SEC Philippines Issues a Permanent Cease-and-Desist Order Against MFT Group

The Securities and Exchange Commission (SEC) has made permanent the cease and desist order (CDO) against Maria Francesca Tan (MFT) Group of Companies, Inc. and Foundry Ventures I, Inc., along with their officers and agents.

In a resolution promulgated on April 1, the Commission En Banc denied for lack of merit the omnibus motion filed by the MFT Group, Maria Francesca “Mica” F. Tan, Ronald G. Nery, Halmond Parker R. Ong, Maricris T. Tan, Jose Donnie B. Montelibano, Arlene C. Mauricio, Maria Beatriz Dolores R. Tomas, and Mary Ruth A. Oquendo, praying for the lifting and/or declaration of the automatic lifting of the CDO.

The Commission En Banc also denied for lack of merit the motion to lift the CDO filed by Foundry Ventures I, Inc., Florita F. Tan, Charles Edward Tan, Christian Konstantin “CK” P. Agbayani, Chiqui Tan, Romarico “Rico” Ruiz, Arlene Navarro, Joanne A. Caber, Thuy Nguyen, Roxanne Agbayani, Luis Gabriel R.Cancio, Noel M. Olan, JR Hernandez, Christian Olan, Tito Cosejo Jr., and Christian “Kenchi” De Vera.

Under the Resolution, MFT Group and Foundry Group are permanently ordered to stop the execution and issuance of new loan agreements and checks/promissory notes, which are securities in the form of investment contracts and/or evidence of indebtedness, without the necessary secondary license from the SEC.

The Commission En Banc issued the CDO on January 16, after the MFT Group, which later on transitioned to Foundry Ventures, was found to have engaged in the unlawful solicitation, offer, and/or sale of securities in the form of investment contracts without the necessary license from the SEC.

Based on the complaints received and the independent investigation conducted by the SEC Enforcement and Investor Protection Department (EIPD), the MFT Group organized public events where it solicited investments supposedly for start-up companies in exchange for a guaranteed return ranging from 12% to 18% per annum. For this purpose, the MFT Group issued post-dated checks but the amounts indicated therein were not paid.

According to the EIPD, the MFT Group deliberately used the term, “interest income,” to give semblance of legitimacy to the transactions, which the group packaged as loans.

Section 8 of Republic Act No. 8799, or The Securities Regulation Code (SRC), provides that securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the SEC.

While registered as corporations, MFT Group of Companies and Foundry Ventures have not secured the required secondary license in the form of an approved registration statement and a permit to sell securities to the public, as required under Section 8 of the SRC, in relation to Section 3 of the 2015 SRC Implementing Rules and Regulations.

MFT Group’s loan contracts were securities

In its motion to lift the CDO, Foundry Ventures argued that the loan agreements that were issued were not securities in the form of an investment contract or evidence of indebtedness.

Rule 26.3.5 of the Implementing Rules and Regulations of the SRC defines investment contracts as a transaction, contract or scheme whereby a person invests his or another person’s money and/or property in a common enterprise and is led to expect profits primarily from the efforts of others.

As held in the case of SEC v. W.J. Howey Co. in the United States in , later on adopted by the Philippine Supreme Court in the case of Gabionza v. Court of Appeals in 2008, the SEC noted that the term “securities” embodies a flexible principle, capable of adapting to meet the countless and variable schemes devised by those who seek to use the money of others on the promise of profits.

Citing the case of State v. Silberberg in the US in 1956, the SEC further emphasized that an instrument is generally held to be an investment contract if the purchaser is to partake of the gross proceeds or net profits of enterprises managed by those disposing of the interest.

“[T]he Supreme Court ruled that commercial papers evidencing indebtedness, which certainly include loan agreements and checks, can be regarded as shares of stocks if issued pursuant to a scheme that enables the lenders to participate in the profits of the corporation (and actually expects a return on their investments),” the order read, citing the Gabionza case.

Accordingly, the Commission En Banc held that “the unauthorized investment scheme of [MFT Group] which made use of loan agreements and checks constituted an offer/sale of unregistered securities in the form of investment contracts and/or evidences of indebtedness.”

CDO was not automatically lifted

The Commission En Banc likewise dismissed the MFT Group’s arguments that the CDO was deemed automatically lifted upon the Commission’s failure to set a hearing after the group’s filing of a motion to lift.

Section 64.3 of the SRC provides that a person against whom a CDO was issued may file a formal request for lifting thereof within five days. The SEC shall then set a hearing not later than 15 days from its filing, with a resolution to be made not later than 10 days after the termination of the hearing. The CDO shall be deemed automatically lifted upon failure by the SEC to resolve the request within such time.

The Commission En Banc found devoid of basis Foundry Ventures’ claim that the SEC failed to conduct a hearing after the filing of the motion to lift.

The concept of a hearing under Section 64 of the SRC, in relation to Section 4- 3, Rule V, Part II of the 2016 Rules of Procedure of the SEC is broad enough to cover the entire proceeding covering a CDO issued by the Commission.

“The fact that the proceedings involving the [CDO] was not yet submitted for resolution necessarily precludes the automatic lifting thereof precisely because it is the resolution which the Commission will issue that will determine if the [CDO] will be lifted or will be made permanent,” the Commission En Banc ruled.

The Commission En Banc also held that the MFT Group was incorrect in interpreting the aforementioned provision, citing the Supreme Court’s decision in Palanca IV v. RCBC Securities Inc. in 2020, which states that securities laws in the country must be interpreted to ensure that its core principles, including the protection of investors, are carried out.

“Necessarily, as long as the violation subsists or that a violation will be committed, the CDO issued by the Commission should subsist and continue to have full force and effect; otherwise the purpose of Sec. 64 of the SRC will be negated,” the Commission En Banc held. 

“A contrary view will incentivize scheming fraudsters and con artists who can conveniently take advantage of an automatic lifting of a CDO by a mere lapse of time, even if the proceedings on the same are not yet terminated, as what happened in the instant case. Such is clearly not the intent of the law.” 

Additionally, despite the filing of a motion to lift on January 23, the MFT Group continued to present additional arguments in support of their position through the filing of more pleadings, which effectively prevented the SEC from fully resolving the motion to lift. The MFT Group had filed, among others, a notice to withdraw as movants, a motion for exclusion as respondent, a motion to suspend the proceedings, and an omnibus motion to declare the automatic lifting of the CDO. 

“More importantly, the fact that the investing public continues to be exposed to the risk of being prejudiced and/or defrauded by the unauthorized sale/offer of unregistered securities by the [MFT Group] militates against the automatic lifting of the [CDO] which the latter is advancing.”

The Commission En Banc further stressed that the prohibition to use and dispose of the investments or assets obtained from unauthorized investment taking activities is justified under the law, as a necessary imperative to effectively protect investors and their investments. Section 2 of Republic Act No. 11765, or the Financial Products and Services Consumer Protection Act, provides the consumer’s right to protection of their assets against fraud and misuse.

​“With this new legislation, we see a crystallization of the intent of the Congress as regards the interpretation and implementation of securities laws, which is to provide an effective mechanism that fully, adequately and relevantly protect the investors and their investments,” the Commission En Banc held.

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