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What makes a corporate executive’s pay “extraordinary”? It all depends, says the 9th U.S. Circuit Court of Appeals, but the combined $37 million planned for two executives at Gemstar-TV Guide International certainly fit the bill. Securities and Exchange Commission v. Gemstar-TV Guide International Inc., No. 05 C.D.O.S. 2421. Former Chief Executive Officer Henry Yuen and former Chief Financial Officer Elsie Leung have been fighting U.S. District Judge William Matthew Byrne Jr.’s order that put their planned severance packages into escrow two years ago. At the time, the Securities and Exchange Commission (SEC) was investigating the leaders of the company to see if they had overstated revenues and misled stockholders. Their case hinges on how the courts interpret a part of the Sarbanes-Oxley Act that lets the SEC force “extraordinary payments” for employees into escrow while their company is under investigation. Yuen and Leung have argued that the district court’s interpretation of “extraordinary” was wrong, and that the law’s wording is unconstitutionally vague. A divided three-judge panel at the 9th Circuit agreed, but last week, an en banc majority rejected both arguments. The en banc’s majority author, Senior Judge Stephen Trott, was the three-judge panel’s dissenter. Judge Carlos Bea, who had written the original majority opinion, wound up being the lone en banc dissent. For a law that aims to protect third-party creditors and corporate investors once the SEC begins an investigation of corporate malfeasance, according to Trott’s opinion, ” ‘out of the ordinary’ means a payment that would not typically be made by a company in its customary course of business.” And Yuen and Leung’s planned severance packages were “ anything but ordinary,” Trott concluded, noting that they were five and six times greater than their base salaries, and that the size of their bonuses appeared tied to the allegedly fraudulent financial reporting at the heart of the SEC investigation. In general, the court should look at factors like the size of the payment, its purpose and the circumstances surrounding it, or even deviation from an industry standard, Trott wrote. But there shouldn’t be a specific litmus test. “To do so for all possible situations would be next to impossible.” In his dissent, Bea said that he would vacate the district judge’s order but give the SEC a chance to present stronger evidence on remand. He said that the SEC should have to show that a payment was extraordinary relative to payments made by other comparable companies that aren’t under investigation by the SEC. Comparing a payment to the normal course of business at the same company is unworkable, Bea asserted, because in that light, “any payment made under any situation novel to that company is now subject to escrow.” That includes, he added, “the first time a company under SEC investigation gives a departing executive not a golden parachute, but a mere gold watch (or, even, a gold-plated watch).” According to Richard Humes, an associate general counsel with the SEC, it would be too onerous to investigate a company’s alleged securities fraud while trying to gather information on other companies’ pay at the same time. “We are pleased . . . the court adopted the standard that we had urged,” he said. Trott defended the court order for escrow as reasonable, noting that the money goes into an interest-bearing account for up to 45 days. Bea proclaimed that “at best, a naive view.” If executives are subsequently charged with a securities violation, the escrow order remains in effect until those proceedings are over, he pointed out. That’s what happened to Yuen and Leung. The SEC sued them for securities fraud about a month after the court order that put their pay into escrow, so their money remains locked in escrow.

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