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Urbancorp breaks, betrays trust
(Article published in the Feb. 12, 2001 issue of TODAY, Opinion Today Section)

Former impeachment prosecutors Joker Arroyo and Oscar Moreno have obviously not been provided by their "well-meaning" sources in Urban Bank (or if they have been, the honorable lawmakers have chosen, for their own reasons, not to disclose them to the public) with facts on the way Urbancorp Investments, Inc., particularly, Teodoro C. Borlongan, one week before Urban Bank voluntarily declared its bank holiday, raided the investment house’s common trust fund to enable a person believed to be an Erap crony, named William Gatchalian, to avoid loss of over Php 65 million.

The raid, allegedly masterminded by Teodoro C. Borlongan, occurred one week before Urban Bank voluntarily declared its bank holiday, enabling Gatchalian to walk away from liability to the claimants against Urbancorp Investments Inc.,of over Php 197 million liability.

A case writer for a business course on trust regulations need not look farther than the filings of the Interim Receiver of Urbancorp Investments, Inc.with the Securities and Exchange Commission.

The documents relating to the transaction on 19 April 2000 between its investment management account named "UII FAO MIP" with Urcoin, Urbancorp’s common trust fund, to illustrate how easily trust managers can violate the trust reposed on them by trusting clients. Never has so many rules of prudence and statute been broken by a trust department in so short a time in such a blatant manner.

"UII FAO UB MIP" is short for "Urbancorp Investments, Inc. for account of Management Incentive Plan of Urban Bank" for its executives. It is an account recorded in the books of the trust department of Urbancorp Investments, Inc. as a trust or other fidicuary account.

When the accounting firm of Joaquin Cunanan & Co., at the request of the Interim Receiver, conducted a verification of the investment house’s liabilities and capital, no agreement, whether trust, investment management or any other type, with the owners or beneficiaries of the Management Incentive Plan was presented.

The Interim Receiver’s information is that no agreement was actually drawn up. This was Violation No. 1: Section 4409Q of the Manual of Regulations for Non-Bank Financial Institutions ("Manual") provides that "each trust or fiduciary account shall be covered by a written document establishing such account…"

According to the Interim Receiver, there is no copy of the Management Incentive Plan on file at the trust department of Urbancorp Investments, Inc. The trust department has also no list of the members or beneficiaries of the plan, although as the name suggested, the participants in the plan were probably the management of Urban Bank.

There is moreover nothing on file to list the names of the persons authorized to act for the plan and bind its members. This was Violation No. 2: Section 4421Q, third paragraph, requires books and records to "contain full information relative to each trust, other fiduciary or investment management account…"

On 19 April 2000, "UII FAO UB MIP", according to Transaction Ticket No. 002184 of Urbancorp Investments Inc., took a one-year term loan in the amount of Php 66 million, at the interest rate of 10% p.a. from Urcoin -- the common trust fund maintained and operated by Urbancorp Investments, Inc. for the collective investment and reinvestment of moneys received by it as trustee from the public.This loan is known as an inter-account transaction, i.e. a transaction between one trust or fiduciary account and another trust or fiduciary account in the same trust institution.

This is not allowed under Section 4409Q.3 of the Manual "unless prior to its execution, such transaction has been fully disclosed and specifically authorized in writing by the client…" Hence, it was Violation No. 3 because the transaction was not authorized by the participants in Urcoin nor was it disclosed to them , by way of alternative compliance, in conformity with Section 4410Q of the Manual. Under that provision, the trustee of a common trust fund, may instead of securing the authorization of its clients, may simply make available to them quarterly a list of actual and prospective investments.

In fact, except for Transaction Ticket No. 002184 which bore only the initials of the only approving officer, namely Teodoro C. Borlongan, dated May 17, no other document, according to the Interim Receiver, is on file with the trust department of Urbancorp Investments, Inc. giving evidence of any action by duly authorized signatories of the investment house. This was Violation No. 4 for it contravenes the principle of dual control found in Section X163.6 of the Manual for banks which is likewise applicable to trust departments of investment houses.

The loan of Urcoin’s funds was made to a borrower, UII FAO UB MIP, that had no capacity to pay. Current assets amount to only a little over Php 1.6 million. Investments in equity were incestuously limited to shares of Urban Bank, Urbancorp Investments, Inc. and Urbancorp Insurance Brokers Inc., all of which were, on the date of the loan (six days before the voluntary bank holiday), suffering serious liquidity problems.

The trust department of Urbancorp Investments, Inc., according to the Interim Receiver, had no financial statements on file of UB MIP as of or reasonably prior to April 19, 2000 when the loan was granted. This was Violation No. 5: Section 4409Q.6 makes Section 76 of the old General Banking Act, requiring lenders to ascertain that borrowers are capable of fulfilling their commitments, applicable to trust loans.

The loan was supposed to have as collateral 20,005 common shares of Urbancorp Investments, Inc. and 268,200 subscription shares of Urban Bank Inc. Yet, according to the Interim Receiver, there were no deeds of assignment in favor of URCOIN on file at Urbancorp Investments, Inc. nor were the certificates of stock endorsed to URCOIN. Moreover, there was also no deed of assignment in favor of Urcoin of the 268,200 shares in Urban Bank subscribed by the Urban Bank Management Incentive Plan.

As may be expected, the supposed lien of Urcoin on the shares was not recorded in the books of issuing companies. In effect, the Php 66 million loan from URCOIN to UII FAO UB MIP is an unsecured loan of the public’s money to the management of Urban Bank. This was Violation No. 6 since, in the light of the circumstances when the loan was granted, it was a highly imprudent loan contravening the injunction in Section 56 of the old General Banking Act (now Sec. 80 of R.A. 8791, The General Banking Law of 2000).

No loan agreement or promissory note between the lending account, Urcoin, and the borrowing account, UII FAO UB MIP, is, according to the Interim Receiver, on file with the trust department of Urbancorp Investments, Inc. This was Violation No. 7 contravening Section 4301Q of the Manual which requires that "all loans/credit extensions shall be supported by evidences of indebtedness and/or loan agreements…" And since Section 77 of the old General Banking Act (now Sec. 39 of R.A. 8791, The General Banking Law of 2000) requires the purpose of all loans to be stated in the contract between the bank and the borrower, that also translated automatically into Violation No. 8.

Almost all of the proceeds of the loan were actually used, as uncovered by a verification by Joaquin Cunanan & Co., to reimburse a reputed crony of then President Joseph Ejercito Estrada by the name of William Gatchalian in the exact amount of Php 65,719,029.50 representing the 25% downpayment of his subscription to 1,712,550 preferred shares of Urbancorp Investments, Inc. On file, according to the Interim Receiver, is an undated Subscription Agreement covering the subscription, but there is no deed of assignment nor any document on file that would support the transfer of the subscription from Mr. Gatchalian to UII FAO UB MIP. This documentation deficiency was Violation No. 9.

But Violation No. 10 is the most serious breach of trust. Urbancorp Investments, Inc. using the money of its investors in URCOIN lent money to the beneficiaries of Urban Bank Management Incentive Plan. The transaction was effected on the authority of only one person, who because he is also the President of Urban Bank, is one of those beneficiaries. But the betrayal did not stop there. The proceeds of the loan were used to take out William Gatchalian’s investment in the preferred shares of Urbancorp Investments, Inc. which were not fully paid shares.

William Gatchalian still owed the company, as a subscriber to 1,712,550 shares at Php 153.50 per share, the 75% balance of his subscription amounting to Php 197,157,318.75. This unpaid subscription which by law is a trust fund for Urbancorp Investments, Inc.’s creditors, having been transferred to UII FAO UB MIP, is not likely to be paid at all. As of 19 December 2000, the Interim Receiver reports that not a single peso has been remitted by UII FAO UB MIP in payment of principal or interest to URCOIN.

In effect, Urbancorp Investments, Inc. borrowed money from its trust investors and used that same money to undermine the trust investors’ ability to get back their own investments. William Gatchalian, in the meantime, who could have been compelled to pay the balance of his subscription in the light of Urbancorp Investment Inc.’s illiquidity, walked away scot free.

The honorable Joker Arroyo and Oscar Moreno are, in my view, not interested in championing the cause of the trust investors of URCOIN aggrieved by this outright misappropriation of their money.

After all, the only person who is on record as having made all this possible is Urban Bank President and Director of Urbancorp Investments, Inc,Teodoro C. Borlongan, and not their favorite whipping boy, BSP Gov. Rafael Buenaventura.