In re Eco Hatchery and Trading Corp.

April 23, 2021 ENFORCEMENT AND INVESTOR PROTECTION DEPARTMENT SEC EIPD Case No. 2021-3119 IN THE MATTER OF: ECO HATCHERY AND TRADING CORPORATION COMPANY REGISTRATION NO. CS201953681 FOR : Revocation of Certificate of Incorporation for Violation of the Revised CorporationCode of the Philippines (R.A.11232) in Relation to Sections 8.1, 28.1 and 26.1 of the SecuritiesRegulation Code (R.A.8799) and Section 6 i (2) of PresidentialDecree No. 902-A for Serious Misrepresentation as to what the corporation can do to the Great Prejudice of or Damage to the General Public ORDER OF REVOCATION This refers to ECO HATCHERY AND TRADING CORPORATION , a stock corporation registered with the Commission on 08 July 2019 under Company Registration No. CS201953681. Its principal office address is at Unit 208, Vinia Residences, Versaflat Street, EDSA Avenue, Brgy. Philam, Quezon City. Its primary purpose is: "To engage business on prawn, shrimp, crab, any sea food and any kind of fishing production in any form with the use of any equipment, instrument, machinery, whether deep sea, fresh water or inland fishing or in the culture of prawns, fish and other marine products in ponds or otherwise, operate fishponds, fishpens, fishery rights and salt beds; to own hold, improve, develop a fishponds, fishpens; to engage in the general prawn, fish culturing and salt production business and in the marketing and trading of all products thus produce and catch, gather, store, handle, purchase and sell prawns, fish and other marine products and to do all acts necessary and related to the exercise of corporate power, within or without the Philippines." While the secondary purposes of ECO HATCHERY AND TRADING CORPORATION as stated in its Articles of Incorporation are: "1. To raise capital or borrow money from not more than nineteen (19) lenders including its stockholders, to meet the financial requirements of its business. 2. To acquire by purchase, exchange, assignment, gift or otherwise, and to hold, own, and use for investment or otherwise, and to sell, assign, transfer, exchange, lease, let, develop, mortgage, pledge, traffic, deal in and with and otherwise operate, enjoy and dispose of real and personal properties of every kind and description and wherever situated, as and to the extent permitted by law, to invest in other companies and enter into joint venture agreements with any company, partnership, persons or government entities, domestic or foreign, for the advancement of its interest, including but not limited to shares of capital stocks, bonds, debentures, promissory notes or other securities or obligations, created, negotiated or issued by any corporation, association, or domestic entities, and real estates, whether improved or unimproved, any interest or right therein as well as buildings, tenement, warehouse, factories, edifice and structures and other improvements and while the owner, holder or possessor thereof, to exercise any and all rights, powers and privileges or any other interest therein. 3. To establish and operate branch offices or agencies to carry out any or all of its operations and business without restriction as to place or amount; and 4. To do and perform all acts and things necessary or incidental to the accomplishment of the foregoing purposes or the exercise of any or all the powers of a corporation for the benefit of this corporation and its stockholders. Provided that the corporation shall not solicit, accept or take investments/placements from the public neither shall it issue investment contracts ." (Emphasis supplied.) The instant case stemmed sometime in July 2019 when the Commission has received information that individuals or group of persons representing an entity named ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION is enticing the public to invest in said entity. Based on the reports from the public and as posted in Facebook (FB), ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION is enticing the public to invest in the said entity with a promise of earning 15% every 15 days for a period of 4 months. Below are some of the FB posts: An investigation conducted by this Department shows that ECO HATCHERY AND TRADING CORPORATION is registered with the Commission on 8 July 2019 under Company Reg. No. CS201953681. An online search likewise shows posting of the SEC Certificate of Incorporation of ECO HATCHERY AND TRADING CORPORATION in its FB account as a way of enticing the public to invest in the said entity, as shown below: On 5 September 2019, the EIPD conducted an ocular inspection and surveillance operation of ECO HATCHERY at the office address provided in its FB posts which is located at Unit 208, Vinia Tower, Brgy. Philam 1, EDSA, Quezon City. The EIPD noted that said address is also the same address indicated in the Articles of Incorporation of ECO HATCHERY AND TRADING CORPORATION . Upon inspection, the EIPD team was informed by the security guard at the lobby that ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION occupied the said office but was closed at the time. To determine whether ECO HATCHERY has secured a business permit, the EIPD verified with Barangay Philam, Quezon City which issued a Certification dated 5 September 2019, that according to the records of their office, ECO HATCHERY did not apply for a business permit at Barangay Philam. Per records of the Commission, ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION is not authorized to solicit investments from the public as it did not secure prior registration and/or license to solicit investment from the Commission as prescribed under Section 8 of the Securities Regulation Code. This is evidenced by the Certifications issued by the concerned departments of the Commission, Company Registration and Monitoring Department, Corporate Governance and Finance Department and Markets and Securities Regulation Department. Consequently, on 3 February 2020, the Commission issued an SEC Advisory informing the public that ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION : x x x is not authorized to solicit investments from the public as this entity did not secure prior registration and/or license to solicit investment from the Commission as prescribed under Section 8 of the Securities Regulation Code (SRC). x x x the public is advised to STOP INVESTING in the investment scheme being offered by the said entities and by ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION x x x Despite the issuance of a public warning by this Commission, ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION did not bother to react, much less refute the issued Advisory against it. On 26 February 2021, a Show Cause Order was issued against ECO HATCHERY AND TRADING CORPORATION addressed to the company's registered principal office address, and to its stockholders-directors-incorporators, namely; Jose Marie Baquiran, Symphony S. Mondragon, Abner A. Pacheco, Lorenzo N. Mendez and Stephen R. Cervantes, directing the company to show cause why its Certificate of Incorporation should not be revoked for serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public and to show cause why no administrative sanction and/or criminal charges should be filed against ECO HATCHERY AND TRADING CORPORATION and/or its incorporators, directors and officers for violation of the Securities Regulation Code. On 11 March 2021, the team went to the declared address of Jose Marie Baquiran, Symphony S. Mondragon and Stephen Cervantes to serve the Show Cause Order. However, the team was not able to properly serve the said Order, since the declared addresses of the abovementioned incorporators were found to be wrong addresses. On 12 March 2021, the team proceeded to the purported address of Lorenzo N. Mendez to serve the Show Cause Order but the Order was not properly served since declared address of Lorenzo N. Mendez was found to be a wrong address. On 15 March 2021, the team went to the declared address of Abner A. Pacheco to serve the Show Cause Order, but was not able to successfully serve the same since his declared address was also found to be a wrong address. On the same date, the team proceeded to the declared principal office of the company located at Unit 208, Vinia Residences, Versaflat Street, EDSA Avenue, Brgy. Philam, Quezon City. However, the Show Cause Order was not properly served since the team was informed that the tenant company has already moved out of the building. Hence, we now resolve the instant proceedings on the basis of available evidence. Clearly in this case, the marketing and/or compensation plan of ECO HATCHERY shows that its main strategy is to earn from recruitment, although presented in the guise of running a prawn, shrimp, crab and fish farm, it would appear that the promised profits and returns would derived from the investments of ECO HATCHERY's new member/investors. Necessarily, these scheme is unsustainable, as it must rely on a continuous inflow of new investors in order to make payouts to earlier investors. Evidently, the compensation plan of promising investors with "high return of investment" or earnings of 15% every 15 days for a period of 4 months being offered by ECO HATCHERY to the public, partakes of the nature of securities in the form of an investment contract. Section 3.1 of the Securities Regulation Code (SRC) defines securities as shares, participation or interest 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 stocks, bonds, debentures, notes, evidences 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; (c) Fractional undivided interests in oil, gas or other mineral rights; (d) Derivatives like options and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (f) Proprietary or non-proprietary membership certificates in corporations; and (g) Other instruments as may in the future be determined by the Commission. An investment contract on the other hand, is defined under SRC Rule 26.3.5 of the 2015 Implementing Rules and Regulations of the Securities Regulation Code (2015 SRC IRR) as follows: "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. 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." Further, the elements of an investment contract were enumerated in the case of Power Homes Unlimited Corporation vs. SEC (G.R. No. 164182, February 26, 2008) traced from the case of SEC vs. Howey Co. (66 S.Ct. 1100, May 27, 1946) and was later modified in the case of SEC vs. Glenn W. Turner Enterprises, Inc. (474 F.2d 476, February 1, 1973), as follows: A contract, transaction or scheme An investment of money A common enterprise Expectation of profits Profits arises primarily from the entrepreneurial and managerial efforts of others Section 8, in relation to Section 12 of the SRC provides that: "SEC. 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. "SEC. 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 sworn Page 11 of 14 registration statement with respect to such securities, in such form and containing such information and documents as the Commission shall prescribe. The registration statement shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3 and 8.4." Securities such as investment contract as defined by the SRC and in relation to SRC Rule 26.3.5 of the 2015 SRC IRR must be registered with the Commission pursuant to Sections 8 and 12 of the SRC before the same can be offered or sold for distribution. Rule 3.1.17 of the 2015 SRC IRR defined Public Offering as any offering of securities to the public or to anyone, 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: 3.1.17.1. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or any part thereof; 3.1.17.2. Presentation in any public or commercial place; 3.1.17.3. Advertisement or announcement on radio, television, telephone, electronic communications, information communication technology or any other forms of communication ; or 3.1.17.4. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or to prospective purchasers through the postal system, information communication technology and other means of information distribution . (Emphasis supplied) On the other hand, a "Broker" is defined under Section 3.3. of the SRC as a person engaged in the business of buying and selling securities for the account of others. "Salesman" is defined under 3.13 of the SRC as a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities. Consequently, Section 28 of the SRC provides that: "SEC. 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." Thus, persons without proper registration or license from the Commission who act as brokers or agents of a company selling or convincing people to invest in the investment scheme including solicitations or recruitment through the internet may likewise be prosecuted and held criminally liable under Section 28 of the SRC and penalized with a maximum fine of Five Million pesos (P5,000,000.00) or penalty of Twenty-One (21) years imprisonment or both pursuant to Section 73 of the SRC. In this particular case, the Department carefully examined the characteristics of the investments offered by ECO HATCHERY to determine if they satisfy the elements of an investment contract. In our evaluation, indeed, the elements of investment contracts are manifested in the investments being offered by ECO HATCHERY which are as follows: By investing in the company, the investor enters into a contract ; There is a placement of money from the public as they are enticed to invest in the company that represented to be engaged in a lucrative business; The money invested is placed in a common enterprise ; The investors expect to derive profits as they are primarily attracted to join ECO HATCHERY for a promise of earning 15% every 15 days for a period of four (4) months; and The investors expect to earn profits derived primarily from the efforts of others or from ECO HATCHERY's new member/investors. Further, it is important to emphasize that ECO HATCHERY AND TRADING CORPORATION as a juridical person, is only allowed to exercise powers inherent to its corporate existence as provided in the Revised Corporation Code of the Philippines and those conferred in its Articles of Incorporation (AOI). In other words, what a corporation can do is necessarily circumscribed by its primary purpose clause in its AOI. In ECO HATCHERY AND TRADING CORPORATION 's Articles of Incorporation as approved by the Commission, it is clearly provided that the business of the subject company is: Primary purpose: "To engage business on prawn, shrimp, crab, any sea food and any kind of fishing production in any form with the use of any equipment, instrument, machinery, whether deep sea, fresh water or inland fishing or in the culture of prawns, fish and other marine products in ponds or otherwise, operate fishponds, fishpens, fishery rights and salt beds; to own hold, improve, develop a fishponds, fishpens; to engage in the general prawn, fish culturing and salt production business and in the marketing and trading of all products thus produce and catch, gather, store, handle, purchase and sell prawns, fish and other marine products and to do all acts necessary and related to the exercise of corporate power, within or without the Philippines. Secondary purposes: 1. To raise capital or borrow money from not more than nineteen (19) lenders including its stockholders, to meet the financial requirements of its business. 2. To acquire by purchase, exchange, assignment, gift or otherwise, and to hold, own, and use for investment or otherwise, and to sell, assign, transfer, exchange, lease, let, develop, mortgage, pledge, traffic, deal in and with and otherwise operate, enjoy and dispose of real and personal properties of every kind and description and wherever situated, as and to the extent permitted by law, to invest in other companies and enter into joint venture agreements with any company, partnership, persons or government entities, domestic or foreign, for the advancement of its interest, including but not limited to shares of capital stocks, bonds, debentures, promissory notes or other securities or obligations, created, negotiated or issued by any corporation, association, or domestic entities, and real estates, whether improved or unimproved, any interest or right therein as well as buildings, tenement, warehouse, factories, edifice and structures and other improvements and while the owner, holder or possessor thereof, to exercise any and all rights, powers and privileges or any other interest therein. 3. To establish and operate branch offices or agencies to carry out any or all of its operations and business without restriction as to place or amount; and 4. To do and perform all acts and things necessary or incidental to the accomplishment of the foregoing purposes or the exercise of any or all the powers of a corporation for the benefit of this corporation and its stockholders. Provided that the corporation shall not solicit, accept or take investments/placements from the public neither shall it issue investment contracts ." (Emphasis supplied.) Nonetheless, the purpose stated in the Articles of Incorporation need not set out with particularity the multitude of activities in which the corporation may engage. The effect of broad purposes or objects is to confer wide discretionary authority upon the directors and management of the corporation as to the kinds of business in which it may engage. However, dealings which are entirely irrelevant to the purposes are unauthorized and called ultra vires . The purpose clause of the articles of incorporation indicates the extent as well as the limitations of the powers which a corporation may exercise. In fact, the purpose in ECO HATCHERY AND TRADING CORPORATION Articles of Incorporation expressly prohibits it to operate an investment-taking scheme. In an opinion, 1 the Commission pronounced that: "It is the corporation's primary purpose clause which confers, as well as limits, the powers which a corporation may exercise and the character of a corporation is usually determined by the objects of its formation and the nature of its business as stated in the articles. The primary purpose of the corporation, as stated in its articles of incorporation, is the first business to be undertaken by the corporation. Hence, the primary purpose determines its classification." Likewise, the Certificate of Registration issued to ECO HATCHERY AND TRADING CORPORATION , explicitly states that: This Certificate grants juridical personality to the corporation but does not authorize it to issue, sell or offer for sale to the public, securities such as but not limited to, shares of stock, investment contracts , debt instruments and virtual currencies without prior Registration Statement approved by the Securities and Exchange Commission nor 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 lending company, and time share, cash share/membership certificate issuers or selling agents thereof nor to operate a fiat money to virtual currency exchange. Neither does this Certificate constitute a permit to undertake activities for which other government agencies require a license or permit. (emphasis supplied) To exacerbate matters, the scheme being offered by ECO HATCHERY/ECO HATCHERY AND TRADING CORPORATION is clearly in the nature of ponzi scheme 2 where the profits or payouts shall be taken from incoming investors or additional pay-ins of existing members-investors considering that it does not have any underlying legitimate business from where it could source its promised return on investments to its investors. Such scheme is prohibited under Section 26 of the SRC: "SEC. 26. Fraudulent Transactions . It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: 26.1. Employ any device, scheme, or artifice to defraud; 26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading; or 26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person." Under Section 6 of Presidential Decree 902-A, the Commission has the power to suspend, or revoke, after proper notice and hearing, the franchise of certificate of registration or corporations, partnerships and associations, on the ground of serious misrepresentations as to what the corporation can do or is doing to the great prejudice of or damage to the general public. Likewise, Section 5.1 (m) of the SRC and Section 179 (j) of the RCCP empower the Commission to revoke the franchise or Certificate of Incorporation/registration of corporations registered with it. Under the 2016 Rules of Procedure of the Securities and Exchange Commission, the EIPD shall exercise authority over persons and entities, whether under the primary authority of other Operating Departments, involved in the following: xxx xxx xxx "1. Investigations and administrative actions involving the following: xxx xxx xxx c) Selling, offering or transacting unregistered securities by entities without secondary license; d) ultra vires acts committed in violation of the Corporation Code. 2. Petitions for revocation 3 of corporate registration in all cases, except those which fall under the original authority of CRMD; 3. Administrative actions for fraudulent transactions involving securities; 4. Administrative actions for all other violations under PD 902-A, except those cases which fall under the original authority of other Operating Departments; and 5. All other matters involving investor protection filed by the public, referred by self-regulatory organizations, or referred by other Operating Departments after initial evaluation or findings that there is a possible violation of laws, rules or regulations that the Commission implements but do not fall under their respective original authority." Further, SEC Admin Case No. 11-10-124 entitled In re: PHILBIO Renewable Energy Resources Corp. , promulgated on 27 April 2016 provides what constitute serious misrepresentation, to wit: "From the foregoing, it is indubitable that PHILBIO misrepresented itself to the public that it can solicit investments despite the fact that it is not one of the purposes of the corporation. Worse, it does not have a license to offer/sell securities. PHILBIO operates an investment-taking scheme which is therefore considered an ultra vires act. These constitute serious misrepresentation as to what the corporation can do or doing to the great prejudice to the general public." Considering that nowhere is it stated in its primary purpose that ECO HATCHERY AND TRADING CORPORATION is authorized to engage in the selling or offering for sale of securities to the public the activity of ECO HATCHERY AND TRADING CORPORATION of selling or offering for sale of investments is considered an ultra vires act and therefore constitute serious misrepresentation. Section 44 of the RCCP provides: SEC. 44. Ultra Vires Acts of Corporations . No corporation shall possess or exercise corporate powers other than those conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the powers conferred. Finally, settled is the rule that any defect in the Articles of Incorporation shall constitute a valid ground to revoke the registration and cancel the certificate thus issued. Hence, the intentional declaration of a false residential address is a glaring defect which is tantamount to fraud in the procurement of the Certificate of Incorporation a ground for the revocation of the issued Certificate of Incorporation under Section 6 i (1) of Presidential Decree No. 902-A. In this instance, all incorporators of ECO HATCHERY AND TRADING CORPORATION , namely, Jose Marie Baquiran, Symphony S. Mondragon, Abner A. Pacheco, Lorenzo N. Mendez and Stephen R. Cervantes have provided wrong addresses as indicated in the company's Articles of Incorporation as validated by EIPD. Thus, the same constitutes fraud in the procurement of registration. 4 WHEREFORE , for violation of Section 44 of the Revised Corporation Code of the Philippines (R.A. 11232) in relation to Sections 8.1, 28.1 and 26.1 of the Securities Regulation Code, P.D. 902-A and Section 179 (j) of the RCCP, the Certificate of Incorporation and the registration of ECO HATCHERY AND TRADING CORPORATION as a corporation, is hereby REVOKED . Accordingly, let this Order be posted at the SEC website and attached by the Corporate Filing and Records Division of the Company Registration and Monitoring Department (CRMD) to the records of the corporation on file with the Commission. Further, the Information and Communications Technology Department (ICTD) of this Commission is likewise requested to enter the "revoked" status of subject corporation in the online database of the Commission. SO ORDERED. Pasay City, April 23, 2021. (SGD.) ATTY. OLIVER O. LEONARDO Officer-in-Charge Enforcement and Investor Protection Department Securities and Exchange Commission Footnotes 1. SEC-OGC Opinion No. 11-33 dated 29 July 2011 addressed to Mr. Jesus B. Lapuz. 2. A Ponzi scheme is an investment program that offers impossibly high returns and pays these returns to early investors out of the capital contributed by later investors. Named after Charles Ponzi who promoted the scheme in the 1920s, the original scheme involved the issuance of bonds which offered 50% interest in 45 days or a 100% profit if held for 90 days. Basically, Ponzi used the money he received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to place their money with him in the false hope of realizing this same extravagant rate of return themselves. (People of the Philippines v. Priscilla Balasa, et al., G.R. 106357, dated September 3, 1998) 3. Revocation refers to involuntary dissolution of corporate registration pursuant to Section 138 of the Revised Corporation Code. 4. Pursuant to a Resolution adopted by the Commission en banc enumerating the grounds constituting fraud in the procurement of registration, i.e. , falsity in any information provided by applicants in the registration documents.