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SEC v. CJH DEVELOPMENT CORPORATION

FACTS:

CJH Development Corporation (CJHDC) and its subsidiary CJH Suites Corporation (CJHSC) were ordered by the SEC En Banc to cease selling securities through leaseback or money-back arrangements. CJHDC and CJHSC filed a petition for certiorari with the Court of Appeals (CA), which annulled the Cease and Desist Order (CDO) and dismissed the case. The CA denied the motion for reconsideration, prompting the SEC to file a petition for review on certiorari with the Supreme Court. The Supreme Court granted the petition, stating that the CDO issued by the SEC is an interlocutory order and should stand.

The case involves the interpretation of the interlocutory nature of a Cease and Desist Order (CDO) under the Securities and Exchange Commission (SEC) Rules. The petitioner, a law firm, filed a petition for declaratory relief seeking a ruling on whether the CDO issued against them by the SEC is temporary or permanent in nature. The SEC argued that the CDO is temporary and can be made permanent through a specific procedure stated in Section 10-5 of the SEC Rules. The Commission may conduct a hearing within fifteen business days from the filing of the motion to make the CDO permanent.

ISSUES:

    • Whether the petitioners' petition for certiorari before the Court of Appeals (CA) should be dismissed for their failure to exhaust all administrative remedies available to them.

  2. Whether or not the present case falls under the exceptions to the doctrine of exhaustion of administrative remedies.

  3. Whether or not the sale of "The Manor" or "The Suites" units to the general public under the "leaseback" or "money-back" scheme is a form of investment contract or sale of securities.

  4. Whether or not the investigation conducted by the Enforcement and Prosecution Department (EPD) necessitated the participation of the petitioners and if they should have been given an opportunity to explain their side before the issuance of the cease and desist order (CDO).

  5. Whether or not the Securities and Exchange Commission (SEC) complied with due process in issuing the cease and desist order.

  6. Whether or not selling unregistered securities operates as a fraud on investors.

RULING:

    • The Court held that the petitioners' failure to exhaust all administrative remedies justify the dismissal of their petition before the CA.

  2. The present case does not fall under the exceptions to the doctrine of exhaustion of administrative remedies. The Supreme Court does not agree with the Court of Appeals (CA) in sustaining the petitioners' contention that the investigation conducted by the EPD necessitated their participation and that they should have been given an opportunity to explain their side prior to the issuance of the CDO.

  3. The issue of whether or not the sale of "The Manor" or "The Suites" units to the general public under the "leaseback" or "money-back" scheme is a form of investment contract or sale of securities is not a pure question of law. It involves a question of fact that falls under the primary jurisdiction of the Securities and Exchange Commission (SEC). The SEC, being the government agency tasked to enforce and implement the provisions of the Securities Regulation Code (SRC), has the expertise and technical knowledge to determine this issue. Accordingly, the Supreme Court held that the determination of this issue must first be obtained in an administrative proceeding before resort to the court is had.

  4. The investigation conducted by the EPD did not necessitate the participation of the petitioners, and they were not required to be given an opportunity to explain their side before the issuance of the CDO. The SRC allows the SEC to issue a cease and desist order without the necessity of a prior hearing if it determines that the act or practice, unless restrained, will operate as a fraud on investors or is likely to cause grave or irreparable injury or prejudice to the investing public. The SEC conducted a proper investigation prior to the issuance of the CDO, satisfying the requirements for its issuance.

  5. The SEC complied with due process in issuing the cease and desist order. The company was amply apprised of the results of the SEC investigation and was given the reasonable opportunity to present its defense.

  6. Selling unregistered securities operates as a fraud on investors as it deceives the investing public by making it appear that the respondents have authority to deal with such securities. The purpose of requiring registration is to afford the public protection from investing in worthless securities.

PRINCIPLES:

  • Doctrine of exhaustion of administrative remedies: Before a party can seek the intervention of the court, they should have availed themselves of all available administrative processes. It entails lesser expenses and provides for a speedier disposition of controversies.

  • Exceptions to the doctrine of exhaustion of administrative remedies: (1) violation of due process; (2) purely legal question involved; (3) patently illegal administrative action amounting to lack or excess of jurisdiction; (4) estoppel on the part of the administrative agency; (5) irreparable injury; (6) respondent is a department secretary acting as an alter ego of the President; (7) requiring exhaustion would be unreasonable; (8) nullification of a claim; (9) subject matter is private land in land case proceedings; (10) no plain, speedy, and adequate remedy provided by the rule; (11) urgency of judicial intervention due to unreasonable delay prejudicing the complainant; (12) no administrative review provided by law; (13) doctrine of qualified political agency applies; (14) non-exhaustion of administrative remedies rendered moot.

  • Doctrine of exhaustion of administrative remedies - A party must exhaust all available administrative remedies before resorting to the courts, unless the case falls under recognized exceptions.

  • Doctrine of primary administrative jurisdiction - When a case requires the expertise, specialized training, and knowledge of an administrative body, relief must first be obtained in an administrative proceeding before resort to the court is had, even if the matter may well be within the court's proper jurisdiction.

  • Cease and desist order - The SEC may issue a cease and desist order without the necessity of a prior hearing if in its judgment 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.

  • Due process requires the opportunity to explain one's position. A formal trial or hearing is not necessary. (Citing case: European Resort & Finance Corp. v. Securities and Exchange Commission)

  • Selling unregistered securities without the proper registration issued by the SEC operates as a fraud on investors. (Citing Section 8.1 of the Securities Regulation Code)