Washington (June 29, 2004) -- TV Guide publisher Gemstar agreed to pay a $10 million civil penalty to settle Securities and Exchange Commission charges that alleged that the company overstated revenues by nearly $250 million over a three-year period.
The SEC's complaint, filed in federal court in Los Angeles last week, charged Gemstar-TV Guide International Inc. with improperly reporting revenues from its interactive program guide licensing and advertising from 1999 through 2002. The company did not admit or deny the allegations.
In a statement, Gemstar said that it is "pleased to have reached an agreement with the SEC, and to conclude this chapter in the company's history."
Gemstar generated revenues from the IPG by licensing the technology to third parties and selling advertising space on it. The SEC's complaint alleges that Gemstar improperly recorded revenue under expired, disputed or non-existent agreements; improperly recorded and reported revenue from a long-term agreement on an accelerated basis; and inflated IPG ad revenue by improperly recording and reporting revenue from multiple-element transactions, including so-called "round-trip" transactions where it paid money to a third party that used the funds to buy advertising from Gemstar.
In addition, the SEC alleged that the company structured certain settlements in order to create "cookie jars" of IPG advertising revenue; improperly recorded and reported IPG advertising revenue from non-monetary and barter transactions; and reported revenue from the sale of print advertising as IPG ad revenue.
The SEC began its investigation in April 2002, after Gemstar disclosed in a filing that revenue from two transactions had been recorded under an expired licensing agreement and in a non-monetary transaction, sending the company's stock price plummeting.
For nearly the next eight months, the SEC said that the company didn't conduct a thorough internal investigation and failed to take appropriate remedial action, even when presented by the commission with "specific evidence of fraudulent conduct." In August 2002, Gemstar issued a restatement reversing only about $20 million in revenue and continued to report overstated revenues, according to the SEC. In November of that year, Gemstar replaced its chief executive officer, chief financial officer and general counsel, adopted new internal controls and retained a new independent auditor and a new independent outside counsel.
Following the change in senior management, the SEC said that Gemstar initiated a comprehensive investigation and re-audit of its financial statements; restated its financials three more times, reversing revenues by a total of $377 million; assisted the commission in its investigation; and voluntarily agreed not to make certain extraordinary severance payments to its former CEO and CFO for over six months.
The $10 million will be distributed to shareholders. The SEC said that in assessing the penalty, it considered the "scope and severity of Gemstar's misconduct, Gemstar's initial failure to cooperate in the commission's investigation or undertake remedial actions, and Gemstar's significant cooperation and remediation following a change in senior management and restructuring of its corporate governance."
However, the SEC credited the company for its "extensive cooperation once new management took control." The SEC said that it is still pursuing its case against former Gemstar senior management.
-- WebCPA staff
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