S.E.C. v. Gemstar Tv Guide Intern., Inc.

• Decision Date: 12 May 2004
• Docket Number: No. 03-56129.,03-56129.
• Citation: 367 F.3d 1087
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, Henry C. Yuen; Elsie M. Leung, Intervenors-Appellants, v. GEMSTAR-TV GUIDE INTERNATIONAL, INC., Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

367 F.3d 1087

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee Henry C. Yuen; Elsie M. Leung, Intervenors-Appellants, v. GEMSTAR-TV GUIDE INTERNATIONAL, INC., Defendant.

No. 03-56129.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted January 7, 2004.

Filed May 12, 2004.

Michelle A. Rice, Stanley S. Arkin, Arkin Kaplan LLP, New York, NY, for the intervenors-appellants.

Richard M. Humes, Thomas J. Karr, Securities and Exchange Commission, Washington, DC, for the applicant-appellee.

Sean T. Prosser, Kimberly S. Greer, Fish & Richardson P.C., San Diego, CA, for the defendant.

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-MRP.

Before: TROTT, RAWLINSON, and BEA, Circuit Judges.

BEA, Circuit Judge:

I

We decide a question of first impression: whether under the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), 15 U.S.C. § 78u-3 ("Section 1103"), certain termination payments to high-level corporate officials are "extraordinary payments," subject to involuntary retention in an escrow account compelled by court order. Because there was no evidence as to what would be an ordinary payment under comparable circumstances, we conclude that the district court erroneously determined certain payments proposed to be made by Defendant Gemstar-TV Guide International Inc. ("Gemstar") to Intervenors-Appellants Yuen and Leung (hereafter Appellants) were "extraordinary payments" within the meaning of section 1103 of Sarbanes-Oxley. We vacate the district court's order and remand for further proceedings consistent with this opinion.

In view of our ruling, we do not decide whether section 1103 of Sarbanes-Oxley is unconstitutionally vague, or operates in an unconstitutionally retroactive manner.

II

FACTS

On August 14, 2002, Gemstar, a Delaware corporation, announced that it was auditing the operations of its Technology and Licensing Sector and Interactive Platform Sector after finding that 2001 revenues and related amortization for these sectors had been overstated by some $40 million. On November 7, 2002, Gemstar announced plans to restructure its management and corporate governance.

As part of the restructuring plans, Gemstar entered into negotiations for termination agreements with its Chief Executive Officer ("CEO"), Dr. Henry Yuen, and its Chief Operating Officer ("COO") and Chief Financial Officer ("CFO"), Elsie Ma Leung. Dr. Yuen's termination agreement provided for a "termination fee" of $22,452,640, an additional $7,030,778 in unpaid salary, bonuses, and unused vacation time, and 5,274,519 shares of restricted stock. Ms. Leung was to receive a termination fee of $6,957,953, an additional $1,209,695 in unpaid salary, bonuses, and unused vacation time, 1,126,504 shares of common stock, and 353,680 shares of restricted stock. Additionally, Yuen agreed to serve as the non-executive chairman of the board and Leung agreed to a position as an employee in the international business department. The arrangements for Yuen's and Leung's compensation are collectively referred to as the Restructuring Payments.

On October 15, 2002, before the Yuen and Leung termination agreements were in final form, attorneys for the Securities and Exchange Commission ("SEC") met with counsel for Gemstar, Yuen, and Leung, and requested that the Restructuring Payments be placed in escrow. On October 17, 2002, the SEC ordered a formal investigation into the announced overvaluation of the revenue and profits from some of Gemstar's sectors. On October 23, 2002, Yuen and Leung notified the SEC that they declined to submit to a voluntary escrow.

On October 28, 2002, as part of its investigation, the SEC issued testimonial subpoenas to Gemstar's Board of Directors. Yuen and Leung contend that in response to the subpoenas Gemstar sent a draft escrow agreement for the Restructuring Payments to the SEC on November 6, 2002. Hours before the restructuring agreements were to be executed on November 7, 2002, Gemstar informed Yuen and Leung's attorney that the Restructuring Payments were to be placed in escrow for six months, and that such escrow provision was non-negotiable. Yuen and Leung acceded to the six-month escrow in "side letters" executed that day.

On March 31, 2003, Appellants Yuen and Leung filed a complaint in district court against the SEC, objecting to the escrow, seeking injunctive and declaratory relief, and requesting a temporary restraining order to unblock and dissolve the escrow to allow the restructuring payments to be made. According to a declaration by Appellants' counsel, "Gemstar is contractually obligated to release the Restructuring Payments to Plaintiffs on May 6, 2003." Appellants' counsel also maintained that the escrow impermissibly interfered with Yuen's and Leung's property rights to receive the Restructuring Payments, and that the escrowed payments did not constitute "extraordinary payments" under section 1103 of Sarbanes-Oxley. Following an April 21, 2003 hearing, the district court denied Appellants' request for a preliminary injunction, finding that the side letters constituted consent by Yuen and Leung to the initial escrow, set to expire May 6, 2003. The district court did not address whether the restructuring payments qualified as "extraordinary payments" under section 1103.

On May 5, 2003, the SEC filed an application with the district court to place the Restructuring Payments in a 45-day escrow account pursuant to Section 1103. In a declaration filed with the application, an attorney for the SEC described the ongoing investigation of Gemstar. The district court sua sponte ordered the parties to maintain the status quo and requested additional briefing. A hearing was held on May 9, 2003. On May 12, 2003, the district court entered an order granting the SEC's application to place the Restructuring Payments in escrow and directed the parties to prepare a joint order to effect such escrow. Appellants filed a motion to reconsider the escrow order on May 22, 2003. After a status conference on May 29, 2003, the court denied Appellants' motion to reconsider and entered the joint order of escrow. The order specifically described the disputed funds as "extraordinary payments" subject to section 1103, and directed that they be held in interest-bearing accounts for 45 days.¹

On June 19, 2003, the SEC commenced a civil action in the Central District of California, No. 03-CV-4376, alleging Yuen and Leung had fraudulently inflated Gemstar's revenue reports by $223 million, in violation of various sections of the Securities Acts of 1933 and 1934. The SEC also filed an application to have the escrow continued indefinitely for the duration of the action against Yuen and Leung.

On June 20, 2003, on the government's ex parte motion, the district court extended the temporary escrow for an additional 45 days. The district court reiterated its finding that the payments were "extraordinary payments" within the meaning of section 1103, and rejected Appellants' contentions that the statute was unconstitutionally vague. On June 24, 2003, the district court entered an order directing the maintenance of the escrow for the duration of the SEC's civil action.

Yuen and Leung filed a notice of interlocutory appeal on July 2, 2003.² Appellants contend section 1103(1) is void for vagueness; (2) effects an unreasonable seizure of their property in violation of the Fourth Amendment; (3) does not retroactively apply to the payments in this case that had already been contracted to be paid or had already been made prior to the enactment of the statute; and (4) does not apply to the disputed payments, which are not "extraordinary payments" for the purposes of Sarbanes-Oxley.³

III

SECTION 1103

Section 1103 of the Sarbanes-Oxley Act gives the SEC authority to ensure that assets of an issuer of securities⁴ which have been fraudulently obtained are not dissipated during the investigation and litigation of securities fraud cases. See 15 U.S.C. § 78u-3 (2002). Specifically, 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.

15 U.S.C. § 78u-3(c)(3)(A)(i). Such an order can be secured only with notice and after a hearing, unless "impracticable or contrary to the public interest." 15 U.S.C. § 78u-3(c)(3)(A)(ii).

Section 1103 authorizes one additional 45-day extension of the temporary escrow order on a showing of good cause. 15 U.S.C. § 78u-3(c)(3)(A)(iv). However, once the subject of an investigation is charged with a securities violation by the commencement of a civil action, "the order shall remain in effect, subject to court approval, until the conclusion of any legal proceedings related thereto, and the affected issuer or other person, shall have the right to petition the court for review of the order." 15 U.S.C. § 78u-3(c)(3)(B)(i).

Sarbanes-Oxley does not define "extraordinary payments." The SEC is empowered to adopt regulations for the implementation of Sarbanes-Oxley. See 15 U.S.C. § 78w. To date the SEC has not done so. Neither Congress nor the SEC has given any indication as to the meaning of the words "extraordinary payments."

IV

STANDARD OF REVIEW

The district court's escrow order is reviewed for abuse of discretion. See United States v. Cal-Almond, Inc., 102 F.3d 999, 1001 (9th Cir.1996) (affirming denial of motion to impose esc...