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CASE: ABACUS SECURITIES CORPORATION, April 1997, [respondent] opened a cash or

Petitioner, vs.RUBEN U. AMPIL, Respondent. regular account with [petitioner] for the
purpose of buying and selling securities as
Stock market transactions affect the general evidenced by the Account Application Form. The
public and the national economy. The rise and parties’ business relationship was governed by
fall of stock marketindices reflect to a the terms and conditions [stated therein].
considerable degree the state of the economy.
Trends in stock prices tend to herald changes April 10, 1997 (Credit transaction and not a cash
inbusiness conditions. Consequently, securities transaction) — The [respondent] actively traded
transactions are impressed with public interest, his account, and as a result of such trading
and are thus subjectto public regulation. In activities, he accumulated an outstanding
particular, the laws and regulations requiring obligation in favor of [petitioner] in the principal
payment of traded shares within sum of ₱6,617,036.22 as of April 30,1997 (it
specifiedperiods are meant to protect the means: there were subsequent transacyions
economy from excessive stock market from April 10). Despite the lapse of the period
speculations, and are thus mandatory. within which to pay his debt, the respondent
failed to do so. Such that [petitioner] thereafter
In the present case, respondent cannot escape sold [respondent’s] securities to set off against
payment of stocks validly traded by petitioner on his unsettled obligations."The sale did not totally
his behalf. These transactions took place before extinguish the debt of the respondent. Hence,
both parties violated the trading law and rules. the [Petitioner] then referred the matter to its
Hence, they fall outside the purview ofthe pari legal counsel for collection purposes."
delicto rule.
In a letter dated August 15, 1997, [petitioner]
FACTS: demanded that [respondent] settle his
In the present controversy, the following obligation plus the agreed penalty charges.
pertinent facts are undisputed:
(1) on April 8, 1997, respondent opened acash In a letter dated August [26], 1997, [respondent]
account with petitioner for his transactions in acknowledged receipt of [petitioner’s] demand
securities; [letter] and admitted his unpaid obligation and
(2) respondent’s purchases were consistently at the same time request[ed] for 60 days to raise
unpaid from April 10 to 30, 1997; funds to pay the same, which was granted by
(3) respondent failed to pay in full, or even just [petitioner]."Despite said demand and the lapse
his deficiency, for the transactions on April 10 of said requested extension, [respondent] failed
and 11, 1997; and/or refused to pay his accountabilities to
(4) despite respondent’s failure to cover his [petitioner]."
initial deficiency, petitioner subsequently For his defense, [respondent] claims that he was
purchased and sold securities for respondent’s induced to trade in a stock security with
account on April 25 and 29; [petitioner] because the latter allowed offset
(5) petitioner did not cancel or liquidate a settlements wherein he is not obliged to pay
substantial amount of respondent’s stock the purchase price. Rather, it waits for the
transactions until May 6, 1997. customer to sell. And if there is a loss,
[petitioner] only requires the payment of the
The petitioner] is a broker and dealer of deficiency (i.e., the differencebetween the
securities of listed companies at the Philippine higher buying price and the lower selling price).
Stock Exchange Center. In addition, it charges a commission for
brokering thesale."However, if the customer
sells and there is a profit, [petitioner] deducts
the purchase price and delivers only thesurplus – 2) request from the appropriate authority an
after charging its commission." extension of time for the payment
The respondent] further claims that all his ofrespondent’s cash purchases.
trades with [petitioner] were not paid in full in
cash at anytime after purchaseor within the T+4 The trial court noted that despite respondent’s
[4 days subsequent to trading] and none of these non-payment within the required period,
trades was cancelled by [petitioner]. Neither petitioner did not cancel the purchases of
did [petitioner] apply with either the Philippine respondent. Neither did it require him to deposit
Stock Exchange or the SEC for an extension of cash payments before it executed the buy
time for the payment or settlement of his cash and/or sell orders subsequent to the first
purchases. This was not brought to his attention unsettled transaction. By allowing respondent
by his broker and so with the requirement of to trade his account actively without cash,
collaterals in margin account. Thus, his trade petitioner effectively induced him to purchase
under an offset transaction with [petitioner]is securities thereby incurring excessive credits.
unlimited subject only to the discretion of the
broker. x x x [Had petitioner] followed a The trial court also found respondent to be
provision which stipulated the liquidation within equally at fault, by incurring excessive credits
the T+3 [3 days subsequent to trading], his net and waiting to see how his investments turned
deficit would only be₱1,601,369.59. out before deciding to invoke the RSA.
[respondent] however affirmed that this is not in
accordance with RSA [Rule 25-1 par. C, which Thus, the RTC concluded that petitioner and
mandates: respondent were in pari delicto and therefore
that if you do not pay for the first] order, you without recourse against each other.
cannot subsequently make any further order
without depositing the cash price in full. Ruling of the Court of Appeals
The CA upheld the lower court’s finding that the
So, if RSA Rule 25-1, par. C, was applied, he was parties were in pari delicto.
limited only to the first transaction (April 10
transaction). That [petitioner] did not comply ISSUE:
with the T+4 mandated in cash transaction. 1. Whether or not the petitioner and
When [respondent] failed tocomply with the respondent are in pari delicto which
T+3, [petitioner] did not require him to put up a allegedly bars any recovery.
deposit before it executed its subsequent
orders.[Petitioner] did not likewise apply for Held:
extension of the T+4 rule. Because of the offset The provisions governing the above transactions
transaction, [respondent] wasinduced to [take a] are Sections 23 and 25 of the RSA16 and Rule 25-
risk which resulted [in] the filing of the instant 1 of the RSARules.
suit against him.
Section 23 (b)
RTC RULING: (b) It shall be unlawful for any member of an
Held that petitioner violated Sections 23 and 25 exchange or any broker or dealer, directly or
of the Revised Securities Act (RSA) and Rule 25- indirectly, to extend or maintain credit or
1 of the Rules Implementing the Act(RSA Rules) arrange for the extension or maintenance of
when it failed to: credit to or for any customer –
1) require the respondent to pay for his stock i. On any security other than an
purchases within three (T+3) or fourdays (T+4) exempted security, in contravention of
from trading; and the rules and regulations which the
Commission shall prescribe under The main purpose of the above statute on
subsection (a) of this Section; margin requirements
ii. Without collateral or on any collateral - Is to regulate the volume of credit flow,by
other than securities, except: way of speculative transactions, into the
a. to maintain a credit initially securities market and redirect resources into
extended in conformity with the more productive uses.
rules and regulations of the - The main purpose:
Commission and a. to give a [g]overnment credit agency an
b. in cases where the extension or effective method of reducing the
maintenance of credit is not for aggregate amount ofthe nation’s credit
the purpose of purchasing or resources which can be directed by
carrying securities or of evading speculation into the stock market and
or circumventing the provisions out of other moredesirable uses of
ofsubparagraph (1) of this commerce and industry x x x."
subsection. b. A related purpose of the governmental
regulation of margins is the stabilization
Sec 25 To prevent indirect violations of the of the economy.
MARGIN REQUIREMENTS under Section 23 c. Restrictions on margin percentages are
hereof, the broker or dealer shall require the imposed "in order to achieve the
customer in non margin transactions to pay the objectives of the government with due
price of the security purchased for his account regard for the promotion of the
within such period as the Commission may economy and prevention of the use of
prescribe, which shall in no case exceed three excessive credit."
trading days; otherwise, the broker shall sell the - Otherwise stated, the margin requirements
security purchasedsntarting on the next trading set out in the RSA are primarily intended to
day but not beyond ten trading days following achieve a macroeconomic purpose -- the
the last day for the customer to pay such protection of the overall economy from
purchase price, unless such sale cannot be excessive speculation in securities.
effected within said period for justifiable - Their recognized secondary purpose is to
reasons. The sale shall be without prejudice to protect small investors.
the right of the broker or dealer to recover any
deficiency from the customer. NOT PURPOSE:
- Not to increase the safety of security loans
Section 23(b) -- the alleged violation of for lenders. Banks and brokers normally
petitioner require sufficient collateral to make
-- it is unlawful for a broker to extend or themselves safe without the help of law.
maintain credit on any securities other than in - Not a protection of the small speculator by
conformity with the rules and regulations issued making it impossible for him to spread
by Securities and Exchange Commission (SEC). himself too thinly –although such a result
will be achieved as a byproduct of the main
Section 25 lays down the rules to prevent purpose.
indirect violations of Section 23 by brokers or
dealers. The law places the burden of compliance with
margin requirements primarily upon the
RSA Rule 25-1 prescribes in detail the regulations brokers and dealers (in this case, to the
governing cash accounts. petitioner)
Sections 23 and 25 and Rule 25-1, otherwise therefore, are in the superior position to prevent
known as the "MANDATORY CLOSE-OUT RULE," the unlawful extension of credit. Because of this
clearly vest upon petitioner (broker and dealer) awareness, the law imposes upon them the
the obligation to primary obligation to enforce the margin
- cancel or otherwise liquidate a customer’s requirements.
order, if payment is not received within
three days from the date of purchase. Right is one thing; obligation is quite another. A
o For transactions subsequent to an right may not be exercised; it may even be
unpaid order, the broker should require waived. An obligation,however, must be
its customer to deposit funds into the performed; those who do not discharge it
account sufficient to cover each prudently must necessarily face the
purchase transactionprior to its consequence oftheir dereliction or omission.
execution.
o These duties are imposed upon the RESPONDENT LIABLE FOR THE FIRST,BUT NOT
broker to ensure faithful compliance FOR THE SUBSEQUENT TRADES
with the margin requirements of the
law, which forbids a broker from These margin requirements are applicable only
extending undue credit to a customer. to transactions entered into by the present
parties subsequent to the initial trades of April
TRADING ON CREDIT (OR "MARGIN TRADING") 10 and 11, 1997. Thus, we hold that petitioner
- allows investors to buy more securities than can still collect from respondent to the extent of
their cash position would normally allow. the difference between the latter’s outstanding
Investors pay only a portion of the purchase obligation as of April 11, 1997 less the proceeds
price of the securities; their broker advances for from the mandatory sell out of the shares
them the balance of the purchase price and pursuant to the RSA Rules.
keeps the securities as collateral for the advance
or loan. Brokers take these securities/stocks to Petitioner’s right to collect is justified under the
their bank and borrow the "balance" on it, since general law on obligations and contracts.
they have to pay infull for the traded stock. Article 1236 (second paragraph)
provides:"Whoever pays for another may
[T]he x x x primary concern is the efficacy of demand from the debtor what he has paid,
security credit controls in preventing speculative except that if he paid without the knowledge or
excesses thatproduce dangerously large and against the will of the debtor, he can recover
rapid securities price rises and accelerated only insofar as the payment has been beneficial
declines in the prices of given securitiesissues to the debtor." (Emphasis supplied)
and in the general price level of securities. Losses Since a brokerage relationship is essentially a
to a given investor resulting from price declines contract for the employment of an agent,
in thinlymargined securities are not of serious principles of contract law also govern the broker-
significance from a regulatory point of view. principal relationship.
When forced sales occur and putpressures on The right to collect cannot be denied to
securities prices, however, they may cause other petitioner as the initial transactions were
forced sales and the resultant snowballing effect entered pursuant to the instructionsof
mayin turn have a general adverse effect upon respondent.
the entire market. The obligation of respondent for stock
transactions made and entered into on April 10
The nature of the stock brokerage business and 11, 1997 remains outstanding. These
enables brokers, not the clients, to verify, at any transactions were valid and the obligations
time, the status of the client’s account. Brokers, incurred by respondent concerning his stock
purchases on these dates subsist. At that time, the period prescribed by law, thereby allowing
there was no violation of the RSA yet. him to make subsequent purchases, petitioner
effectively converted respondent’s cash
Petitioner’s fault arose onlywhen it failed to: account into a credit account. However,
1) liquidate the transactions on the fourth day extension or maintenance of credits on non-
following the stock purchases, or on April 14 and margin transactions, are specifically prohibited
15,1997; and underSection 23(b). Thus, petitioner was remiss
2) complete its liquidation no later than ten days in its duty and cannot be said to have come to
thereafter, applying the proceeds thereof as court with "clean hands"insofar as it intended to
payment for respondent’s outstanding collect on transactions subsequent to the initial
obligation. trades of April 10 and 11, 1997.

Elucidating further, since the buyer was not able RESPONDENT EQUALLY GUILTYFOR
to pay for the transactions that took place on SUBSEQUENT TRADES
April 10 and 11, that is at T+4, the broker was The respondent is equally guilty in entering into
duty-bound to advance the payment to the the transactions in violation of the RSA andRSA
settlement banks without prejudice to the right Rules.
ofthe broker to collect later from the client. In
securities trading, the brokers are essentially the Clearly, he is not an unsophisticated, small
counter parties to the stock transactions at the investor merely prodded by petitioner to
Exchange. Since the principals of the broker are speculate on themarket with the possibility of
generally undisclosed, the broker is personally large profits with low -- or no -- capital outlay, as
liable for the contracts thusmade. Hence, he pictures himself to be. Rather, he is an
petitioner had to advance the payments for experienced and knowledgeable trader who is
respondent’s trades. well versed in the securities market and who
made his owninvestment decisions. Obviously,
Brokers have a right to be reimbursed for sums he knowingly speculated on the market, by
advanced by them with the express or implied taking advantage of the "no-cash-out"
authorization of the principal, in this case, arrangement extendedto him by petitioner.
respondent. It should be clear that Congress
imposed the margin requirements to protect The SC noted that it was the respondent who
the general economy, not to give thecustomer repeatedly asked for some time to pay his
a free ride at the expense of the broker. Not to obligations for his stock transactions. Petitioner
require respondent to pay for his April 10 and 11 acceded to his requests. It is only when sued
tradeswould put a premium on his upon his indebtedness that respondent raised as
circumvention of the laws and would enable him a defense the invalidity of the transactions due
to enrich himself unjustly at theexpense of to alleged violations of the RSA. It was
petitioner. respondent’s privilege to gamble or speculate, as
he apparently did so by asking for extensions of
In the present case, petitioner obviously failed to time and refraining from giving orders to his
enforce the terms and conditions of its broker tosell, in the hope that the prices would
Agreement with respondent, specifically rise. Respondent’s conduct is precisely the
paragraph 8 thereof, purportedly acting on the behavior of an investor deplored by the law.
plea of respondent to give him time to raise
funds therefor. These stipulations, in relation to In the final analysis, both parties acted in
paragraph 4, constituted faithful compliance violation of the law and did not come to court
with the RSA. By failing to. ensure respondent’s with clean hands with regardto transactions
payment of his first purchase transaction within subsequent to the initial trades made on April
10 and 11, 1997. Thus, the peculiar facts of the orequitable relief consistent with our foregoing
present case bar the application of the pari finding that he was not an innocent investor as
delicto rule -- expressed in the maxims "Ex dolo he presented himself tobe.
malo non oritur action"and "In pari delicto potior
est conditio defendentis" -- to all the
transactions entered into by the parties. The WHEREFORE, the assailed Decision and
paridelecto rule refuses legal remedy to either Resolution of the Court of Appeals are hereby
party to an illegal agreement and leaves them MODIFIED. Respondent is ordered to pay
where they were. petitioner the difference between the former’s
outstanding obligation as of April 11, 1997 less
In this case, the pari delicto rule applies only to the proceeds from the mandatory sell out of
transactions entered into after the initial trades shares pursuant to the RSA Rules, with interest
made on April 10 and 11,1997. Since the initial thereon at the legal rateuntil fully paid.
trades are valid and subsisting obligations,
respondent is liable for them. Justice and good
conscience require all persons to satisfy their
debts.

Inescapable, this Court would not hesitate to


grant relief in accordance with good faith and
conscience.

Pursuant to RSA Rule 25-1, petitioner should


have liquidated the transaction (sold the stocks)
on the fourth day following the transaction (T+4)
and completed its liquidation not later than ten
days following the last day for thecustomer to
pay (effectively T+14). Respondent’s outstanding
obligation is therefore to be determined by using
the closing prices of the stocks purchased at
T+14 as basis.We consider the foregoing formula
to be just and fair under the circumstances.

When petitioner tolerated thesubsequent


purchases of respondent without performing its
obligation to liquidate the first failed
transaction, andwithout requiring respondent
to deposit cash before embarking on trading
stocks any further, petitioner, as thebroker,
violated the law at its own peril. Hence, it
cannot now complain for failing to obtain the full
amount of its claimfor these latter transactions.

On the other hand, with respect to respondent’s


counterclaim for damages for having been
allegedly induced bypetitioner to generate
additional purchases despite his outstanding
obligations, we hold that he deserves no legal