The SEC's action, filed in United States District Court in Los Angeles, amends the Commission's complaint filed against Gemstar's former chief executive officer, Henry C. Yuen, and former chief financial officer, Elsie M. Leung, on June 19, 2003. The complaint seeks permanent injunctions, civil money penalties, disgorgement of ill-gotten gains (including salaries, bonuses and any proceeds from the sale of stock during the fraud), and bars from service as an officer or director of a public company.
Randall R. Lee, Regional Director of the SEC's Pacific Regional Office, stated, "These new charges reveal that the betrayal of the investing public by Gemstar's management was carried out not just by the former CEO and CFO, but with the participation and assistance of others in the executive suite. It's even more disturbing that two of the defendants were also members of Gemstar's board, and that one of them was the general counsel of the company."
The SEC's new charges name the following defendants:
- Peter C. Boylan, age 39, of Tulsa, Okla. From July 2000 to April 1, 2002, Boylan was a co-president, co-chief operating officer, and member of the board of directors of Gemstar, and co-chairman, chief executive officer, and co-president of Gemstar's wholly owned subsidiary, TV Guide, Inc.
- Jonathan B. Orlick, age 46, of Chatsworth, Calif. During the relevant period, Orlick served as general counsel, executive vice president, and a member of the board of directors of Gemstar. He is a member of the Washington, D.C. and Florida bars.
- Craig Waggy, age 44, of Tulsa, Okla. Waggy was the chief financial officer of TV Guide from September 1997 to May 2002. Waggy holds a master's degree in accounting and was employed at a major accounting firm for approximately 13 years.
The SEC's amended complaint alleges that, from June 1999 through September 2002, Gemstar overstated its total revenues by at least $248 million to meet its ambitious projections for revenue growth from IPG licensing and advertising. As described in the SEC's amended complaint, Gemstar manipulated its financial results through the following schemes.
- Improperly reporting IPG licensing and advertising revenue from expired, disputed, or non-existent agreements.
- Improperly reporting IPG advertising revenue from related transactions as if they were unrelated transactions. Some of the related transactions involved either "round-trip" transactions in which Gemstar paid money to a third party and then received it back as purported IPG advertising revenue or non-monetary transactions in which Gemstar used IPG advertising to acquire other advertising or assets.
- Improperly reporting revenues switched from its media and licensing business sectors to its IPG advertising sector. Gemstar switched the revenue by structuring transactions unrelated to IPG advertising so that all or a portion of the amount to be paid to Gemstar was nominally and artificially designated as the purchase of IPG advertising.
- Improperly reporting IPG advertising revenue from TV Guide when Gemstar had not run the advertising.
- Improperly reporting IPG licensing revenue by recognizing the revenue from an eight-year licensing contract over twelve months.
The amended complaint also alleges that Orlick participated in Gemstar's fraudulent recording and disclosure of certain IPG licensing and advertising revenue. The amended complaint alleges that Orlick knew, but omitted to disclose, that Gemstar was improperly recognizing and reporting material amounts of licensing revenue from two companies. The amended complaint also alleges that Orlick participated in Gemstar's fraudulent recognition of this licensing revenue by repeatedly signing false management representation letters to Gemstar's auditors regarding the status of negotiations with one of the companies. Orlick failed to disclose material information regarding certain of Gemstar's IPG revenue.
The amended complaint alleges that Waggy participated in Gemstar's fraudulent recognition and disclosure of certain IPG advertising revenue. The amended complaint alleges that Waggy participated in Gemstar's fraudulent recognition of IPG advertising revenue from TV Guide for advertising that did not run, from a third party that did not have the financial ability to pay for the advertising, and from an advertising barter transaction. Waggy also omitted to disclose material information regarding certain of Gemstar's IPG revenue. The amended complaint further alleges that Waggy participated in Gemstar's fraudulent disclosure by preparing annual and quarterly reports that omitted to disclose that certain IPG advertising revenue was improperly recognized and misrepresented that certain IPG advertising was unrelated to Gemstar's other transactions with the advertiser.
The SEC's amended complaint charges Boylan, Orlick, and Waggy with securities fraud, falsifying Gemstar's books and records, and aiding and abetting Gemstar's reporting and record-keeping violations of the federal securities laws. The amended complaint also charges Orlick with lying to Gemstar's auditors.
Previously, the U.S. District Court in Los Angeles granted the SEC's application for an order requiring Gemstar to escrow 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.
