Appendix — Yuen v. Securities & Exchange Commission

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CASE No. CV 03-03124 MRP

Filed June 20, 2003

SECURITIES AND EXCHANGE COMMISSION

Applicant,

GEMSTAR-TV GUIDE INTERNATIONAL, INC.,

Respondents.

MEMORANDUM OF DECISION RE:

AN APPLICATION FOR A TEMPORARY

ORDER PURSUANT TO SECTION 1103

OF THE SARBANES-OXLEY ACT

Il. Introduction

Section 1103 of the Sarbanes-Oxley Act (“Section

1103”), 15 U.S.C. § 78u-3(c)(3), empowers the Securi-

ties and Exchange Commission (“SEC” or “Commis-

sion”) to apply for a court ordered escrow for up to 90

days of any “extraordinary payments” that an issuer

seeks to make to its officers while under investigation

for possible securities law violations. Section 1103 pro-

vides:

Whenever, during the course of a lawful investiga-

tion involving possible violations of the Federal

securities laws by an issuer of publicly traded secu-

rities or any of its directors, officers, partners, con-

trolling persons, agents, or employees, it shall

appear to the Commission that it is likely that the

issuer will make extraordinary payments (whether

compensation or otherwise) to any of the foregoing

persons, the Commission may petition a Federal dis-

trict court for a temporary order requiring the issuer

to escrow, subject to court supervision, those pay-

ments in an interest-bearing account for 45 days.

15 U.S.C. § 78u-3(c)(3)(A)(i). The temporary order may

be entered “only after notice and opportunity for a hear-

ing,” unless such procedures would be “imprac-

ticable or contrary to the public interest.” 15 U.S.C.

§ 78u-3(c)(3)(A)(ii).

Section 1103 further provides that the temporary order

“may be extended by the court upon good cause shown

for not longer than 45 additional days, provided that the

combined period of the order shali not exceed 90 days.”

15 U.S.C. § 78u-3(c)(3)(A)(iv).

II. Background

A. Factual Background

Gemstar-TV Guide International, Inc. (“Gemstar” or

“Company”) is a Delaware corporation with offices in

Pasadena, California. It is also the subject of an ongoing

SEC investigation as well as the defendants in numerous

class action suits filed by Gemstar shareholders.

Dr. Henry Yuen was, until November 2002, Gemstar’s

Chief Executive Officer (“CEO”). Elsie Leung served as

Gemstar’s Chief Financial Officer (“CFO”), co-Presi-

dent, and co-Chief Operating Officer until November

2002. Yuen and Leung are hereinafter referred to as the

“Intervenors.”

According to the various allegations, the Company

violated federal securities laws between June 2000 and

April 2002 by recognizing millions of dollars of revenue

in violation of Generally Accepted Accounting Princi-

ples. Specifically, Gemstar is alleged to have improperly

recognized revenue from an expired licensing agreement

with Scientific-Atlanta, Inc. (“Scientific-Atlanta’”).

Additionally, the Company is alleged to have improperly

recognized revenue in connection with its acquisition of

certain assets of Fantasy Sports Properties, Inc. (“Fan-

- tasy Sports’’).

In April 2002, Gemstar filed its annual report on Form

10-K for fiscal year-ended December 31, 2001 wherein

it disclosed that it had recognized the Scientific-Atlanta

revenue as well as $20 million in advertising revenues

based on the nonmonetary barter transaction with Fan-

tasy Sports. On June 27, 2002, the SEC issued Order No.

4-460, which required Yuen and Leung to file with the

SEC a statement in writing, under oath, declaring that

Gemstar’s most recent Form 10-K and any Form 8-K

filed subsequent thereto: (i) do not contain any untrue

statement of material fact; (ii) do not omit to state 2

materia! fact necessary to make the statements made in

the SEC filings not misleading; and (iii) have been

reviewed with the Company’s audit committee, or in the

absence of an audit committee the independent members

of the Company’s Board of Directors. Yuen and Leung

refused to certify the accuracy of Gemstar’s financials as

required by Order No. 4-460. Gemstar subsequently

restated its prior financial results.

The market and the SEC reacted negatively to this

chain of events. Thereafter, Yuen, Leung, and Gemstar

reached an agreement whereby Yuen and Leung would

step down from their positions as officers of Gemstar.

Through a series of heavily negotiated agreements

intended to terminate their employment, Gemstar

attempted to award Yuen over $40 million in cash and

stock options, restricted stock, and stock units for

approximately 14.5 million shares of Gemstar stock, and

attempted to award Leung approximately $10 million in

cash and stock options, restricted stock, and stock units

for 2.3 million shares of Gemstar stock. The total mon-

etary compensation (“Cash Payments”) to be distributed

to Yuen and Leung are described and apportioned in two

“Termination Agreements” entered into on November 7,

2002 as follows:

Yuen Leung

Termination fee $22,452,640! $6,957,953

Unpaid salary,

bonus, and vacation!

TOTAL $29,483,418} $8,167,648

$7,030,778 | $1,209,695

For their part, Yuen and Leung provided Gemstar with

certain releases (Arkin Decl. Ex. A at 9-11, Ex. B at 9-

11) and made representations and warranties as to the

accuracy of certain former Gemstar filings with the SEC

(Arkin Decl. Ex. A at 17-18, Ex. B at 14-15). Addi-

tionally, Yuen and Leung resigned as officers and direc-

tors of Gemstar. (Arkin Decl. Ex. A at 1-2, Ex. B at 1-2.)

The Intervenors refer to this portion as “Unpaid Accrued

Items.”

As part of the restructuring process, Yuen and Leung.

also each entered into agreements with Gemstar (col-

lectively, the “Side Letters” to place the Cash Payments

in escrow until the earlier of: (i) May 6, 2003, or (ii) the

SEC’s agreement to release the funds.

B. Procedural Background

In a separate earlier action, Yuen v. S.E.C., No. 03-2219

(C.D. Cal. filed Mar. 31, 2003), the Intervenors sought

a preliminary injunction preventing the SEC from taking

any further steps to thwart the distribution of the Cash

Payments. Under their theory, the SEC, by coercing the

execution of the Side Letters, had circumscribed the pro-

cedural protections and substantive limitations provided

for by Congress in Section 11.03. In so doing, the SEC,

working in conjunction with Gemstar, allegedly had

violated Sections 706(2)(A), (B), (C), and (D) of the

Administrative Procedures Act (“AAA”), §5 U.S.C.

§ 551, et. seq.

The SEC disagreed with the Intervenors’ characteri-

zation. It asserted that although the Commission

informed counsel for Yuen and Leung and for Gemstar

that it would seek a court order freezing extraordinary

payments pursuant to Section 1103 and obtained an

agreement from Gemstar to give the Commission seven

days’ notice before any termination payments were dis-

bursed to Yuen or Leung, it did not have any input into

the terms of the Side Letters between Gemstar, Yuen,

and Leung.

In that earlier proceeding, Gemstar remained silent as

to the chain of events leading up to the restructuring.

The court rejected the Intervenors’ request for a pre-

liminary injunction, finding that they were not likely to

succeed on the merits of their contentions.

D. Motion Before the Court

The Commission filed this action seeking an order

pursuant to Section 1103 to freeze any extraordinary

payments by Gemstar to Yuen and Leung. Though the

original action named only Gemstar as a defendants,

Yuen and Leung, with the Court’s permission, have now

intervened as respondents pursuant to Local Rules 7-19

and Rule 24(a).

Ili. Legal Standard

Section 1103 sets forth two main requirements that

must be met before the Commission is permitted to peti-

tion the Court for a temporary order. First, the petition

must occur “during the course of a lawful investigation

involving possible violations of the Federal securities

laws.” 15 U.S.C. § 78u-3(A)(i). Second, it must “appear”

to the Commission that “it is likely that the issuer will

make extraordinary payments.” /d.

Congress did not explicitly set forth the Commission’s

burden in seeking a Section 1103 order. However, there

appears to be no serious challenge here that the appli-

cation is pursued in conjunction with a “lawful investi-

gation” and that it is “likely” the Gemstar will make

some payments to Yuen and Leung. Whether those pay-

ments are, in the statutory sense, “extraordinary,” requires

additional consideration, but the Court ultimately con-

cludes that under almost any standard, the Commission

has met its burden here.

IV. Discussion

A. The Meaning of “Extraordinary Payments”

The interpretation of Section 1103 appears tobe an .

- -- issue of first impression.” In interpreting Section 1103,

as with the interpretation of any federal statute, the

Court’s goal “is to ascertain the intent of Congress and

to give effect to legislative will.” United States v. Taylor,

802 F.2d 1108, 1113 (9th Cir. 1986), cert. denied, 479

U.S. 1094 (1987). “Statutory interpretation begins with

the plain language of the statute.” United States v. Men-

doza, 244 F.3d 1037, 1042 (9th Cir. 2001) (citation —

omitted). Unless exceptional circumstances dictate oth-

erwise, judicial inquiry into the meaning of a statute is

- complete once the Court finds that the terms of the

statute are unambiguous. Burlington Northern R. Co. v.

Oklahoma Tax Commission, 481 U.S. 454, 461 (1987).

Looking first to the words of the statute, it is apparent

that not every payment by an issuer is intended to be

subject to Section 1103. If Congress had intended to

grant the Commission authority to freeze all payments,

it could have easily authorized the freezing of the

broader term “payments,” rather than the narrower term,

“extraordinary payments.” It is “a cardinal principle of

2 On March 19, 2003, Healthsouth Corporation (“Health-

~ south”) consented to the entry of an order to freeze extraordinary pay-

ments by Healthsouth in the Northern District of Alabama. S.E.C. v.

Healthsouth Corp., Litig. Release No. 18044, 2003 SEC LEXIS 656

(Mar. 20, 2003). The district court also simultaneously entered an

~— order freezing substantially all the assets of Healthsouth CEO and

Chairman Richard M. Scrushy. /d. It is unclear whether Scrushy vol-

untarily consented to the initial freeze of his assets or whether Health-

south ever negotiated to provide “extraordinary payments” to him;

but it is clear that the freeze on Scrushy’s assets was not instituted

pursuant to Section 1103.

statutory construction that a statute ought, upon the

whole, to be so construed that, if it can be prevented, no

clause, sentence, or word shall be superfluous, void, or

insignificant.” City of Los Angeles v. United States

D.O.C., 307 F.3d 859, 870 (9th Cir. 2002) (quoting TRW

inc. v. Andrews, 534 U.S. 19, 31 (2001) (internal quo-

tation marks and citation omitted)).

The plain words of Section 1103 also reflect Congress's

intent that “compensation” is within the scope of pay-

ments that may be frozen pursuant to the provision.

While it is not immediately apparent whether Section

1103’s use of “compensation” is meant to include or

exclude different types of compensation—e.g., bonus,

vacation pay, or salary—it seems clear that the mere fact

that a payment is compensation for something cannot

automatically exclude that payment from a freeze pur-

suant to Section 1103. Specifically, since “compensa-

tion” in common usage refers to a payment that is made

in exchange for something else, see, e.g., Webster’s

Ninth New Collegiate Dictionary 268 (1984) (“some-

thing that constitutes an equivalent or recompense”), and

since “compensation or otherwise” is subject to Section

1103, it surely cannot be the case that the mere fact that

a payment was bargained for excludes that payment from

a Section 1103 freeze.

Other portions of the statute require more effort to

illuminate. Particularly relevant here, “extraordinary

payments” is not a term defined in Section 1103. Neither

the term “extraordinary payments” nor the word

“extraordinary” is used anywhere else in the Sarbanes-

Oxley Act. Nor has the Commission made any public

comments or releases that endeavor to explain the term.

The Court thus begins with the presumption that the ieg-

islative intent is reflected by the ordinary meanings of

the words. Russello v. United States, 464 U.S. 16, 21

(1983) (quoting Richards v. United States, 369 U.S. 1,9

(1962)).

The Commission argues a plain meaning interpretation

that would broadly define “extraordinary payments.”

Citing Black’s Law Dictionary and Webster's New Uni-

versal Unabridged Dictionary (SEC Mot. at 14-16), it

argues that “extraordinary” in common parlance essen-

tially means “out of the ordinary” or “unusual.” Unusual,

of course, is a comparative adjective that has meaning

only in relation to what is “usual.” Here, the Commis-

sion argues that the payments are unusual for two rea-

sons. First, they were made to effect at least three

extraordinary corporate events for Gemstar: the removal

of Yuen as CEO, the removal of Leung as CFO, and the

change of control of Gemstar from Yuen and Leung to

others. Second, the Commission argues that the pay-

ments are extraordinary in size when compared with

Yuen’s and Leung’s respective annual salaries. Accord-

ing to the SEC, the total payments are more than five

times Yuen’s and Leung’s respective salaries.

The “plain meaning” definition proffered by the Inter-

venors is much narrower. Under their construction, a

payment is not extraordinary unless it is (i) made with-

out proper corporate approval, or (ii) cannot be traced to

identifiable legal obligations or well-established cor-

porate policies existing at the time that the SEC com-

menced its investigation. (Yuen Supp. at 6.) In other

words, the Intervenors argue that unless a payment is

essentially illegal (i.e., made without corporate approval)

or gratuitous (i.e., no identifiable legal obligation), it

cannot be an extraordinary payment subject to Section

1103.

Though they represent extreme ends of the spectrum

of possible “plain meanings,” the interpretations prof-

fered by both the commission and the Intervenors are at

10a

least colorable. To urge the reasonableness of their

respective positions, each party also offers its own “pre-

sumption” as to how broadly or narrowly the statute

should be read. For their part, the Intervenors argue that

Section 1103 “is in the nature of an attachment,” and

thus, to the extent that the plain meaning of Section 1103

is susceptible to different readings, the reading with nar-

rower effect is to be preferred. (Supp. Mem. of Yuen and

Leung at 4.)

This argument is wrong. The cases relied upon by the

Intervenors are predicated either on the equity powers

inherent in the federal courts, see, e.g, Rosen v. Cascade

Int’l, Inc., 21 F.3d 1520, 1527-30 (11th Cir. 1994), or on

California law, see, e.g., Utley v. United States, 404 F.2d

746, 752 (9th Cir. 1962). Even if Section 1103 effected

a seizure, the Intervenors’ attempt to import these stan-

dards into Section 1103 is flatly inconsistent with Rule

64’s mandate that in such seizures of property “any

existing statute of the United States governs to the extent

to which itis applicable.” Fed. R. Civ. P. 64; see aiso

Reebok Int’! v. Marnatech Enters., 970 F.2d 552, 558-59

(9th Cir. 1992); S.E.C. v. Unifund SAL, 910 F.2d 1028,

1041 (2d Cir. 1990) (where SEC sought an asset freeze,

holding that issuance need not be tested against state law

standards and that remedy may be granted, even in cir-

cumstances where the elements required to support tra-

ditional injunction have not been established).

Moreover, as the Commission correctly points out, the

Supreme Court has consistently stated that the Securities

and Exchange Act of 1934 (“34 Acts”), of which Sec-

tion 1103 is a part,’ should be construed “not technically

and restrictively, but flexibly to effectuate its remedial

; Section 1103 is an amendment to Section 21C(c) of the Secu-

rities Exchange Act of 1934.

lla

purposes.” S.E.C. v. Zandford, 535 U.S. 813, 819 (2002)

(quotation marks and citations omitted).

Furthermore, Section 1103’s legislative history sug-

gests that the section should be read broadly to satisfy

Congressional purposes.* Section 1103 was initially

introduced as Amendment No. 4188 by Senator Trent

Lott. 148 Cong. Rec. $6542 (2002). In the debate which

ensued after Amenament No. 4188’s introduction, dif-

ferent Senators focused on various possible abuses that

Section 1103 was meant to prevent, and none seemed to

believe that Section 1103 should be limited to prevent

only a'particular type of abuse:

Section 3 freezes payments of potential wrongdoers.

This section would allow the SEC, during an inves-

tigation, to seek an order in Federal court imposing

a 45-day freeze on extraordinary payments to cor-

porate executives. Again, this year we have seen

just that sort of thing happening. While an investi-

gation is underway, basically rewards were given to

these corporate executives. While it would require

a court order, there would be this 45-day freeze. The

targeted payments would be placed in escrow,

ensuring that corporate assets are not improperly

taken from [sic] an executive’s personal bene-

fit. . . . We have also seen that there are some

cases where the law had some loopholes or where it

was not timely or where it was not strong enough.

One example, of course, is where there has been

shredding. Another example is the very bad image

of corporate executives taking increased payments,

4 Where, as here, the text of the statute is unclear or inade-

quate, and there is no case law on point, resort to legislative history

in ascertaining Congressional intent is proper. Ram v. I.N.S., 243 F.3d

510, SIS (9th Cir. 2001).

12a

extraordinary payments, while they are being inves-

tigated. You can’t have that sort of thing.

Id. at S6545 (statement of Sen. Lott). Nothing in Sena-

tor Lott's statement suggested that Section 1103 was

meant to prevent only those increased payments 1) that

are made without corporate approval or 2) that are not

pursuant to an existing legal obligation. Senator Dayton

understood the provision to be a “45-day freeze on cor-

porate executives’ extraordinary income based upon the

SEC being able to hold that in escrow and freeze it for

45 days while they look at it.” /d. at. $6546. Likewise,

Senator Hatch also outlined the provision in broad terms:

“In particular, these provisions would enable to [sic]

SEC to freeze improper payments by obtaining a federal

court order. The order, which could last for 45 days and

be extended upon a showing of good cause, would freeze

extraordinary payments to corporate executives and

require that such payments be escrowed.” /d. at S6550.

Finally, statements in the House also suggest a flexi-

ble and broad scope:

Under this legislation, top executives will not be

allowed to pilfer the assets of the company by giv-

ing themselves huge bonuses and other extraordi-

nary payments if the company is subject to an [sic]

SEC investigation. Their pay and benefits are frozen

when the investigation starts. Americans will know

that corporate officers will no longer be able to mis-

use the bankruptcy laws to discharge liabilities

based upon securities fraud, and the honest brokers

of corporate America will know that those who

abuse the law and tarnish corporate America’s rep-

utation will go to jail for a long, long time.

148 Cong. Rec. H4685 (2002) (statement of Rep.

Sensenbrenner).

13a

These statements, taken together with the Supreme

Court’s guidance that the ‘34 Act is to be liberally

applied, convince the Court that Section 1103 should be

applied in a flexible and broad manner. The fact that cor-

porate approval was granted or that the payment is paid

in part because of a prior legal obligation, while relevant

to the inquiry, cannot automatically shelter such payment

from Section 1103's reach.

Nor can there be one litmus test that determines what

is or is not extraordinary payment; rather, Congress

intended for the courts to look to a variety of factors to

determine whether a payment is extraordinary. These

factors may include, among others, the size of the pay-

ment, the circumstances under which a payment is made,

and the purpose of the payment. Given the flexible

approach taken by Congress, the determination of what

constitutes an extraordinary payment must be determined

on a case by case basis, and the Court should not

endeavor to set forth guidelines for determining all

future cases. As discussed below however, whaiever the

meandering boundaries of Section 1103 may be, the

Court finds that the payments at issue fall squarely

within them.

B. Void for Vagueness

As an alternative to the narrow interpretation they

offer, the Intervenors also assert that Section 1103 is

unconstitutionally vague. The due process clauses of the

Fifth and Fourteenth Amendment guarantee individuals

the right to fair notice of whether, their conduct is pro-

hibited by law.° See Colautti v. Franklin, 439 U.S. 379,

. Since Section 1103 is part of a federal statute, the vagueness

challenge is properly analyzed under the due process clause of the

Fifth Amendment. At least with respect to a vagueness challenge,

l4a

390-91 (1979). Although only constructive rather than

actual notice is required, individuals must be given a

reasonable opportunity to discern whether their conduct

is proscribed so they can choose whether or not to com-

ply with the law. Giaccio v. Pennsylvania, 382 U.S. 399,

402-03 (1966). The doctrine, by requiring explicit stan-

dards for those who apply them, also serves to prevent

impermissible delegation of basic policy matters to “to

policemen, judges, and juries for resolution on an ad hoc

and subjective basis, with the attendant dangers of arbi-

trary and discriminatory application.” Grayned v. City of

Rockford, 408 U.S. 104, 108-09 (1972); Papachristou v.

City of Jacksonville, 405 U.S. 156, 162 (1972). Of

course, statutes need not be written with “mathematical”

precision, nor can they be so written. Grayned, 408 U.S.

at 110. :

A challenged statute enjoys a presumption of consti-

tutionality, see Baggett v. Bullitt, 377 U.S. 360, 372

(1964), and where two alternative readings are possible,

the reading that avoids constitutional invalidity is to be

preferred, see Gomez v. United States, 490 U.S. 858, 864

(1989); Crowell v. Benson, 285 U.S. 22, 62 (1932).

The degree of specificity required of statutes varies

depending on the subject matter being regulated and the

punishments that may be meted out to violators. In this

case, Section 1103 is not backed with the force of crim-

inal sanctions and is thus subject to less exacting review.

See Forbes v. Napolitano, 236 F.3d 100%, 1011 (9th Cir.

however, the due process rights and requirements under the Four-

teenth and Fifth Amendments are co-extensive, and the courts use the

standards and analysis under both Amendments interchangeably. See,

e.q., United States v. Griefen, 200 F.3d 1256, 1266 (9th Cir. 2000) (in

a case analyzing vagueness of a federal statute, citing Supreme Court

precedent analyzing a state law, Kolender v. Lawson, 461 U.S. 352

(1983)).

15a

20009) (stating that where statute provides for criminal

penalties, it is subject to more exacting review) (citing

Kolender v. Lawson, 461 U.S. 352, 357 (1983)).

Also, since Section 1103 implicates no First Amend-

ment rights, the law requires less specificity of it. Smith

v. Goguen, 415 U.S. 566, 573 (1914) (“Where a statute's

literal scope . . . is capable of reaching expression shel-

tered by the First Amendment, the doctrine, demands a

greater degree of specificity than in other contexts.”).

Moreover, where no First Amendment rights are at stake,

facial challenges are not appropriate; rather the section

“must be examined in the light of the facts of the case at

hand.” United States v. Mazurie, 419 U.S. 544, 550

(1974) (citation omitted). See also United States v.

Purdy, 264 F.3d 809, 811 (9th Cir. 2001) (“Where, as

here, a statute is challenged as unconstitutionally vague

in a cause of action not involving the First Amendment,

we do not consider whether the statute is unconstitu-

tional on its face.”) (citation omitted).

It is significant that Section 1103 is primarily targeted

to acts committed by public corporations. “In the field of

regulatory statutes governing business activities, where

the acts limited are in a narrow category, greater leeway

is allowed.” Papachristou, 405 U.S. at 162 (citations

omitted); Village of Hoffman Estates v. Flipside, Hoff-

man Estates, 455 U.S. 489, 498 (1982). Moreover, when

evaluating economic legislation, the question is not

whether a provision is vague as to the general public;

rather, the question is whether a provision is vague to a

“business person of ordinary intelligence.” Hoffman, 455

U.S. at 501. Indeed, since Section 1103 applies only to

issuers required to file periodic reports under the ‘34

Act, Section 1103's target audience likely has a higher

level of sophistication than even the ordinary business

person.

l6a

Finally, the nature of Section 1103's deprivation is not

particularly severe or unforgiving. See id. at 498 (“The

degree of vagueness that the Constitution tolerates. . .

depends in part on the nature of the enactment.”). Sec-

tion 1103 empowers the SEC only to freeze assets tem-

porarily, not to assume permanent title over those assets.

A defendant loses legal title to those assets only if the

SEC prevails in a separate action to enforce the Federal

securities laws.

For those persons whose payments are potentially sub-

ject to a freeze pursuant to Section 1103, there should be

little difficulty in understanding the acts that Section

1103 seeks to prevent. In Section 1103, Congress is

clearly targeting the disbursement of certain payments

while an investigation by the SEC is underway. The

number of forms these payments may assume is con-

strained only by the boundless imaginations of issuers,

executives, and their lawyers; however, the Court thinks

it is clear what the statute “as a whole prohibits.”°

Grayned, 104 U.S. at 110.

This is not a case where “no standard of conduct is

specified at all” in the statute, but is instead a case where

the statute “requires a person to conform his conduct to

an imprecise but comprehensible normative standard.”

Smith, 415 U.S. at 578. (quoting Coates v. City of Cin-

cinatti, 402 U.S. 611, 614 (1971)). Especially consider-

ing that Section 1103 was intended to be used after the

blends into the ordinary. Such potential occurrences do not change the

result here. Because Section 1103 is not vague in characterizing the

payments at issue to the Intervenors as extraordinary, the Court need

not consider whether any other application of Section 1103 might be

vague and unconstitutional. See Parker v. Levy, 417 U.S. 733, 756

(1974) (“One to whose conduct a statute clearly applies may not suc-

cessfully challenge it for vagueness.”).

17a

Commission has begun investigating a person or issuer

for violations of the securities laws, to say that Congress

must specifically delineate what an extraordinary pay-

ment is would be to vitiate the core purposes of Section

1103 by creating a situation where “too easy opportuni-

ties are afforded to nullify the purposes of the legisla-

tion.” Winters v. New York, 333 U.S. 507, 525 (1948)

(Frankfurter, J., dissenting). For these reasons, the Court

finds that Section 1103 is not unconstitutionally vague.’

7 In Jordan v. DeGeorge, the Supreme Court reviewed various

terms that have withstood void for vagueness challenges:

The phrase “crime involving moral turpitude” presents no

greater uncertainty or difficulty than language found in many

other statutes repeatedly sanctioned by the Court. The Sher-

man Act provides the most obvious example, “restraint of

trade” as construed to mean “unreasonable or undue restraint

of trade,” Nash vy. United States, 229 U.S. 373 (1913). Com-

pare other statutory language which has survived attack

under the vagueness doctrine in this Court: “in excess of the

number of employees needed by such licensee to perform

actual services,” United States v. Petrillo, 332 U.S. 1 (1947);

“any offensive, derisive or annoying word,” Chaplinsky v.

New Hampshire, 315 U.S. 568 (1942); “connected with or

related to the national! defense,” Gorin v. United States, 312

U.S. 19 (1941); “psychopathic personality,” Minnesota v.

Probate Court, 309 U.S. 270 (1940); “wilfully overvalues

any security,” Kay v. United States, 303 U.S. 1 (1938); “fair

and open competition,” Old Dearborn Co. v. Seagram Corp.,

299 U.S. 183 (1936); “reasonable variations shall be per-

mitted, “United States v. Shreveport Grain & Elevator Co.,

287 U.S. 77 (1932); “unreasonable waste of natural gas,”

Bandini Petroleum Co. v. Superior Court, 284 U.S. 8 (1931);

“political purposes,” United States v. Wurzbach, 280 U.S. 396

(1930); “range -usually occupied by any cattle grower,”

Omaechevarria v. idaho, 246 U.S. 343 (1918).

Jordan v. De George, 341 U.S. 223, 231-32 n.15 (1951). These cases and

subsequent cases suggest that the party seeking to invalidate a statute on

grounds of vagueness bears a high burden.

18a

C. Are the Payments Extraordinary?

The Intervenors contend that the Cash Payments have

two components, “Unpaid Accrued Items” and a “ter-

mination fee.” The Court addresses each of these com-

ponents in turn.

1. Unpaid Accrued Items

As to the Unpaid Accrued Items, the Intervenors assert

that this amount really comprises three parts: 1) accrued

unused vacation pay; 2) accrued unpaid salary; and 3)

accrued unpaid bonuses, for 2001.

Yuen Leung

Vacation $1,921,870 $474,406

Salary $1,028,489 $191,231

Bonuses $4,080,418 $544,058

TOTAL $7,030,777 | $1,209,695

These breakdowns are not reflected in the Termination

Agreements themselves, but are the apportionments

agreed upon by Gemstar and the Intervenors in the

course of their negotiations.

Examining these Unpaid Accrued Items, the Court finds

that two factors make this portion of the payments extraor-

dinary. First, the circumstances under which the payments

were made are extraordinary. The payments were negoti-

ated over a five month period and involved the participa-

tion of the Gemstar Board, a Special Committee, and

outside consultants. The Board, the Special Committee,

and the Intervenors were each represented by separate sets

of counsel. Additionally, the Termination Agreements were

executed as part of the process of removing both Leung

and Yuen from their positions as Gemstar officers. After

the restructing was effected, Gemstar saw fit to report the

19a

terms of the agreements as an “Item 5” in a Form 8-K fii-

ing.* In short, the manner in which the Termination Agree-

ments were negotiated and the changes that they effected

indicate that the Termination Agreements and the pay-

ments negotiated within them are anything but ordinary.

Second, the payments are large in amount. Yuen would

receive nearly $3 million for accrued vacation and salary

pay while Leung would receive over $600,000. The

$4,080,418 and $544,058 allegedly attributable to

bonuses payable to Yuen and Leung, respectively, also

appear to be extraordinarily large.°

Notwithstanding the unusual circumstances and the

size of the payments, Intervenors nevertheless contend

that the amounts attributable to Unpaid Accrued Items

are not extraordinary. Initially, they argue that the unused

vacation pay, accrued unpaid salary, and accrued unpaid

bonuses all derive from prior legal obligations, and thus

cannot be extraordinary. The Court finds the Intervenors’

argument that prior legal obligations are automatically’®

§ Item 5 provides, in pertinent part:

The registrani may, at its option, report under this Item any

events, with respect to which information is not otherwise

calied for by this form, that the registrant deems of impor-

tance to security holders.

Form 8-K, item 5 (emphasis added).

° As well, to the extent that the bonuses are keyed to Gem-

star's financial performance—the accuracy of which is alleged to

have been compromised by the Intervenors—the Court must view the

payments with a skeptical eye.

The Court is not suggesting that the pre-existing nature of an

obligation should never be taken into account—only that it does not

automatically exclude such payments from Section !103. For exam-

ple, the fact that a payment to an officer was a repayment for an ear-

lier persona) loan extended by the officer would be one factor that

would influence a Section 1103 decision.

20a

outside the scope of Section 1103 to be inconsistent with

both the plain meaning and the purpose of the statute.

See supra. Moreover, the Intervenors’ reading of Section

1103 would create an exception that would consume the

rule. If pre-existing legal obligations are by definition

not extraordinary, corporate executives could simply

negotiate payments ahead of time, and the Commission

would be unable to stop such payments.

The Intervenors also contend that the existing nature

of the obligations should be taken into account when

evaluating whether the payments are extraordinarily

large. They argue that if these payments are based on

former obligations, then they are by definition no larger

than what the Intervenors had been paid in past years.

One significant problem with this argument is that the

Termination Agreements themselves do not make the

apportionments and characterizations set forth by the

Intervenors in these proceedings. The actual agreement

States that the Cash Payments are for “full and complete

settlement for all unpaid salary, bonuses and unused

vacation days due under the Current Employment Agree-

ment or otherwise.” (Arkin Decl. Ex. A at 2 (Yuen.), Ex.

B at 2 (Leung).) While Gemstar and the Intervenors ulti-

mately came to an agreement as to the amounts

attributable to unpaid salary, bonuses, and unused vaca-

tion days, Gemstar’s position is that at the time the Ter-

mination Agreements were negotiated, everything about

the underlying obligations, including which particular

employment agreement governed, was in dispute. It is

thus unclear as to how much, if any, of the amounts at

issue were actually derived from prior legal obligations.

In any event, other factors present in this case such as

the manner in which the Termination Agreements were

negotiated, and the circumstances surrounding the exe-

cution of those agreements, suggest that the Unpaid

2la

Accrued Items would be extraordinary, regardless of -

whether it was partially derived from prior obligations.

The Intervenors also argue that accrued vacation pay

cannot be an extraordinary payment because under appli-

cable California law, the “right to vacation pay is non-

forfeitable and such pay will be paid to the employee on

the termination of his employment for any reason.”

Evans v. Unemployment Ins. Appeals Bd., 39 Cal.3d 398,

414 (1985); see also Suastez v. Plastic Dress-Up Co., 31

Cal.3d 774 (1982).

Even aside from the obvious supremacy clause prob-

lems raised by the position, see U.S. Const. art. VI, this

reliance-on Evans and Saustez is misplaced. Evans and

Saustez deal with the issue of whether accrued vacation

pay may be forfeited, not with whether the vacation pay

may be withheld to offset some other liability. In

Saustez, for example, the court held that an employee's

vacation pay “vested” as it was earned, such that a sub-

sequent event (e.g., not reaching an anniversary of

employment) could not act to divest the employee of that

accrued vacation pay. Saustez, 31 Cal.3d at 780-84. The

Evans court held that accrued vacation paid after an

employee ceases working cannot be offset against pen-

sion payments. Evans, 39 Cal.3d at 414-16. Both cases

relied on the principle that once earned, vacation pay

could not, either directly or indirectly, be unearned.

Application of Section 1103 would not contradict the

principle set forth in Saustez and Evans. To begin with,

Section 1103 results in a temporary deprivation, not a

permanent deprivation, usually associated with a “for-

feiture.” More importantly, an injunction under Section

1103 would say nothing about whether the vacation pay

had been accrued; it would only speak as to whether

vacation pay, if accrued, could be used to satisfy a

potential judgment. That is, even if Yuen and Leung are

22a

adjudged to be legally entitled to their accrued vacation

pay, nothing would prevent this Court from using those

funds to satisfy a judgment. A contrary interpretation

would necessarily lead to the absurd result that accrued

vacation pay, whether in the hands of the employer or in

the hands of the employee, is inviolable and can never

be used to satisfy a judgment.

2. Termination Fee

The second portion of the Cash Payments is what the

Termination Agreements label “termination fee.” Again,

neither Gemstar nor the Intervenors provide a satisfac-

tory explanation as to the basis of that fee. In any event,

other factors present in this case such as the manner in

which the Termination Agreements were negotiated, and

the circumstances surrounding the execution of those

agreements indicate that the termination fees are exactly

the type of payments that the drafters of Section 1103

sought to enjoin.

V. Conclusion

For the foregoing reasons, the Court finds that the

Cash Payments at issue are extraordinary payments sub-

ject to Section 1103 and shall be placed in escrow for 45

days pursuant to that provision.

Dated: June 20, 2003

WM, MATTHEW BYRNE, JR.

Honorable Wm. Matthew Byrne, Jr.

United States District Judge

23a

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 03-56129

Argued and Submitted January 7, 2004

Filed May 12, 2004

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

HENRY C. YUEN; ELSIE M. LEUNG,

Intervenors-Appellants,

—Y

GEMSTAR-TV GUIDE INTERNATIONAL, INC.,

Defendant.

Securities and Exchange Commission (SEC) sought to

continue, for duration of pending fraud action against

corporation’s former officers, temporary escrow of ter-

mination payments made to officers by corporation. The

United States District Court for the Central District of

California, William Matthew Byrne, J., granted SEC’s

application, and officers sought interlocutory appeal.

24a

The Court of Appeals, Bea, Circuit Judge, held that:

(1) Court of Appeals had jurisdiction over interlocu-

tory appeal, and

(2) as a matter of first impression, District Court’s

determination that termination payments constituted

“extraordinary payments” under Sarbanes-Oxley Act,

warranting escrow, required initial determination of what

would constitute “ordinary” payments in same or simi-

lar circumstances.

Vacated and remanded.

Trott, Circuit Judge, filed dissenting opinion.

Michelle A. Rice, Stanley S. Arkin, Arkin Kaplan

LLP, New York, NY, for the intervenors-appellants.

Richard M. Humes, Thomas J. Karr, Securities and

Exchange Commission, Washington, DC, for the appli-

cant-appellee.

Sean T. Prosser, Kimberly S. Greer, Fish & Richard-

son P.C., San Diego, CA, for the defendant.

Appeal from the United States District Court for the

Central District of California; Wm. Matthew Byrne, Jr.,

District Judge, Presiding. D.C. No. CV-03-03124-MRP.

25a

Before: TROTT, RAWLINSON, and BEA, Circuit

Judges.

BEA, Circuit Judge:

We decide a question of first impression: whether under

the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”),

15 U.S.C. § 78u-3 (“Section 1103”), certain termination

payments to high-level corporate officials are “extraor-

dinary payments,” subject to involuntary retention in an

escrow account compelled by court order. Because there

was no evidence as to what would be an ordinary pay-

ment under comparable circumstances, we conclude that

the district court erroneously determined certain pay-

ments proposed to be made by Defendant Gemstar-TV

Guide International Inc. (“Gemstar”) to Intervenors-

Appellants Yuen and Leung (hereafter Appellants) were

“extraordinary payments” within the meaning of section

1103 of Sarbanes-Oxley. We vacate the district court's

order and remand for further proceedings consistent with

this opinion.

In view of our ruling, we do not decide whether sec-

tion 1103 of Sarbanes-Oxley is unconstitutionally vague,

or operates in an unconstitutionally retroactive manner.

FACTS

On August 14, 2002, Gemstar, a Delaware corpora-

tion, announced that it was auditing the operations of its

Technology and Licensing Sector and Interactive Plat-

26a

form Sector after finding that 2001 revenues and related

amortization for these sectors had been overstated by

some $40 million. On November 7, 2002, Gemstar

announced plans to restructure its management and cor-

porate governance.

As part of the restructuring plans, Gemstar entered

into negotiations for termination agreements with its

Chief Executive Officer (“CEO”), Dr. Henry Yuen, and

its Chief Operating Officer (“COO”) and Chief Financial

Officer (“CFO”), Elsie Ma Leung. Dr. Yuen’s termina-

tion agreement provided for a “termination fee” of

$22,452,640, an additional $7,030,778 in unpaid salary,

bonuses, and unused vacation time, and 5,274,519 shares

of restricted stock. Ms. Leung was to receive a termi-

nation fee of $6,957,953, an additional $1,209,695 in

unpaid salary, bonuses, and unused vacation time,

1,126,504 shares of common stock, and 353,680 shares

of restricted stock. Additionally, Yuen agreed to serve as

the non-executive chairman of the board and Leung

agreed to a position as an employee in the international

business department. The arrangements for Yuen’s and

Leung’s compensation are collectively referred to as the

Restructuring Payments.

On October 15, 2002, before the Yuen and Leung ter-

mination agreements were in final form, attorneys for

the Securities and Exchange Commission (“SEC”) met

with counsel for Gemstar, Yuen, and Leung, and requested

that the Restructuring Payments be placed in escrow. On

October 17, 2002, the SEC ordered a formal investiga-

tion into the announced overvaluation of the revenue and

profits from some of Gemstar’s sectors. On October 23,

2002, Yuen and Leung notified the SEC that they

declined to submit to a voluntary escrow.

On October 28, 2002, as part of its investigation, the

SEC issued testimonial subpoenas to Gemstar’s Board of

27a

Directors. Yuen and Leung contend that in response to

the subpoenas Gemstar sent a draft escrow agreement for

the Restructuring Payments to the SEC on November 6,

2002. Hours before the restructuring agreements were to

be executed on November 7, 2002, Gemstar informed

Yuen and Leung’s attorney that the Restructuring Pay-

ments were to be placed in escrow for six months, and

that such escrow provision was non-negotiable. Yuen

and Leung acceded to the six-month escrow in “side let-

ters” executed that day.

On March 31, 2003, Appellants Yuen and Leung filed

a complaint in district court against the SEC, objecting

to the escrow, seeking injunctive and declaratory relief,

and requesting a temporary restraining order to unblock

and dissolve the escrow to allow the restructuring pay-

ments to be made. According to a declaration by Appel-

lants’ counsel, “Gemstar is contractually obligated to

release the Restructuring Payments to Plaintiffs on May

6, 2003.”- Appellants’ counsel also maintained that the

escrow impermissibly interfered with Yuen’s and Leung’s

property rights to receive the Restructuring Payments,

and that the escrowed payments did not constitute

“extraordinary payments” under section 1103 of Sar-

banes-Oxley. Following an April 21, 2003 hearing, the

district court denied Appellants’ request for a prelimi-

Nary injunction, finding that the side letters constituted

consent by Yuen and Leung to the initial escrow, set to

expire May 6, 2003. The district court did not address

whether the restructuring payments qualified as “extraor-

dinary payments” under section 1103.

On May 5, 2003, the SEC filed an application with the

district court to place the Restructuring Payments in a

45-day escrow account pursuant to Section 1103. In a

declaration filed with the application, an attorney for the

SEC described the ongoing investigation of Gemstar.

28a

The district court sua sponte ordered the parties to main-

tain the status quo and requested additional briefing. A

hearing was held on May 9, 2003. On May 12, 2003, the

district court entered an order granting the SEC’s appli-

cation to place the Restructuring Payments in escrow

and directed the parties to prepare a joint order to effect

such escrow. Appellants filed a motion to reconsider the

escrow order on May 22, 2003. After a status conference

on May 29, 2003, the court denied Appellants’ motion to

reconsider and entered the joint order of escrow. The

order specifically described the disputed funds as

“extraordinary payments” subject to section 1103, and

directed that they be held in interest-bearing accounts

for 45 days.!

On June 19, 2003, the SEC commenced a civil action

in the Central District of California, No. 03-CV-4376,

alleging Yuen and Leung had fraudulently inflated Gem-

star’s revenue reports by $223 million, in violation of

various sections of the Securities Acts of 1933 and 1934.

The SEC also filed an application to have the escrow

continued indefinitely for the duration of the action

against Yuen and Leung.

On June 20, 2003, on the government’s ex parte

motion, the district court extended the temporary escrow

for an additional 45 days. The district court reiterated its

finding that the payments were “extraordinary pay-

ments” within the meaning of section 1103, and rejected

Appellants’ contentions that the statute was unconsti-

tutionally vague. On June 24, 2003, the district court

entered an order directing the maintenance of the escrow

for the duration of the SEC’s civil action.

i The record does not indicate location of the escrow or the

interest rate applied to the escrow accounts.

29a

Yuen and Leung filed a notice of interlocutory appeal

on July 2, 2003.* Appellants contend section 1103(1) is

void for vagueness; (2) effects an unreasonable seizure

of their property in violation of the Fourth Amendment;

(3) does not retroactively apply to the payments in this

case that had already been contracted to be paid or had

already been made prior to the enactment of the statute;

and (4) does not apply to the disputed payments, which

are not “extraordinary payments” for the purposes of

Sarbanes-Oxley.’

Ill

SECTION 1103

Section 1103 of the Sarbanes-Oxley Act gives the SEC

authority to ensure that assets of an issuer of securities‘

2 The notice of appeal specified that Yuen and Leung were

appealing only the temporary orders of May 12, 2003, May 29, 2003,

and June 20, 2003. The notice of appeal did not include the district

court's currently operative order of June 24, 2003. We granted Yuen’s

and Leung's motion to amend their notice of appeal to include the

June 24, 2003 order.

3” A this time, only one other case involving an asset freeze

under Sarbanes-Oxley had been published, See SEC v. Healthsouth

Corp., 261 F.Supp.2d 1298 (N.D.Ala.2003). Healthsouth does not

specifically address what constitutes sufficient evidence of “extraor-

dinary payments” under section 1103. The district court in Health-

south construed the SEC’s escrow request as an equitable motion for

preliminary injunction and rejected the imposition of an escrow on the

ground that the SEC could not show likely success on the merits. The

court concluded that “no other basis for granting the relief requested

by the SEC exists.” Healthsouth Corp., 261 F.Supp.2d at 1317.

. An issuer is defined as “any person who issues or proposes

to issue any security. . .” 15 U.S.C. § 78c(a)(8). It is undisputed that

Gemstar was, at all times relevant, an issuer of securities within the

meaning of Sarbanes-Oxley.

30a

which have been fraudulently obtained are not dissipated

during the investigation and litigation of securities fraud

cases. See 15 U.S.C. § 78u-3 (2002). Specifically, sec-

tion 1103 provides that:

[w]henever, during the course of a lawful investi-

gation involving possible violations of the Federal

securities laws by an issuer of publicly traded secu-

rities or any of its directors, officers, partners, con-

trolling persons, agents, or employees, it shall appear

to the Commission that it is likely that the issuer

will make extraordinary payments (whether com-

pensation or otherwise) to any of the foregoing per-

sons, the Commission may petition a Federal district

court for a temporary order requiring the issuer to

escrow, subject to court supervision, those payments

in an interest-bearing account for 45 days.

15 U.S.C. § 78u-3(c)(3)(A)(i). Such an order can be

secured only with notice and after a hearing, unless

“impracticable or contrary to the public interest.” 15

U.S.C. § 78u-3(c)(3)(A)(ii).

Section 1103 authorizes one additional 45-day exten-

sion of the temporary escrow order on a showing of good

cause. 15 U.S.C. § 78u-3(c)(3)(A)(iv). However, once

the subject of an investigation is charged with a securi-

ties violation by the commencement of a civil action,

“the order shall remain in effect, subject to court

approval, until the conclusion of any legal proceedings

related thereto, and the affected issuer or other person,

shall have the right to petition the court for review of the

order.” 15 U.S.C. § 78u-3(c)(3)(B)(i).

Sarbanes-Oxley does not define “extraordinary pay-

ments.” The SEC is empowered to adopt regulations for

the implementation of Sarbanes-Oxley. See 15 U.S.C.

§78w. To date the SEC has not done so. Neither

3la

Congress nor the SEC has given any indication as to the

meaning of the words “extraordinary payments.”

STANDARD OF REVIEW

The district court’s escrow order is reviewed for abuse

of discretion. See United States v. Cal-Almond, Inc., 102

F.3d 999, 1001 (9th Cir.1996) (affirming denial of

motion to impose escrow). The district court abuses its

discretion when it applies incorrect legal standards or

makes clearly erroneous findings of fact. Jd. at 1003.

The district court’s interpretation and construction of a

federal statute are questions of law reviewed de novo.

SEC v. McCarthy, 322 F.3d 650, 654 (9th Cir.2003).

ANALYSIS

1. Jurisdiction

As a threshold issue, the SEC has argued that this

appeal is moot because the orders specified in the notice

of appeal are no longer in effect. Mootness is grounded

in the Constitution’s jurisdictional requirement that fed-

eral courts can hear only cases involving an actual case

or controversy; mootness preempts any determination on

the merits. See Cammermeyer v. Perry, 97 F.3d 1235,

1237 (9th Cir.1996). Mootness turns on “whether there

exists a present controversy as to which effective relief

can be granted.” Village of Gambell v. Babbitt, 999 F.2d

403, 406 (9th Cir.1993) (citation and internal quotation

marks omitted). As noted in footnote 2 above, because

the court granted Appellants’ motion to amend its notice

of appeal to include the district court's order of June 24,

32a

2003, which extended the escrow until the completion of

the underlying litigation, the SEC’s mootness challenge

fails.

The parties are in agreement that this court has juris-

diction pursuant to 28 U.S.C. § 1292(a)(1). They char-

acterize the escrow order entered by the district court as

an appealable Rule 65 preliminary injunction rather than

a non-appealable provisional remedy under Rule 64. See

Fed.R.Civ.P. 64, 65. This issue is not free from doubt,

for the escrow order was entered as an exercise of an

explicit statutory provision, rather than grounded on any

traditional equitable considerations such as are normally

required for a preliminary injunction. See, e.g., South-

west Voter Registration Educ. Project v. Shelley, 344

F.3d 914, 917-18 (9th Cir.2003) (en banc). We are also

mindful that jurisdiction of this court cannot be imposed

simply by agreement of the parties. See Owen Equip. &

Erection Co. v. Kroger, 437 U.S. 365, 377, n. 21, 98

S.Ct. 2396, 57 L.Ed.2d 274 (1978).

However, in the circumstances of this case, we find

that the district court’s order is analogous to a prelimi-

nary injunction and we have iurisdiction under section

1292(a). See Cal-Almond, Inc., 102 F.3d at 1001 (exer-

cising section 1292(a)(1) jurisdiction and affirming dis-

trict court’s order placing contested advertising and

promotion assessments in escrow).

2. Statutory Construction

This appeal presents issues of statutory construction

of the term “extraordinary payments.” In its June 20,

2003 order, the district court correctly noted, “ ‘extraor-

dinary’ in common parlance essentially means ‘out of

the ordinary’ or ‘unusual.’ Unusual, of course, is a com-

parative adjective that has meaning only in relation to

what is ‘usual.’ ” District Court’s June 20, 2003 Mem-

33a

randum of Decision at 9 (emphasis added).° This obser-

vation has value only if properly applied. Unfortunately,

it was not. 3

“It would seem that, ordinarily, one could determine

what was ‘extraordinary’ and ‘abnormal,’ or not normal,

only by comparison with what was established to be nor-

mal.” Bjelland & Co., Inc. v. United States, 45 Cust. Ct.

435, 442 (Cust.Ct., Jul. 26, 1960) (on appeal for reap-

praisement of imported goods, affirming customs

appraiser’s valuation of good exchanged in the “ordinary

course of trade”). Here, plaintiff SEC limited its proof in

its section 1103 application to an investigating attorney’s

affidavit (Cebeci Declaration, Excerpts of Record at 111-

58). The affidavit incontestably established the first ele-

ment of section 1103: that an SEC investigation was

under way. 15 U.S.C. § 78u-3(c)(3)(B)()).

However, the affidavit—and consequently the record

—is completely silent regarding what constituted usual

or ordinary payments upon termination of a CEO and

Chairman of the Board (Yuen) or COO and CFO (Leung)

under the same or similar circumstances to those exist-

ing at the time that Appellants ended their employment

with Gemstar. Absent any such proof, the district court

erroneously substituted two conclusory statements of

what was “extraordinary” without concomitant proof of

what was “ordinary,” and an SEC filing, required under

a standard different from that oi section 1103.

First, the district court found that the negotiation of

the termination agreements for Appellants was “extraor-

dinary” because of the various groups that participated

in the negotiations and because the negotiations occurred

> The district court correctly resorted to “common parlance” in

interpreting section 1103. United States v. Migi, 329 F.3d 1085, 1088

(9th Cir.2003).

34a

over a five-month period. Members of the Board of

Directors, officers of the corporation, and compensation

consultants, accountants, and attorneys for both sides

negotiated the restructuring agreements. Nothing in the

record suggests this extended negotiation constitutes a

deviation from the norm for corporate decision-making

of this type. While common experience of the district

court might help to determine what is the usual way to

negotiate the termination of a lawyer at a law firm or a

staff member of the court, common experiences of this

kind do not aid judgment in the circumstances of Appel-

lants’ termination at Gemstar.

As the declaration of Appellants’ counsel shows

(Excerpts of Record at 15-23), Gemstar-TV Guide was

the product of a merger between an off-shore company

founded by Appellants and TV Guide, a subsidiary of

News Corporation, a large telecommunications company.

The corporation’s earnings before interest, taxes, depre-

ciation and amortization were reported as $242.2 million

in the last nine months of 2000. Appellants presented

uncontradicted evidence that revenue-producing strate-

gies of Yuen and Leung differed, if not clashed, with

those of News Corp. Appellants were interested pri-

marily in raising revenue attributable to the corpora-

tion's sales, perhaps not coincidentally to raise their own

compensation, which was tied to revenue and profits.

The minority owners, Gemstar’s current management,

were in part interested in publicizing one of their sister

corporations through Gemstar’s operations, without pay-

ing Gemstar any advertising revenue. Such a strategy

would increase revenues for the sister corporation, but

not for Gemstar. As owners and officers in Gemstar,

Appellants would not share in the profits of the sister

corporation.

35a

In case Yuen or Leung were terminated “without

cause,” lengthy and complex employment agreements

governed their termination payments (Supplemental

Excerpts of Record at 79, 118). Yuen and Leung had

three different components for calculation of their

Annual Incentive Bonuses. Complex enough when based

on the company’s past performance, computations also

had to be done for future payments, with the consequent

and predictable squabbling over methods for projecting

future financial performance.

In view of Gemstar’s revenue structure, the conflict-

ing strategies, and the complex schemes for computation

of termination payments, it is not surprising that Gem-

star would require not only releases, but also represen-

tations and warranties from the departing employees.

Yet, for all the persons involved in the negotiations, not

one presented evidence before the district court that the

period or mechanics of the negotiations were out of the

ordinary in view of the circumstances. Nor, despite the

six-month period between commencement of the inves-

tigation (October 17, 2002) and the section 1103 hearing

(May 9, 2003), was any expert testimony prepared and

presented as to the habits and customs of the market-

place—what was “ordinary”—under the same or similar

circumstances.°®

The second factor on which the district court based its

finding that the proposed payments were “extraordinary

payments” was their size. See Memorandum of Decision

at 19. We agree that such sums are “extraordinary pay-

ments” in relation to what federal judges are paid. How-

6 This observation is not to be taken as a direction that, on

remand, expert testimony is either required or admissible. As always,

the choice of evidence is a matter for the parties. The admission of

expert evidence is, in the first instance, a matter for the district court.

See Fed.R.Evid. 702.

36a

ever, nothing in section 1103 constrains us to look

through such a prism. ;

There is no evidence in the record of what similarly

placed officers and board members of corporations of

similar revenues and worth are paid upon termination.

Such payments may be called “golden parachutes” or

“golden handshakes” in the press, but purple prose is not

enough to prove a statutory requirement in court. For

enforcement of the securities laws of the United States,

evidence of what is “usual” under the same or similar

circumstances is necessary to distinguish “extraordinary

payments” and to order their impoundment in an escrow

pursuant to section 1103.

Last, the district court found it significant that after

the termination contracts were finalized, defendant Gem-

star chose to report the terms in a Form 8-K filing. A

Form 8-K filing is required from an “issuer of securities

when substantial events occur. . .” Scherk v. Alberto-

Culver Co., 417 U.S. 506, 528 n. 6, 94 S.Ct. 2449, 41

L.Ed.2d 270 (1974). In this era of heightened corporate

vigilance, it is not surprising that Gemstar management

should: choose to make this report upon the termination

of the founders of the company, who were being paid

millions of dollars on departure in an amount approxi-

mating 15% of the previous year’s revenues. But, a dis-

cretionary corporate disclosure is not an admission that

the company has paid an “extraordinary” amount. In any

case, there was also no evidence of whether other

“issuers” had made similar reports for similar sums paid

to similarly departing upper management under the same

or similar circumstances. A “substantial event” may or

may not coincide with an “extraordinary payment.” Only

evidence of comparable events and circumstances can

tell us.

37a

Instead of objective evidence, what we have here is

the district court’s conjecture as to what would have

been “ordinary” or “usual” negotiations for termination

payments, conjecture as to what the size should have

been of such payments and conclusions drawn from fil-

ings made under different standards. The bases used by

the district court to judge the negotiations, the payments,

and the filing were “irreducibly subjective.” cf. Nufiez v.

San Diego, 114 F.3d 935, 943 (9th Cir. 1997) (consider-

ing vagueness challenge to loitering ordinance).

The district court did not need to rely on such sub-

jective bases. Legistation which uses relative adjectives

to proscribe activities is not unknown to the law. Statutes

and law prohibit “excessive” verdicts (CAL. CIV. PROC.

CODE § 657; Fed.R.Civ.P. 59) and sanction “unreason-

able” behavior (CAL. CIV. CODE § 1714; Restatement

(Second) of Torts, § 281). It is not beyond the judiciary’s

capacity to interpret and apply statutes which prohibit

“excessive” or “unreasonable” amounts. Trial and appel-

late courts are called upon to do so every day.’ As to

r Foi nstance, courts are often called upon to determine

whether awards of attorney's fees are “reasonable.” See Pennsylva-

nia v. Delaware Valley Citizens’ Council for Clean Air, 478 U.S. 546,

562, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986). “The fee applicant has

the burden of producing satisfactory evidence, in addition to the affi-

davits of its counsel, that the requested rates are in line with those

prevailing in the community for similar services of lawyers of rea-

sonably comparable skill and reputation.” Jordan v. Multnomah

County, 815 F.2d 1258, 1263 (9th Cir.1987) (citation omitted). The

proffered evidence of reasonable fees must constitute “more than a

mere ‘rough guess or initial approximation of the final award to be

made.” Pennsylvania, 478 U.S. at 564, 106 S.Ct. 3088.

Likewise, courts daily determine what are “extraordinary” fees in pro-

bate courts across the country. But, unlike the district court, those pro-

bate courts have elaborate statutes, rules of procedure and case authority

to guide them in determining what services by estate representatives are

38a

“excessive,” see State Farm Ins. Co. v. Campbell, 538

U.S. 408, 123 S.Ct. 1513, 1519-20, 155 L.Ed.2d 585

(2003). But in doing so, the courts are guided by pre-

cepts of proportionality and precedent.

Less often, courts are asked whether some remunera-

tion constitutes “extraordinary payment.” An example is

the line of cases which determines whether payments

made by a corporation to an employee is deductible from

gross income as an “ordinary and necessary” business

expense, or is an “extraordinary payment” disallowed as

a decuction. See, e.g., LabelGraphics, Inc. v. Commis-

sioner of Internal Revenue, 221 F.3d 1091, 1096 (9th

Cir.2000); Elliotts, Inc. v. Commissioner Internal Rev-

enue, 716 F.2d 1241, 1242 (9th Cir.1983).

Whether the adjective is “excessive,” “negligent” or

“extraordinary,” the cases in which those terms appear

use similar processes of judgment. The trier-of-fact

determines first what constitutes “adequate compensa-

tion,” “reasonable care,” or “customary or ordinary pay-

ments.” Such determinations require evidence which

consists of similar factual situations which can be com-

pared to the case at hand. If the case at hand falls outside

the bounds permitted in the comparison cases, that result

is deemed “excessive,” “negligent,” or “extraordinary.”

Absent a definition from Congress, “we interpret the

words using their ‘ordinary, contemporary, and common

meaning[s].’ ” United States v. Migi, 329 F.3d at 1088.

As is suggested in the district court’s order, the statute’s

qualifying term “extraordinary” necessarily implies

proof that the payments deviate from the ordinary. See

“ordinary” (and covered by the statutory fees) and what expenses are

“extraordinary,” conferring entitlement to added fees. See e.g. CAL.

PROB. CODE §§ 10801, 10811; CAL. COURT R. 7.702; in re Fulcher’s

Estate, 234 Cal.App.2d 710, 718, 44 Cal.Rptr. 861 (1965).

39a

Chalmers v. City of Los Angeles, 796 F.2d 1205, 1215

(9th Cir.1985) (holding that counsel’s success was not

extraordinary in light of the evidence presented at trial

and the non-complexity of the case). A reasonable inter-

pretation of the common meaning of section 1103

requires that the questioned payments be out of the ordi-

nary. Not mere government assertion, but proof by

admissible objective evidence of what is ordinary is nec-

essary to allow a court to determine what is extraordi-

nary. Such evidence was not adduced in the district

court; that absence requires the reversal of the judgment

of the district court.

CONCLUSION

For the reasons stated, Appellants’ appeal from the

June 24, 2003 escrow order ‘s granted, and that order is

vacated and remanded for proceedings consistent with

this opinion.

The clerk is directed to stay the mandate in this case

for 14 calendar days following the filing of this opinion,

should the government seek to file a renewed section

1103 request consistent with the standard of proof out-

lined in this opinion.

VACATED AND REMANDED; the Clerk shall stay the

mandate for 14 days after the filing of this opinion.

TROTT, Circuit Judge, dissenting:

The principal issue we decide in this case arises in a

distinctive statutory context that cannot be ignored or

slighted. Judge Wallace cogently explained this impor-

40a

tant context in SEC v. Rind, 991 F.2d 1486 (9th

Cir.1993):

When the [Securities and Exchange] Commission

sues to enforce the securities laws, it vindicates

public rights and furthers the public interest. The

public character of Commission action is reflected

in the introduction to the 1934 Act: “{T]ransactions

in securities . . . are affected with amational pub-

lic interest which makes it necessary to provide for

regulation and control of such transactions.” 15

U.S.C. § 78b. Congress entrusted the Commission

with the vital mission of ensuring the honesty and

fairness of the capital markets. “The entire purpose

and thrust of a [Commission] enforcement action is

to expeditiously safeguard the public interest by

enjoining securities violations. The claims asserted

in such an action stem from, and are colored by, the

intense public interest in [Commission] enforcement

of these laws.” SEC v. Asset Management Corp.,

456 F.Supp. 998, 1000 (S.D.Ind.1978).

Id. at 1491. In reversing the district court’s decision in

this case, I respectfully believe my colleagues have

unintentionally overlooked this context, a context which

makes the securities business one of the most highly reg-

ulated in our nation. In so doing, their opinion deals an

unwarranted blow to the public interest and to the Com-

mission's ability adequately to protect that broad inter-

est against the flood of corporate scandals of which

Congress and the public has become all too painfully

aware in the past few years. Thus, I dissent.

4la

The civil statute under our microscope, Section 1103,

15 U.S.C. § 78u-3(c)(3) is extraordinarily narrow, well

defined, and utterly clear. It comes into play only

(1) during the course of a Tevful investigation by

the Securities and Exchange Commission,

(2) involving possible violations of the federal secu-

rities law,

(3) committed by an issuer of publicly traded secu-

rities or any of its directors, officers, partners, con-

trolling persons, agents, or employees,

(4) whenever it shall appear to the Commission that

it is likely that the issuer will make extraordinary

payments to any of those named persons.

See 15 U.S.C. § 78u-3(c)(3). In other words, this law

covers only insiders making shadowy payments to insid-

ers.

Should this combination of events occur, then

Congress has empowered the Commission to petition a

federal district court for nothing more onerous than a

temporary Order requiring the issuer under scrutiny to

escrow those intended payments to insiders for no more

than 45 days in a very familiar device, an interest bear-

ing account—all of this subject to court supervision.

This protocol on its face bears all the hallmarks and

indicia of due process of law and protections for the

rights and interests of all concerned in securities matters,

including the public and investors. It is a civil law that

imposes no penalties, it does not implicate any consti-

tutionally-protected behavior, and it regulates only

issuers of publicly-traded securities. Its purpose is to

protect corporate funds and the investing public against

42a

theft, fraud, and dissipation. As the Commission under-

scores in its brief, (1) the initial escrow lasts for only 45

days with the possibility of a 45-day extension, see 15

U.S.C. § 78u-3(c)(3)(A)(D); (2) any person affected by

the escrow order has the right to petition the court for

relief, see 15 U.S.C. § 78u-3(c)(3)(B)(i); aad (3) if no

enforcement action is filed before the temporary escrow

expires, the “extraordinary payments involved” shall be

returned to the issuer or other affected person with

accrued interest, see 15 U.S.C. § 78u-3(c)(3)(A)(J),

(B)(i1). The issue brought to us, of course, arises from

Congress’ use of the word “extraordinary,” and the basic

claim is that this word is so vague that it renders this

entire process unlawful. I respectfully believe this claim

has no merit.

Faced with one giant corporate scandal after another,

Congress’ purpose in enacting this mild, temporary mea-

sure could not be clearer. One after another, stockhold-

ers and others have been left holding an empty bag after

corporate insiders engaged in fraud and other corporate

crimes at the ultimate expense of the corporation’s

shareholders and innocent employees. By the time the

authorities have been alerted to the fraud, it's too late,

the money has already disappeared into the pockets of

those who abused their fiduciary responsibilities and the

public trust, rendering the traditional remedies used by

the Commission to rectify such wrongs—disgorgement,

civil penalties, restitution, etc.—difficult if not impos-

sible to pursue. In the meanwhile, the disappearance of

such funds impoverishes and damages the issuer itself,

once again to the detriment of the shareholders and inno-

cent employees, whose pensions in many cases have

43a

been permanently thrashed. Ultimately, our nation is

the victim, as the public loses confidence in the stock

market.

Section 1103 was initially introduced as Amendment

No. 4188, by Senator Trent Lott. See 148 Cong. Rec.

$6542 (daily ed. July 10, 2002). In the debate that

ensued after Amendment No. 4188’s introduction, dif-

ferent senators focused on various possible abuses that

Section 1103 was meant to prevent:

Section 3 freezes payments of potential wrongdoers.

This section would allow the SEC, during an inves-

tigation, to seek an order in Federal court imposing

a 45-day freeze on extraordinary payments to cor-

porate executives. Again, this year we have seen

just that sort of thing happening. While an investi-

gation is underway, basically rewards were given to

those corporate executives. While it would require

a court order, there would be this 45-day freeze. The

targeted payments would be placed in escrow,

ensuring that corporate assets are not improperly

taken from [sic] an executive’s personal benefit....

We have also seen that there are some cases where

the law had some loopholes or where it was not

timely or where it was not strong enough. One

example, of course, is where there has been shred-

ding. Another example is the very bad image of cor-

porate executives taking increased payments,

extraordinary payments, while they are being inves-

tigated. You can’t have that sort of thing.

Id. (statement of Sen. Lott).

The House of Representatives shared these objectives:

Under this legislation, top executives will not be

allowed to pilfer the asseis of the company by giv-

ing themselves huge bonuses and other extraordi-

44a

nary payments if the company is subject to an [sic]

SEC investigation. Their pay and benefits are frozen

when the investigation starts. Americans will know

that corporate officers will no longer be able to mis-

use the bankruptcy laws to discharge liabilities

based upon securities fraud, and the honest brokers

of corporate America will know that those who

abuse the law and tarnish corporate America’s rep-

utation will go to jail for a long, long time.

148 Cong. Rec. H4685 (daily ed. July 16, 2002) (state-

ment of Rep. Sensenbrenner).

Itt

The facts and circumstances of this case provide a

textbook example of the problem. On April 1, 2002,

Gemstar filed its Form 10-K for the year 2001. The fil-

ing reported that $107.6 million it had previously

claimed as revenue had not actually been realized. Gem-

star revealed also that it had previously claimed as sub-

stantial revenue receipts from a single “nonmonetary

transaction” that was not properly booked. The fall-out

from these reevaluations? The next day, Gemstar’s stock

price declined by a startling 37 percent. But, this was

just the beginning. A Form 8-K is a Commission report

used to report “material events or corporate changes”

that may have an effect on the value of a company’s

securities. On August 14, 2002, Gemstar announced in a

Form 8-K that it intended to restate its 2001 financial

results and to reverse $20 million, plus make substantial

corrections. Gemstar filed as exhibits to that Form 8-K

sworn statements from Yuen and Leung, CEO and CFO

respectively, to the effect that they were not able to cer-

tify as required by law that some of Gemstar’s financial

45a

statements were accurate, and that they were not able to

comply with Commission orders to do so.

On September 25, 2002, Gemstar filed yet another

Form 8-K (1) confirming that it had been notified by

NASDAQ that its securities were subject to delisting for

failure timely to file a Form 10-Q for the quarter ending

on June 30, 2002, (2) that because of an unresolved dis-

pute between Gemstar and its independent auditor

KPMG, the company could not file its quarterly Form

10-Q report, and (3) that the resolution of these account-

ing and financial matters involving restatement of finan-

cial statements was “uncertain” and “unpredictable.”

Clearly, the accounting wheels were falling off this com-

pany.

What about Intervenors CEO Yuen and CFO Leung,

whose compensation was tied to the performance of

Gemstar’s reported financial results? On March 27,

2002, all of four days before the revelation to the public

about Gemstar’s inaccurate revenue claims, Yuen dis-

posed of 7 million Gemstar shares, receiving an initial

payment of $59 million. No doubt the purchasers of

these shares were duped into believing they were getting

fair value for their money, only to see the roof fall in

when the facts came publicly to light.

Back at the ranch, and simultaneously with the inter-

nal and external unraveling of this creative accounting

mess, CEO Yuen and CFO Leung were cutting a new

deal with Gemstar’s Board to resign from their respec-

tive executive positions—but remain as employees—in

return for a payment in cash by Gemstar to Yuen of

$29.48 million and to Leung of $8.16 million, plus enor-

mous shares of stocks and stock options. Gemstar

reported these unusual developments on November 12,

2002, in yet another Form 8-K filing. It is this package

of payments around which Yuen and Leung fashion their

46a

unconvincing and extraordinary claim that the negotiated

payments were not “extraordinary,” and that the term

“extraordinary” is vague.

Not surprisingly, the Commission finally commenced

a formal investigation of this odorific scenario to deter-

mine whether Gemstar and its former and present offi-

cers and directors had engaged in securities fraud by

making materially false and misleading public state-

ments regarding revenue, earnings and losses, etc., for

the relevant years.

Here, it is important and instructive to understand

what must happen in order for the Commission to launch

an investigation into suspected violations of the secu-

rities jaws, an action which is a prerequisite to peti-

tioning the court under Section 1103 for a temporary

escrow.

Both the Securities Act of 1933 (“Securities Act’) and

the Securities Exchange Act of 1934 (“Exchange Act”)

provide the Commission the authority to initiate inves-

tigations into suspected violations of the securities laws.

See 15 U.S.C. § 77t(a) (“Whenever it shall appear to the

Commission. . . that the provisions of this subchapter

. . have been or are about to be violated, itmay.. .

investigate such facts.” (emphasis added)); 15 U.S.C.

§ 78u(a)(1) (“The Commission may . . . make such

investigations as it deems necessary to determine whether

any person has violated, is violating, or is about to vio-

late any provision of this chapter. . .”).

A formal investigation is the process by which the

SEC issues subpoenas calling for document production

or testimony, supported by the power of the federal

courts. To enable the staff of the SEC, rather than the

47a

individual, appointed members of the SEC, to perform

such an investigation, the Commission must delegate its

powers to the staff in a Formal Order of Investigation.

That Formal Order of Investigation consists of three

parts: 1) a jurisdictional section setting forth the SEC’s

investigative authority; 2) a probable cause section set-

ting forth the information which, “if true, tends to show”

that certain activities have occurred and securities laws

have been violated; and 3) a delegation section, con-

taining a statement by the Commission that it is dele-

gating its investigative power to the staff. See Marvin

Pickholz, SEC Crimes, § 2:4 (Dec.2003); see also

Am.Jur. Securities, § 1622 (noting that in most circum-

stances “[nJeither a Commission decision whether to

conduct a preliminary investigation nor a formal order of

investigation is a final order which may be judicially

reviewed”).

Here, the Formal Order of Investigation, which was

part of the Commission’s submission to the district court

pursuant to Section 1103, was signed on October 17,

2002. In relevant part, it says:

Members of the staff have reported information to

the Commission which tends to show that from at

least 1999 to the present:

A. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities, directly or indirectly, in the offer or sale

of, or in connection with the purchase or sale of

Gemstar securities, may have employed a device,

scheme, or artifice to defraud, made or obtained

money or property by means of an untrue statement

48a

of material fact or omitted to state a material fact

necessary in order to make the statements made, in

light of the circumstances under which they were

made, not misleading, or engaged in transactions,

acts, practices or courses of business which oper-

ated or would operate as a fraud or deceit upon any

person. As part of the aforesaid activities, such per-

sons or entities may have, directly or indirectly,

among other things, made materially false and mis-

leading statements and may have traded in Gemstar

stock while in possession of material nonpublic

information in breach of a fiduciary or other duty

arising out of a relationship of trust and confidence

concerning, among other things, Gemstar’s revenues

and earnings or losses as set forth in Gemstar’s

1999, 2000, 2001 and 2002 Forms 10-K and 10-Q;

B. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities failed or caused the failure to file or filed or

caused to be filed with the Commission annual

reports on Form 10-K and quarterly reports on Form

10-Q which may have contained an untrue statement

of material fact or may have omitted to state a mate-

rial fact necessary, or may have failed to add such

further material information as may be necessary in

order to make the statements made, in light of the

circumstances under which they were made, not

misleading concerning, among other things, Gem-

Star’s revenue and earnings or losses.

C. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities may have failed to or caused the failure to:

1. make and keep books, records and accounts

which, in reasonable detail, accurately and fairly

49a

reflected Gemstar’s transactions and disposition of

assets;

2. devise and maintain a system of internal account-

‘ing controls sufficient to provide reasonable assur-

ances that transactions were recorded as necessary

to permit preparation of financial statements in

conformity with Generally Accepted Accounting

Principles or any other criteria applicable to such

statements, and to maintain accountability for

assets;

D. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities may have, directly or indirectly, falsified or

caused to be falsified, books, records, or accounts

required to be maintained by Gemstar.

E. Geinstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities may have knowingly circumvented or know-

ingly failed to implement a system of internal

accounting controls or knowingly falsified any

book, record or account required to be maintained

by Gemstar.

F. While engaged in the above described activities,

such person or entities, directly or indirectly, made

use of the mails or the means, instruments, or

instrumentalities of transportation or communica-

tion in interstate commerce.

Ill

The Commission, having considered the staff’s

report and deeming such acts and practices, if true,

to be in possible violation of Section 17(a) of the

50a

Securities Act of 1933 (“Securities Act”) and Sec-

tions 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and

13(b)(5) of the Exchange Act and Rules 10b-5, 12b-

20, 13a-1, 13a-13, and 13b2-1 thereunder, finds it

necessary and appropriate and hereby:

ORDERS, pursuant to Section 20(a) of the Securities

Act and Section 21(a) of the Exchange Act, that a

private investigation be made to determine whether

any persons or entities have engaged in, or are about

to engage in, any of the reported acts or practices or

any acts or practices of similar purport or object;

The next step in this process is for the Commission to

file with the district court an application for a temporary

order pursuant to Section 1103. The Commission took

this step on May 5, 2003, accompanied by a declaration

in support executed by the Commission’s attorney autho-

rized to conduct the relevant investigation. Here are

excerpts from the declaration, excerpts that sound very

much like the allegations of probable cause to be found

in a standard search warrant.

8. Since the Commission issued its Formal Order on

October 17, 2002, the Commission’s staff has taken

investigative testimony from 57 witnesses, for 105

days of testimony. The testimony has been taken

throughout the United States.

9. The Commission's staff has scheduled the inves-

tigative testimony of additional witnesses.

10. Since the Commission issued its Formal Order

on October 17, 2002, the Commission’s staff has

issued regulatory requests to brokerage firms for

brokerage account information.

Sla

11. Since the Commission issued its Formal Order

on October 17, 2002, the Commission’s staff has

issued ove. ne hundred subpoenas for the produc-

tion of documents. Pursuant to the subpoenas for the

production of documents, the staff has received sub-

stantial document productions in response to the

subpoenas.

12. On January 7, 1998, Henry Yuen entered into an

Amended and Restated Employment Agreement

(“Yuen’s Employment Agreement”) with Gemstar

International Group, Ltd. and Gemstar Development

Corp. (collectively with Gemstar-TV Guide Inter-

national, Inc., “Gemstar”), a copy of which is

attached hereto as Exhibit 2.

13. Under Yuen’s Employment Agreement, Yuen’s

initial vase salary was $1 million, subject to annual

increases that were based on Gemstar’s reported

financial results. See Exhibit 2 at § 3(a).

14. Yuen’s Employment Agreement contained a for-

mula under which Yuen’s base salary could increase

each year, depending upon annual percentage

increases in Gemstar’s consolidated revenues and

consolidated net earnings, as reported in Gemstar’s

financial statements. /d.

15. Yuen’s Employment Agreement contained a pro-

vision for an annual merit bonus that was calculated

using Gemstar’s reported financial results. The for-

mula used his adjusted base salary and the annual

percentage increase, if any, in Gemstar’s consoli-

dated earnings before interest, taxes, depreciation

and amortization (“EBITDA”). Yuen could elect to

receive his merit bonus in the form of cash or stock

options. /d. at § 3(b).

52a

16. Yuen’s Employment Agreement also included a

}-ovision for an annual incentive bonus that was

calculated using Gemstar’s reported financial

results. The formula used his adjusted base salary

and increases in Gemstar’s consolidated earnings

per share as reported in Gemstar’s Forms 10-Q and

10-K. Yuen could elect to receive his annual incen-

tive bonus in the form of cash or stock options. /d.

at § 3(c) & Schedule I.

17. Yuen’s Employment Agreement provided Yuen

with annual stock options. /d. at § 3(d).

18. During the investigation, the staff took Yuen’s

testimony on April 1, 2003, when he answered gen-

eral background questions. The staff did not inquire

into specific transactions in any detail. Yuen appeared

again to provide testimony on April 23, 2003, at

which time Yuen asserted his Fifth Amendment

privilege against self-incrimination in response to

all questions.

19. I have examined Forms W-2 issued to Yuen by

Gemstar from 1999 through 2002, and have added

the amounts of compensation reported on the Forms

W-2 for those four years, which totals $37,849,002.35.

The staff understands that this includes salary and

wages, as well as monies related to the exercise of

stock options.

20. The staff has analyzed brokerage records from

Yuen’s brokerage firm, including a “Master Agree-

ment” dated March 27, 2002, and confirmations of

transactions executed under that agreement. The

brokerage records show that between April 3, 2002

and April 8, 2002, Yuen entered into “prepaid for-

ward” transactions to dispose of 7 million shares of

53a

Gemstar stock. The brokerage records show that

Yuen received an initial payment from the disposi-

tion of these 7 million shares of approximately $59

million.

21. A copy of Gemstar’s press release, dated October

8, 2001, entitled Gemstar-TV Guide International,

Inc. CEO and CFO Exercise Options to Acquire and

Hold Shares, is attached hereto as Exhibit 3.

22. On March 31, 1998, Elsie Leung entered into an

Amended and Restated Employment Agreement with

Gemstar International Group, Ltd. and Gemstar

Development Corp. (“Leung's Employment Agree-

ment”), a copy of which is attached hereto as

Exhibit 4.

23. Under Leung’s Employment Agreement, her ini-

tial base salary was $700,000, subject to annual

increases based on Gemstar’s financial results. Jd. at

§ 3(a).

24. Leung’s Employment Agreement included a for-

mula to calculate annual increases in her base

salary, which used annual percentage increases in

Gemstar’s consolidated revenues and consolidated

net earnings as shown in Gemstar’s financial state-

ments. /d.

25. Leung’s Employment Agreement included a pro-

vision for an annual incentive bonus based upon

Gemstar’s financial results. The formula for calcu-

lating Leung’s incentive bonus used her adjusted

base salary and increases in Gemstar’s consolidated

earnings per share as reported in Gemstar’s Forms

10-Q and 10-K. /d. at § 3(b) & Schedule I.

54a

26. Leung’s Employment Agreement further pro-

vided Leung with annual stock options. /d. at § 3(c).

27. I have examined Forms W-2 issued to Leung by

Gemstar from 1999 through 2002, and have added

the amounts of compensation reported on the Forms

W-2 for those four years, which totals $11,180,561.28.

28. A copy of Gemstar’s press release dated October

8, 2002 entitled Gemstar Approves Management

Changes; Jeff Shell to Become CEO, is attached

hereto as Exhibit 5.

29. A copy of Gemstar’s press release dated April

18, 2003 entitled Gemstar-TV Guide Terminates

Employment of Yuen and Leung, is attached hereto

as Exhibit 6.

30. A copy of Gemstar’s press release dated March

7, 2001, entitled Gemsitar-TV Guide International,

Inc. Reports Financial Results For the Quarter and

Fiscal Year Ended December 31, 2000, is attached

hereto as Exhibit 7.

31. A copy of Gemstar’s press release dated Novem-

ber 14, 2001 entitled Gemstar-TV Guide Interna-

tional, Inc. Reports Financial Results For the

Quarter Ended September 30, 2001, is attached

hereto as Exhibit 8.

32. A copy of Gemstar’s press release dated March

18, 2002 entitled Gemstar-TV Guide International,

Inc. Reports Financial Results For the Quarter and

Year Ended December 31, 2001, is attached hereto

as Exhibit 9.

33. A copy of the relevant pages of Gemstar’s Form

10-K, filed April 1, 2002, is attached hereto as

Exhibit 10.

55a

34. A copy of Gemstar’s press release dated August

14, 2000, entitled Gemstar-TV Guide-International,

Inc. Reports Financial Results of Gemstar Inter-

national Group Limited For the Quarter Ended June

30, 2000, is attached hereto as Exhibit 11.

35. A copy of Gemstar’s Form 8-K, filed August 14,

- 2002, is attached hereto as Exhibit 12.

36. A copy of the relevant pages from Gemstar’s

Form 10-K/A, for the fiscal year ended December

31, 2001, and filed on March 31, 2003, is attached

hereto as Exhibit 13.

37. A copy of Gemstar’s press release dated January

23, 2003 entitled Gemstar-TV Guide International

Announces Further Anticipated Restatements Related

to Previously Disclosed Review, is attached hereto

as Exhibit 14.

38. A copy of Gemstar’s press release dated March

10, 2003 entitled Gemstar-TV Guide International

Announces Further Anticipated Restatements

Related to Previously Disclosed Review, is attached

hereto as Exhibit 15.

39. On May 2, 2003, the staff provided notice to

counsel for Gemstar, pursuant to Local Rule 7-19.1,

that the Commission had authorized the staff to file

an Application under Section 1103 of Sarbanes-

Oxley Act of 2002 to seek a temporary order requir-

ing Gemstar to escrow any extraordinary payments

to its employees. The staff informed counsel for

Gemstar that the Commission intended to file the

Application on May 5, 2003, as early in the morning

as possible.

(Emphasis added).

56a

In a supplemental memorandum in support of its

application for a temporary order, the Commission made

its compelling case that the payments at issue were not

regular payments in the everyday operation or normal

management of Gemstar. In many instances, the Com-

mission simply pointed out what Yuen and Leung would

have been normally entitled to, and then highlighted the

differences arising from the suspect Termination Agree-

ments that were not usual and ordinary, and thus

“extraordinary.” I highlight and quote from the memo-

randum:

I. INTRODUCTION

The Securities and Exchange Commission (“Com-

mission”) seeks a temporary order preventing Gem-

star-TV Guide International, Inc., (Gemstar”) [sic]

from making any extraordinary payments to certain

persons for a period of 45 days, under Section 1103

of the Sarbanes-Oxley Act of 2002. Respondent

Gemstar does not oppose entry of an order main-

taining the status quo. Intervenors Henry C. Yuen

and Elsie Leung (collectively “Intervenors”) oppose

such an order because they contend:

(1) they should be heard before any order is entered;

(2) there is no reason to enter the order on an expe-

dited basis; (3) the payments are not extraordinary

under Section 1103; and (4) Section 1103 is uncon-

stitutional.

Il. ARGUMENT

A. The Restructuring Payments are Extraordinary

Payments under Section 1103

The principal] issue is whether the Restructuring

Payments of $37.64 million in cash are extraordi-

57a

nary payments under Section 1103. Yuen and Leung

admit that the payments are being made pursuant to

their November 7, 2002 “Termination Agreements”

with Gemstar that were the subject of at least five

months of extended negotiation and approval by

Gemstar’s entire Board of Directors. (Yuen Memo

at p. 9.) Yuen and Leung also admit that the

Restructuring Payments were made to effect their

removal as Chief Executive Officer and Chief

Financial Officer, respectively, and to remove con-

trol of Gemstar’s Board of Directors from Yuen. The

Restructuring Payments and their circumstances are

so extraordinary that Yuen asserted his Fifth

Amendment privilege to all questions about his com-

pensation during testimony on April 25, 2003.

Under these circumstances, the Restructuring Pay-

ments are extraordinary payments.

Yuen and Leung ignore the significant events that

are the basis for the Restructuring Payments, and

focus only on the components which they charac-

terize as ordinary payments made under “long

standing contractual commitments.” (/d. p. 8.) How-

ever, the operative agreements under which the

Restructuring Payments are being made are the

November 7, 2002 Termination Agreements, entered

into on the same day that the payments originally

were to be disbursed by Gemstar. The Restructuring

Payments are being made pursuant to the Termina-

tion Agreements, which by their terms supersede all

other agreements between the parties. The restruc-

turing was so significant that Gemstar issued a

press release announcing it on October 8, 2002, and

filed a Form 8-K on November 7, 2002.

58a

Yuen and Leung also ignore that, in terms of rela-

tionship to annual compensation, the Restructuring

Payments are extraordinary. Yuen is to receive a

total of $56.7 million in cash and stock, of which

$29.48 million is cash. This is more than five times

Yuen’s 2001 base salary of approximately $5 million

a year. Leung is to receive $14.4 million in cash and

stock, of which $8.16 million is cash. Similarly, this

is more than six times Leung's 2001 base salary of

$1.3 million.

There can be little dispute that the Restructuring

Payments are not being made in a normal and usual

course of business, but rather are “for an excep-

tional purpose or a special occasion.” Black’s Law

Dictionary, at p. 406 (Abridged Sixth Edition 1991).

Indeed, if there were nothing remarkable about

these payments, then Yuen could have testified

freely about them on April 25, 2003; instead, he

invoked his Fifth Amendment privilege against self-

incrimination with respect to all questions about his

compensation.

B. The Component Amounts Are Extraordinary Pay-

ments Under Section 1103

Yuen and Leung misdirect the Court away from the

events and circumstances of the Restructuring Pay-

ments and the total $37.64 million in cash, and

focus instead on alleged components of the Restruc-

turing Payments, which they identify as: (1) termi-

nation fees or severance payments; (2) accrued

unpaid bonuses for 2001; (3) accrued unpaid salary;

and (4) accrued unused vacation pay.

However, the Termination Agreements do not

describe the Restructuring Payments as having the

59a

same components Yuen and Leung now advance to

the Court: Yuen’s Termination Agreement describes

the payments as: “(I) a termination fee of

$22,452,640 and (ii) $7,030,778 (in full and com-

plete settlement for all unpaid salary, bonuses and

unused vacation days due under the Current

Employment Agreement or otherwise ).” Leung’s is

similar. The Termination Agreements state that the

single lump sum payments are a “settlement” of

amounts due or “otherwise,” and not merely simple

contractual payments due in the ordinary course.

The description in the Termination Agreements is

consistent with Intervenors’ admission that the

Restructuring Payments were the subject of

“extended” negotiations, and that component

amounts that make up the lump sum settlement pay-

ments in the Termination Agreements are largely

different than amounts due under their employment

agreements.

Yuen’s and Leung’s argument that the Court should

look at each component in isolation, and not in con-

text of the events and the governing documents,

should be rejected. Under their argument, an

extraordinary payment would escape Section 1103

if made up of components that can be characterized

as usual or ordinary. Thus, if the Court finds that the

“vacation pay” component is not extraordinary, then

in the future an issuer and its employees will simply

call suspect extraordinary payments “vacation pay”

to evade the statute. Section 1103 should not be read

in a restrictive manner that would render it mean-

ingless, but rather it should be read broadly to effect

the remedial purposes of the federal securities laws.

See, e.g., SEC v. Zandford, 535 U.S. 813, 122 S.Ct.

1899, 153 L.Ed.2d 1 (2002).

60a

The termination fees are extraordinary payments

Yuen and Leung admit that the bulk of the funds are

a termination fee or severance payment, but do not

provide any specific arguments why these are not

extraordinary payments under Section 1103. Yuen

and Leung admit that the amount of termination fees

were negotiated, and are substantially different than

the severance payments they may have been entitled

to under their existing employment agreements. The

Termination Agreements provide that Yuen is to

receive a “termination fee” of $22.45 million, and

Leung a “termination fee” of $6,957,953.

The “termination fees” are the amounts agreed to,

after extended negotiation between Gemstar, Yuen,

and Leung, as the amounts Gemstar must pay to ter-

minate Yuen and Leung. Generally, the termination

of a chief executive officer or chief financial officer

is an extraordinary event, usually accompanied by

a public announcement and a Form 8-K filing, as it

was here.

. The accrued unpaid bonuses for 2001

Bonuses are clearly the type of extraordinary pay-

ments encompassed by Section 1103. By definition,

a bonus is not an ordinary and usual payment, but

rather a “consideration or premium paid in addition

to what is strictly due” and a “premium or extra or

irregular remuneration.” As Senator Lott com-

mented about Section 1103: “While an investigation

is underway, basically rewards were given to these

corporate executives.” Any common sense inter;

pretation of a bonus understands that it is a special

reward for meeting or surpassing goals.

6la

Yuen and Leung’s 2001 bonuses are exactly the type

of payments that should be frozen: their bonuses are

rewards for Gemstar’s 2001 reported financial

results. The Commission is investigating whether

Gemstar’s 2001 financial results were fraudulently

overstated. Since Yuen and Leung (and others)

signed and filed Gemstar’s 2001 Form 10-K on

April 1, 2002, Gemstar has restated and reversed

substantial revenue items contained in the 2001

Form 10-K. The very set of events Section 1103 was

designed to prevent is implicated by the bonus pay-

ments: while the Commission is attempting to deter-

mine whether Gemstar’s 2001 financial results were

overstated and fraudulent, Yuen and Leung are

demanding to be paid for those results.

Under their employment agreements, the calculation

_ of Yuen and Leung’s bonuses is tied directly to Gem-

star’s reported financial results. Yuen’s “merit

bonus” is calculated using his adjusted base salary wn

and Gemstar’s percentage increase in EBITDA

(earnings before interest, taxes, depreciation, and

amortization). Yuen and Leung each had an identi-

cal provision in their employment agreements for ‘an

“incentive bonus,” calculated based on Gemstar’s

reported financial results.

3..The accrued unpaid salary

The unpaid salary component of the settlement

amount is, like the bonus payment component,

directly dependent upon Gemstar’s reported 2001

financial statements that are under investigation by

the Commission. Yuen and Leung’s employment

agreements included a formula for the annual

adjustment of their base salary. Under that formula,

62a

if consolidated revenues or consolidated net earn-

ings increase, then Yuen and Leung's base salary is

increased by a proportional amount. (Id., Ex 2, at

18 (Yuen Employment Agreement, 9 3(2)); Ex. 4, at

55 (Leung Employment Agreement 4 3(4)).

The calculation of the “catch-up” salary based

upon allegedly fraudulent financial statements is,

again, exactly the type of “reward” about which

Section 1103 is concerned. Gemstar has restated

hundreds of millions of dollars of revenues from

multiple transactions since Yuen and Leung entered

into the Termination Agreements. To the extent

Gemstar’s reported financial results have been

overstated for a number of years (as indicated by

the restatements), Yuen and Leung’s compensation

and bonuses are terminally infected with those over-

Statements.

. The accrued unused vacation pay

The extraordinary nature of the vacation pay

amount in the settlement is revealed by the context.

In the ordinary course, an employee would take

their vacation time during a year and receive their

salary while on vacation. The employee is paid

accrued but unused vacation pay only on a special

occasion—when their employment is terminated.

[Sic] But for the restructuring and their removal,

Yuen and Leung had no contractual rights, under

their employment agreements, to be paid for

accrued but unused vacation.

(Emphasis Added).

63a

Given the context of Section 1103 and the narrowly

defined, regulated, and targeted area to which it applies,

I conclude that Congress’ use of the term “extraordi-

nary” in connection to paymenis being made by the

‘issuer to those insiders possibiy under investigation for

potential securities fraud does not constitute a legal or a

constitutional infirmity in this statute. “Extraordinary”

simply means, in plain language, out of the ordinary. In

this context—and the context is the key—’’out of the

ordinary” simply means a payment made not in the cus-

‘tomary or normal pursuit of the regular trade or business

of the issuer under scrutiny, but in response to an irreg-

ular or abnormal demand of the moment that reasonably

appears to have been provoked or motivated by or con-

nected to the possible violations of securities laws that

triggered the investigation.

There is no need necessarily to engage in metaphysi-

cal inquiries about what is ordinary in another company

or to look to some sort of an industry standard to ascer-

tain the meaning of this provision. One can simply look

at the business of the issuer and determine whether the

payments under scrutiny directly advance the issuer's

normal business objectives, or whether the payment rea-

sonably appears to be in the nature of damage control,

___hush money, taking financial advantage of the fraud,

cover-up, looting, etc.

The district court had it exactly right. The court

looked in context at (1) the circumstances of the pay-

ment, (2) the purpose of the payment, and (3) the size of

the payment. The court concluded in a thorough,

thoughtful, and well-reasoned, 23-page decision that the

Commission “has met its burden” “under almost any

standard.”

64a

The court correctly focused on the nature, purpose,

and circumstances of the payments and determined that

they had nothing to do with Gemstar’s ordinary business.

The court accurately noted that

{t]he payments were negotiated over a five-month

period and involved the participation of the Gemstar

Board, a Special Committee, and outside consul-

tants. The Board, the Special Committee, and the

Intervenors Yuen and Leung were each represented

by separate sets of counsel. Additionally, the ter-

mination agreements were executed as part of the

process of removing Leung and Yuen from their

positions as Gemstar Officers.

The court concluded that the termination agreements

and the disputed payments “are anything but ordinary.”

I agree. Why? Because the measure of “extraordinary” is

what ordinarily goes on in the process of the issuer’s

business, and these facts are clearly unusual and extraor-

dinary. As the Commission's supplemental memorandum

points out, the negotiated Termination Agreement pay-

ments here are five and six times greater than Yuen’s and

Leung’s base salary, the component amounts that make

up the lump sum payments are different than the

amounts due under their employment agreements, the

termination fees are different from what they may have

been entitled to under existing agreements, the bonuses

are fruit of the alleged fraudulent financial results, and

the vacation pay item did not exist under their contracts.

One would not expect benefits like these to be flowing

from corporate assets to executives resigning under fire.

This scenario is not business as usual. It appears to be

looting. I believe, as did the district court, that Gem-

star’s execution of its overali business objectives and

ordinary management of its business operations did not

65a

entail terminating its CEO and CFO in the shadow of

misstated revenues, misleading public statements, secu-

rities fraud investigations, plunging stock prices, and

public relations debacles, not to mention Yuen’s and

Leung’s inability to certify Gemstar’s books as accurate.

If these mega-suspicious payments were not “extraor-

dinary,” the word needs either to be redefined or to be

taken out of our dictionaries. Gemstar’s Form 8-K fil-

ings raise red flags all over the place.

Do we really expect the government to offer evidence

of what constitutes “usual or ordinary payments to a

CEO and a CFO under same or similar circumstances,”

i.e., under threat of delisting, in a fight with its inde-

pendent auditor, and under investigation for having mis-

stated revenues, cooked the books, defrauded investors,

employees and the market, and possibly committed a

basket full of crimes? Why would this be necessary? On

reflection, the idea that a.court needs somehow to have

evidence of a “norm for corporate decision-making of

this type,” 1.e., rampaging fraud and a world of trouble,

seems off the mark. In some cases, one might need to

look to a norm, but not this one. Legal “probable cause”

statements do not need information about how normal

people act to create a reasonable suspicion with respect

to the targeted suspects. These insiders appear, from the

record submitted to the district court, to be pirates

engaged in cookie jar mismanagement of Gemstar. The

Commission subsequently sued them for multiple secu-

rities fraud violations, seeking anti-fraud injunctions,

civil money penalties, and disgorgement of ill-gotten

gains, including salaries, bonuses, and proceeds from the

sale of stock—each one of which is at the epicenter of

the payments at issue. The Commission’s complaint

alleges that because their compensation was linked to

Gemstar's reported financial results, Yuen and Leung

66a

reaped millions of dollars in financial gains—in excess

salary, bonuses, and options—from their fraudulent

manipulations of Gemstar’s revenues, to the tune of an

overstatement of those revenues by at least $223 million.

Congress designed Section 1103 to add teeth to the

Commission’s ability to perform its mission. It ensures

that recovery by way of disgorgement, etc., is effective

rather than empty. As for the importance of disgorge-

ment, we have said,

Disgorgement plays a central role in the enforce-

ment of the securities laws. The effective enforce-

ment of the federal securities laws requires that the

Commission be able to make violations unprof-

itable. The deterrent effect of a Commission

enforcement action would be greatly undermined if

securities law violators were not required to dis-

gorge illicit profits. By deterring violations of the

securities laws, disgorgement actions further the

Commission’s public policy mission of protecting

investors and safeguarding the integrity of the mar-

kets. Although the Commission at times may use the

disgorged proceeds to compensate injured victims,

this does not detract from the public nature of Com-

mission enforcement actions: the touchstone

remains the fact that public policies are served and

the public interest is advanced by the litigation.

Rind, 991 F.2d at 1491-92 (citations, internal quotation

marks, and alterations omitted).

Finally, the proof of the extraordinary nature of this

pudding is in the eating: The multimillion-dollar, sus-

picious-resignation Termination Agreements, which

Yuen and Leung claim are not extraordinary, were

approved and signed by Jonathan Orlick, Gemstar'’s Gen-

eral Counsel, now also a defendant in a civil fraud com-

67a

plaint filed by the SEC, involving fraud allegedly aris-

ing out of this same tarnished episode in Gemstar’s exis-

tence. So much for the ordinary course of business

argument.

Yuen and Leung bring other issues to our attention,

such as whether Section 1103 is void for vagueness,

whether it violates the Fourth Amendment, whether its

application here is impermissibly retroactive, etc. These

issues also have no merit.

Thus, and with all respect to my colleagues, I dissent.

68a

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 03-56129

Argued and Submitted December 15, 2004

Filed March 22, 2005

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

HENRY C. YUEN; ELSIE M. LEUNG,

Intervenors-Appellants,

—Y.—

GEMSTAR-TV GUIDE INTERNATIONAL, INC.,

Defendant.

Michelle Rice, Arkin Kaplan LLP, for Yuen & Leung,

New York, NY, for the intervenors-appellants.

Richard M. Humes, Securities and Exchange Com-

mission, Washington, D.C., for the plaintiff-appellee.

Thomas J. Karr, Securities and Exchange Commission,

Washington, D.C., for the plaintiff-appellee.

Richard L. Stone, for Gemstar-TV Guide, for the

defendant-respondent-appellee.

69a

Sean T. Prosser and Kimberly S. Greer, Morrison &

Foerster LLP, San Diego, CA, for the defendant-respon-

dent-appellee.

Appeal from the United States District Court for the

Central District of California; Wm. Matthew Byrne, Jr.,

District Judge, Presiding. D.C. No. CV-03-03124-

WMB/MRP.

Before: SCHROEDER, Chief Judge, REINHARDT,

TROTT, THOMAS, GRABER, MCKEOWN, WARDLAW,

FISHER, CLIFTON, CALLAHAN, and BBA, Circuit Judges.

Opinion by Judge TROTT; Concurrence by Judge

REINHARDT; Dissent by Judge BEA.

TROTT, Circuit Judge:

In response to a formal application by the Securities

and Exchange Commission (“SEC” and “Commission”),

the district court entered an order pursuant to Section

1103 of the Sarbanes-Oxley Act of 2002, 15 U.S.C.

§ 78u-3(c)(3), placing in escrow in excess of $37 million

representing contemplated one-time paym its by Gem-

star-TV Guide International, Inc. (“Gemstar”), a public

corporation, to its resigning Chief Executive Officer

(“CEO”), Dr. Henry Yuen, and its Chief Financial Offi-

cer (“CFO”), Elsie Leung. This escrow order—directed

70a

to Gemstar—was predicated upon the district court's

conclusion under the statute that these payments, which

were to be made during the course of a lawful investi-

gation by the SEC of Gemstar involving possible viola-

tions of federal securities laws, were “extraordinary.”

Gemstar did not oppose the entry of this order and has

not filed a substantive brief in connection with this

appeal. However, Intervenors-Appellants Yuen and

Leung do appeal, claiming (1) that this statute is uncon-

stitutionally vague on its face and as applied to them; (2)

that the district court erred as a matter of law in its inter-

pretation of the statutory term “extraordinary payments”;

and (3) that the district court erred in its determination

that the payments in question could be deemed “extraor-

dinary.”' Title 28 U.S.C. § 1292(a)(1) gives us jurisdic-

tion over this timely appeal, and we affirm.

Appellants claim also that this statute violates the Fourth

Amendment's prohibition against unreasonable searches and seizures.

This assertion has no merit. As will be apparent from our discussion

of the remaining issues, the formal administrative and judicial pro-

cess established by Congress whereby assets might be “seized” in this

industry pursuant to court order easily satisfies the Supreme Court's

three-part test articulated in New York v. Burger, 482 U.S. 691, 702-

03, 107 S.Ct. 2636, 96 L.Ed.2d 601 (1987), which established an

exception from the warrant requirement under certain delineated cir-

cumstances involving “closely regulated” businesses. First, the gov-

ernment’s interest on behalf of the public that drives this process is

certainly “substantial.” Second, the process resulting, without a

search, in a temporary “seizure” is patently necessary to further the

regulatory scheme; and third, by involving the district courts as the

decision-maker, the program as legislated is plainly “a constitu-

tionally adequate substitute for a warrant.” In sum, this process is

“reasonable” as required by the Fourth Amendment. See also United

States v. V-1 Oil Co., 63 F.3d 909 (9th Cir. 1995) (applying the Burger

test to regulated businesses transporting hazardous materials).

Tila

The civil statute under our microscope, Section 1103,

15 U.S.C. § 78u-3(c)(3), is narrow, well defined, and

clear. !t comes into play only

(1) during the course of a lawful investigation by

the SEC,

(2) involving possible violations of the federal secu-

rities laws,

(3) committed by an issuer of publicly traded secu-

rities or any of its directors, officers, partners, con-

trolling persons, agents, or employees,

(4) whenever it shall appear to the Commission that

it is likely that the issuer will make extraordinary

payments to any of those named persons.

See 15 U.S.C. § 78u-3(c)(3)(A)(I). Should this com-

bination of events occur, as happened here, Congress has

empowered the Commission to petition a federal district

court for nothing more onerous than a temporary order

requiring the issuer under scrutiny to escrow those

intended payments to a clearly defined group of insiders

for no more than 45 days in a very familiar device, an

interest-bearing account—ali of this subject to court

supervision.

This protocol on its face bears the hallmarks and indi-

cia of due process of law and protection for the rights

and interests of all concerned, including the public, the

shareholders who own the corporation, and third-party

creditors who hold corporate debt—as well as the per-

sons to whom such payments might be made. It is a civil

law that imposes no penalties, does not implicate any

constitutionally protected behavior, and regulates only

issuers of publicly traded securities. Enacted in the dis-

72a

turbing shadow of a flood of corporate scandals, its pur-

pose is to temporarily protect corporate funds and the

investing public and creditors against theft, fraud, and

dissipation. As the Commission underscores in its brief,

(1) the initial escrow lasts for only 45 days with the pos-

sibility of a single 4S-day extension, see 15 U.S.C.

§ 78u- 3(c)(3)(A)(1), (iv); (2) any person affected by the

escrow order has the right to petition the court for relief,

see 15 U.S.C. § 78u-3(c)(3)(B)(1); and (3) if no enforce-

ment action is filed before the temporary escrow expires,

the “extraordinary payments” involved shall be returned

to the issuer or other affected person with accrued inter-

est, see 15 U.S.C. § 78u-3(c)(3)(B)(ii).

The issues brought to us arise primarily from

Congress’ use of the word “extraordinary.” The inter-

venor-appellants claim that the district court erred in its

interpretation and application of the word “extraordi-

nary” and that the woid is so vague that it renders this

entire process unlawful. Upon examination, these claims

are unpersuasive.

Faced with one cataclysmic corporate accounting

scandal after another, including Enron, WorldCom, and

Tyco, Congress’ purpose in enacting Section 1103's

escrow measure could not be clearer. One after another,

many persons, companies, and pension plans have been

left holding an empty bag after corporate insiders com-

mitted fraud and other corporate crimes and misdeeds at

the ultimate expense of the corporation's shareholders,

creditors, and innocent employees. By the time the

authorities have been alerted to the fraud, it’s too late;

the assets of the company have already disappeared, ren-

dering the traditional remedies used by the Commission

73a

to rectify such wrongs— disgorgement, civil penalties,

restitution, etc.—difficult, if not impossible, to pursue.

In the meanwhile, the disappearance of such funds

impoverishes and damages the issuer itself, once again

to the detriment of the shareholders, creditors, and inno-

cent employees, whose pensions in many cases have

been permanently thrashed. Ultimately, our nation is the

victim, as the public loses confidence in the stock mar-

ket.

Section 1103 was initially introduced as Amendment

No. 4188 by Senator Trent Lott. See 148 Cong. Rec.

$6542 (daily ed. July 19, 2002). In the debate that

ensued after Amendment No. 4188's introduction, dif-

ferent senators focused on various possible abuses that

Section 1103 was meant to prevent:

Section 3 freezes payments of potential wrongdoers.

This section would allow the SEC, during an inves-

tigation, to seek an order in Federal court imposing

a 45-day freeze on extraordinary payments to cor-

porate executives. Again, this year we have seen

just that sort of thing happening. While an investi-

gation is underway, basically rewards were given to

these corporate executives. While it would require

a court order, there would be this 45-day freeze. The

targeted payments would be placed in escrow,

ensuring that corporate assets are not improperly

taken from [sic] an executive’s personal benefit.

. . . We have also seen that there are some cases

where the law had some loopholes or where it was

not timely or where it was not strong enough. One

example, of course, is where there has beetrshred-

ding. Another example is the very bad image of cor-

porate executives taking increased payments,

extraordinary payments, while they are being inves-

tigated. You can’t have that sort of thing.

: 74a

Id. at 56545 (statement of Sen. Lott) (emphasis added).

The House of Representatives shared these objectives:

Under this legislation, top executives will not be

allowed to pilfer the assets of the company by giv-

ing themselves huge bonuses and other extraordi-

nary payments if the company is subject to an SEC

investigation. Their pay and benefits are frozen

when the investigation starts. Americans will know

that corporate officers will no longer be able to mis-

use the bankruptcy laws to discharge liabilities

based upon securities fraud, and the honest brokers

of corporate America will know that those who

abuse the law and tarnish corporate America’s rep-

utation will go to jail for a long, long time.

148 Cong. Rec. H4685 (daily ed. July 16, 2002) (state-

ment of Rep. Sensenbrenner). From this background, it

is readily apparent that the intent of Congress in enact-

ing this statute was to provide a strong shield for third-

party creditors and corporate investors once the SEC

begins an investigation of corporate malfeasance.

iil

The facts and circumstances of this case provide a

textbook example of the problem. On April 1, 2002,

Gemstar filed its Form 10-K report for the year 2001.

The filing reported that $107.6 million Gemstar had pre-

viously claimed as revenue had not actually been real-

ized. Gemstar revealed also that it had claimed as

substantial revenue receipts from a single “non-monetary

transaction” that was not properly booked. The fallout

from these reevaluations? The next day, Gemstar’s stock

price declined by a startling 37 percent. But, this was

just the beginning. On August 14, 2002, Gemstar

75a

announced in a Form 8-K—a Commission report used to

report “material events or corporate changes” that may

have an effect on the value of a company’s securities,

see 15 U.S.C. § 78m(a)(1); 17 C.F.R. § 240.13a-11—that

it intended to restate its 2001 financial results and to

reverse $20 million, plus make substantial corrections.

Gemstar filed as exhibits to that Form 8-K sworn state-

ments from CEO Yuen and CFO Leung, to the effect that

they were not able to certify as required by law that

some of Gemstar’s financial statements were accurate,

and that they were not able to comply with written Com-

mission orders to do so.

On September 25, 2002, Gemstar filed yet another

Form 8-K (1) confirming that it had been notified by

NASDAQ that its securities were subject to delisting for

failure timely to file a Form 10-Q for the quarter ending

on June 30, 2002; (2) that because of an unresolved dis-

pute between Gemstar and its independent auditor

KPMG, the company could not file its quarterly Form

10-Q report; and (3) that the resolution of these account-

ing and financial matters involving restatement of finan-

cial statements was “uncertain” and “unpredictable.”

Clearly, the wheels were falling off this company.

What about Intervenors CEO Yuen and CFO Leung,

whose compensation was tied to the performance of

Gemstar’s now-suspect reported financial results? On

March 27, 2002, all of four days before the revelation to

the public about Gemstar’s inaccurate revenue claims,

Yuen disposed of 7 million Gemstar shares, receiving an

initial payment of $59 million. No doubt the purchasers

of these shares believed they were getting fair value for

their money, only to see the roof fall in when the facts

became public.

Simultaneous with the internal and external unravel-

ing of this creative accounting mess, CEO Yuen and

76a

CFO Leung were cutting a new deal with Gemstar’s

Board to “resign” from their respective executive posi-

tions—but remain as employees—in return for a pay-

ment in cash by Gemstar to Yuen of $29.48 million and

to Leung of $8.16 million, plus large shares of stock and

stock options. Yuen would receive approximately 5.27

million shares of restricted stock or stock units, and

Leung would receive options to purchase in excess of

1.1 million shares of common stock and 353,680 shares

of restricted stock or stock options. Gemstar reported

these unusual developments on November 12, 2002, in

yet another Form 8-K filing. Not surprisingly, the Com-

mission commenced a formal investigation of this sce-

nario to determine whether Gemstar and its former and

present officers and directors had engaged in actionable

securities fraud by making materially false and mis-

leading public statements regarding revenue, earnings

and losses, etc., for the relevant years. It is this package

of “restructuring payments” around which Yuen and

Leung fashion their unconvincing claims that the term

“extraordinary” is vague, and, in any event, that the

negotiated payments were not “extraordinary.”

It is instructive to understand what must happen in

order for the Commission to launch an investigation into

suspected violations of the securities laws as a prereq-

uisite to petitioning the court under Section 1103 fora

temporary escrow.

Both the Securities Act of 1933 (“Securities Act”) and

the Securities Exchange Act of 1934 (“Exchange Act”)

give the Commission the authority to initiate investi-

gations into suspected violations of the securities laws.

See 15 U.S.C. § 77t(a) (“Whenever it shall appear to the

77a

Commission . . . that the provisions of this title .

have been or are abou. .o be violated, it may. . . inves-

tigate such facts.” (emphasis added)); 15 U.S.C.

§ 78u(a)(1) (“The Commission may . . . make such

investigations as it deems necessary to determine

whether any person has violated, is violating, or is about

to violate any provision of this title. . . .”). A formal

investigation is the process by which the SEC issues

subpoenas calling for document production or testimony,

supported by the power of the federal courts. To enable

the staff of the SEC, rather than the appointed members

of the SEC, to perform such an investigation, the Com-

mission must delegate its powers to the staff in a Formal

Order of Investigation. That order consists of three parts:

(1) a jurisdictional section setting forth the SEC’s inves-

tigative authority; (2) a probable cause section setting

forth the information which, “if true, tends to show” that

certain activities have occurred and securities laws have

been violated; and (3) a delegation section, containing a

statement by the Commission that it is delegating its

investigative power to the staff. Marvin Pickholz, SEC

Crimes, § 2:4 (Dec.2003); see also Am.Jur. Securities,

Regulation-Federal § 1622 (noting that in most circum-

stances “[nJeither a Commission decision whether to

conduct a preliminary investigation nor a formal order of

investigation is a final order which may be judicially

reviewed’).

Here, the Formal Order of Investigation, which was

part of the Commission’s submission to the district court

pursuant to Section 1103, was signed on October 17,

2002. In relevant part, it says: ss

Members of the staff have reported information to

the Commission which tends to show that from at

least 1999 to the present:

78a

A. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities, directly or indirectly, in the offer or sale of,

or in connection with the purchase or sale of Gem-

Star securities, may have employed a device,

scheme, or artifice to defraud, made or obtained

money or property by means of an untrue statement

of material fact or omitted to state a material fact

necessary in order to make the statements made, in

light of the circumstances under which they were

made, not misleading, or engaged in transactions,

acts, practices or courses of business which oper-

ated or would operate as a fraud or deceit upon any

person. As part of the aforesaid activities, such per-

sons or entities may have, directly or indirectly,

among other things, made materially false and mis-

leading statements and may have traded in Gemstar

stock while in possession of material nonpublic

information in breach of a fiduciary or other duty

arising out of a relationship of trust and confidence

concerning, among other things, Gemstar’s revenues

and earnings or losses as set forth in Gemstar’s

1999, 2000, 2001 and 2002 Forms 10-K and 10-Q;

B. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities failed or caused the failure to file or filed or

caused to be filed with the Commission annual

reports on Form 10-K and quarterly reports on Form

10-Q which may have contained an untrue statement

of material fact or may have omitted to state a mate-

rial fact necessary, or may have failed to add such

further material information as may be necessary in

order to make the statements made, in light of the

circumstances under which they were made, not

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misleading concerning, among other things, Gem-

star’s revenue and earnings or losses.

C. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities may have failed to or caused the failure to:

1. make and keep books, records and accounts

which, in reasonable detail, accurately and

fairly reflected Gemstar's transactions and dis-

position of assets;

2. devise and maintain a system of internal

accounting controls sufficient to provide rea-

sonable assurances that transactions were

recorded as necessary to permit preparation of

financial statements in conformity with Gen-

erally Accepted Accounting Principles or any

other criteria applicable to such statements, and

to maintain accountability for assets;

D. Gemstar and its fermer and present officers,

directors, employees, affiliates, and other persons or

entities may have, directly or indirectly, falsified or

caused to be falsified, books, records, or accounts

required to be maintained by Gemstar.

E. Gemstar and its former and present officers,

directors, employees, affiliates, and other persons or

entities may have knowingly circumvented or know-

ingly failed to implement a system of internal

accounting controls or knowingly falsified any

book, record or account required to be maintained

by Gemstar.

F. While engaged in the above described activities,

such person or entities, directly or indirectly, made

use of the mails or the means, instruments, or instru-

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mentalities of transportation or communication in

interstate commerce.

The Commission, having considered the staff’s

report and deeming such acts and practices, if true,

to be in possible violation of Section 17(a) of the

Securities Act of 1933 (“Securities Act”) and Sec-

tions 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and

13(b)(5) of the Exchange Act and Rules 10b-5, 12b-

20, 13a-1,; 13a-13, and 13b2-1 thereunder, finds it

necessary and appropriate and hereby:

ORDERS, pursuant to Section 20(a) of the Securities

Act and Section 21(a) of the Exchange Act, that a

private investigation be made to determine whether

any persons or entities have engaged in, or are about

to engage in, any of the reported acts or practices or

any acts or practices of similar purport or object;

The next step in this process is for the Commission to

file with the district court an application for a temporary

freeze order pursuant to Section 1103. The Commission

took this step on May 5, 2003, accompanied by a sup-

porting declaration executed by the Commission’s attor-

ney authorized to conduct the relevant investigation.

Here are excerpts from the declaration, excerpts that

sound much like the allegations of probable cause to be

found in a standard search warrant:

8. Since the Commission issued its Formal Order on

October 17, 2002, the Commission’s staff has taken

investigative testimony from 57 witnesses, for 105

days of testimony. The testimony has been taken

throughout the United States.

9. The Commission's staff has scheduled the inves-

tigative testimony of additional witnesses.

8la

10. Since the Commission issued its Formal Order

on October 17, 2002, the Commission’s staff has

issued regulatory requests to brokerage firms for

brokerage account information.

11. Since the Commission issued its Formal Order

on October 17, 2002, the Commission’s staff has

issued over one hundred subpoenas for the produc-

tion of documents. Pursuant to the subpoenas for the

production of documents, the staff has received sub-

stantial document productions in response to the

subpoenas.

12. On January 7, 1998, Henry Yuen entered into an

Amended and Restated Employment Agreement

(“Yuen’s Employment Agreement”) with Gemstar

International Group, Ltd. and Gemstar Development

Corp. (collectively with Gemstar-TV Guide Inter-

national, Inc., “Gemstar”), a copy of which is

attached hereto as Exhibit 2.

13. Under Yuen’s Employment Agreement, Yuen’s

initial base salary was $1 million, subject to annual

increases that were based on Gemstar’s reported

financial results. See Exhibit 2 at § 3(a).

14. Yuen’s Employment Agreement contained a for-

mula under which Yuen’s base salary could increase

each year, depending upon annual percentage

increases in Gemstar’s consolidated revenues and

consolidated net earnings, as reported in Gemstar’s

financial statements. /d.

15. Yuen’s Employment Agreement contained a pro-

vision for an annual merit bonus that was calculated

using Gemstar’s reported financial results. The for-

mula used his adjusted base salary and the annual

percentage increase, if any, in Gemstar’s consoli-

82a

dated earnings before interest, taxes, depreciation

and amortization (“EBITDA”). Yuen could elect to

receive his merit bonus in the form of cash or stock

options. /d. at § 3(b).

16. Yuen’s Employment Agreement also included a

provision for an annual incentive bonus that was

calculated using Gemstar’s reported financial

results. The formula used his adjusted base salary

and increases in Gemstar’s consolidated earnings

per share as reported in Gemstar'’s Forms 10-Q and

10-K. Yuen could elect to receive his annual incen-

tive bonus in the form of cash or stock options. /d.

at § 3(c) & Schedule I.

17. Yuen’s Employment Agreement provided Yuen

with annual stock options. /d. at § 3(d).

18. During the investigation, the staff took Yuen’s

testimony on April 1, 2003, when he answered gen-

eral background questions. The staff did not inquire

into specific transactions in any detail. Yuen

appeared again to provide testimony on April 23,

2003, at which time Yuen asserted his Fifth Amend-

ment privilege against self-incrimination in response

to all questions.

19. I have examined Forms W-2 issued to Yuen by

Gemstar from 1999 through 2002, and have added

the amounts of compensation reported on the Forms

W-2 for those four years, which totals $37,849,002.35.

The staff understands that this includes salary and

wages, as well as monies related to the exercise of

stock options.

20. The staff has analyzed brokerage records from

Yuen’s brokerage firm, including a “Master Agree-

ment” dated March 27, 2002, and confirmations of

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transactions executed under that agreement. The

brokerage records show that between April 3, 2002

and April 8, 2002, Yuen entered into “prepaid for-

ward” transactions to dispose of 7 million shares of

Gemstar stock. The brokerage records show that

Yuen received an initial payment from the disposi-

tion of these 7 million shares of approximately $59

million.

21. A copy of Gemstar’s press release, dated Octo-

ber 8, 2001, entitled Gemstar-TV Guide Interna-

tional, Inc. CEO and CFO Exercise Options to

Acquire and Hold Shares, is attached hereto as

Exhibit 3.

22. On March 31, 1998, Elsie Leung entered into an

Amended and Restated Employment Agreement with

Gemstar International Group, Ltd. and Gemstar

Development Corp. (“Leung’s Employment Agree-

ment”), a copy of which is attached hereto as

Exhibit 4.

23. Under Leung’s Employment Agreement, her ini-

tial base salary was $700;000, subject to annual

increases based on Gemstar’s financial results. /d. at

§ 3(a).

24. Leung’s Employment Agreement included a for-

mula to calculate annual increases in her base

salary, which used annual percentage increases in

Gemstar’s consolidated revenues and consolidated

net earnings as shown in Gemstar’s financial state-

ments. /d.

25. Leung’s Employment Agreement included a pro-

vision for an annual incentive bonus based upon

Gemstar's financial results. The formula for calcu-

lating Leung's incentive bonus used her adjusted

84a

base salary and increases in Gemstar’s consolidated

earnings per share as reported in Gemstar’s Forms

10-Q and 10-K. /d. at § 3(b) & Schedule I.

26. Leung’s Employment Agreement further pro-

vided Leung with annual stock options. /d. at § 3(c).

27. I have examined Forms W-2 issued to Leung

by Gemstar from 1999 through 2002, and have

added the amounts of compensation reported on the

Forms W-2 for those four years, which totals

$11,180,561.28.

* * *

39. On May 2, 2003, the staff provided notice to

counsel for Gemstar, pursuant to Local Rule 7-19.1,

that the Commission had authorized the staff to file

an Application under Section 1103 of Sarbanes-

Oxley Act of 2002 to seek a temporary order requir-

ing Gemstar to escrow any extraordinary payments

to its employees. The staff informed counsel for

Gemstar that the Commission intended to file the

‘Application on May 5, 2003, as early in the morning

as possible.

(emphasis added). As attachments to this application, the

Commission included numerous press releases issued by

Gemstar and excerpts from its 8-K and 10-K reports

highlighting the tumult inside the company surrounding

management changes and the restatement of financial

results.

In a supplemental memorandum in support of its

application for a temporary order, the Commission made

a compelling case that the payments at issue were not

regular payments in the everyday operation or normal

management of Gemstar. In many instances, the Com-

85a

mission simply pointed out what Yuen and Leung nor-

mally would have been entitled to, and then highlighted

the differences arising from the Termination Agree-

ments, notable differences that were not usual and not

ordinary, and thus “extraordinary.” We highlight and

quote from the memorandum:

I. INTRODUCTION

The Securities and Exchange Commission (“Com-

mission”) seeks a temporary order preventing Gem-

star-TV Guide International, Inc., (“Gemstar”) [sic]

from making any extraordinary payments to certain

persons for a period of 45 days, under Section 1103

of the Sarbanes-Oxley Act of 2002. Respondent

Gemstar does not oppose entry of an order main-

taining the status quo. Intervenors Henry C. Yuen

and Elsie Leung (collectively “Intervenors”) oppose

such an order because they contend: (1) they should

be heard before any order is entered; (2) there is no

reason to enter the order on an expedited basis; (3)

the payments are not extraordinary under Section

1103; and (4) Section 1103 is unconstitutional.

Il. ARGUMENT

A. The Restructuring Payments are Extraordi-

nary Payments under Section 1103

The principal issue is whether the Restructuring

Payments of $37.64 million in cash are extraordi-

nary payments under Section 1103. Yuen and Leung

admit that the payments are being made pursuant to

their November 7, 2002 “Termination Agreements”

with Gemstar that were the subject of at least five

months of extended negotiation and approval by

Gemstar’s entire Board of Directors. (Yuen Memo

86a

at p. 9.) Yuen and Leung also admit that the

Restructuring Payments were made to effect their

removal as Chief Executive Officer and Chief

Financial Officer, respectively, and to remove con-

trol of Gemstar’s Board of Directors from Yuen. The

Restructuring Payments and their circumstances are

so extraordinary that Yuen asserted his Fifth

Amendment privilege to all questions about his com-

pensation during testimony on April 25, 2003.

Under these circumstances, the Restructuring Pay-

ments are extraordinary payments.

Yuer and Leung ignore the significant events that

are the basis for the Restructuring Payments, and

focus only on the components which they charac-

terize as ordinary payments made under “long

standing contractual commitments.” (/d. p. 8.) How-

ever, the operative agreements under which the

Restructuring Payments are being made are the

November 7, 2002 Termination Agreements, entered

into on the same day that the payments originally

were to be disbursed by Gemstar. The Restructuring

Payments are being made pursuant to the Termina-

tion Agreements, which by their terms supersede all

other agreements between the parties. The restruc-

turing was so significant that Gemstar issued a

press release announcing it on October 8, 2002, and

filed a Form 8-K on November 7, 2002.

Yuen and Leung also ignore that, in terms of rela-

tionship to annual compensation, the Restructuring

Payments are extraordinary. Yuen is to receive_a_—

total of $56.7 million in cash and stock, of which

$29.48 million is cash. This is more than five times

Yuen's 200] base salary of approximately $5 million

a year. Leung is to receive $14.4 million in cash and

87a

stock, of which $8.16 million is cash. Similarly, this

is more than six times Leung’s 200] base salary of

$1.3 million.

There can be little dispute that the Restructuring

Payments are not being made in a normal and usual

course of business, but rather are “for an excep-

tional purpose or a special occasion.” Black's Law

Dictionary, at p. 406 (Abridged Sixth Edition 1991).

Indeed, if there were nothing remarkable about

these payments, then Yuen could have testified

freely about them on April 25, 2003; instead, he

invoked his Fifth Amendment privilege against self-

incrimination with respect to all questions about his

compensation.

B. The Component Amounts Are Extraordinary

Payments Under Section 1103

Yuen and Leung misdirect the Court away from the

events and circumstances of the Restructuring Pay-

ments and the total $37.64 million in cash, and

focus instead on alleged components of the Restruc-

turing Payments, which they identify as: (1) termi-

nation fees or severance payments; (2) accrued

unpaid bonuses for 2001; (3) accrued unpaid salary;

and (4) accrued unused vacation pay.

However, the Termination Agreements do not

describe the Restructuring Payments as having the

same components Yuen and Leung now advance to

the Court: Yuen’s Termination Agreement describes

the payments as: “(I) a termination fee of $22,452,640

and (ii) $7,030,778 (in full and complete settlement

for all unpaid salary, bonuses and unused vacation

days due under the Current Employment Agreement

or otherwise ).”” Leung’s is similar. The Termination

88a

Agreements state that the single lump sum payments

are a “settlement” of amounts due or “otherwise,”

and not merely simple contractual payments due in

the ordinary course. The description in the Termi-

nation Agreements is consistent with Intervenors’

admission that the Restructuring Payments were the

subject of “extended” negotiations, and that com-

ponent amounts that make up the lump sum settle-

ment payments in the Termination Agreements are

largely different than amounts due under their

employment agreements.

Yuen’s and Leung’s argument that the Court should

look at each component in isolation, and not in con-

text of the events and the governing documents,

should be rejected. Under their argument, an

extraordinary payment would escape Section 1103 if

made up of components that can be characterized as

usual or ordinary. Thus, if the Court finds that the

“vacation pay” component is not extraordinary, then

in the future an issuer and its employees will simply

call suspect extraordinary payments “vacation pay”

to evade the statute. Section 1103 should not be

read in a restrictive manner that would render it

meaningless, but rather it should be read broadly to

effect the remedial purposes of the federal securities

laws. See, e.g., SEC v. Zandford, 535 U.S. 813, 122

S.Ct. 1899, 153 L.Ed.2d 1 (2002).

l. The termination fees are extraordinary payments

Yuen and Leung admit that the bulk of the funds are

a termination fee or severance payment, but do not

provide any specific arguments why these are not

extraordinary payments under Section 1103. Yuen

and Leung admit that the amount of termination fees

were negotiated, and are substantially different than

89a

the severance payments they may have been entitled

to under their existing employment agreements. The

Termination Agreements provide that Yuen is to

receive a “termination fee” of $22.45 million, and

Leung a “termination fee” of $6,957,953.

The “termination fees” are the amounts agreed to,

after extended negotiation between Gemstar, Yuen,

and Leung, as the amounts Gemstar must pay to ter-

minate Yuen and Leung. Generally, the termination

of a chief executive officer or chief financial officer

is an extraordinary event, usually accompanied by

a public announcement and a Form 8-K filing, as it

was here.

2. The accrued unpaid bonuses for 2001

Bonuses are clearly the type of extraordinary pay-

ments encompassed by Section 1103. By definition,

a bonus is not an ordinary and usual payment, but

rather a “consideration or premium paid in addition

to what is strictly due” and a “premium or extra or

irregular remuneration.” As Senator Lott com-

mented about Section 1103: “While an investigation

is underway, basically rewards were given to these

corporate executives.” Any common sense inter-

pretation of a bonus understands that it is a special

reward for meeting or surpassing goals.

Yuen and Leung’s 2001 bonuses are exactly the type

of payments that should be frozen: their bonuses are

rewards for Gemstar’s 2001 reported financial

results. The Commission is investigating whether

Gemstar’s 2001 financial results were fraudulently

overstated. Since Yuen and Leung (and others)

signed and filed Gemstar’s 2001 Form 10-K on

April 1, 2002, Gemstar has restated and reversed

90a

substantial revenue items contained in the 2091

Form 10-K. The very set of events Section 1103 was

designed to prevent is implicated by the bonus pay-

ments: while the Commission is attempting to deter-

mine whether Gemstar’s 2001 financial results were

overstated and fraudulent, Yuen and Leung are

demanding to be paid for those results.

Under their employment agreements, the calculation

of Yuen and Leung’s bonuses is tied directly to Gem-

Star’s reported financial results. Yuen’s “merit

bonus” is calculated using his adjusted base salary

and 'Gemstar’s percentage increase in EBITDA

(earnings before interest, taxes, depreciation, and

amortization). Yuen and Leung each had an identi-

cal provision in their employment agreements for an

“incentive bonus,” calculated based on Gemstar’s

reported financial results.

3. The accrued unpaid salary

The unpaid salary component of the settlement

amount is, like the bonus payment component,

directly dependent upon Gemstar’s reported 2001

financial statements that are under investigation by

the Commission. Yuen and Leung’s employment

agreements included a formula for the annual

adjustment of their base salary. Under that formula,

if consolidated revenues or consolidated net earn-

ings increase, then Yuen and Leung’s base salary is

increased by a proportional amount. ([d., Ex. 2, at

18 (Yuen Employment Agreement, 4] 3(a)); Ex. 4, at

55 (Leung Employment Agreement 4 3(a))).

The calculation of the “catch-up” salary based

upon allegedly fraudulent financial statements is,

again, exactly the type of “reward” about which

9la

Section 1103 is concerned. Gemstar has restated

hundreds of millions of dollars of revenues from

multiple transactions since Yuen and Leung entered

into the Termination Agreements. To the extent

Gemstar’s reported financial results have been

overstated for a number of years (as indicated by

the restatements), Yuen and Leung’s compensation

and bonuses are terminally infected with those over-

statements.

4. The accrued unused vacation pay

The extraordinary nature of the vacation pay

amount in the settlement is revealed by the context.

In the ordinary course, an employee would take

their vacation time during a year and receive their

salary while on vacation. The employee is paid

accrued but unused vacation pay only on a special

occasion—when their employment is terminated.

[Sic] But for the restructuring and their removal,

Yuen and Leung had no contractual rights, under

their employment agreements, to be paid for accrued

but unused vacation.

(emphasis added).

The district court’s escrow order is reviewed for abuse

of discretion. See United States v. Cal-Almond, Inc., 102

F.3d 999, 1002-03 (9th Cir.1996) (analogizing escrow

order to preliminary injunction and applying abuse of

discretion standard). The district court abuses its dis-

cretion when it applies incorrect legal standards or

makes clearly erroneous findings of fact. Jd. at 1003.

The district court’s interpretation and construction of a

92a

federal statute are questions of law reviewed de novo.

SEC v. McCarthy, 322 F.3d 650, 654 (9th Cir.2003).

We decide the issues in this case in a distinctive statu-

tory context. We explained this context in SEC v. Rind,

991 F.2d 1486, 1491 (9th Cir.1993):

When the Commission sues to enforce the securities

laws, it vindicates public rights and furthers the

public interest. The public character of Commission

action is reflected in the introduction to the 1934

Act: “[T]ransactions in securities. . . are affected

with a national public interest which makes it nec-

essary to provide for regulation and control of such

transactions.” 15 U.S.C. § 78b. Congress entrusted

the Commission with the vital mission of ensuring

the honesty and fairness of the capital markets.

“The entire purpose and thrust of a [Commission]

enforcement action is to expeditiously safeguard the

public interest by enjoining securities violations.

' The claims asserted in such an action stem from,

and are colored by, the intense public interest in

[Commission] enforcement of these laws.” SEC v.

Asset Management Corp., 456 F.Supp. 998, 1000

(S.D.Ind.1978).

Given this context and the narrowly defined, regu-

lated, and targeted area to which it applies, we conclude

that Congress’ use of the term “extraordinary” in Section

1103 in connection with payments being made by a com-

pany to insiders during an investigation for potential

securities fraud—read in the light of the remedial pur-

poses of federal securities laws—does not constitute a

legal or a constitutional infirmity. “Extraordinary”

93a

means, in plain language, out of the ordinary. In the con-

text of a statute aimed at preventing the raiding of cor-

porate assets, “out of the ordinary” means a payment that

would not typically be made by a company in its cus-

tomary course of business.” The standard of comparison

is the company’s common or regular behavior. Thus, the

determination of whether a payment is extraordinary will

be a fact-based and flexible inquiry. Context-specific

factors such as the circumstances under which the pay-

ment is contemplated or made, the purpose of the pay-

ment, and the size of the payment may inform whether a

payment is extraordinary, as the district court properly

noted in this case. For example, a payment made by a

company that would otherwise be unremarkable may be

rendered extraordinary by unusual circumstances. See

BLACK’S LAW DICTIONARY 586 (6th ed.1990)

(defining “extraordinary” as “[o]Jut of the ordinary;. . .

employed for an exceptional purpose or on a special

occasion”).

A nexus between the suspected wrongdoing and the

payment itself may further demonstrate that the payment

is extraordinary, although such a connection is not

required. Evidence of the company’s deviation from an

“industry standard”—or the practice of similarly situated

2 We have taken a similar approach in interpreting the analo-

gous phrase “extraordinary expenses.” See, e.g., Atlanta-One, Inc. v.

SEC, 100 F.3d 105, 107-108 (9th Cir.1996) (noting that “extraordi-

nary expenses” of a business could not justify very high commission

fees); in re United States Trustee, 32 F.3d 1370, 1374 (9th Cir. 1994)

(noting that, for reimbursing a trustee in bankruptcy, the “extraor-

dinary expenses” are those “associated with the special needs of an

individual case.”); Frito-Lay, Inc. v. Local Union No. 137, Int'l Bhd.

of Teamsters, 623 F.2d 1354, 1365 n. 11 (9th Cir.1980) (“In addition

to lost profits, an injured employer is entitled to recover the extraor-

dinary expenses, not normal to its business operation, incurred as a

result of the Union's illegal strike.) (emphasis added).

94a

businesses—also might reveal whether a payment is

extraordinary. Again, however, the statute does not com-

pel any specific method of making the determination but

allows for the consideration of a variety of factors, as

the situation may warrant.

The district court had it exactly right in reading this

Statute, “ ‘not technically and restrictively, but flexibly

to effectuate its remedial purposes.’ ” SEC v. Zandford,

535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002)

(quoting SEC v. Capital Gains Research Bureau, Inc.,

375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237

(1963)). The court avoided any “one litmus test” and

instead looked in context at (1) the circumstances of the

payment, (2) the purpose of the payment, and (3) the

size of the payment. The court concluded in a thorough,

thoughtful, and well-reasoned decision that the Com-

mission “has met its burden” “under almost any stan-

dard.”

The court correctly focused on the nature, purpose,

and circumstances of the payments and determined that

they had nothing to do with Gemstar’s ordinary business.

The court accurately observed that

[t]he payments were negotiated over a five month

period and involved the participation of the Gemstar

Board, a Special Committee, and outside consul-

tants. The Board, the Special Committee, and the

Intervenors Yuen and Leung were each represented

by separate sets of counsel. Additionally, the ter-

mination agreements were executed as part of the

process of removing both Leung and Yuen from

their positions as Gemstar Officers.

The court concluded that the termination agreements

and the disputed payments “are anything but ordinary.”

We agree. Using as a measure what ordinarily goes on in

95a

the process of the issuer’s business, these facts are

clearly unusual and extraordinary. As the Commission’s

supplemental memorandum points out, the negotiated

Termination Agreement payments here are five and six

times greater than Yuen’s and Leung’s base salary, the

component amounts that make up the lump sur pay-

ments are different than the amounts due und*, their

employment agreements, the termination fees are dif-

ferent from what they may have been entitled to under

existing agreements, the bonuses appear to be fruit of the

alleged fraudulent financial results, and the vacation pay

item did not exist under their contracts. One would not

expect benefits like these to be flowing from corporate

assets to executives resigning under fire from key man-

agement positions. This scenario is not business as usual.

Telling also is the glaring fact that CEO Yuen would not

discuss these matters with the Commission, choosing

instead to assert his Fifth Amendment privilege. See SEC

v. Colello, 139 F.3d 674, 677 (9th Cir.1998) (“Parties are

free to invoke the Fifth Amendment in civil cases, but

the court is equally free to draw adverse inferences from

their failure of proof.”).

Finally, we discern—as did the district court—that a

nexus between the alleged wrongdoing and the contem-

plated payments was apparent from the Commission's

submissions. As the district court said, “the bonuses are

keyed to Gemstar’s financial performance—the accuracy

of which is alleged to have been compromised by the

Intervenors.”

We believe, as did the district court, that Gemstar’s

execution of its overall business objectives and ordinary

management of its business operations did not entail ter-

minating its CEO and CFO in the shadow of misstated

revenues, misleading public statements, securities fraud

investigations, plunging stock prices, and public rela-

96a

tions debacles, not to mention Yuen’s and Leung’s

inability to certify Gemstar’s books as accurate. Gem-

star’s Form 8-K filings certainly raise red flags the SEC

would be remiss to ignore.

The dissent suggests that to establish what is “extraor-

dinary,” the government must offer evidence of what

constitutes “usual or ordinary payments to a CEO and a

CFO under same or similar circumstances,” i.e., pay-

ments contemplated under threat of delisting, in a fight

with its independent auditor; and during an investigation

for having misstated revenues, cooked the books,

defrauded investors, employees and the market, and pos-

sibly committed a basket full of crimes. We respectfully

disagree. The idea that a court needs somehow to have

evidence of a “norm for corporate decision-making of

this type,” i.e., rampant fraud and a world of trouble, is

off the mark. Odd it would be indeed to shield payments

from escrow simply because an ousted insider at some

other corporation has been similarly enriched. In some

cases, it might be probative to look to a broader norm,

but not here. Legal “probable cause” statements, of

which this is a variant, do not need information about

how normal people act to create a reasonable suspicion

with respect to the targeted suspects. See Go Leasing,

Inc. v. NTSB, 800 F.2d 1514, 1518 (9th Cir.1986)

(“Agencies charged with a prosecutorial function must

have flexibility in confronting the varieties of facts pre-

sented in particular cases.”’).

These insiders appear, from the record submitted to

the district court, to be part of an enterprise engaged in

cookie jar mismanagement. The Commission subse-

quently sued them for multiple securities fraud viola-

tions, seeking anti-fraud injunctions, civil money

penalties, and disgorgement of ill-gotten gains, includ-

ing salaries, bonuses, and proceeds from the sale of

97a

stock—each one of which is at the epicenter of the pay-

ments at issue. The Commission’s complaint alleges that

because their compensation was linked to Gemstar’s

reported financial results, Yuen and Leung reaped mil-

lions of dollars in financial gains—in excess salary,

bonuses, and options—from their fraudulent manipula-

tions of Gemstar’s revenues, to the tune of an over-

statement of those revenues by at least $223 million.

Congress designed Section 1103 to add necessary

teeth to the Commission’s ability to perform its mission.

It ensures that recovery by way of disgorgement, etc., is

effective rather than empty. As for the importance of dis-

gorgement, we have said:

Disgorgement plays a central role in the enforce-

ment of the securities laws. The effective enforce-

ment of the federal securities laws requires that the

Commission be able to make violations unprof-

itable. The deterrent effect of a Commission

enforcement actien would be greatly undermined if

securities law viclators were not required to dis-

gorge illicit profits. By deterring violations of the

securities laws, disg

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