X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
In January, Jonathan Orlick may become the latest ex-GC to take the witness stand. At press time the Securities and Exchange Commission’s civil suit against Orlick and four other former executives of Gemstar-TV Guide International Inc. was scheduled to go to trial in Los Angeles federal court. The government claims that the defendants falsified Gemstar’s financial records in order to boost the company’s revenue and misreported at least $248 million in revenue between 1999 and the third quarter of 2002. Based in Los Angeles, Gemstar produces on-screen television schedules, which it calls interactive program guides (IPG). The company sells advertising in the guides, and it also licenses its technology to TV manufacturers and cable- and satellite-television providers. In June 2004 the SEC reached a settlement in its civil suit against Gemstar. The company agreed to pay $10 million in penalties, and neither denied nor admitted the government’s charges. The SEC lauded Gemstar’s “significant cooperation and remediation following a change in senior management.” (Gemstar fired CEO Henry Yuen and CFO Elsie Leung in April 2003; Orlick was terminated two months later.) SEC officials declined to talk about their case against Orlick. But the agency’s complaint gives a preview of what its lawyers may say when the trial starts January 18. The SEC alleges that Orlick and his fellow Gemstar executives manipulated the company’s financial results by improperly reporting licensing and advertising revenue based on agreements that had expired, were disputed, or did not exist. The agency will likely highlight Orlick’s role in three disputed licensing and advertising agreements with Scientific-Atlanta Inc., Time Warner Inc., and Motorola Inc. The government is basing its charges on documents and e-mails obtained from Gemstar and its auditors at KPMG. Orlick and his attorney, Piper Rudnick Gray Cary partner Susan Resley, declined to comment for this article. However, Resley provided a copy of Orlick’s answer to the SEC’s complaint. In the answer, Orlick admits to the existence of various documents in the SEC’s hands and to some conversations attributed to him. But he rejects the government’s fraud allegations, and denies that he did anything illegal. Stanley Twardy, a former U.S. attorney for Connecticut, says that the SEC will need to show that Gemstar’s financial accounting was “purposefully falsified, and that Jonathan knew about it himself.” Currently the chair of the government investigations practice group at Day, Berry & Howard in Stamford, Connecticut, Twardy is not involved in the Gemstar case. But on the basis of his knowledge of past government prosecutions, he thinks the SEC will try to prove its case against Orlick by showing that the lawyer must have known about the fraud “because of his role [as general counsel and] the meetings around him.” As for Orlick, Twardy predicts that the ex-GC’s defense will be twofold: “One, that there was no fraud. And if there was, it was done by others. He was not aware of it, he had no reason to question it.” The SEC is seeking monetary penalties against Orlick, and also wants to bar him from serving as an officer or director at any public company in the future. Even though the SEC’s civil case has been a headache for Gemstar and its former officials, they’ve managed to avoid criminal prosecution so far. For a year after his departure from Gemstar, Orlick’s role in the alleged fraud was unclear. He filed a libel suit against the company shortly after being fired, stating that Gemstar defamed him when it said he had been let go “for cause.” Orlick’s employment contract defined “cause” as being sued for fraud or embezzlement, or being convicted of a felony — none of which had happened at the time of Orlick’s June 2003 firing. As a result, Gemstar agreed to an undisclosed settlement of Orlick’s libel claim in October 2004. The SEC didn’t add Orlick to its suit against Gemstar executives until January 2004, and even then the agency was vague about what the ex–GC had done. Orlick brought a motion to dismiss the complaint against him for not being specific enough. In June, Judge Mariana Pfaelzer agreed and tossed the complaint against Orlick without prejudice. The following month, however, the SEC filed a third amended complaint — a 93-page document that goes into substantial detail about Orlick’s alleged wrongdoing. Judge Pfaelzer accepted the complaint. The government alleges that the largest amount of fraud stemmed from Gemstar’s licensing agreement with Lawrenceville, Ga.-based Scientific-Atlanta, which makes set-top boxes for cable and satellite TV systems. After the agreement expired in 1999, Scientific-Atlanta stopped paying licensing fees to Gemstar, the SEC says. Yet Gemstar allegedly continued to record revenue from Scientific-Atlanta until 2002. After CEO Yuen left the company that year, Gemstar erased $113.5 million in nonexistent Scientific-Atlanta revenue. The two companies engaged in a pitched legal battle once the licensing agreement expired. In an e-mail to his colleagues, cited in the SEC’s complaint, Orlick said the two companies were “miles apart” in their proposals for a new pact. But he told a different story to Gemstar’s auditors, the government says. In his representation letters, Orlick allegedly assured the accountants that the squabble with Scientific-Atlanta was being resolved. The SEC adds that Orlick wrongly told CEO Yuen that Gemstar could continue reporting revenue from Scientific-Atlanta even though the licensing agreement had expired. In his answer, Orlick admits that he “participated” in Gemstar’s discussions with Scientific-Atlanta, was kept “apprised of the status” of litigation, and “attempted to negotiate” a new licensing agreement. But he denies the SEC’s overall characterization of his involvement as fraudulent behavior. The second major allegation against Orlick also involves licensing revenue. From September 2001 to March 2002, Gemstar recognized $18 million of IPG licensing revenue from Stamford, Conn.-based Time Warner Cable, all of which was subsequently erased. According to the SEC, Gemstar didn’t have a licensing agreement with Time Warner Cable and never received money from the company. The government alleges that Orlick told Gemstar’s auditors that Time Warner Cable revenue was covered under an agreement that Gemstar had with parent company AOL Time Warner, even though he received multiple letters from AOL Time Warner saying that this wasn’t the case. The SEC says that Gemstar’s outside counsel (at an unnamed law firm) tried to persuade Orlick to disclose the actual facts relating to the company’s recognition of Time Warner Cable revenue. However, Orlick allegedly told his outside lawyers that disclosure wasn’t necessary because there was no longer a dispute, plus the amounts being discussed in the settlement negotiations were higher than the amount of revenue being recognized. In his answer, Orlick admits to the representation letters and conversations with CEO Yuen cited by the SEC, but he denies the agency’s allegations, and he denies lying to Gemstar’s outside counsel. Day, Berry’s Twardy says that the documents cited by the SEC don’t necessarily spell doom for Orlick. “The e-mails are really snapshots,” he says. “The SEC looks at them in one light as evidence of fraud, and that’s how they characterize it, but Orlick will try to put it in proper perspective.” Still, Twardy believes that Orlick has the tougher road ahead: “Even before Sarbanes-Oxley, the SEC and the government pervailed in the overwhelming majority of these cases.”

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.