Atilla Arkin vs. Merrill Lynch Philippines, Inc.

[SEC-SICD * CASE NO. 3296. December 6, 1991.] ATILLA ARKIN , complainant , vs . MERRILL LYNCH PHILIPPINES, INC., ET AL. , respondents . D E C I S I O N For consideration is the complaint filed by Atilla Arkins, seeking the enforcement of his rights and for redress of the violations committed against his privileges/rights as a trader. Complainant invokes Section 5(a) of Presidential Decree No. 902-A, particularly devices or schemes employed by the board of directors, business associates, or officers amounting to fraud detrimental to the interest of the public and for violations by the respondents of the Revised Securities Act as well as the Rules and Regulations Governing Commodity Futures Exchange. dctai Complainant alleges, among others, that in 1986 respondent Merrill Lynch Philippines, Inc., (herein referred to as MLPI) although fully cognizant that it had no futures commodity license obtained from the Securities and Exchange Commission, still continued soliciting future commodities contracts/orders from customers. From June 1986 to May 1987, complainant gave his investments to respondent MLPI which accepted the bank draft, prepared and issued the corresponding receipts to the customers. It was only later that complainant learned that: respondent MLPI was without any SEC license, that MLPI's brokerage operation was deleted from its Articles of Incorporation. Respondent MLPI committed deceitful concealment, false representations, wholesale fraudulent machinations in that complainant was made to pre-sign agreement/standard blank forms/documents from it. At times, complainant was given a copy of such pre-signed papers while other papers were not furnished to him. Complainant, therefore, prays that judgment be rendered in his favor and against the respondents as follows: 1. declaring the solicited trading agreements, contracts, or orders in violation of the Rules and of the Revised Securities Act void ab initio; 2. declaring respondent Merrill Lynch Philippines, Inc., as unlawfully/fraudulently discharging the functions of a future commodities trading broker/merchant/advisor; 3. ordering respondent MLPI to permanently refrain and desist from permitting the aforesaid respondents to remain associated with them in such unauthorized capacity and to pay what the complainant has claimed and proven to have given; 4. imposing upon both respondents the corresponding administrative fines as the evidence may warrant; 5. in the alternative declaring that such agreements/ transactions are voidable by reason of the fraudulent and insidious pattern of activities collectively employed by the respondent; and ordering all respondents to pay and indemnify as a solitary liability the complainant of his total investments he has paid to the MLPI and such damages as the evidence may warrant; 6. issuing a permanent injunction against the respondents. Respondents Merrill Lynch Philippines, Inc., Robert M. Sears, Antonio Luchangco, Teodoro Sazon and Ramon Z. Olivera II through their counsel, as well as respondents Thomas McAdams Deford, Merrill Lynch, Pierce, Fenner & Smith, Inc. through counsel filed their respective motions to dismiss which were both denied. In their answer, respondents Merrill Lynch Philippines, Inc. (MLPI), Robert Sears, Antonio Luchangco, Teodoro D. Sazon and Ramon Z. Olivera II through counsel specifically denied the allegations in the complaint and aver seriatem that Merrill Lynch Pierce Fenner and Smith, Inc. and Merrill Lynch International Bank are not doing business and do not maintain any office in the Philippines much less in the office of MLPI; that complainant never traded in commodity futures but in stocks, stock index options and stock options; that complainant entered into a customer's agreement with Merrill Lynch Pierce Fenner & Smith, Inc. which allowed him to trade on margin shares of stock in the New York Stock Exchange; that he financed his trading in margin by remitting the necessary funds to Merrill Lynch Pierce Fenner & Smith, Inc.; that complainant despite advise that his account would be liquidated if he did not deposit the necessary funds to meet the margin calls being issued to him by Merrill Lynch Pierce Fenner & Smith, Inc., continuously traded on margin without depositing the funds to meet the margin call. The main basis of contention revolves on whether or not Merrill Lynch Philippines, Inc. (MLPI) acts as a subsidiary corporation in behalf of Merrill Lynch Pierce Fenner and Smith, Inc. or is the former a mere servicing agent of the latter. From the testimonial and documentary evidence adduced in the hearing, the Hearing Panel finds that MLPI is an affiliate or a subsidiary of MLPFS, the principal. MLPI rendered acts and services of obtaining/soliciting orders from customers like the complainant herein and transmitting these orders to its principal corporation MLPFS. The activities of MLPI disclosed that it solicited customers' orders from trading in commodity futures through an office form called "order tickets". These orders are transmitted by MLPI to Merrill Lynch Pierce Fenner and Smith International New York, U.S.A. (Exh. "T-2"). Such act of relaying orders performed by the respondent MLPI to MLPFSI are acts of solicitations of commodity futures merchant broker (Exh. "T-3"), MLPI acting as the affiliate of the parent foreign corporation MLPFSI. MLPI is not a mere servicing agent because as found by the SEC Field Audit and Financial Division's initial investigation on June 1986, it accepts trade or orders from customers through the financial consultants who are regular employees of the company and are duly licensed as such or as account executives by the Commodity Futures Trading Commission. The properly accomplished order tickets are sent by the financial consultants to the Wire Room a division of MLP Operations Department where these are directly transmitted by computer to its clearing arm in New York, USA Merrill Lynch, Inc. The floor broker at the clearing house sends back to MLPI the confirmation of the trades or orders via computerized channel also. Upon receipt of the confirmation, the financial consultants relay the same to their customers immediately by telephone while a form called Trade Confirmation is formally delivered later by a messenger to a stipulated address of said customers. Thus, MLPI is subsidiary corporation of the respondent parent corporation MLPFSI. Although parent-subsidiary corporations are considered separate and distinct from each other, the fact that MLPI receives all official communications for and in behalf of MLPFSI and subsequently relays the same to the latter as its principal, the summons issued to the latter through its local agent MLPI is sufficient for this Commission to acquire jurisdiction over the juridical entity of this foreign corporation. Therefore, a subsidiary or auxiliary corporation which is created by a parent corporation merely as an agency for the latter will be regarded as identical with the parent corporation. (La Campana Coffee Factory, Inc. vs. Kaisahan Ng Mga Manggagawa Sa La Campana, et al., L-5677, May 25, 1953) Corollary to this main issue is whether MLPI is a commodity futures broker or a mere trading advisor. Evidence indicates that in the Memorandum dated June 6, 1986 by the Field Audit and Financial Analysis Division of the Brokers & Exchanges Department, SEC (Exh. "U"), it has been inferred that a Commodity Trading Advisor is only allowed to engage in the following activities: LLphil "1. Advising, either directly or through publication or writings, other persons 1.1. as to the value of commodities 2.2. as to the advisability of trading in any commodity for future delivery, subject to the rules of the particular commodity futures exchange. 2. Issues or promulgates analysis or reports concerning commodities;" and that said Advisor shall derive his compensation or profit only from such advises, analyses and reports. However, based on the Audit Findings of this above-mentioned SEC FAFAD, MLPI is not a mere Commodity Trading Advisor confined to advising activities but in reality a Commodity Futures Broker accepting trades or orders from customers through their financial consultants by accomplishing a form known as Order Tickets earlier mentioned. All the complete requirements are sent to the principal broker in New York which is Merrill Lynch Pierce Fenner & Smith International, Inc. who would in turn, assign computerized account numbers for each client. Moreover, the income of MLPI is paid by their principal broker Merrill Lynch Pierce Fenner & Smith Int'l., Inc. Thus, MLPI being a commodity futures broker is an agent of their New York principal MLPFSI. Indeed, there is a grave violation of the terms and conditions imposed by this Commission when the license to operate as a Commodity Trading Advisor was granted on November 19, 1985. Moreover, according to the complainant, "Because the trading hours in New York comes in night time so from 9:30 in the morning, night time up to 4:00 in the morning, there are two personnel in the office of Merrill Lynch Philippines. Inc. in Pacific Bank Building, Ayala Avenue, Makati, Metro Manila to accept the order and to confirm the purchase . (TSN February 29, 1988, pp. 45-49) Indeed, these acts of accepting the order and confirming the purchase are not within the ambit of a Commodity Trading Advisor but by a Commodity Futures Broker. Another point being considered is whether or not there was fraud committed in the liquidation of petitioner's account. Evidence discloses that complainant was given a signature card (Exh. "6") of MLPFSI which he signed to open a Merrill Lynch New York account. Moreover, he was given an account number to commence depositing funds in MLPFSI using such account number. (TSN November 9, 1988, pp. 15-20) Complainant placed his order with MLPFSI through MLPI by way of telex direct to New York (TSN December 17, 1990, pp. 5-7). In turn, MLPSI sent confirmation orders of the complainant as shown by Exhs. JJJ-1 to JJJ-4. Thus, the liquidation made by respondent MLPI of complainant's investment based solely on respondent Robert Sears' computation attached to his September 29, 1987 letter marked as Exh. "0" is not justified. Respondent MLPFSI with whom complainant entered into contract, should have sent a formal communication to the complainant, explaining such liquidation of the latter's investments. dctai Another relevant controversy to resolve is whether or not complainant traded on commodities futures contracts, with MLPFSI through MLPI. Complainant repeatedly pointed out and respondents admitted that complainant purchased and traded on margin, stock options, and stock index options with MLPSI. Complainant substantially proved his allegation by presenting Exhs. KKK up to KKK-17 which were receipts issued by MLPI's cashier. From the mails, complainant received Statements of Security Accounts from MLPFSI which confirmed all the payments made by the complainant. Complainant further invested in Future Expansion Plan, a kind of commodity futures as indicated by Exhs. "AAA", "BBB", "CCC", "DDD" and "GGG". He invested the amount of $10,000.00 on Future Expansion Plan as shown by the Futures Expansion Plan Monthly Statements (Exh. "HHH") and by the Confirmation Letter of Roger G. Faux, Jr., President of Merrill Lynch Options/Futures Management, Inc. with office at New York, U.S.A., marked as Exh. "III". Lastly, on the matter of whether the complaint against the individual respondents is meritorious, this Hearing Panel finds that they have not acted in excess of the authority given to them by respondent MLPI. Neither was there any allegation that as in the case of respondent Sazon, he acted for an undisclosed principal. The pertinent provision, Article 1897 of the Civil Code, succinctly states: "The agent who acts as such is not personally liable to the party with whom he contracts, unless he expressly binds himself or exceeds the limits of his authority without giving such party sufficient notice of his powers." No evidence could substantiate any personal liability of respondent Sazon. Respondent Sazon's contacts with complainant were restricted to his official duties as an officer of MLPI. As an officer of MLPI, respondent Sazon was an agent who is not personally liable under existing laws. PREMISES CONSIDERED, judgment is hereby rendered in favor of the complainant and against the respondents Merrill Lynch Philippines, Inc. and Merrill Lynch, Pierce, Fenner & Smith, Inc. declaring these above-mentioned transactions void by reason of fraudulent activities employed by the said respondents and ordering these respondents to indemnify the complainant of the total investments he has paid to the MLPI. No pronouncement as to costs. SO ORDERED. (SGD.) JOSEFINA L. PASAY-PAZ Director (SGD.) ENRIQUE L. FLORES, JR. (SGD.) MANUEL P. PEREA Hearing Officer Hearing Officer