SEC Sues Former Gemstar Executives

The Securities and Exchange Commission filed civil fraud charges Thursday against two former top executives of Gemstar-TV Guide International Inc. in connection with an alleged “widespread and complex scheme” to inflate the company’s revenue.

The lawsuit filed in federal court in Los Angeles accuses Gemstar’s founder and former chief executive, Henry Yuen, and former chief financial officer, Elsie Leung, of overstating revenue by $223 million over a two-year period when they were in charge of the Hollywood-based publisher of TV Guide.

“The manipulation of financial results to present a distorted picture of a company’s true performance represents a betrayal of the investing public,” SEC enforcement director Stephen Cutler said in a statement. “It is even more disturbing when a company’s highest officials engage in such conduct.”

Attorney Stanley Arkin, who represents Yuen, 55, and Leung, 57, called the SEC’s charges “as unfair as they are fragile and arbitrary.”

Arkin has said the case revolves around how to value advertising on the company’s electronic programming guide. Arkin has stressed that KPMG, Gemstar’s auditor at the time in question, supported the accounting methods used by Yuen and Leung.

A Gemstar spokesman said the company continues to cooperate with the SEC.

In addition to securities fraud, the SEC’s complaint claims that Yuen and Leung lied to auditors and falsified Gemstar’s books, outlining eight incidents of alleged manipulation. The agency is seeking civil penalties and is asking the court to prevent Yuen and Leung from ever serving as officers or directors of a public company.

The agency also wants them to give up what the suit calls “ill-gotten gains,” including salaries, bonuses and proceeds from the sale of stock during the alleged fraud.

The agency asked that nearly $38 million in severance payments to Leung and Yuen -- held in escrow since May pending the investigation -- remain frozen. Under a provision of last year’s Sarbanes-Oxley corporate governance law, the two could lose these payments if they are found to have violated securities laws.

In the suit, the SEC claims that Yuen and Leung touted as the growth engine of the company the interactive program guide, or IPG, that would generate revenue from both advertising and licensing fees. To meet ambitious projections to Wall Street for the IPG, the two executives inappropriately booked as IPG advertising and licensing sales revenue that in fact was derived from other means, according to the lawsuit.

In one case, the suit says, Gemstar booked $113.5 million in licensing revenue from Scientific-Atlanta Inc. even though the equipment manufacturer’s contract with the company had expired and was being contested. In other cases, Gemstar paid money to third parties for certain transactions, then received some of the money back and booked it as IPG advertising revenue, the suit says.

The complaint alleges that Yuen and Leung were enriched by these manipulations because their compensation was in large part based on Gemstar’s financial results. During the two-year period, Yuen earned $18.8 million in salary and bonuses, exercised stock options for about $14.6 million in profit and made $63.6 million by selling Gemstar stock, the SEC said.

The charges are the result of a formal investigation of Gemstar’s accounting practices launched by the SEC in October. The agency said Thursday that others involved in the alleged scheme are under investigation.

The lawsuit is the latest action by the SEC in its quest to rein in corporate wrongdoing and restore investor confidence after a series of accounting scandals at companies such as Enron Corp. and WorldCom Inc.

Yuen and Leung stepped down last fall, after the SEC launched its accounting probe and Gemstar’s largest shareholder, News Corp., wrested the company from Yuen, who controlled the board.

Gemstar fired KPMG in October. Since Yuen and Leung resigned, Gemstar, under new management appointed by News Corp., has restated or reversed about $357 million in revenue for the last three years.

News Corp. also has written down its entire $6-billion investment in Gemstar as a result of a plunge in the company’s stock after disclosures last spring of accounting irregularities.

“The company believes that it has resolved its past accounting issues, and has taken significant steps toward the resolution of associated regulatory issues,” company spokesman Whit Clay said.