South-Western Legal Studies in Business

Sarbanes-Oxley Allows SEC to Force Extraordinary Payments to Execs into Escrow Accounts Pending Investigation
Description Appeals court held that under Sarbanes-Oxley the SEC can intervene to request that extraordinary payments to executives may be put in escrow pending an investigation of company finances. In this case, the CEO and CFO were granted huge payments when they resigned amid an accounting scandal; the court held that to be extraordinary.
Topic Securities Law
Key Words Sarbanes-Oxley; Extraordinary Payments; Intervention; Escrow Order
C A S E   S U M M A R Y
Facts In April 2002, Gemstar revised its 2001 earnings statements substantially downward; its stock then dropped sharply. Right before that filing, its CEO, Yuen, sold 7 million shares of stock for $59 million. As soon as the accounting mess became public, Yuen and CFO Leung resigned their positions. The board granted them about $37 million worth of cash and stock. As permitted under the Sarbanes-Oxley Act, the SEC intervened, asking the court to order the $37 million be placed in escrow pending the results of the investigation of the accounting problems at the company. The district court granted the request, holding that Sarbanes-Oxley allows "extraordinary" payments to be forced into escrow pending investigations. The company appealed.

Affirmed. The payments made by the publicly traded company to its officers were "extraordinary," for purpose of the escrow order provision of Sarbanes-Oxley, since the nature, purpose, and circumstances of the payments had nothing to do with the company's ordinary business. The officers were resigning under fire. They were granted payments many times greater than their base salaries. The payments were not based on an existing contract. The bonuses they were granted may have been based upon fraudulent transactions the SEC was investigating. What is an extraordinary payment will be determined on a case-by-case basis, as circumstances will differ from one company to another. While in this case there is a link between alleged wrongdoing and the escrow order, the Act does not require there be an allegation of wrongdoing for the SEC to request that an extraordinary payment be put in escrow pending an investigation of company finances.

Citation SEC v. Gemstar-TV Guide International, Inc., 401 F.3d 1031 (9th Cir., 2005)

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