On April 9, the Securities and Exchange Commission announced the successful completion of its efforts to prevent a $29.5 million severance package from being paid to the former CEO of Gemstar-TV Guide International, Henry C. Yuen, who committed securities fraud prior to leaving Gemstar. The severance package, which was returned to the Company, had been held in an escrow account pursuant to Section 1103 of the Sarbanes-Oxley Act.
Section 1103 provides that “[w]henever, during the course of a lawful investigation involving possible violations of the Federal securities laws by an issuer of publicly traded securities or any of its directors, officers, partners, controlling persons, agents, or employees, it shall appear to the Commission that it is likely that the issuer will make extraordinary payments (whether compensation or otherwise) to any of the foregoing persons, the Commission may petition a Federal district court for a temporary order requiring the issuer to escrow, subject to court supervision, those payments in an interest-bearing account for 45 days.” Section 1103 further provides that an extension of the 45 day period may be approved by the court until the conclusion of any legal proceedings.
In the Gemstar case, Mr. Yuen and Gemstar agreed to a $29.5 million severance agreement nearly simultaneously with Gemstar’s public disclosure that it would need to restate its 2001 financial results, which would result in a material change to such results. The Commission immediately commenced a formal investigation and thereafter sought and received an order from the U.S. District Court pursuant to Section 1103 that froze Mr. Yuen’s severance payment. After obtaining the order, the Commission sued Mr. Yuen in the District Court, which found in favor of the Commission on all claims. After an unsuccessful appeal by Mr. Yuen to the Ninth Circuit Court of Appeals, the District Court ordered the severance payment be returned to Gemstar.
Section 1103 was enacted in the wake of massive accounting scandals earlier in the decade to allow the Commission to freeze large, “extraordinary” payments to potential wrongdoers while the Commission investigated an issuer, so that the funds would not be unreachable by the time the Commission completed its inquiry and/or enforcement. The Gemstar case is one of the first instances of the Commission exercising its Section 1103 powers.