G.R. No. 154131 - Securities and Exchange Commission vs. Performance Foreign Exchange Corp.

PFEC is a domestic corporation duly registered on June 23, 1998 under SEC Registration No. A199808910.
Its primary purpose is to operate as a broker/agent facilitating various transactions involving foreign exchange, deposits, interest rate instruments, fixed income securities, bonds/bills, repurchase agreements, certificates of deposit, bankers’ acceptances, bills of exchange, and over‐the‐counter options – including those related to lesser developed countries’ (L.D.C.) debt, energy, stock indexes, or similar derivative products. Notably, it is expressly not organized to act as a broker for the trading of securities under the Revised Securities Act.
Its secondary purpose involves engaging in money-changing or exchanging foreign currencies into domestic currency or into other foreign currencies.

After approximately two years of operation, PFEC received a letter dated November 28, 2000 from the Securities and Exchange Commission (SEC) requiring its appearance before the Compliance and Enforcement Department (CED) on December 14, 2000 for a clarificatory conference regarding its business operations.
PFEC’s officers complied and explained the nature of their business during the conference.

On January 16, 2001, Emilio B. Aquino, Director of the CED, issued a Cease and Desist Order (in CED Case No. 99-2297).
The Order alleged that PFEC was trading in foreign currency futures contracts on behalf of its clients without possessing the necessary license, an act purportedly in violation of Section 11 of Republic Act (R.A.) No. 8799 (The Securities Regulation Code) and related regulations concerning commodity futures contracts.
The Order mandated that PFEC, along with its officers, directors, agents, and affiliates, immediately cease soliciting funds for foreign currency trading and to cease operating as a foreign currency futures merchant/broker.
It further provided for a five-day period within which a request for lifting the Order could be filed pursuant to Section 64.3 of R.A. No. 8799.

On January 25, 2001, PFEC filed a motion with the SEC praying for the lifting of the Cease and Desist Order, contending that:

It had not violated any law or regulation;
Its operations were in line with its approved corporate purposes;
It was not engaged in trading currency futures contracts but only in spot currency trading.

On February 8, 2001, SEC Chairman Lilia R. Bautista sought clarification from the Bangko Sentral ng Pilipinas (BSP) by sending a letter requesting a definitive statement as to whether PFEC’s transactions amounted to financial derivatives, which could only be lawfully undertaken by banks or non-bank financial intermediaries performing quasi-banking functions.
Without awaiting the BSP’s determination, on February 9, 2001, the SEC issued an Order denying PFEC’s motion for lifting the Cease and Desist Order, and directed that the Order remain in force until PFEC submitted an appropriate BSP endorsement verifying its capacity to engage in such transactions.
PFEC subsequently filed a Manifestation With Urgent Motion on February 16, 2001, seeking the temporary suspension of the February 9 Order pending the BSP’s determination.
On March 15, 2001, PFEC complied with the SEC’s directive by submitting a summary of its operations and its foreign exchange spot product to a BSP panel for evaluation.

On April 23, 2001, the SEC rendered its action permanent by issuing an Order that:

Made the Cease and Desist Order permanent;
Directed PFEC to show cause within thirty (30) days why its certificate of registration should not be revoked, on grounds of alleged misrepresentation regarding its business operations and violation of the Securities Regulation Code and Presidential Decree No. 902-A.

PFEC then filed a motion on May 4, 2001, praying that the permanent Order be set aside.
With no action from the SEC on the motion and facing injurious effects on its business, PFEC filed a Petition for Certiorari with a request for a temporary restraining order and preliminary injunction before the Court of Appeals on June 20, 2001.

On August 13, 2001, the BSP provided a clarificatory letter indicating that PFEC’s business activity was essentially plain currency margin trading rather than futures trading or trading in financial derivatives, thereby falling outside BSP’s derivative licensing jurisdiction.
On February 11, 2002, the Court of Appeals rendered a Decision granting PFEC’s petition which set aside the SEC’s Cease and Desist Order and its subsequent orders.
The Court of Appeals ruled that the SEC acted with grave abuse of discretion by issuing the orders prematurely and without a complete investigation or verification process.
The SEC’s subsequent motion for reconsideration was denied in a Resolution dated July 3, 2002, leaving the Court of Appeals’ decision intact.

Whether the SEC acted with grave abuse of discretion by issuing the Cease and Desist Order and the subsequent permanent Order without first completing a proper investigation or verification of PFEC’s business operations.

Whether the initial clarificatory conference and subsequent referral to the BSP constituted an adequate investigation to justify the issuance of such orders.
Whether the SEC established a sufficient factual basis showing that PFEC’s business operations would operate as a fraud on investors or cause grave, irreparable injury to the investing public.
Whether making the Cease and Desist Order permanent prior to obtaining the BSP’s definitive endorsement was legally and procedurally proper.