Yuen sues SEC for severance package. (Up Front).

When Gemstar-TV Guide International Inc. Chairman Henry Yuen conceded defeat in his boardroom battle with Rupert Murdoch's News Corp., it seemed to end a career as one of the business world's most litigious executives.

But with the lawsuit he filed against the Securities and Exchange Commission on March 31, the Loyola University law school graduate shows the same temerity he used against rival consumer electronics makers and cable operators.

Yuen, along with former Chief Financial Officer Elsie Leung, are seeking the release of $38 million in severance pay, including back pay and "unused vacation time" that has been held in escrow since November.

Usually, it's the SEC that sends its lawyers after executives who have presided over accounting fiascoes, such as Gemstar's restatement of $55.8 million in revenues over the past four years. But Yuen and Leung have turned the tables on the agency, alleging it went too far in using new powers granted by the SarbanesOxley Act.

They claim that the SEC "injected itself' into their severance negotiations with a special committee of Gemstar's board last October, then asked the two executives to place "virtually all" of their package into escrow "for an indefinite period." When Yuen and Leung refused, they say, the SEC coerced the compafly into putting the payments into a six-month escrow trust by initiating an investigation into the company and issuing subpoenas to its board members.

"We address what we believe to be unlawful, arrogant and high-handed conduct by the Securities and Exchange Commission," said Yuen's and Leung's New York-based litigator, Stanley Arkin (best known for representing Revlon Inc. Chairman Ronald Perelman and Johnny Carson in one of his divorces). Yuen and Leung are demanding a hearing before a federal district court judge on April 7.

SEC officials refuse to publicly comment on the suit. But in its seven-page response, the agency says it "was not a party" to the escrow agreement and that Yuen and Leung "freely consented" to the deal. It also hints that Yuen and Leung resigned just weeks before Gemstar announced that it would have to restate earnings for another fiscal period.

Running battle

This isn't the first run-in Yuen has had with the agency since it began its investigation into Gemstar. On March 12, the SEC obtained a subpoena to force Yuen and Leung to testify about Gemstar's finances. The two sides later settled and agreed to meet at the SEC's Los Angeles offices last week.

After one of those meetings, Yuen, dressed in khakis and a light blue shirt, was courteous as he waved a reporter ahead of him on the way to the elevator.

Gemstar recently restated its results for the first three quarters of 2002, along with the previous three fiscal years. In addition to revenue restatements, the company reduced previously reported earnings before interest, taxes, depreciation and amortization by $113.7 million after adjusting for such things as patent litigation expenses and a "compensation expense charge" related to options Yuen received from the company.

Yuen's challenge to the SEC centers on the interpretation of a little-known portion of the Sarbanes-Oxley Act. Tucked away in thousands of pages of corporate governance rules, Section 1103 allows the SEC to obtain a court order freezing "extraordinary payments" made to a departing executive by a company under formal investigation. Those payments can be held in escrow unless the company or individual is formally charged.

Previously, the SEC could only freeze such payments if either the company or a former executive were formally charged with violating the Securities and Exchange Act.

The rule has garnered little attention from attorneys defending white-collar defendants. Most have been anticipating the effects of other mandates of Sarbanes-Oxley, including Section 307, which compels lawyers to inform the SEC about their clients' securities law violations, and 304, which forces companies to appoint independent audit committees.

Test case

But Yuen's case may spotlight Section 1103. One reason: The SEC has yet to define "extraordinary payments." Bonuses, stock options, even vacation days, could be held in escrow if securities officials are suspicious about the payments.

"The company now has to think about what kind of package they give someone who they're trying to kick off the board," said M. Ridgeway Barker, chairman of the securities law practice of New York law firm Kelley Drye & Warren.

Yuen, Leung and their attorneys refuse to comment about the case. But in their complaint, they say they fear that when the escrow period ends on May 6, the SEC will use them as a test case to exercise its powers under Section 1103. They claim the SEC had agreed that $2.4 million accrued as vacation time could be released before the May 6 escrow date end. But once the escrow agreement went into effect, it refused to allow them to collect.

In its response, the SEC acknowledges it had agreed to the release of "certain funds," but said it warned Gemstar, Yuen and Leung that any further dispersal would be challenged. Regarding what action might be taken after the escrow date passes, an SEC official would only say that a recommendation hasn't been made to officials in Washington.

Meanwhile, some of Yuen's allegations in the complaint shed light on the bruising battle for control of Gemstar he waged against News Corp., which owns 43 percent of the company's shares. The two fought almost immediately after Yuen merged the company with TV Guide Inc., the firm that News Corp. controlled along with John Malone's Liberty Media Corp.

Yuen claims that News Corp. wanted to use Gemstar and its interactive program guide as "leverage" in negotiations with cable and satellite firms to cut better deals for its Fox cable channels.

Although Gemstar is not named as a defendant, Yuen alleges that the company went behind Yuen and Leung's back by negotiating with the SEC on putting the funds in escrow, then wrote the escrow into the terms of their severance agreements. When Yuen and Leung balked, the company threatened to terminate the deal and take steps to "cause the immediate, public termination of Dr. Yuen and Ms. Leung's employment:' the lawsuit said.

Gemstar declined to comment on these accusations, but one company official wondered why Yuen would sue the SEC when the company has decided to release the funds as soon as the escrow period ends.

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