SECURITIES FRAUD: DETECTION,

INVESTIGATION AND PREVENTION Director Jose P. Aquino

Enforcement and Investor Protection Department

Securities and Exchange Commission

Presentation Targets

• Provide an overview of the objectives and functions of

the SEC

• Introduce the offenses involving fraud which are

investigated by the SEC

• Provide practical tips on how to detect and avoid these

offenses

Objectives of the SEC

• To develop the Philippine Capital Markets

• Encourage wider participation of share ownership

• Promote self regulation in the securities industry

• Ensure full and fair disclosure about securities and

• Minimize and eliminate insider trading and other

fraudulent or manipulative devices.

SEC Mission

• To strengthen the corporate and capital market

infrastructure of the Philippines, and to maintain a

regulatory system, based on international best

standards and practices, that promotes the interests

of investors in a free, fair and competitive business

environment.

Governing Laws

SEC Reorganization Act (PD 902-A of 1976)

Revised Securities Act (BP 178 of 1982)

Securities Regulation Code (RA No. 8799 of 2000)

13 February 2004 Amended Implementing Rules

and Regulations

2006 Rules of Procedure

Various Commission Memorandum Circulars.

Legal Definitions of Fraud

• “‘Fraud’ is defined as a generic term embracing all

multifarious means which human ingenuity can devise,

and which are resorted to by one individual to secure an

advantage over another by false suggestions or by

suppression of truth and includes all surprise, trick,

cunning, dissembling and any unfair way by which

another is cheated.”

(Alleje v. Court of Appeals G.R. No. 107152, 25 January 1995)

Legal Definitions of Fraud

• "Fraud" is defined as an instance or an act of trickery or deceit especially when involving misrepresentation (Webster's Third New International Dictionary of the English Language, 1993 Ed., p. 904). It is also defined as "An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. Anything calculated to deceive, whether by a single act or combination, or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or innuendo, by speech or silent, word of mouth or look or gesture. . . A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, dissembling, and any unfair way by which another is cheated. . . 'Bad faith' and 'fraud' are synonymous, and also synonyms of dishonesty, infidelity, faithlessness, perfidy, unfairness, etc." (Black's Law Dictionary, 1990 Ed. p. 660, citations omitted).”

(Flores v. Layosa G.R. No. 154714, 12 August 2004, footnote 25)

Detection and Investigation

• Aside from investigative and visitorial powers, the SEC

has the following functions to bolster its detection and

investigation of fraudulent activities:

Maintains the registry for all corporate filings such as

general information sheets, audited financial

statements, etc.

Issues secondary licenses for securities issuers and

salesman licenses for securities salesmen

Provides guidelines on reportorial and compliance

requirements

The Wisdom of Registration

• Registration and disclosure of a security and its relevant

details provides the SEC with information concerning the

viability of the underlying business

• A security which is not registered is not only a violation of the

law but is a red flag for likely fraudulent activity because non-

registration implies an intention to conceal information.

• Considering that securities and investment products are

frequently innovated, the requirement of registration enables

the SEC to confirm the viability and validity of new products

Selling/Offering for Sale of

Unregistered Securities

• Section 8.1 - Requirement of Registration of Securities. –

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

Commission.

• 3.1. “Securities” are shares, participation or interests in a

corporation or in a commercial enterprise or profit-

making venture and evidenced by a certificate, contract,

instrument, whether written or electronic in character.

Kinds of Securities

(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;

(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription;

(c) Fractional undivided interests in oil, gas or other mineral rights;

(d) Derivatives like option and warrants;

(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments;

(f) Proprietary or non proprietary membership certificates incorporations; and

(g) Other instruments as may in the future be determined by the Commission.

What is an Investment Contract?

• “Howey Test”

Whereby a person:

(1) makes an investment of money

(2) in a common enterprise

(3) with the expectation of profits

(4) to be derived solely from the efforts of others

(Power Homes Unlimited v. SEC G.R. No. 164182,

26 February 2008)

Power Homes Unlimited v. SEC Case

• Court applied the Howey Test and found the scheme to be an Investment Contract based on the following findings:

“An investor enrolls in petitioner’s program by paying US$234. This entitles him to recruit two (2) investors who pay US$234 each and out of which amount he receives US$92. A minimum recruitment of four (4) investors by these two (2) recruits, who then recruit at least two (2) each, entitles the principal investor to US$184 and the pyramid goes on.

We reject petitioner’s claim that the payment of US$234 is for the seminars on leverage marketing and not for any product. Clearly, the trainings or seminars are merely designed to enhance petitioner’s business of teaching its investors the know-how of its multi-level marketing business. An investor enrolls under the scheme of petitioner to be entitled to recruit other investors and to receive commissions from the investments of those directly recruited by him. Under the scheme, the accumulated amount received by the investor comes primarily from the efforts of his recruits.”

Fraudulent Offenses

• Fraudulent Transactions

• Market Manipulation

• Insider Trading

• Fraudulent Reporting

Monetary Profit is the motive behind these offenses!

Fraudulent Transactions

• SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or

indirectly, in connection with the purchase or sale of any securities to:

26.1. Employ any device, scheme, or artifice to defraud;

26.2. Obtain money or property by means of any untrue statement of a material fact or

any omission to state a material fact necessary in order to make the statements

made, in the light of the circumstances under which they were made, not misleading;

26.3. Engage in any act, transaction, practice or course of business which operates or

would operate as a fraud or deceit upon any person.

• Best examples are investment scams (Ponzi, Pyramid, Boiler room, etc.)

• A charge for violation of Sec. 26 (fraud) may be filed along with a charge for violation

of Sec. 8.1 (non-registration).

Popular Investment Scams

Pyramiding Schemes Ponzi Schemes Boiler Room Operations Victim Profiles: - A, B, C sectors of society - Government employees/retirees - Private sector - Retirees - In short, anyone with money to invest.

PYRAMID SCAMS

Illustration

Features

Rewards participants for inducing other people to join the program.

A participant pays for the chance to receive compensation for introducing new persons to the scheme, as well as when those new persons themselves introduce new participants.

Focuses primarily on the exchange of money for recruitment.

Features

• Selling point: each participant can recoup his original investment and make more money by recruiting more participants.

• Hides scam by layering or associating the scheme

with products or privileges, even if these:

Have no real world value Are priced in an inflated manner Do not appeal to the investors without the

promise of getting commissions from recruitment

Red Flags

• Victims are asked to purchase a large and expensive inventory of goods (without refund for unsold goods).

• The perpetrators conduct “opportunity” meetings, whether face to face or en masse, with a high-pressure atmosphere emphasizing the high returns of the scheme and its successful members.

• Participants are rewarded for inducing other people to join the program.

Red Flags

• The perpetrators claim huge profits through continued growth of “downlines” or bonuses based on the participants’ advancement in the structure.

• The marketing of a product or privilege, if done at all, is only of secondary importance and is used to provide a cover of legitimate activity to evade prosecution.

Recent Examples of Pyramid Schemes

• Motivational/Self-Improvement Programs

• Travel Club

• Marketing Seminars on Real Estate Property

• So-called Internet Affiliate Programs

What’s the Difference between

Pyramid Schemes and Direct Selling/

Multi-Level Marketing

• Direct Selling is face-to-face selling to the consumers

through independent distributors or sales people. It is a

legitimate marketing medium that is used to sell

practically anything.

• Pyramiding is an illegal money scam often confused with

legitimate network marketing plans, where people are

convinced to pay money for a chance to profit from the

payments of others who might join late

(Based on the Direct Sellers Association of the Philippines)

How to Distinguish between a Pyramid

Scheme and Direct-Selling/MLM • 8 Point Test

1. Is there a product?

2. Are commissions paid on sale of products and not on registration/entry fees?

3. Is the intent to sell a product not a position?

4. Is there no direct correlation between the number of recruits and compensation?

5. If recruitment were to be stopped today, will the participants still make money?

6. Is there a reasonable product return policy?

7. Do products have fair market value?

8. Is there a compelling reason to buy?

If the answer to all the questions is YES, then the company being evaluated is a legitimate company. But if the answer is NO, then there is a high probability that it is a pyramid scam.

(Based on the Direct Sellers Association of the Philippines)

What can you do?

• Do not merely rely on the favorable testimonies of ordinary people even your own friends and family. These scams prey and exploit these kinds of relationships.

• Call the SEC to inquire whether the entity providing investment opportunities possesses a secondary license to do so.

• Call the Direct Selling Association of the Philippines (DSAP) to check if the entity engaged in the recruitment activity is a bona fide member.

• Exercise caution and do not part with your money unless you have verified the legitimacy of the entity’s operations.

Note: The SEC cannot guarantee the recovery of your money!!!

Ponzi Schemes

History of the Ponzi Scheme

• Named after Charles Ponzi (Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi) an Italian businessman and con artist

• In the early 1920’s, he promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage.

• In reality, Ponzi was paying early investors using the investments of later investors. This type of scheme is now known as a “Ponzi Scheme". His scheme ran for over a year before it collapsed, costing his "investors" $20 million.

Features

• Investors are enticed with the promise of extremely high returns (ranging from a low of 6% to a high of 29% per month).

• Initial investors are paid exceptional returns from the deposits of a growing number of new investors.

• “Profits” to investors are not created by the success of the underlying business but instead are derived from the capital contributions of others.

Features

• Schemes always offer an economic purpose so that investors think they are investing in a viable venture that generates income.

• Guarantee payments by issuance of postdated checks.

How a Ponzi Scheme works?

COMPANY

“A”

invests

Promise of

unusually high

interest rates

(6% to 29%) a

month

Company

returns part of

A’s investment

as “interest”

“A” tells others of good investment opportunity

COMPANY

“A” “B” invests

Company pays

A’s next

interest due

from B’s money

Company

returns part

of B’s

investment as

“interest”

“A” and “B” tell others of good investment opportunity

How a Ponzi Scheme works?

How a Ponzi Scheme unravels?

• The obligation to pay off all the previous investors can no longer be met with the revenues collected from new recruits.

• News of non-payment of investments spreads and investors rush in to withdraw their funds similar to a “bank run”

• The Promoter disappears together with the investors’ money.

Red Flags

• Unrealistic high returns on investment

• Underlying business activity is not explained well or is too complicated and laden with technical terms such as “Futures commodities trading”, “Gold-backed long-term securities” or “Foreign Exchange Swap Arrangements”

• The Promoter discourages the investor from cashing out his investment and encourages the rolling over of the investment and/or infusing more money

Red Flags

• Reliance on the release of “Account Statements” instead of actual cash pay-outs as evidence of the high returns to the investors

• Delays in the payment of the returns are not adequately explained and brushed aside as inconsequential

• Promoter possesses no secondary license to sell or offer securities from the SEC and its salesmen have no license to act as such

Recent Examples

• Aman Group of Companies (Manuel Amalilio)

• Multitel (Rosario Baladjay)

• Everflow (Felix and Iris Aquino)

• H-Factor Marketing and Trading Corporation

How to Distinguish between a Ponzi

Scheme and a Legitimate Investment • Check with the SEC if the Promoter possesses a secondary license to sell that

specific security it is offering or selling

Do not merely rely on the Promoter possessing Articles of Incorporation as a duly registered corporation with the SEC.

No person or corporation, even if duly registered with the SEC, can offer or sell securities without a secondary license.

The secondary license/license to sell relates to a specific investment product only!

• The underlying business operation is properly explained, legitimate and viable.

• The return on investment is reasonable and not unrealistic.

• Endorsement or association with a reputable person/s or entity is not always a guarantee of legitimacy.

Ex. (i) Bernie Madoff was a former regulator and respected icon in Wall Street.

(ii) Performance Investment Products Corporation (PIPC) targeted the elite, politicians and celebrities.

What can you do?

• Do not merely rely on the favorable testimonies of ordinary

people even your own friends and family. These scams prey

and exploit these kinds of relationships.

• Call the SEC to inquire whether the entity providing

investment opportunities possesses a secondary license to do

so or if its salesmen have bona fide licenses.

• Exercise caution and do not part with your money unless you

have verified the legitimacy of the Promoter’s operations.

Note: The SEC cannot guarantee the recovery of your money!!!

Boiler Room Operations

• The use of high-pressure sales tactics to sell

illegitimate investment products such as:

Unreasonable rates of returns & promises of profit

Guaranteed returns without any sound basis

“This investment opportunity is ‘once-in-a-lifetime’ and you would be stupid to miss out on it!”

“Think of your family and their future!”

“Well-known rich people are doing this and don’t you want to be rich?”

“This information is secret and I’m only telling this to you.”

Note: The movies “Boiler Room” and “Wolf of Wall Street” are actually based on the life of Jordan Belfort, a stockbroker who defrauded his 1,510 clients of over USD 200 Million in his various stock scams.

Effect of Technology on Pyramid Scams, Ponzi

Schemes and Boiler Room Operations

• Ponzi and Pyramid Schemes have found their way on the Internet through websites, e-mails and even on social media.

• Payment, promotion and recruitment are no longer done face-to-face and involve no physical contact.

• Scammers are harder to catch since there is no contact with the clients and the money is harder to recover since the transactions are cross-border.

• Increased Risk for the Investor

• Rule of Thumb:

When in doubt, just keep your money!!!

Market

Manipulation

Market Manipulation

• SEC. 24. Manipulation of Security Prices; Devices and Practices. - 24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly:

(a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market

(b) To effect, alone or with others, a series of transactions in securities that raises or depresses the price:

(c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security.

(d) To make false or misleading statements with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange.

(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of the Commission.

Types of Market Manipulation

By employing trading schemes that creates a false or

misleading appearance relative to the price or activity in a security. (Ref. to pars. (a) and (b), Section 24.1 of SRC)

By circulating false information about the security or the unusual movement of a security. (Ref. to pars. (c) and (d), Section 24.1)

By practicing other trading methods contrary to rules. (Ref. To par. (e), section 24.1 and Section 24.2)

Motive for Market Manipulation

• To gain immediate profit or minimize losses

• To window dress a trading or loan portfolio

• To avoid breaching regulatory requirements or

business contracts

• Greed in general!

Effects of Market Manipulation

• It erodes confidence in the market as an investment venue as the presence of such practices results in financial losses to victims.

• It destroys the credibility of the market as a venue for price discovery as it results in inefficient price levels.

• It robs the nation of an efficient mechanism in allocating and distributing its resources.

Participants in Market Manipulation

A. Issuers of securities

B. Participants in the securities market (beneficial

owners/retail clients)

C. Market intermediaries (brokers)

D. Any combination of the above acting in

cooperation with one another

*The offense may be carried out through a conspiracy.

Wash Sales

• Wash sales are transactions where the same person (or affiliate) is, for all practical purposes both the purchaser and seller. A wash sale thus has only the appearance of a bona fide transaction since there is no genuine change in actual ownership of a security .

• Objective: A group of investors (pool operators) engage in a series of wash sales at successively higher prices, hoping to lure other investors to purchase by the illusion that the stock price was on steady upward trend. If successful, members of the pool dump their holdings of the stock at the high price and then watch the price fall.

Improperly Matched Orders

• Engaging in transactions where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties.

Normally, under the PSE trading system, a buy order should be matched to an available sell order of the same stock at the price and quantity stated. If a sell order has insufficient quantity, the buy order may be matched to another sell order to fulfill the quantity of the purchase. Conversely, a sell order may be matched to multiple buy orders to cover the total quantity to be sold.

Ex. Orders to buy or sell of Customer A and his associates of substantially the same volume at the same price were executed in PAM System/PSE Trade by different brokers for the account of Customer A and his associates.

• Usually carried out in collusion of the trader/broker

Painting the Tape

• Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security

• Refers to activity on the PSE ticker-tape

Examples of Painting the Tape • A group acting together create a flurry of unusual activity in a stock,

which attracts the attention of people who monitors the ticker-tape.

These hapless investors would think, “Gee, something must be going

on. Someone must know something. I’ll jump on board.”

• That makes the activity and upward spike in the stock price even more

noticeable, attracting other momentum players – and before you know

it, there’s a full-fledged little rally (increased activity) going on in this

stock.

• So now the stock is really on a roll, CNBC commentators are trying to

come up with knowing one-line explanations (“expectations of street-

beating third quarter earnings”), and it’s easy for the perpetrators to

sell the shares you traded back and forth to get this going.

Marking the Close

• Buying and selling securities at the close of the market (3:30 p.m.) in

an effort to alter the closing price of the security

• Also called “End of Day Price Ramping”

Ex.

Stock ZTE market price @ P100

Broker A for the account of Broker B whose client is individual C

would execute trades ranging from 20,000 to 40,000 shares at

around 3:15 – 3:30 p.m. at P105

Purpose: to peg or set the closing price of ZTE for the day

Hype and Dump

• Engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices or vice versa (i.e. selling activity at lower prices and then buying at such lower prices);

Pump and dump schemes often occur on the Internet through forums and message boards geared towards investors.

Messages posted urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch.

Often the promoters will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks.

Hype and Dump

• In reality, those who hype a stock may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is "pumped" up by the buying frenzy they create.

• Once these fraudsters "dump" their shares and stop hyping the stock, the price typically falls, and investors lose their money.

• Usually, shares hyped do not have any recent disclosures which would affect their price.

• Also called “Pump and Dump”

Ex. Steve Madden Ltd. (Footwear Company)’s IPO was pumped and pumped by the brokerage firm Stratten Oakmont which was owned by Jordan Belfort, whose life was the basis for the movies “Boiler Room” and “The Wolf of Wall Street”

Squeezing the Float

• Taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices. (SRC Rule 24.1, Amended IRR)

• Float = the total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares.

• Akin to hoarding of basic commodities in case of shortages.

Squeezing the Float Example

• Underwriters in an IPO transfer a significant portion of their allotment to their trading accounts, from which the securities are sold by the underwriters in the aftermarket at a price substantially above the offer price.

• This practice constricts the supply of shares available to investors at the IPO price and contributes to the securities’ higher aftermarket price.

• The underwriter may sell a significant portion of the underwritten security at the offering price to its employees, officers, relatives or other broker dealers with whom the underwriter has reciprocal arrangements – such allotments are made notwithstanding the fact that the underwriters has customers who are unable to purchase the security at its original price.

Insider Trading

Insider Trading

• SEC. 27. Insider’s Duty to Disclose When Trading. –

27.1. It shall be unlawful for an insider to sell or buy

a security of the issuer, while in possession of

material information with respect to the issuer or the

security that is not generally available to the

public…

Insider Trading

“The provision explains in simple terms that the insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct. The intent of the law is the protection of investors against fraud, committed when an insider, using secret information, takes advantage of an uninformed investor. Insiders are obligated to disclose material information to the other party or abstain from trading the shares of his corporation. This duty to disclose or abstain is based on two factors: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone; and second, the inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing.”

(SEC v. Interport Resources Corporation, G.R. No. 135808, 6 October 2008)

Material Non-Public Information

• 27.2. For purposes of this Section, information is “material non-public” if:

(a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or

(b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.

Who are Insiders?

• 3.8. “Insider” means:

(a) the issuer;

(b) a director or officer (or person performing similar functions) of, or a person controlling the issuer;

(c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public;

(d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or

(e) a person who learns such information by a communication from any of the foregoing insiders.

Elements of Insider Trading

i. Respondent possessed non-public information about

the issuer-company or the market for its shares.

ii. Such non-public information was material information.

iii. Respondent bought or sold the securities of the

company.

iv. Respondent owed a duty to disclose to the seller (or

buyer) of the securities.

v. Respondent failed to disclose the non-public

information he possessed.

Exemptions to Insider Trading

• Insider Trading cannot be committed if:

(a) The insider proves that the information was not gained from such relationship; or

(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves:

(i) that he disclosed the information to the other party, or

(ii) that he had reason to believe that the other party otherwise is also in possession of the information.

Presumptions on Insider Trading

• A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8 of the SRC, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information:

Presumptions on Insider Trading

• Presumption may be rebutted upon a showing by

the purchaser or seller that he was not aware of the

material non-public information at the time of the

purchase or sale.

Fraudulent

Reporting

Reportorial Requirements

• Sec 6(i)[6] of Presidential Decree 902-A:

Power to punish corporations for failure to file required reports in appropriate

forms as determined by the Commission within the prescribed period;

• Sec. 141. of the Corporation Code

Every corporation, domestic or foreign, lawfully doing business in the

Philippines shall submit to the Securities and Exchange Commission an annual

report of its operations, together with a financial statement of its assets and

liabilities, certified by any independent certified public accountant in appropriate

cases, covering the preceding fiscal year and such other requirements as the

Securities and Exchange Commission may require. Such report shall be

submitted within such period as may be prescribed by the Securities and

Exchange Commission.

• Other various rules, regulations and memorandum circulars of the Commission

Policy on Self-Reporting

• Transparency

• Accuracy

• Fairness in Representations

Corporate Reports and Filings are meant to provide

relevant and accurate information to the public and

to form the basis for their own investment and

business decisions

System of Self-Reporting

• Practical since the Commission received thousands of

reports and documents annually

• However, reports are usually scrutinized for

completeness and compliance with required forms by the

appropriate receiving Department

• Reports and filings usually contain a signed undertaking

that any inaccuracy in the information provided may be

the basis for a case of perjury

Sample Undertakings

• Annual General Information Sheet

I,

INFORMATION SHEET WHICH CONSISTS OF PAGES HAVE BEEN MADE IN GOOD FAITH, DULY VERIFIED BY

, 20 IN .

CORPORATE SECRETARY OF THE ABOVE-MENTIONED

DAY OF

(Name) (Position)

DECLARE UNDER THE PENALTY OF PERJURY, THAT ALL MATTERS SET FORTH IN THIS

I UNDERSTAND THAT THE FAILURE OF THE CORPORATION TO FILE THIS GIS FOR FIVE (5) CONSECUTIVE YEARS SHALL BE

CONSTRUED AS NON-OPERATION OF THE CORPORATION AND A GROUND FOR THE REVOCATION OF THE

CORPORATION'S CERTIFICATE OF INCORPORATION. IN THIS EVENTUALITY, THE CORPORATION HEREBY WAIVES ITS RIGHT TO

A HEARING FOR THE SAID REVOCATION.

( )

ME AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, ARE TRUE AND CORRECT.

DONE THIS

Sample Undertakings

• Audited Financial Statements

“Statement of Management’s Responsibility for Financial Statements

The management of (name of registrant) is responsible for all information and representations contained in the financial statements for the year(s) ended (date). The financial statements have been prepared in conformity with generally accepted accounting principles and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use of disposition and liabilities are recognized.

The Board of Directors reviews the financial statements before such statements are approved and submitted to the stockholders of the company.

(Name of auditing firm), the independent auditors appointed by the stockholders, have examined the financial statements of the company in accordance with generally accepted auditing standards and have expressed their opinion of the fairness of presentation upon completion of such examination, in their report to stockholders.

(Signed by CEO and CFO)

The independent certified public accountant’s responsibility for the financial statements required to be filed with the Commission is confined to the expression of his opinion on such statements which he has examined.

Special Accounting Rules under the

SRC • SEC. 68. Special Accounting Rules. – The Commission shall have the

authority to make, amend, and rescind such accounting rules and regulations as may be necessary to carry out the provisions of this Code, including rules and regulations governing registration statements and prospectuses for various classes of securities and issuers, and defining accounting, technical and trade terms used in this Code. Among other things, the Commission may prescribe the form or forms in which required information shall be set forth, the items or details to be shown in the balance sheet and income statement, and the methods to be followed in the preparation of accounts, appraisal or valuation of assets and liabilities, determination of depreciation and depletion, differentiation of recurring and non-recurring income, differentiation of investment and operating income, and in the preparation, where the Commission deems it necessary or desirable, of consolidated balance sheets or income accounts of any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with, the issuer.

Administrative Liability

• SEC. 54 – Administrative Sanctions – If after due notice and

hearing, the Commission finds that:

(c) Any registrant or other person has, in a registration statement or

in other reports, applications, accounts, records or documents

required by law or rules to be filed with the Commission, made

any untrue statement of a material fact, or omitted to state any

material fact required to be stated therein or necessary to make

the statements therein not misleading; or, in the case of an

underwriter, has failed to conduct an inquiry with reasonable

diligence to insure that a registration statement is accurate and

complete in all material respects;

Civil Liability for Fraudulent Reporting

• SEC. 56. Civil Liabilities on Account of False Registration Statement. –

56.1. Any person acquiring a security, the registration statement of which or any

part thereof contains on its effectivity an untrue statement of a material fact or

omits to state a material fact required to be stated therein or necessary to make

such statements not misleading, and who suffers damage, may sue and recover

damages from the following enumerated persons, unless it is proved that at the

time of such acquisition he knew of such untrue statement or omission:

(a) The issuer and every person who signed the registration statement;

(b) Every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the

filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted;

(c) Every person who is named in the registration statement as being or about to become a director of, or a person performing similar

functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement;

(d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or

prospectus.

(e) Every person who, with his written consent, which shall be filed with the registration statement, has been named as having prepared

or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in

connection with the registration statement, with respect to the statement, report, or valuation, which purports to have been prepared

or certified by him.

(f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement, with respect to

that portion of the registration statement which purports to have been contributed by him.

(g) Every underwriter with respect to such security.

Civil Liability for Fraudulent Reporting

• 57.2. Any person who shall make or cause to be made any

statement in any report, or document filed pursuant to this Code or

any rule or regulation thereunder, which statement was at the time

and in the light of the circumstances under which it was made false

or misleading with respect to any material fact, shall be liable to any

person who, not knowing that such statement was false or

misleading, and relying upon such statements shall have purchased

or sold a security at a price which was affected by such statement,

for damages caused by such reliance, unless the person sued shall

prove that he acted in good faith and had no knowledge that such

statement was false or misleading.

Common Cases of Reportorial Fraud

• Overstatement of Gross Income

• Understatement of Liabilities

• Overstatement of Expenses

• Understatement of Net Income

• Concealment of Specific Transactions

• Unsupported Write-offs

• Excessive Window-Dressing

How to Detect Fraudulent Reports?

• When possible, check the working papers or the

documentary basis for the entries made in the reports

• In some cases, a whistleblower or insider is necessary to

uncover the fraud

• Assess whether the reports are actually consistent with

the level of operations, recent actions and/or financial

health of the corporation

• Determine if there are some officers or employees in the

corporation with the motive to make false reports

Thank you for Listening!

THE END

Our Location : SEC Building, EDSA,

Greenhills

Mandaluyong City,

Metro Manila

Philippines

Our Telephone

Numbers

: (632) 584-0923

Our Fax Number : (632) 584-5293

Our e-mail address : inquiry@sec.gov.ph