When is a Forward-Looking Statement Considered an Untrue Statement Under the Securities Regulation Code?

G.R. No. 230649, April 26, 2023

Imagine investing in a promising golf course project, lured by the promise of its completion date. But what happens when that date comes and goes, and the project remains unfinished? Can the officers of the corporation be held criminally liable for making an “untrue statement”? This recent Supreme Court decision sheds light on the complexities of securities regulation, probable cause, and corporate liability in the Philippines.

This case examines the circumstances under which corporate officers can be held liable for violations of the Securities Regulation Code, particularly concerning potentially misleading statements in registration statements. It highlights the importance of establishing a direct link between the officer’s actions and the alleged violation.

Understanding the Securities Regulation Code

The Securities Regulation Code (RA 8799) aims to protect investors by ensuring transparency and accuracy in the securities market. It requires companies offering securities to the public to register with the Securities and Exchange Commission (SEC) and provide detailed information about their business, financial condition, and projects. A key provision, Section 12.7, mandates that issuers state under oath in every prospectus that all information is true and correct. It further specifies that “any untrue statement of fact or omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading shall constitute fraud.”

Section 73 outlines the penalties for violating the Code, including fines and imprisonment for individuals who make untrue statements or omit material facts in a registration statement. The law also addresses the liability of corporations and their officers, stating that penalties may be imposed on the juridical entity and the officers responsible for the violation.

For example, if a company falsely inflates its projected earnings in a prospectus to attract investors, this would constitute an untrue statement of a material fact. Similarly, if a company fails to disclose significant risks associated with a project, this would be an omission of a material fact. Both scenarios could lead to criminal liability under the Securities Regulation Code.

The specific provisions at play in this case are:

SECTION 12.7. Upon effectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading shall constitute fraud.

SECTION 73. Penalties. — Any person who violates any of the provisions of this Code, or the rules and regulations promulgated by the Commission under authority thereof, or any person who, in a registration statement filed under this Code, makes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, shall, upon conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million pesos (P5,000,000.00) or imprisonment of not less than seven (7) years nor more than twenty-one (21) years, or both in the discretion of the court.

The Caliraya Springs Case: A Timeline

The case revolves around Caliraya Springs Golf Club, Inc., which filed a registration statement with the SEC in 1997 to sell shares to finance its golf course and clubhouse project in Laguna. The project was expected to be completed by July 1999. However, the project faced delays, and the SEC later discovered that Caliraya had not complied with its undertakings.

Here’s a breakdown of the key events:

• 1997: Caliraya files a registration statement with the SEC, projecting completion of its golf course project by July 1999.
• 2003: The SEC discovers that Caliraya has not complied with its project undertakings.
• 2004: The SEC revokes Caliraya’s registration of securities and permit to sell to the public.
• 2009: The SEC asks Caliraya and its officers to explain the misrepresentations regarding the project’s development.
• 2010: An ocular inspection reveals that only one of the two golf courses is completed.
• 2013: The Regional Trial Court (RTC) initially dismisses the criminal case against the corporate officers for lack of probable cause.
• 2014: The RTC grants the prosecution’s motion for reconsideration but ultimately dismisses the case again.
• 2016: The Court of Appeals (CA) affirms the RTC’s dismissal.
• 2023: The Supreme Court upholds the CA’s decision, emphasizing the need to establish a direct link between the corporate officers’ actions and the alleged violation.

The SEC filed a complaint against the incorporators, board members, and officers of Caliraya, alleging a violation of Section 12.7 in relation to Section 73 of the Securities Regulation Code. The Information alleged that the respondents fraudulently made an untrue statement by declaring July 1999 as the expected completion date when the project remained incomplete.

The Supreme Court quoted:

“[Omitting] to state any material fact required to be stated therein or necessary to make the statements therein not misleading.” Indeed, when it became clear that such estimate would not come to pass, it was incumbent on the registered issuer to amend its registration statement to correct the same in order to reasonably protect the investing public. This Caliraya failed to do.

However, the Court ultimately ruled in favor of the respondents, emphasizing that the prosecution failed to establish probable cause to hold them personally liable. The Court highlighted that the Information charged the respondents for making an untrue statement, which was not the proper mode of violation in this instance. Furthermore, the Information did not charge Caliraya itself, and there was no direct link between the respondents and the alleged violation.

Practical Implications for Businesses and Investors

This case underscores the importance of accuracy and transparency in securities registration statements. While forward-looking statements are inherent in project proposals, companies must update their disclosures promptly when actual progress deviates significantly from initial projections. Failure to do so could lead to liability for omitting material facts that could mislead investors.

Moreover, the case clarifies that corporate officers are not automatically liable for corporate violations. Prosecutors must demonstrate a direct link between the officer’s actions and the alleged violation to establish probable cause for criminal charges.

Key Lessons

• Update Disclosures: Regularly review and update registration statements to reflect the current status of projects and address any deviations from initial projections.
• Document Everything: Maintain thorough records of project progress, challenges, and decisions made by corporate officers.
• Seek Legal Counsel: Consult with legal counsel to ensure compliance with securities regulations and to understand the potential liabilities of corporate officers.

Frequently Asked Questions

Q: What is probable cause?

A: Probable cause refers to the existence of such facts and circumstances as would engender the belief, in a reasonable mind, that the person charged was guilty of the crime for which he was prosecuted.

Q: Are corporate officers automatically liable for corporate violations?

A: No, corporate officers are not automatically liable. Their liability must be proven by establishing a direct link between their actions and the alleged violation.

Q: What is an untrue statement under the Securities Regulation Code?

A: An untrue statement means one not in accord with facts or one made in deceit for ulterior motives.

Q: What should companies do if a project’s completion date is delayed?

A: Companies should amend their registration statement to reflect the updated timeline and explain the reasons for the delay.

Q: What is the role of the SEC in regulating securities?

A: The SEC is responsible for ensuring transparency and accuracy in the securities market to protect investors.

ASG Law specializes in corporate law and securities regulation. Contact us or email hello@asglawpartners.com to schedule a consultation.