Donald Oclassen, et al. vs. San Miguel Corporation

[SEC-SICD * CASE NO. 3914. August 26, 1996.] DONALD OCLASSEN, ET AL. , petitioner , vs . SAN MIGUEL CORPORATION , respondent . SAN MIGUEL CORPORATION , third-party petitioner , vs . MARK SECURITIES CORPORATION , third-party respondent . MARK SECURITIES CORPORATION , fourth-party petitioner , vs . DANILO HERNANDEZ , fourth-party respondent . D E C I S I O N This is a case for recovery of the 848 SMC class "B" shares of stock dividend, plus the stock and cash dividends accruing thereto, filed by the complainants against respondent SMC. In their complaint and amended complaint, filed on December 3, 1990 and January 24, 1991, respectively, the complainants allege that they are the heirs of the late Evangeline A. Oclassen, a.k.a. E.A. Oclassen ("Evangeline" for brevity), who was a non-resident stockholder of SMC; that the said Evangeline was an American, who died November 27, 1986, and was a resident of 2458 32nd Avenue, San Francisco, California, U.S.A., at the time of her death; that upon inquiry made by Donald Oclassen in the Philippines, sometime in January 1989, the complainants learned that the SMC Stock Certificate No. B003604 of Evangeline (Exhibit "2") was cancelled by SMC, and her 848 shares of stock were sold through Mark Securities Corporation ("Mark"), on December 9, 1988; that the cancellation of the said stock certificate and the sale of the said shares of stock were unauthorized and fraudulent; that Evangeline could not have sold the shares of stock, and her signature-endorsement on the stock certificate was a forgery, because she was already dead when the same happened on December 9, 1988; that had not the said shares been sold, the same could have multiplied to a total of 3,392 shares which was valued at P188,720.00 plus the P5,300.00 cash dividends that were declared by SMC; that the complainants are also entitled to the restoration of Evangeline's 848 shares of stock, plus the stock and cash dividends accruing thereto, including moral damages in the sum of P500,000.00, and exemplary damages of another P500,000.00. In its answer and amended answer, filed on January 18, and March 5, 1991, respectively, SMC maintains that the complainants have no cause of action against it, because the participation of SMC in the transfer of Evangeline's stock certificate, was merely ministerial; that SMC exercised the required diligence in effecting the transfer; that Stock Certificate No. B003604 of Evangeline (Exhibit "2") was sent to her at her residence in San Francisco, California, U.S.A.; that Evangeline personally received the said stock certificate as shown on the acknowledgment stub (Exhibit "3", also complainants' Exhibit "G"), which bears her signature thereon; that as far as the corporate books and records of SMC are concerned, Stock Certificate No. B003604 was not declared and/or reported lost or stolen, nor the fact of death reported to SMC before the same was cancelled on December 9, 1988; that the fact of death of Evangeline was reported to SMC only sometime in January 1989, which was after the said stock certificate was cancelled on December 9, 1988 (Exhibit "9"); that, instead of immediately reporting the death of Evangeline, the complainants misrepresented to SMC that Evangeline was still alive in October 1988, when complainants sent to SMC the October 6, 1988 letter (Exhibit "4", also complainants' Exhibit "b-1"); that Mr. Donald Oclassen admitted that it was her sister, Myra, who signed the name of Evangeline (TSN, January 20, 1993, pp. 19-20), that even assuming for the sake of argument that there was truth to their claim, complainants' cause of action is not against SMC, but against Mark, because it was through Mark's direct participation that Evangeline's shares of stock were sold; that it was also Mark that guaranteed the genuineness of the endorsement/signature of Evangeline on the subject stock certificate, and even instructed SMC's Stock Transfer Office ("SMC-STO") to cancel the traded stock certificate. LLphil SMC filed its third-party complainant against Mark, on January 18, 1991, claiming that sometime in December 1988, Mark delivered to SMC- STO the Stock Certificate No. B003604 of Evangeline (Exhibit "2"), together with Mark's December 6, 1988 transfer instruction letter (Exhibit "7"), directing SMC-STO to cancel the said stock certificate and issue a new stock certificate in lieu of the cancelled one; that the traded stock certificate appeared to be duly signed/endorsed by Evangeline as shown by her signature-endorsement appearing on the reverse side of the stock certificate (Exhibit "2-A") that Mark guaranteed the genuineness of the said signature-endorsement, as shown by the words and phrases "ENDORSEMENT GUARANTEED MARK SECURITIES CORPORATION" stamped on the stock certificate (Exhibit "2-B"); that pursuant to existing jurisprudence, and SEC rules and regulations, the clause "endorsement guaranteed" means that Mark guaranteed the genuineness of the traded stock certificate, and Evangeline's signature thereon, and that Mark is liable accordingly on its guarantee; that the words and phrases "endorsement guarantee" (Exhibit "2-B), and the December 6, 1988 transfer instruction letter (Exhibit "7") given by Mark, were all that were needed for SMC-STO to cancel the traded stock, record on its corporate books the transfer of ownership, and issue new stock certificate in lieu of the cancelled one; that, nevertheless, before complying with the said transfer instructions, SMC-STO, in the exercise of prudence, proceeded to check from its corporate books and records, and from the specimen signature card of Evangeline (Exhibits "8" and "8-A):) i)if the traded stock certificate was reported lost or stolen, under garnishment or pledge, or had existing lien; and, ii) if the signature of Evangeline on the traded stock certificate was similar to or had semblance of similarity with her specimen signatures; that this process is called post-verification which is done after SMC-STO received from the broker, like Mark, the duly endorsed stock certificate that was already traded in the stock market; that the said post-verification is evidenced by the initials of an SMC employee that conducted the same; that since the subject stock certificate of Evangeline had no lien, much less her alleged death was not reported, and her signature thereon was similar to her specimen signatures (Exhibits "8" and "8-A", also complainants' Exhibits "E" and "E-1"), and, more importantly, Mark guaranteed the genuineness of Evangeline's signature (Exhibit "2-B"), thus SMC-STO cancelled Stock Certificate No. B-003604 on December 9, 1988, and issued new stock certificate in lieu thereof. SMC counterclaims against the complainants the sums of P500,000.00 as exemplary damages, P200,000.00 plus P2,000.00 per appearance as attorney's fees, and P50,000.00 as litigation expenses. In protecting its third party complaint, SMC is also claiming from Mark P1 Million as exemplary damages, P200,000.00 plus P2,000.00 per appearance as attorney's fees, and P50,000.00 as litigation expenses. On March 22, 1991, Mark filed its answer the third-party complaint, alleging that it had complied with the standard procedures adopted by all stockholders, whereby the stock certificates to be sold were first sent to the issuing corporation for pre-verification of the signatures on the stock certificates, before they were sold in the market that Mark sent to SMC-STO the stock certificate of Evangeline, and the same was verified by SMC-STO before Mark sold Evangeline's shares of stock in the market; that the "endorsement guaranteed" stamped by Mark on the said stock certificate did not make it liable to SMC, because the same is of limited application and must be taken only within the context of Secs. 9 and 10 of the SEC Rules to Avoid Delays in the Issuance of Stock Certificates that Mark, as a stockbroker, cannot be held liable, civil or otherwise, because it transacted business merely as a broker or as an agent; that assuming that the signature of Evangeline was forged, SMC was, at the very least, remiss in its duty, considering that its STO was the only that is in a position to verify the signatures of its stockholders; that SMC-STO failed to give a notice to Mark within reasonable time of the fact that there were irregularities in the transfer of the subject stock certificate and, therefore, SMC's claim against Mark is barred by laches and/or estoppel. Mark counterclaims against SMC the sum of P3 Million as moral damages, P2 Million as exemplary damages, and P150,000.00 as attorney's fees. On May 30, 1991, SMC filed its Reply with Answer to Counterclaim to the answer of Mark, alleging that it was Mark's duty before it issues a transfer instruction to SMC-STO, to obtain first among other things, a customer's specimen signature of the seller of the traded stock, which in this case is Evangeline who was the true and registered owner of the traded stocks; that Mark did not obtain and keep a specimen signature card of Evangeline; that the procedures referred in the industry with respect to SMC shares; that if such were true, then Mark would have all SMC shares traded with them "pre-verified" by SMC-STO; that SMC's conduct of the so-called pre-verification or post verification does not differ with its task of verifying from its records 1) whether the traded stock certificates were reported lost or stolen, under garnishment or pledge, or had existing lien or encumbrances, and 2) from comparing the signature of the seller- stockholder on the endorsement with those SMC's file to determine whether the signatures are similar or appear to be similar; that pre-verification had never been a practice of SMC or any other stock transfer office, and assuming that it was done, the same did not amount to guaranteeing the genuineness of the signature-endorsement on the traded stock certificate, because SMC-STO was not in a position to guarantee the genuineness of the signature, considering that it never participated in the sale of stocks or dealt with the parties to the sale, whether directly or indirectly; that the verification conducted by SMC-STO was not done before the stocks were sold, but after they were sold in the market; that if it was the broker that delivered the traded stock, together with the transfer instruction, an "endorsement guarantee" is always required and without it, SMC-STO would not process the transfer order. Mark filed a fourth party complaint against Danilo Hernandez ("Hernandez"), alleging that it was the latter who delivered to Mark the stock certificate of Evangeline, and represented to Mark that he is the owner of the said certificate; that Mark paid the proceeds of the sale to Hernandez. On October 25, 1991, upon motion of SMC, Hernandez was declared in default for not filing his responsive pleading within the prescribed period. LexLib During the trial, without objection from the complainants and Mark, SMC adopted as part of its evidence the testimonies of Mark's witnesses, Messrs. Antonio Alvarez, Anastacio Mercado and Andres Borja, in SEC Case No. 3955, entitled "San Miguel Corporation vs. Mark Securities Corp., etc." Mark also adopted the said testimonies as part of its evidence. The said testimonies are contained in the transcripts of stenographic notes taken on June 8, 10 and 11, July 31, and August 13, 21 and 25, 1992 (Exhibits "12", "13", "14", "15", "16", "17-A" and "18", respectively). Mark adopted its evidence in the main case as its ex-parte evidence against Hernandez in the fourth-party complaint. Hearings were conducted where all the parties presented both documentary and testimonial evidence, and after a careful and thorough evaluation thereof, it has been established that the sale of Evangeline's shares of stock was unauthorized and fraudulent. However, the same could not be attributed to SMC based on the evidence presented by both the complainants and Mark. There is no showing that SMC had even participated in the said transaction. SMC's participation in cancelling Evangeline's stock certificate was ministerial in nature which was merely in compliance with the instruction of Mark to cancel Stock Certificate No. B003604 of Evangeline. When the said stock certificate was delivered to SMC, it bore the signature of Evangeline the genuineness of which was guaranteed by Mark with the words: "ENDORSEMENT GUARANTEED-MARK SECURITIES" stamped thereon. The contention of SMC that the function of stock transfer agent is ministerial in nature is found in Rules Governing Transfer Agents, Brokers and Clearing House in connection with Issuance of Stock Certificates (as amended) promulgated by this Commission on September 18, 1970, which provides: "2. Duties of Transfer Agents. The transfer agents will prepare and issue stock certificate of fully paid subscription duly certified by the Treasurer of the issuer company. He will also record transfer of stock for shares which are outstanding or thereafter issued when, from time to time, such certificates are surrendered to the company for that purpose. . . . . ." It appearing that it was Mark which had direct participation in the transaction, it should have inquired from Danilo Hernandez if the signature of Evangeline was genuine or not, considering that it was Mark which had the duty to guarantee Evangeline's signature endorsement. Mark, which deals directly with securities buyers and sellers, should know if the transaction and the signature were genuine or not. Upon the other hand, SMC-STO, whose duty in cancelling Evangeline's stock certificate is merely ministerial, after receiving the transfer instruction and certificate of Evangeline with the endorsement guaranty, still went on to verify if the stock certificate. It was ascertained that the said certificate which bore signature of Evangeline was not reported lost or stolen, has no existing liens and encumbrance her signature thereon was similar to her specimen signature and therefore transferable. Such an act is a clear indication of SMC's exercise of prudence to thwart any attempt designed to effect any irregular or illegal transfer of shares of stock. Mark's argument that it could not guarantee the signature of Evangeline because she is not its customer appears to be an attempt at passing the blame to SMC whose duty, as earlier stated, is ministerial in nature. Mark is much aware that endorsement guaranty the genuineness of the signature appearing on the stock certificate. With this guarantee, SMC is not under any obligation to determine the genuineness of the signature of Evangeline. This is lodged with Mark. Furthermore, the uniform Commercial Code contains a provision on signature guarantees . . . This provision is as follows: (1) Any person guaranteeing signature of an indorser of a security warrants that at the time of signing; a) the signature was genuine; and b) the signer was an appropriate person to endorse; and xxx xxx xxx (3) The foregoing warranties are made to any person, taking or dealing with the security in relieve on the guarantee and the guarantor is liable to such person for any loss resulting from breach of the warranties." (Francis T. Christy and Robert S. Appel, the transfer of Stock, Vol. 1, 1976 edition, Section 44. p. 6:16) It also appears that Mark was negligent in transacting the shares of stock of Evangeline when it effected the transfer of her shares of stock based on the admission of Mr. Anastacio Mercado, Mark's Chief Operating Officer. (TSN, Nov. 4, pp. 33-34). On the allegation of Mark that it would not have executed SMB shares of stock unless SMC-STO first pre-verified the stock certificate was likewise belied by Mr. Mercado's admission that Mark continues and is still dealing with or executing orders to sell SMB shares of stock despite SMC's stock certificate not being pre-verified by SMC-STO, even after SMC-STO had long stopped the alleged practice of pre-verification (TSN, Sept. 28, 1994, p. 29) SMC's witness, Mr. Enrique Yusengco also testified that the counter-signatures on the said stock certificate are merely internal activity in their department, not an indication that the certificate was pre-verified. He said that the verification conducted by SMC-STO was not before the sale but after the stock certificate was sold in the market and after Mark had instructed SMC-STO to transfer the stock in favor of Hernandez and guaranteed the genuineness of Evangeline's signature thereon. It cannot be denied that the act of Mark in guaranteeing the genuineness of the signature of Evangeline on the certificate of stock in question made them liable. This conclusion also finds support in the provision of Section 10 of the SEC Rule to Avoid Delay in the Issuance of Stock Certificate , which states: Endorsement Guaranty means warranty of the Genuineness of the Investment The term "endorsement of owner guaranteed" or simply "endorsement guaranteed" whether on the stock certificate shall mean a warranty of the genuineness of the stock power or the stock certificate and the endorsement thereon, and the guarantor shall be liable accordingly." The wording of the rule is quite clear and it cannot be susceptible to an interpretation which would give a different meaning to its clear provision, otherwise the said rule would be rendered meaningless. Furthermore, the endorsement guaranty on the stock certificate in question refers to the genuineness of the signature of Evangeline, not of the genuineness of the signature of Mr. Hernandez on the stock power as confirmed by Mark's President, Mr. Andres Borja (TSN, April 20, 1995, pp. 25-27). And considering that Evangeline's signature is a forgery, Mark is bound and hence liable on its endorsement pursuant to Section 10 of the SEC Rules to avoid delays. Its claim that it would not have guaranteed the genuineness of the signature of Evangeline, not being its customer, is belied by the fact that it guaranteed the genuineness of the endorsement of Evangeline which as earlier stated is a forgery. Section 10 does not only define the meaning of endorsement guarantee. More than just defining the words, it, and more importantly, defines the nature and the extent of liability of stockbrokers guaranteeing the endorsement on the stock power or stock certificate. LLphil On the submission of Mark that pre-verification is a standard practice among brokers, particularly those who are members of the Makati Stock Exchange, of which Mark is a member, such standard procedure mentioned by Mark does not appear in the Rules of Makati Stock Exchange nor expressly allowed by the Exchange. Mark's argument that Section 10 mentioned earlier applied only to street certificates is a departure from what the section provides. The said section does not mention the term "street certificate". While it may be true that Sections 5 and 9 of the said SEC Rule mentioned "street certificate" it cannot be said that Section 10 applies only to "street certificates". As to the claim of Mark that the anomaly was perpetrated by SMC or its employees in the stock transfer department, no evidence was presented to substantiate the claim except affidavits of certain employees of SMC- STO taken before the NBI but the said employees were not presented by Mark to confirm the truth of the contents of the affidavits. Upon the other hand, SMC points to Mark's involvement in certain transactions involving SMC's non-resident stockholders which SMC terms as anomalous pointing to some kind of unholy alliance between Mark and Hernandez. In the light of the foregoing observation and findings, this Hearing Officer finds Mark and Hernandez, jointly and severally liable to the complainants for the sum equivalent to 848 Class B shares at the current and prevailing price in the stock market, plus interest at the legal rate from the date of the filing of the complaint on December 3, 1990 until fully paid. The complainants' claim for damages in the form of cash and stock dividend accruing to Evangeline's 848 shares cannot be granted because the same is highly speculative. WHEREFORE, judgment is hereby rendered as follows: a) Mark and Danilo Hernandez should pay, jointly and severally, the complainants, the sum equivalent of 848 Class "B" shares of stock, at its current and prevailing price in the stock market, plus interest at the legal rate from December 3, 1990 until fully paid. b) Mark Securities Corporation should pay SMC as attorney's fees in the amount of P100,000.00 and litigation expense in the amount of P50,000.00. LLjur SO ORDERED. (SGD.) MANUEL P. PEREA Hearing Officer