U.S. Securities and Exchange Commission
Litigation Release No. 18199 / June 20, 2003
Auditing and Accounting Enforcement Release No. 1805 / June 20, 2003
Securities and Exchange Commission v. Henry C. Yuen and Elsie M. Leung, Case No. CV 03-4376 NM (MANx) (C.D. Cal.)
SEC Sues Former CEO And CFO Of Gemstar-TV Guide For Financial Fraud Scheme
On June 19, 2003, the Securities and Exchange 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 in United States 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.
The Commission's complaint alleges that 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 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.
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, specifically, Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder.
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.