High court backs SEC vs Sobrepeña

The Supreme Court has ruled in favor of the Securities and Exchange Commission (SEC) in a dispute with the group of businessman Robert John Sobrepeña over the sale of what the corporate regulator deemed as “securities” with condominium-hotel (condotel) units in Camp John Hay as underlying assets.

In a decision dated Nov. 28, 2016, the high court upheld the cease-and-desist order (CDO) issued by the SEC in 2012 against CJH Development Corp. (CJHDC) and CJH Suites Corp. (CJHSC) for selling unregistered securities, which the regulator considered as operating as “fraud” on investors.

The ruling also affirmed the authority of the SEC to determine what instruments are securities as it requires the technical knowledge and expertise of this corporate regulator.

SEC Chair Teresita Herbosa lauded the Supreme Court decision as a “clear sign that the SEC is on the right track in its unrelenting quest to be the champion in investor protection even as it espouses the widest participation of ownership and democratization of wealth always in consonance with the Constitution and other Philippine laws.”

CJHDC is a local corporation engaged in the acquisition, development, sale, lease and management of real estate. It is the parent firm of CJHSC, which entered into a lease agreement with the Bases Conversion and Development Authority (BCDA) for the development into a public tourism complex, multiple-use forest watershed and human resource development center, of a 247- hectare property within the John Hay Special Economic Zone in Baguio City.

Part of the development plan was the construction of two condotels named “The Manor” and “The Suites.” Subject to CJHDC’s leasehold rights, the residential units in these condotels were then offered for sale to the general public by means of two schemes. The first was a straight purchase and sale contract where the buyer pays the purchase price for the unit bought, either in lump sum or on installment basis and thereafter enjoys the benefits of full ownership, subject to payment of maintenance dues and utility fees.

The second scheme involved the sale of the unit with an added option of a “leaseback” or a “money-back” arrangement. Under this added option, the buyer pays for the unit bought and, subsequently, surrenders possession to the management of CJHDC or CJHSC. These corporations then intended to create a pool of these units and, in turn, offer them for billeting under the management of the hotel operated by the Camp John Hay Leisure Inc. This arrangement lasted for a period of 15 years with a renewal option for the same period or until 2046.

The buyers who choose the “leaseback” arrangement would receive either a proportionate share in 70 percent of the annual income derived from the hotel operation of the pooled rooms or a guaranteed 8-percent return on their investment.

The SEC investigated whether the “leaseback” or “money-back” arrangements were, in essence, investment contracts considered as securities under Republic Act No. 8799, otherwise known as the Securities Regulation Code (SRC).

The legal battle was brought all the way up to the Supreme Court, which reversed an earlier ruling by the Court of Appeals favoring Sobrepeña.

In its ruling, the high court said it “neither agrees with the ruling of the CA that there is nothing in the assailed CDO which shows that the acts sought to be restrained therein operate as a fraud on investors.”