Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, April 9, 2008

Court Upholds Forfeiture of Gemstar-TV Guide Severance Payment

The SEC announced a court ruling that successfully concludes its effort to stop a $29.5 million severance package from being paid to the former CEO of Gemstar-TV Guide International, Henry C. Yuen, who committed securities fraud before leaving his position at the Pasadena, Calif.-based company. The funds were previously set aside in an escrow account that will now be dissolved so that the money remains with the company and its shareholders.  The SEC was able to stop the large payment to Yuen through a provision in the Sarbanes-Oxley Act - Section 1103 - that allows the Commission to seek a temporary order from a federal district court requiring the company to hold "extraordinary payments" likely to be made to any officer, director, or affiliate of the company who is charged with a violation of the securities laws. The SEC charged Yuen with various violations of the federal securities laws in 2003, and he was later found guilty on all claims and forced to pay more than $22 million in financial penalties. This forfeiture of his severance payment will bring the total financial cost to more than $51 million for Yuen in the wake of his securities fraud violations.

"The U.S. District Court for the Central District of California ordered on March 27, 2008, that the $29.5 million be returned to the company. The district court had granted the SEC's application for an order pursuant to Section 1103 of the Sarbanes-Oxley Act on May 13, 2003, requiring Gemstar-TV Guide to escrow the pending payment to Yuen.

After obtaining the temporary order, the SEC sued Yuen for various violations of the federal securities laws. Following a three-week trial in December 2005, the court ruled in favor of the SEC against Yuen on all claims. Yuen committed securities fraud by making misrepresentations and omissions of material fact about certain Gemstar revenues, aiding and abetting Gemstar's primary violations of the periodic reporting and record keeping control requirements, and lying to the auditors. On May 8, 2006, the court ordered Yuen to disgorge more than $10.5 million in ill-gotten gains, pay prejudgment interest of more than $1.1 million, and pay a civil penalty of more than $10.5 million. On April 1, 2008, the Ninth Circuit Court of Appeals affirmed the district court ruling that Yuen committed securities fraud, and found that the financial penalties against Yuen were appropriate.

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