Securities and Exchange Commission vs. Performance Foreign Exchange Corporation

A cease and desist order issued by the SEC under Section 64 of the Securities Regulation Code is invalid if issued without prior proper investigation or verification and without a finding that the restrained act will operate as a fraud on investors or cause grave or irreparable injury to the public.

Performance Foreign Exchange Corporation (PFEC), a domestic corporation registered with the SEC to operate as a broker/agent for foreign exchange and engage in money changing, was summoned for a clarificatory conference after two years of operation. The SEC's Compliance and Enforcement Department suspected PFEC was engaged in foreign currency futures contracts trading without the necessary license, prompting the issuance of a cease and desist order.

• SEC Registration and Operations: PFEC registered with the SEC on June 23, 1998, with the primary purpose of operating as a broker/agent for foreign exchange and derivative products, and the secondary purpose of engaging in money changing.
• Clarificatory Conference and CDO: After two years of operation, the SEC required PFEC to appear before the Compliance and Enforcement Department (CED) for a clarificatory conference. On January 16, 2001, the CED Director issued a Cease and Desist Order (CDO), enjoining PFEC from operating as a foreign currency futures merchant/broker for allegedly violating Section 11 of Republic Act No. 8799.
• Motion to Lift and BSP Referral: PFEC moved to lift the CDO, claiming it engaged in spot currency trading, not currency futures. On February 8, 2001, the SEC Chairman wrote the Bangko Sentral ng Pilipinas (BSP) requesting a definitive statement on whether PFEC's activities constituted financial derivatives. The following day, without awaiting the BSP's reply, the SEC denied PFEC's motion and required a BSP endorsement to lift the CDO, admitting it could not determine certain material facts regarding PFEC's transactions.
• Permanent CDO: On April 23, 2001, still without the BSP's determination, the SEC made the CDO permanent and directed PFEC to show cause why its certificate of registration should not be revoked for serious misrepresentation to the prejudice of the general public.
• BSP Determination: On August 13, 2001, the BSP replied that PFEC's foreign currency leverage trading does not fall under futures trading because it is not exchange-traded, nor can it be classified as financial derivatives, characterizing it instead as plain currency margin trading not covered by BSP derivative licensing guidelines.

• Respect for Quasi-Judicial Findings: Petitioner argued that the Court of Appeals erred in disregarding the rule that factual findings of quasi-judicial bodies like the SEC, which possess specialized expertise, are generally accorded respect and finality when supported by substantial evidence.

• Grave Abuse of Discretion: Respondent countered that the SEC acted without or in excess of jurisdiction or with grave abuse of discretion by issuing the CDO and making it permanent without a positive factual finding of violation and without waiting for the BSP's determination of the nature of its business.
• Violation of Due Process: Respondent maintained that the SEC's orders, issued without factual basis, violated its fundamental right to due process.

• Grave Abuse of Discretion: Whether the SEC acted with grave abuse of discretion in issuing the Cease and Desist Order and making it permanent without proper investigation or verification and without a finding of fraud or grave injury to the public.

• Grave Abuse of Discretion: Grave abuse of discretion was established because the SEC failed to comply with the two essential requirements of Section 64 of Republic Act No. 8799. First, proper investigation or verification was not conducted prior to issuance; the SEC's referral to the BSP was an essential part of this investigation, yet the CDO was issued and made permanent before the BSP's response was received. Second, there was no finding that PFEC's operations would operate as a fraud or cause grave or irreparable injury to the investing public, a determination impossible to make without first establishing the nature of the business through the BSP's findings.

• Requirements for Issuance of a Cease and Desist Order — Under Section 64 of the Securities Regulation Code, the SEC must satisfy two conditions before issuing a cease and desist order: (1) proper investigation or verification must be conducted; and (2) there must be a finding that the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. Both requisites must be satisfied before the order's issuance, not after.

• "It bears stressing, however, that such investigation and verification, to be proper, must be conducted by petitioner before, not after, issuing the Cease and Desist Order in question."
• "Obviously, without BSP’s determination of the nature of respondent’s business, there was no factual and legal basis to justify the issuance of such order."

• Section 64, Republic Act No. 8799 (The Securities Regulation Code) — Governs the issuance of cease and desist orders by the SEC. Applied to invalidate the SEC's orders because the SEC failed to conduct proper investigation or verification prior to issuance and failed to make a finding of fraud or grave/irreparable injury to the investing public.
• Section 11, Republic Act No. 8799 — Prohibits offering or entering into commodity futures contracts without SEC authorization. The SEC initially relied on this provision to allege PFEC's violation, but the BSP later clarified PFEC's activities were not commodity futures.
• Presidential Decree No. 902-A — Cited by the SEC in its April 23, 2001 Order as the statutory basis for revoking PFEC's certificate of registration for serious misrepresentation.

Puno, Corona, Azcuna, Garcia