401 F.3d 1031 (9th Cir. 2005), 03-56129, S.E.C. v. Gemstar-TV Guide Intern., Inc.

Docket Nº:03-56129.
Citation:401 F.3d 1031
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, Henry C. Yuen; Elsie M. Leung, Intervenors-Appellants, v. GEMSTAR-TV GUIDE INTERNATIONAL, INC., Defendant.
Case Date:March 22, 2005
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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401 F.3d 1031 (9th Cir. 2005)


Henry C. Yuen; Elsie M. Leung, Intervenors-Appellants,



No. 03-56129.

United States Court of Appeals, Ninth Circuit

March 22, 2005

Argued and Submitted Dec. 15, 2004

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Michelle Rice, Arkin Kaplan LLP, for Yuen & Leung, New York, NY, for the intervenors-appellants.

Richard M. Humes, Securities and Exchange Commission, Washington, D.C., for the plaintiff-appellee.

Thomas J. Karr, Securities and Exchange Commission, Washington, D.C., for the plaintiff-appellee.

Richard L. Stone, for Gemstar-TV Guide, for the defendant-respondent-appellee.

Sean T. Prosser and Kimberly S. Greer, Morrison & Foerster LLP, San Diego, CA, for the defendant-respondent-appellee.

Appeal from the United States District Court for the Central District of California; Wm. Matthew Byrne, Jr., District Judge, Presiding. D.C. No. CV-03-03124-WMB/MRP.


Opinion by Judge TROTT; Concurrence by Judge REINHARDT; Dissent by Judge BEA.

TROTT, Circuit Judge:

In response to a formal application by the Securities and Exchange Commission ("SEC" and "Commission"), the district court entered an order pursuant to Section 1103 of the Sarbanes-Oxley Act of 2002, 15 U.S.C.§ 78u-3(c)(3), placing in escrow in excess of $37 million representing contemplated one-time payments by Gemstar-TV Guide International, Inc. ("Gemstar"), a public corporation, to its resigning Chief Executive Officer ("CEO"), Dr. Henry Yuen, and its Chief Financial Officer ("CFO"), Elsie Leung. This escrow order--directed to Gemstar--was predicated upon the district court's conclusion under the statute that these payments, which were to be made during the course of a lawful investigation by the SEC of Gemstar involving possible violations of federal securities laws, were "extraordinary." Gemstar did not oppose the entry of this order and has not filed a substantive brief in connection with this appeal. However, Intervenors-Appellants Yuen and Leung do appeal, claiming (1) that this statute is unconstitutionally vague on its face and as applied to them; (2) that the district court erred as a matter of law in its interpretation of the statutory term "extraordinary payments"; and (3) that the district court erred in its determination that the payments in question could be deemed "extraordinary." 1 Title 28 U.S.C. § 1292(a)(1) gives us jurisdiction over this timely appeal, and we affirm.

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The civil statute under our microscope, Section 1103, 15 U.S.C. § 78u-3(c)(3), is narrow, well defined, and clear. It comes into play only

(1) during the course of a lawful investigation by the SEC,

(2) involving possible violations of the federal securities laws,

(3) committed by an issuer of publicly traded securities or any of its directors, officers, partners, controlling persons, agents, or employees,

(4) whenever it shall appear to the Commission that it is likely that the issuer will make extraordinary payments to any of those named persons.

See 15 U.S.C. § 78u-3(c)(3)(A)(I). Should this combination of events occur, as happened here, Congress has empowered the Commission to petition a federal district court for nothing more onerous than a temporary order requiring the issuer under scrutiny to escrow those intended payments to a clearly defined group of insiders for no more than 45 days in a very familiar device, an interest-bearing account--all of this subject to court supervision.

This protocol on its face bears the hallmarks and indicia of due process of law and protection for the rights and interests of all concerned, including the public, the shareholders who own the corporation, and third-party creditors who hold corporate debt--as well as the persons to whom such payments might be made. It is a civil law that imposes no penalties, does not implicate any constitutionally protected behavior, and regulates only issuers of publicly traded securities. Enacted in the disturbing shadow of a flood of corporate scandals, its purpose is to temporarily protect corporate funds and the investing public and creditors against theft, fraud, and dissipation. As the Commission underscores in its brief, (1) the initial escrow lasts for only 45 days with the possibility of a single 45-day extension, see 15 U.S.C. § 78u-3(c)(3)(A)(I), (iv); (2) any person affected by the escrow order has the right to petition the court for relief, see 15 U.S.C. § 78u-3(c)(3)(B)(I); and (3) if no enforcement action is filed before the temporary escrow expires, the "extraordinary payments" involved shall be returned to the issuer or other affected person with accrued interest, see 15 U.S.C. § 78u-3(c)(3)(B)(ii).

The issues brought to us arise primarily from Congress' use of the word "extraordinary." The intervenor-appellants claim that the district court erred in its interpretation and application of the word "extraordinary" and that the word is so vague that it renders this entire process unlawful. Upon examination, these claims are unpersuasive.


Faced with one cataclysmic corporate accounting scandal after another, including Enron, WorldCom, and Tyco, Congress' purpose in enacting Section 1103's escrow measure could not be clearer. One after another, many persons, companies, and pension plans have been left holding an empty bag after corporate insiders committed fraud and other corporate crimes and misdeeds at the ultimate expense of the corporation's shareholders, creditors, and innocent employees. By the time the authorities have been alerted to the fraud, it's too late; the assets of the company have already disappeared, rendering the traditional remedies used by the Commission to rectify such wrongs--disgorgement, civil penalties, restitution, etc.--difficult, if not impossible, to pursue. In the meanwhile, the disappearance of such funds impoverishes and damages the issuer itself, once again to the detriment of the shareholders, creditors, and innocent

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employees, whose pensions in many cases have been permanently thrashed. Ultimately, our nation is the victim, as the public loses confidence in the stock market.

Section 1103 was initially introduced as Amendment No. 4188 by Senator Trent Lott. See 148 Cong. Rec. S6542 (daily ed. July 10, 2002). In the debate that ensued after Amendment No. 4188's introduction, different senators focused on various possible abuses that Section 1103 was meant to prevent:

Section 3 freezes payments of potential wrongdoers. This section would allow the SEC, during an investigation, to seek an order in Federal court imposing a 45-day freeze on extraordinary payments to corporate executives. Again, this year we have seen just that sort of thing happening. While an investigation is underway, basically rewards were given to these corporate executives. While it would require a court order, there would be this 45-day freeze. The targeted payments would be placed in escrow, ensuring that corporate assets are not improperly taken from [sic] an executive's personal benefit.... We have also seen that there are some cases where the law had some loopholes or where it was not timely or where it was not strong enough. One example, of course, is where there has been shredding. Another example is the very bad image of corporate executives taking increased payments, extraordinary payments, while they are being investigated. You can't have that sort of thing.

Id. at 56545 (statement of Sen. Lott) (emphasis added).

The House of Representatives shared these objectives:

Under this legislation, top executives will not be allowed to pilfer the assets of the company by giving themselves huge bonuses and other extraordinary payments if the company is subject to an SEC investigation. Their pay and benefits are frozen when the investigation starts. Americans will know that corporate officers will no longer be able to misuse the bankruptcy laws to discharge liabilities based upon securities fraud, and the honest brokers of corporate America will know that those who abuse the law and tarnish corporate America's reputation will go to jail for a long, long time.

148 Cong. Rec. H4685 (daily ed. July 16, 2002) (statement of Rep. Sensenbrenner). From this background, it is readily apparent that the intent of Congress in enacting this statute was to provide a strong shield for third-party creditors and corporate investors once the SEC begins an investigation of corporate malfeasance.


The facts and circumstances of this case provide a textbook example of the problem. On April 1, 2002, Gemstar filed its Form 10-K report for the year 2001. The filing reported that $107.6 million Gemstar had previously claimed as revenue had not actually been realized. Gemstar revealed also that it had claimed as substantial revenue receipts from a single "non-monetary transaction" that was not properly booked. The fallout from these reevaluations? The next day, Gemstar's stock price declined by a startling 37 percent. But, this was just the beginning. On August 14, 2002, Gemstar announced in a Form 8-K--a Commission report used to report "material events or corporate changes" that may have an effect on the value of a company's securities, see 15 U.S.C. § 78m(a)(1); 17 C.F.R. § 240.13a-11--that it intended to restate its 2001 financial results and to reverse $20 million, plus make substantial corrections. Gemstar filed as exhibits to that Form 8-K sworn statements from CEO Yuen and CFO Leung, to the effect


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