In the Matter of Philippine Landgroup, Inc.

July 4, 2013 SEC CDO CASE NO. 03-12-001 IN THE MATTER OF PHILIPPINE LANDGROUP, INC. ENFORCEMENT AND PROSECUTION DEPARTMENT , petitioner . ORDER Pending consideration of the Commission is the Motion for Issuance of a Cease and Desist Order (CDO) filed by the Enforcement and Prosecution Department (EPD) of this Commission against PHILIPPINE LANDGROUP, INC. (PLGI), their respective officers, directors, representatives, salesmen, agents, and any and all persons claiming and acting for or on its behalf to prevent fraud, injury or prejudice to the investing public pursuant to the provisions of Section 64 of the Securities Regulation Code (SRC). 1 PLGI is a corporation duly registered with the Commission on 23 February 2007 under SEC Registration No. CS200702775. Its principal office address appearing in its Articles of Incorporation (AI) is 0511 Washington St. Green Meadows, Mabiga, Mabalakat, Pampanga. The primary purpose for which PLGI is formed is: TCHEDA "To acquire by purchase, lease, or otherwise, lands or interest in lands and realty, and to own, hold, improve, develop, manage, and operate said land or lands or real estate so acquired, and to erect or cause to be erected on any lands, owned, held, occupied, or acquired by the corporation, buildings and other structures with their appurtenances and to rebuild, enlarge, alter, improve, or remodel any building or other structures now or hereafter erected on any lands or real estates so owned, held, or occupied, or otherwise dispose of any lands or real estate or interests in land or real estates and in buildings and other structures at anytime owned or held by the corporation." 2 PLGI's Certificate of Incorporation (CI) states that juridical personality is granted to the corporation, "but does not authorize it to undertake business activities requiring a Secondary License from this Commission such as, but not limited to acting as: broker or dealer in securities, government securities eligible dealer (GSED), investment adviser of an investment company, close-end or open-end investment company, investment house, transfer agent, commodity/financial futures exchange/broker/merchant, financing company, pre-need plans and time shares/club shares/membership certificates issuers or selling agents thereof. Neither does this Certificate constitute as permit to undertake activities for which other government agencies require a license or permit." 3 FACTS OF THE CASE On 27 July 2010, Mr. Brian O. Tulloch and Mr. Bruce Tulloch (Tullochs) of Resort Suites International (RSI) went to the EPD to report the alleged unauthorized activity of PLGI of offering unregistered security investment to the public through one of its real estate development projects, the Grandview Tower Condotel (Grandview Tower) located at Don Juico Avenue, Balibago, Angeles City. They showed and submitted flyers and marketing brochures distributed by respondent PLGI. The contents of the flyers are as follows: "Imagine. . . Owning your own hotel room with a steady income stream for Life ! "well now you can . . . and its easy in 3 steps 1.) Visit our new showroom located @ Grandview Tower Don Juico Avenue Clark View, Angeles City 2.) Together with our trained Sales Executives you select your unit. 3.) Complete initial paperwork & pay the reservation fee of Php50,000.00 How does it Work? aTcSID Your investment in the Grandview Hotel unit is well protected as you are issued the condominium title for your unit in your name. You as owner of your unit enter into a management agreement with Grandview Property Management, Inc. for the management of your unit. Your unit goes into the rental pool & gains income on a regular basis. Upon payment of the reservation you will be issued a copy of the management agreement, contract to sell & other relevant documents for your perusal prior to signing." 4 (Emphasis ours) Upon request of the EPD, the Corporation and Finance Department (CFD) issued a Certification dated 02 August 2010 stating that the respondent PLGI "is not a registered issuer of securities under Section [sic] 8 and 12 of the Securities Regulation Code and is therefore not licensed to offer or issue securities to the public." 5 On 05 August 2010, Mr. Bruce Tulloch inquired about the status of the investigation and reported that RSI was retained by the respondent as its exclusive sales agent to sell "Grand View Vacation Club". However, respondent "refused to file with the SEC a Secondary License for Grandview Vacation Club or their Condotel Units being SOLD as Investment Products with Projected 'Buyers-Investors Annual Rental Returns'." 6 On 16 September 2010, the Tullochs filed their verified Complaint-Affidavit with the EPD, 7 for PLGI's possible violations of the SRC. HDAECI Thus, the EPD formed an investigating team (the Team), which proceeded to the Grandview Tower condotel project site in Angeles City on 24 September 2010. 8 They posed as potential buyers, to conduct a surveillance of the activities of respondent PLGI and Grandview Property Management, Inc. (GPMI), which manages the projects of PLGI. In their Field Investigation Report, the Team narrated that they immediately spotted a "notice" at the makeshift gate of the construction site, stating that there is a pending civil case against the Grandview Tower project. At the office, they were met by Mr. Tom Hanton, a sales executive of the Grandview Tower, who led them to the showrooms. Mr. Hanton said that by the end of November 2010, the units will be turned over to the buyers, and by February 2011, the Grandview Tower will be fully operational with all the promised amenities and establishments. He assured the Team that owning a unit would be a wise investment . The unit owner has the option to rent it out and earn income by himself or by the property management of GPMI, with 80% going to the property owner while 20% to GPMI, being the management firm. He also confirmed that eventually, the arrangement will be in the form of a time sharing arrangement. 9 After viewing the model unit, Mr. Hanton gave the Team a personalized plastic bag containing the different marketing brochures which are like the brochures submitted by the Tullochs. When he was asked about the pending civil case, Mr. Hanton replied that the case involves a dispute on view and falling debris from the construction and has already been settled. 10 A team member asked if they have a management contract but they did not have one as of the time of the visit. cEaTHD After investigating the project site, the Team later went to the Angeles City Hall to secure a copy of the business permit/license of PLGI and GPMI. The Certification 11 dated 24 September 2010 issued by the Business Permit & Licensing Division of the City of Angeles states that: "This is to certify that as per records of this office, no business permit has been issued to the following business establishments: 1. Philippine Land Group, Inc. 2. Grandview Property Management, Inc." On 25 September 2010, the Team received an email from Mr. Hanton which speaks of a glossy Grandview Tower folder as providing that "[o]n payment of the reservation fee you will receive a management agreement and other relevant documents for you to look at before signing." 12 On 29 September 2010, a copy of the Condotel Management Agreement 13 was submitted to the Team by Mr. Hanton, which shows that there are three parties to the agreement: 1) GPMI represented by its President, Mr. Marinus Van Merkesteijn, referred to as the "Manager;" 2) the Condotel Unit Owners (CUO), who have expressed their desire to have their units managed, and 3) PLG Condominium Corporation, referred to as the "Proprietor." Section 2.1 of the management agreement provides: "The Proprietor and the CUO appoints the Manager to be the sole and exclusive manager of the Condotel during the Operating Term with such rights in relation to the Condotel as are necessary or reasonably incidental to the performance of the Manager of its obligations under this Agreement." 14 TaCDIc The flyer states: "Invest NOW. Self-liquidating." "Ask us how your investment can pay for itself within a few years." 15 On 12 October 2010, the Tullochs appeared at the office of the EPD for a conference, and stated under oath that: 1) they learned about PLGI when they went to the sales office of Grandview where model units are displayed; 2) they were hired to introduce or recommend major improvements to the Condotel; 3) PLGI was selling investments even before they were hired; 4) they designed the Grandview Vacation Club which is a hybrid of time share and real estate investment trust; 5) they were asked to draft the papers for submission to the Commission but the papers were not filed; 6) PLGI furnish all buyers with the management contract for the units; 7) they were told that ninety percent (90%) of the buyers are foreigners; and 8) PLGI employs sales agents who are not licensed to sell investment contracts. 16 On 14 October 2010, Mr. Quirino Marquinez, Jr., one of the Directors of PLGI appeared with counsel at the office of the EPD for a conference, wherein he admitted under oath that he handles the marketing of the projects of PLGI, one of which is Grandview Tower. He confirmed that marketing is done with the use of the flyers which were submitted by the Tullochs. He said that the same flyers are given out to prospective buyers. PLGI also markets their product by giving presentations and by entertaining walk-in clients. 17 On 04 November 2010, the incorporators and officers of respondent, Mr. Maqrinus Van Merkesteijn (President), Mr. Arnel Torres (Vice-President) and Mr. Quirino Marquinez Jr. (Director) appeared at the office of the EPD together with their counsel, for a conference. Under oath, they stated that PLGI is engaged in the construction of residential subdivision and condotels. Grandview Tower was originally marketed as residential condo units and because of the increasing demand, they decided that part of the project will be operated as a hotel. Mr. Van Merkesteijn instructed the sales agents to tell potential buyers that a management agreement will be set up wherein the buyers may invest on their condo units by letting Grandview Property Management Corporation lease out their condo units and they get a share of the profits. 18 CIDcHA Out of 138 units, 50 are reserved for the vacation club, which is not yet registered with the Commission, so they have not yet sold these to the public. Initially, PLGI entered into an Agreement with RSI for marketing, but was eventually terminated. PLGI now has its brokers and in house sales employees in charge of marketing. 19 During the conference, the incorporators submitted Contracts to Sell to two buyers and a flyer and brochure. 20 On 14 December 2010, respondent PLGI submitted a Manifestation dated 03 December 2010 listing the names of its seventeen brokers. 21 On 14 January 2011, the EPD verified with the Market Regulation Department (MRD) if the brokers listed in the Manifestation are registered with the Commission, and also verified with the CFD if respondent has by then, secured a secondary license per commitment of its incorporators during the conference on 04 November 2010. On 11 January 2011, CFD issued a Certification that based on the records on file with the Commission, PLGI is not a registered issuer of securities pursuant to Sections 8 and 12 of the SRC and is therefore not licensed to offer or issue securities to the public. 22 On 27 January 2011 the MRD issued a Certification to the effect that PLGI has not been issued a secondary license to act as broker-dealer in securities under the SRC, and is not, under any circumstances, authorized to engage in activities and/or solicit investments. Likewise, the persons enumerated in the PLGI Manifestation dated 03 December 2010 have not been issued any license to act as brokers or dealers in securities under the SRC. 23 CDTHSI On 26 January 2011, Ms. Lina R. Reyes, a representative of one of the buyers of the condominium units in PLGI, appeared in the office of the EPD and testified under oath that she has a special power of attorney from spouses Ibrahim and Randa Saliba, buyers of a condominium unit of Grandview Tower. She accompanied the spouses to view the showroom of Grandview Tower, and they eventually purchased a unit. They were informed of the rental management contract and were told of the 70-30 arrangement, the bigger share going to the buyer. They were also told that all purchasers of the condo hotel units are required to enter into the management contract arrangement with GPMI. After purchase of the property, the spouses were given a brochure containing the details of the purchase, but because of disagreements regarding the contract and the delay in construction, her clients filed a case of rescission in court (RTC Branch 60, Civil Case No. 14376). 24 The Team received a verified tip that respondent has been advertising in a magazine despite having been informed against doing it without prior registration with the Commission. On 27 April 2011, the Team returned to the site of Grandview and found significant changes in the structure of the condotel. The Team also inspected websites of PLGI and Grandview Tower and found that it states, among others, "Explore 'Hotel Investment Trust' Vacation Ownership Incredible Values" and "Grandview Hotel & Vacation Investment Club Projected Annual Income Distributions to 'HIT' Shareholders." 25 EPD also discovered two Facebook accounts in the name of Grandview Tower Hotel Vacation Club, which states: "Grandview Tower Hotel & Vacation Club is registering with SEC a Hotel Investment Trust ("HIT") public offering with dual shareholder annual benefits of attractive income and worldwide vacations. To request an investment prospectus please advise." 26 cAISTC RULING The EPD, in its complaint, annexes, and supporting documents ( i.e. , their Field Investigation Report, the affidavits and/or statements under oath of the Tullochs, and the incorporators and officers of PLGI, and its buyers, marketing brochures and flyers distributed by respondent, the management agreement provided by Mr. Hanton, the Contract to Sell submitted by the incorporators, which specifically provides that "the VENDEE's [sic] of those units will enter into a management contract with Grandview Property Management, Inc.") presented substantial evidence that the respondent is engaged in the selling and offering for sale unregistered securities in the form of investment contracts. It was established that PLGI's sale of the Grandview Tower condotel units with promise to earn income which ranges from 70% to 80% for the property owner on a regular basis, involves the sale of securities in the form of an investment contract. HcTDSA Section 3.1 of the SRC provides: "SECTION 3. Definition of Terms. 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: . . . (b) Investment contracts , certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription;" (Emphasis supplied) Investment contract is defined in the "Amended Implementing Rules and Regulations of the Securities Regulation Code" 27 (Amended IRR of the SRC) as follows: "SRC RULE 3 Definition of Terms Used in the Rules and Regulations 1. As used in the rules and regulations adopted by the Commission under the Code, unless the context otherwise requires: xxx xxx xxx 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. ISADET 1. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. 2. 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." It appears that the business model of PLGI, as supported by the evidence presented, is that a buyer of a unit in Grandview Tower, a project of PLGI, enters into an investment contract, via a Contract to Sell with PLGI, and a Management Agreement with GPMI upon purchase of a unit or units of Grandview Tower. These documents are contracts which constitute a scheme that takes the nature of an investment contract wherein the vendee invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. The paragraph 3 (c) of the Contract to Sell 28 provides: "Residential units shall be used exclusively for residential purpose, commercial units only for commercial or office use and the condotel units will form the condotel section of the PROJECT and the VENDEE'S [sic] of those units will enter into a management contract with Grandview Property Management, Inc . . . ." (Emphasis ours) DTaAHS The Condotel Management Agreement provides in paragraph 7.1: 29 "At least 30 days before the commencement of each Accounting Period or by such later date that the Manager, Proprietor and CUO agree upon, the Manager shall prepare and submit to the Proprietor and CUO a budget for the ensuing Accounting Period. Such budget shall outline in reasonable detail all such matters that should be properly contained in a budget for a Condotel of similar nature to the Condotel including details of all estimated revenue and income and all estimated outgoings and expenditure (including any estimated Capital Expenditure)." (Emphasis ours) Further, a sample letter 30 of PLGI addressed to Mr. Saliba, a vendee states: ISTCHE "This is to inform you that as part of the Condominium Agreement and you as having been [sic] acquired a unit in our condominium with Unit no. 418, you are hereby entitled to a 75-25% profit sharing of the unit rental . . . ." (Emphasis ours) Moreover, the contents of the brochures and flyers aforementioned are indicative of the elements of an investment contract per SRC Rule 3 (1) paragraph G subparagraphs 1-2 as stated earlier. The facts gathered show that the investment scheme offered by PLGI has the elements of an investment contract as enunciated by the Supreme Court in Power Homes Unlimited Corporation vs. SEC 31 where the concept of an investment contract under R.A. No. 8799 was tackled, and the Court concluded, "to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others." Through the purchase of a condotel of respondent PLGI, the vendee becomes an investor who enters into a contract. The purchase price takes the form of investment of money for which the investor will receive a guaranteed amount of profit. The amount of ranges from 80%, as stated by Mr. Hanton, to 75% per sample letter of PLGI to a vendee. In the scheme offered by PLGI, the buyer of the condominium unit of Grandview Tower does not buy the unit only. By purchasing a unit, the buyer is required to enter into a management agreement with GPMI, wherein the unit bought is pooled together with the units purchased by other buyers and operated as a hotel enterprise. Effectively the buyers of the units do not merely invest in a condominium unit. By doing so, they enter into a common enterprise, with the expectation of profits, primarily through the efforts of others. The purchase money used to buy a unit is invested in a common enterprise, which is the condotel. The investor expects to derive profits from the management and operation of the pooled units constituting the condotel, as described in the flyers, brochures, Contract to Sell and Management Agreement, a letter from PLGI, which lead the investor to expect profits primarily from the efforts of others. DSTCIa In addition, The Team further uncovered the fact that the price list of units given to them by Mr. Hanton refers to the vacation club, some of which are on the 3rd floor, while all the units on the 4th and 5th floors are classified as such, and the announcements regarding the Grand Tower Hotel Vacation Club were already being made on their Facebook account in the Internet. The respondent PLGI has engaged in offering and selling securities to the general public as defined under Rule 3, Paragraph 1, Subparagraph N of the Amended IRR of the SRC, by distributing flyers, brochures, placing advertisements in the Internet, and conducting presentation sot prospective clients. Rule 3, Paragraph 1, Subparagraph N of the Amended IRR of the SRC provides: "N. Public Offering means a random or indiscriminate offering of securities in general to anyone who will buy, whether solicited or unsolicited. Any solicitation or presentation of securities for sale through any of the following modes shall be presumed to be a public offering: i. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or any part thereof; HTCaAD ii. Presentation in any public or commercial place; iii. Advertisement or announcement in any radio or television, or in any online or email system; or iv. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or mailing the same to prospective purchasers." The acts of respondent in soliciting sales undoubtedly fall under the definition of public offering, but PLGI failed to secure the registration of subject securities with the Commission, per Sections 8 and 12 of the SRC, as certified by the CFD. HETDAa PLGI also failed to obtain a secondary license to act as broker-dealer in securities under the SRC, and the company's salesmen listed in its Manifestation have not been issued any license to act as brokers or dealers in securities as certified by the MRD. Sections 28.1 and 28.2 of the SRC provide: "SECTION 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. 28.1. No person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the Commission. 28.2. No registered broker or dealer shall employ any salesman or any associated person, and no issuer shall employ any salesman, who is not registered as such with the Commission." The corporation cannot feign ignorance of the requirement inasmuch as the Certificate of Incorporation specifically states the requirement of a Secondary License from the Commission for acting as broker or dealer in securities and club shares, among others. The Commission is duty-bound to protect the interest of the investing public. As discussed above, PLGI does not merely sell condominium units. The overall investment scheme which is being aggressively offered and sold by PLGI has the elements of an investment contract, a form of security which must be registered with the Commission before it is sold to the public. PLGI and its salesmen must also secure a secondary license to act as broker-dealer or salesmen or associated persons thereof in securities, but they have not complied with this mandatory requirement. Thus, it is necessary that a Cease and Desist Order be issued to enjoin the company from further offering and selling securities to the public. Otherwise, allowing PLGI to continue its business operations will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. SCcHIE PREMISES CONSIDERED, PHILIPPINE LAND GROUP, INC., its officers, directors, agents, representatives, conduits, assigns, and any and all persons claiming and acting for and in their behalf and under their authority, are hereby ordered to IMMEDIATELY CEASE AND DESIST, 32 UNDER PAIN OF CONTEMPT, from further offering, soliciting, or otherwise offering or selling unregistered securities to the public, namely the sale of units in the Grandview Tower which has prima facie been established to constitute an investment contract, club shares, pooling of funds, investment trusts, or similar forms, and, in connection therewith, soliciting, accepting or receiving from others, money for the purpose of investing therein. All persons against whom this CDO is issued may, within a non-extendible period of five (5) business days from receipt of this Order, file a formal request or motion for the lifting thereof with the Commission. If no such Motion is filed within the prescribed period, this CDO shall be deemed permanent. The Enforcement and Prosecution Department is hereby DIRECTED to: (a) serve this Order on the President, General Manager, Corporate Secretary, Treasurer or In-House Counsel of PHILIPPINE LAND GROUP, INC. (b) post copies of the Order at the entrance of the main office and/or branches, if any, of PHILIPPINE LAND GROUP, INC. Let a copy of this Order be also posted in the Commission's website and published in a national newspaper of general circulation. Let a copy of this Order be furnished the Company Registration and Monitoring Department, the Corporation Finance Department and the Economic Research and Information Department for their information and appropriate action. HCIaDT FAIL NOT UNDER PENALTY OF LAW. SO ORDERED. Mandaluyong City, July 4, 2013. (SGD.) TERESITA J. HERBOSA Chairperson (SGD.) MA. JUANITA E. CUETO Commissioner (SGD.) MANUEL HUBERTO B. GAITE Commissioner (SGD.) ELADIO M. JALA Commissioner (SGD.) ANTONIETA F. IBE Commissioner Footnotes 1. Republic Act 8799 (2000). 2. Records, p. 164. 3. Records, p. 173. 4. Records, p. 156. 5. Records, p. 153. 6. Records, p. 152. 7. Records pp. 145-149. 8. Records p. 144. 9. Field Investigation Report, Records pp. 143-144. 10. Id. , Records, p. 142. 11. Records, p. 128. 12. Records, p. 126. 13. Records, p. 122. 14. Records, p. 117. 15. Records, 136. 16. Summary of Proceedings dated 12 October 2010, Records p. 91. 17. Summary of Proceedings dated 14 October 2010, Records p. 87. 18. Petition par. 31, Records p. 182 and p. 86. 19. Summary of Proceedings dated 04 November 2010 Records, p. 86. 20. Motion for Issuance of Cease and Desist Order dated 13 March 2012, Records p. 182. 21. Records, p. 53. 22. Records, p. 51. 23. Records, p. 50. 24. Petition par. 38, Records, pp. 47-49. 25. Records, p. 8. 26. Records, p. 180 and Records, p. 01. 27. December 30, 2003. 28. Records, p. 83. 29. Records, p. 114. 30. Records, p. 90. 31. G.R. No. 164182, February 26, 2008. 32. Section 64.1., SRC. 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. xxx xxx xxx