1.

SECURITIES AND EXCHANGE COMMISSION,  Code,2 it should have first registered such contract or securities with the
vs. PROSPERITY.COM, INC.,  SEC.

This case involves the application of the Howey test in order to Instead of asking the SEC to lift its CDO in accordance with Section 64.3
determine if a particular transaction is an investment contract. of Republic Act (R.A.) 8799, PCI filed with the Court of Appeals (CA) a
petition for certiorari against the SEC with an application for a
The Facts and the Case temporary restraining order (TRO) and preliminary injunction in CA-G.R.
SP 62890. Because the CA did not act promptly on this application for
Prosperity.Com, Inc. (PCI) sold computer software and hosted websites TRO, on January 31, 2001 PCI returned to the SEC and filed with it
without providing internet service. To make a profit, PCI devised a before the lapse of the five-day period a request to lift the CDO. On the
scheme in which, for the price of US$234.00 (subsequently increased to following day, February 1, 2001, PCI moved to withdraw its petition
US$294), a buyer could acquire from it an internet website of a 15- before the CA to avoid possible forum shopping violation.
Mega Byte (MB) capacity. At the same time, by referring to PCI his own
down-line buyers, a first-time buyer could earn commissions, interest During the pendency of PCI’s action before the SEC, however, the CA
in real estate in the Philippines and in the United States, and insurance issued a TRO, enjoining the enforcement of the CDO.3 In response, the
coverage worth ₱50,000.00. SEC filed with the CA a motion to dismiss the petition on ground of
forum shopping. In a Resolution,4 the CA initially dismissed the petition,
To benefit from this scheme, a PCI buyer must enlist and sponsor at finding PCI guilty of forum shopping. But on PCI’s motion, the CA
least two other buyers as his own down-lines. These second tier of reversed itself and reinstated the petition.5 
buyers could in turn build up their own down-lines. For each pair of
down-lines, the buyer-sponsor received a US$92.00 commission. But In a joint resolution,6 CA-G.R. SP 62890 was consolidated with CA-G.R.
referrals in a day by the buyer-sponsor should not exceed 16 since the SP 64487 that raised the same issues. On July 31, 2003 the CA rendered
commissions due from excess referrals inure to PCI, not to the buyer- a decision, granting PCI’s petition and setting aside the SEC-issued
sponsor. CDO.7 The CA ruled that, following the Howey test, PCI’s scheme did not
constitute an investment contract that needs registration pursuant to
Apparently, PCI patterned its scheme from that of Golconda Ventures, R.A. 8799, hence, this petition.
Inc. (GVI), which company stopped operations after the Securities and
Exchange Commission (SEC) issued a cease and desist order (CDO) The Issue Presented
against it. As it later on turned out, the same persons who ran the
affairs of GVI directed PCI’s actual operations. The sole issue presented before the Court is whether or not PCI’s
scheme constitutes an investment contract that requires registration
In 2001, disgruntled elements of GVI filed a complaint with the SEC under R.A. 8799.
against PCI, alleging that the latter had taken over GVI’s operations.
After hearing,1 the SEC, through its Compliance and Enforcement unit, The Ruling of the Court
issued a CDO against PCI. The SEC ruled that PCI’s scheme constitutes
an Investment contract and, following the Securities Regulations

1
The Securities Regulation Code treats investment contracts as website do not invest money in PCI that it could use for running some
"securities" that have to be registered with the SEC before they can be business that would generate profits for the investors. The price of
distributed and sold. An investment contract is a contract, transaction, US$234.00 is what the buyer pays for the use of the website, a tangible
or scheme where a person invests his money in a common enterprise asset that PCI creates, using its computer facilities and technical skills.
and is led to expect profits primarily from the efforts of others.8 
Actually, PCI appears to be engaged in network marketing, a scheme
Apart from the definition, which the Implementing Rules and adopted by companies for getting people to buy their products outside
Regulations provide, Philippine jurisprudence has so far not done more the usual retail system where products are bought from the store’s
to add to the same. Of course, the United States Supreme Court, shelf. Under this scheme, adopted by most health product distributors,
grappling with the problem, has on several occasions discussed the the buyer can become a down-line seller. The latter earns commissions
nature of investment contracts. That court’s rulings, while not binding from purchases made by new buyers whom he refers to the person
in the Philippines, enjoy some degree of persuasiveness insofar as they who sold the product to him. The network goes down the line where
are logical and consistent with the country’s best interests.9  the orders to buy come.

The United States Supreme Court held in Securities and Exchange The commissions, interest in real estate, and insurance coverage worth
Commission v. W.J. Howey Co.10 that, for an investment contract to ₱50,000.00 are incentives to down-line sellers to bring in other
exist, the following elements, referred to as the Howey test must customers. These can hardly be regarded as profits from investment of
concur: (1) a contract, transaction, or scheme; (2) an investment of money under the Howey test.
money; (3) investment is made in a common enterprise; (4) expectation
of profits; and (5) profits arising primarily from the efforts of The CA is right in ruling that the last requisite in the Howey test is
others. 11 Thus, to sustain the SEC position in this case, PCI’s scheme or lacking in the marketing scheme that PCI has adopted. Evidently, it is
contract with its buyers must have all these elements. PCI that expects profit from the network marketing of its products. PCI
is correct in saying that the US$234 it gets from its clients is merely a
An example that comes to mind would be the long-term commercial consideration for the sale of the websites that it provides.
papers that large companies, like San Miguel Corporation (SMC), offer
to the public for raising funds that it needs for expansion. When an WHEREFORE, the Court DENIES the petition and AFFIRMS the decision
investor buys these papers or securities, he invests his money, together dated July 31, 2003 and the resolution dated June 18, 2004 of the Court
with others, in SMC with an expectation of profits arising from the of Appeals in CA-G.R. SP 62890.
efforts of those who manage and operate that company. SMC has to
register these commercial papers with the SEC before offering them to SO ORDERED.
investors.1âwphi1

Here, PCI’s clients do not make such investments. They buy a product
of some value to them: an Internet website of a 15-MB capacity. The
client can use this website to enable people to have internet access to
what he has to offer to them, say, some skin cream. The buyers of the 2.UNITED HOUSING FOUNDATION VS FORMAN

2
 nontenant, pledged, encumbered, or bequeathed (except to a surviving
spouse), and do not convey voting rights based on the number owned
Respondents are 57 residents of Co-op City, a massive cooperative (each apartment having one vote). On termination of occupancy, a
housing project in New York City, organized, financed, and constructed tenant must offer his stock to Riverbay at $25 per share, and, in the
under the New York Private Housing Finance Law (Mitchell-Lama Act). unlikely event that Riverbay does not repurchase, the tenant cannot
They brought this action on behalf of all the apartment owners and sell his shares for more than their original price, plus a fraction of the
derivatively on behalf of the housing corporation, alleging, inter mortgage amortization that he has paid during his tenancy, and then
alia, violations of the antifraud provisions of the Securities Act of 1933 only to a prospective tenant satisfying the statutory income eligibility
and of the Securities Exchange Act of 1934 (hereafter collectively requirements. Under the Co-op City Lease arrangement, the resident is
Securities Acts), in connection with the sale to respondents of shares of committed to make monthly rental payments in accordance with the
the common stock of the cooperative housing corporation. Citing size, nature, and location of the apartment. The Securities Acts define a
substantial increases in the tenants' monthly rental charges as a result "security" as "any . . . stock, . . . investment contract, . . . or, in general,
of higher construction costs, respondents' claim centered on a Co-op any interest or instrument commonly known as a security.'" Petitioners
City Information Bulletin issued in the project's initial stages, which moved to dismiss the complaint for lack of federal jurisdiction,
allegedly misrepresented that the developers would absorb future cost maintaining that the Riverbay stock did not constitute securities as thus
increases due to such factors as inflation. Under the Mitchell-Lama Act, defined. The District Court granted the motion to dismiss. The Court of
which was designed to encourage private developers to build low-cost Appeals reversed, holding that (1) since the shares purchased were
cooperative housing, the State provides large, long-term low-interest called "stock," the definitional sections of the Securities Acts were
mortgage loans and substantial tax exemptions, conditioned on step- literally applicable, and (2) the transaction was an investment contract
by-step state supervision of the cooperative's development. under the Securities Acts, there being a profit expectation from rental
Developers must agree to operate the facilities "on a nonprofit basis," reductions resulting from (i) the income produced by commercial
and may lease apartments to only state-approved lessees whose facilities established for the use of Co-op City tenants; (ii) tax
incomes are below a certain level. The corporate petitioners in this case deductions for the portion of monthly rental charges allocable to
built, promoted, and presently control Co-op City: United Housing interest payments on the mortgage; and (iii) savings based on the fact
Foundation (UHF), a nonprofit membership corporation, initiated and that Co-op City apartments cost substantially less than comparable
sponsored the project; Riverbay, a nonprofit cooperative housing nonsubsidized housing.
corporation, was organized by UHF to own and operate the land and
buildings and issue the stock that is the subject of the instant action; Held: The shares of stock involved in this Litigation do not constitute
and Community Securities, Inc. (CSI), UHF's wholly owned subsidiary, "securities" within the purview of the Securities Acts, and since
was the project's general  respondents' claims are not cognizable in federal court, the District
Court properly dismissed their complaint. Pp.  421 U. S. 847-858.
Page 421 U. S. 838
(a) When viewed, as they must be, in terms of their substance (the
contractor and sales agent. To acquire a Co-op City apartment, a economic realities of the transaction), rather than their form, the
prospective purchaser must buy 18 shares of Riverbay stock for each instruments involved here were not shares of stock in the ordinary
room desired at $25 per share. The shares cannot be transferred to a sense of conferring the right to receive "dividends contingent upon an

3
apportionment of profits," Tcherepnin v. Knight,389 U. S. 332,  389 U. S. established not for profit purposes, but to make essential services
339, with the traditional characteristics of being  available to residents of the huge complex. Pp.  421 U. S. 855-857.

Page 421 U. S. 839 500 F.2d 1246, reversed.

negotiable, subject to pledge or hypothecation, conferring voting rights POWELL, J., delivered the opinion of the Court, in which BURGER, C.J.,
proportional to the number of shares owned, and possibility of and STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined.
appreciating in value. On the contrary, these instruments were BRENNAN, J., filed a dissenting opinion, in which DOUGLAS and WHITE,
purchased not for making a profit, but for acquiring subsidized low- JJ., joined, post, p.  421 U. S. 860. 
cost. housing. Pp.  421 U. S. 848-851.
Page 421 U. S. 840
(b) A share in Riverbay does not constitute an "investment contract" as
defined by the Securities Acts, a term which, like the term "any . . . MR. JUSTICE POWELL delivered the opinion of the Court.
instrument commonly known as a security,'" involves investment in a
common venture premised on a reasonable expectation of profits to be The issue in these cases is whether shares of stock entitling a purchaser
derived from the entrepreneurial or managerial efforts of others. Here, to lease an apartment in Co-op City, a state subsidized and supervised
neither of the kinds of profits traditionally associated with securities nonprofit housing cooperative, are "securities" within the purview of
were offered to respondents; instead, as indicated in the Information the Securities Act of 1933 and the Securities Exchange Act of 1934.
Bulletin, which stressed the "non-profit" nature of the project, the focus
was upon the acquisition of a place to live. Pp.   421 U. S. 851-854. I

(c) Although deductible for tax purposes, the portion of rental charges Co-op City is a massive housing cooperative in New York City. Built
applied to interest on the mortgage (benefits generally available to between 1965 and 1971, it presently houses approximately 50,000
home mortgagors) does not constitute "profits," and, in any event, people on a 200-acre site containing 35 high-rise buildings and 236
does not derive from the efforts of third parties. Pp.  421 U. S. 854-855. town houses. The project was organized, financed, and constructed
under the New York State Private Housing Finance Law, commonly
(d) Low rent attributable to state financial subsidies no more embodies known as the Mitchell-Lama Act, enacted to ameliorate a perceived
income or profit attributes than other types of government subsidies. crisis in the availability of decent low income urban housing. In order to
P.  421 U. S. 855. encourage private 

(e) Such income as might derive from Co-op City's leasing of Page 421 U. S. 841
commercial facilities within the housing project to be used to reduce
tenant rentals (the prospect of which was never mentioned in the developers to build low-cost cooperative housing, New York provides
Information Bulletin) is too speculative and insubstantial to bring the them with large long-term, low interest mortgage loans and substantial
entire transaction within the Securities Acts. These facilities were tax exemptions. Receipt of such benefits is conditioned on a willingness

4
to have the State review virtually every step in the development of the participation in the affairs of the cooperative appertains to the
cooperative.  See N.Y.Priv.Hous.Fin.Law § § 11-37, as amended (1962 apartment, with the residents of each apartment being entitled to one
and Supp. 1974-1975). The developer also must agree to operate the vote irrespective of the number of shares owned.
facility "on a nonprofit basis," § 11-a(2a), and he may lease apartments
only to people whose incomes fall below a certain level and who have Any tenant who wants to terminate his occupancy, or who is forced to
been approved by the State. [Footnote 1] move out, [Footnote 5] must offer his stock to Riverbay at its initial
selling price of $25 per share. In the extremely unlikely event that
The United Housing Foundation (UHF), a nonprofit membership Riverbay declines to repurchase the stock, [Footnote 6] the tenant
corporation established for the purpose of "aiding and encouraging" cannot sell it for more than 
the creation of "adequate, safe and sanitary housing accommodations
for wage earners and other persons of low or moderate income," Page 421 U. S. 843
[Footnote 2] Appendix in Court of Appeals 95a (hereafter App.), was
responsible for initiating and sponsoring the development of Co-op the initial purchase price plus a fraction of the portion of the mortgage
City. Acting under the Mitchell-Lama Act, UHF organized the Riverbay that he has paid off, and then only to a prospective tenant satisfying
Corporation (Riverbay) to own and operate the land and buildings the statutory income eligibility
constituting Co-op City. Riverbay, a nonprofit cooperative housing requirements.  See N.Y.Priv.Hous.Fin.Law § 31-a (Supp. 1974-1975).
corporation, issued the stock that is the subject of this litigation. UHF
also contracted with Community Services, Inc. (CSI), its wholly owned In May, 1965, subsequent to the completion of the initial planning,
subsidiary, to serve as the general contractor and sales  Riverbay circulated an Information Bulletin seeking to attract tenants
for what would someday be apartments in Co-op City. After describing
Page 421 U. S. 842 the nature and advantages of cooperative housing generally and of Co-
op City in particular, the Bulletin informed prospective tenants that the
agent for the project. [Footnote 3] As required by the Mitchell-Lama total estimated cost of the project, based largely on an anticipated
Act, these decisions were approved by the State Housing construction contract with CSI, was $283,695,550. Only a fraction of
Commissioner. this sum, $32,795,550, was to be raised by the sale of shares to
tenants. The remaining $250,900,000 was to be financed by a 40-year
To acquire an apartment in Co-op City, an eligible prospective low-interest mortgage loan from the New York Private Housing Finance
purchaser [Footnote 4] must buy 18 shares of stock in Riverbay for Agency. After construction of the project the mortgage payments and
each room desired. The cost per share is $25, making the total cost current operating expenses would be met by monthly rental charges
$450 per room, or $1,800 for a four-room apartment. The sole purpose paid by the tenants. While these rental charges were to vary,
of acquiring these shares is to enable the purchaser to occupy an depending on the size, nature, and location of an apartment, the 1965
apartment in Co-op City; in effect, their purchase is a recoverable Bulletin estimated that the "average" monthly cost would be $23.02
deposit on an apartment. The shares are explicitly tied to the per room, or $92.08 for a four-room apartment.
apartment: they cannot be transferred to a nontenant; nor can they be
pledged or encumbered; and they descend, along with the apartment, Several times during the construction of Co-op City, Riverbay, with the
only to a surviving spouse. No voting rights attach to the shares as such: approval of the State Housing Commissioner, revised its contract with

5
CSI to allow for increased construction costs. In addition, Riverbay Petitioners, while denying the substance of these allegations, [Footnote
incurred other expenses that had not been reflected in the  9] moved to dismiss the complaint on the ground that federal
jurisdiction was lacking. They maintained that shares of stock in
Page 421 U. S. 844 Riverbay were not "securities" within the definitional sections of the
federal Securities Acts. In addition, the state parties moved to dismiss
1965 Bulletin. To meet these increased expenditures, Riverbay, with on sovereign immunity grounds.
the Commissioner's approval, repeatedly secured increased mortgage
loans from the State Housing Agency. Ultimately the construction loan The District Court granted the motion to dismiss.  Forman v.
was $125 million more than the figure estimated in the 1965 Bulletin. Community Services, Inc., 366 F.Supp. 1117 (SDNY 1973). It held that
As a result, while the initial purchasing price remained at $50 per room, the denomination of the shares in Riverbay as "stock" did not, by itself,
the average monthly rental charges increased periodically, reaching a make them securities under the federal Acts. The court further ruled,
figure of $39.68 per room as of July 1974. [Footnote 7] relying primarily on this Court's decisions in SEC v. C. M. Joiner Leasing
Corp., 320 U. S. 344 (1943), and SEC v. W. J. Howey Co., 328 U. S.
These increases in the rental charges precipitated the present lawsuit. 293 (1946), that the purchase in issue was not a security transaction,
Respondents, 57 residents of Co-op City, sued in federal court on since it was not induced by an offer of tangible material profits, nor
behalf of all 15,372 apartment owners, and derivatively on behalf of could such profits realistically be expected. In the District Court's
Riverbay, seeking upwards of $30 million in damages, forced rental words, it was 
reductions, and other "appropriate" relief. Named as defendants
(petitioners herein) were UHF, CSI, Riverbay, several individual Page 421 U. S. 846
directors of these organizations, the State of New York, and the State
Private Housing Finance Agency. The heart of respondents' claim was "the fundamental nonprofit nature of this transaction" which
that the 1965 Co-op City Information Bulletin falsely represented that presented "the insurmountable barrier to [respondents'] claims in th[e]
CSI would bear all subsequent cost increases due to factors such as federal court." 366 F.Supp. at 1 128. [Footnote 10]
inflation. Respondents further alleged that they were misled in their
purchases of shares since the Information Bulletin failed to disclose The Court of Appeals for the Second Circuit reversed.  Forman v.
several critical facts. [Footnote 8] On these bases,  Community Services, Inc., 500 F.2d 1246 (1974). It rested its decision on
two alternative grounds. First, the court held that, since the shares
Page 421 U. S. 845 purchased were called "stock" the Securities Acts, which explicitly
include "stock" in their definitional sections, were literally applicable.
respondents asserted two claims under the fraud provisions of the Second, the Court of Appeals concluded that the transaction was an
federal Securities Act of 1933, as amended, § 17(a), 48 Stat. 84, 15 investment contract within the meaning of the Acts and as defined by
U.S.C. § 77q(a); the Securities Exchange Act of 1934, as amended, § Howey, since there was an expectation of profits from three sources: (i)
10(b), 48 Stat. 891, 15 U.S.C. § 78j(b); and 17 CFR § 240.10b-5 (1975). rental reductions resulting from the income produced by the
They also presented a claim against the State Financing Agency under commercial facilities established for the use of tenants at Co-op City;
the Civil Rights Act of 1871, 42 U.S.C. § 1983, and 10 pendent state law (ii) tax deductions for the portion of the monthly rental charges
claims. allocable to interest payments on the mortgage; and (iii) savings based

6
on the fact that apartments at Co-op City cost substantially less than "the term 'security' in sufficiently broad and general terms so as to
comparable nonsubsidized housing. The court further ruled that the include within that definition the many types of instruments that, in
immunity claims by the state parties were unavailing. [Footnote 11] our commercial world 
Accordingly, the 
Page 421 U. S. 848
Page 421 U. S. 847
fall within the ordinary concept of a security."
case was remanded to the District Court for consideration of
respondents' claims on the merits. H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933). The task has fallen to
the Securities and Exchange Commission (SEC), the body charged with
In view of the importance of the issues presented, we granted administering the Securities Acts, and ultimately to the federal courts
certiorari. 419 U.S. 1120 (1975). As we conclude that the disputed to decide which of the myriad financial transactions in our society come
transactions are not purchases of securities within the contemplation within the coverage of thee statutes.
of the federal statutes, we reverse.
In making this determination in the present case, we do not write on a
II clean slate. Well-settled principles enunciated by this Court establish
that the shares purchased by respondents do not represent any of the
Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1), defines a "countless and variable scheme devised by those who seek the use of
"security" as the money of others on the promise of profits," Howey, 328 U.S. at  328
U. S. 299, and therefore do not fall within "the ordinary concept of a
"any note, stock, treasury stock, bond, debenture, evidence of security."
indebtedness, certificate of interest or participation in any profit-
sharing agreement, collateral trust certificate, preorganization A
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional We reject at the outset any suggestion that the present transaction,
undivided interest in oil, gas, or other mineral rights, or, in general, any evidenced by the sale of shares called "stock," [Footnote 13] must be
interest or instrument commonly known as a 'security,' or any considered a security transaction simply because the statutory
certificate of interest or participation in, temporary or interim definition of a security includes the words "any . . . stock." Rather, we
certificate for, receipt for, guarantee of, or warrant or right to subscribe adhere to the basic principle that has guided all of the Court's decisions
to or purchase, any of the foregoing. [Footnote 12]" in this area:

In providing this definition, Congress did not attempt to articulate the "[I]n searching for the meaning and scope of the word 'security' in the
relevant economic criteria for distinguishing "securities" from "non- Act[s], form should be disregarded for substance and the emphasis
securities." Rather, it sought to define should be on economic reality."

7
Tcherepnin v. Knight, 389 U. S. 332,  389 U. S. 336 (1967).  See also "[i]nstruments may be included within [the definition of a security], as
Howey, supra, at  328 U. S. 298.  [a] matter of law, if on their face they answer to the name or
description."
Page 421 U. S. 849
320 U.S. at  320 U. S. 351 (emphasis supplied). And later, again in
The primary purpose of the Acts of 1933 and 1934 was to eliminate dictum, the Court stated that a security "might" be shown "by proving
serious abuses in a largely unregulated securities market. The focus of the document itself, which, on its face, would be a note, a bond, or a
the Acts is on the capital market of the enterprise system: the sale of share of stock."  Id. at  320 U. S. 355 (emphasis supplied). By using the
securities to raise capital for profit-making purposes, the exchanges on conditional words "may" and "might" in these dicta the Court made
which securities are traded, and the need for regulation to prevent clear that it was not establishing an inflexible rule barring inquiry into
fraud and to protect the interest of investors. Because securities the economic realities underlying a transaction. On the contrary, the
transactions are economic in character, Congress intended the Court intended only to make the rather obvious point that, in contrast
application of these statutes to turn on the economic realities to the instrument before it which was not included within the explicit
underlying a transaction, and not on the name appended thereto. Thus, statutory terms, most instruments bearing these traditional titles are
in construing these Acts against the background of their purpose, we likely to be covered by the statutes. [Footnote 15]
are guided by a traditional canon of statutory construction:
In holding that the name given to an instrument is not dispositive, we
"[A] thing may be within the letter of the statute and yet not within the do not suggest that the name is wholly irrelevant to the decision
statute, because not within its spirit, nor within the intention of its whether it is a security. There may be occasions when the use of a
makers." traditional name such as "stocks" or "bonds" will lead a purchaser
justifiably to assume that the federal securities laws apply. 
Church of the Holy Trinity v. United States, 143 U. S. 457,  143 U. S.
459 (1892).  See also United States v. American Trucking Assns., 310 U. Page 421 U. S. 851
S. 534,  310 U. S. 543 (1940). [Footnote 14] Respondents' reliance
on Joiner as support for a "literal approach" to defining a security is This would clearly be the case when the underlying transaction
misplaced. The issue in Joiner was whether assignments of interests in embodies some of the significant characteristics typically associated
oil leases, coupled with the promoters' offer to drill an exploratory well, with the named instrument.
were securities. Looking to the economic 
In the present case, respondents do not contend, nor could they, that
Page 421 U. S. 850 they were misled by use of the word "stock" into believing that the
federal securities laws governed their purchase. Common sense
inducement provided by the proposed exploratory well, the Court suggests that people who intend to acquire only a residential
concluded that these leases were securities even though "leases" as apartment in a state-subsidized cooperative, for their personal use, are
such were not included in the list of instruments mentioned in the not likely to believe that, in reality they are purchasing investment
statutory definition. In dictum, the Court noted that securities simply because the transaction is evidenced by something
called a share of stock. These shares have none of the characteristics

8
"that, in our commercial world fall within the ordinary concept of a an investment in a common venture premised on a reasonable
security." H.R.Rep. No. 85, supra, at 11. Despite their name, they lack expectation of profits to be derived from the entrepreneurial or
what the Court in Tcherepnin deemed the most common feature of managerial efforts of others. By profits, the Court has meant either
stock: the right to receive "dividends contingent upon an capital appreciation resulting from the development of the initial
apportionment of profits." 389 U.S. at  389 U. S. 339. Nor do they investment, as in Joiner, supra, (sale of oil leases conditioned on
possess the other characteristics traditionally associated with stock: promoters' agreement to drill exploratory well), or a participation in
they are not negotiable; they cannot be pledged or hypothecated; they earnings resulting from the use of investors' funds, as in Tcherepnin v.
confer no voting rights in proportion to the number of shares owned; Knight, supra (dividends on the investment based on savings and loan
and they cannot appreciate in value. In short, the inducement to association's profits). In such cases, the investor is "attracted solely by
purchase was solely to acquire subsidized low-cost living space; it was the prospects of a return" on his investment.  Howey, supra, at  328 U.
not to invest for profit. S. 300. By contrast, when a purchaser is motivated by a 

B Page 421 U. S. 853

The Court of Appeals, as an alternative ground for its decision, desire to use or consume the item purchased -- "to occupy the land or
concluded that a share in Riverbay was also an "investment contract" to develop it themselves," as the Howey Court put it, ibid. -- the
as defined by the Securities Acts. Respondents further argue that, in securities laws do not apply. [Footnote 17]  See also Joiner,
any event, what they agreed to purchase is "commonly known as supra. [Footnote 18]
a security'" within the meaning of these laws. In considering these
claims, we again must examine the substance -- the economic realities In the present case, there can be no doubt that investors were
of the transaction -- rather than the  attracted solely by the prospect of acquiring a place to live, and not by
financial returns on their investments. The Information Bulletin
Page 421 U. S. 852 distributed to prospective residents emphasized the fundamental
nature and purpose of the undertaking:
names that may have been employed by the parties. We perceive no
distinction, for present purposes, between an "investment contract" "A cooperative is a non-profit enterprise owned and controlled
and an "instrument commonly known as a `security.'" In either case, democratically by its members -- the people who are using its
the basic test for distinguishing the transaction from other commercial services. . . ."
dealings is
"* * * *" 
"whether the scheme involves an investment of money in a common
enterprise with profits to come solely from the efforts of others." "People find living in a cooperative community enjoyable for more than
one reason. Most people join, however, for the simple reason that it is
Howey, 328 U.S. at  328 U. S. 301. [Footnote 16] This test, in shorthand a way to obtain decent housing at a reasonable price. 
form, embodies the essential attributes that run through all of the
Court's decisions defining a security. The touchstone is the presence of

9
Page 421 U. S. 854 deductibility for tax purposes of the portion of the monthly rental
charge applied to interest on the mortgage. We know of no basis in law
However, there are other advantages. The purpose of a cooperative is for the view that the payment of interest, with its consequent
to provide home ownership, not just apartments to rent. The deductibility for tax purposes, constitutes income or profits. [Footnote
community is designed to provide a favorable environment for family 20] These tax benefits are nothing more than that which is available to
and community living. . . ." any homeowner who pays interest on his mortgage.   See § 216 of
Internal Revenue Code, 26 U.S.C. § 216; Eckstein v. United States, 196
"The common bond of collective ownership which you share makes Ct.Cl. 644, 452 F.2d 1036 (1971).
living in a cooperative different. It is a community of neighbors. Home
ownership, common interest, and the community atmosphere make The Court of Appeals also found support for its concept of profits in the
living in a cooperative like living in a small town. As a rule, there is very fact that Co-op City offered space at a cost substantially below the
little turnover in a cooperative." going rental charges for comparable housing. Again, this is an
inappropriate theory of "profits" that we cannot accept. The low rent
App. 162a, 166a. Nowhere does the Bulletin seek to attract investors by derives from the substantial financial subsidies provided by the State of
the prospect of profits resulting from the efforts of the promoters or New York. This benefit cannot be liquidated into cash; nor does it result
third parties. On the contrary, the Bulletin repeatedly emphasizes the from the managerial efforts of others. In a real sense, it no more
"nonprofit" nature of the endeavor. It explains that, if rental charges embodies the attributes of income or profits than do welfare benefits,
exceed expenses, the difference will be returned as a rebate, not food stamps, or other government subsidies.
invested for profit. It also informs purchasers that they will be unable
to resell their apartments at a profit, since the apartment must first be The final source of profit relied on by the Court of Appeals was the
offered back to Riverbay "at the price . . . paid for it." [Footnote possibility of net income derived from the leasing by Co-op City of
19]  Id. at 163a. In short, neither of the kinds of profits traditionally commercial facilities, professional 
associated with securities was offered to respondents.
Page 421 U. S. 856
The Court of Appeals recognized that there must be an expectation of
profits for these shares to be securities, and conceded that there is "no offices and parking spaces, and its operation of community washing
possible profit on a resale of [this] stock." 500 F.2d at 1254. The court machines. The income, if any, from these conveniences, all located
correctly  within the common areas of the housing project, is to be used to
reduce tenant rental costs. Conceptually, one might readily agree that
Page 421 U. S. 855 net income from the leasing of commercial and professional facilities is
the kind of profit traditionally associated with a security investment.
noted, however, that profit may be derived from the income yielded by [Footnote 21]  See Tcherepnin v. Knight, supra. But in the present case,
an investment as well as from capital appreciation, and then proceeded this income -- if indeed there is any -- is far too speculative and
to find "a expectation of income' in at least three ways."   Ibid.  Two of insubstantial to bring the entire transaction within the Securities Acts.
these supposed sources of income or profits may be disposed of
summarily. We turn first to the Court of Appeals' reliance on the

10
Initially we note that the prospect of such income as a means of In holding that there is no federal jurisdiction, we do not address the
offsetting rental costs is never mentioned in the Information Bulletin. merits of respondents' allegations of fraud. Nor do we indicate any
Thus, it is clear that investors were not attracted to Co-op City by the view as to whether the type of claims here involved should be
offer of these potential rental reductions.  See Joiner, 320 U.S. at  320 protected by federal regulation. [Footnote 26] We decide only that the
U. S. 353. Moreover, nothing in the record suggests that the facilities, in type of 
fact, return a profit in the sense that the leasing fees are greater than
the actual cost to Co-op City of the space rented. [Footnote 22] The Page 421 U. S. 860
short of the matter is 
transaction before us, in which the purchasers were interested in
Page 421 U. S. 857 acquiring housing, rather than making an investment for profit, is not
within the scope of the federal securities laws.
that the stores and services in question were established not as a
means of returning profits to tenant, but for the purpose of making Since respondents' claims are not cognizable in federal court, the
essential services available for the residents of this enormous complex. District Court properly dismissed their complaint. [Footnote 27] The
[Footnote 23] By statute, these facilities can only be "incidental and judgment below is therefore
appurtenant" to the housing project. N.Y.Priv.Hous.Fin.Law § 12(5)
(Supp. 1974-1975). Undoubtedly they make Co-op City a more Reversed.
attractive housing opportunity, but the possibility of some rental
reduction is not an "expectation of profit" in the sense found necessary * Together with No. 74 647, New York et al. v. Forman et al., also on
in Howey. [Footnote 24]  certiorari to the same court.

Page 421 U. S. 858 [Footnote 1]

There is no doubt that purchasers in this housing cooperative sought to Eligibility is limited to families whose monthly income does not exceed
obtain a decent home at an attractive price. But that type of economic six times the monthly rental charge (or for families of four or more,
interest characterizes every form of commercial dealing. What seven times the rental charge). N.Y.Priv.Hous.Fin.Law § 31(2)(a) (Supp.
distinguishes a security transaction -- and what is absent here -- is an 1971975). Preference in admission must be given to veterans, the
investment where one parts with his money in the hope of receiving handicapped, and the elderly. § 31(7)-(9)
profits from the efforts of others, and not where he purchases a
commodity for personal consumption or living quarters for personal [Footnote 2]
use. [Footnote 25] 
UHF is composed of labor unions, housing cooperatives, and civic
Page 421 U. S. 859 groups. It has sponsored the construction of several major housing
cooperatives in New York City.
III

11
[Footnote 3] [Footnote 8]

CSI is a business corporation that has acted as the contractor on several Respondents maintained that the following material facts were
UHF-sponsored housing cooperatives. omitted: (i) the original estimated cost had never been adhered to in
any of the previous Mitchell-Lama projects sponsored by UHF and built
[Footnote 4] by CSI; (ii) petitioners knew that the initial estimate would not be
followed in the present project; (iii) CSI was a wholly owned subsidiary
Respondents are referred to herein variously as "purchasers," of UHF; (iv) CSI's net worth was so small that it could not have been
"owners," or "tenants." Respondents do not hold legal title to their legally held to complete the contract within the original estimated
respective apartments, but they are purchasers and owners of the costs; (v) the State Housing Commissioner had waived his own rule
shares of Riverbay which entitles them to occupy the apartments. By regarding liquidity requirements in approving CSI as the contractor; and
virtue of their right of occupancy, respondents are usually described as (vi) there was an additional undisclosed contract between CSI and
tenants. Riverbay.

[Footnote 5] [Footnote 9]

A tenant can be forced to move out if he violates the provisions of his Petitioners asserted that the Information Bulletin warned purchasers of
"occupancy agreement," which is essentially a lease for the apartment, the possibility of rental increases, and denied that it omitted material
or if his income grows to exceed the eligibility standards. facts. They also argued that, prior to occupancy all tenants were
informed that rental charges had increased. In any event, petitioners
[Footnote 6] claimed that respondents have suffered no damages, since they may
move out and retrieve their initial investments in full.
To date, every family that has withdrawn from Co-op City has received
back its initial payment in full. Indeed, at the time this suit was filed [Footnote 10]
there were 7,000 families on the waiting list for apartments in this
cooperative. In addition a special fund of nearly $1 million had been The District Court also dismissed the § 1983 claim finding that the
established by small monthly contributions from all tenants to insure "federal securities allegations represent the only well pleaded
that those wanting to move out would receive full compensation for underlying basis for jurisdiction under the Civil Rights Act." 366 F.Supp.
their shares. 1117, 1132 (1973). In view of these rulings the court did not reach the
sovereign immunity claims.
[Footnote 7]
[Footnote 11]
As the rental charges increased, the income eligibility requirements for
residents of Co-op City expanded accordingly.  See  n 1, supra. The Court of Appeals held that the state agency was independent and
distinct from the State itself, and therefore was a "person" for purposes

12
of § 1983, that both the agency and the State had waived immunity Nor can respondents derive any support for a literal approach
under § 32(5) of the Private Housing Finance Law, and that the State from Tcherepnin v. Knight, supra, which quoted the Joiner dictum.
had also implicitly waived its immunity by voluntarily participating in Indeed, in Tcherepnin, the Court explicitly stated that "form should be
the sale of securities, an area subject to plenary federal regulation.  See disregarded for substance," 389 U.S. at  389 U. S. 336, and only after
Parden v. Terminal R. Co., 377 U. S. 184 (1964). In view of our analyzing the economic realities of the transaction at issue did it
disposition of these cases, we do not reach these issues. conclude that an instrument called a "withdrawable capital share" was,
in substance, an "investment contract," a share of "stock," a "certificate
[Footnote 12] of interest or participation in [a] profit-sharing agreement," and a
"transferable share."
The definition of a security in § 3(a)(10) of the 1934 Act, 15 U.S.C. §
78c(a)(10), is virtually identical and, for present purposes, the coverage [Footnote 16]
of the two Acts may be considered the same.  See Tcherepnin v.
Knight, 389 U. S. 332,  389 U. S. 336,  389 U. S. 342 (1967); S.Rep. No. This test speaks in terms of "profits to come solely from the efforts of
792, 73d Cong., 2d Sess., 14 (1934). others." (Emphasis supplied.) Although the issue is not presented in
this case, we note that the Court of Appeals for the Ninth Circuit has
[Footnote 13] held that

While the record does not indicate precisely why the term "stock" was "the word 'solely' should not be read as a strict or literal limitation on
used for the instant transaction, it appears that this form is generally the definition of an investment contract, but rather must be construed
used as a matter of tradition and convenience.  See P. Rohan & M. realistically, so as to include within the definition those schemes which
Reskin, Cooperative Housing Law & Practice § 2.01(4) (1973). involve in substance, if not form, securities."

[Footnote 14] SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 482, cert. denied, 414
U.S. 821 (1973). We express no view, however, as to the holding of this
With the exception of the Second Circuit, every Court of Appeals case.
recently to consider the issue has rejected the literal approach urged by
respondents.  See C. N. S. Enterprises, Inc. v. G. & G. Enterprises, [Footnote 17]
Inc., 508 F.2d 1354 (CA7 1975); McClure v. First National Bank of
Lubbock, 497 F.2d 490 (CA5 1974), cert. denied, 420 U.S. 930 In some transactions, the investor is offered both a commodity or real
(1975); Lino v. City Investing Co., 487 F.2d 689 (CA3 1973).  See also 1 L. estate for use and an expectation of profits.  See SEC Release No. 33-
Loss, Securities Regulation 493 (2d ed.1961) ("substance governs, 5347, 38 Fed.Reg. 1735 (Jan. 18, 1973).  See generally Rohan, The
rather than form: . . . just as some things which look like real estate are Securities Law Implications of Condominium Marketing Programs
securities, some things which look like securities are real estate"). Which Feature a Rental Agency or Rental Pool, 2 Conn.L.Rev. 1 (1969).
The application of the federal securities laws to these transactions may
[Footnote 15] raise difficult questions that are not present in this case.

13
[Footnote 18] [Footnote 21]

In Joiner, 320 U.S. at  320 U. S. 348, the Court stated: The "income" derived from the rental of parking spaces and the
operation of washing machines clearly was not profit for respondents,
"Undisputed facts seem to us, however, to establish the conclusion that since these facilities were provided exclusively for the use of tenants.
defendants were not, as a practical matter, offering naked leasehold Thus, when the income collected from the use of these facilities
rights. Had the offer mailed by defendants omitted the economic exceeds the cost of their operation the tenants simply receive the
inducements of the proposed and promised exploration well, it would return of the initial overcharge in the form of a rent rebate. Indeed, it
have been a quite different proposition." could be argued that the "income" from the commercial and
professional facilities is also, in effect, a rebate on the cost of goods and
This distinction was critical, because the exploratory drillings gave the services purchased at these facilities, since it appears likely that they
investments "most of their value and all of their lure."  Id. at  320 U. S. are patronized almost exclusively by Co-op City residents.  See Note, 53
349. The land itself was purely an incidental consideration in the Tex.L.Rev. 623, 630-631, n. 38 (1975).
transaction.
[Footnote 22]
[Footnote 19]
The Court of Appeals quoted the gross rental income received from
This requirement effectively insures that no apartment will be sold for these facilities. But such figures by themselves are irrelevant, since the
more than its original cost. Consonant with the purposes of the record does not indicate the cost to Co-op City of providing and
Mitchell-Lama Act, whenever there are prospective buyers willing to maintaining the rented space.
pay as much as the initial purchase price for an apartment in Co-op
City, Riverbay will repurchase the apartment and resell it at its original [Footnote 23]
cost.  See App. 138a. If, for some reason, Riverbay does not purchase
the apartment the tenant still cannot make a profit on his sale.  See See generally Miller, Cooperative Apartments: Real Estate or
supra at  421 U. S. 842-843. Securities?, 45 B.U.L.Rev. 465, 500 (1965).

[Footnote 20] [Footnote 24]

Even if these tax deductions were considered profits, they would not Respondents urge us to abandon the element of profits in the
be the type associated with a security investment since they do not definition of securities and to adopt the "risk capital" approach
result from the managerial efforts of others.  See Rosenbaum, The articulated by the California Supreme Court in Silver Hills Country Club
Resort Condominium and the Federal Securities Laws -- A Case Study in v. Sobieski, 55 Cal.2d 811, 361 P.2d 906 (1961).  Cf. El Khadem v. Equity
Governmental Inflexibility, 60 Va.L.Rev. 785, 795-796 (1974); Note, 62 Securities Corp., 494 F.2d 1224 (CA9), cert. denied, 419 U.S. 900
Geo.L.J. 1515, 1524-1526 (1974). (1974).  See generally Coffey, The Economic Realities of a "Security": Is
There a More Meaningful Formula?, 18 W.Res.L.Rev. 367 (1967); Long,

14
An Attempt to Return "Investment Contracts" to the Mainstream of "offered and sold with emphasis on the economic benefits to the
Securities Regulation, 24 Okla.L.Rev. 135 (1971); Hannan & Thomas, purchaser to be derived from the managerial efforts of the promoter,
The Importance of Economic Reality and Risk in Defining Federal or a third party designated or arranged for by the promoter,"
Securities, 25 Hastings L.J. 219 (1974). Even if we were inclined to
adopt such a "risk capital" approach, we would not apply it in the are to be considered securities.  Id. at 1736. In particular, the
present case. Purchasers of apartments in Co-op City take no risk in any Commission explained that the Securities Acts do not apply when
significant sense. If dissatisfied with their apartments, they may recover "commercial facilities are a part of the common elements of a
their initial investment in full. See  n 5, supra. residential project" if

Respondents assert that, if Co-op City becomes bankrupt, they stand to "(a) the income from such facilities is used only to offset common area
lose their whole investment. But, in view of the fact that the State has expenses and (b) the operation of such facilities is incidental to the
financed over 92% of the cost of construction and carefully regulates project as a whole and are not established as a primary income source
the development and operation of the project, bankruptcy in the for the individual owners of a condominium or cooperative unit."
normal sense is an unrealistic possibility. In any event, the risk of
insolvency of an ongoing housing cooperative "differ[s] vastly" from the Ibid.  See also SEC Real Estate Advisory Committee Report 74-91 (1972);
kind of risk of "fluctuating" value associated with securities Dickey & Thorpe, Federal Security Regulation of Condominium
investments.  SEC v. Variable Annuity Co., 359 U. S. 65,  359 U. S. 90-91 Offerings, 19 N.Y.L.F. 473 (1974).
(1959) (BRENNAN, J., concurring).  See Hannan & Thomas, supra at 242-
249; Long, Introduction to Symposium: Interpreting the Statutory Several commentators have noted the inconsistency between the SEC's
Definition of a Security: Some Pragmatic Considerations, 6 St. Mary's position in the above release and the decision by the Court of Appeals
L.J. 96, 126-128 (1974). in this case, which the SEC now supports.  See Berman & Stone, Federal
Securities Law and the Sale of Condominiums, Homes, and Homesites,
[Footnote 25] 30 Bus.Law. 411, 420-425 (1975); Comment, Condominium Regulation:
Beyond Disclosure, 123 U.Pa.L.Rev. 639, 65655 (1975); Note, supra, 
The SEC has filed an amicus curiae brief urging us to hold the federal n20, at 628. In view of this unexplained contradiction in the
securities laws applicable to this case. Traditionally, the views of an Commission's position, we accord no special weight to its views.  See
agency charged with administering the governing statute would be Reliance Electric Co. v. Emerson Electric Co., 404 U. S. 418,  404 U. S.
entitled to considerable weight.  See, e.g., Saxbe v. Bustos, 419 U. S. 426 (1972); Blue Chip Stamps v. Manor Drug Stores, ante at  421 U. S.
65,  419 U. S. 74 (1974); Investment Company Institute v. Camp, 401 U. 746-747, n. 10.
S. 617,  401 U. S. 626-627 (1971). But in this case, the SEC's position
flatly contradicts what appears to be a rather careful statement of the [Footnote 26]
Commission's views in a recent release. In Release No. 33-5347, 38
Fed.Reg. 1735 (Jan. 18, 1973), applicable to the "sale of condominium It has been suggested that the sale of housing developments such as
units, or other units in a real estate development," the SEC stated its condominiums and cooperatives is in need of federal regulation, and
view that only those real estate investments that are therefore the securities laws should be construed or amended to reach
these transactions.  See, e.g., Note, Federal Securities Regulation of

15
Condominiums: A Purchaser's Perspective, 62 Geo.L.J. 1403 (1974); I dissent. The property interests here are "securities," in my view, both
Note, Cooperative Housing Corporations and the Federal Securities because they are shares of "stock" and because they are "investment
Laws, 71 Col.L.Rev. 118 (1971). Others have disagreed, claiming that contracts."
the extensive body of regulation developed over more than four
decades under these Acts would be inappropriate and unduly costly to I
the sellers and buyers of residential housing.  See Berman &
Stone, supra,  n 24; Note, supra,  n 20. Moreover, extension of the Both the Securities Act of 1933, 15 U.S.C. § 77b(1), and the Securities
securities laws to real estate transactions would involve important Exchange Act of 1934, 15 U.S.C. § 78c(a)(10), define the term "security"
questions as to the appropriate balance between state and federal as including, among other things, an "investment contract." The
responsibility. The determination of whether and in what manner essential ingredients of an investment contract have been clear
federal regulation may be required for housing transactions, where the since SEC v. W. J. Howey Co., 328 U. S. 293,  328 U. S. 301 (1946), held
characteristics of an investment in securities are not present, is better that "[t]he test is whether the scheme involves an investment of
left to the Congress, which can assess both the costs and benefits of money in a common enterprise with profits to come solely from the
any such regulation. Indeed, only recently Congress instructed the efforts of others."  See Tcherepnin v. Knight, 389 U. S. 332,  389 U. S.
Secretary of Housing and Urban Development 338 (1967). There is no doubt that Co-op City residents invested money
in a common enterprise; the only questions involve 
"to conduct a full and complete investigation and study . . . with
respect to . . . the problems, difficulties, and abuses or potential abuses Page 421 U. S. 861
applicable to condominium and cooperative housing."
whether the investment was to be productive of "profits to come solely
§ 821, 88 Stat. 740, 42 U.S. c. § 3532 (1970 ed., Supp. IV).  See also Real from the efforts of others."
Estate Settlement Procedures Act of 1974, 88 Stat. 1724, 12 U.S. c. §
2601 et seq. (1970 ed., Supp. IV); Interstate Land Sales Full Disclosure The record discloses little of the activities of Riverbay Corporation, the
Act, 82 Stat. 590, 15 U.S. C. §§ 1701-1720. owner and operator of Co-op City, as a lessor of commercial and office
space. It does appear, however, that revenues well in excess of $1
[Footnote 27] million per year flow into the corporation from such activities,
Appendix in Court of Appeals 361a (hereafter App.), a fact noted by the
Besides the Securities Acts claims, respondents also included a vague Court of Appeals. 500 F.2d 1246, 1254 (CA2 1974). Even after deduction
and conclusory allegation under 42 U.S.C. § 1983 against petitioner of expense -- taxes alone take half of the gross -- the residue could
New York State Housing Finance Agency. We agree with the District hardly be de minimis, even for an operation as large as Co-op City.
Court that this count must also be dismissed.  See  n 9, supra. The Therein lies the patent fallacy of the Court's conclusion that this aspect
remaining counts in the complaint were all predicated on alleged of the corporation's activities is "speculative and
violations of state law not independently cognizable in federal court. insubstantial."  Ante at  421 U. S. 856. The District Court rightly
recognized that management by third parties is essential in a project so
MR JUSTICE BRENNAN, with whom MR. JUSTICE DOUGLAS and MR. massive as Co-op City. 366 F.Supp. 1117, 1128 (SDNY 1973). Co-op City
JUSTICE WHITE join, dissenting. residents as stockholders were thus necessarily bound to rely on the

16
management of Riverbay Corporation to produce income in the form of "to place the tenant stockholders of a cooperative apartment in the
rents from the commercial and office space made an integral part of same position as the owner of a dwelling house so far as deductions for
the project. interest and taxes are concerned."

As stockholders, Co-op City residents also necessarily relied on S.Rep. No. 1631, 77th Cong., 2d Sess., 51 (1942). This tax benefit
corporate management to build and operate the facility efficiently to constitutes a profit both for the individual homeowners and for the
the end that monthly charges would be minimized. The Court of "tenant stockholders of a cooperative apartment." The difference is
Appeals held that profits were involved partly because Co-op City that the profit of the individual homeowner does not "come solely
offered housing at bargain prices. 500 F.2d at 1254. The Court from the efforts of others," whereas the profit from this source realized
substitutes its own judgment in holding that "[t]he low rent derives by a resident of Co-op City does. Setting up and operating a corporation
from the substantial financial subsidies provided by the State of New so as to take advantage of special tax provisions is a project requiring
York."  Ante at  421 U. S. 855. It is simple common sense that specialized skills. If the arrangements go awry, the residents can find
management efficiency necessarily enters into the equation in the themselves without the hoped-for tax advantages. 
determination of the charges assessed against residents. But even to
the extent that the resident stockholders do benefit in reduced  Page 421 U. S. 863

Page 421 U. S. 862 See, e.g., Eckstein v. United States, 196 Ct.Cl. 644, 452 F.2d 1036
(1971). Thus, the investors must depend upon the "efforts of others,"
charges from government subsidies, the benefit is not for this reason here Co-op City's management, properly to organize and operate the
any the less a profit to them. The welfare benefits to which the Court project to realize the tax advantage for them.
refers, ante at  421 U. S. 855, may also be profits, but those profits lack
the essential ingredient of profits present here that "come solely from In SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344 (1943), the
the efforts of others." Here, the resident investors utilize the efforts of investment was in oil leases. In Howey, it involved citrus groves.
others to obtain government subsidies. Investors in Wall Street who do Though taxation was not a factor in the Court's disposition of those
this every day will be surprised to learn that the benefits so obtained cases, each of those investments was of a type offering tax advantages
are not considered profits. as a principal attraction to the investor. Cunnane, Tax Shelter
Investments After the 1969 Tax Reform Act, 49 Taxes 450 (1971). It is
The Court of Appeals also relied on the tax deductibility accorded to no answer that the individual investor could have obtained the same
portions of the monthly carrying charges paid by Co-op City residents tax advantages by purchasing an entire citrus business or by becoming
as a source of profit to them. 500 F.2d at 1254. The Court rejects this an independent oil operator. He could, but if he did, his profits from tax
argument with the statement that "[t]hese tax benefits are nothing advantages would not then "come solely from the efforts of others." It
more than that which is available to any homeowner. . . ."  Ante at  421 is only when he relies on third parties to produce the profits for him
U. S. 855. This is true but irrelevant to the question whether they that, as here, the question of investment contract analysis arises.
constitute profits that "come solely from the efforts of others." The
special federal tax provision for cooperative owners, 26 U.S.C. § 216, Besides its express rejection of each of the forms of profit found by the
was intended Court of Appeals, the Court must surprise knowledgeable economists

17
with its proposition, ante at  421 U. S. 852, that profits cannot assume and consumer goods is not frivolous.  Ante at  421 U. S. 858. But the
forms other than appreciation of capital or participation in earnings. distinction is not useful in the resolution of the question before us. Of
[Footnote 2/1] All of the varieties of profit involved here accrue to the course, the purchase of the stock to get an apartment involves an
resident stockholders in the form of money saved, rather than money element of consumption, but it also involves an element of investment.
earned. [Footnote 2/2] Not only would simple common sense teach The variable annuity contract considered 
that the two are the same, but a more sophisticated economic analysis
also compels the conclusion that, in a practical world, there is no Page 421 U. S. 865
difference between 
in SEC v. Variable Annuity Co., 359 U. S. 65 (1959), presented a not
Page 421 U. S. 864 irrelevant analogous situation. What was purchased, after all, was
expressly labeled "stock." In any event, what was purchased
the two forms of income. [Footnote 2/3] The investor finds no reason constituted an "investment contract," within Howey, for resident
to distinguish, for example, between tax savings and after-tax income. stockholders of Co-op City invested "in a common enterprise with
Under a statute having as one of its "central purposes" "to protect profits to come solely from the efforts of others." They therefore were
investors," Tcherepnin, 389 U.S. at  389 U. S. 336, it is obvious that the purchasing securities within the purview of the Securities Act of 1933
Court errs in distinguishing among types of economic inducements and the Securities Exchange Act of 1934.
which have no bearing on the motives of investors. Construction of the
statute in terms of economic reality is more faithful to its "central" II
purpose "to protect investors."
Moreover, both statutes define the term "security" to include "stock."
There can be no doubt that one of the inducements to the resident Therefore, coverage under the statutes is clear under the Court's
stockholders to purchase a Co-op City apartment was the prospect of holding in Joiner that "[i]nstruments may be included within any of
profits in one or more of the forms I have discussed. The fact that these definitions, as matter of law if, on their face, they answer to the
literature encouraging purchase mentioned some is important, name or description." 320 U.S. at  320 U. S. 351; see Tcherepnin, 389
although not conclusive, evidence.  See Joiner, supra, at 320 U. S. 353. U.S. at  389 U. S. 339. "Security" was broadly defined with the explicit
The Information Bulletins, while not mentioning income from object of including "the many types of instruments that, in our
commercial and office space as an advantage of stock ownership, did commercial world fall within the ordinary concept of a security,"
emphasize the "reasonable price" of the housing, App. 166a, 187a, and H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933). Stock is therefore
they asserted that "every effort" would be made to keep monthly included because instruments "such as notes, bonds, and stocks, are
carrying charges low, id. at 174a, 194a. Tax benefits were also pretty much standardized and the name alone carries well settled
discussed as an advantage of ownership, though of course no meaning."  Joiner, 320 U.S. at  320 U. S. 351. Even if this principle
guarantee of favorable federal and state tax treatment was nevertheless allows room for exception of some instruments labeled
made.  Id. at 175a, 195a. "stock," the Court's justification for excepting the stock involved in this
case is singularly unpersuasive. The Court states that
I do not deny that there are some limits to the broad statutory
definition of a security, and the Court's distinction between securities

18
"[c]ommon sense suggests that people who intend to acquire only a III
residential apartment in a state-subsidized cooperative, for their
personal use, are not likely to believe that, in reality, they are At oral argument, petitioner United Housing Foundation contended
purchasing investment securities simply because the transaction is  strenuously that comprehensive state participation and regulation of
the construction and operation of Co-op City constituted Riverbay
Page 421 U. S. 866 Corporation not a capitalistic enterprise, but a beneficial public housing
enterprise, created by a partnership of public and private groups for
evidenced by something called a share of stock." the benefit of people of modest incomes. I need not disagree with this
characterization to conclude that nevertheless there is a role for the
Ante at  421 U. S. 851. But even informed commentators have federal 
expressed misgivings about this question. [Footnote 2/4] Thus, the
Court's justification departs unacceptably from the principle Page 421 U. S. 868
of Joiner that,
statutes to play in avoiding the danger of fraud and other evils in the
"[i]n the enforcement of an act such as this, it is not inappropriate that raising of the massive sums the project involved.  See SEC v. Capital
promoters' offerings be judged as being what they were represented to Gains Research Bureau, 375 U. S. 180,  375 U. S. 195 (1963); H.R.
be." Rep.No. 85, 73d Cong., 1st Sess., 2-3 (1933). No doubt New York's
intensive regulation also helps avoid those
320 U.S. at  320 U. S. 353. evils.  SeeN.Y.Priv.Hous.Fin.Law. But Congress contemplated
concurrent state and federal regulation in enacting the securities
While the absence in the case of Co-op City stock of some features laws.  SEC v. Variable Annuity Co., 359 U.S. at  359 U. S. 75 (concurring
normally associated with stock is a relevant consideration, the opinion), and therefore the existence of state regulation does not and
presence of the attributes that led me to conclude that this stock cannot be a reason for excluding appropriate application of the federal
constitutes an "investment contract," leads me also to conclude that it statutes. Indeed, the resident stockholder investors of Co-op City are
is a "stock" for purposes of the two statutes.  Cf. Affiliated Ute Citizens particularly entitled to the federal protection. The District Court
v. United States, 406 U. S. 128 (1972). properly observed:

In sum, I conclude that the interests purchased by the stockholders "[I]f ever there was a group of people who need and deserve full and
here were "securities" both because they were "stock" and because careful disclosure in connection with proposals for the use of their
they were "investment contracts." [Footnote 2/5] In my view, therefore funds, it is this type of group. . . . The housing selection decision is a
the Court of Appeals correctly held that the District Court erred in critical one in their lives. The cost of housing demands a good
dismissing this suit. [Footnote 2/6]  percentage of their incomes. Their savings are most likely to be
minimal, and they probably don't have lawyers or accountants to guide
Page 421 U. S. 867 them. Further, they are people likely to put a great deal of credence in
statements made with respect to an offering by reputable civic groups

19
and labor unions, particularly when the proposal is stamped with the [Footnote 2/4]
imprimatur of the state."
See, e.g., 1 L. Loss, Securities Regulation 492-493 (2d ed.1961).
366 F.Supp. at 1125.
[Footnote 2/5]
I part from the District Court in concluding however that investors not
only should be protected but, under my reading of the statutes, are Accordingly, I have no occasion to examine the "risk capital" approach
protected by the securities laws. A different, perhaps better, form of of Silver Hills Country Club v. Sobieski,55 Cal.2d 811, 361 P.2d 906
redress can and will be devised for this kind of investment, but until it (1961), to determine whether that would lead to the same result.
is, these investors are not to be denied what the 
[Footnote 2/6]
Page 421 U. S. 869
Petitioners in No. 74-647, the State of New York and the New York
federal statutes plainly allow them.  See Note, Cooperative Housing State Housing Finance Agency, argue that respondents' suit against
Corporations and the Federal Securities Laws, 71 Col.L.Rev. 118 (1971). them is barred by the Eleventh Amendment. The Court finds it
The SEC, though perhaps tardily, has come to the view that these unnecessary to deal with this contention, but my conclusion requires
housing corporations fall within its regulatory authority because the that I answer the Eleventh Amendment defense. The Court of Appeals
kind of investment involved is a "security" under the statutes. I wholly found no Eleventh Amendment bar here, and I am in agreement with
agree. I would affirm the judgment of the Court of Appeals. this result.

[Footnote 2/1] The Housing Finance Agency is a "public benefit corporation" under
New York law, N.Y.Priv.Hous.Fin.Law § 43(1) (1962 and Supp. 1974-
See P. Samuelson, Economics 618-626 (9th ed.1973). 1975), empowered "[t]o sue and be sued," § 44(1). The agency is
authorized to accept funds from the State, the Federal Government, or
[Footnote 2/2] "any other source," § 44(16), but it also is empowered to issue notes,
bonds, or other obligations to obtain financing, §§ 44(7) and 46.
Apparently there is at least a possibility that dividends could be paid to Significantly, the State is not liable on the agency's notes or bonds, and
shareholders, but these would really just be partial refunds of money such obligations do not constitute debts of the State. § 46(8). The
already paid in which was not needed. agency is therefore not an "alter ego" of the State; rather, it is an
independent body not entitled to assert the Eleventh
[Footnote 2/3] Amendment.  See Cowles v. Mercer County, 7 Wall. 118 (1869); P.
Bator, p. Mishin, D. Shapiro & H. Wechsler, Hart & Wechsler's The
See, e.g., P. Samuelson, supra,  n 1, at 435; Coase, The Problem of Federal Courts and the Federal System 690 (2d ed.1973). Compare
Social Cost, 3 J. Law & Econ. 1 (1960). Matherson v. Long Island State Park Comm'n, 442 F.2d 566 (CA2
1971), and Zeidner v. Wulforst, 197 F.Supp. 23, 25 (EDNY 1961), with
Whitten v. State University Construction Fund, 493 F.2d 177 (CA1

20
1974), and Charles Simkin & Sons, Inc. v. State University Construction
Fund, 352 F.Supp. 177 (SDNY), aff'd mem., 486 F.2d 1393 (CA2 1973).

The State of New York, unlike the agency, may assert the Eleventh
Amendment, but it has consented to suit.

"With regard to duties and liabilities arising out of this article, the state,
the commissioner or the supervising agency may be sued in the same
manner as a private person."

N.Y.Priv.Hous.Fin.Law § 32(5) (emphasis added). To be sure, state

waiver statutes are to be strictly construed, and they do not necessarily
indicate consent to suit in federal court.  See Kennecott Copper Corp. v.
State Tax Comm'n, 327 U. S. 573 (1946); Ford Motor Co. v. Department
of Treasury, 323 U. S. 459 (1945); Great Northern Life Ins. Co. v.
Read, 322 U. S. 47 (1944). Nevertheless, the language used in § 32(5) is,
in my view, sufficiently broad to permit suit in both state and federal
courts.

3.LANDRETH TIMBER CO VS LANDRETH

Syllabus

Respondents father and sons, who owned all of the common stock of a
lumber business that they operated, offered their stock for sale
through brokers. The company's sawmill was subsequently damaged by
fire, but potential purchasers were told that the mill would be rebuilt
and modernized. Thereafter, a stock purchase agreement for all of the

21
stock was executed, and ultimately petitioner company was formed by (b) When an instrument is labeled "stock" and possesses all of the
the purchasers. Respondent father agreed to stay on as a consultant for traditional characteristics of stock, a court is not required to look to the
some time to help with the daily operations of the mill. After the economic substance of the transaction to determine whether the stock
acquisition was completed, the mill did not live up to the purchasers' is a "security" within the meaning of the Acts. A contrary rule is not
expectations. Eventually, petitioner sold the mill at a loss and went into supported by this Court's prior decisions involving unusual instruments
receivership. Petitioner then filed suit in Federal District Court for not easily characterized as "securities." Nor were the Acts intended, as
rescission of the sale of stock and damages, alleging that respondents asserted by respondents, to cover only "passive investors," and not
had violated the registration provisions of the Securities Act of 1933 privately negotiated transactions involving the transfer of control to
(1933 Act) and the antifraud provisions of the Securities Exchange Act "entrepreneurs." Pp.  471 U. S. 688-692.
of 1934 (1934 Act). The court granted summary judgment for
respondents, holding that, under the "sale of business" doctrine, the (c) An instrument bearing both the name and all of the usual
stock could not be considered a "security" for purposes of the Acts characteristics of stock presents the clearest case for coverage by the
because managerial control of the business had passed into the hands plain language of the definition. "Stock" is distinguishable from most if
of the purchasers, who bought 100% of the stock. The court concluded not all of the other listed categories, and may be viewed as being in a
that the transaction thus was a commercial venture, rather than a category by itself for purposes of interpreting the Acts' definition of
typical investment. The Court of Appeals affirmed. "security." Pp.  471 U. S. 693-694.

Held: The stock at issue here is a "security" within the definition of the (d) Application of the "sale of business" doctrine depends on whether
Acts, United Housing Foundation, Inc. v. Forman, 421 U. S. 837, control has passed to the purchaser. Even though the transfer of 100%
distinguished, and the "sale of business" doctrine does not apply. of a corporation's stock normally transfers control, the purchasers here
Pp.  471 U. S. 685-697. had no intention of running the sawmill themselves. Moreover, if the
doctrine were applied here, it would also have to be applied to cases in
(a) Section 2(1) of the 1933 Act and § 3(a)(10) of the 1934 Act define a which less than 100% of a company's stock was sold, thus inevitably
"security" as including "stock" and other listed types of instruments. leading to difficult questions of line-drawing. As explained in Gould v.
Although the fact that instruments bear the label "stock" is not of itself Ruefenacht, post, p.  471 U. S. 701, coverage by the Acts would in most
sufficient to invoke the Acts' coverage, when an instrument is both cases be unknown and unknowable to the parties at the time the stock
called "stock" and bears stock's usual characteristics as identified was sold. Such uncertainties attending the applicability of the Acts
in Forman, supra, a purchaser justifiably may assume that the federal would be intolerable. Pp.  471 U. S. 694-697.
securities laws apply. The stock involved here possesses all of the
characteristics traditionally associated with common stock. Moreover, 731 F.2d 1348, reversed.
reading the securities laws to apply to the sale of stock at issue here
comports with Congress' remedial purpose in enacting the legislation to POWELL, J., delivered the opinion of the Court, in which BURGER, C.J.,
protect investors. Pp.  471 U. S. 685-688.  and BRENNAN, WHITE, MARSHALL, BLACKMUN, REHNQUIST, and
O'CONNOR, JJ., joined. STEVENS, J., filed a dissenting
Page 471 U. S. 682 opinion, post, p.  471 U. S. 697. 

22
Page 471 U. S. 683 petitioner Landreth Timber Co. Dennis and Bolten then acquired all of
petitioner's Class A stock, representing 85% of the equity, and six other
JUSTICE POWELL delivered the opinion of the Court. investors together owned the Class B stock, representing the remaining
15% of the equity.
This case presents the question whether the sale of all of the stock of a
company is a securities transaction subject to the antifraud provisions After the acquisition was completed, the mill did not live up to the
of the federal securities laws (the Acts). purchasers' expectations. Rebuilding costs exceeded earlier estimates,
and new components turned out to be incompatible with existing
I equipment. Eventually, petitioner sold the mill at a loss and went into
receivership. Petitioner then filed this suit seeking rescission of the sale
Respondents Ivan K. Landreth and his sons owned all of the of stock and $2,500,000 in damages, alleging that respondents had
outstanding stock of a lumber business they operated in Tonasket, widely offered and then sold their stock without registering it as
Washington. The Landreth family offered their stock for sale through required by the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1933
both Washington and out-of-state brokers. Before a purchaser was Act). Petitioner also alleged that respondents had negligently or
found, the company's sawmill was heavily damaged by fire. Despite the intentionally made misrepresentations and had failed to state material
fire, the brokers continued to offer the stock for sale. Potential facts as to the worth and prospects of the lumber company, all in
purchasers were advised of the damage, but were told that the mill violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et
would be completely rebuilt and modernized. seq. (1934 Act).

Samuel Dennis, a Massachusetts tax attorney, received a letter offering Respondents moved for summary judgment on the ground that the
the stock for sale. On the basis of the letter's representations transaction was not covered by the Acts, because, under the so-called
concerning the rebuilding plans, the predicted productivity of the mill, "sale of business" doctrine, petitioner had not purchased a "security"
existing contracts, and expected profits, Dennis became interested in within the meaning of those Acts. The District Court granted
acquiring the stock. He talked to John Bolten, a former client who had respondents' motion and dismissed the complaint for want of federal
retired to Florida, about joining him in investigating the offer. After jurisdiction. It acknowledged that the federal statutes include "stock"
having an audit and an inspection of the mill conducted, a stock as one of the instruments constituting a "security," and that the stock
purchase agreement was negotiated, with Dennis the purchaser of all at issue possessed all of the characteristics of conventional stock.
of the common stock in the lumber company. Ivan Landreth agreed to Nonetheless, it joined what it termed the "growing majority" of courts
stay on as a consultant for some time to help with the daily operations that had held that the federal securities laws do not apply to the sale of
of the mill. Pursuant to the terms of the stock purchase agreement, 100% of the stock of a closely held corporation. App. to Pet. for Cert.
Dennis assigned the stock he purchased to B & D Co., a corporation 13a. Relying on United Housing Foundation, Inc. v. Forman, 421 U. S.
formed for the sole purpose of acquiring the lumber company stock. B 837 (1975), and SEC v. W. J. Howey Co., 328 U. S. 293 (1946), the
& D then merged with the lumber company, forming  District Court ruled that the stock could not be considered a "security"
unless the purchaser had entered into the 
Page 471 U. S. 684
Page 471 U. S. 685

23
transaction with the anticipation of earning profits derived from the for, guarantee of, or warrant or right to subscribe to or purchase, any
efforts of others. Finding that managerial control of the business had of the foregoing. [Footnote 1]"
passed into the hands of the purchasers, and thus that the transaction
was a commercial venture, rather than a typical investment, the District As we have observed in the past, this definition is quite broad, Marine
Court dismissed the complaint. Bank v. Weaver, 455 U. S. 551,  455 U. S. 556 (1982), and includes both
instruments whose names alone carry well-settled meaning, as well as
The United States Court of Appeals for the Ninth Circuit affirmed the instruments of "more variable character [that] were necessarily
District Court's application of the sale of business doctrine. 731 F.2d designated by more descriptive terms," such as "investment contract"
1348 (1984). It agreed that it was bound by United Housing and "instrument commonly known as a security.'"   SEC v. C. M. Joiner
Foundation, Inc. v. Forman, supra, and SEC v. W. J. Howey Co., supra, to Leasing Corp.,320 U. S. 344,   320 U. S. 351 (1943). The face of the
determine in every case whether the economic realities of the definition shows that "stock" is considered to be a "security" within the
transaction indicated that the Acts applied. Because the Courts of meaning of the Acts. As we observed in United Housing Foundation,
Appeals are divided over the applicability of the federal securities laws Inc. v. Forman, supra, most instruments bearing such a traditional title
when a business is sold by the transfer of 100% of its stock, we granted are likely to be covered by the definition.   Id. at   421 U. S. 850.
certiorari. 469 U.S. 1016 (1984). We now reverse.
As we also recognized in Forman, the fact that instruments bear the
II label "stock" is not of itself sufficient to invoke the coverage of the Acts.
Rather, we concluded that we must also determine whether those
It is axiomatic that "[t]he starting point in every case involving instruments possess "some of the significant characteristics typically
construction of a statute is the language itself."  Blue Chip Stamps v. associated with" stock, id. at  421 U. S. 851, recognizing that, when an
Manor Drug Stores, 421 U. S. 723,  421 U. S. 756 (1975) (POWELL, J., instrument is both called "stock" and bears stock's usual characteristics,
concurring); accord, Teamsters v. Daniel, 439 U. S. 551,  439 U. S. "a purchaser justifiably [may] assume that the federal securities laws
558 (1979). Section 2(1) of the 1933 Act, 48 Stat. 74, as amended and apply," id. at  421 U. S. 850. We identified those characteristics usually
as set forth in 15 U.S.C. § 77b(1), defines a "security" as including associated with common stock as (i) the right to receive dividends
contingent upon an apportionment of profits; (ii) negotiability; (iii) the
"any note, stock, treasury stock, bond, debenture, evidence of ability to be pledged or hypothecated; (iv) the conferring of voting
indebtedness, certificate of interest or participation in any profit- rights in proportion to the number of shares owned; and (v) the
sharing agreement, collateral-trust certificate, preorganization capacity to appreciate in value. [Footnote 2]  Id. at  421 U. S. 851. 
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional Page 471 U. S. 687
undivided interest in oil, gas, or other mineral rights, . . . or, in general,
any interest or instrument commonly known as a 'security,' or any Under the facts of Forman, we concluded that the instruments at issue
certificate of interest or participation in, temporary or interim there were not "securities" within the meaning of the Acts. That case
certificate for, receipt  involved the sale of shares of stock entitling the purchaser to lease an
apartment in a housing cooperative. The stock bore none of the
Page 471 U. S. 686 characteristics listed above that are usually associated with traditional

24
stock. Moreover, we concluded that, under the circumstances, there hold that the traditional stock at issue here falls outside the Acts'
was no likelihood that the purchasers had been misled by use of the coverage.
word "stock" into thinking that the federal securities laws governed
their purchases. The purchasers had intended to acquire low-cost III
subsidized living space for their personal use; no one was likely to have
believed that he was purchasing investment securities.  Ibid. Under other circumstances, we might consider the statutory analysis
outlined above to be a sufficient answer compelling judgment for
In contrast, it is undisputed that the stock involved here possesses all of petitioner. [Footnote 3] Respondents urge, however, that language in
the characteristics we identified in Forman as traditionally associated our previous opinions, including Forman, requires that we look beyond
with common stock. Indeed, the District Court so found. App. to Pet. the label "stock" and the characteristics of the instruments involved to
for Cert. 13a. Moreover, unlike in Forman, the context of the determine whether application of the Acts is mandated by the
transaction involved here -- the sale of stock in a corporation -- is economic substance of the transaction. Moreover, the Court of Appeals
typical of the kind of context to which the Acts normally apply. It is thus rejected the view that the plain meaning of the definition would be
much more likely here than in Forman that an investor would believe sufficient to hold this stock covered, because it saw "no principled
he was covered by the federal securities laws. Under the circumstances way," 731 F.2d at 1353, to justify treating notes, bonds, and other of
of this case, the plain meaning of the statutory definition mandates the definitional categories differently. We address these concerns in
that the stock be treated as "securities" subject to the coverage of the turn.
Acts.
A
Reading the securities laws to apply to the sale of stock at issue here
comports with Congress' remedial purpose in enacting the legislation to It is fair to say that our cases have not been entirely clear on the proper
protect investors by method of analysis for determining when an instrument is a "security."
This Court has decided a number of cases in which it looked to the
"compelling full and fair disclosure relative to the issuance of 'the many economic substance of the transaction, rather than just to its form, to
types of instruments that in our commercial world fall within the determine whether the Acts applied. In SEC v. C. M. Joiner Leasing
ordinary concept of a security.'" Corp., for example, the Court considered whether the 1933 Act applied
to the sale of leasehold interests in land near a proposed oil well
SEC v. W. J. Howey Co., 328 U.S. at  328 U. S. 299 (quoting H.R.Rep. No. drilling. In holding that the leasehold interests were "securities," the
85, 73d Cong., 1st Sess., 11 (1933)). Although we recognize that Court noted that "the reach of the Act does not stop with the obvious
Congress did not intend to provide a comprehensive federal remedy and commonplace." 320 U.S. at  320 U. S. 351. Rather, it ruled that
for  unusual devices such 

Page 471 U. S. 688 Page 471 U. S. 689

all fraud, Marine Bank v. Weaver, supra, at  455 U. S. 556, we think it as the leaseholds would also be covered
would improperly narrow Congress' broad definition of "security" to

25
"if it be proved as matter of fact that they were widely offered or dealt stock at issue here may be considered "securities" because of their
in under terms or courses of dealing which established their character name and characteristics. Instead, they argue that our cases require us
in commerce as "investment contracts," or as "any interest or in every instance to look to the economic substance of the transaction
instrument commonly known as a "security.'""  to determine whether the Howey test has been met. According to
respondents, it is clear that petitioner sought not to earn profits from
Ibid. the efforts of others, but to buy a company that it could manage and
control. Petitioner was not a passive investor of the kind Congress
SEC v. W. J. Howey Co., supra, further elucidated the Joiner Court's intended the Acts to protect, but an active entrepreneur, who sought
suggestion that an unusual instrument could be considered a "security" to "use or consume" the business purchased just as the purchasers
if the circumstances of the transaction so dictated. At issue in that case in Formansought to use the apartments they acquired after purchasing
was an offering of units of a citrus grove development coupled with a shares of stock. Thus, respondents urge that the Acts do not apply.
contract for cultivating and marketing the fruit and remitting the
proceeds to the investors. The Court held that the offering constituted We disagree with respondents' interpretation of our cases. First, it is
an "investment contract" within the meaning of the 1933 Act because, important to understand the contexts within which these cases were
looking at the economic realities, the transaction "involve[d] an decided. All of the cases on which respondents rely involved unusual
investment of money in a common enterprise with profits to come instruments not easily characterized as "securities."  See 
solely from the efforts of others." 328 U.S. at  328 U. S. 301. n 4, supra. Thus, if the Acts were to apply in those cases at all, it would
have to have been because the economic reality underlying the
This so-called "Howey test" formed the basis for the second part of our transactions indicated that the instruments were actually of a type that
decision in Forman, on which respondents primarily rely. As discussed falls within the usual concept of a security. In the case at bar, in
above, see  471 U. S. supra, the first part of our decision contrast, the instrument involved is traditional stock, plainly within the
in Formanconcluded that the instruments at issue, while they bore the statutory definition. There is no need here, as there was in the prior
traditional label "stock," were not "securities" because they possessed cases, to look beyond the characteristics of the instrument to
none of the usual characteristics of stock. We then went on to address determine whether the Acts apply. 
the argument that the instruments were "investment contracts."
Applying the Howey test, we concluded that the instruments likewise Page 471 U. S. 691
were not "securities" by virtue of being "investment contracts,"
because the economic realities of the transaction showed that the Contrary to respondents' implication, the Court has never foreclosed
purchasers had parted with their money not for the purpose of reaping the possibility that stock could be found to be a "security" simply
profits from the efforts of others, but for the purpose of purchasing a because it is what it purports to be. In SEC v. C. M. Joiner Leasing
commodity for personal consumption. 421 U.S. at  421 U. S. 858. Corp., 320 U. S. 344 (1943), the Court noted:

Respondents contend that Forman and the cases on which it was based "[W]e do nothing to the words of the Act; we merely accept them. . . .
[Footnote 4] require us to reject the view that the shares of  In some cases, [proving that the documents were securities] might be
done by proving the document itself, which on its face would be a note,
Page 471 U. S. 690 a bond, or a share of stock."

26
Id. at  320 U. S. 355. Nor does Forman require a different result. U.S.C. § 77d(2), exempts transactions not involving any public offering
Respondents are correct that, in Forman, we eschewed a "literal" from the Act's registration provisions, there is no comparable
approach that would invoke the Acts' coverage simply because the exemption from the antifraud provisions. Thus, the structure and
instrument carried the label "stock."  Forman does not, however, language of the Acts refute respondents' position. [Footnote 6] 
eliminate the Court's ability to hold that an instrument is covered when
its characteristics bear out the label.  See supra at  471 U. S. 686-687. Page 471 U. S. 693

Second, we would note that the Howey economic reality test was B

designed to determine whether a particular instrument is an
"investment contract," not whether it fits within any of the examples We now turn to the Court of Appeals' concern that treating stock as a
listed in the statutory definition of "security." Our cases are consistent specific category of "security" provable by its characteristics means that
with this view. [Footnote 5]  Teamsters other categories listed in the statutory definition, such as notes, must
be treated the same way. Although we do not decide whether coverage
Page 471 U. S. 692 of notes or other instruments may be provable by their name and
characteristics, we do point out several reasons why we think stock
v. Daniel, 439 U.S. at  439 U. S. 558 (appropriate to turn to may be distinguishable from most if not all of the other categories
the Howey test to "determine whether a particular financial listed in the Acts' definition.
relationship constitutes an investment contract"); United Housing
Foundation, Inc. v. Forman, 421 U. S. 837 (1975); see supra at  471 U. S. Instruments that bear both the name and all of the usual
689. Moreover, applying the Howey test to traditional stock and all characteristics of stock seem to us to be the clearest case for coverage
other types of instruments listed in the statutory definition would make by the plain language of the definition. First, traditional stock
the Acts' enumeration of many types of instruments "represents to many people, both trained and untrained in business
superfluous.  Golden v. Garafalo, 678 F.2d 1139, 1144 (CA2 1982).  See matters, the paradigm of a security."  Daily v. Morgan, supra,at 500.
Tcherepnin v. Knight, 389 U. S. 332,  389 U. S. 343 (1967). Thus persons trading in traditional stock likely have a high expectation
that their activities are governed by the Acts. Second, as we made clear
Finally, we cannot agree with respondents that the Acts were intended in Forman, "stock" is relatively easy to identify because it lends itself to
to cover only "passive investors," and not privately negotiated consistent definition.  See supra, at  471 U. S. 686. Unlike some
transactions involving the transfer of control to "entrepreneurs." The instruments, therefore, traditional stock is more susceptible of a plain
1934 Act contains several provisions specifically governing tender meaning approach.
offers, disclosure of transactions by corporate officers and principal
stockholders, and the recovery of short-swing profits gained by such Professor Loss has agreed that stock is different from the other
persons.  See, e.g.,1934 Act, §§ 14, 16, 15 U.S.C. §§ 78n, 78p. categories of instruments. He observes that it "goes against the grain"
Eliminating from the definition of "security" instruments involved in to apply the Howey test for determining whether an instrument is an
transactions where control passed to the purchaser would contravene "investment contract" to traditional stock. L. Loss, Fundamentals of
the purposes of these provisions. Accord, Daily v. Morgan, 701 F.2d Securities Regulation 211-212 (1983). As Professor Loss explains:
496, 503 (CA5 1983). Furthermore, although § 4(2) of the 1933 Act, 15

27
"It is one thing to say that the typical cooperative apartment dweller We also perceive strong policy reasons for not employing the sale of
has bought a home, not a security; or that not every installment business doctrine under the circumstances of this case. [Footnote 7] By
purchase 'note' is a security; or that a person who charges a restaurant respondents' own admission, application of the 
meal by signing 
Page 471 U. S. 695
Page 471 U. S. 694
doctrine depends in each case on whether control has passed to the
his credit card slip is not selling a security, even though his signature is purchaser. It may be argued that, on the facts of this case, the doctrine
an 'evidence of indebtedness.' But stock (except for the residential is easily applied, since the transfer of 100% of a corporation's stock
wrinkle) is so quintessentially a security as to foreclose further normally transfers control. We think even that assertion is open to
analysis." some question, however, as Dennis and Bolten had no intention of
running the sawmill themselves. Ivan Landreth apparently stayed on to
Id. at 212 (emphasis in original). manage the daily affairs of the business. Some commentators 

We recognize that in SEC v. C. M. Joiner Leasing Corp., 320 U. S. Page 471 U. S. 696

344 (1943), the Court equated "notes" and "bonds" with "stock" as
categories listed in the statutory definition that were standardized who support the sale of business doctrine believe that a purchaser who
enough to rest on their names.  Id. at  320 U. S. 355. Nonetheless, has the ability to exert control but chooses not to do so may deserve
in Forman, we characterized Joiner's language as dictum. 421 U.S. the Acts' protection if he is simply a passive investor not engaged in the
at  421 U. S. 850. As we recently suggested in a different context daily management of the business. Easley, Recent Developments in the
in Securities Industry Assn. v. Board of Governors, FRS, 468 U. S. Sale-of-Business Doctrine: Toward a Transactional Context-Based
137 (1984), "note" may now be viewed as a relatively broad term that Analysis for Federal Securities Jurisdiction, 39 Bus.Law. 929, 971-972
encompasses instruments with widely varying characteristics, (1984); Seldin, When Stock is Not a Security: The "Sale of Business"
depending on whether issued in a consumer context, as commercial Doctrine Under the Federal Securities Laws, 37 Bus.Law. 637, 679
paper, or in some other investment context.  See id. at  468 U. S. 149- (1982). In this case, the District Court was required to undertake
153. We here expressly leave until another day the question whether extensive factfinding, and even requested supplemental facts and
"notes" or "bonds" or some other category of instrument listed in the memoranda on the issue of control, before it was able to decide the
definition might be shown "by proving [only] the document itself."  SEC case. App. to Pet. for Cert. 13a.
v. C. M. Joiner Leasing Corp., supra, at  320 U. S. 355. We hold only that
"stock" may be viewed as being in a category by itself for purposes of More importantly, however, if applied to this case, the sale of business
interpreting the scope of the Acts' definition of "security." doctrine would also have to be applied to cases in which less than
100% of a company's stock was sold. This inevitably would lead to
IV difficult questions of line-drawing. The Acts' coverage would in every
case depend not only on the percentage of stock transferred, but also
on such factors as the number of purchasers and what provisions for
voting and veto rights were agreed upon by the parties. As we explain

28
more fully in Gould v. Refenacht, post at  471 U. S. 704-706, decided (1982); United Housing Foundation, Inc. v. Forman, 421 U. S. 837,  421
today as a companion to this case, coverage by the Acts would in most U. S. 847, n. 12 (1975).
cases be unknown and unknowable to the parties at the time the stock
was sold. These uncertainties attending the applicability of the Acts [Footnote 2]
would hardly be in the best interests of either party to a
transaction. Cf. Marine Bank v. Weaver, 455 U.S. at  455 U. S. 559, n. 9 Although we did not so specify in Forman, we wish to make clear here
(rejecting the argument that the certificate of deposit at issue there that these characteristics are those usually associated with common
was transformed, chameleon-like, into a "security" once it was stock, the kind of stock often at issue in cases involving the sale of a
pledged). Respondents argue that adopting petitioner's approach will business. Various types of preferred stock may have different
increase the workload of the federal courts by converting state and characteristics and still be covered by the Acts.
common law fraud claims into federal claims. We find more daunting,
however, the prospect that parties to a transaction may never know [Footnote 3]
whether they are 
Professor Loss suggests that the statutory analysis is sufficient. L. Loss,
Page 471 U. S. 697 Fundamentals of Securities Regulation 212 (1983).  See infra at  471 U.
S. 693-694.
covered by the Acts until they engage in extended discovery and
litigation over a concept as often elusive as the passage of [Footnote 4]
control.  Accord, Golden v. Garafalo, 678 F.2d at 1145-1146.
Respondents also rely on Tcherepnin v. Knight, 389 U. S. 332 (1967),
V and Marine Bank v. Weaver, 455 U. S. 551(1982), as support for their
argument that we have mandated in every case a determination of
In sum, we conclude that the stock at issue here is a "security" within whether the economic realities of a transaction call for the application
the definition of the Acts, and that the sale of business doctrine does of the Acts. It is sufficient to note here that these cases, like the other
not apply. The judgment of the United States Court of Appeals for the cases on which respondents rely, involved unusual instruments that did
Ninth Circuit is therefore not fit squarely within one of the enumerated specific kinds of
securities listed in the definition.  Tcherepnin involved withdrawable
Reversed. capital shares in a state savings and loan association,
and Weaver involved a certificate of deposit and a privately negotiated
[Footnote 1] profit-sharing agreement.  See Marine Bank v. Weaver, supra, at  455
U. S. 557, n. 5, for an explanation of why the certificate of deposit
We have repeatedly ruled that the definitions of "security" in § 3(a)(10) involved there did not fit within the definition's category "certificate of
of the 1934 Act and § 2(1) of the 1933 Act are virtually identical, and deposit, for a security."
will be treated as such in our decisions dealing with the scope of the
term. Marine Bank v. Weaver, 455 U. S. 551,  455 U. S. 555, n. 3 [Footnote 5]

29
In support of their contention that the Court has mandated use of L. Loss, Fundamentals of Securities Regulation 212 (1983) (emphasis in
the Howey test whenever it determines whether an instrument is a original) (footnote omitted).
"security," respondents quote our statement in Teamsters v.
Daniel, 439 U. S. 551, 439 U. S. 558, n. 11 (1979), that the Howey test [Footnote 7]
"embodies the essential attributes that run through all of the Court's
decisions defining a security'" (quoting  Forman,  421 U.S. at   421 U. S. JUSTICE STEVENS dissents on the ground that Congress did not intend
852). We do not read this bit of dicta as broadly as respondents do. We the antifraud provisions of the federal securities laws to apply to
made the statement in Forman in reference to the purchasers'
argument that, if the instruments at issue were not "stock" and were "the private sale of a substantial ownership interest in [a business]
not "investment contracts," at least they were "instrument[s] simply because the transactio[n] w[as] structured as [a] sal[e] of stock
commonly known as a `security'" within the statutory definition. We instead of assets."
stated, as part of our analysis of whether the instruments were
"investment contracts," that we perceived "no distinction,  for present Post at  471 U. S. 700. JUSTICE STEVENS, of course, is correct in saying
purposes,  between an `investment contract' and an `instrument that it is clear from the legislative history of the 1933 and 1934 Acts
commonly known as a "security."'"   Ibid.  (emphasis added). This was that Congress was concerned primarily with transactions "in securities .
not to say that the Howey test applied to any case in which an . . traded in a public market."  Post at  471 U. S. 698.  United Housing
instrument was alleged to be a security, but only that, once the label Foundation, Inc. v. Forman, 421 U.S. at  421 U. S. 849. It also is true that
"stock" did not hold true, we perceived no reason to analyze the case there is no indication in the legislative history that Congress considered
differently whether we viewed the instruments as "investment the type of transactions involved in this case and in Gould v.
contracts" or as falling within another similarly general category of the Ruefenacht, post, p.  471 U. S. 701.
definition -- an "instrument commonly known as a `security.'" Under
either of these general categories, the Howey test would apply.
The history is simply silent -- as it is with respect to other transactions
to which these Acts have been applied by the Securities and Exchange
[Footnote 6] Commission and judicial interpretation over the half century since this
legislation was adopted. One only need mention the expansive
In criticizing the sale of business doctrine, Professor Loss agrees. He interpretation of § 10(b) of the 1934 Act and Rule 10b-5 adopted by the
considers that the doctrine Commission. What the Court said in Blue Chip Stamps v. Manor Drug
Stores, 421 U. S. 723 (1975), is relevant:
"comes dangerously close to the heresy of saying that the fraud
provisions do not apply to private transactions; for nobody, apparently, "When we deal with private actions under Rule 10b-5, we deal with a
has had the temerity to argue that the sale of a publicly owned judicial oak which has grown from little more than a legislative acorn.
business for stock of the acquiring corporation that is distributed to the Such growth may be quite consistent with the congressional enactment
shareholders of the selling corporation as a liquidating dividend does and with the role of the federal judiciary in interpreting it, See J. I. Case
not involve a security." Co. v Borak, [377 U.S. 426 (1964)], but it would be disingenuous to
suggest that either Congress in 1934 or the Securities and Exchange
Commission in 1942 foreordained the present state of the law with

30
respect to Rule 10b-5. It is therefore proper that we consider, in
addition to the factors already discussed, what may be described as
policy considerations when we come to flesh out the portions of the
law with respect to which neither the congressional enactment nor the
administrative regulations offer conclusive guidance."

Id. at  421 U. S. 737.  See also Ernst & Ernst v. Hochfelder, 425 U. S.

185,  425 U. S. 196-197 (1976).

In this case, unlike with respect to the interpretation of § 10(b) in Blue

Chip Stamps, we have the plain language of § 2(1) of the 1933 Act in
support of our interpretation. In Forman, supra, we recognized that the
term "stock" is to be read in accordance with the common
understanding of its meaning, including the characteristics identified
in Forman.  See supra at  471 U. S. 686. In addition, as stated in Blue
Chip Stamps, supra, it is proper for a court to consider -- as we do today
-- policy considerations in construing terms in these Acts.
4. PEOPLE OF THE PHILIPPINES, plaintiff-appellee, 
vs.
PRISCILLA BALASA, NORMITA VISAYA, GUILLERMO FRANCISCO,
NORMA FRANCISCO and ANALINA FRANCISCO, accused, NORMA
FRANCISCO, GUILLERMO FRANCISCO and ANALINA
FRANCISCO, accused-appellants.

G.R. No. 108601-02 September 3, 1998

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, 

vs.
PRISCILLA BALASA, NORMITA VISAYA, GUILLERMO FRANCISCO,
NORMA FRANCISCO and ANALINA FRANCISCO, accused, NORMA
FRANCISCO, GUILLERMO FRANCISCO and ANALINA
FRANCISCO, accused-appellants.

Avarice, mother of crimes, greedy for more the more she possesses,
eversearching open-mouthed for gold. 1

31
Greed has always been one of man's failings. The hope of greater gain Tunghayan natin kung papaano naganap ang gawang panloloko sa mga
has lured many a man to throw caution, and his common sense, to the taga Palawan ng mga dayo lamang.
wind. This human foible, known to many, has been exploited
throughout the ages by con men, charlatans and cheats to bilk the On July 6, 1989, the Panata Foundation of the Philippines, Inc., a non-
gullible public of their hard-earned money. History has thus seen the stock, non-profit corporation with principal address at San Miguel,
unraveling of various disingenuous stratagems which are at bottom Puerto Princesa, Palawan, was registered with the securities and
nothing but seams. The case at hand once again proves that "a sucker is Exchange Commission, under S.E.C. Reg. No. 165565. Its ten
born every minute." incoporators were Priscilla Balasa, Normita Visaya, Analina Francisco,
Lolita Gelilang, Cynthia Ang, Norma Francisco, Purabel Espidol, Melinda
Totoong walang pagkaubos sa ating daigdig ang mga taong nanlilinlang. Mercado, Rodolfo Ang, Jr. and Teresa G. Carandang. Five incorporators,
Hindi magkakagayon naman kung walang nagpapalinlang. Dahil sa namely, Priscilla Balasa, Normita Visaya, Analina Francisco, Lolita
kanilang malaking hangarin na magkamal ng kimpal kimpal na Gelilang and Cynthia Ang were named first trustees.
kayamanan, pinapasukan nila ang mga kaduda-dudang alok ng mga
mapagsamantala na kung sila ay mamuhunan ng kaunting salapi, ito ay In addition, the management of the foundation was entrusted to
tutubo ng malaki sa ilang araw lamang. Kaya't napakaraming mga tao Priscilla Balasa, as president and general manager; Normita Visaya as
ang nagagantso. Hindi masasabing mga hangal o dili kaya'y mga corporate secretary and head comptroller; Norma Francisco as cashier;
maralita na walang gaanong pinag-aralan ang mga nabibiktima. Kahit Guillermo Francisco as the disbursing officer; and Analina Francisco as
ang mga maykaya at matataas sa ating lipunan ay napaglalaruan din. treasurer. The latter also doubled as a typist of the Foundation.
Milyun-milyong salapi ang nahuhuthot sa kanila, hindi ng mga masakim
na magnanakaw, kundi ng kanila na ring mga kasamahan sa tinatawag On the other hand, the employees of the foundation were the tellers
na "alta sociedad." Mismong mga kaibigan at kapanatag ng loob ang Rosemarie Balasa, Sylvia Magnaye, Judith Ponciano, Jessica Buaya,
naguudyok sa kanilang sumali sa mga pakana na magpapayaman sa Rosario Arciaga, Paul Francisco, Enriquita Gabayan and Anita Macmac.
kanila. Higit namang nakakaawa kapag ang naloloko ay iyong The comptrollers, Ruth Jalover, Amarino Agayo, and Avelina Yan were
nangungutang lamang at nagbabakasakali na ang ilang daan nila ay under the supervision of Normita Visaya. Nelia Daco, one of the clerks
magiging libo. assigned outside, was the one in direct contact with the depositors.

Itong kapasiyahang ito ng Mataas na Hukuman ay nagbababalang muli. The Foundation's purposes, as stated in its by-laws, were as follows:
Magpakaingat-ingat ang lahat. Ang naghahangad ng kagitna, isang
salop ang nawawala. 1. Uplift members' economic
condition by way of financial or
Iyon namang nanlilinlang. Walang gawaing masama na hindi consultative basis (sic);
nabubunyag rin. Totoong mahigpit ang ating batas na pumaparusa sa
mga ganyang hindi na natututo, lalo't higit kung ang mga salarin ay mga 2. To encourage members in a self-
sindikato. help program;

32
 3. To grant educational assistance; When a person would deposit an amount, the amount would be taken
by a clerk to be given to the teller. The teller would then fill up a
4. To implement the program on the printed form called a "slot." These "slots" were part of a booklet, with
Anti-Drug campaign; one booklet containing one hundred "slots." A "slot," which resembled
a check, contained the following data:
5. To acquire facilities either by or
through purchase, lease, bequest of PANATA FOUNDATION Control No. 33
donations, equipments (sic),
machineries (sic) and supplies for (Logo) OF THE PHILIPPINES INC. Date 12-5-87 / Dec. 26, 1987
purposes of carrying out its business
operation or hold such real or PFOPI Puerto Princesa, Palawan Amount P 500.00
personal properties as may be
convenient and proper in order to Sec. Reg. No. 165565
achieve the purpose of this
corporation; M CHESTER MONREAL

6. To cooperate with other Address RPC

organizations, institutions with
similar activities for purposes of Share FIVE
carrying out its business; and
Amount in words FIVE HUNDRED PESOS Only
7. To organize seminars or
conferences specially in the rural
(Sgd.)
areas and other selected cities. 2
(Sgd.) PRICILLA BALASA
After obtaining its SEC registration, the foundation immediately swung
into operation. It sent out brochures soliciting deposits from the public,
————————— ———————
assuring would-be depositors that their money would either be
——
doubled after 21 days or trebled after 30 days. Priscilla Balasa also went
around convincing people to make deposits with the foundation at
their office at the Diaz Apartment, Puerto Princesa. Signature of Member President /
Manager
The modus operandi for investing with the foundation was as follows:
No. 30333 3

33
The control number indicated the number of the "slot" in a booklet, was the depositor who would choose that his deposit be tripled, in
while the space after "date" would contain the date when the slot was which case, the deposit would mature later 7.
acquired, as well as the date of its maturity. The amount deposited
determined the number of shares, one share being equivalent to one The amounts received by the foundation were deposited in banks.
hundred pesos. The depositor had the discretion when to affix his Thus, a foundation teller would, from time to time, go to PNB, PCI
signature on the space provided therefor. Some would sign their slot Bank, DBP and the Rural Bank of Coron to deposit the collections in a
only after payment on maturity, while others would sign as soon as joint account in the names of Priscilla Balasa and Norma Francisco.
they were given the slot. However, without the control number and the
stamp of the teller, duly signed or initialed, no depositor could claim Initially, the operation started with a few depositors, with most
the proceeds of his deposit upon maturity. 4 depositors investing small amounts to see whether the foundation
would make good on its promise. When the foundation paid double or
After the slot had been filled up by the teller, he would give it to the triple the amounts of their investment at maturity, most not only
clerk assigned outside. The clerk would then give the slot to the reinvested their earnings but even added to their initial investments. As
depositor. Hence, while it was the teller who prepared and issued the word got around that deposits could be doubled within 21 days, or
slot, he had no direct contact with the depositor. The slots handed to a tripled if the period lasted for more than 30 days, more depositors
depositor were signed beforehand by the president of the foundation. were attracted. Blinded by the prospect of gaining substantial profits
for nothing more than a minuscule investment, these investors, like
Every afternoon, the comptrollers would take the list of depositors previous ones, were lured to reinvest their earnings, if not to invest
made by the tellers with the amounts deposited by each, and have more.
these typed. Norma Francisco would then receive from the tellers the
amounts deposited by the public. It was also her job to pay the salaries Most would invest more than P5,000.00, the investment limit set by
of the foundation's employees. For his part, Guillermo Francisco would the foundation. Priscilla Balasa would, however, encourage depositors
release money whenever a deposit would mature as indicated in the to invest more than P5,000.00, provided that the excess was deposited
slots. under the name of others. She assured the depositors that this was
safe because as long as the depositor was holding the slots, he was the
According to the foundations rules, an investor could deposit up to "owner" of the amount deposited. Most investors then deposited
P5,000.00 only, getting a slot corresponding thereto. Anyone who amounts in the names of their relatives.
deposited more than that amount would, however, be given a slot but
the slot had to be in he name of another person or several other At the outset, the foundation's operations proceeded smoothly, as
persons, depending upon the amount invested. 5 According to Sylvia satisfied investors collected their investments upon maturity. On
Magnaye, a foundation teller, all deposits maturing in August 1989 November 29, 1989, however, the foundation did not open. Depositors
were to be tripled. For such deposits, the slots issued were colored whose investments were to mature on said date demanded payments
yellow to signify that the depositor would have his deposit tripled. but none was forthcoming. On December 2, 1989, Priscilla Balasa
Deposits that would mature subsequent to August were only given announced that since the foundation's money had been invested in the
double the amount deposited. 6 However, there were times when it stock market, it would resume operations on December 4, 1989. On
that date, the foundation remained closed. Depositors began to

34
demand reimbursement of their deposits, but the foundation was Gabriel to the effect that as an investor/subscriber to
unable to deliver. the PANATA Foundation, Inc. which is a non-stock
corporation allegedly registered with the SEC under
Consequently, sixty-four informations, all charging the offense of Registration No. 165565 and by means of other similar
estafa, as defined in Presidential Decree No. 1689, were filed against deceit induce the said Estrella San Gabriel to give and
Priscilla Balasa, Normita Visaya, Norma Francisco, Guillermo Francisco, deliver to the said accused the amount of P5,500.00 as
Analina Francisco and eight other persons, mostly incorporators and her investment in said foundation, and by
employees of the Panata Foundation, before the Regional Trial Court of manifestation and misrepresentation by the said
Palawan. Fourteen cases, including Criminal Case Nos. 8429 and 8751, accused that the said invested amount will be doubled
were raffled off to Branch 52. Two more cases, Criminal Case Nos. 8704 or tripled within a certain period of days said accused
and 8749, were similarly assigned to it. Of the sixteen casts assigned to knowing fully well that their manifestation and
Branch 52, eight were, with the consent of the accused, provisionally representations were false and fraudulent as they are
dismissed for lack of evidence. made only for the purpose of obtaining as in fact they
obtained the amount with intent to defraud misapply,
In Criminal Case No. 8429, the information charging the accused with misappropriate and convert the said amount for their
the crime of estafa "as amended by PD 1689" was filed on December own personal use and benefit, to the damage and
12, 1989. The accused in this case were: Priscilla Balasa, Almarino prejudice of said Estrella San Gabriel in the amount of
Agayo, Norma Francisco, Normita Visaya, Paul Francisco, Nelia Daco, P5,500.00, Philippine Currency.
Ruth Jalover, 8 Guillermo Francisco, Candido Tolentino, Jr., Rosemarie
Balasa, 9 Ricardo del Rosario, Emelita Gabayan, Rosario Arciaga, Jessica CONTRARY TO LAW and penalized under Presidential
Buaya, Avelina Yan, Anita Macmac, Gina Gabaldon, Ronaldo Belo, Decree No. 1689.
Fernando Cadauan, Lolita Gelilang, Cynthia Ang, Judith Ponciano, Sylvia
Magnaye, 10 Analina Francisco and Sulpicio Nabayan. As Amended on Likewise, in Criminal Case No. 8704, the information, filed on May 23,
February 16, 1990, the information in this case reads as follows: 1990, charged Priscilla Balasa, Norma Francisco, Guillermo Francisco,
Normita Visaya, Analina Francisco, Lolita Gelilang, Cynthia Ang, Rodolfo
That sometime on (sic) December, 1989, the above- Ang, Jr., Purable Espidol, Melinda Mercado, Almarino Agayo, Candido
named accused being the Manager and employees of Tolentino, Jr., Ricardo del Rosario, Fernando Caduan, Paul Francisco
the PANATA Foundation of the Philippines, Inc., with and Teresita Carandang with the crime of estafa "as amended by
office at No. 20 Diaz Apartment, Manalo Extension, Presidential Decree No. 1689" as follows:
Puerto Princesa City, Philippines, and within the
jurisdiction of this Honorable Court, the said accused That sometime in July, 1989 to December 1989, the
conspiring and confederating with one another and above-named accused being then the Manager
operating as a syndicate, did then and there wilfully, incorporators, members of the board of trustees,
unlawfully and feloniously defraud one Estrella San officers and employees of the PANATA FOUNDATION
Gabriel y Lacao by means of false representation and OF THE PHIL., INC. with Office No. 20 Diaz Apartment,
fraudulent means which they made to said Estrella San Manalo Extension, Puerto Princess City, Philippines

35
 and within the jurisdiction of this Honorable Court, the Similar informations were filed against the same persons in Criminal
said accused conspiring, confederating together and Cases Nos. 8749 and 8751. The complainant in Criminal Case No. 8749,
mutually helping one another, and operating as a complainant Shiela San Juan, was allegedly defrauded of P25,800.00
syndicate, did then and there wilfully, unlawfully and while in Criminal Case No. 8751, the amount of P6,800.00 was allegedly
feloniously defraud, the complainant Conchita defrauded from Benjamin Yangco.
Bigornia, by means of false pretenses/representation
and fraudulent means which they made to said In like manner, similarly worded informations in Criminal Case Nos.
Conchita Bigornia to the effect that as 8734 and 8428, raffled off to Branch 50, alleged that Elisia Mensias was
depositor/subscriber to the PANATA FOUNDATION OF defrauded in the amount of P4,500.00 and Alfonso and Prescilla Lacao
THE PHIL., INC., which is a non-stock corporation defrauded in the amount of P58,850.00, respectively.
allegedly registered with the SEC under Registration
No. 165565 and by means of other similar deceit After the filing of the informations, warrants for the arrest of the
induce the said Conchita Bigornia, to give and deliver defendants in the corresponding criminal cases were issued. However,
to the said accused the amount of TWENTY FOUR only Priscilla Balasa, Normita Visaya, Guillermo Francisco, Norma
THOUSAND ONE HUNDRED (P24,100.00) PESOS, Francisco and Analina Francisco were arrested, the rest of the
Philippine Currency, as his/her deposit/subscription in defendants having gone into hiding.
said Foundation, and by manifestation and
misrepresentation by the said accused that the said On arraignment, the arrested defendants all pleaded not guilty to the
deposited/subscription amount will be doubled or crimes charged but before the presentation of prosecution evidence,
tripled within a certain period of days said accused Priscilla Balasa and Normita Visaya escaped from police custody. With
knowing fully well that this manifestation were (sic) their escape, only the spouses Guillermo and Norma Francisco were
false and fraudulent as they are made only for the called to present evidence on behalf of the defense. Analina Francisco,
purpose of obtaining as in fact they obtained the being a deaf-mute, was not called to the witness stand due to the lack
amount of TWENTY FOUR THOUSAND ONE HUNDRED of a competent interpreter. The spouses, in denying criminal liability,
PESOS (P24,100.00) from the said (Conchita Bigornia) presented the following facts:
and the said accused once in possession of the said
amount with intent to defraud, misapply, Priscilla Balasa, Normita Visaya, and Analina Francisco, full-blooded
misappropriate and convert the said amount for their sisters, are the common children of appellant spouses Guillermo and
own personal use and benefit, to the damage and Norma Francisco. Before the Panata Foundation started operations in
prejudice of the said Conchita Bigornia in the amount July 1989, Priscilla had been living with her parents in San Mateo,
aforestated. Isabela. Analina, on the other hand, was living with their elder sister,
Normita, in Manila. Priscilla, however, left for Palawan in June 1989.
CONTRARY TO LAW and penalized under P.D. No.
1689. Sometime thereafter, Guillermo Francisco received a letter from
Priscilla asking him to come to Palawan to provide her company, the
latter's husband having left for abroad as a seaman. Consequently,

36
Francisco came to Palawan sometime in August 1989 to live with engaged in except the foundation and a paluwagan, which she ran
Priscilla at the Diaz Apartment in Puerto Princesa. Norma Francisco also together with a certain Manny Diaz. Norma knew that the foundation
came to Palawan in August, purportedly to visit Priscilla's daughter, was a charitable institution that had helped a lot of people. She did not
whom she missed. Analina likewise came to Palawan from Manila in help Ruth Jalover in the same way that she helped Sylvia Magnaye with
August. her job as teller, but she had nothing to do with the keeping of records.
She knew that money came from the tellers, who got the money from
Guillermo denies participation in the commission of the crime charged. Nelia Daco, the one receiving money from prospective investors. 13
In his testimony, he limits his participation in the foundation's activities
to paying the holders of matured slots. It was the comptroller, Ruth On March 31, 1992, Branch 50 of the Regional Trial Court of Palawan
Jalover, who would give him the record on which to base the issued a joint decision in Criminal Case Nos. 8734 and 8428 finding the
remittances he would make. 11 The money he disbursed was not always accused guilty of the crime charged and of having acted in conspiracy in
in his possession, as it would have to come from the bank. It was Sylvia committing the same. Finding no aggravating or mitigating
Magnaye who would withdraw the money from the bank while it was circumstances in the commission of the crime, the trial court decreed
Nelia Daco who would directly receive money from the people. Thus, thus:
not even once did he participate in the process of receiving money. His
daughters Priscilla Balasa and Normita Visaya performed other jobs in WHEREFORE AND IN VIEW OF THE FOREGOING
the operation of the foundation while his other daughter, Analina CONSIDERATIONS, judgment is hereby rendered
Francisco, only typed documents. He knew that the foundation helped finding all the accused in the 2 above-entitled cases
people who received money from it. 12 Although the primary purpose of guilty as principals of the crime of estafa as the same
the foundation was to help the needy, Guillermo testified having is defined and penalized under the Revised Penal
knowledge of only one recipient thereof, the church of Aborlan. Code.

In her testimony, Norma Francisco also denied complicity in the crime a. In Criminal Case No. 8428 accused
charged, claiming that she only did household chores in Puerto Priscilla Balasa, Normita Visaya,
Princesa. She alleged that sometimes, she would "help the tellers." Analina Francisco, Guillermo
However, because Ruth Jalover was educated and she was not, the Francisco and Norma Francisco are
former would sometimes become the "acting manager of her hereby sentenced to suffer the
daughter." Sylvia Magnaye, her daughter's sister-in-law and a penalty of reclusion perpetua as well
permanent employee of the foundation, was one of the tellers who as to pay the costs. The accused are
would deposit and withdraw from the bank. The eight tellers of the jointly and severally ordered to pay
foundation all applied for their jobs with Priscilla but it was Normita the offended party Alfonso Lacao the
who interviewed them. However, Normita was only a clerk in the sum of Fifty Eight Thousand Eight
foundation while Analina would type whatever work Ruth Jalover Hundred Fifty (P58,850.00) Pesos and
would give her. While Norma had no official position in the foundation, to pay the further sum of Thirty
her husband, Guillermo, was the paymaster. During her stay in Puerto Thousand Pesos (P30,000.00) as and
Princesa, she knew of no other business that her daughter Priscilla was for moral damages;

37
 b. In Criminal Case No. 8734, accused doubt as co-principals of the crime of estafa
Normita Visaya, Analina Francisco, committed by a syndicate in violation of Section 1 of
Norma Francisco and Guillermo Presidential Decree No. 1689, and each of the
Francisco are hereby sentenced to aforenamed accused is sentenced to reclusion
suffer the penalty of reclusion perpetua; to pay to Estrella Lacao San Gabriel, jointly
perpetua as well as to pay the costs. and severally, by way of restitution, the sum of
They are furthermore ordered jointly P5,500.00.00, with interest thereon of 12% per annum
and severally to indemnify the from December, 1989, until fully paid; and to pay the
offended party Elisea Mensias the costs.
sum of Four Thousand Five Hundred
(P4,500.00) Pesos as well as to pay On grounds of reasonable doubt engendered by lack
the additional sum of Fifteen of sufficiently clear and convincing evidence as against
Thousand (P15,000.00) Pesos as and her, co-accused Analina Francisco is acquitted of the
for moral damages. offense charged.

The cases against the accused Almarino Agayo, Paul SO ORDERED.

Francisco, Candido Tolentino, Jr., Ricardo del Rosario,
Jessica Buaya, Fernando Cadauan, Lolita Gelilang Although Branch 52 rendered separate decisions in the cases assigned
Cynthia Ang, Rodolfo Ang Jr., Purable Espidol, Melinda to it, all had essentially the same disposition — imposing the penalty
Mercado, and Teresit Carandang who remained at of reclusion perpetua upon each of the convicted accused — only the
large up to the present time are hereby ordered name of the offended party and the amount to be restituted varied.
archived to be reinstated in the docket of this Court as Thus, in Criminal Case No.
soon they shall have been arrested or surrendered 8704, 14 the trial court ordered the accused to pay Conchita Bigornia by
voluntarily to the jurisdiction of this Court. way of restitution, the amount of P24,200.00 with interest thereon of
12% per annum from December 1989. In Criminal Case No. 8749, 15 the
SO ORDERED. same convicted accused were ordered to restitute Shiela San Juan the
amount of P25,800.00 plus 12% per annum from December 1989. In
On the other hand, Branch 52 rendered separate decisions in the cases Criminal Case No. 8751, 16 the convicted accused were ordered to
assigned to it. Thus, on October 14, 1991, the trial court in Criminal restitute Benjamin Yangco the amount of P6,800.00 with 12% interest
Case No. 8429 rendered a decision, the dispositive portion of which per annum from December 1989.
reads as follows:
Guillermo and Norma Francisco filed notices of appeal in Criminal Case
WHEREFORE, premises considered, judgment is Nos. 8429, 8704, 8749 and 8751. Their appeal was docketed as G.R. No.
hereby rendered finding co-accused PRISCILLA 106357. Likewise, the joint decision in Criminal Case Nos. 8734 and
BALASA, NORMITA VISAYA, GULLLERMO FRANCISCO, 8428 was appealed to this Court by Guillermo Francisco, Norma
and NORMA FRANCISCO guilty beyond reasonable Francisco, Analina Francisco, and Normita Visaya, docketed herein as

38
G.R. Nos. 108601-02. Noting Normita Visaya's escape from police them alleged prejudice against the complaining witnesses, not against
custody after arraignment, the Court, on August 15, 1994, and pursuant the national, provincial, or city economy nor was evidence presented
to Section 8, Rule 124 of the Revised Rules of Court, ordered the therefor.
dismissal of her appeal on the ground of abandonment. The Court also
considered Priscilla Balasa's conviction to be final and executory, in Appellants' conviction must, however, be sustained, the issues raised
light of her escape from police custody. It also ordered the issuance of being devoid of merit. The number and diversity of issues raised by
a warrant for the arrest of Normita Visaya and an alias warrant of appellants impel us to discuss the points raised seriatim.
arrest against Priscilla Balasa.
For the first assignment of error, we hold that the elements of the
On October 16, 1993, appellants' counsel, Atty. Agustin Rocamora, filed crime defined and penalized by P.D. No. 1689 have been proven
an appellants' brief in G.R. No. 106357. Thereafter, appellants beyond reasonable doubt in these appealed cases. The informations
appointed the Maramba and Mamauag Law Office as new counsel in filed against appellants alleged that by means of false representation or
substitution of Atty. Rocamora. On November 2, 1994, new counsel false pretenses and through fraudulent means, complainants were
filed a motion to consolidate G.R. No. 106357 and G.R. Nos. 108601-02. defrauded of various amounts of money by the accused. Article 315,
On December 7, 1994, the Court granted the motion and ordered the paragraph 2 (a) of the Revised Penal Code provides that swindling or
consolidation of the two cases. On the same day, counsel for appellants estafa by false pretenses or fraudulent acts executed prior to or
submitted a consolidated appellants' brief. simultaneously with the commission of the fraud is committed by
"using fictitious name, or falsely pretending to possess power,
In G.R. No. 106357, counsel for appellants raise the following errors: influence, qualifications, property, credit, agency, business or imaginary
transactions, or by other similar deceits." The elements of estafa under
1. The trial court erred in convicting the this penal provision are: (1) the accused defrauded another by means
appellants despite the total absence of of deceit and (2) damage or prejudice capable of pecuniary estimation
evidence against them; is caused to the offended party or third party. 17 It is indisputable that
the foundation failed to return the investments of the complaining
2. The trial court erred in ruling that witnesses, hence it is undeniable that the complainants suffered
conspiracy existed on the basis of the damage in the amount of their unrecouped investments. What needs
relationship of the appellants to the principal elucidation is whether or not the element of defraudation by means of
accused; and deceit has been established beyond reasonable doubt.

3. The trial court erred in convicting Fraud, in its general sense, is deemed to comprise anything calculated
appellants despite their prior conviction for to deceive, including all acts, omissions, and concealment involving a
the same offense in Criminal Case No. 8429. breach of legal or equitable duty, trust, or confidence justly reposed,
resulting in damage to another, or by which an undue and
On the other hand, the brief filed by appellants in the consolidated unconscientious advantage is taken of another. 18 It is a generic term
cases mainly argues that they cannot be convicted of the defined in embracing all multifarious means which human ingenuity can device,
Presidential Decree No. 1689 because the informations filed against and which are resorted to by one individual to secure an advantage

39
over another by false suggestions or by suppression of truth and In contravention of these by-laws and modus operandi, the people
includes all surprise, trick, cunning, dissembling and any unfair way by behind the foundation enticed people to "deposit or invest" funds in
which another is cheated. 19 On the other hand, deceit is the false the foundation under a "double or treble your deposit" scheme. These
representation of a matter of fact whether by words or conduct, by investment activities were clearly ultra vires acts or acts beyond the
false or misleading allegations, or by concealment of that which should foundation's authority. Evidently, SEC registration was obtained only
have been disclosed which deceives or is intended to deceive another for the purpose of giving a semblance of legitimacy to the foundation;
so that he shall act upon it to his legal injury. 20 that the foundation's business was sanctioned by the government; and
that it was allowed by law to accept deposits. This pretension was
In pursuit of their agenda, appellants established a foundation which, carried out even on the slots it issued, the foundations' S.E.C. registry
by its articles of incorporation, was established, allegedly to "uplift number being indicated thereon.
members' economic condition by way of financial or consultative
basis." Organized as a non-stock, non-profit charitable institution, its In carrying out the charade, the manager went to the extent of
funds were to be obtained through membership dues and such other delivering a speech and personally encouraging people to deposit or
assessments as may be agreed upon by its board of invest in the foundation. Alfonso Lacao, a complainant and prosecution
directors. 21 Furthermore, the modus operandi 22 of the foundation, duly witness, testified:
signed by Priscilla Balasa, provided that: 
Q: Have you heard of this so called
Funding Panata Foundation?

Any funding requirements to finance the operation of A: Yes, ma'm I heard it from my
the association shall be done through the collection of friends who are talking about this
membership fees, dues, donations, bequests and Panata Foundation they even
other assessments. The amount of which shall be informed me that the manager of this
subject to the approval of the general membership of Panata Foundation is calling for a
the association. meeting for all depositors and
prospective depositors on Saturday
Likewise, all funds in-flows would be used exclusively afternoon.
to carry out the purposes for which the FOUNDATION
is established and would not inure to the benefit of Q: With that information did you get
any single member of the FOUNDATION. interested in the proposed meeting
being called by this Panata
The operations personnel shall come from volunteers Foundation?
among its members and should the need arise, hiring
of additional personnel be resorted to. A: I was curious and came Saturday I
went to the office of the Panata
Foundation to attend the meeting.

40
 Q: And at that time where was this Q: Aside from that what did Priscilla
office located? Balasa tell those people who
attended the meeting?
A: At Diaz Apartment, Manalo
Extension, Puerto Princesa City. A: She was assuring the people that
they must not be afraid to deposit
Q: Did you attend that meeting? their money because they will not be
fooling around with them.
A: Yes ma'am.
x x x           x x x          x x x
Q: Whom did you see sponsoring that
meeting on that particular day? Q: And did Priscilla Balasa tell those
persons attending the meeting what
A: Upon arrival I saw a woman would happen with the money they
delivering her message to the will deposit with the Panata
depositors and to the prospective Foundation?
depositors. I asked a friend of me (sic)
who is that woman and he informed A: She was telling the people that you
me that she is the manager of the could deposit the money and it will
Panata Foundation Priscilla Balasa. be doubled within 21 days. I was
further informed that the maximum
x x x           x x x          x x x amount to be deposited is P5,000,00.

Q: What was Priscilla Balasa doing if Q: You stated a while ago that the
any in that particular meeting? amount deposited will be doubled
after 21 days?
A: In her message she was convincing
all the people there to make their A: Yes ma'am.
deposit to the Panata Foundation
because according to her they were Q: Aside from that what else if any
sent here to help the people of did Priscilla Balasa tell the public who
Puerto Princesa City and the people attended that meeting?
of Palawan.
A: She was telling the public to make
ease with their deposit because they

41
 were sent here to help the people of Q: Other than to issue slots, do you
Puerto Princesa City and Palawan. know what other phase of operation
in running the Panata Foundation
Q: Did she tell the public as to where during the time that you were
the money would be coming from? employed?

A: Right that moment she was not A: No sir, I can only observe that
able to tell the public. 23 issuing of slots.

On cross-examination, Mr. Lacao testified: Q: Madam Witness, aside from

issuing slots, there is only the activity
Q: But did it not occur to your mind of the foundation that you are well
considering your past experience to aware of?
investigate or cause the investigation
of this Panata Foundation considering A: Sometimes they also sent me to
your connection as to whether they deposit.
are in a position to make double your
money investment specially so they Q: The deposit of the amount
are not engage (sic) in business, so to collected in the bank, is that correct?
speak?
A: I do not know but they just send
A: Once I overheard the manager say me to deposit amounts.
when she was there telling the
people around the depositors that Q: But you do not know in what other
their money is being invested in a business activity other than the
world bank. 24 matter of collecting money and
issuance of slots you do not know if
Priscilla Balasa, thus, promised the credulous public quick financial the Panata Foundation is involved in
gains on their investments. The foundation even printed brochures any business activity?
proclaiming the merits of the foundation's investment
scheme. 25 Likewise, to bolster the illusion that indeed, the foundation A: Yes, sir.
was legitimate, the claim was made that deposits would be invested
abroad in a world bank, with said transactions allegedly enabling the Q: You do not know whether the
foundation to double or treble depositors' investments. The evidence, foundation receives money regularly
however, proves the contrary. Sylvia Magnaye, one of the tellers, from any other source?
testified:

42
 A: I do not know sir. 26 clearly deduced from the fact that the foundation was not engaged nor
authorized to engage in any lucrative business to finance its operation.
On cross-examination, she testified: It was not shown that it was the recipient of donations or bequest with
which to finance its "double or triple your money" scheme, nor did it
Q: You mentioned Madam Witness, have any operating capital to speak of when it started operations.
that on several occasions you were
asked to deposit certain amounts in Parenthetically, what appellants offered the public was a "Ponzi
the bank, do you remember having scheme," an investment program that offers impossibly high returns
told the Court that? and pays these returns to early investors out of the capital contributed
by later investors. 29Named after Charles Ponzi who promoted the
A: Right, sir. 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
Q: Do you remember how many 90 days. Basically, Ponzi used the money he received from later
banks these deposited amounts were investors to pay extravagant rates of return to early investors, thereby
if you remember? inducing more investors to place their money with him in the false
hope of realizing this same extravagant rate of return themselves. This
A: I deposited at PNB, PCIBank, and was the very same scheme practiced by the Panata Foundation.
DBP and Rural Bank of Coron.
However, the Ponzi scheme works only as long as there is an ever-
Q: Do you remember in whose names increasing number of new investors joining the scheme. To pay off the
you deposited these amounts you 50% bonds Ponzi had to come up with a one-and-a-half times increase
deposited? with each round. To pay 100% profit he had to double the number of
investors at each stage, and this is the reason why a Ponzi scheme is a
scheme and not an investment strategy. The progression it depends
A: In the name of the joint account of
upon is unsustainable. The pattern of increase in the number of
Priscilla Balasa and Norma
participants in the system explains how it is able to succeed in the short
Francisco. 27
run and, at the same time, why it must fail in the long run. This game is
difficult to sustain over a long period of time because to continue
The testimonial evidence presented by the prosecution proves that
paying the promised profits to early investors, the operator needs an
appellants employed fraud and deceit upon gullible people to convince
ever larger pool of later investors. 30The idea behind this type of
them to invest in the foundation. It has been held that where one
swindle is that the "con-man" collects his money from his second or
states that the future profits or income of an enterprise shall be a
third round of investors and then absconds before anyone else shows
certain sum, but he actually knows that there will be none, or that they
up to collect. Necessarily, these schemes only last weeks, or months at
will be substantially less than he represents, the statement constitutes
most. 31
actionable fraud where the hearer believes him and relies on the
statement to his injury. 28 That there was no profit forthcoming can be

43
Note should also be taken of the fact that appellants used "slots" in hearer, and has thus accomplished a fraudulent result, he cannot
their operation. These slots are actually securities, 32 the issuance of defend against the fraud by proving that the victim was negligent in
which needs the approval of the Securities and Exchange Commission. failing to discover the falsity of the statement — is said to be peculiarly
Knowing fully well that the S.E.C. would not approve the issuance of applicable where the owner of the property or a business intentionally
securities by a non-stock, non-profit organization, the operators of the makes a false statement concerning its rents, profits or income. The
Ponzi scheme, nevertheless, applied for registration as a foundation, an doctrine of caveat emptor has been held not to apply to such a case. 35
entity not allowed to engage in securities.
The second assignment of error is likewise devoid of merit. Appellants
Finally, if the foundation were indeed legitimate, the incorporators, deny the existence of a conspiracy in the perpetration of the fraudulent
outside of the members of the Francisco family, would not have scheme, charging that mere relationship does not prove conspiracy.
escaped from the clutches of the law. If the foundation and its Guillermo Francisco further maintains that he was not even an
investment scheme were legal, then it behooved them to come out and incorporator of the foundation.
testify for their own exoneration. The wicked flee when no man
pursueth: but the righteous are bold as a lion. 33 The evidence adduced by the prosecution confirms the existence of a
conspiracy among the appellants in committing the crime charged. The
In their defense, appellants would shift the blame on the investors. fact that Guillermo Francisco was not an incorporator of the foundation
Invoking the legal principle of caveat emptor, they maintain that it was does not make him any less liable for the crime charged. By his own
the investors' own greed that did them in, implying that the depositors admission, he participated in the foundation's activities by serving as its
should have known that no sensible business could afford to pay such paymaster. Because he is father and husband to three of the organizers
extravagant returns. Having investigated the foundation and its of the foundation, it is not farfetched to presume that he was aware of
activities, the investors should fault themselves, not the appellants, for its operations. By his active cooperation, he showed a community of
investing in the foundation despite the patent impossibility of its design with the incorporators of the foundation, thereby making him a
claims. co-conspirator and equally liable for the crime charged. His voluntary
and indispensable cooperation was a concatenation of the criminal acts
The contention is untenable. The fact that the buyer makes an performed by his co-accused. 36 In this regard, appellant Guillermo
independent investigation or inspection has been held not to preclude Francisco is not being implicated as a co-conspirator solely because he
him from relying on the representation made by the seller where the is the father of the principal proponent of the Ponzi scheme. He is held
seller has superior knowledge and the falsity of such representation liable as a conspirator because of his indispensable act of being the
would not be apparent from such examination or inspection, and, a paymaster of the foundation.
fortiori, where the efforts of a buyer to learn the true profits or income
of a business or property are thwarted by some device of the seller, Likewise, Norma Francisco's bare denial cannot exempt her from
such efforts have been held not to preclude a recovery. 34 It has often complicity. Denials of an accused cannot be accorded greater
been held that the buyer of a business or property is entitled to rely on evidentiary weight than the positive declarations of credible witnesses
the seller's statements concerning its profits, income or rents. The rule who testify on affirmative matters. 37 Moreover, her efforts to show
— that where a speaker has knowingly and deliberately made a that she was a mere housewife who simply helped in her daughter's
statement concerning a fact the falsity of which is not apparent to the

44
"business" is refuted by the prosecution witnesses. Ruth Jalover Q: In the Panata Foundation?
testified:
A: Yes sir. 39
Q: Madam Witness, do you know a
person by the name of Norma On cross-examination, she further testified:
Francisco?
Q: Now, I would like to direct your
A: Yes sir. attention also to the other accused,
Norma Francisco. You stated that she
Q: And how did you come to Know is your cashier, do you remember
her Madam Witness? having done that?

A: She is my co-employee at the A: Yes sir.

Panata Foundation sir.
Q: When you say she is the cashier,
Q: What was her job in the Panata do you mean to say that she is the
Foundation? one who pays out money or amounts
to the employees Madam Witness?
A: She was the one who received the
money from our tellers every A: Yes sir. 40
afternoon. 38
Aside from being the cashier, Norma Francisco was also an
Sylvia Magnaye, on the other hand, testified: incorporator of the foundation. Likewise, the money invested in the
foundation was deposited in joint bank accounts in Priscilla Balasa's
Q: Madam Witness, do you know a name and hers. Norma Francisco's activities would thus show a
person by the name of Norma community of design with the other accused making her a co-
Francisco? conspirator and equally liable for the crime charged. Her voluntary and
indispensable cooperation concurred with the criminal acts performed
A: Yes sir. by her co-accused.

Q: How did you come to know her As for Analina Francisco, however, the evidence adduced as to her
Madam Witness? complicity in the nefarious scheme is far from conclusive. While she
was an incorporator and treasurer of the foundation, there is no
A: She is our former cashier sir. denying the fact that she is a deaf-mute. As such, she is incapable of
communicating and conveying her thoughts to the complaining

45
witnesses and other depositors. This casts serious doubt on whether constitutes economic sabotage that threatens the stability of the
she could be deemed to have similarly conspired and confederated nation. 42
with the other accused. As Branch 52 pointed out, on paper she might
have been in the thick of the foundation's operation — being an In support of their argument, appellants point out that there could not
incorporator and treasurer. We are not, however, convinced that she have been economic sabotage under the facts of the case because the
was actually involved in the sinister scheme. In fact, she was given the total amount of P125,400.00 allegedly embezzled "by the other
manual task of typing papers, despite her being the treasurer of the accused (not herein appellants)," did not weaken or threaten national
foundation. Her disability might have been the principal reason for economic stability. To emphasize that point, appellants enumerate the
giving her that job — she was literally deaf and mute to the nefarious revenue collections of Palawan and Puerto Princesa City, "for dearth of
activities going on in the foundation that she did not pose a danger to a better reference," from 1987 to 1992 showing that the revenue
it. Furthermore, it is well settled that where the acts of an accused are collections for 1989 alone amounted to P75,002,499,19. Appellants
capable of two interpretations, that which is in consonance with assert that as compared to such revenue collection in 1989, the
innocence should prevail. amount allegedly embezzled was negligible. As such, the crime
committed in this case was not of the same genre as the "Agrix" and
With respect to the third assignment of error, appellants cannot raise "Dewey Dee" scams that "spurred the birth of P.D. No. 1689. 43
the defense of double jeopardy for which the following requisites must
concur: (1) a first jeopardy must have attached prior to the second; (2) Appellants, in a desperate attempt to avoid conviction, grasp at straws.
the first jeopardy must have been validly terminated; (3) the second The law upon which appellants have been charged and convicted reads
jeopardy must be for the same offense, or the second offense includes as follows:
or is necessarily included in the offense charged in the first information,
or is an attempt to commit the same or a frustration thereof. 41 In the PRESIDENTIAL DECREE NO. 1689
instant case, the offense charged in Criminal Case No. 8429 is different
from the offense charged in the other cases. While these cases arose INCREASING THE PENALTY FOR CERTAIN FORMS OF 
out of the same scheme, the fraudulent acts charged were committed
against different persons, hence they do not constitute the same SWINDLING OR ESTAFA.
offense.
WHEREAS, there is an upsurge in the commission of
Lastly, appellants assert that they cannot be convicted under P.D. No. swindling and other forms of frauds in rural banks,
1689. They contend that the following requisites must concur for cooperatives, "samahang nayon(s)", and farmers'
conviction under P.D. No. 1689: (1) that estafa is committed under associations or corporations/associations operating on
Articles 315 or 316 of the Revised Penal Code; (2) by a syndication of funds solicited from the general public;
five or more persons; (3) against a) stockholders or members of rural
banks, cooperatives, or samahang nayon; b) corporations or
WHEREAS, such defraudation or misappropriation of
associations the funds of which are solicited from the general public;
funds contributed by stockholders or members of such
and (4) such defraudation erodes the confidence of the public in the
rural banks, cooperatives, "samahang nayon(s)", or
banking and cooperative systems, contravenes public interest, and (5)

46
 farmers' associations, or of funds solicited by temporal to reclusion perpetua if the amount of the
corporations/associations from the general public, fraud exceeds 100,000 pesos.
erodes the confidence of the public in the banking and
cooperative system, contravenes the public interest, Sec. 2. This decree shall take effect immediately.
and constitutes economic sabotage that threatens the
stability of the nation; DONE in Manila, Philippines, this 6th day of April, in
the year of Our Lord, nineteen hundred and eighty.
WHEREAS, it is imperative that the resurgence of said
crimes be checked, or at least minimized, by imposing Under this law, the elements of the crime are: (a) estafa or other forms
capital punishment on certain forms of swindling and of swindling as defined in Articles 315 and 316 of the Revised Penal
other frauds involving rural banks, cooperatives, Code is committed; (b) the estafa or swindling is committed by a
"samahang nayon(s)", farmers' associations or syndicate, and (c) defraudation results in the misappropriation of
corporations/associations operating on funds solicited moneys contributed by stockholders, or members of rural banks,
from the general public; cooperatives, "samahang nayon(s)," or farmers associations, or of
funds solicited by corporations/associations from the general public.
NOW, THEREFORE, I, FERDINAND E. MARCOS, These are the only elements of the crime under Section 1 of the decree.
President of the Philippines, by virtue of the powers The two other "ingredients" added by appellants to constitute the
vested in me by the Constitution, do hereby decree crime of economic sabotage under P.D. No. 1689 have been taken from
and order as follows: the "whereas" clause or preamble of the law. A preamble is not exactly
an essential part of an act as it is an introductory or preparatory clause
Sec. 1. Any person or persons who shall commit estafa that explains the reasons for the enactment, usually introduced by the
or other forms of swindling as defined in Article 315 word "whereas." 44 In People v.
and 316 of the Revised penal Code, as amended, shall Purisima, 45 we explained that the preamble serves as the key to the
be punished by life imprisonment to death if the intent and spirit of the decree. It enumerates the facts or events
swindling (estafa) is committed by a syndicate justifying the promulgation of the decree. It enumerate the fact or
consisting of five or more persons formed with the events justifying the promulgation of the decree and the sanctions for
intention of carrying out the unlawful or illegal act, the acts prohibited therein. As such, although it is an aid in
transaction, enterprise or scheme, and the interpretation, the preamble of an act or decree is not the law subject
defraudation results in the misappropriation of thereof. Appellants' novel theory must, therefore, be given short shrift
moneys contributed by stockholders, or members of by this Court.
rural banks, cooperatives, "samahang nayon(s)", or
farmers associations, or of funds solicited by Assuming arguendo that the preamble was part of the statute,
corporations/associations from the general public. appellants' contention that they should not be held criminally liable
because it was not proven that their acts constituted economic
When not committed by a syndicate as above defined, sabotage threatening the stability of the nation remains too flimsy for
the penalty imposable shall be  reclusion extensive discussion. As the preamble of P.D. No. 1689 shows, the act

47
prohibited therein need not necessarily threaten the stability of the together with others acted and operated as a syndicate as defined
nation. It is sufficient that it "contravenes public interest." Public under P.D. No. 1689 and should be held liable therefor." 46 However, it
interest was affected by the solicitation of deposits under a promise of imposed the penalty of reclusion perpetua, the penalty imposable
substantial profits, as it was people coming from the lower income under the second paragraph of Section 1 of P.D. No. 1689 — where the
brackets who were victimized by the illegal scheme. offenders are not members of a syndicate and the amount involved is
more than P100,000.00. The existence of a syndicate having been
Similarly, the fact that the entity involved was not a rural bank, proved, the crime falls under the first paragraph of Section 1 of P.D. No.
cooperative, samahang nayon or farmers' association does not take the 1689, with an imposable penalty of life imprisonment to death. Hence,
case out of the coverage of P.D. No. 1689. Its third "whereas clause" the imposition of reclusion perpetua is incorrect. Given the absence of
states that it also applies to other "corporations/associations operating aggravating or mitigating circumstances, the lesser penalty, or life
on funds solicited from the general public." The foundation fits into imprisonment, should have been meted out. 47
these category as it "operated on funds solicited from the general
public." To construe the law otherwise would sanction the proliferation Branch 52, likewise, ruled that the accused committed the offense of
of minor-league schemers who operate in the countryside. To allow estafa by a syndicate under P.D. No. 1689. Therefore appellants, due to
these crimes to go unabated could spell disaster for people from the the absence of mitigating or aggravating circumstances, should have
lower income bracket, the primary target of swindlers. been punished with life imprisonment. However, in the dispositive
portion of its decision in the four cases assigned to it, Branch 52
Again, P.D. No. 1689 penalizes offenders with life imprisonment to imposed the penalty of reclusion perpetua instead.
death regardless of the amount involved, provided that a syndicate
committed the crime. A syndicate is defined in the same law as The Court finds this an opportune time to restate that the penalties of
"consisting of five or more persons formed with the intention of life imprisonment and reclusion perpetua are not the same. Thus:
carrying out the unlawful or illegal act, transaction, enterprise or
scheme." If the offenders are not members of a syndicate, they shall While "life imprisonment" may appear to be the
nevertheless be held liable for the acts prohibited by the law but they English translation of reclusion perperua, in reality, it
shall be penalized by reclusion temporal to reclusion perpetua if the goes deeper than that. First, "life imprisonment" is
amount of the fraud is more than one hundred thousand pesos invariably imposed for serious offenses penalized by
(P100,000.00). special laws, while reclusion perpetua is prescribed
under The Revised Penal Code. Second, "life
In the instant case, a syndicate perpetrated the Ponzi scheme. The imprisonment," unlike reclusion perpetua, does not
evidence shows that at least five persons — Priscilla Balasa, Normita carry with it any accessory penalty. Third, "life
Visaya, Norma Francisco, Guillermo Francisco, and the other imprisonment" does not appear to have any definite
incorporators of the foundation — collaborated, confederated and extent or duration, while reclusion perpetua entails
mutually helped one another in directing the foundation's activities. imprisonment for at least thirty (30) years after which
the convict becomes eligible for pardon, although the
In its decision in Criminal Case Nos. 8428 and 8734, Branch 50 found maximum period thereof shall in no case exceed forty
that the "accused numbering 5 who composed the Francisco Family (40) years. 48

48
WHEREFORE, premises considered, the decisions appealed from are VELASCO, JR., and
hereby AFFIRMED in so far as appellants GUILLERMO and NORMA
FRANCISCO are convicted for violation of the first paragraph of Section COURT OF APPEALS, LUKE BRION, JJ.
1 of Presidential Decree No. 1689 and ordered to restitute to
complainants the amounts they have been defrauded, subject to the ROXAS and EVELYN NOLASCO,
MODIFICATION that appellants GUILLERMO and NORMA FRANCISCO
shall each suffer the penalty of life imprisonment for each violation of Respondents. Promulgated:
the same law under the corresponding criminal cases. Appellant
ANALINA FRANCISCO is hereby ACQUITTED of the crimes charged September 12, 2008
under Criminal Case Nos. 8428 and 8734 on ground of reasonable
doubt and her immediate release from custody is ordered unless she is
x ---------------------------------------------------------------------------------x 
being held on other legal grounds.
DECISION
Let a copy of this Decision be furnished the Department of Justice and
the Philippine National Police in order that the arrest of Priscilla Balasa,
Tinga, J.:
Normita Visaya and the others who have so far eluded the law shall be
effected with dispatch.
On 21 August 2000, petitioners Betty Go Gabionza (Gabionza) and
Isabelita Tan (Tan) filed their respective Complaints-affidavit 1 charging
SO ORDERED.
private respondents Luke Roxas (Roxas) and Evelyn Nolasco (Nolasco)
with several criminal acts. Roxas was the president of ASB Holdings, Inc.
5. BETTY GABIONZA and G.R. No. 161057
(ASBHI) while Nolasco was the senior vice president and treasurer of
the same corporation. 
ISABELITA TAN,
According to petitioners, ASBHI was incorporated in 1996 with its
Petitioners, declared primary purpose to invest in any and all real and personal
properties of every kind or otherwise acquire the stocks, bonds, and
Present: other securities or evidence of indebtedness of any other corporation,
and to hold or own, use, sell, deal in, dispose of, and turn to account
QUISUMBING, J. any such stocks.2ASBHI was organized with an authorized capital stock
of P500,000.00, a fact reflected in the corporation’s articles of
Chairperson, incorporation, copies of which were appended as annexes to the
complaint.3
- versus - CARPIO MORALES,
Both petitioners had previously placed monetary investment with the
TINGA, Bank of Southeast Asia (BSA). They alleged that between 1996 and

49
1997, they were convinced by the officers of ASBHI to lend or deposit reconsideration but this was denied in February 2001.10 With respect to
money with the corporation. They and other investors were urged to the charges of estafa under Article 315(2) of the Revised Penal Code
lend, invest or deposit money with ASBHI, and in return they would and of violation of the Revised Securities Act (which form the crux of
receive checks from ASBHI for the amount so lent, invested or the issues before this Court), the Task Force concluded that the subject
deposited. At first, they were issued receipts reflecting the name "ASB transactions were loans which gave rise only to civil liability; that
Realty Development" which they were told was the same entity as BSA petitioners were satisfied with the arrangement from 1996 to 2000;
or was connected therewith, but beginning in March 1998, the receipts that petitioners never directly dealt with Nolasco and Roxas; and that a
were issued in the name of ASBHI. They claimed that they were told check was not a security as contemplated by the Revised Securities
that ASBHI was exactly the same institution that they had previously Act. 
dealt with.4
Petitioners then filed a joint petition for review with the Secretary of
ASBHI would issue two (2) postdated checks to its lenders, one Justice. On 15 October 2001, then Secretary Hernando Perez issued a
representing the principal amount and the other covering the interest resolution which partially reversed the Task Force and instead directed
thereon. The checks were drawn against DBS Bank and would mature the filing of five (5) Informations for estafa under Article 315(2)(a) of
in 30 to 45 days. On the maturity of the checks, the individual lenders the Revised Penal Code on the complaints of Chan and petitioners
would renew the loans, either collecting only the interest earnings or Gabionza and Tan, and an Information for violation of Section 4 in
rolling over the same with the principal amounts.5 relation to Section 56 of the Revised Securities Act.11 Motions for
reconsideration to this Resolution were denied by the Department of
In the first quarter of 2000, DBS Bank started to refuse to pay for the Justice in a Resolution dated 3 July 2002.12
checks purportedly by virtue of "stop payment" orders from ASBHI. In
May of 2000, ASBHI filed a petition for rehabilitation and receivership Even as the Informations were filed before the Regional Trial Court of
with the Securities and Exchange Commission (SEC), and it was able to Makati City, private respondents assailed the DOJ Resolution by way of
obtain an order enjoining it from paying its outstanding liabilities.6 This a certiorari petition with the Court of Appeals. In its assailed
series of events led to the filing of the complaints by petitioners, Decision13 dated 18 July 2003, the Court of Appeals reversed the DOJ
together with Christine Chua, Elizabeth Chan, Ando Sy and Antonio and ordered the dismissal of the criminal cases. The dismissal was
Villareal, against ASBHI.7 The complaints were for estafa under Article sustained by the appellate court when it denied petitioners’ motion for
315(2)(a) and (2)(d) of the Revised Penal Code, estafa under reconsideration in a Resolution dated 28 November 2003.14 Hence this
Presidential Decree No. 1689, violation of the Revised Securities Act petition filed by Gabionza and Tan.
and violation of the General Banking Act. 
The Court of Appeals deviated from the general rule that accords
A special task force, the Task Force on Financial Fraud (Task Force), was respect to the discretion of the DOJ in the determination of probable
created by the Department of Justice (DOJ) to investigate the several cause. This Court consistently adheres to its policy of non-interference
complaints that were lodged in relation to ASBHI.8 The Task Force, in the conduct of preliminary investigations, and to leave to the
dismissed the complaint on 19 October 2000, and the dismissal was investigating prosecutor sufficient latitude of discretion in the
concurred in by the assistant chief state prosecutor and approved by determination of what constitutes sufficient evidence to establish
the chief state prosecutor.9 Petitioners filed a motion for

50
probable cause for the filing of an information against a supposed is difficult to make a different conclusion, judging from the fact that
offender.15 respondents Roxas and Nolasco authorized and accepted for ASB the
fraud-induced loans. This makes them liable for estafa under Article
At the outset, it is critical to set forth the key factual findings of the DOJ 315 (paragraph 2 [a]) of the Revised Penal Code. They cannot escape
which led to the conclusion that probable cause existed against the criminal liability on the ground that they did not personally deal with
respondents. The DOJ Resolution states, to wit: the complainant-petitioners in regard to the transactions in question.
Suffice it to state that to commit a crime, inducement is as sufficient
The transactions in question appear to be mere renewals of the loans and effective as direct participation.16
the complainant-petitioners earlier granted to BSA. However, just after
they agreed to renew the loans, the ASB agents who dealt with them Notably, neither the Court of Appeals’ decision nor the dissent raises
issued to them receipts indicating that the borrower was ASB Realty, any serious disputation as to the occurrence of the facts as narrated in
with the representation that it was "the same entity as BSA or the above passage. They take issue instead with the proposition that
connected therewith." On the strength of this representation, along such facts should result in a prima facie case against either Roxas or
with other claims relating to the status of ASB and its supposed Nolasco, especially given that neither of them engaged in any face-to-
financial capacity to meet obligations, the complainant-petitioners face dealings with petitioners. Leaving aside for the moment whether
acceded to lend the funds to ASB Realty instead. As it turned out, this assumed remoteness of private respondents sufficiently insulates
however, ASB had in fact no financial capacity to repay the loans as it them from criminal liability, let us first discern whether the above-
had an authorized capital stock of only P500,000.00 and paid up capital stated findings do establish a prima facie case that petitioners were
of only P125,000.00. Clearly, the representations regarding its indeed the victims of the crimes of estafa under Article 315(2)(a) of the
supposed financial capacity to meet its obligations to the complainant- Revised Penal Code and of violation of the Revised Securities Act. 
petitioners were simply false. Had they known that ASB had in fact no
such financial capacity, they would not have invested millions of pesos. Article 315(2)(a) of the Revised Penal Code states:
Indeed, no person in his proper frame of mind would venture to lend
millions of pesos to a business entity having such a meager ART. 315. Swindling (estafa). — Any person who shall defraud another
capitalization. The fact that the complainant-petitioners might have by any of the means mentioned herein below shall be punished by:
benefited from its earlier dealings with ASB, through interest earnings
on their previous loans, is of no moment, it appearing that they were xxx xxx xxx
not aware of the fraud at those times they renewed the loans.
(2) By means of any of the following false pretenses or fraudulent acts
The false representations made by the ASB agents who dealt with the executed prior to or simultaneous with the commission of the fraud:
complainant-petitioners and who inveigled them into investing their
funds in ASB are properly imputable to respondents Roxas and Nolasco, (a) By using a fictitious name, or falsely pretending to possess power,
because they, as ASB’s president and senior vice president/treasurer, influence, qualifications, property, credit, agency, business or imaginary
respectively, in charge of its operations, directed its agents to make the transactions, or by means of other similar deceits;
false representations to the public, including the complainant-
petitioners, in order to convince them to invest their moneys in ASB. It

51
xxx xxx xxx extended the loans in the first place had they known its true financial
setup. The DOJ reasonably noted that "no person in his proper frame of
The elements of estafa by means of deceit as defined under Article mind would venture to lend millions of pesos to a business entity
315(2)(a) of the Revised Penal Code are as follows: (1) that there must having such a meager capitalization." In estafa under Article 315(2)(a),
be a false pretense, fraudulent act or fraudulent means; (2) that such it is essential that such false statement or false representation
false pretense, fraudulent act or fraudulent means must be made or constitute the very cause or the only motive which induces the
executed prior to or simultaneously with the commission of the fraud; complainant to part with the thing.21
(3) that the offended party must have relied on the false pretense,
fraudulent act or fraudulent means, that is, he was induced to part with Private respondents argue before this Court that the true capitalization
his money or property because of the false pretense, fraudulent act or of ASBHI has always been a matter of public record, reflected as it is in
fraudulent means; and (4) that as a result thereof, the offended party several documents which could be obtained by the petitioners from the
suffered damage.17 SEC.22 We are not convinced. The material misrepresentations have
been made by the agents or employees of ASBHI to petitioners, to the
Do the findings embodied in the DOJ Resolution align with the effect that the corporation was structurally sound and financially able
foregoing elements of estafa by means of deceit?  to undertake the series of loan transactions that it induced petitioners
to enter into. Even if ASBHI’s lack of financial and structural integrity is
First. The DOJ Resolution explicitly identified the false pretense, verifiable from the articles of incorporation or other publicly available
fraudulent act or fraudulent means perpetrated upon the petitioners. It SEC records, it does not follow that the crime of estafa through deceit
narrated that petitioners were made to believe that ASBHI had the would be beyond commission when precisely there are bending
financial capacity to repay the loans it enticed petitioners to extend, representations that the company would be able to meet its
despite the fact that "it had an authorized capital stock of obligations. Moreover, respondents’ argument assumes that there is
only P500,000.00 and paid up capital of only P125,000.00."18 The legal obligation on the part of petitioners to undertake an investigation
deficient capitalization of ASBHI is evinced by its articles of of ASBHI before agreeing to provide the loans. There is no such
incorporation, the treasurer’s affidavit executed by Nolasco, the obligation. It is unfair to expect a person to procure every available
audited financial statements of the corporation for 1998 and the public record concerning an applicant for credit to satisfy himself of the
general information sheets for 1998 and 1999, all of which petitioners latter’s financial standing. At least, that is not the way an average
attached to their respective affidavits.19 person takes care of his concerns. 

The Court of Appeals conceded the fact of insufficient capitalization, Second. The DOJ Resolution also made it clear that the false
yet discounted its impact by noting that ASBHI was able to make good representations have been made to petitioners prior to or
its loans or borrowings from 1998 until the first quarter of 2000. 20 The simultaneously with the commission of the fraud. The assurance given
short-lived ability of ASBHI, to repay its loans does not negate the to them by ASBHI that it is a worthy credit partner occurred before
fraudulent misrepresentation or inducement it has undertaken to they parted with their money. Relevantly, ASBHI is not the entity with
obtain the loans in the first place. The material question is not whether whom petitioners initially transacted with, and they averred that they
ASBHI inspired exculpatory confidence in its investors by making good had to be convinced with such representations that Roxas and the
on its loans for a while, but whether such investors would have same group behind BSA were also involved with ASBHI. 

52
Third. As earlier stated, there was an explicit and reasonable conclusion borrower through Philfinance. When the latter failed to deliver back
drawn by the DOJ that it was the representation of ASBHI to petitioners petitioner's placement with the corresponding interest earned at the
that it was creditworthy and financially capable to pay that induced maturity date, the liability incurred by Philfinance was a civil
petitioners to extend the loans. Petitioners, in their respective one."28 That rationale is wholly irrelevant to the complaint at bar, which
complaint-affidavits, alleged that they were enticed to extend the loans centers not on the inability of ASBHI to repay petitioners but on the
upon the following representations: that ASBHI was into the very same fraud and misrepresentation committed by ASBHI to induce petitioners
activities of ASB Realty Corp., ASB Development Corp. and ASB Land, to part with their money. 
Inc., or otherwise held controlling interest therein; that ASB could
legitimately solicit funds from the public for investment/borrowing To be clear, it is possible to hold the borrower in a money market
purposes; that ASB, by itself, or through the corporations aforestated, placement liable for estafa if the creditor was induced to extend a loan
owned real and personal properties which would support and justify its upon the false or fraudulent misrepresentations of the borrower. Such
borrowing program; that ASB was connected with and firmly backed by estafa is one by means of deceit. The borrower would not be generally
DBS Bank in which Roxas held a substantial stake; and ASB would, upon liable for estafa through misappropriation if he or she fails to repay the
maturity of the checks it issued to its lenders, pay the same and that it loan, since the liability in such instance is ordinarily civil in nature. 
had the necessary resources to do so.23
We can thus conclude that the DOJ Resolution clearly supports a prima
Fourth. The DOJ Resolution established that petitioners sustained facie finding that the crime of estafa under Article 315 (2)(a) has been
damage as a result of the acts perpetrated against them. The damage is committed against petitioners. Does it also establish a prima facie
considerable as to petitioners. Gabionza lost P12,160,583.32 whereas finding that there has been a violation of the then-Revised Securities
Tan lost 16,411,238.57.24 In addition, the DOJ Resolution noted that Act, specifically Section 4 in relation to Section 56 thereof? 
neither Roxas nor Nolasco disputed that ASBHI had borrowed funds
from about 700 individual investors amounting to close to P4B.25 Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act,
generally requires the registration of securities and prohibits the sale or
To the benefit of private respondents, the Court of Appeals ruled, citing distribution of unregistered securities.29The DOJ extensively concluded
Sesbreno v. Court of Appeals,26 that the subject transactions "are akin that private respondents are liable for violating such prohibition against
to money market placements which partake the nature of a loan, the the sale of unregistered securities:
non-payment of which does not give rise to criminal liability for estafa."
The citation is woefully misplaced. Sesbreno affirmed that "a money Respondents Roxas and Nolasco do not dispute that in 1998, ASB
market transaction partakes the nature of a loan and therefore borrowed funds about 700 individual investors amounting to close to
‘nonpayment thereof would not give rise to criminal liability for estafa P4 billion, on recurring, short-term basis, usually 30 or 45 days,
through misappropriation or conversion.’"27 Estafa through promising high interest yields, issuing therefore mere postdate checks.
misappropriation or conversion is punishable under Article 315(1)(b), Under the circumstances, the checks assumed the character of
while the case at bar involves Article 315 (2)(a), a mode of estafa by "evidences of indebtedness," which are among the "securities"
means of deceit. Indeed, Sesbreno explains: "In money market mentioned under the Revised Securities Act. The term "securities"
placement, the investor is a lender who loans his money to a borrower embodies a flexible rather than static principle, one that is capable of
through a middleman or dealer. Petitioner here loaned his money to a adaptation to meet the countless and variable schemes devised by

53
those who seek to use the money of others on the promise of profits the ambit of a valid corporate act" to note that a corporation does not
(69 Am Jur 2d, p. 604). Thus, it has been held that checks of a debtor need prior registration with the SEC in order to be able to issue a check,
received and held by the lender also are evidences of indebtedness and which is a corporate prerogative. 
therefore "securities" under the Act, where the debtor agreed to pay
interest on a monthly basis so long as the principal checks remained This analysis is highly myopic and ignorant of the bigger picture. It is
uncashed, it being said that such principal extent as would have one thing for a corporation to issue checks to satisfy isolated individual
promissory notes payable on demand (Id., p. 606, citing Untied States obligations, and another for a corporation to execute an elaborate
v. Attaway (DC La) 211 F Supp 682). In the instant case, the checks were scheme where it would comport itself to the public as a pseudo-
issued by ASB in lieu of the securities enumerated under the Revised investment house and issue postdated checks instead of stocks or
Securities Act in a clever attempt, or so they thought, to take the case traditional securities to evidence the investments of its patrons. The
out of the purview of the law, which requires prior license to sell or Revised Securities Act was geared towards maintaining the stability of
deal in securities and registration thereof. The scheme was to designed the national investment market against activities such as those
to circumvent the law. Checks constitute mere substitutes for cash if so apparently engaged in by ASBHI. As the DOJ Resolution noted, ASBHI
issued in payment of obligations in the ordinary course of business adopted this scheme in an attempt to circumvent the Revised Securities
transactions. But when they are issued in exchange for a big number of Act, which requires a prior license to sell or deal in securities. After all,
individual non-personalized loans solicited from the public, numbering if ASBHI’s activities were actually regulated by the SEC, it is hardly likely
about 700 in this case, the checks cease to be such. In such a that the design it chose to employ would have been permitted at all.
circumstance, the checks assume the character of evidences of
indebtedness. This is especially so where the individual loans were not But was ASBHI able to successfully evade the requirements under the
evidenced by appropriate debt instruments, such as promissory notes, Revised Securities Act? As found by the DOJ, there is ultimately a prima
loan agreements, etc., as in this case. Purportedly, the postdated facie case that can at the very least sustain prosecution of private
checks themselves serve as the evidences of the indebtedness. A respondents under that law. The DOJ Resolution is persuasive in citing
different rule would open the floodgates for a similar scheme, whereby American authorities which countenance a flexible definition of
companies without prior license or authority from the SEC. This cannot securities. Moreover, it bears pointing out that the definition of
be countenanced. The subsequent repeal of the Revised Securities Act "securities" set forth in Section 2 of the Revised Securities Act includes
does not spare respondents Roxas and Nolasco from prosecution "commercial papers evidencing indebtedness of any person, financial
thereunder, since the repealing law, Republic Act No. 8799 known as or non-financial entity, irrespective of maturity, issued, endorsed, sold,
the "Securities Regulation Code," continues to punish the same offense transferred or in any manner conveyed to another."31 A check is a
(see Section 8 in relation to Section 73, R.A. No. 8799). 30 commercial paper evidencing indebtedness of any person, financial or
non-financial entity. Since the checks in this case were generally rolled
The Court of Appeals however ruled that the postdated checks issued over to augment the creditor’s existing investment with ASBHI, they
by ASBHI did not constitute a security under the Revised Securities Act. most definitely take on the attributes of traditional stocks. 
To support this conclusion, it cited the general definition of a check as
"a bill of exchange drawn on a bank and payable on demand," and took We should be clear that the question of whether the subject checks fall
cognizance of the fact that "the issuance of checks for the purpose of within the classification of securities under the Revised Securities Act
securing a loan to finance the activities of the corporation is well within may still be the subject of debate, but at the very least, the DOJ

54
Resolution has established a prima facie case for prosecuting private the accused, "the right still exists to punish the accused for an offense
respondents for such offense. The thorough determination of such of which they were 
issue is best left to a full-blown trial of the merits, where private
respondents are free to dispute the theories set forth in the DOJ convicted and sentenced before the passage of the later act."35 This
Resolution. It is clear error on the part of the Court of Appeals to doctrine was reaffirmed as recently as 2001, where the Court, through
dismiss such finding so perfunctorily and on such flimsy grounds that Justice Quisumbing, held in Benedicto v. Court of Appeals36 that an
do not consider the grave consequences. After all, as the DOJ exception to the rule that the absolute repeal of a penal law deprives
Resolution correctly pointed out: "[T]he postdated checks themselves the court of authority to punish a person charged with violating the old
serve as the evidences of the indebtedness. A different rule would open law prior to its repeal is "where the repealing act reenacts the former
the floodgates for a similar scheme, whereby companies without prior statute and punishes the act previously penalized under the old
license or authority from the SEC. This cannot be countenanced."32 law."37 It is worth noting that both the Revised Securities Act and the
Securities Regulation Code of 2000 provide for exactly the same
This conclusion quells the stance of the Court of Appeals that the penalty: "a fine of not less than five thousand (P5,000.00) pesos nor
unfortunate events befalling petitioners were ultimately benign, not more than five hundred thousand (P500,000.00) pesos or
malevolent, a consequence of the economic crisis that beset the imprisonment of not less than seven (7) years nor more than twenty
Philippines during that era.33 That conclusion would be agreeable only if one (21) years, or both, in the discretion of the court."38
it were undisputed that the activities of ASBHI are legal in the first
place, but the DOJ puts forth a legitimate theory that the entire modus It is ineluctable that the DOJ Resolution established a prima facie case
operandi of ASBHI is illegal under the Revised Securities Act and if that for violation of Article 315 (2)(a) of the Revised Penal Code and
were so, the impact of the Asian economic crisis would not obviate the Sections 4 in relation to 56 of the Revised Securities Act. We now turn
criminal liability of private respondents.  to the critical question of whether the same charges can be pinned
against Roxas and Nolasco likewise.
Private respondents cannot make capital of the fact that when the DOJ
Resolution was issued, the Revised Securities Act had already been The DOJ Resolution did not consider it exculpatory that Roxas and
repealed by the Securities Regulation Code of 2000.34 As noted by the Nolasco had not themselves dealt directly with petitioners, observing
DOJ, the new Code does punish the same offense alleged of petitioners, that "to commit a crime, inducement is as sufficient and effective as
particularly Section 8 in relation to Section 73 thereof. The complained direct participation."39 This conclusion finds textual support in Article
acts occurred during the effectivity of the Revised Securities Act. 1740 of the Revised Penal Code. The Court of Appeals was unable to
Certainly, the enactment of the new Code in lieu of the Revised point to any definitive evidence that Roxas or Nolasco did not instruct
Securities Act could not have extinguished all criminal acts committed or induce the agents of ASBHI to make the false or misleading
under the old law.  representations to the investors, including petitioners. Instead, it
sought to acquit Roxas and Nolasco of any liability on the ground that
In 1909-1910, the Philippine and United States Supreme Courts the traders or employees of ASBHI who directly made the dubious
affirmed the principle that when the repealing act reenacts representations to petitioners were never identified or impleaded as
substantially the former law, and does not increase the punishment of respondents. 

55
It appears that the Court of Appeals was, without saying so, applying ability of both petitioners and private respondents to adduce evidence
the rule in civil cases that all indispensable parties must be impleaded during the trial, but it cannot quell the existence of the crime even
in a civil action.41 There is no equivalent rule in criminal procedure, and before trial is had. At the very least, the non-identification or non-
certainly the Court of Appeals’ decision failed to cite any statute, impleading of such traders or agents cannot negatively impact the
procedural rule or jurisprudence to support its position that the failure finding of probable cause. 
to implead the traders who directly dealt with petitioners is indeed
fatal to the complaint.42 The assailed ruling unfortunately creates a wide loophole, especially in
this age of call centers, that would create a nearly fool-proof scheme
Assuming that the traders could be tagged as principals by direct whereby well-organized criminally-minded enterprises can evade
participation in tandem with Roxas and Nolasco – the principals by prosecution for criminal fraud. Behind the veil of the anonymous call
inducement – does it make sense to compel that they be jointly center agent, such enterprises could induce the investing public to
charged in the same complaint to the extent that the exclusion of one invest in fictional or incapacitated corporations with fraudulent
leads to the dismissal of the complaint? It does not. Unlike in civil cases, impossible promises of definite returns on investment. The rule, as set
where indispensable parties are required to be impleaded in order to forth by the Court of Appeals’ ruling, will allow the masterminds and
allow for complete relief once the case is adjudicated, the profiteers from the scheme to take the money and run without fear of
determination of criminal liability is individual to each of the the law simply because the defrauded investor would be hard-pressed
defendants. Even if the criminal court fails to acquire jurisdiction over to identify the anonymous call center agents who, reading aloud the
one or some participants to a crime, it still is able to try those accused script prepared for them in mellifluous tones, directly enticed the
over whom it acquired jurisdiction. The criminal court will still be able investor to part with his or her money. 
to ascertain the individual liability of those accused whom it could try,
and hand down penalties based on the degree of their participation in Is there sufficient basis then to establish probable cause against Roxas
the crime. The absence of one or some of the accused may bear impact and Nolasco? Taking into account the relative remoteness of private
on the available evidence for the prosecution or defense, but it does respondents to petitioners, the DOJ still concluded that there was. To
not deprive the trial court to accordingly try the case based on the repeat:
evidence that is actually available.
The false representations made by the ASB agents who dealt with the
At bar, if it is established after trial that Roxas and Nolasco instructed complainant-petitioners and who inveigled them into investing their
all the employees, agents and traders of ASBHI to represent the funds in ASB are properly imputable to respondents Roxas and Nolasco,
corporation as financially able to engage in the challenged transactions because they, as ASB’s president and senior vice president/treasurer,
and repay its investors, despite their knowledge that ASBHI was not respectively, respectively, in charge of its operations, directed its
established to be in a position to do so, and that representatives of agents to make the false representations to the public, including the
ASBHI accordingly made such representations to petitioners, then complainant-petitioners, in order to convince them to invest their
private respondents could be held liable for estafa. The failure to moneys in ASB. It is difficult to make a different conclusion, judging
implead or try the employees, agents or traders will not negate such from the fact that respondents Roxas and Nolasco authorized and
potential criminal liability of Roxas and Nolasco. It is possible that the accepted for ASB the fraud-induced loans.43
non-participation of such traders or agents in the trial will affect the

56
Indeed, the facts as thus established cannot lead to a definite,
exculpatory conclusion that Roxas and Nolasco did not instruct, much
less forbid, their agents from making the misrepresentations to
petitioners. They could of course pose that defense, but such claim can
only be established following a trial on the merits considering that
nothing in the record proves without doubt such law-abiding prudence
on their part. There is also the fact that ABSHI, their corporation, 6. G.R. No. 138949            June 6, 2001
actually received the alleged amounts of money from petitioners. It is
especially curious that according to the ASBHI balance sheets dated 31 UNION BANK OF THE PHILIPPINES, petitioner, 
December 1999, which petitioners attached to their affidavit- vs.
complaints,44 over five billion pesos were booked as "advances to SECURITY AND EXCHANGE COMMISSION, respondent.
stockholder" when, according to the general information sheet for
1999, Roxas owned 124,996 of the 125,000 subscribed shares of
PANGANIBAN, J.:
ASBHI.45 Considering that ASBHI had an authorized capital stock of
only P500,000 and a subscribed capital of P125,000, it can be
The mere fact that petitioner, in regard to its banking functions, is
reasonably deduced that such large amounts booked as "advances to
already subject to the supervision of the Bangko Sentral ng Pilipinas
stockholder" could have only come from the loans extended by over
does not exempt the former from reasonable disclosure regulations
700 investors to ASBHI. 
issued by the Securities and Exchange Commission (SEC). These
regulations -- imposed on petitioner as a banking institution listed in
It is true that there are exceptions that may warrant departure from
the stock market -- are meant to assure full, fair and accurate
the general rule of non-interference with the determination of
information for the protection of investors. Imposing such regulations
probable cause by the DOJ, yet such exceptions do not lie in this case,
is a function within the jurisdiction of the SEC.1âwphi1.nêt
and the justifications actually cited in the Court of Appeals’ decision are
exceptionally weak and ultimately erroneous. Worse, it too hastily
The Case
condoned the apparent evasion of liability by persons who seemingly
profited at the expense of investors who lost millions of pesos. The
Court’s conclusion is that the DOJ’S decision to prosecute private Before us is a Petition for Review on Certiorari1 under Rule 45 of the
respondents is founded on sufficient probable cause, and the ultimate Rules of Court, challenging the November 16, 1998 Decision2 of the
determination of guilt or acquittal is best made through a full trial on Court of Appeals (CA) in CA-GR SP No. 48002. The dispositive portion of
the merits. Indeed, many of the points raised by private respondents the assailed Decision reads as follows: 
before this Court, related as they are to the factual context surrounding
the subject transactions, deserve the full assessment and verification "GIVEN THE FOREGOING, the assailed Orders dated November
only a trial on the merits can accord. 5, 1997 and April14,1998 are hereby AFFIRMED, with the
MODIFICATION that petitioner is assessed a single fine of FIFTY
WHEREFORE, the petition is GRANTED.  THOUSAND (P50,OOO.00) PESOS plus FIVE HUNDRED

57
 (P500.00) PESOS beginning July 21, 1997, for each day of Philippine Stock Exchange for clarification. (Annex E, p. 22,
continuing violation."3 Rollo) 

Likewise assailed is the May 31, 1999: A Resolution,4 which denied "On May 9, 1997, respondent Commission, through its Money
petitioner's A Motion for Reconsideration.  Market Operations Department Director, wrote petitioner,
reiterating its previous position that petitioner is not exempt
The Facts from the filing of certain reports. The letter further stated that
the Revised Securities Act Rule 11 (a) requires the submission
The court a quo summarized the antecedents of the case as follows:  of reports necessary for full, fair and accurate disclosure to the
investing public, and not the registration of its shares. (Annex
"Records show that on April 4, 1997, petitioner, through its F, p. 23, Rollo). 
General Counsel and Corporate Secretary, sought the opinion
of Chairman Perfecto Yasay, Jr. of respondent Commission as "On July 17, 1997, respondent Commission wrote petitioner,
to the applicability and coverage of the Full Material Disclosure enjoining the latter to show cause why it should not be
Rule on banks, contending that said rules, in effect, amend penalized for its failure to submit a Proxy/Information
Section 5 (a) (3) of the Revised Securities Act which exempts Statement in connection with its annual meeting held on May
securities issued or guaranteed by banking institutions from 23, 1997, in violation of respondent Commission's Full Material
the registration requirement provided by Section 4 of the same Disclosure Rule.' (Annex 6, p. 24, Rollo ). 
Act. (Annex "C", p. 20, Rollo). 
"Failing to respond to the aforesaid communication, petitioner
"In reply thereto, Chairman Yasay, in a letter dated April 8, was given a '2nd Show Cause with Assessment' by respondent
1997, informed petitioner that while the requirements of Commission on July 21, 1997. Petitioner was then assessed a
registration do not apply to securities of banks which are fine of P50,000.00 plus P500.00 for every day that report [was]
exempt under Section 5 (a) (3) of the Revised Securities Act, not filed, or a total of P91,000.00as of July 21, 1997. Petitioner
however, banks with a class of securities listed for trading on was likewise advised by respondent Commission to submit the
the Philippine Stock Exchange, Inc. are covered by certain required reports and settle the assessment, or submit the case
Revised Securities Act Rules governing the filing of various to a formal hearing. (Annex H, p. 25, Rollo). 
reports with respondent Commission, i.e., (1) Rule 11 (a)-1
requiring the filing of Annual, Quarterly, Current, Predecessor "On August 18,1997, petitioner wrote respondent Commission
and Successor Reports; (2) Rule 34-(a)-1 requiring submission disputing the assessment. (Annex I, pp. 26-27, Rollo). 
of Proxy Statements; and (3) Rule 34-(c)-1 requiring submission
of Information Statements, among others. (Annex D, P, U, "Thus, on November 5,1997, respondent issued the assailed
Rollo).  Order, the dispositive portion of which provides: 

"Not satisfied, petitioner, per letter dated April 30, 1997, "In view of the foregoing, the appeal filed by the
informed Chairman Yasay that they will refer the matter to the Union Bank of the Philippines is hereby denied. The

58
 penalty imposed in the amount of P91,000.00 as of relates not only to the emergence of the multi-farious needs of
July 21, 1997, for failure to file SEC Form 11-A excludes a modern or modernizing society and the establishment of
the fine accruing after the cut-off date until the final diverse administrative agencies for the addressing and
submission of the report. Further, the amount of satisfying those needs; it also relates to accumulation of
P50,000.00 shall be collected for the violation of RSA experience and growth of specialized capabilities by the
Rule 34(a)- or Rule34(c)(1)." (p.17, Rollo). administrative agency charged with implementing a particular
statute. (Nestle Philippines, Inc. v Court of Appeals, ibid., at
"Petitioner sought a reconsideration thereof which was denied pp. 510-511) 
by respondent Commission per assailed Order dated Apri14,
1998, the dispositive portion of which reads:  "In this regard, the Supreme Court, in Philippine Stock
Exchange v. Securities and Exchange Commission, et. al., G.R.
"There being no new matters raised in the motion for No.125469, October  27, 1998, already upheld the power of
reconsideration to overcome the denial of the Appeal respondent Securities and Exchange Commission to
by the Commission En Banc in its Order of November promulgate rules and regulations, as it may consider
5, 1997, and considering that the reasons advanced appropriate, for the enforcement of the Revised Securities Act
are [a] mere rehash of its defenses duly addressed in and the other pertinent laws. Thus, pursuant to their
the Appeal, the Motion for Reconsideration is hereby, regulatory authority, respondent Securities and Exchange
DENIED. (p. 19, Rollo)."5 Commission adopted the policy of 'full material disclosure'
where all companies, listed or applying for listing, are required
Petitioner then elevated its case to the Court of Appeals which, as to divulge truthfully and accurately, all material information
already stated, affirmed the questioned Orders.  about themselves and the securities they sell, for the
protection of the investing public, and under pain of
The CA Ruling administrative, criminal and civil sanctions. While the
employment of the 'full material disclosure' policy is
In its well-written 10-page Decision, the Court of Appeals cited sanctioned and recognized by the laws, nonetheless, the
expertise of Respondent SEC on matters within the ambit the latter's Revised Securities Act sets substantial and procedural
mandate, as follows:  standards which a proposed issuer of securities must satisfy. 

"To begin with, it is already well-settled that the construction "Moreover and perhaps most importantly, the construction
given to a statute by an administrative agency charged with given by the respondent Commission on the scope of
the interpretation and application of the statute is entitled to application of the 'Full Material Disclosure' policy permits
great respect and should be accorded great weight by the greater opportunity for respondent Commission to implement
courts, unless such construction is clearly shown to be in sharp [its] statutory mandate of protecting the investing public by
conflict with the governing statute or the Constitution and requiring public issuers of securities to inform the public of the
other laws. (Nestle Philippines, Inc. v. Court of Appeals, 203 true financial conditions and prospects of the corporation."6
SCRA 504 [1991], at page 510). The rationale for this rule

59
The court a quo stressed that Rules 11 (a)-1, 34 (a)-1, and 34 (c)-1 were First Issue:
issued by respondent to implement the Revised Securities Act (RSA). Applicabilitv of the Assailed RSA Implementing Rules
They do not require the registration of petitioner's securities; thus, it
cannot be said that the SEC amended Section 5 (a) (3) of the said Act.  Because its securities are exempt from the registration requirements
under Section 5(a) (3) of the Revised Securities Act, petitioner argues
Hence, this Petition.7 that it is not covered by RSA Implementing Rule 11 (a)-1, which
requires the filing of annual, quarterly, current predecessor and
Issues successor reports; Rule 34(a)-1, which mandates the filing of proxy
statements and forms of proxy; and Rule 34(c)-1, which obligates the
Petitioner submits for our resolution the following issues:  submission of information statements. 

"A. Whether or not petitioner is required to comply with the We do not agree. Section 5(a) (3) of the said Act reads:
respondent SEC's full disclosure rules. 
"Sec. 5. Exempt Securities. (a) Except expressly provided, the
"B. Whether or not the SEC's full disclosure rules [are] contrary requirement of registration under subsection (a) of Section
to and effectively [amend] section 5 (a) (3) of the Revised four of this Act shall not apply to any of the following classes of
Securities Act.  securities: 

"C. Whether or not Respondent Court of Appeals gravely erred xxx xxx xxx 
in holding that petitioner violated three (3) Rules namely: Rule
11 (A)-1, Rule 34 (A)-1 and Rule 34 (C)-1 of the full disclosure (3) Any security issued or guaranteed by any banking
rule.  institution authorized to do business in the Philippines, the
business of which is substantially confined to banking, or a
"D. Whether or not Respondent Court of Appeals erred in financial institution licensed to engage in quasi-banking, and is
affirming with modification the imposition of excessive fines in supervised by the Central Bank."
violation of the Philippine Constitution.8
This provision exempts from registration the securities issued by
In the main, the Court will determine (1) the applicability of RSA banking or financial institutions mentioned in the law. Nowhere does it
Implementing Rules 11 (a)-1, 34 (a)-1 and 34 (c)-1 to petitioner; and (2) state or even imply that petitioner, as a listed corporation,  is exempt
the propriety of the fine imposed upon the latter.  from complying with the reports required by the assailed RSA
Implementing Rules. Worth repeating is the CA's disquisition on the
The Court's Ruling matter, which we quote: 

The Petition is not meritorious.  "However, the exemption from the registration requirement
enjoyed petition does nor necessarily connote that [it is]

60
 exempted from the other reportorial requirements. Having exempt it from complying with the continuing disclosure requirements
confined the exemption enjoyed by the petitioner merely to embodied in the assailed Rules. Petitioner, as a bank, is primarily
the initial requirement of registration of securities for public subject to the control of the BSP; and as a corporation trading its
offering, and not, [to] the subsequent filing of various periodic securities in the stock market, it is under the supervision of the SEC. It
reports, respondent Commission, as the regulatory agency, is must be pointed out that even the PSE is under the control and
able to exercise its power of supervision and control over supervision of respondent.14 There is no over-supervision here. Each
corporations and over the securities market as a whole. regulating authority operates within the sphere of its powers. That
Otherwise, the objectives of the 'Full Material Disclosure' stringent requirements are imposed is understandable, considering the
policy would be defeated since petitioner corporation and its paramount importance given to the interests of the investing public. 
dealings would be totally beyond the reach of respondent
Commission and the investing public."9 Otherwise stated, the mere fact that in regard to its banking functions,
petitioner is already subject to the supervision of the BSP does not
It must be emphasized that petitioner is a commercial banking exempt the former reasonable disclosure regulations issued by the SEC.
corporation10 listed in a stock exchange. Thus, it must adhere not only These regulations are meant to assure full, fair and accurate disclosure
to banking and other allied special laws, but also to the rules of information for the protection of investors in the stock market.
promulgated by Respondent SEC, the government entity tasked not Imposing such regulations is a function within the jurisdiction of the
only with the enforcement of the Revised Securities Act,11 but also the  SEC. Since petitioner opted to trade its shares in the exchange, then it
must abide by the reasonable rules imposed by the SEC. 
supervision of all corporations, partnerships or associations which are
grantees of government-issued primary franchises and/or licenses or Second Issue:
permits to operate in the Philippines.12 Propriety of Fine Imposed

RSA Rules 11 (a)-1, 34 (a)-1 and 34 (c)-1 require the submission of Contending that both respondent and the CA erred in imposing an
certain reports to ensure full, fair accurate disclosure of information for excessive fine upon it, petitioner complaints that it was not given an
the protection of the investing public. These Rules were issued by the opportunity to be heard regarding the matter. 
respondent pursuant to the authority conferred upon it by Section 3 of
the RSA.13 It bears stressing that the fine imposed upon petitioner is sanctioned by
Section 46 (b) of the RSA, which reads as follows: 
The said Rules do not amend Section 5(a)(3) of the Revised Securities
Act, because they do not  revoke or amend the exemption from "Sec. 46. Administrative sanctions.  If, after proper notice and
registration of the securities enumerated thereunder. They are hearing, the Commission finds that there is a violation of this
reasonable regulations imposed upon petitioner as a banking Act, its rules,  or its orders or that any registrant has, in a
corporation trading its securities in the stock market.  registration statement and its supporting papers and other
reports required by the law or rules to be filed with the
That petitioner is under the supervision of the Bangko Sentral ng Commission, made any untrue statement of a material fact, or
Pilipinas (BSP) and the Philippine Stock Exchange (PSE) does not omitted to state any material fact required to be stated therein

61
 or necessary to make the statements therein not misleading,
or refused to permit any lawful examination into its affairs, it
shall, in its discretion, impose any or all of the following
sanctions: xxx xxx xxx 
7. G.R. No. 86738 November 13, 1991
(b ) A fine of no less than two hundred (P200.00) pesos
nor more than fifty thousand (P50,000.00) pesos plus NESTLE PHILIPPINES, INC., petitioner, 
not more than five hundred (P500.00) pesos for each vs.
day of continuing violation."  COURT OF APPEALS and SECURITIES AND EXCHANGE
COMMISSION, respondents.
Petitioner complied with RSA Rule 11 (a)-1 on April 30,1998. To date, it
still has not complied with either RSA Rule 34 (a)-1 or Rule 34 (c)-1. Sometime in February 1983, the authorized capital stock of petitioner
That there was a failure to submit the required reports on time is Nestle Philippines Inc. ("Nestle") was increased from P300 million
evident in the present case. Thus, respondent was justified in imposing divided into 3 million shares with a par value of P100.00 per share, to
a fine upon it.  P600 million divided into 6 million shares with a par value of P100.00
per share. Nestle underwent the necessary procedures involving Board
We reject the contention of petitioner that it was not heard on the and stockholders approvals and effected the necessary filings to secure
matter of the fine imposed. The latter was assessed after the former the approval of the increase of authorized capital stock by respondent
had failed to respond to the SEC's first show-cause letter dated June 17, Securities and Exchange Commission ("SEC"), which approval was in
1997.15 In its August 18,1997 letter,16 petitioner sought before the SEC fact granted. Nestle also paid to the SEC the amount of P50,000.00 as
en banc the nullification of the fine. The matter was raised to the filing fee in accordance with the Schedule of Fees and Charges being
appellate court, which then considered it. Clearly then, petitioner implemented by the SEC under the Corporation Code. 1
satisfied the essence of due process-notice and opportunity to be
heard.17 That it received adverse rulings from both respondent and the
CA does nor mean that its right to be heard was discarded.1âwphi1.nêt
Nestle has only two (2) principal stockholders: San Miguel Corporation and Nestle S.A. The other stockholders, who are

WHEREFORE, the Petition is hereby DENIED individual natural persons, own only one (1) share each, for qualifying purposes, i.e., to qualify them as members of the

Board of Directors being elected thereto on the strength of the votes of one or the other principal shareholder.

On 16 December 1983, the Board of Directors and stockholders of Nestle approved resolutions authorizing the issuance of

344,500 shares out of the previously authorized but unissued capital stock of Nestle, exclusively to San Miguel Corporation

and to Nestle S.A. San Miguel Corporation subscribed to and completely paid up 168,800 shares, while Nestle S.A.

subscribed to and paid up the balance of 175,700 shares of stock.

62
On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate Secretary, M.L. Antonio, with the SEC seeking directly or indirectly in connection with the sale or distribution of such increased capital stock. (Emphasis

exemption of its proposed issuance of additional shares to its existing principal shareholders, from the registration supplied)

requirement of Section 4 of the Revised Securities Act and from payment of the fee referred to in Section 6(c) of the same

Act. In that letter, Nestle requested confirmation of the correctness of two (2) propositions submitted by it:

embraces "not only an increase in the authorized capital stock but also the issuance of additional shares to existing

stockholders of the unissued portion of the unissued capital stock". 3

 Nestle urged that
interpretation upon the following argument.
1. That there is no need to file a petition for exemption under Section 6(b) of the Revised Securities Act with

respect to the issuance of the said 344,600 additional shares to our existing stockholders out of our unissued
The use of the term "increased capital stock" should be
capital stock; and
interpreted to refer to additional capital stock or equity
participation of the existing stockholders as a consequence of
either an increase of the authorized capital stock or the
issuance of unissued capital stock. If the intention of the
2. That the fee provided in Section 6(c) of [the Revised Securities] Act is not applicable to the said issuance of pertinent legal provision [were] to limit the exemption to
additional shares. 2 subscription to proposed increases in the authorized capital
stock of a corporation, we see no reason why the law should
not have been more specific or accurate about it.
It certainly  should have mentioned "increase in the authorized
The principal, indeed the only, argument presented by Nestlewas that Section 6(a) (4) of the Revised Securities Act which
capital stock of the corporation" rather than merely the
provides as follows:
expression "the issuance of additional capital stock 4 (Emphasis
supplied)

Sec. 6. Exempt transactions. — a) The requirement of registration under subsection (a) of Section four of this

Act shall not apply to the sale of any security in any of the following transactions:

Nestle expressly represented in the same letter that all the additional shares proposed to be issued would be issued only to
x x x           x x x          x x x
San Miguel Corporation and Nestle S.A. and that no commission or other form of remuneration had been given, directly or

indirectly, in connection with the issuance or distribution of such additional shares of stock.
(4) The distribution by a corporation, actively engaged in the business authorized by its articles of

incorporation, of securities to its stockholders or other security holders as a stock dividend or other
In respect of its claimed exemption from the fee provided for in Section 6(c) of the Revised Securities Act, Nestle contended
distribution out of surplus; or the issuance of securities to the security holder or other creditors of a
that since Section 6 (a) (4) of the statute declares (in Nestle's view) the proposed issuance of 344,500 previously authorized
corporation in the process of a bona fide reorganization of such corporation made in good faith and not for
but unissued shares of Nestle's capital stock to its existing shareholders as an exempt transaction, the SEC could not collect
the purpose of avoiding the provisions of this Act, either in exchange for the securities of such security
fees for "the same transaction" twice. Nestle adverted to its payment back in 21 February 1983 of the amount of P50,000.00
holders or claims of such creditors or partly for cash and partly in exchange for the securities or claims of such
as filing fees to the SEC when it applied for and eventually received approval of the increase of its authorized capital stock
security holders or creditors; or the issuance of additional capital stock of a corporation sold or distributed by
effected by Board and shareholder action last 16 December 1983.
it among its own stockholders exclusively, where no commission or other remuneration is paid or given

63
In a letter dated 26 June 1986, the SEC through its then Chairman Julio A. Sulit, Jr. responded adversely to petitioner's 1) to newly or contemporaneously authorized capital stock issued in the course of increasing the authorized capital stock of

requests and ruled that the proposed issuance of shares did not fall under Section 6 (a) (4) of the Revised Securities Act, a corporation; or 2) to previously authorized but unissued capital stock.

since Section 6 (a) (4) is applicable only where there is an increase in the authorized capital stock of a corporation. Chairman

Sulit held, however, that the proposed transaction could be considered by the Commission under the provisions of Section 6 Under Section 38 of the Corporation Code, a corporation engaged in increasing its authorized capital stock, with the
(b) of the Revised Securities Act which reads as follows: required vote of its Board of Directors and of its stockholders, must file a sworn statement of the treasurer of the

corporation showing that at least twenty-five percent (25%) of "such increased capital stock" has been subscribed and that

(b) The Commission may, from time to time and subject to such terms and conditions as it may prescribe, at least twenty-five percent (25%) of the amount subscribed has been paid either in actual cash or in property transferred to

exempt transactions other than those provided in the preceding paragraph, if it finds that the enforcement of the corporation. In other words, the corporation must issue at least twenty-five percent (25%) of the newly or

the requirements of registration under this Act with respect to such transactions is not necessary in the public contemporaneously authorized capital stock in the course of complying with the requirements of the Corporation Code for

interest and for the protection of the investors by reason of the small amount involved or the limited increasing its authorized capital stock.

character of the public offering.

The Commission then advised petitioner to file the appropriate request for exemption and to pay the fee required under

Section 6 (c) of the statute, which provides: In contrast, after approval by the SEC of the increase of its authorized capital stock, and from time to time thereafter, the

corporation, by a vote of its Board of Directors, and without need of either stockholder or SEC approval, may issue and sell
(c) A fee equivalent to one-tenth of one per centum of the maximum aggregate price or issued value of the shares of its already authorized but still unissued capital stock to existing shareholders or to members of the general
securities shall be collected by the Commission for granting a general or particular exemption from the public. 5
registration requirements of this Act.

Petitioner moved for reconsideration of the SEC ruling, without success.

Both the SEC and the Court of Appeals resolved the ambiguity by construing Section 6 (a) (4) as referring only to the issuance
On 3 July 1987, petitioner sought review of the SEC ruling before this Court which, however, referred the petition to the
of shares of stock as part of and in the course of increasing the authorized capital stock of Nestle. In the case at bar, since
Court of Appeals.
the 344,500 shares of Nestle capital stock are proposed to be issued from already authorized but still unissued capital stock

and since the present authorized capital stock of 6,000,000 shares with a par value of P100.00 per share is not proposed to
In a decision dated 13 January 1989, the Court of Appeals sustained the ruling of the SEC. be further increased, the SEC and the Court of Appeals rejected Nestle's petition.

Dissatisfied with the Decision of the Court of Appeals, Nestle is now before this Court on a Petition for Review, raising the We believe and so hold that the construction thus given by the SEC and the Court of Appeals to Section 6 (a) (4) of the
very same issues that it had raised before the SEC and the Court of Appeals. Revised Securities Act must be upheld.

Examining the words actually used in Section 6 (a) (4) of the Revised Securities Act, and bearing in mind common corporate

usage in this jurisdiction, it will be seen that the statutory phrase "issuance of additional capital stock" is indeed infected

with a certain degree of ambiguity. This phrase may refer either to: a) the issuance of capital stock as part of and in the
In the first place, it is a principle too well established to require extensive documentation that the construction given to a
course of increasing the authorized capital stock of a corporation; or (b) issuance of already authorized but still unissued
statute by an administrative agency charged with the interpretation and application of that statute is entitled to great
capital stock. By the same token, the phrase "increased capital stock" found at the end of Section 6 (a) (4), may refer either:
respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict

with the governing statute or the Constitution and other laws. As long ago as 1903, this Court said in  In re Allen 6
 that

64
 When capital stock is issued in the course of and in compliance with the requirements of increasing its authorized capital
[t]he principle that the contemporaneous construction of a
stock under Section 38 of the Corporation Code, the SEC as a matter of course examines the financial condition of the
statute by the executive officers of the government, whose
corporation, and hence there is no real need for exercise of SEC authority under the Revised Securities Act. Thus, one of the
duty is to execute it, is entitled to great respect, and should
multiple documentation requirements under the current regulations of the SEC in respect of filing a certificate of increase of
ordinarily control the construction of the statute by the courts,
authorized capital stock, is submission of "a financial statement duly certified by an independent Certified Public
is so firmly embedded in our jurisdiction that no authorities
need be cited to support it. 7 Accountant (CPA)  as of the latest date possible or as of the date of the meeting when stockholders approved the

increase/decrease in capital stock or thereabouts. 11

 When all or part of the newly authorized
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society capital stock is proposed to be issued as stock dividends, the SEC
and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to requirements are even more exacting; they require, in addition to the
accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing regular audited financial statements, the submission by the corporation
a particular statute. 8
 In Asturias Sugar Central, Inc. v. Commissioner of of a "detailed or Long Form Report of the certifying Auditor."
9
Customs   the Court stressed that executive officials are presumed to Moreover, since approval of an increase in authorized capital stock by
have familiarized themselves with all the considerations pertinent to the stockholders holding two-thirds (2/3) of the outstanding capital
the meaning and purpose of the law, and to have formed an stock is required by Section 38 of the Corporation Code, at a
independent, conscientious and competent expert opinion thereon. stockholders meeting held for that purpose, the directors and officers
The courts give much weight to contemporaneous construction of the corporation may be expected to take pains to inform the
because of the respect due the government agency or officials charged shareholders of the financial condition and prospects of the
with the implementation of the law, their competence, expertness, corporation and of the proposed utilization of the fresh capital sought
experience and informed judgment, and the fact that they frequently to be raised.
are the drafters of the law they interpret. 10
Upon the other hand, as already noted, issuance of previously
authorized but theretofore unissued capital stock by the corporation
requires only Board of Directors approval. Neither notice to nor
In the second place, and more importantly, consideration of the underlying statutory purpose of Section 6(a) (4) compels us approval by the shareholders or the SEC is required for such issuance.
to sustain the view taken by the SEC and the Court of Appeals. The reading by the SEC of the scope of application of Section There would, accordingly, under the view taken by petitioner Nestle, no
6(a) (4) permits greater opportunity for the SEC to implement the statutory objective of protecting the investing public by opportunity for the SEC to see to it that shareholders (especially the
requiring proposed issuers of capital stock to inform such public of the true financial conditions and prospects of the small stockholders) have a reasonable opportunity to inform
corporation. By limiting the class of exempt transactions contemplated by the last clause of Section 6(a) (4) to issuances of themselves about the very fact of such issuance and about the
stock done in the course of and as part of the process of increasing the authorized capital stock of a corporation, the SEC is condition of the corporation and the potential value of the shares of
enabled to examine issuances by a corporation of previously authorized but theretofore unissued capital stock, on a case-to- stock being offered.
case basis, under Section 6(b); and thereunder, to grant or withhold exemption from the normal registration requirements

depending upon the perceived level of need for protection by the investing public in particular cases. Under the reading urged by petitioner Nestle of the reach and scope of
the third clause of Section 6(a) (4), the issuance of previously
authorized but unissued capital stock would automatically constitute
an exempt transaction,without regard to the length of time which may
have intervened between the last increase in authorized capital stock

65
and the proposed issuance during which time the condition of the with the examination and approval of the certificate of increase of
corporation may have substantially changed, and without regard to authorized capital stock then submitted by petitioner. The fee, upon
whether the existing stockholders to whom the shares are proposed to the other hand, provided for in Section 6 (c) which petitioner will be
be issued are only two giant corporations as in the instant case, or are required to pay if it does file an application for exemption under
individuals numbering in the hundreds or thousands. Section 6 (b), is quite different; this is a fee specifically authorized by
the Revised Securities Act, (not the Corporation Code) in connection
In contrast, under the ruling issued by the SEC, an issuance of with the grant of an exemption from normal registration requirements
previously authorized but still unissued capital stock may, in a imposed by that Act. We do not find such fee either unreasonable or
particular instance, be held to be an exempt transaction by the SEC exorbitant.
under Section 6(b) so long as the SEC finds that the requirements of
registration under the Revised Securities Act are "not necessary in the WHEREFORE, for all the foregoing, the Petition for Review on
public interest and for the protection of the investors" by reason, inter Certiorari is hereby DENIED for lack of merit and the Decision of the
alia, of the small amount of stock that is proposed to be issued or Court of Appeals dated 13 January 1989 in C.A.-G.R. No. SP-13522, is
because the potential buyers are very limited in number and are in a hereby AFFIRMED. Costs against petitioner.
position to protect themselves. In fine, petitioner Nestle's proposed
construction of Section 6(a) (4) would establish an inflexible rule of SO ORDERED.
automatic exemption of issuances of additional, previously authorized
but unissued, capital stock. We must reject an interpretation which
may disable the SEC from rendering protection to investors, in the
public interest, precisely when such protection may be most needed.

Petitioner Nestle's second claim for exemption is from payment of the

fee provided for in Section 6 (c) of the Revised Securities Act, a claim
based upon petitioner's contention that Section 6 (a) (4)
covers  both issuance of stock in the course of complying with the
statutory requirements of increase of authorized capital stock and
issuance of previously authorized and unissued capital stock. Petitioner
claims that to require it now to pay one-tenth of one percent (1%) of
the issued value of the 344,500 shares of stock proposed to be issued,
is to require it to pay a second time for the same service on the part of
the SEC. Since we have above rejected petitioner's reading of Section 6
(a) (4), last clause, petitioner's claim about the additional fee of one-
tenth of one percent (1%) of the issue value of the proposed issuance
of stock (amounting to P34,450 plus P344.50 for other fees or a total of
P37,794.50) need not detain us for long. We think it clear that the fee
collected in 21 February 1983 by the SEC was assessed in connection

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