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IPG Inflation

The Securities and Exchange Commission broadened the scope of its civil case against former Gemstar-TV Guide International Inc. chairman Henry Yuen and former CFO Elsie Leung, claiming last week that former co-president and co-chief operating officer Peter Boylan III and two of his former Gemstar colleagues committed securities fraud.

The amended complaint, filed in U.S. District Court for the Central District of California in Los Angeles on Jan. 5, claims that Boylan, former Gemstar CFO Craig Waggy and former Gemstar general counsel Jonathan Orlick participated in a scheme to inflate Gemstar's licensing and advertising revenue, and to mislead investors concerning Gemstar's financial performance.

The SEC had filed its original suit against Yuen and Leung on June 19, 2003. In that suit, the SEC claimed that Yuen and Leung misrepresented Gemstar's financial performance and misled investors.

In the amended complaint, the SEC claims that between 1999 and the third quarter of 2002, Gemstar — which owns TV Guide, the TV Guide Channel and cable's most widely distributed interactive program guide — fraudulently overstated and misreported at least $248 million of revenue because of the conduct of the defendants.

"These new charges reveal that the betrayal of the investing public by Gemstar's management was carried out not just by the former CEO and CFO, but with the participation and assistance of others in the executive suite," said Randall Lee, regional director of the SEC's Pacific regional office, in a statement. "It's even more disturbing that two of the defendants were also members of Gemstar's board, and that one of them was the general counsel of the company."

Boylan, 39, and Orlick, 46, were Gemstar directors during the period in question. Waggy, 44, was CFO of TV Guide and Gemstar from 1997 to 2002.

Boylan is currently president and CEO of Liberty Broadband Interactive Television Inc., an interactive services investment company controlled by Liberty Media Corp. Waggy is senior vice president and CFO of LBIT.


According to Liberty spokesman Mike Erickson, no announcements have been made regarding changes to either man's position at the company.

Orlick — who was promoted by new Gemstar CEO Jeff Shell from general counsel to president of intellectual property last January — was fired by Gemstar on June 5. Orlick sued Gemstar later that month, alleging that he was fired for cooperating with the SEC's investigation into the company.

Boylan and Waggy have been key drivers behind the consolidation of ITV vendors, overseeing Liberty's deal to buy OpenTV Corp. and OpenTV's acquisitions of Wink Communications Inc. and ACTV Inc.

The SEC complaint seeks permanent injunctions, civil money penalties and disgorgement of ill-gotten gains (including salaries, bonuses and any proceeds from the sale of stock during the fraud), and seeks to bar the accused from service as an officer or director of a public company.

While all three defendants have been accused of manipulating Gemstar's financial results to coincide with projections the company made to Wall Street, Boylan is the most high-profile executive to be charged besides Yuen.

He had resigned from Gemstar in April 2002, shortly before shareholder lawsuits began to emerge accusing the company of improper accounting practices.

According to the amended civil suit, Boylan was instrumental in two transactions that misrepresented advertising revenue for Gemstar's IPG unit — one with Motorola Inc. and one with Tribune Co.

According to the suit, the Motorola transaction involved the settlement of a lawsuit Gemstar filed against the set-top box maker in 1999 for patent infringement. The suit alleges that Yuen was lead negotiator of the settlement until July 2000, after which Boylan took over the lead in the discussion.

When Gemstar reached a settlement agreement with Motorola in October 2000, they agreed that a portion of the settlement amount — $17.5 million — would be characterized as advertising revenue on Gemstar's IPG or in its TV Guide magazine.

The SEC alleges that after the settlement was reached, Gemstar issued a press release — which Boylan reviewed — and held a conference call with analysts — which Boylan led — neither of which made mention of the advertising agreement.


But perhaps more egregious is the agency's claim that Boylan was the architect of an elaborate scheme to inflate IPG advertising revenue in a deal involving the sale to Tribune of TV Guide's rights to distribute Chicago television station WGN nationwide.

According to the suit, WGN owner Tribune made it known that it wanted to buy back the distribution rights to the TV station in 1999. Boylan led the negotiations, first as TV Guide president and later, after the merger with Gemstar, as Gemstar co-president and co-COO.

According to the suit, in November 2000 Boylan sent a letter to Tribune offering to sell the WGN rights for $224 million, half of which was to be paid by a five-year $112 million advertising commitment by Tribune to Gemstar.

After Tribune made a counter offer, the two parties reached an agreement in principle in April 2001, when Tribune agreed to purchase the stock for $106 million and to buy $100 million of advertising from Gemstar over six years.

According to the suit, Boylan requested prior to the closing that Tribune send two separate term sheets — one for the stock purchase and one for the advertising purchase — "to eliminate all 'linkage' between the advertising deal and the sale of the WGN distribution rights, with the understanding that the advertising deal would 'never be executed without the other deal.'"

Later, Boylan sent Tribune an e-mail stating that Gemstar had "eliminated all prior e-mail references to a single document … so we have a clean trail on our records for tax and audit purposes with the two separate transactions," the complaint stated.

(While the complaint referred to e-mail messages and appeared to quote from them in part, it did not include verbatim e-mail transcripts.)

Boylan's attorney, Patricia Glaser, a partner in the Los Angeles law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro LLP, said in a statement that the claims against her client are "without merit and Mr. Boylan will be completely vindicated."


Whether or not criminal charges will be filed against the three men remains to be seen. In October, the U.S. Attorney's office filed a motion to stay discovery in the Yuen suit, because it said it was conducting a criminal investigation into the matter.

In that motion, U.S. Attorney Debra Yang stated that her office had notified four former Gemstar executives that they are the targets of that investigation. The U.S. Attorney would not identify those executives.

Although the U.S. Attorney's motion to stay was denied in October — months before Boylan, Waggy or Orlick were named in the civil suit — a spokesman for the U.S. Attorney's office said that it would not preclude filing criminal charges or filing another motion to stay the civil action.

U.S. Attorney spokesman Thom Mrozek added that the criminal investigation is ongoing.

Back in its October filing, the U.S. Attorney said that criminal charges could be filed as soon as the end of March 2004.

For its part, Gemstar said that it has been cooperating with the investigation and that the executives involved in the suit are no longer involved with the company. Gemstar underwent a sweeping management change in November 2002, replacing all of its senior executives.

"Since the management restructuring, the company's current management has worked closely in cooperation with the SEC in connection with this investigation," Gemstar said. "The company believes that it has resolved its past accounting issues and has taken significant steps towards the resolution of associated regulatory issues."