Remedios S. David vs. Onapal Philippine Commodities, Inc.

[SEC-SICD * CASE NO. 3535. September 26, 1990.] REMEDIOS S. DAVID , complainant , vs . ONAPAL PHIL. COMMODITIES, INC. , respondent . D E C I S I O N This is an action for: (1) annulment of the Trading Contract entered into by and between the petitioner and the respondent on February 16, 1988; (2) recovery or return of investment in the amount of TWO HUNDRED TWENTY TWO THOUSAND EIGHT HUNDRED SEVENTY PESOS (P222,870.00); and (3) damages. Complainant alleged, inter alia, that respondent is a duly organized corporation engaged in the business of a commodity futures broker: that sometime in February 1988, respondent, thru Reginald Lomotan, solicited and persuaded her to trade in commodity futures; that in the process of soliciting and persuading her to trade in commodity futures, Reginald Lomotan, a co-employee of her husband, represented himself as having undergone extensive training in futures trading and was thus qualified and authorized to solicit accounts for respondent and he even told her that she can easily make profits since futures trading is not risky and even middle income persons like her can afford it considering that only a minimum deposit of FIFTY THOUSAND PESOS (P50,000.00) is necessary to open an account and start trading; that said deposit and/or profit is withdrawable anytime; that thinking that the representations of Reginald Lomotan were indeed true and correct, complainant opened an account with respondent on February 19, 1988; that at the time she opened her account, Jose Cardenas, an officer of respondent, was introduced to her; that Jose Cardenas represented himself to be an expert and good trader so that he was made to manage complainant's account and the latter was required to issue a Special Power of Attorney appointing the former as the latter's attorney-in-fact who will do the trading for her by placing the buy and/or sell orders; that the number given to complainant's account was 2114 and the code name given was Berbil Bill; that complainant's initial margin deposit of P50,000.00 was immediately traded on the day it was deposited; that complainant was later required to periodically make additional margin deposits in various amounts to support her trading positions which were then incurring losses; that complainant was able to deposit and invest the total amount of TWO HUNDRED TWENTY TWO THOUSAND EIGHT HUNDRED SEVENTY (P222,870.00) PESOS, which amount was totally wiped out as of November 1988; that complainant had later on realized that fraud, bad faith, deceptions and gross misrepresentations were perpetrated on her by respondent as gleaned from the following: a. Respondent allowed, if not required, Reginald Lomotan, an unlicensed investment consultant/account executive, to solicit accounts particularly that of complainant; b. Respondent, through Reginald Lomotan, deceived complainant by not telling her the truth that the initial minimum marginal deposit required is P100,000.00 and not P50,000.00; and, c. Complainant's account violated condition No. 18 of the Order renewing the license of respondent since it is a managed account. that in a discussion with Reginald Lomotan, complainant was told that it has been the practice of respondent to allow, tolerate, encourage and even require its unlicensed salesmen, solicitors or investment consultants to solicit and trade futures contracts, without properly informing the said "unlicensees" of the necessity of a SEC license and the consequences of illegal solicitations and tradings; that complainant was defrauded and deceived by respondent through their employment of fraudulent schemes, devices and means that are in violation of the legal requirements and rules of the Commission; and, that due to the deceptions, misrepresentations, fraud and bad faith of respondent, complainant suffered sleepless nights, mental anguish, wounded feelings and serious anxiety and was likewise constrained to hire the services of a lawyer. Respondent, in its amended answer, denied all the material allegations in the amended petition and alleged, among others, that Reginald Lomotan merely referred the complainant to Jose Cardenas, a licensed trader; that Jose Cardenas was a former employee of respondent and trader of complainant; that complainant willingly, knowingly and voluntarily signed the special power of attorney appointing Jose Cardenas as her attorney-in-fact; that the transactions undertaken by Jose Cardenas is with the knowledge and consent of complainant; that complainant was required to make additional margin deposit periodically in accordance with the provision of paragraph 1 (b) of the Rules for Commodity Futures Trading incorporated in the trading contract; that pursuant to the trading contract and other documents relative thereto, respondent traded in behalf of the complainant and that whatever loss the latter may incur is a normal occurrence in the ordinary course of business; that complainant deposited and invested the total amount of P268,120.00 broken down as follows: February 19, 1988 P50,000.00 February 27, 1988 50,000.00 March 16, 1988 43,050.00 March 31, 1988 30,200.00 June 02, 1988 50,000.00 August 4, 1988 44,750.00 August 12, 1988 120.00 P268,120.00 ========= that the total withdrawals of complainant were as follows: March 10, 1988 P14,000.00 August 12, 1988 30,000.00 November 24, 1988 1,250.00 P45,250.00 ========= that complainant was informed that the minimum margin deposit requirement is P100,000.00, however, she verbally requested that trading of her account be started immediately in order to take advantage of the investment opportunity through the short margin system with a commitment that the balance of P50,000.00 will be paid in a week's time which she did on February 26, 1988; that the Special Power of Attorney executed by complainant appointing Jose Cardenas as her attorney-in-fact is a personal act between complainant and Jose Cardenas; that respondent strictly complied with the regulation that only employees duly licensed by the Commission are allowed to solicit and trade in commodity futures; that solicitations for investors conducted by unlicensed employees could not have been made with the full knowledge and consent of the respondent; that if there be any unlicensed employee who solicited investment with the knowledge and consent of the respondent, such employee could have been allowed to do so upon his/her misrepresentation as being licensed by the Commission when he applied with respondent; that respondent is duly authorized to engage in the business of a broker in commodity futures and its business is being conducted legally in accordance with established business practices; that on February 16, 1988 complainant and respondent executed a trading contract and applying the Rule for Commodity Futures Trading, whereby respondent was appointed by the complainant as her broker; that in an acknowledgment executed on February 16, 1988, complainant acknowledged the receipt of her copy of the trading agreement and that she has read and understood its contents as well as the risk disclosure statement and that she executed the same freely and voluntarily; that on February 16, 1988, complainant also signed the risk disclosure statement and executed a special Power of Attorney in favor of Jose Cardenas authorizing him to take charge of her account 2114 with respondent; that in view of the special power of attorney, respondent has been authorized by complainant to trade her account with respondent and these transactions were made with the knowledge and consent of complainant; that complainant received the Confirmation of Contract and Balance Sheet for each of the trading transactions on her account but she did not file any protest or objection to any of these transactions when they had the opportunity to do so, and, that by reason of the filing of the instant case, respondent was compelled to litigate and engage the services of counsel for an agreed fee of P150,000.00. On June 20, 1989, the preliminary conference was terminated and the parties have agreed that the issues to be resolved are: 1. Whether or not the trading contract entered into by and between respondent and complainant is null and void; 2. Whether or not respondent allowed an unlicensed investment consultant, solicitor or salesman to the solicitation of the complainant's account and of trading the same; 3. Whether or not respondent misrepresented to the complainant that the initial investment necessary to invest in commodity futures is P50,000.00 only and not P100,000.00 as required by this Commission; 4. Whether or not respondent violated Condition No. 18 of the order renewing its license to operate by its having allowed a managed account which was the account of the complainant; and 5. Whether or not Complainant is entitled to moral and exemplary damages and attorney's fees. This case was originally instituted by the complainant against the herein respondent and Messrs. Reginald Lomotan and Jose Cardenas. However, for one reason or another, Messrs. Reginald Lomotan and Jose Cardenas were dropped as party-respondents thereby leaving Onapal Phil. Commodities, Inc. as the sole respondent in this case. Complainant, aside from presenting documentary evidence, presented herself, her husband Alfredo L. David and Reginald Lomotan as her witnesses to prove the allegations in her amended complaint. On the other hand, respondent presented some documentary evidence but failed to present any single witness to support its defenses and counterclaim. Hence, all the testimonies of complainant's witnesses remain unrefuted. As culled from the records and the evidence presented, it appears that sometime in February 1988, Reginald Lomotan, then an employee of the respondent and who was allowed and required by the latter to solicit accounts (TSN., September 6, 1989, p. 42), had enticed the complainant to invest in commodity futures trading by misrepresenting to the complainant that he is an authorized solicitor, salesman or investment consultant of respondent. Reginald Lomotan told and explained to the complainant that commodity futures trading is a form of investment wherein an investor could easily make money by investing a minimum of P50,000.00 which is the required amount to open an account. Having been convinced by Reginald Lomotan, complainant agreed to invest in commodity futures trading. Thus, on February 19, 1988 at the office of the respondent, complainant, in the presence of Reginald Lomotan, was made to sign the Trading Contract (Exhs. "A" and "I") which was antedated to February 16, 1988. On the very same day of the signing of the Trading Contract (Exhs. "A" and "I"), complainant made an initial deposit of P50,000.00 (Exh "B") and opened her account No. 2114 with code name "Berbil Bill". Likewise, on the same day, respondent had traded complainant's account even if the initial deposit was only P50,000.00 (Exhs. "D" and "11"). In the course of her trading in commodity futures with respondent, complainant was required to make additional deposits. However, her total net deposit of P222,870.00 was totally wiped out. From the foregoing facts alone, it could readily be deduced that respondent was guilty of fraud and misrepresentation in securing complainant's investments which would warrant the nullification of the Trading Contract (Exhs. "A" and "1"). Thus, Articles 1390 and 1338 of the Civil Code of the Philippines (Civil Code, for short) provides: "ARTICLE 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: xxx xxx xxx (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud . (Emphasis supplied) "ARTICLE 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to." Otherwise stated, in order that fraud may vitiate consent and be a cause for annulment of a contact, the following requisites must concur: 1. It must have been employed by one contracting party upon the other (Article 1342 and 1344, Civil Code ); 2. It must have induced the other party to enter into the contract (Art. 1338, id.); 3. It must have been serious (Art. 1344, id..); and, 4. It must have resulted in damage or injury to the party seeking annulment (Butte vs. Ong Sui Nui (C.A.), 51 Off. Gaz. 5704, Nov., 1955). All the aforesaid requisites for the annulment of a contract are present in the instant case. On the issue of whether or not respondent had allowed an unlicensed investment consultant, solicitor or salesman to do the solicitation of complainant's account and of trading the same, Reginald Lomotan, an unlicensed investment consultant (TSN., September 6, 1989, p. 19), testified that he was allowed and required by the respondent to solicit accounts (TSN., September 6, 1989, p. 42). Thus, in the process of soliciting accounts, he solicited and enticed the complainant to invest in commodity futures trading. Not only that, Reginald Lomotan even traded the account of complainant. He testified that he was the one who accomplished the Selling Order Form dated February 29, 1988 (Exh. "L"). Buying Order Form dated March 1, 1988 (Exh. "M") and Selling Order Form dated February 23, 1988 (Exhs. "N" and "23"). Reginald Lomotan clarified in his testimony that although he was the one who prepared or accomplished the aforesaid forms (Exhs. "L", "M", "N" and "23"), he did not sign them because he was not a licensed investment consultant. Instead, he had said forms signed by Jose Cardenas who was then a licensed investment consultant of respondent. LexLib Apropos the third issue, it is clear that the respondent was equally guilty of misrepresentation with that of Reginald Lomotan. Although it was Reginald Lomotan who actually made such misrepresentation that the initial investment necessary to invest in commodity futures trading is P50,000.00 only and not P100,000.00 as required by the Commission, it is a fact that respondent did not do anything to correct such misrepresentation. In fact, respondent had tolerated and allowed the complainant's account to be traded even if it had knowledge that the latter's initial deposit was only P50,000.00. Verily, respondent has not acted in good faith in having allowed the complainant's account to be traded in the market. In so doing, respondent has likewise not afforded justice to complainant. Thus, Art. 19 of the Civil Code states: "Every person must in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." Likewise, as shown from the evidence presented, both documentary and testimonial, this Hearing Officer believes that respondent, as well as Reginald Lomotan, could possibly be charged by the Commission, through its Brokers and Exchanges Department, for having violated the Revised Rules and Regulations on Commodity Futures Trading of the Commission, approved by the Monetary Board, Central Bank of the Philippines on November 13, 1987 and promulgated by the Commission on December 15, 1987. Section 20 re licensing of person associated with futures commission merchants, Section 26 and 27 re margin, and deposit requirements and Section 28 re prohibited acts of said Rules read: "SECTION 20 . Licensing of person associated with futures commission merchants . It shall be unlawful for any person to be associated with any futures commission merchant as a partner, officer or employee (or any person occupying a similar status or performing similar functions) in any capacity which involves (a) the solicitation or acceptance of customers orders (other than in a clerical capacity) or (b) the supervision of any person or persons so engaged unless such person shall have been registered/licensed by the Commission and such license shall not have expired nor been suspended or revoked, and it shall be unlawful for any futures commission merchant to knowingly permit such person to become or remain associated with him in such capacity." "SECTION 26 . Initial and Maintenance Deposit . There must be an initial deposit of not less than P100,000.00 to open an account before any customer can place an order. If the customer losses, he can be allowed to continue trading provided that his remaining deposit is not less than P50,000.00 otherwise he must put in additional money to bring his deposit up to P50,000.00." "SECTION 27 . Margin Requirements . The margin on each futures contract must not be less than the minimum margin set by the Commission in accordance with these Rules. . . .". "SECTION 28 . Prohibited Acts . It shall be unlawful for any person to engage in any futures transaction, or solicit, accept orders, or act as a conduit without being duly authorized by either the SEC or the commodity futures exchange under the existing rules." It must likewise be noted that pursuant to the respondent's Renewal of License as Commodity Futures Commission Merchant/Broker, all contracts traded by any unlicensed salesman of respondent shall be considered null and void. With respect to the fourth issue, that is, whether or not respondent violated condition No. 18 of the Order renewing its license to operate by its having allowed a managed account which was the account of the complainant, suffice it to say that no substantial proof has been adduced to prove the same. A managed account is an account of a client over which a member exercises trading authority or control. Applying this definition to the instant case, it is simply an account of the complainant over which the respondent exercises trading authority or control. In this case, while it is true that respondent had exercised trading authority or control over complainant's account, the same was made possible by virtue of the execution by the complainant of a Special Power of Attorney (Exhs. "C" and "4"), duly notarized by a Notary Public, authorizing Jose Cardenas then a licensed investment consultant of respondent to handle complainant's account, including placing orders and trading transactions and related acts, the validity of which she failed to challenge. Anent the complainant's claim for moral and exemplary damages, the same needs no further discussion since it could not be awarded in the light of the recent ruling of the Court of Appeals in the case of Augusto Padilla et al., vs. Securities and Exchange Commission, et al., C.A.-G.R. SP No. 18630, promulgated on February 1, 1990, which states: "We are aware of the fact that the Securities and Exchange Commission has adopted the practice of awarding actual and other kinds of damages without protest or objection on the part of litigants. However, as explained above, we believe such practices to be unauthorized and illegal." With regard to complainant's claim for attorney's fee, complainant had testified that she has an agreement with her counsel for her to pay P50,000.00 as attorney's fee. This hearing Officer believes that a reasonable amount of attorney's fee should, at least, be awarded to the complainant to compensate her for the amount that she has paid her lawyer who had devoted time and effort in prosecuting her case with the Commission. ACCORDINGLY, judgment is hereby rendered: 1. Declaring as null and void the Trading Contract entered into by and between complainant and the respondent; 2. Declaring as null and void all the trading transactions undertaken by the respondent or its agent in behalf of the complainant; 3. Ordering the respondent to pay the complainant the sum of P222,870.00 Philippine Currency, plus legal rate of interest from the date the instant case was filed until fully paid; and, 4. Ordering the respondent to pay the complainant the sum of P10,000.00 as attorney's fee. Let a copy of this Decision be furnished the Brokers and Exchanges Department for its appropriate action. SO ORDERED. (SGD.) ROLANDO C. MALABONGA Hearing Officer