At his peak, Henry Yuen was a enigmatic powerbroker. A one-time mathematics professor, he once ran Gemstar TVGuide, operating out of a nondescript office in Pasadena, Calif. Thanks to a raft of patents for how information could be put on a TV screen, his out-of-the-way office was nonetheless a must-stop for any company interested in TV's fast-blossoming world of digital programming. Yuen's bowl-cut hairstyle and owlish glasses only enhanced his image.
He struck deals to provide an on-screen program guide -- and to collect royalties -- from major cable players like AT&T (T) and consumer-electronic companies like Sony (SNE) and Zenith. That made Gemstar (GMST) a hot-growth stock as the New Millennium dawned, and it lured investors like Rupert Murdoch, who in 2000 merged his TV Guide empire with Gemstar.
Now, the Securities & Exchange Commission is alleging that Yuen may have also been cooking the books -- a charge his lawyer vehemently denies. On June 19, the SEC filed suit in federal court against Yuen and Elsie Leung, Gemstar's former chief financial officer, charging them with a "widespread and complex scheme to inflate Gemstar's licensing and advertising revenues."
"FRAGILE AND ARBITRARY"? Among the deals the SEC alleged to be improper: Gemstar recorded as revenue $113.5 million in licensing fees from set-top-box maker Scientific Atlanta (SFA) that the SEC says Gemstar never received. The SEC also alleged that Gemstar recorded as revenue $20 million for advertising even though the funds had not been paid and were a pledge of advertising support that Gemstar had made when it bought online service Fantasy Sports in June, 2001.
In all, the SEC charges, the two execs overstated Gemstar's revenues by $223 million, helping Yuen and Leung "reap millions of dollars in financial gains from their fraudulent scheme," according to the SEC suit.
Stanley Arkin, the lawyer who represents Yuen and Leung, strongly denounced the SEC allegations in a statement, calling them "as unfair as they are fragile and arbitrary." Arkin added that Yuen and Leung "relied appropriately on the counsel of a team of experienced auditors and attorneys."
MURDOCH'S MAN. The suit caps a tumultuous year for Yuen, who Gemstar says it terminated in April, 2003, "for cause." At the time, Yuen was nonexecutive chairman, after having been forced from the top job by News Corp. (NWS), which owns a 43% stake in Gemstar. In October, 2002, Murdoch had installed a former News Corp. executive, Jeff Shell, as CEO, relegating Yuen to his nonexecutive chairman role.
At the time of Yuen's dismissal, he had resisted an SEC subpoena to provide information about Gemstar's accounting practices. Gemstar says it sent a letter to the SEC's chairman in March "expressing the company's expectation of cooperation." Yuen did not respond to the subpoena on Arkin's suggestion, his lawyer told BusinessWeek Online, because "I didn't think he could get a fair shake from the SEC."
Now, Arkin says in his statement, Yuen and Lueng "look forward to airing these and other facts and circumstances in a fair forum and are confident that the insubstantiality of the SEC claims will be shown." Among those claims is the SEC'S allegation that Gemstar recorded revenue for its electronic program guide "under expired, disputed, or nonexistent agreements."
RESTATEMENTS COMING.The SEC also charges that Yuen authorized Gemstar to shift income from various other businesses to its program-guide business, "in order to show dramatic growth and acceptance" of advertising on the guide, "when in fact such growth and acceptance did not exist."
Gemstar now says current management "has, and continues to, cooperate fully with the SEC's investigation" and that it "has resolved its past accounting issues." In the past nine months, Gemstar said it intended to restate several of its prior dealings, including $110.9 million in advertising revenues for its program guide and $92.8 million in licensing revenues.
With the SEC announcement, Gemstar's stock price fell 27 cents, to $5.22. Two years earlier, it traded as high as $42 a share. If the company and its shares ever return to glory, it'll be without Gemstar's enigmatic founder. By Ronald Grover in Los Angeles