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Insider trading doctrine’s seeds were sown in PH

(Article published in the Oct 26,2011 issue of Manila Standard Today) 

The Honourable Roberto V. Ongpin ended his Oct 13 statement defending his accumulation of Philex shares and subsequent block sale to MVP in November ’09 with, “So I ask, ‘insider trading’? Nonsense.  This was part of normal stock market operations, based on careful analysis of the value of Philex shares and fortuitous events such as mentioned above with the entry into the fray of Mr. Ang and Mr. Garcia.” 

Only time will tell whether such a robust defense will stand the rigors of an Ombudsman inquiry.  Meanwhile, a look at one of the early cases decided by our courts on how the activity was viewed by our forebears is instructive.  Such case is Strong v. Repide, 213 U.S. 419, an appeal decided on May 03, 1919 by the US Supreme Court from a decision of the Supreme Court of the Philippine Islands that is reported in 6 Phil 680.

The case involved a transaction over the shares of a juridical entity that owned what used to be known as “Friar lands.”  Shortly after the Americans took over the country, the Government, in 1903, offered to buy, in toto, all the friar lands for the sum of $6,043,219.47 in gold.  The lands were owned by different and separate owners, one of them (and owner of what amounts to nearly half of the lands known as the “Domican lands”) was the Philippine Sugar Estates Development Company Ltd. (PSED).  After much negotiation with the owners of the lands, an agreement was reached, except with the owners of PSED, for the sale to the Government of the lands at the price of $7,535,000.  The agreeing owners sought to convince Gutierrez Repide, representative of lone hold-out PSED, to accept the proferred price; but Repide was admant in his refusal. 


What went on, as surmised by the US Supreme Court, in the mind of Repide, is as follows: “The defendant, of course, as the negotiations progressed, knew that the decision of the question lay with him, and that, if he should decide to accept the last offer of the government, his decision would be the decision of his company, as he owned three-fourths of its shares, and the negotiations would then go through as all the owners of the balance of the land desired it. If the sale should not be consummated, and things should remain as they were, the defendant also knew that the value of the lands and of the shares in the company would be almost nothing. He himself says, in speaking of these lands owned by his company, that had the government "given the haciendas the protection which they ought to have received, they would have been worth $6,000,000 in gold; but, considering the abnormal condition in which they were on account of the failure of the government to protect these haciendas, it is impossible to fix any value; they were worth nothing; they were a charge."

Repide, however, was a fast worker.  The court noted that “While this state of things existed, and before the final offer had been made by the Governor, the defendant [Repide], although still holding out for a higher price for the lands, took steps, about the middle or latter part of September, 1903, to purchase the 800 shares of stock in his company owned by Mrs. Strong...The defendant, having decided to obtain these shares, instead of seeing Jones [the seller’s agent], who had an office next door, employed one Kauffman, a connection of his by marriage, and Kauffman employed a Mr. Sloan, a broker, who had an office some distance away, to purchase the stock for him, and told Sloan that the stock was for a member of his wife's family. Sloan communicated with the husband of Mrs. Strong, and asked if she desired to sell her stock. The husband referred him to Mr. Jones for consultation, who had the stock in his possession. Sloan did not know who wanted to buy the shares, nor did Jones when he was spoken to. Jones would not have sold at the price he did had he known it was the defendant who was purchasing, because, as he said, it would show increased value, as the defendant would not be likely to purchase more stock unless the price was going up… Mr. Jones might well have supposed there was no immediate prospect of a sale of the lands being made, while at the same time defendant [Repide] had knowledge of the probabilities thereof which he had acquired by his conduct of the negotiations for their sale, as agent of all the shareholders, and while acting specially for them and himself.”

The result of the negotiations was that on or about October 10, 1903, the 800 shares of stock were sold for $16,000, Mexican currency, to Repide who thus obtained said shares for about one tenth of the amount they became worth by the sale of the lands between two and three months thereafter.

What is significant is that “in all the negotiations in regard to the purchase of the stock from Mrs. Strong,through her agent Jones, not one word of the facts affecting the value of this stock was made known” to the buyer by the seller.”

“But, on the contrary, perfect silence was kept. The real state of the negotiations with the government was not mentioned, nor was the fact stated that it rested chiefly with the defendant [Repide] to complete the sale. The probable value of the shares in the very near future was thus unknown to anyone but defendant, while the plaintiff had no knowledge or suspicion that defendant Repide was the one seeking to purchase the shares.”

Such behaviour, in today’s standards, clearly is unlawful inside trading.  But the law was different then.

         But still, to its credit, weaving through the maze of Philippine law in force at that time that could condemn such practice, the US Supreme Court, though not having the benefit of our modern securities law, nevertheless saw it fit to annul the sale on the basis of fraud since it was clearly driven by the insider’s exploitation of knowledge that was not available to the seller.  Before the Securities Regulation Code came be, long before, Philippine law already had sign posts in place on the right thing to do.