Named in the Commission's complaint are the following defendants:
- Henry C. Yuen, age 55, of Pasadena, CA. Yuen was Gemstar's chief executive officer and chairman of the board during the relevant period.
- Elsie M. Leung, age 57, of Pasadena, CA. Leung, a California-licensed CPA, was Gemstar's chief financial officer and a member of its board of directors during the relevant period.
The Commission's complaint alleges that, to enable Gemstar to meet its ambitious projections for revenue growth from IPG licensing and advertising, Yuen, Leung, and others engaged in a fraudulent scheme to overstate Gemstar's revenues and to report the inflated revenues to the investing public. In total, the defendants caused Gemstar to overstate its total revenues by at least $223 million from March 2000 through September 2002.
Stephen M. Cutler, Director of the Commission's Division of Enforcement, said: "The manipulation of financial results to present a distorted picture of a company's true performance represents a betrayal of the investing public. It is even more disturbing when a company's highest officials engage in such conduct and enrich themselves at the same time."
Randall R. Lee, Regional Director of the Commission's Pacific Regional Office, stated: "These charges, together with our emergency action last month to prevent Gemstar-TV Guide from making tens of millions of dollars in extraordinary payments to its former CEO and CFO, demonstrate the SEC's unwavering commitment to ensuring that those who deceive the investing public are held accountable and do not profit from their misdeeds."
The Commission's complaint alleges that Yuen and Leung manipulated Gemstar's financial results in three ways. First, Gemstar recorded revenue under expired, disputed, or non-existent agreements, and improperly reported this as IPG licensing and advertising revenue.
Second, Gemstar recorded amounts from related transactions as if they were not related, some of which included "round-trip" transactions (that is, Gemstar paid money to a third party and then received it back) and non-monetary payments, and reported this as IPG advertising revenue in order to inflate those revenues. Third, Gemstar switched revenues from its media and licensing business sectors to its IPG advertising sector in order to show dramatic growth and acceptance of IPG advertising, when in fact such growth and acceptance did not exist. In these transactions, Yuen and Leung allegedly created revenue by structuring the transactions so that all or a portion of the amount to be paid to Gemstar was nominally and falsely designated as the purchase of IPG advertising in order to inflate IPG advertising revenue.
The Commission's complaint further alleges that Yuen and Leung reaped millions of dollars in financial gains from their fraudulent scheme in that their compensation was tied to the financial performance of the company. By fraudulently overstating Gemstar's revenues, Yuen and Leung fraudulently inflated their own salaries and bonuses. According to the complaint, from 2000 through 2002, Yuen received approximately $18.8 million in salary and bonuses; exercised stock options for a taxable profit of approximately $14.6 million; and realized over $63.6 million from the disposition of Gemstar stock. In addition, Yuen is seeking payment of over $29 million as a termination fee and payment of salary, bonuses, and vacation pay that he claims to be owed by Gemstar. During this same period, Leung received over $5.3 million in salary and bonuses, and exercised stock options for a taxable profit of approximately $4.9 million, according to the complaint. In addition, she is seeking payment of over $8.1 million as a termination fee and payment of salary, bonuses, and vacation pay that she claims to be owed.
The SEC's complaint charges Yuen and Leung with securities fraud, lying to the auditors, falsifying Gemstar's books and records, and aiding and abetting Gemstar's reporting, record-keeping, and internal controls violations of the federal securities laws.
Previously, on May 9, 2003, the U.S. District Court in Los Angeles granted the SEC's application for an order requiring Gemstar to escrow for 45 days 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. For further information contact:
Randall R. Lee
Regional Director
Pacific Regional Office
(323) 965-3807
Sandra J. Harris
Associate Regional Director
Pacific Regional Office
(323) 965-3962
