Twist: CFO Sues SEC

Former Gemstar finance chief Elsie Leung files suit against the commission; a litmus test for Sarbanes-Oxley?
Lisa YoonApril 3, 2003

Apparently, finance officers dismissed under dubious circumstances don’t always go gentle into that good night.

In recent cases, several former CFOs have resigned after SEC investigations implicated them in accounting scandals. Exhibit A: HealthSouth’s Weston Smith, who quit his job after reportedly pleading guilty to helping that company cook its books.

But ousted finance executives play offense too, as evidenced this week by former Gemstar-TV Guide International CFO Elsie Leung.

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On Tuesday, Leung and former Gemstar CEO Henry Yuen, both of whom left the TV Guide publisher in October over accounting irregularities, filed a suit against the SEC. According to Bloomberg, the two are seeking the release of their severance pay ($37.6 million between them). The former Gemstar executives claim the SEC forced Gemstar to put the money into escrow without “constitutional due process necessary for the government to deprive a citizen of property” — and used intimidation and threats to boot.

The SEC invoked the Sarbanes-Oxley Act in taking its action, citing a provision in the act for punishing executives who defraud investors.

Gemstar caught the SEC’s attention a year ago, when president Peter Boylan resigned after the company announced a write-down of up to $5 billion to amortize goodwill related to its $14 billion purchase of TV Guide in July 2000. (The figure ended up at $6 billion, the company reported Monday. It also restated results for three years.)

Shortly after that, the publisher revealed it had booked millions in revenue it had not received — and would not receive — unless it won a court case. By August, the company announced a restructuring, bringing in CEO Jeff Shell and accepting resignations from Yuen and Leung.

But according to the suit, the SEC Yuen’s and Leung’s payments before filing charges, and therefore was wrong to invoke the Sarbanes-Oxley provision, reports Bloomberg. The suit says this is the first time such action was taken since the passage of Sarbanes-Oxley last year.

The case is one to watch on a number of counts, says one attorney (who declined to be named for this story). For starters, the lawyer says the SEC rarely gets sued. But more importantly, the suit challenges sections of the Sarbanes-Oxley that appear to confer increased authority on the SEC. It raises questions about the role of due process and, therefore, the constitutionality of the commission’s new powers.

For a new law that’s largely untested in the courts, the ultimate questions is whether or not Sarbanes-Oxley makes good public policy, says the lawyer.