SEC’s power to investigate criminal offenses

One of the issues that arises from the criminal penalty provisions of the Revised Corporation Code (RCC) is whether private complainants, especially those within the intra-corporate relations, may, on the basis of their criminal complaint, commence a preliminary investigation with the prosecutor’s office without going through the Security and Exchange Commission (SEC).

Unlike the Philippine Competition Act which provides expressly that the Philippine Competition Commission (PCC) has “sole and exclusive authority to initiate and conduct a fact-finding or preliminary inquiry for the enforcement of this Act,” and, if the evidence so warrants, to “file before the DoJ (Department of Justice) criminal complaints for violations of this Act or relevant laws for preliminary investigation and prosecution before the proper court,” no such “sole and exclusive authority to prosecute” is expressly granted to the SEC under the terms of the RCC.

Prior to the passage of the Securities Regulation Code that transferred the original and exclusive jurisdiction over the corporate cases under Section 5 of P.D. 902-A to the RTC Special Commercial Courts, the SEC, through its Prosecution and Enforcement Department (PED), was granted under Section 8 of the decree “the exclusive authority to investigate, on complaint or motu proprio any act or omission of the Board of Directors/Trustees … of their stockholders, officer … including any fraudulent devices, schemes or representations in violation of any law or rules and regulations administered and enforced by the SEC, to file and prosecute in accordance with law and rules and regulations issued by the [SEC] and in appropriate cases, the corresponding criminal or civil case before the SEC or the property court or body upon prima facie finding of violation of any laws or rules and regulations administered and enforced by the SEC.”

Mobilia Products, Inc. v. Umezawa, interpreted Section 8 of P.D. 902-A to the effect that “the filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and concomitant filing of a criminal action before the regular courts; such that a fraudulent act may give rise to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as well as criminal liability for violation of the Revised Penal Code cognizable by the regular courts, both charges to be filed and proceeded independently, and may be simultaneously with the other.”

Section 8 of P.D. 902-A has been expressly repealed by Section 76 of the Securities Regulation Code, so that Morato v. Court of Appeals, ruled that “Thus, under the new law, the PED ceased to exist,” but that nonetheless the investigative proceedings of the SEC could continue on the ground that the SEC had not lost its prosecutorial or criminal investigative powers under the laws that its administers, pursuant to paragraphs (d) and (l) of Section 5 of the Securities Regulation Code, thus:

(d) Regulate, investigate or supervise the activities of persons to ensure compliance;

x x x

(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws.

In addition, Morato held that SEC’s power to investigate securities fraud cases has been re-enacted in Section 53 of the Securities Regulation Code.

SEC v. Interport Resources Corp., confirmed that “Section 53 of the Securities Regulations Code clearly provides that criminal complaints for violations of rules and regulations enforced or administered by the SEC shall be referred to the Department of Justice (DoJ) for preliminary investigation, while the SEC nevertheless retains limited investigatory powers.” The Court affirmed that the prevailing rule is that a criminal complaint for violation of the Securities Regulation Code, or any of its implementing rules and regulations, must first be filed with the SEC, which determines the existence of probable cause, before a preliminary investigation can be commenced by the Department of Justice (DoJ). It is only when the SEC finds that there is probable cause, that the case is referred to the DoJ, under the following doctrine enunciated in Interport Resources Corp., thus: “A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it must first be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts will not determine a controversy involving a question within the jurisdiction of the administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the specialized knowledge and expertise of said administrative tribunal to determine technical and intricate matters of fact.”

The RCC retains the same administrative set-up to allow the application of Interport Resources Corp. ruling, and come to the reasonable conclusion that the SEC has sole investigative powers for violations of the Code to find probable cause before a criminal complaint can proceed to preliminary investigation stage with either the DoJ or the public prosecutors, thus:

(a) SECTION 154: The SEC “may investigate an alleged violation of this Code, or of a rule, regulation, or order of the SEC”;

(b) SECTION 155: The SEC “may administer oaths and affirmations, issue subpoena and subpoena duces tecum, take testimony in any inquiry or investigation, and may perform other acts necessary to the proceedings or to the investigation”;

(c) SECTION 156: The SEC “may issue a cease and desist order ex parte to enjoin an act or practice which is fraudulent or can be reasonably expected to cause significant, imminent, and irreparable danger or injury to public safety or welfare,” and thereafter, the SEC “may proceed administratively against such person in accordance with Section 158 of this Code, and/or transmit evidence to the Department of Justice for preliminary investigation or criminal prosecution and/or initiate criminal prosecution for any violation of this Code, rule, or regulation”;

(d) SECTION 179: SEC shall have the power and authority to:

(i) “Issue cease and desist orders ex parte to prevent imminent fraud or injury to the public”;

(ii) “Issue subpoena duces tecum and summon witnesses to appear in proceedings before the SEC”; and,

(iii) “In appropriate cases, order the examination, search and seizure of documents, papers, files and records, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases, subject to the provisions of existing laws.”

VETTING SECTION 170 OF THE REVISED CORPORATION CODE
Although Section 170 of the RCC is a reproduction of Section 144 of the old Corporation Code, nonetheless it has the following features that may lead to a different treatment, thus:

(a) Section 170 appears after several new provisions in the RCC providing for criminal penalties for specific violations of the Code; and that its title has been changed from “Violations of this Code” to “Other Violations of the Code; Separate Liability”;

(b) Section 170 has deleted the penalty of imprisonment found in the old Section 144 and increased the range of fines that can be imposed for violations of any other provisions of the RCC which are not specifically penalized: a fine of not less than P10,000 but not more than P1 million;

(c) Section 170 provides for a new paragraph: “Liability for any of the foregoing offenses shall be separate from any other administrative, civil, or criminal liability under this Code and other laws.”

It is also significant to note that the RCC has expressly granted to the SEC the power to investigate and prosecute offenses for alleged violation of the Code under Section 154; contempt power to impose a fine in Section 157 against any person who, without justifiable cause, fails or refuses to comply with any lawful order or decision by the SEC; and power to impose administrative sanctions in Section 158 in the form of specified ranges of fines when it “finds that any provision of this Code, rules or regulations, or any of the SEC’s order has been violated.”

The milieu of “criminalization of corporate practice” in which Section 170 of the RCC finds itself may arguably give rise to the need for the Supreme Court to revisit the legislative purpose of the still all-encompassing provision that seeks to impose the criminal penalty of fine for “Violations of any of the other provisions of this Code … not otherwise specifically penalized therein.”

For the reasons discussed below, we posit that even when it is clear that the intent of Congress under Section 170 is to provide a basis for penalizing violations of any other provisions of the RCC which are not specifically punished therein, it will be difficult for the SEC, or for complaining shareholders or members, to obtain criminal conviction under Section 170 for violations of the RCC which are not specifically punished therein.

SECTION 170 VERSUS SECTION 158 ON ADMINISTRATIVE SANCTIONS
Section 170 retains the first proviso of the old Section 144 covering instances when violations of the RCC are committed by a corporation, providing for the penalty of dissolution, thus:

SEC. 170. Other Violations of the Code; Separate Liability. — … If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee, or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.

When Section 170 refers to a situation “If the violation is committed by a corporation,” it can only refer to the offenses defined under Sections 165 to 167 of the RCC that are the only sections that expressly make a corporation criminally liable. Ironically though, Section 170 covers only criminal offenses that are committed by a corporation for violation of any other provision of the RCC “not otherwise specifically penalized therein.” This would have the rather ridiculous effect that the dissolution provision of Section 170 cannot be effected against a corporation that has committed an offense specifically penalized under the RCC, namely under Sections 165 to 167 thereof.

In contrast, Section 158 of the RCC empowers the SEC to impose the administrative sanction of “suspension or revocation of the certificate of incorporation,” or “dissolution of the corporation and forfeiture of its assets” in instances where the SEC, after due notice and hearing, finds that “any provision of this Code, rules or regulations, or any of the [SEC’s] orders has been violated.”

Section 170 as it seeks to define criminal offenses for “Other Violations of the RCC,” should be clearly distinguished from Section 158 which grants to the SEC the power to impose administrative sanctions when it “finds that any provision of this Code, rules or regulations, or any of the [SEC’s] orders has been violated.” Section 170 imposes the penalties pursuant to a criminal case, where the evidence of guilt must be beyond reasonable doubt; whereas, Section 158 imposes penalties pursuant to an administrative proceeding where the evidence of violation need only be based on substantial evidence. It seems clear that with the grant under Section 158 of the power to impose the administrative sanction of dissolution against erring corporations, the first proviso under Section 170 (which was taken from Section 144 of the old Code) should have been entirely deleted.

The immediately foregoing discussions demonstrate how the language used under Section 170 of the RCC is rather confusing as failing to indicate the true intent of Congress in the matter covered therein.

This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.

Atty. Cesar L. Villanueva is Co-Chair for Governance in the MAP Committee on ESG, Chair of Institute of Corporate Directors, the first Chair of Governance Commission for GOCCs, a former Dean of the Ateneo Law School, and Founding Partner of Villanueva Gabionza & Dy Law Offices.