Freezing of Gemstar Severance Is OKd

A federal appeals court in San Francisco ruled Tuesday that securities regulators could use the Sarbanes-Oxley Act to freeze $29.5 million in severance pay to Henry Yuen, former chief executive of Gemstar-TV Guide International Inc.

The decision by a panel of 11 judges on the U.S. 9th Circuit Court of Appeals bolsters the Securities and Exchange Commission’s efforts to prevent executives from profiting from alleged wrongdoing. The SEC froze the severance of Yuen and former Gemstar Chief Financial Officer Elsie Leung after accusing them of accounting fraud.

The SEC sought to preserve a provision of the Sarbanes-Oxley Act, which last year had been limited by a three-judge panel of the 9th Circuit. The law, passed after disclosures of accounting fraud at Enron Corp. and WorldCom Inc., now known as MCI Inc., lets the agency freeze payouts to corporate officers under investigation.

“This ruling clarifies matters for the SEC and gives the agency a powerful weapon to use against violators,” said James Cox, a Duke University law professor. The tool is so effective in part because it reduces the assets that a defendant can use to fight an SEC suit, he said.

Tuesday’s decision also freezes Leung’s access to $8.1 million in severance. The agency sued both former executives in 2003, accusing them of inflating revenue by $223 million. Leung and Yuen this year reached proposed settlements with the SEC that are awaiting approval from commissioners.

“Congress’ purpose in enacting” the measure “could not be clearer,” Judge Stephen Trott wrote in a decision for the 10-1 majority. “One after another, many persons, companies and pension plans have been left holding an empty bag after corporate insiders committed fraud and other corporate crimes at the ultimate expense of the corporation’s shareholders, creditors and innocent employees.”

Stanley Arkin, an attorney for Yuen and Leung, declined to comment on the ruling.

Los Angeles-based Gemstar publishes TV Guide and licenses technology for on-screen TV program guides and program listings to cable operators and electronics makers. Rupert Murdoch’s News Corp. owns a controlling stake in Gemstar with about 41% of the shares.

The provision of the Sarbanes-Oxley Act lets the SEC ask a court to order a company to temporarily put into escrow “extraordinary” payments made to executives under investigation for possible violations of federal securities laws.

In a dissent, Judge Carlos Bea wrote that the SEC should be required to present evidence that payment was “extraordinary relative to payments made to other comparable companies” under circumstances that didn’t involve an SEC investigation.