Promulgated:
October 6, 2008
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CONCURRING OPINION
Tinga, J.:
While I fully concur with the ponencia ably penned by Justice Chico-Nazario, I write separately to highlight the factual and legal background behind the legal proscription against the blight that is “insider trading.” This case is the farthest yet this Court has explored the matter, and it is heartening that our decision today affirms the viability for prosecutions against insider trading, an offense that assaults the integrity of our vital securities market. This case bears special significance, even if it does not dwell on the guilt or innocence of petitioners who are charged with insider trading, simply because the arguments raised by them essentially assail the validity of our laws against insider trading. Since we deny certiorari and debunk the challenge, our ruling will embolden our securities regulators to investigate and prosecute insider trading cases, thereby ensuring a more stable, mature and investor-friendly stock market.
The securities market, when active and vibrant, is an effective engine of economic growth. It is more able to channel capital as it tends to favor start-up and venture capital companies. To remain attractive to investors, however, the stock market should be fair and orderly. All the regulations, all the requirements, all the procedures and all the people in the industry should strive to achieve this avowed objective. Manipulative devices and deceptive practices, including insider trading, throw a monkey wrench right into the heart of the securities industry. When someone trades in the market with unfair advantage in the form of highly valuable secret inside information, all other participants are defrauded. All of the mechanisms become worthless. Given enough of stock market scandals coupled with the related loss of faith in the market, such abuses could presage a severe drain of capital. And investors would eventually feel more secure with their money invested elsewhere.[1]
The securities market is imbued with public interest and as such it is regulated. Specifically, the reasons given for securities regulation are (1) to protect investors, (2) to supply the informational needs of investors, (3) to ensure that stock prices conform to the fundamental value of the companies traded, (4) to allow shareholders to gain greater control over their corporate managers, and (5) to foster economic growth, innovation and access to capital.[2]
In checking securities fraud, regulation of the stock market assumes quite a few forms, the most common being disclosure regulation and financial activity regulation.
Disclosure regulation requires issuers of securities to make public a large amount of financial information to actual and potential investors. The standard justification for disclosure rules is that the managers of the issuing firm have more information about the financial health and future of the firm than investors who own or are considering the purchase of the firm’s securities. Financial activity regulation consists of rules about traders of securities and trading on or off the stock exchange. A prime example of this form of regulation is the set of rules against trading by insiders.[3]
I.
In its barest essence, insider trading involves the trading of securities based on knowledge of material information not disclosed to the public at the time.[4] Such activity is generally prohibited in many jurisdictions, including our own, though the particular scope and definition of “insider trading” depends on the legislation or case law of each jurisdiction. In the United States, the rule has been stated as “that anyone who, for trading for his own account in the securities of a corporation has ‘access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone’ may not take ‘advantage of such information knowing it is unavailable to those with whom he is dealing’, i.e., the investing public.”[5]
It would be useful to examine the historical evolution of the rule.
In the
The first paradigm shift came with a decision in 1903 of the Georgia Supreme Court in Oliver v. Oliver,[8] which pronounced that the shareholder had a right to disclosure, and the corporation a corresponding duty to disclose such material information, based on the principle that “[w]here the director obtains the information giving added value to the stock by virtue of his official position, he holds the information in trust for the benefit of [the shareholders].”[9] Subsequent state jurisprudence affirmed this fiduciary obligation to disclose material nonpublic information to shareholders before trading with them, otherwise known as the “minority” or the “duty to disclose” rule. However, the U.S. Supreme Court in 1909 expressed preference for a different rule in Strong v. Repide,[10] acknowledging that the corporate directors generally owed no duty to disclose material facts when trading with shareholders, unless there were “special circumstances” that gave rise to such duty. The “special circumstances,” as identified in Strong, were the concealment of identity by the defendant, and the failure to disclose significant facts having a dramatic impact on the stock price.
Both the “special circumstances” and “duty to disclose” rules gained adherents in the next several years. In the meantime, the 1920s saw the unprecedented popularity of the stock market with the general public, which was widely taken advantage of by corporations and brokers through unscrupulous practices. The American stock market collapse of October 1929, which helped trigger the worldwide Great Depression, left fully half of the $25 million worth of securities floated during the post-First World War period as worthless, to the injury of thousands of individuals who had invested their life savings in those securities.[11] The consequent wellspring of concern over the welfare of the investors animated the passage of the first U.S. federal securities laws, such as the Securities Exchange Act of 1934 which declared that “transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest which makes it necessary to provide for regulation and control of such transactions.”[12]
Section 10(b) of the Securities Exchange Act of 1934 provided that:
It shall
be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of
the national securities exchange ─ x x x
(b) To
use or employ, in connection with the purchase or sale of any security
registered on a national securities exchange or any security not so registered,
any manipulative or deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.[13]
It is this provision which stands as
the core statutory authority prohibiting insider trading under
It
shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange,
(a)
To
employ any device, scheme, or artifice to defraud,
(b)
To
make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c)
To
engage in any act, practice, or course of business which operates or would
operate as a fraud or deceipt upon any person,
in connection with the purchase or sale
of any security.[17]
Again, the rule by itself did not provide for an explicit prohibition on insider trading practices, and commentators have expressed doubts whether the U.S. SEC in 1942 had indeed contemplated that the rule work to such effect.[18] Yet undoubtedly the Rule created a powerful antifraud weapon,[19] and it would finally be applied by the U.S. SEC as a prohibition against insider trading in the 1961 case of In re Cady, Roberts & Co.[20]
The facts of that case hew closely to our traditional understanding of insider trading. A corporate director of Curtiss-Wright Corporation had told one of his business partners, Gimpel, that the board of directors had decided to reduce the company’s quarterly dividend. Armed with such information even before the news was announced, Gimpel sold several thousand shares in the corporation’s stock held in customer accounts over which he had discretionary trading authority. When the news of the reduced dividend was publicly disclosed, the corporation’s share prices predictably dropped, and the owners of the sold shares were able to avoid injury. The U.S. SEC ruled that Gimpel had violated Rule 10b-5, even though he was not an insider privy to the confidential material information, but merely a “tippee” of that insider. In doing so, the U.S. SEC formulated the “disclose or abstain” rule, requiring that an insider in possession of material nonpublic information must disclose such information before trading or, if disclosure is impossible or improper, abstain from trading.[21]
Not long after, the American federal courts adopted the principles pronounced by the U.S. SEC in Cady, Roberts, and the rule
evolved that insider trading was deemed a form of securities fraud within the U.S. SEC’s regulatory jurisdiction.[22] Subsequently, jurisprudential limitations were imposed by the U.S. Supreme Court, ruling for example that an insider bears a duty to disclose on the basis of a fiduciary relationship of trust and confidence as between him and the shareholders;[23] or that a tippee is liable for insider trading only if the tipper breached a fiduciary relationship by disclosing information to the tippee, who knew or had reason to know of the breach of duty.[24] In response to these decisions, the U.S. SEC promulgated Rule 14e-3, which specifically prohibited insiders of the bidder and the target company from divulging confidential information about a tender offer to persons that are likely to violate the rule by trading on the basis of that information.[25]
In the United Kingdom, insider trading is considered as
a type of “market abuse” assuming the form of behavior “based on
information which is not generally available to those using the market but
which, if available to a regular user of the market, would or would be likely
to be regarded by him as relevant when deciding the terms on which transactions
in investments of the kind in question should be effected.”[26]
The Philippines has adopted statutory regulations
in the trading of securities, tracing in fact as far back as 1936, or just two
years after the enactment of the US Securities Exchange Act of 1934. The then
National Assembly of the
However, in January of 1973, the SEC would issue a
set of rules,[30] which
required specific insiders to “make a resonably full, fair and accurate
disclosure of every material fact relating or affecting it which is of interest
to investors.”[31] It was
explained therein that a fact is material if it “induces or tends to induce or
otherwise affect the sale or purchase of the securities of the issuing
corporation, such as an acquisition of mining claims, patent or formula, real
estate, or similar capital assets; discovery of mineral ores; declaration of
dividends; executing a contract of merger or consolidation; rights offering;
and any other important event or happening.”[32]
The enactment of the Revised Securities Act in
1980 (Batas Pambansa Blg. 178, as amended) provided for the first time a
specific statutory prohibition in Philippine law against insider trading. This
was embodied in Section 30 of the law, which provides:
Sec. 30. Insider’s duty to disclose when
trading – (a) It shall be unlawful for an insider to sell or buy a security of
the issuer, if he knows a fact of special signifinace whith respest to the
issuer or the security that is not generally available, unless (1) the insider
proves that the fact is generally available or (2) if the other party to the
transaction (or his agent ) is identified, (a) the insider proves that the
other party knows it, or (b) that other party in fact knows it from the insider or otherwise.
(b) “Insider” means (1) the issuer, (2) a director
or officer of, or a person controlling, controlled by, or under common control
with, the issuer, (3) a person whose relationship or former relationship to the
issuer gives or gave him access to a fact of special significance about the
issuer or the security that is not generally available, or (4) a person who
learns such a fact from any of the foregoing insiders as defined in this
subsection, with knowledge that the person from whom he learns the fact is such
an insider.
(c) A fact is “of special
significance” if (a) in addition to being material it would be likely, on being
made generally available, to affect the market price of a security to a
significant extent, or (b) a reasonable person would consider it especially
important under the circumstances in determining his course of action in the
light of such factors as the degree of its specificity, the extent of its
difference from information generally available previously, and its nature and
reliability.
(d) This section shall
apply to an insider as defined in subsection (b) (3) hereof only to the extent
that he knows of a fact of special significance by virtue of his being an
insider.
Contrary to the claims of respondents, such terms
as “material fact,” “reasonable person,” “nature and reliability” and
“generally available” as utilized in Section 30 do not suffer from the vice of
vagueness and do not necessitate an administrative rule to supply definitions of
the terms either. For example, as the ponente
points out, the 1973 Rules already provided for a definition of a “material
fact,” a definition that was actually incorporated in Section 30.
Yet there is an underlying dangerous implication
to respondents’ arguments which makes the Court’s rejection thereof even more
laudable. The ability of the SEC to effectively regulate the securities market
depends on the breadth of its discretion to undertake regulatory activities. The
intractable adherents of laissez-faire
absolutism may decry the fact that there exists an SEC in the first place, yet
it is that body which assures the protection of interests of ordinary
stockholders and investors in the capital markets, interests which may be
overlooked by the issuers of securities and their corporate overseers whose own
interests may not necessarily align with that of the investing public. A “free
market” that is not a “fair market” is not truly free, even if left unshackled
by the State as it would in fact be shackled by the uninhibited greed of only
the largest players.
Respondents essentially contend that the SEC is
precluded from enforcing its statutory powers unless it first translates the
statute into a more comprehensive set of rules. Without denigrating the SEC’s
delegated rule-making power, each provision of the law already constitutes an
executable command from the legislature. Any refusal on the part of the SEC to
enforce the statute on the premise that it had yet to undergo the gauntlet of
administrative interpretation is derelict to that body’s legal mandate. By no
means is the Congress impervious to the concern that certain statutory
provisions are best enforced only after an administrative regulation
implementing the same is promulgated. In such cases, the legislature is
solicitous enough to specifically condition the enforcement of the statute upon
the promulgation of the relevant administrative rules. Yet in cases where the
legislature does not see fit to impose such a conditionality, the body tasked
with enforcing the law has no choice but to do so. Any quibbling as to the
precise meaning of the statutory language would be duly resolved through the
exercise of judicial review.
It bears notice that unlike the American
experience where the U.S. Congress has not seen fit to specifically legislate
prohibitions on insider trading, relying instead on the discretion of the U.S.
SEC to penalize such acts, our own legislature has proven to be more pro-active
in that regard, legislating such prohibition, not once, but twice. The Revised
Securities Act was later superseded by the Securities Regulation Code of 2000
(Rep. Act No. 8799), a law which is admittedly more precise and ambitious in
its regulation of such activity. The passage of that law is praiseworthy
insofar as it strengthens the State’s commitment to combat insider trading. And the promulgation of this decision confirms
that the judiciary will not hesitate in performing its part in seeing to it
that our securities laws are properly implemented and enforced.
III
I also wish to share my thoughts on the issue of principles.
The issue boils down to the determination of whether the investigation conducted by the SEC pursuant to Section 45[33] of the Revised Securities Act in 1994 tolled the running of the period of prescription. I submit it did.
Firstly, this Court, in ruling in Baviera v. Paglinawan[34] that the Department of Justice cannot conduct a preliminary investigation for the determination of probable cause for offenses under the Revised Securities Code, without an investigation first had by the SEC, essentially underscored that the exercise is a two-stage process. The procedure is similar to the two-phase preliminary investigation prior to the prosecution of a criminal case in court under the old rules.[35] The venerable J.B.L. Reyes in People v. Olarte[36] finally settled a long standing jurisprudential conflict at the time by holding that the filing of the complaint in the Municipal Court, even if it be merely for purposes of preliminary examination or investigation, should, and does, interrupt the period of prescription of the criminal responsibility, even if the court where the complaint or information is filed cannot try the case on its merits. The court gave three reasons in support of its decision, thus:
. . . Several reasons
buttress this conclusion: first the text of Article 91 of the Revised Penal
Code, in declaring that the period of prescription “shall be interrupted by the
filing of the complaint or information” without distinguishing whether the
complaint is filed in the court for preliminary examination or investigation merely,
or for action on the merits. Second, even if the court where the complaint or
information is filed may only proceed to investigate the case its actuations
already represent the initial step of the proceedings against the offender.
Third, it is unjust to deprive the injured party of the right to obtain
vindication on account of delays that are not under his control. All that the victim of the offense may do not
on his part to initiate the prosecution is to file the requisite complaint.[37]
The same reasons which moved the Court in 1967 to declare that the mere filing of the complaint, whether for purposes of preliminary examination or preliminary investigation should interrupt the prescription of the criminal action inspire the Court’s ruling in this case.
It should be emphasized that Sec. 45 of the Revised Securities Act invests the SEC with the power to “make such investigations as it deems necessary to determine whether any person has violated or is about to violate any provision of this Act or any rule or regulation thereunder, and may require or permit any person to file with it a statement in writing, under oath or otherwise, as the Commission shall determine, as to all facts and circumstances concerning the matter to be investigated” and to refer criminal complaints for violations of the Act to the Department of Justice for preliminary investigation and prosecution before the proper court.
The SEC’s investigatory powers are obviously akin to the preliminary examination stage mentioned in People v. Olarte. The SEC’s investigation and determination that there was indeed a violation of the provisions of the Revised Securities Act would set the stage for any further proceedings, such as preliminary investigation, that may be conducted by the DOJ after the case is referred to it by the SEC.
Secondly, Sec. 2 of Act No. 3326[38] provides in part:
Prescription shall begin to run from the day of the
commission of the violation of the law, and if the same be not known at the
time, from the discovery thereof and the institution of judicial proceedings
for its investigation and punishment. The prescription shall be interrupted when
proceedings are instituted against the guilty person, and shall begin to
run again if the proceedings are dismissed for reasons not constituting
jeopardy. (Emphasis supplied)
Act No. 3326 was approved on
While it may be observed that the term “judicial proceedings” in Sec. 2 of Act No. 3326 appears before “investigation and punishment” in the old law, with the subsequent change in set-up whereby the investigation of the charge for purposes of prosecution has become the exclusive function of the executive branch, the term “proceedings” should now be understood either executive or judicial in character: executive when it involves the investigation phase and judicial when it refers to the trial and judgment stage. With this clarification, any kind of investigative proceeding instituted against the guilty person which may ultimately lead to his prosecution as provided by law shall suffice to toll prescription.
Thus,
in the case at bar, the initiation of investigative proceedings against
respondents, halted only by the injunctive orders issued by the Court of
Appeals upon their application no less, should and did interrupt the
prescriptive period of the criminal action.
DANTE
O. TINGA
Associate
Justice
[2]See R.
[4]“Generally speaking, insider trading is trading in securities while in possession of material nonpublic information.” S. Bainbridge, Corporation Law and Economics (2002 ed.), p. 519.
[5]Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961); cited in Texas Gulf Sulpher Co., 401 F.2d 833 (2d Cir. 1968).
[6]Bainbridge, supra note 4 at 520 citing H.L. Wilgus, Purchase of Shares of a Corporation by a Director from a Shareholder, 8 Mich. L. Rev. 267, 267 (1910).
[11]See R.
[13]15 U.S.C. § 78j(b).
[15]
[18]“According
to one account, the decision to adopt the rule and model it on section 17(a)
[of the 1933 Securities Exchange Act] was arrived at without any deliberation,
with the only official discussion consisting of one SEC Commissioner reportedly
observing, “we are against fraud, aren’t we?” T.L.
Hazen, The Law of Securities Regulation (4th ed., 2002), at 571; citing
J. Blackmun, dissenting, Blue Chips Stamps v. Manor Drug Stores,
421
[22]Particularly, through the case of SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968), which has been described as “the first of the truly seminal insider trading cases,” even though much of its core insider trading holding had since been rejected by the U.S. Supreme Court. See Bainbridge, supra note 4, at 529.
[23]
[30]Rules Requiring Disclosure of Material
Facts by Corporations whose Securities are Listed in any Stock Exchange or
Registered/Licensed Under the Revised Securities Act, dated 29 January 1973.
[31]See R. Morales, The Philippine Securities Regulation Code (Annotated) (2002 ed.) at 199.
[35]The
first phase was the preliminary examination for the determination of the fact
of commission of the offense and the existence of probable cause, as well as
the issuance of the warrant of arrest.
The second phase was the preliminary investigation proper (after arrest,
for the determination of whether there was a prima facie case against the accused and whether the issuance of
the arrest warrant was justified).
[38]Entitled “An Act To Establish Periods of Prescription for Violation Penalized by Special Acts and Municipals Ordinances And To Provide When Prescription Shall Begin To Act.”
[39]9 Phil. 509 (1908).
[40]46 Phil. 380.
[42]52 Phil. 712 (1929).
[43]52 Phil. 712, 715.