 2010, the Enforcement and Prosecution Department (hereinafter "EPD" or "Petitioner") of the Securities and Exchange Commission filed a Petition for Revocation of Corporate Registration with Prayer for Issuance of Cease and Desist Order, mainly alleging that Respondents are offering or selling to the public unregistered securities called the Smart/Super Smart Savings Program ("SSP"). In an Order dated 9 December 2010, the Commission ordered the Respondent corporations to CEASE AND DESIST from further offering, soliciting, or otherwise offering or selling unregistered securities to the public. Respondents The First Galleon Fund Management Corporation ("Fund Management" , for brevity) and Equitable Securities Philippines, Inc. ("ESPI",for brevity) filed a Motion to Lift Cease and Desist Order dated 20 December 2010. No such motion to lift the cease and desist order was filed by Respondent The First Galleon Family Fund, Inc. ( "Family Fund", for brevity),warranting that the cease and desist order against it be made permanent pursuant to Sec. 10-5 of the 2006 Rules of Procedure of the Securities and Exchange Commission. A hearing on the Motion to Lift Cease and Desist Order was held on 10 January 2011, with appearance by counsel for EPD, and Mr. Gaizka Garamendi, President and Chairman of both Fund Management and ESPI, and counsel for Fund Management and ESPI. EPD and counsel for Fund Management and ESPI both prayed for time to file pleadings on the matter. Such prayer was granted, with EPD given fifteen (15) days from the date of the hearing to file its comment on the motion, and Fund Management and ESPI likewise given fifteen (15) days from receipt of EPD's comment to file their reply. On 25 January 2011, EPD filed its Opposition (to the MOTION TO LIFT CEASE AND DESIST ORDER).First, EPD points out that Family Fund has not filed a formal request or motion to lift the Cease and Desist Order issued against it, nor was Family Fund represented in the 10 January 2011 hearing despite due notice. cHSIDa On 9 February 2011, counsel for Fund Management and ESPI filed their Reply (to Opposition to the Motion to Lift Cease and Desist Order) through registered mail. Fund Management claims that it has never engaged in the offer or sale of securities, particularly of investment contracts, to the public. It asserts that it is a mere underwriter of securities and a registered investment adviser of Family Fund. In support of this claim, Fund Management referred to its Certificate of Registration as the Investment Adviser of Family Fund, issued by the Commission's Market Regulation Department ("MRD"),and a letter addressed to Fund Management dated 02 August 2010 from Director Jose P. Aquino of the MRD regarding the suspension of registration of securities of Family Fund. This letter states that: "In view of the suspension of the registration of securities of TFGFFI, your company ,THE FIRST GALLEON FUND MANAGEMENT CORPORATION, as it is the duly registered Investment Company Adviser, as well as its fund manager and distributor, is likewise hereby DIRECTED TO DESIST AND REFRAIN from further selling shares of The First Galleon Family Fund to the public. ..." 1 (Emphasis provided.) Fund Management asserts that since it is not an issuer of securities, it is not required to submit a registration statement of securities and that it is also not required to secure a license to offer and sell securities because it does not offer or sell securities to the public. ESPI claims that it is not obliged to secure a license to offer and sell securities because it is a broker-dealer and not an issuer of securities. Annexed to its Motion to support this claim is a letter from Director Jose P. Aquino dated 19 May 2010 ordering ESPI to show cause why its registration as a broker-dealer should not be revoked for alleged violations of certain provisions of the Corporation Code 2 and the Securities Regulation Code, 3 in relation to its deposit-taking activities. The letter states: "It has come to our attention that you are accepting deposits from investors for which you issue provisional receipts (Annex A),passbooks and statements of accounts (Annex B) in connection with the product allegedly being offered by The First Galleon Fund Management Corporation denominated as "Smart Savers Program." 4 Fund Management and ESPI assert that it is Family Fund that is the issuer of securities. It does not matter whether Fund Management is a mere underwriter or that ESPI is a registered broker-dealer. The issue is not whether Fund Management and ESPI issued the unregistered securities. The issue is whether or not Fund Management or ESPI offered or sold the unregistered securities. Petitioner, in its Opposition, reiterates its allegation in the Petition that "the offer and sale of the SMART/SUPER SMART SAVINGS PROGRAM, an investment contract, was successfully done with the indispensable cooperation of all three (3) respondent companies." A perusal of the documents attached to the Complaint-Affidavits of the complainant-investors reveal that deposits were made to ESPI, for which ESPI issued provisional receipts, serving as installment deposits for the future purchase of Family Fund shares. The investors also get in return various kinds of insurance benefits from Fund Management through its insurance provider. Fund Management also issued acknowledgement receipts for the amounts invested, while Family Fund issued depository receipts. AacCHD Also annexed to the Petition is an internal communication bearing The First Galleon Fund Management Corporation letterhead, dated 27 March 2009, signed by AVP of Marketing Roldan R. Jamindang, addressed to all unit heads and Galleon employees. This letter or memorandum introduced their 2009 Smart Savings Program available for direct marketing on 1 April 2009. The letter outlined the terms and conditions of the SSP, and gave instructions that "All interested Unit Heads and associates must seek accreditation from Head Office before they can market the 2009 Smart Savings Program." Redemption claim forms also have The First Galleon Fund Management Corporation logo. Other redemption claim forms were pre-printed letters addressed to ESPI and Fund Management, with blanks for the investors to fill out. Records of installments and passbooks issued to investors were labeled "Galleon/Equitable",and at the back of the passbooks, "ESPI/Galleon Smart Savings Program" was printed. Application forms to the Family Fund also bear The First Galleon Fund Management Corp. letterhead. On the upper right corner of the "PROPOSAL" submitted by Michael G. Bulilan, 5 the following is printed: "SMART/SUPER SMART SAVINGS PROGRAM of The First Galleon Fund Management Corporation with the help of Equitable Securities (Phils.) Inc." This Proposal is signed at the bottom by Mr. Gaizka Garamendi, President and Chairman of both Fund Management and ESPI. Based on the affidavit of Mr. Cesar Ullegue, it was at the office of Fund Management that he learned of the SSP. He was told that the SSP is a joint offering of respondents ESPI and Fund Management. Under the definition of securities provided in Section 3.1 6 of the SRC, the Smart/Super Smart Savings Program is a security, in the form of an investment contract. 7 This being so, it must be registered before it is offered or sold to the general public. However, no application for registration of the SSP exists in the records, in violation of Sections 8.1 and 12.1 of the SRC. Section 8.1 provides: Section 8. Requirement of Registration of Securities. 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. xxx xxx xxx Section 12.1 provides: Section 12. Procedure for Registration of Securities. 12.1 All securities required to be registered under Subsection 8.1 shall be registered through the filing by the issuer in the main office of the Commission, of a sword registration statement with respect to such securities, in such form and containing such information and documents as the Commission shall prescribe. ... xxx xxx xxx Considering the participation of Fund Management and ESPI in the offer and sale to the public of the unregistered securities called SSP based on the evidence on record, Fund Management and ESPI are deemed to have knowingly offered and sold unregistered securities, in violation of the law. ETDAaC PREMISES CONSIDERED, the Motion to Lift Cease and Desist Order filed by Respondents The First Galleon Fund Management Corp. and Equitable Securities Philippines, Inc. is hereby DENIED and the CEASE AND DESIST ORDER issued against The First Galleon Family Fund, Inc.,The First Galleon Fund Management Corp. and Equitable Securities Philippines, Inc.,its officers, directors, agents, representatives, conduits, assigns, and any and all persons claiming and acting for and in behalf and under its authority is hereby made PERMANENT. Respondents The First Galleon Family Fund, Inc.,The First Galleon Fund Management Corp. and Equitable Securities Philippines, Inc. are hereby ORDERED to file their Answer to the Petition for Revocation of Corporate Registration dated 30 November 2010 and serve a copy thereof to the Petitioner within fifteen (15) days from receipt of this Order. Failure to file Answer within the prescribed period may result in a judgment by default rendered in favor of the Petitioner and the relief(s) applied for may be granted. Petitioner is hereby directed to file its reply within ten (10) days from receipt of Respondents' Answer. SO ORDERED. City of Mandaluyong, February 18, 2011. (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. Annex "B" of the Motion to Lift Cease and Desist Order. 2. Batas Pambansa Blg. 68 (1980). 3. Republic Act No. 8799 (2000). 4. Annex "C" of the Motion to Lift Cease and Desist Order. 5. Annex "R" of the Petition. 6. 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: xxx xxx xxx (b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; xxx xxx xxx" 7. As defined by the Amended Implementing Rules and Regulations of the SRC, in Rule 3 (1) (G): G. An investment contract means a contract, transaction or scheme (collectively "contract") whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. A common enterprise is deemed created when two (2) or more investors "pool" their resources, creating a common enterprise, even if the promoter receives nothing more than a broker's commission.