Can a victim of securities fraud directly file a criminal case for violation of the Securities Regulation Code (SRC) with the Department of Justice (D0J)?
There is a fairly recent case that provides an answer to this question.
In Baviera vs. Paglinawan, G.R. No. 168380 (Feb. 8, 2007), Manuel Baviera (Baviera) purchased $8,000 worth of securities called Global Third Party Mutual Funds (GTPMF) under an Investment Trust Agreement from the Standard Chartered Bank-Philippines (SCB).
Due to bearish market conditions, the value of Baviera’s investment in the GTPMF decreased to $3,000 from its original amount of $8,000.
Baviera demanded compensation from SCB because SCB allegedly guaranteed the investment against loss, but the latter rejected the demand.
Baviera then filed with the DOJ two criminal cases against the members of the board of directors and officials of the SCB. One of the cases was for selling unregistered securities in the Philippines, which is prohibited under Section 8.1 of the Securities Regulation Code (SRC).
The DoJ dismissed Baviera’s complaint for criminal violation of the SRC, holding that the same should have been filed first with the Securities and Exchange Commission (SEC). Baviera then assailed the dismissal before the Court of Appeals (CA). The CA dismissed Baviera’s petition.
Appeal
Baviera appealed the decision of the Court of Appeals to the Supreme Court.
The issue before the Supreme Court was whether the CA erred in ruling that the DoJ did not commit grave abuse of discretion in dismissing Baviera’s complaint.
The Supreme Court held that the CA was correct in ruling that the DoJ did not commit grave abuse of discretion in dismissing Baviera’s complaint for violation of the SRC.
According to the High Court, “[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.”
Opposing views
Some observers say that the Baviera ruling is anti-investor because it imposes a bureaucratic step before investors can bring those who commit criminal violation of the SRC to justice.
For example, victims of insider trading or market manipulation cannot directly file a criminal case with the Prosecutor’s Office for violation of the relevant provisions of the SRC but they have to go through the SEC. What if the SEC initially dismisses a complaint for insider trading or market manipulation filed with it by an investor? What the Baviera ruling means is that the investor will have to go all the way up to the Supreme Court to reverse the dismissal of the case by the SEC before the appropriate criminal case can be filed with the Prosecutor’s Office for preliminary investigation.
In this light, observers point out that the Baviera ruling sets a dangerous precedent, especially if we consider the fact that it can be used to dismiss criminal cases for violation of other special laws being enforced by specialized agencies.
Clear examples of these special laws are the General Banking Law and the Pre-Need Code, which are under the specialized jurisdiction of the Bangko Sentral ng Pilipinas and the Insurance Commission, respectively.
On the other hand, the Baviera case can help ensure order where order should exist—for the sake of orderly market, so to speak. It helps guarantee against sham or groundless criminal cases that are intended to harass businesses in an effort to recover legitimate market losses.
The Baviera ruling requires that the case must first be filtered by the SEC—the administrative agency that has the specialized knowledge and expertise to deal with the matter—before a criminal complaint can be filed with the Prosecutor’s Office.
In this regard, notable is the Supreme Court’s observation that Baviera’s investment went down to $3,000 because “[t]he trend in the securities market … was bearish.” In short, Baviera appeared to have filed the criminal case with the DoJ as a means to recover what appears to be a legitimate market loss.
So the question is: Does Baviera lay down a dangerous precedent or is it a necessary tool to maintain order and discipline in the market as envisioned by our Securities Regulation Code?
Your take on the matter may be better than mine.
(The author, formerly the president and CEO of the Philippine Stock Exchange, is now the co-managing partner and head of the Corporate & Special Projects Department of ACCRALAW. He can be contacted through felim@accralaw.com.)