Neither Gem Nor Star

Embattled TV programming-guide provider Gemstar-TV Guide(Nasdaq: GMSTE)reported this week it will restate $111 million in revenues it booked in the past. In other words, the company claimed revenues it shouldn't have.

Additionally, former CEO Henry Yuen and CFO Elsie Leung have agreed to testify before the Securities and Exchange Commission sometime within the next few weeks. Yuen and Leung stepped down in ignominy last year after Rupert Murdoch's News Corp. (NYSE: NWS), which held a 42% stake in the company, got fed up with their management. In March of 2002, then-president Peter Boylan left when Gemstar announced it would write down more than $5 billion of goodwill from its purchase of TV Guide.

But the real bombshell came last summer. Gemstar sued former customers Scientific Atlanta(NYSE: SFA) and Echostar(Nasdaq: DISH) for patent infringement when they released comparable technologies to Gemstar's. So assured of victory was Yuen that he continued accruing royalties from the two companies. To call this "aggressive accounting" is a substantial understatement. Pity poor Yuen when Gemstar lost the case. All those accruals had to be reversed, sounding the death knell for his management of the company.

After News Corp. essentially assumed management control of Gemstar, the company fired the original auditors (who did what?!) and began reviewing past accounting. This announcement marks the second restatement this year. This is to be expected, as a company that has played aggressively in one area, generally speaking, has shaded the laws of GAAP and common sense elsewhere, as well. There may be more restatements.

Plenty of folks for whom I have deep respect call Gemstar a bargain these days. Certainly, the fact that they've dumped their shady management team improves the company's suitability for investment alone, and TV Guide, despite improvements in digital programming data, remains a cash cow. But I'm a little concerned that Yuen and Leung remain employees of the company at all, and that Leung remains on its board of directors. In fact, the company yesterday expressed "disappointment" that the SEC had to enforce a subpoena on Yuen and Leung, who were instructed by the company to cooperate.

The story's not over yet, and more may be found in Gemstar's receivables cesspool that will cause shareholders pain. Gemstar, at this point, is a poster child for the motivation for executives to lie, cheat, and steal. After all, unless Yuen is thrown in jail or stripped of his stock (both highly unlikely), he will still be unbelievably rich, based in no small part on his ability to lie.




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