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Sanction  against Securities Misbehaviour

(Article published in the Nov 2,2011 issue of Manila Standard Today) 

Fooling around with the securities market is dangerous for a fool’s legal health.  The policy of the State, as stated in Section 2 of the Securities Regulation Code (SRC), is to “establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market.”

The specific mention of “insider trading” as among “fraudulent or manipulative devices and practices which create distortions in the free market” stresses how anathema the law considers its practice and explains the seeming severity of the administrative, civil, and criminal, sanctions that are dumped on the wrong-doer’s head for the sinful act of selling or buying “a security of the issuer, while in possession of material information with respect to the issue or the security that is not generally available to the public” unless any exempting circumstances listed in the law was present.  It is treated by the law as harshly as early dessert tribes castigated those who are caught defecating on their only watering well.


Section 54 empowers the Securities and Exchange Commission, after due notice and hearing, to impose the proper administrative sanctions which include, for the insider trader, disqualification from being an officer, member of the Board of Directors, or person performing similar functions.” This is, under the following section, “without prejudice to the filing, by the SEC, of criminal charges as against the individuals responsible for the violation.”

The criminal sanctions are severe.  The insider trader, upon conviction, is to “suffer a fine of not less than fifty thousand pesos (P50,000) nor more than Five million pesos (P5,000,000) or imprisonment of not less than seven (7) years nor more than twenty one (21) years, or both in the discretion of the court.”

And if the government were not to act, the private parties damaged thereby are not without recourse. Section 61 says that any person who violates Section 27.1 (the provisions on insider trading) or any rule or regulations issued thereunder “by purchasing or selling a security while in possession of material information not generally available to the public shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of the security subject of the violation purchased or sold securities of the same class unless such insider...proves that such investor knew the information or would have purchased or sold at the same price regardless of such disclosure of the information to him.”

The said suit by an investor, on the authority of Section 63, must be brought with the Regional Trial Court which is given by law the exclusive jurisdiction to hear and decide it.  That court is, again stressing how insider trading is look upon, authorized to award damages in the amount of “triple the amount of the transaction plus actual damages. In addition, the court may also award exemplary damages in case of bad faith, fraud, malevolence or wantonness, as well as attorney’s fees not exceeding 30% of the award.

Taking short-swing profits is similarly frowned upon by the law.  Section 23.2, for the purpose of preventing the unfair use of insider information, makes the profit of an insider that is realized by him from any purchase and sale or sale and purchase of the security within six (6) months, unless such security was acquired in good faith in connection with a loan previously contracted,  inure to the benefit of and consequently recoverable by the issuer.  This is regardless of whether as a matter of fact, the insider had intended to hold the security for more six (6) months. 

 The case must also be brought at the Regional Trial Court.  If the issuer fails to bring the case, a security owner may file the case, on behalf of the issuer, after the lapse of sixty (60) days  from receipt of the security owner’s request for the issuer to do so. 

As a violation of the Securities Regulation Code, short swing profits subject the guilty perpetrator, in addition to the aforesaid civil liability to disgorge his profit, to the same administrative and crimilar liabilities of other violations of the that law. 

A different law, the Corporation Code, covers the liability for grabbing the corporate opportunity from the issuer.  A director is seen as a fiduciary of the stakeholders in the corporation and is therefore expected to be loyal to them.  He therefore ought not, as a general proposition, be permitted to act contrary to their interest.  Grabbing an corporate opportunity from the his stakeholder’s is thus a breach of that fiduciary responsibility. 

Accordingly, Section 23 of the law imposes on him, should he grab a business opportunity that belongs to the corporation, to turnover his profits to the corporation, unless his actuation has been ratified by the stockholders owning two-thirds outstanding capital of the corporation.  This rule applies even if funds used and put at risk were the funds of the perpetrator.  Criminal sanctions consist in, under Section 144 of the Corporation Code, a fine of at least P1,000 and a maximum of P10,000 or imprisonment of at least 30 days and not more 5 years, or both fine and imprisonment, at the discretion of the court.  Administrative sanctions against the erring director also apply.

The combined effect of these sanctions, is, hopefully, effective deterrence against acts inimical to the integrity of the securities market.