Securities and Exchange Commission
Litigation Release No. 18530 / January 6, 2004
Accounting and Auditing Enforcement
Release No. 1937 / January 6, 2004
SEC Sues Three Additional Former Senior Executives of Gemstar-TV Guide For Their Part in Financial Fraud
Securities and Exchange Commission v. Henry C. Yuen et al., Case No. CV 03-4376 NM (MANx) (C.D. Cal.)
The Securities and Exchange Commission announced that today it filed securities fraud charges against three former senior executives of Gemstar-TV Guide International, Inc. - its former co-president, its former general counsel, and the former chief financial officer of its wholly owned subsidiary, TV Guide, Inc. The complaint charges that these executives participated in Gemstar's widespread and complex scheme to inflate its licensing and advertising revenue and to mislead investors about the company's true financial performance.
The SEC's action, filed in United States District Court in Los Angeles, amends the Commission's complaint filed against Gemstar's former chief executive officer, Henry C. Yuen, and former chief financial officer, Elsie M. Leung, on June 19, 2003. The complaint seeks permanent injunctions, civil money penalties, disgorgement of ill-gotten gains (including salaries, bonuses and any proceeds from the sale of stock during the fraud), and bars from service as an officer or director of a public company.
The SEC's new charges name the following defendants:
- Peter C. Boylan, age 39, of Tulsa, Okla. From July 2000 to April 1, 2002, Boylan was a co-president, co-chief operating officer, and member of the board of directors of Gemstar, and co-chairman, chief executive officer, and co-president of Gemstar's wholly owned subsidiary, TV Guide, Inc.
- Jonathan B. Orlick, age 46, of Chatsworth, Calif. During the relevant period, Orlick served as general counsel, executive vice president, and a member of the board of directors of Gemstar. He is a member of the Washington, D.C. and Florida bars.
- Craig Waggy, age 44, of Tulsa, Okla. Waggy was the chief financial officer of TV Guide from September 1997 to May 2002. Waggy holds a master's degree in accounting and was employed at a major accounting firm for approximately 13 years.
The SEC charged each defendant with violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. The SEC also charged Orlick and Waggy with aiding and abetting violations of Rule 13a-13 of the Exchange Act, and Orlick with violations of Rule 13b2-2 of the Exchange Act.
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 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, Gemstar 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 SEC's amended complaint alleges that, from June 1999 through September 2002, Gemstar overstated its total revenues by at least $248 million to meet its ambitious projections for revenue growth from IPG licensing and advertising. As described in the SEC's amended complaint, Gemstar manipulated its financial results through the following schemes.
- Improperly reporting IPG licensing and advertising revenue from expired, disputed, or non-existent agreements.
- Improperly reporting IPG advertising revenue from related transactions as if they were unrelated transactions. Some of the related transactions involved either "round-trip" transactions in which Gemstar paid money to a third party and then received it back as purported IPG advertising revenue or non-monetary transactions in which Gemstar used IPG advertising to acquire other advertising or assets.
- Improperly reporting revenues switched from its media and licensing business sectors to its IPG advertising sector. Gemstar switched the revenue by structuring transactions unrelated to IPG advertising so that all or a portion of the amount to be paid to Gemstar was nominally and artificially designated as the purchase of IPG advertising.
- Improperly reporting IPG advertising revenue from TV Guide when Gemstar had not run the advertising.
- Improperly reporting IPG licensing revenue by recognizing the revenue from an eight-year licensing contract over twelve months.
The amended complaint alleges that Boylan participated in Gemstar's fraudulent reporting of transactions relating to IPG advertising. The amended complaint alleges that Boylan structured two transactions unrelated to IPG advertising so that a portion of the amount to be paid to Gemstar was nominally and artificially allocated to the sale of IPG advertising. The amended complaint further alleges that in press releases, conference calls with securities analysts, and annual reports, Boylan omitted to disclose material information regarding the transactions.
The amended complaint also alleges that Orlick participated in Gemstar's fraudulent recording and disclosure of certain IPG licensing and advertising revenue. The amended complaint alleges that Orlick knew, but omitted to disclose, that Gemstar was improperly recognizing and reporting material amounts of licensing revenue from two companies. The amended complaint also alleges that Orlick participated in Gemstar's fraudulent recognition of this licensing revenue by repeatedly signing false management representation letters to Gemstar's auditors regarding the status of negotiations with one of the companies. Orlick failed to disclose material information regarding certain of Gemstar's IPG revenue.
The amended complaint alleges that Waggy participated in Gemstar's fraudulent recognition and disclosure of certain IPG advertising revenue. The amended complaint alleges that Waggy participated in Gemstar's fraudulent recognition of IPG advertising revenue from TV Guide for advertising that did not run, from a third party that did not have the financial ability to pay for the advertising, and from an advertising barter transaction. Waggy also omitted to disclose material information regarding certain of Gemstar's IPG revenue. The amended complaint further alleges that Waggy participated in Gemstar's fraudulent disclosure by preparing annual and quarterly reports that omitted to disclose that certain IPG advertising revenue was improperly recognized and misrepresented that certain IPG advertising was unrelated to Gemstar's other transactions with the advertiser.
The SEC's amended complaint charges Boylan, Orlick, and Waggy with securities fraud, falsifying Gemstar's books and records, and aiding and abetting Gemstar's reporting and record-keeping violations of the federal securities laws. The amended complaint also charges Orlick with lying to Gemstar's auditors.
Previously, the U.S. District Court in Los Angeles granted the SEC's application for an order requiring Gemstar to escrow 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.
Additional information can be found in Litigation Release No. 18199 (June 20, 2003), No. 18135 (May 13, 2003), and No. 18095 (April 18, 2003).