The Securities and Exchange Commission has charged former Gemstar-TV Guide CEO Henry Yuen and CFO Elsie Leung with fraud. The commission alleges that the two artificially inflated revenue at the publish company by at least $223 million from 2000 to 2002.
According to the SEC, the executives recorded licensing and advertising revenue from expired or disputed contracts, engaged in “round-trip” transactions, and inflated the company’s advertising business by recording cash at that unit that really belonged to Gemstar’s media and licensing businesses.
“The manipulation of financial results to present a distorted picture of a company’s true performance represents a betrayal of the investing public,” said SEC Division of Enforcement Director Stephen Cutler.
According to a report in the New York Times, Randall Lee, director of the commission’s Pacific region office, asserted that Yuen and Leung also deceived KPMG, the company’s external auditors. During the two-year period in question, the SEC says Yuen collected about $97 million in salary, bonuses, and stock options and sales.
The suit, filed in federal court in Los Angeles, seeks monetary penalties and the return of gains from the alleged fraud. It also seeks to permanently ban Yuen and Leung from serving as officers in a public company.
Stanley Arkin, a lawyer for Yuen and Leung, told the Times that his clients had acted properly and openly. “All of these transactions, in one way or another, were approved and monitored by professionals,” he said. “They did not conspire in some dark closet.”
Management at Gemstar — now controlled by News Corp. CEO Rupert Murdoch, who owns 42 percent of the company — says it’s cooperating with the SEC and claims to have tightened the company’s corporate governance procedures.
Survey: Little Ethics Training for Boards
A surprisingly large number of corporate ethics officers say their board members have never received training in ethics or compliance issues, according to a survey conducted by The Conference Board. More than 80 ethics, human resources, and legal officers who attended The Conference Board’s 2003 Ethics Conference in New York participated in the survey.
While 81 percent of the respondents said their companies have conducted ethics and compliance training for their employees, only 27 percent have held training sessions for their directors. A little of half said say their boards are “not engaged enough” in major ethical issues.
That, in turn, might explain this response: six out of ten of the respondents said compensation for senior executives at their companies is “out of control.”
Another worrisome sign: sixty two percent acknowledged that executives who leave their positions because of major violations of ethics and compliance codes “get a financial package and go.” At about 38 percent of the companies surveyed, wrong-doers leave without a package.
“Although board involvement in governance has increased dramatically in the past year, the survey results are a clear indicator that ethics officers, boards, and executives need to strive for higher levels of ethical leadership and accountability,” said Steve Priest, who conducted the survey.
While most executives concede that corporate ethics training can play a role in preventing major scandals, few believe that it can stop malfeasance altogether. About 42 percent of the respondents said ethics training would have made little difference in the scandals at HealthSouth or Enron. About seventy percent of the executives polled conceded that fear of retaliation is a “big issue” in their companies.
Even more disturbing, only 6 percent said their companies have a “culture of dissent” where employees can openly speak their minds.
(Editor’s note: To find out about a new Web-based ethics training program designed to limit corporate liability, read “Learn Ethics in Your Spare Time.”)
Insider Trading at Freddie Mac?
Lawmakers are asking regulators to investigate several Freddie Mac executives who allegedly sold company stock in the days before a management shakeup sent the mortgage specialist’s shares tumbling.
The sales — apparently worth a combined $520,316 — were made four days before news broke that Freddie Mac’s three top executives were leaving the company. The price of shares in the publicly traded government agency fell 19 percent following the shakeup.
Freddy Mac’s former chief operating officer David Glenn sold 4,228 shares for $255,921, according to CBS Marketwatch. In addition, Maude Mater, general counsel, and Paul Peterson, an executive vice president, sold shares for $37,468 and $32,746 respectively. Also selling the week before the shakeup was Melvin Kann, a senior vice president and general auditor. He sold 509 shares for a total of $30,810. William Ledman, senior vice president, sold 2,699 shares for $163,370.
“While there may be a perfectly innocent explanation for these insider stock sales, the fact that they occurred at a time these insiders were likely to have been in possession of material non-public information … raises very serious questions,” Reps. Richard Markey (D-Mass.), and Christopher Shays, (R-Conn.), wrote in a letter to William Donaldson, chief of the Securities and Exchange Commission.
The two legislators maintain that the commission has no authority to regulate insider sales, or require that Freddie Mac executives report to them. But lawmakers in Washington are currently considering a bill that would require government-backed businesses like Freddie Mac and Fannie Mae to be regulated by the SEC.
Backwards Reports Annual Read: Experts
Despite mounting pressure to improve corporate governance and provide more transparent disclosure to investors, a good number of executive annual letters to shareholders still are misleading, according to a report in Reuters. Those letters contain phrases — jargon like “robust growth” and “best in class” — that cloud true performance, the article noted.
“On average, most letters have not improved,” Laura Rittenhouse, president of And Beyond Communications, a New York investor relations firm, told Reuters. “I don’t believe the climate for investors will get better until companies are encouraged to stop the hyperbole.”
Some corporate governance experts are warning investors not to rely too much on the CEO letter because it is often used as a marketing tool. “My tip to people looking at annual reports, start from the back and read forward. Read the letter last,” said Patrick McGurn, senior vice president at Institutional Shareholder Services.
Although many investors would concede that financial statements and footnotes are more important measures of corporate performance than letters to shareholders, Rittenhouse and some others say the shareholder letter is a key indicator of corporate attitudes. They claim investors may equate acknowledgement of shortcomings with more transparent financial disclosure.
- Barry Melancon, chief executive and president of the American Institute of Certified Public Accountants (AICPA) made $747,000 in salary and received $214,458 in employee benefits in the fiscal year ending July 31, 2002, according to the AICPA’s most recent tax return obtained by Reuters on Friday. Observers say the PCAOB, an accounting industry oversight board established by Congress last year, has eclipsed much of AICPA’s power to set auditing rules, as well as its role as the main regulator of the accounting profession. In its last fiscal year, the AICPA lost about $80 million on its investment in CPA2BIZ, a for-profit Web site for accountants, according to Reuters.
- Deborah McLaughlin is the new finance chief at Slade’s Ferry Bancorp, a bank holding company with 12 offices in Massachusetts and Rhode Island. McLaughlin joins the bank from NSTAR, an energy delivery company, where she served as executive vice president. Prior to NSTAR, she was president and COO of Commonwealth Electric and Commonwealth Gas. McLaughlin is a certified internal auditor, and a graduate of Boston College and Babson College. She holds a BS in accounting and an MBA. “McLaughlin’s expertise in regulatory affairs and audit procedures will serve the bank well,” said President and CEO Mary Lynn Lenz. “She understands the fiduciary implications of Sarbanes-Oxley.”