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Unregistered foreign securities

The fact that a foreign security is issued by a prestigious international financial services company is no guarantee it can be legally offered for sale or sold in our country.

This was a lesson the brothers Jose Pua and Benjamin Pua, who claim to be long time depositors of Citibank Binondo branch, learned the hard and expensive way.

According to Jose, in 1999, he was invited by the bank branch manager to a dinner party at the Manila Hotel to meet several officers and employees of Citibank Hong Kong branch.


Weeks later, Chingyee Yau, a vice president of Citibank Hong Kong, came back to sell securities to him. As part of the conditions of the sale, Jose opened an account with Citibank Hong Kong.


After opening the account, Yau offered and sold to the Pua brothers several securities issued by public limited companies established in Jersey, Channel Islands.

(Jersey is the largest island of the Channel Islands, a territory in Europe that is under the administration of the United Kingdom but is not considered a part of that country.)

The offer, sale and signing of the subscription agreements were all done and completed at Citibank Binondo in the presence of its officers and employees.


The Puas later learned that the securities they bought were not registered with the Securities and Exchange Commission (SEC) nor were their terms and conditions submitted to the SEC for evaluation and approval.

Believing the bank’s actions violate the Securities Regulation Code (SRC), the Puas filed in 2002 a complaint in a regional trial court against Citibank N.A., (the Philippine chapter of multinational company Citigroup) for declaration of nullity of the subscription agreements and damages.


They claimed the terms and conditions of the agreements are contrary to law and public policy.

Citibank sought the dismissal of the complaint on the ground that the court does not have jurisdiction (or authority) to hear the case.

It argued that since “the merits of the case would largely depend on the issue of whether or not there was a violation of the SRC, in particular, whether or not there was a sale of unregistered securities,” the complaint should have been filed with the SEC, not the regular court.

The court denied the motion. It said the questions raised in the complaint are more appropriate for the judiciary to resolve than an administrative agency.

Citibank appealed the decision to the Court of Appeals. The latter set aside the lower court’s action and ruled that “all complaints involving violations of the SRC should be first filed with the SEC.”


Unfazed by the rebuff, the Puas elevated the case to the Supreme Court for a final ruling on the question of jurisdiction.

In the case of “Jose U. Pua and Benjamin Hanben U. Pua vs Citibank, N.A., G.R. No. 180064, Sept. 16, 2013,” the tribunal narrowed down the issue to whether or not the SEC has primary jurisdiction over the subject matter of the complaint.

The Puas stated that civil actions for damages arising from violations of the SRC fall, by express provision of the SRC itself, within the exclusive jurisdiction of regional trial courts.

Citibank, on the other hand, anchored its defense on an earlier ruling of the tribunal (Baviera vs. Paglinawan, G.R. No. 168380, Feb. 8, 2007) which states that “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.”

The tribunal said the SRC makes a distinction between the kinds of actions—civil or criminal—that an aggrieved party may file for violations of its provisions.

If it is a criminal suit, Sec. 53 requires the complaint to be investigated first by the SEC then, when found meritorious, referred to the Department of Justice for preliminary investigation and prosecution before the proper court.

On the other hand, if the suit is civil in nature, i.e., for recovery of money or damages, Secs. 56 to 63 provide that the action should be brought before the regional trial court which shall have exclusive jurisdiction to hear and decide such suit.


Since the Puas filed a civil, not criminal, action against Citibank, the tribunal ruled that SEC does not have primary jurisdiction over their case.

In other words, they need not go through the SEC to compel Citibank to return their investments and pay them damages. They can seek relief directly from the regular courts and not have to plod through the SEC’s and DOJ’s bureaucratic maze.

Thus, the tribunal ordered the trial court to continue to hear the case—eleven years after it was initially filed.

The final outcome of this case will be of interest to foreign financial institutions with local affiliates that may want to sell their securities to Philippine residents.

Under existing rules, securities cannot be offered for sale or sold in the country without prior SEC approval. A violation of this regulation could give rise to severe fines or prison term on the guilty parties.

Assuming Pua’s allegations are true, Citibank has to show that the actions of its Binondo branch staff—inviting them to Manila Hotel to meet Citibank Hongkong officers and assisting the latter in the signing of the subscription agreements—do not constitute willful participation in the sale of unregistered securities.

There is a principle in law that says, what you cannot do directly cannot be done indirectly.

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TAGS: Business, column, foreign securities, raul j. palabrica

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