Employment Law Attorneys

SEC Sues Former CEO and CFO of Gemstar-TV Guide for Financial Fraud Scheme5 min read

On June 19, the Commission filed securities fraud charges against the
former chief executive officer and former chief financial officer of
Gemstar-TV Guide International, Inc. for their roles in a widespread and
complex scheme to inflate Gemstar’s licensing and advertising revenues.
The Commission’s lawsuit, filed today in U.S. District Court in Los
Angeles, seeks antifraud injunctions, civil money penalties,
disgorgement of ill-gotten gains (including salaries, bonuses, and
proceeds from the sale of stock during the fraud), and permanent bars
from service as an officer or director of a public company. The
Commission also seeks continuation of the order that the district court
entered on May 9, 2003, pursuant to the Sarbanes-Oxley Act requiring
Gemstar to place into escrow extraordinary payments to any of its
directors, officers, or other affiliates, including nearly $38 million
in cash payments that the company had previously agreed to pay the
defendants.
Named in the Commission’s complaint are the following defendants:
Henry C. Yuen, age 55, of Pasadena, CA. Yuen was Gemstar’s chief
executive officer and chairman of the board during the relevant
period.
Elsie M. Leung, age 57, of Pasadena, CA. Leung, a California-
licensed CPA, was Gemstar’s chief financial officer and a member of
its board of directors during the relevant period.
Gemstar is a Los Angeles-based media and technology company that, among
other things, publishes TV Guide magazine and develops, licenses, and
markets an interactive program guide (IPG) for televisions. The IPG is
a technology that enables consumers to navigate through and select
television programs. During the relevant period, Gemstar generated
revenues from the IPG by licensing the technology to third parties and
selling advertising on the IPG. In statements to securities analysts
and the investing public, Yuen repeatedly touted the IPG technology and
IPG advertising revenues as the company’s future and as the “value
driver” of the company’s stock, and downplayed expected declines in
revenue from TV Guide magazine.
The Commission’s complaint alleges that, to enable Gemstar to meet its
ambitious projections for revenue growth from IPG licensing and
advertising, Yuen, Leung, and others engaged in a fraudulent scheme to
overstate Gemstar’s revenues and to report the inflated revenues to the
investing public. In total, the defendants caused Gemstar to overstate
its total revenues by at least $223 million from March 2000 through
September 2002.
Stephen M. Cutler, Director of the Commission’s Division of Enforcement,
said: “The manipulation of financial results to present a distorted
picture of a company’s true performance represents a betrayal of the
investing public. It is even more disturbing when a company’s highest
officials engage in such conduct and enrich themselves at the same
time.”
Randall R. Lee, Regional Director of the Commission’s Pacific Regional
Office, stated: “These charges, together with our emergency action last
month to prevent Gemstar-TV Guide from making tens of millions of
dollars in extraordinary payments to its former CEO and CFO, demonstrate
the SEC’s unwavering commitment to ensuring that those who deceive the
investing public are held accountable and do not profit from their
misdeeds.”
The Commission’s complaint alleges that Yuen and Leung manipulated
Gemstar’s financial results in three ways. First, Gemstar recorded
revenue under expired, disputed, or non-existent agreements, and
improperly reported this as IPG licensing and advertising revenue.
Second, Gemstar recorded amounts from related transactions as if they
were not related, some of which included “round-trip” transactions (that
is, Gemstar paid money to a third party and then received it back) and
non-monetary payments, and reported this as IPG advertising revenue in
order to inflate those revenues.
Third, Gemstar switched revenues from its media and licensing business
sectors to its IPG advertising sector in order to show dramatic growth
and acceptance of IPG advertising, when in fact such growth and
acceptance did not exist. In these transactions, Yuen and Leung
allegedly created revenue by structuring the transactions so that all or
a portion of the amount to be paid to Gemstar was nominally and falsely
designated as the purchase of IPG advertising in order to inflate IPG
advertising revenue.
The Commission’s complaint further alleges that Yuen and Leung reaped
millions of dollars in financial gains from their fraudulent scheme in
that their compensation was tied to the financial performance of the
company. By fraudulently overstating Gemstar’s revenues, Yuen and Leung
fraudulently inflated their own salaries and bonuses. According to the
complaint, from 2000 through 2002, Yuen received approximately $18.8
million in salary and bonuses; exercised stock options for a taxable
profit of approximately $14.6 million; and realized over $63.6 million
from the disposition of Gemstar stock. In addition, Yuen is seeking
payment of over $29 million as a termination fee and payment of salary,
bonuses, and vacation pay that he claims to be owed by Gemstar.
During this same period, Leung received over $5.3 million in salary and
bonuses, and exercised stock options for a taxable profit of
approximately $4.9 million, according to the complaint. In addition,
she is seeking payment of over $8.1 million as a termination fee and
payment of salary, bonuses, and vacation pay that she claims to be owed.
The SEC’s complaint charges Yuen and Leung with securities fraud, lying
to the auditors, falsifying Gemstar’s books and records, and aiding and
abetting Gemstar’s reporting, record-keeping, and internal controls
violations of the federal securities laws.
Previously, on May 9, 2003, the U.S. District Court in Los Angeles
granted the SEC’s application for an order requiring Gemstar to escrow
for 45 days any extraordinary payments to any of its directors,
officers, partners, controlling persons, agents, or employees pursuant
to Section 1103 of the Sarbanes-Oxley Act of 2002. The Court’s order
placed in escrow, subject to court supervision, approximately $37.64
million in cash payments that Gemstar had previously agreed to pay to
Yuen and Leung.
The Commission’s investigation into the conduct of others is continuing.
[SEC v. Henry C. Yuen and Elsie M. Leung, Case No. CV 03-4376 NM, MANx,
CD Cal.] (LR-18199; AAE Rel. 1805; Press Rel. 2003-75)
SEC News Digest Issue 2003-118