Gemstar Ex-Execs’ Severance Unfrozen

Two former top executives of the company that publishes TV Guide may collect $37.6 million in severance payments that had been blocked by regulators, a federal appeals court ruled Wednesday.

The Securities and Exchange Commission persuaded a federal judge last year to freeze a $29.5-million “golden parachute” for Henry Yuen, former chief executive of Gemstar-TV Guide International Inc., and to block a $6.1-million severance payment to former Chief Financial Officer Elsie Leung.

The SEC had the money placed in an escrow account pending an investigation into financial irregularities at Los Angeles-based Gemstar-TV Guide, which has restated its financial results for 2000, 2001 and 2002. The agency has accused Yuen and Leung of overstating revenue by $223 million.

Under a provision of the Sarbanes-Oxley Act of 2002, which aimed to improve corporate governance, the two could lose these payments if they were found to have violated securities laws.

But on a 2-1 vote Wednesday, a panel of the U.S. 9th Circuit Court of Appeals held that the SEC had failed to demonstrate that the payments were “extraordinary.” The Sarbanes-Oxley law requires such a finding for money to be frozen while a suit is pending.

Since neither Congress nor the SEC has defined “extraordinary payments,” the government must prove “by admissible objective evidence” that the payments were out of line, the court ruled. It said the SEC had failed to provide evidence of what a normal payment would be in the circumstances.

“Such payments may be called ‘golden parachutes’ or ‘golden handshakes’ in the press, but purple prose is not enough to prove a statutory requirement in court,” Judge Carlos Bea wrote for the majority.

Stanley Arkin, a lawyer for Yuen and Leung, called the ruling a rebuke to “the raging winds and violent speech” that occurred in reaction to financial scandals that enriched executives and battered shareholders and employees at Enron Corp., WorldCom Inc. and other huge companies.

In an atmosphere of “anger and political comment,” the SEC employed “very aggressive and coercive” tactics, Arkin said. “We indeed need to reform corporate governance, but we need to do it in a way that is fair, moderate and respects the reality of legal process in America.”

SEC spokesman John Nester would say only that the agency was studying the opinion and evaluating its options.

The appeals court stayed its order for 14 days to allow the SEC to file a more persuasive case.

One legal expert, Stanford University law and business professor Joseph Grundfest, said he believed “it may well be easy to find experts to come in and explain to the district court how extraordinary this situation is. “

The decision “leaves the door open for the SEC to come in and present the evidence of what’s ordinary and have the lower court reach the same decision with a different factual basis. And then the two judges can say, ‘Now it’s extraordinary,’ ” Grundfest said.

For now, though, “the majority position guts Section 1103,” the part of Sarbanes-Oxley that allows the SEC to freeze extraordinary payments to executives under fire, said Columbia University securities law professor John Coffee.

Coffee said the SEC could ask the entire 9th Circuit Court to review the decision, adding that he thought it likely the full court would overturn it if that occurred.

In a stern dissent, Judge Stephen Trott called Yuen’s severance “clearly unusual and extraordinary,” saying that reversing the lower court “deals an unwarranted blow” to the SEC’s ability to combat corporate abuse.

“If these mega-suspicious payments were not ‘extraordinary,’ the word needs either to be redefined or to be out of our dictionaries,” Trott wrote.

He noted that counting large stock grants that also were awarded, Yuen received $56.7 million on his way out Gemstar’s door.

“One would not expect benefits like these to be flowing from corporate assets to executives resigning under fire,” Trott wrote. “This scenario is not business as usual. It appears to be looting.”

Coffee agreed, saying, “Everything about this seems extraordinary.”