SEC v. Yuen

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

SECURITIES AND EXCHANGE 
COMMISSION,
Plaintiff-Appellee, No. 03-56129
HENRY C. YUEN; ELSIE M. LEUNG, D.C. No.
Intervenors-Appellants,  CV-03-03124-
v. WMB/MRP
GEMSTAR-TV GUIDE INTERNATIONAL, OPINION
INC.,
Defendant.

Appeal from the United States District Court
for the Central District of California
Wm. Matthew Byrne, Jr., District Judge, Presiding

Argued and Submitted
December 15, 2004—Pasadena, California

Filed March 22, 2005

Before: Mary M. Schroeder, Chief Judge, Stephen Reinhardt,
Stephen S. Trott, Sidney R. Thomas, Susan P. Graber,
M. Margaret McKeown, Kim McLane Wardlaw,
Raymond C. Fisher, Richard R. Clifton,
Consuelo M. Callahan, and Carlos T. Bea, Circuit Judges.

Opinion by Judge Trott;
Concurrence by Judge Reinhardt;
Dissent by Judge Bea

3391
3394 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL

COUNSEL

Michelle Rice, Arkin Kaplan LLP, for Yuen & Leung, New
York, New York, for the intervenors-appellants.

Richard M. Humes, Securities and Exchange Commission,
Washington, D.C., for the plaintiff-appellee.

Thomas J. Karr, Securities and Exchange Commission, Wash-
ington, D.C., for the plaintiff-appellee.

Richard L. Stone, for Gemstar-TV Guide, for the defendant-
respondent-appellee.
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3395
Kimberly S. Greer, Fish & Richardson, P.C., San Diego, Cali-
fornia, for the defendant-respondent-appellee.

OPINION

TROTT, Circuit Judge:

In response to a formal application by the Securities and
Exchange Commission (“SEC” and “Commission”), the dis-
trict 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 payments by Gemstar-TV Guide International, Inc.
(“Gemstar”), a public corporation, to its resigning Chief Exec-
utive Officer (“CEO”), Dr. Henry Yuen, and its Chief Finan-
cial Officer (“CFO”), Elsie Leung. This escrow order —
directed 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 violations 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 unconstitutionally vague on its face and as applied
to them; (2) that the district court erred as a matter of law in
its interpretation of the statutory term “extraordinary pay-
ments”; and (3) that the district court erred in its determina-
tion that the payments in question could be deemed
“extraordinary.”1 Title 28 U.S.C. § 1292(a)(1) gives us juris-
diction over this timely appeal, and we affirm.
1
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 process established by Congress
3396 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
I

The civil statute under our microscope, Section 1103, 15
U.S.C. § 78u-3(c)(3), is narrow, well defined, and clear. It
comes into play only

(1) during the course of a lawful investigation by
the SEC,

(2) involving possible violations of the federal
securities laws,

(3) committed by an issuer of publicly traded
securities or any of its directors, officers, part-
ners, controlling 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 combination of
events occur, as happened here, Congress has empowered the
Commission to petition a federal district court for nothing

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 (1987), which established an exception
from the warrant requirement under certain delineated circumstances
involving “closely regulated” businesses. First, the government’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 legis-
lated is plainly “a constitutionally 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) (apply-
ing the Burger test to regulated businesses transporting hazardous materi-
als).
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3397
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 — all of this sub-
ject to court supervision.

This protocol on its face bears the hallmarks and indicia 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 cor-
porate debt — as well as the persons 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 disturbing shadow of a flood of corporate scan-
dals, its purpose is to temporarily protect corporate funds and
the investing public and creditors against theft, fraud, and dis-
sipation. As the Commission underscores in its brief, (1) the
initial escrow lasts for only 45 days with the possibility of a
single 45-day extension, see 15 U.S.C. § 78u-3(c)(3)(A)(I),
(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)(I); and (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 per-
son with accrued interest, 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 intervenor-appellants claim
that the district court erred in its interpretation and application
of the word “extraordinary” and that the word is so vague that
it renders this entire process unlawful. Upon examination,
these claims are unpersuasive.

II

Faced with one cataclysmic corporate accounting scandal
after another, including Enron, WorldCom, and Tyco, Con-
3398 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
gress’ purpose in enacting Section 1103’s escrow measure
could not be clearer. One after another, many persons, compa-
nies, and pension plans have been left holding an empty bag
after corporate insiders committed fraud and other corporate
crimes and misdeeds at the ultimate expense of the corpora-
tion’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 to
rectify such wrongs — disgorgement, civil penalties, restitu-
tion, 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 innocent employees, whose pen-
sions in many cases have been permanently thrashed. Ulti-
mately, 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. S6542 (daily
ed. July 10, 2002). In the debate that ensued after Amendment
No. 4188’s introduction, different senators focused on various
possible abuses that Section 1103 was meant to prevent:

Section 3 freezes payments of potential wrongdo-
ers. This section would allow the SEC, during an
investigation, to seek an order in Federal court
imposing a 45-day freeze on extraordinary payments
to corporate executives. Again, this year we have
seen just that sort of thing happening. While an
investigation 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
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3399
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,
extraordinary payments, while they are being inves-
tigated. You can’t have that sort of thing.

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 giving
themselves huge bonuses and other extraordinary
payments if the company is subject to an SEC inves-
tigation. Their pay and benefits are frozen when the
investigation starts. Americans will know that corpo-
rate officers will no longer be able to misuse 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 reputation will go to jail
for a long, long time.

148 Cong. Rec. H4685 (daily ed. July 16, 2002) (statement of
Rep. Sensenbrenner). From this background, it is readily
apparent that the intent of Congress in enacting this statute
was to provide a strong shield for third-party creditors and
corporate investors once the SEC begins an investigation of
corporate malfeasance.

III

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 previously claimed as revenue
had not actually been realized. Gemstar revealed also that it
3400 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
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, Gem-
star’s stock price declined by a startling 37 percent. But, this
was just the beginning. On August 14, 2002, Gemstar
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 statements 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 state-
ments were accurate, and that they were not able to comply
with written 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 dispute 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 accounting and financial matters involving restatement
of financial 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 Gem-
star shares, receiving an initial payment of $59 million. No
doubt the purchasers of these shares believed they were get-
ting fair value for their money, only to see the roof fall in
when the facts became public.
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3401
Simultaneous with the internal 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 respective 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
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 Commission com-
menced a formal investigation of this scenario to determine
whether Gemstar and its former and present officers and
directors had engaged in actionable securities fraud by mak-
ing materially false and misleading public statements regard-
ing 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.”

IV

It is instructive to understand what must happen in order for
the Commission to launch an investigation into suspected vio-
lations of the securities laws as a prerequisite to petitioning
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”) give the
Commission the authority to initiate investigations into sus-
pected violations of the securities laws. See 15 U.S.C. § 77t(a)
(“Whenever it shall appear to the Commission . . . that the
provisions of this title . . . have been or are about to be vio-
lated, it may . . . investigate such facts.” (emphasis added));
15 U.S.C. § 78u(a)(1) (“The Commission may . . . make such
3402 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
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 pro-
cess by which the SEC issues subpoenas calling for document
production or testimony, supported by the power of the fed-
eral courts. To enable the staff of the SEC, rather than the
appointed members of the SEC, to perform such an investiga-
tion, the Commission 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
investigative authority; (2) a probable cause section setting
forth the information which, “if true, tends to show” that cer-
tain 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 (not-
ing that in most circumstances “[n]either a Commission deci-
sion 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 per-
sons or entities, directly or indirectly, in the
offer or sale of, or in connection with the pur-
chase or sale of Gemstar securities, may have
employed a device, scheme, or artifice to
defraud, made or obtained money or property
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3403
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 operated
or would operate as a fraud or deceit upon any
person. As part of the aforesaid activities, such
persons or entities may have, directly or indi-
rectly, among other things, made materially
false and misleading 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 relation-
ship 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 per-
sons or entities failed or caused the failure to
file or filed or caused to be filed with the Com-
mission annual reports on Form 10-K and quar-
terly reports on Form 10-Q which may have
contained an untrue statement of material fact or
may have omitted to state a material fact neces-
sary, 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,
Gemstar’s revenue and earnings or losses.

C. Gemstar and its former and present officers,
directors, employees, affiliates, and other per-
sons or entities may have failed to or caused the
failure to:
3404 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
1. make and keep books, records and
accounts which, in reasonable detail,
accurately and fairly reflected Gem-
star’s transactions and disposition of
assets;

2. devise and maintain a system of inter-
nal accounting controls sufficient to
provide reasonable assurances that
transactions were recorded as neces-
sary to permit preparation of financial
statements in conformity with Gener-
ally Accepted Accounting Principles or
any other criteria applicable to such
statements, and to maintain account-
ability for assets;

D. Gemstar and its former and present officers,
directors, employees, affiliates, and other per-
sons 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 per-
sons or entities may have knowingly circum-
vented or knowingly failed to implement a
system of internal accounting controls or know-
ingly 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 commu-
nication in interstate commerce.
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3405
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 Securi-
ties 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 supporting declara-
tion executed by the Commission’s attorney 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 wit-
nesses, for 105 days of testimony. The testi-
mony has been taken throughout the United
States.

9. The Commission’s staff has scheduled the
investigative testimony of additional witnesses.

10. Since the Commission issued its Formal Order
on October 17, 2002, the Commission’s staff
3406 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
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
production of documents. Pursuant to the sub-
poenas for the production of documents, the
staff has received substantial document produc-
tions in response to the subpoenas.

12. On January 7, 1998, Henry Yuen entered into
an Amended and Restated Employment Agree-
ment (“Yuen’s Employment Agreement”) with
Gemstar International Group, Ltd. and Gemstar
Development Corp. (collectively with
Gemstar-TV Guide International, Inc., “Gem-
star”), a copy of which is attached hereto as
Exhibit 2.

13. Under Yuen’s Employment Agreement,
Yuen’s initial base salary was $1 million, sub-
ject 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
formula under which Yuen’s base salary could
increase each year, depending upon annual per-
centage increases in Gemstar’s consolidated
revenues and consolidated net earnings, as
reported in Gemstar’s financial statements. Id.

15. Yuen’s Employment Agreement contained a
provision for an annual merit bonus that was
calculated using Gemstar’s reported financial
results. The formula used his adjusted base sal-
ary and the annual percentage increase, if any,
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3407
in Gemstar’s consolidated earnings before
interest, taxes, depreciation and amortization
(“EBITDA”). Yuen could elect to receive his
merit bonus in the form of cash or stock
options. Id. at § 3(b).

16. Yuen’s Employment Agreement also included
a provision for an annual incentive bonus that
was calculated using Gemstar’s reported finan-
cial 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 incentive bonus in the form
of cash or stock options. Id. at § 3(c) & Sched-
ule I.

17. Yuen’s Employment Agreement provided
Yuen with annual stock options. Id. at § 3(d).

18. During the investigation, the staff took Yuen’s
testimony on April 1, 2003, when he answered
general 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
3408 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
Agreement” dated March 27, 2002, and confir-
mations of transactions executed under that
agreement. The brokerage records show that
between April 3, 2002 and April 8, 2002, Yuen
entered into “prepaid forward” 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 Inter-
national, 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 Agree-
ment with Gemstar International Group, Ltd.
and Gemstar Development Corp. (“Leung’s
Employment Agreement”), a copy of which is
attached hereto as Exhibit 4.

23. Under Leung’s Employment Agreement, her
initial base salary was $700,000, subject to
annual increases based on Gemstar’s financial
results. Id. at § 3(a).

24. Leung’s Employment Agreement included a
formula 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 statements. Id.

25. Leung’s Employment Agreement included a
provision for an annual incentive bonus based
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3409
upon Gemstar’s financial results. The formula
for calculating Leung’s incentive bonus used
her adjusted base salary and increases in Gem-
star’s consolidated earnings per share as
reported in Gemstar’s Forms 10-Q and 10-K.
Id. at § 3(b) & Schedule I.

26. Leung’s Employment Agreement further pro-
vided Leung with annual stock options. Id. 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 tem-
porary order requiring 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 possi-
ble.

(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 high-
lighting the tumult inside the company surrounding manage-
ment changes and the restatement of financial results.

In a supplemental memorandum in support of its applica-
tion for a temporary order, the Commission made a compel-
3410 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
ling case that the payments at issue were not regular payments
in the everyday operation or normal management of Gemstar.
In many instances, the Commission simply pointed out what
Yuen and Leung normally would have been entitled to, and
then highlighted the differences arising from the Termination
Agreements, 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
(“Commission”) seeks a temporary order preventing
Gemstar-TV Guide International, Inc., (Gemstar”)
[sic] from making any extraordinary payments to
certain persons for a period of 45 days, under Sec-
tion 1103 of the Sarbanes-Oxley Act of 2002.
Respondent Gemstar does not oppose entry of an
order maintaining the status quo. Intervenors Henry
C. Yuen and Elsie Leung (collectively “Interve-
nors”) 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.

II. 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 extraordinary
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
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3411
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 Restruc-
turing Payments were made to effect their removal
as Chief Executive Officer and Chief Financial Offi-
cer, respectively, and to remove control of Gemstar’s
Board of Directors from Yuen. The Restructuring
Payments and their circumstances are so extraordi-
nary that Yuen asserted his Fifth Amendment privi-
lege to all questions about his compensation during
testimony on April 25, 2003. Under these circum-
stances, the Restructuring Payments are extraordi-
nary payments.

Yuen and Leung ignore the significant events that
are the basis for the Restructuring Payments, and
focus only on the components which they character-
ize as ordinary payments made under “long standing
contractual commitments.” (Id. p. 8.) However, 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 dis-
bursed by Gemstar. The Restructuring Payments are
being made pursuant to the Termination Agree-
ments, which by their terms supersede all other
agreements between the parties. The restructuring
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 2001 base salary of approximately $5 million
a year. Leung is to receive $14.4 million in cash and
3412 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
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
Payments Under Section 1103

Yuen and Leung misdirect the Court away from
the events and circumstances of the Restructuring
Payments and the total $37.64 million in cash, and
focus instead on alleged components of the Restruc-
turing Payments, which they identify as: (1) termina-
tion 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 com-
plete settlement for all unpaid salary, bonuses and
unused vacation days due under the Current Employ-
ment Agreement or otherwise).” Leung’s is similar.
The Termination Agreements state that the single
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3413
lump sum payments are a “settlement” of amounts
due or “otherwise,” and not merely simple contrac-
tual payments due in the ordinary course. The
description in the Termination Agreements is consis-
tent with Intervenors’ admission that the Restructur-
ing Payments were the subject of “extended”
negotiations, and that component amounts that make
up the lump sum settlement payments in the Termi-
nation 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 context of the events and the governing docu-
ments, 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 meaning-
less, 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).

1. 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
3414 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
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 commented
about Section 1103: “While an investigation is
underway, basically rewards were given to these cor-
porate executives.” Any common sense interpretation
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 fraud-
ulently overstated. Since Yuen and Leung (and oth-
ers) 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
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3415
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 calcula-
tion of Yuen and Leung’s bonuses is tied directly to
Gemstar’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 identical
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. (Id., Ex 2, at 18
(Yuen Employment Agreement, ¶ 3(a)); Ex. 4, at 55
(Leung Employment Agreement ¶ 3(a)).

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
3416 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
into the Termination Agreements. To the extent
Gemstar’s reported financial results have been over-
stated for a number of years (as indicated by the
restatements), Yuen and Leung’s compensation and
bonuses are terminally infected with those overstate-
ments.

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 vaca-
tion.

(emphasis added).

V

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 stan-
dard). The district court abuses its discretion when it applies
incorrect legal standards or makes clearly erroneous findings
of fact. Id. at 1003. The district court’s interpretation and con-
struction of a federal statute are questions of law reviewed de
novo. SEC v. McCarthy, 322 F.3d 650, 654 (9th Cir. 2003).

VI

[1] 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):
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3417
When the Commission sues to enforce the securi-
ties 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 neces-
sary 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] enforce-
ment 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 [Commis-
sion] enforcement of these laws.” SEC v. Asset Man-
agement Corp., 456 F. Supp. 998, 1000 (S.D. Ind.
1978).

[2] Given this context and the narrowly defined, regulated,
and targeted area to which it applies, we conclude that Con-
gress’ use of the term “extraordinary” in Section 1103 in con-
nection with payments being made by a company to insiders
during an investigation for potential securities fraud — read
in the light of the remedial purposes of federal securities laws
— does not constitute a legal or a constitutional infirmity.
“Extraordinary” means, in plain language, out of the ordinary.
In the context of a statute aimed at preventing the raiding of
corporate assets, “out of the ordinary” means a payment that
would not typically be made by a company in its customary
course of business.2 The standard of comparison is the compa-
2
We have taken a similar approach in interpreting the analogous phrase
“extraordinary expenses.” See, e.g., Atlanta-One, Inc. v. SEC, 100 F.3d
105, 107-108 (9th Cir. 1996) (noting that “extraordinary 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 “extraordinary expenses” are those “associated
3418 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
ny’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 circum-
stances under which the payment is contemplated or made,
the purpose of the payment, 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 “ex-
traordinary” as “[o]ut of the ordinary; . . . employed for an
exceptional purpose or on a special occasion”).

A nexus between the suspected wrongdoing and the pay-
ment 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 stan-
dard” — or the practice of similarly situated businesses —
also might reveal whether a payment is extraordinary. Again,
however, the statute does not compel any specific method of
making the determination but allows for the consideration of
a variety of factors, as the situation may warrant.

[3] 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 (2002) (quoting SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180, 195 (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

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 extraordinary expenses, not normal to its business operation,
incurred as a result of the Union’s illegal strike.”) (emphasis added).
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3419
thorough, thoughtful, and well-reasoned decision that the
Commission “has met its burden” “under almost any stan-
dard.”

[4] 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 termi-
nation agreements were executed as part of the pro-
cess 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 the process of
the issuer’s business, these facts are clearly unusual and
extraordinary. As the Commission’s supplemental memoran-
dum 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 differ-
ent 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 resign-
ing under fire from key management positions. This scenario
is not business as usual. Telling also is the glaring fact that
CEO Yuen would not discuss these matters with the Commis-
sion, choosing instead to assert his Fifth Amendment privi-
3420 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
lege. 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.”).

[5] 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 sub-
missions. 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 execu-
tion of its overall business objectives and ordinary manage-
ment of its business operations did not entail terminating its
CEO and CFO in the shadow of misstated revenues, mislead-
ing public statements, securities 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. Gemstar’s Form 8-K filings certainly raise red flags
the SEC would be remiss to ignore.

The dissent suggests that to establish what is “extraordi-
nary,” 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., payments 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 possibly committed a basket full of crimes. We respect-
fully 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 proba-
tive to look to a broader norm, but not here. Legal “probable
cause” statements, of which this is a variant, do not need
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3421
information about how normal people act to create a reason-
able 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 presented in
particular cases.”).

These insiders appear, from the record submitted to the dis-
trict court, to be part of an enterprise engaged in cookie jar
mismanagement. The Commission subsequently sued them
for multiple securities 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 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 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 disgorgement, 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 unprofitable.
The deterrent effect of a Commission enforcement
action would be greatly undermined if securities law
violators were not required to disgorge illicit profits.
By deterring violations of the securities laws, disgor-
gement actions further the Commission’s public pol-
icy mission of protecting investors and safeguarding
3422 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
the integrity of the markets. Although the Commis-
sion at times may use the disgorged proceeds to
compensate injured victims, this does not detract
from the public nature of Commission 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 quotations, and
alterations omitted).

VII

Having concluded that Gemstar’s payments to Yuen and
Leung constitute “extraordinary payments” within the mean-
ing of Section 1103, we turn to the Appellants’ argument that
Section 1103 is unconstitutionally vague. Our analysis must
begin with a presumption in favor of the constitutionality of
an act of Congress. Parker v. Levy, 417 U.S. 733, 757 (1974).
With this principle in mind, we conclude (1) that Section
1103 is not void for vagueness as applied to Yuen or Leung,
and (2) that because Section 1103 does not concern First
Amendment issues, Yuen and Leung’s facial challenge fails
as well. See United States v. Mazurie, 419 U.S. 544, 550
(1975) (“It is well established that vagueness challenges to
statutes which do not involve First Amendment freedoms
must be examined in the light of the facts of the case at
hand.”).

[6] As the SEC points out, statutes that regulate businesses
do not require the same precision as statutes addressing con-
stitutional and criminal issues. In Village of Hoffman Estates
v. Flipside, Hoffman Estates, Inc., 455 U.S. 489 (1982), the
Supreme Court held:

[E]conomic regulation is subject to a less strict
vagueness test because its subject matter is often
more narrow, and because businesses, which face
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3423
economic demands to plan behavior carefully, can be
expected to consult relevant legislation in advance of
action. Indeed, the regulated enterprise may have the
ability to clarify the meaning of the regulation by its
own inquiry, or by resort to an administrative pro-
cess.

Id. at 498 (footnotes omitted); see also Papachristou v. City
of Jacksonville, 405 U.S. 156, 162 (1972) (“In the field of
regulatory statutes governing business activities, where the
acts limited are in a narrow category, greater leeway is
allowed.”); Botosan v. Paul McNally Realty, 216 F.3d 827,
836 (9th Cir. 2000) (“Because the ADA is a statute that regu-
lates commercial conduct, it is reviewed under a less stringent
standard of specificity.”). Under this less stringent standard,
the Appellants’ void for vagueness argument lacks merit. A
statute is unconstitutionally vague if it fails one of two tests:
“First, if it fails to provide people of ordinary intelligence a
reasonable opportunity to understand what conduct it prohib-
its. Second, if it authorizes or even encourages arbitrary and
discriminatory enforcement.” Hill v. Colorado, 530 U.S. 703,
732 (2000). Yuen and Leung cannot show that Section 1103
fails either test.

VIII

We conclude that the district court was correct in its under-
standing of the meaning of “extraordinary payments” and in
the application of that flexible standard to the facts and cir-
cumstances of this case. Wisely, we believe, both Congress
and the SEC have avoided creating a specific litmus test that
determines what is or is not an “extraordinary payment.” To
do so for all possible situations would be next to impossible
and would serve only to guide corporate scoundrels searching
for ways to circumvent this salutary law.

AFFIRMED.
3424 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
REINHARDT, Circuit Judge, concurring in the result, with
whom GRABER, Circuit Judge, joins:

I agree that the severance packages in question are “ex-
traordinary payments.” I do not believe, however, that Con-
gress intended courts to apply a vague and multi-faceted test
that requires consideration of the purpose, circumstances, and
size of the benefits, as well as other more complex factors,
when determining whether to grant a temporary order escrow-
ing such one-time payments for a short period of time while
the SEC makes its decision regarding the filing of formal
charges. Rather, employing a well-established meaning of the
word “extraordinary,” I would hold that all severance pack-
ages due top corporate officers and officials, and any other
substantial non-routine payments to which they may be enti-
tled, constitute “extraordinary payments” that the district
court may order placed in escrow temporarily.

Section 1103 is a prophylactic provision intended to main-
tain the financial status quo of companies under investigation.
As Senator Lott, sponsor of the provision, explained, its pur-
pose is to “freeze[ ] payments of potential wrongdoers . . .
[by] imposing a 45-day freeze on extraordinary payments to
corporate executives.” Floor Statement of then Senate Major-
ity Leader Lott, 148 Cong. Rec. S6545 (July 10, 2002)
(emphasis added). In order to effectuate the broad remedial
purpose of the Sarbanes-Oxley Act, section 1103 authorizes
the SEC to freeze any payments that are not made in the
course of ordinary business operations and that might
adversely affect the SEC’s ability to protect the shareholders
of a company under investigation. The freeze is intended to
ensure that disgorgement and other remedies will be available
should corporate financial wrongdoing be established. Com-
plementing section 1103’s “freezing” of certain funds of a
company under investigation, the “extraordinariness” require-
ment ensures that individuals will continue to receive their
regular salaries and benefits and that the company will not be
restricted in its usual and ordinary day-to-day operations dur-
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3425
ing the pendency of the investigation. In contrast, the sever-
ance of a corporate executive, such as a CEO or a CFO, and
the payment of benefits related to that severance, is, by defini-
tion, “extraordinary”: it is uncommon, unusual, and, ulti-
mately, not a part of the regular day-to-day business of the
company.1

This interpretation of section 1103 is well-supported. It
accords with a common and well-established definition of
“extraordinary.” See e.g., Black’s Law Dictionary 406 (6th
ed. (abridged) 1991) (defining “extraordinary,” inter alia, as
“employed for an exceptional purpose or on a special occa-
sion”); Oxford English Dictionary (2d. ed. 1989) (defining
“extraordinary,” inter alia, as being “[o]ut of the usual or reg-
ular course of order . . . exceptional; unusual; singular.”). It
is corroborated by the Congressional record. See, e.g., Floor
Statement of Senator Lott, 148 Cong. Rec. S6545 (daily ed.
July 10, 2002) (complaining that executives were receiving
“rewards,” “corporate assets . . . [for] personal benefit,” and
“increased payments,” “[w]hile an SEC investigation is
underway”); Floor Statement of Representative Sensenbren-
ner 148 Cong. Rec. H4685 (daily ed. July 16, 2002) (stating
that under this legislation, “top executives will not be allowed
to pilfer the assets of the company by giving themselves huge
bonuses and other extraordinary payments if the company is
subject to [an] SEC investigation. Their pay and benefits are
frozen when the investigation starts”).2 Lastly, a bright-line
rule comports with the purpose of the Act, particularly in light
1
As Judge Trott’s opinion for the court points out, see ante at 3397-98,
we have recently experienced a tidal wave of corporate accounting scan-
dals. Although the government tends, unabashedly, to give medals to high-
ranking officials whose missions have ended in disaster, corporations are
more likely to give extravagant bonuses to such individuals, while inviting
them to leave so as to avoid further public embarrassment.
2
As the above statements from Congress illustrate, Congress referred to
“bonuses,” “rewards,” and “increased payments,” as “extraordinary pay-
ments.” All are payments beyond a corporate executive’s ordinary and
customary salary or other compensation.
3426 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
of the early stage of the investigation at which the SEC would
ordinarily need to invoke section 1103, a stage at which the
agency is yet to develop much of the relevant information.
See Floor Statement of Representative Baker, 148 Cong. Rec.
H4683-01 (daily ed. July 16, 2002) (noting that section 1103
allows “the SEC to freeze extraordinary payments until appro-
priate investigation may be concluded to determine whether
such payments were warranted or not.” (emphasis added)). As
the SEC puts it, “complex proceedings are inimical . . . to the
purposes of Section 1103” when the “investigation remains
nascent or incomplete, and on an expedited (often emergency)
basis.”3

Irrespective of how common the termination of a CEO,
CFO, or any key employee may be in the business world at
large, or even at the particular company under investigation,
the termination itself, and more important, the substantial sev-
erance package that so frequently accompanies it, is “extraor-
dinary” under section 1103, because the event is not part of
the regular day-to-day operations of the enterprise and the
payments tend to disturb the financial status quo that the SEC
is seeking to maintain. I see no need to weigh the amount of
the severance package relative to the petitioners’ base salary,
or to assess whether the severance negotiations were suspi-
cious or carried out in an “extraordinary” manner; nor do I see
any need to examine any of the other factors the majority sug-
gests may in some circumstances be relevant, such as the sev-
erance benefits of officers of other companies. Like the
majority, I believe that Congress intended to “provide a strong
shield for third-party creditors and corporate investors once
the SEC begins an investigation of corporate malfeasance,”
ante at 3399. Contrary to the majority, however, I believe that
whether there are suspicions of additional wrongdoing in the
negotiation of the severance package, and whether the SEC
can prove that any severance payments are connected with the
pending investigation, is irrelevant to the question whether
3
Petition of the SEC for Rehearing and Rehearing En Banc, at 15.
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3427
severance payments are “extraordinary” under the Act. If the
purpose of section 1103 is, as the majority agrees, to prevent
wrongdoers from depleting the corporate treasury and to
ensure that there are adequate funds to provide for disgorge-
ment should the allegations of fraud prove to be true, then an
“extraordinary” payment would still be extraordinary even
though it simply matched the executive’s base annual salary,
which in most cases would be in the millions. Similarly, the
payment would be extraordinary even though the terms and
amount were established entirely and unambiguously by pre-
negotiated provisions incorporated in an employment contract
long before the investigation commenced and even though no
further negotiations whatsoever transpired after the first hint
of scandal. In short a severance payment is an extraordinary
payment regardless of the circumstances.

Of course, just because all severance payments are extraor-
dinary does not mean that all such payments will be automati-
cally frozen when an investigation starts. Indeed, the SEC has
the discretion to decide whether a particular extraordinary
payment should be placed in escrow, and whether to request
an escrow order from a federal judge. In making that decision
it will undoubtedly consider whether, on the basis of the lim-
ited facts available to it, a particular freeze order is necessary
or desirable to protect the public interest. Also, if, ultimately,
the investigation does not lead to a charge by the SEC, any
escrowed payment is released, while if a charge against the
company is filed, the individual affected by such a freeze may
petition a federal court for review of the order.

The clear-cut rule established by section 1103 provides an
orderly and efficient method of effectuating Congress’ intent
while giving firm guidance to companies that are under inves-
tigation. The risk that in the absence of a freeze the SEC will
be unable to achieve its objective of protecting the public
interest because it cannot recoup the extraordinary payments
made to high-ranking corporate officers or officials substan-
tially outweighs the limited inconvenience a temporary freeze
3428 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
imposes upon the issuer and the would-be recipient of the
extraordinary payment. In my opinion, Congress did not
intend that before the SEC may freeze a severance payment
for 45 or 90 days, it must satisfy the “extraordinariness” stan-
dard by presenting a substantial body of evidence to a court
regarding the purpose, circumstances, and size of the particu-
lar payment. I would hold that under section 1103, all sever-
ance packages due to corporate executives fall into the
category of “extraordinary payments” and are subject to a
temporary freeze when the company in question, or those act-
ing on its behalf, are under investigation for serious securities
violations. For this reason, I agree that the order freezing the
severance payments of Yuen and Leung must be affirmed.

BEA, Circuit Judge, dissenting:

We are called upon to interpret the phrase “extraordinary
payments” found in Section 1103 of the Sarbanes-Oxley Act.
15 U.S.C. § 78u-3(c)(3)(A)(i). In my view, the majority errs
in two regards.

First, the majority interprets “extraordinary payments” to
mean “payments under extraordinary circumstances.” See
Maj. Op. at 3417-20. This first step enables the majority to
take account of a variety of circumstances (such as the fact
that the payments at issue were made “in the shadow” of con-
duct ultimately giving rise to the SEC’s investigation) that are
only indirectly related (or, in some cases, not related at all) to
the payments at issue. See id. at 3419-20. Of course, it is per-
fectly proper for the SEC to consider such circumstances in
deciding whether to initiate an investigation regarding possi-
ble violations of the federal securities laws. But by also con-
scripting these and similar circumstances to render payments
“extraordinary,” the majority violates basic canons of statu-
tory construction, rewriting the statute and, in so doing, ren-
dering the very term at issue surplusage.
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3429
Second, by establishing as the principally relevant standard
whether the circumstances surrounding the payments at issue
are “extraordinary” not for other companies, but for the com-
pany making the payments, any payment made under any sit-
uation novel to that company is now subject to escrow. Thus,
the first time a company under SEC investigation gives a
departing executive not a golden parachute, but a mere gold
watch (or, even, a gold-plated watch), escrow will be avail-
able to the SEC. This alone renders the majority’s standard
unworkable. But the majority then exacerbates the problem by
conceding that comparison to the industry or other companies
may also be relevant in some circumstances, thereby creating
a second standard but without providing any guidance as to
when each of these potentially conflicting standards applies.

Reading the statute as it is written rather than as some may
wish it had been written and applying what is a workable
standard, I continue to believe the SEC must present evidence
that a payment was extraordinary relative to payments made
by other comparable companies, under circumstances which
have not resulted in an investigation by securities agencies,
but which are otherwise comparable. Because the SEC pre-
sented no such evidence, I would vacate the district court’s
order and remand to permit the SEC the opportunity to pre-
sent appropriate evidence. Accordingly, I respectfully dissent.

I.

Before I address what I regard as the majority’s two errors
in interpreting the statute, it is important to set the record
straight as to what is at stake. The majority describes the
escrow as “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 — all of this subject to court supervision.” Maj. Op.
at 3396-97. This is, at best, a naive view — blinkered from
what can and did happen in this case. Once the subject of an
3430 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
investigation is charged with a securities violation by the
commencement of a civil action, “the [escrow] order shall
remain in effect, subject to court approval, until the conclu-
sion of any legal proceedings related thereto . . . .” 15 U.S.C.
§ 78u-3(c)(3)(B)(i) (emphasis added). Here, the district
court’s initial escrow order was effective as of May 9, 2003.
Nearly two years have passed, and Yuen’s and Leung’s pay-
ments remain in escrow.

II.

Section 1103 provides in relevant part:

Whenever, during the course of a lawful investiga-
tion involving possible violations of the Federal
securities laws by an issuer of publicly traded securi-
ties or any of its directors, officers, partners, control-
ling persons, agents, or employees, it shall appear to
the Commission that it is likely that the issuer will
make extraordinary payments (whether compensa-
tion or otherwise) to any of the foregoing persons,
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) (emphasis added). Congress did
not define “extraordinary payments.”1 Nor has the SEC pro-
mulgated regulations doing so, although it is empowered to
1
When Congress wants to “cap” termination payments, it certainly
knows how to do it with unquestionable precision. See, e.g., 11 U.S.C.
§ 502(b)(7) (capping an employee’s claim for damages resulting from the
termination of an employment agreement when the employer has filed for
bankruptcy to (1) one year’s compensation provided by such contract mea-
sured from the earlier of the date of the filing of the bankruptcy petition
or the date of termination, plus (2) any unpaid compensation due under
such contract owing on such date).
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3431
adopt regulations for the implementation of the Sarbanes-
Oxley Act. 15 U.S.C. § 78w(a)(1).

Thus, purporting to rely on the statute’s “plain language,”
Maj. Op. at 3417, but presumably influenced by what it per-
ceives to have been Congress’ intent in enacting Section
1103, id. at 3397-99, the majority defines “extraordinary pay-
ments” as those “that would not typically be made by a com-
pany in its customary course of business.” Id. at 3417.
Continuing, the majority explains that “[c]ontext-specific fac-
tors such as the circumstances under which the payment is
contemplated or made . . . may inform whether a payment is
extraordinary” — indeed, that “a payment made by a com-
pany that would otherwise be unremarkable may be rendered
extraordinary by unusual circumstances” — and, thus, that
the district court correctly focused not only on the size of the
payment, but also on “the circumstances of the payment” and
“the purpose of the payment.” Id. at 3417-18 (emphasis
added); accord id. at 3419 (“The court correctly focused on
the nature, purpose, and circumstances of the payments
. . . .”). Finally, in affirming the district court’s order, the
majority concludes:

We believe, as did the district court, that Gemstar’s
execution of its overall business objectives and ordi-
nary management of its business operations did not
entail terminating its CEO and CFO in the shadow
of misstated revenues, misleading public statements,
securities 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. Gemstar’s Form 8-K filings certainly raise
red flags the SEC would be remiss to ignore.

Id. at 3420 (emphasis in original); accord id. at 3419 (“Using
as a measure what ordinarily goes on in the process of the
issuer’s business, these facts are clearly unusual and extraor-
dinary.”).
3432 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
In so interpreting the statute, the majority errs in two
regards.

A.

First, the majority’s interpretation violates basic canons of
statutory construction. To begin, the majority has not so much
interpreted the statute as it has rewritten it. As explained
above, the majority’s interpretation of “extraordinary pay-
ments” amounts to “payments under extraordinary circum-
stances.” See Maj. Op. at 3417-20. Indeed, the majority itself
explains that “a payment made by a company that would oth-
erwise be unremarkable may be rendered extraordinary by
unusual circumstances.” Id. at 3418. Thus, under the majori-
ty’s interpretation, any payment following “extraordinary cir-
cumstances” may be subject to escrow. Yuen and Leung
could have been paid $1 or $1 billion — it would make no
difference to the majority.

But this simply is not what the statute says. As the statute
is written, “extraordinary” modifies “payments”; as the major-
ity has rewritten it, “extraordinary” modifies the circum-
stances under which the payments were made. To put it
bluntly, where in the statute is the word “circumstances”?
Moreover, the majority has not only inserted words into the
statute, it has rearranged the remainder of it. This we cannot
do, even for the laudable purpose of giving effect to important
public interests:

Our concern for the protective purposes of remedial
legislation . . . does not vest this court with a license
to rewrite the statute, for “our problem is to construe
what Congress has written. After all, Congress
expresses its purpose by words. It is for us to ascer-
tain — neither to add nor to subtract, neither to
delete nor distort.” 62 Cases, More or Less, Each
Containing Six Jars of Jam v. United States, 340
U.S. 593, 596, 71 S.Ct. 515, 518, 95 L.Ed. 566
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3433
(1951). “Our compass is not to read a statute to reach
what we perceive — or even what we think a reason-
able person should perceive — is a ‘sensible result’;
Congress must be taken at its word unless we are to
assume the role of statute revisers.” Bifulco v.
United States, 447 U.S. 381, 401, 100 S.Ct. 2247,
2259, 65 L.Ed.2d 205 (1980).

United States v. Smith, 740 F.2d 734, 738 (9th Cir. 1984)
(emphasis added) (internal parentheticals omitted); see also Xi
v. INS, 298 F.3d 832, 839 (9th Cir. 2002) (“[A] decision to
rearrange or rewrite the statute falls within the legislative, not
the judicial, prerogative.”); Lewis v. McAdam, 762 F.2d 800,
804 (9th Cir. 1985) (“We have no constitutional authority to
rewrite a [securities] statute simply because we may deter-
mine that it is susceptible of improvement.”) (citing
Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)).

Further, given the circumstances the majority finds rele-
vant, the majority’s interpretation renders “extraordinary” sur-
plusage. According to the majority, that the payments here
were made “in the shadow of misstated revenues, misleading
public statements, securities fraud investigations, plunging
stock prices, and public relations debacles,” “Yuen’s and
Leung’s inability to certify Gemstar’s books as accurate[,]
[and] Gemstar’s Form 8-K filings” are all indicia that the pay-
ments here were “extraordinary” — or, more accurately, made
under extraordinary circumstances. Maj. Op. at 3420.

Some of these factors are certain to be present any time the
SEC investigates a company for possible violations of the fed-
eral securities laws, and the rest are likely to be present. But
the escrow provision is, in any event, applicable only when
“during the course of a lawful investigation involving possible
violations of the Federal securities laws” it appears to the
SEC that “extraordinary payments” are to be made. 15 U.S.C.
§ 78u-3(c)(3)(A)(i) (emphasis added). Thus, by defining “ex-
traordinary” to mean little if anything more than that circum-
3434 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
stances exist that might give cause to the SEC to initiate a
lawful investigation, “extraordinary” serves no independent
modifying purpose. Each payment made in the midst of cir-
cumstances likely to lead to an SEC investigation becomes
made under “extraordinary circumstances,” therefore an “ex-
traordinary payment.” Hence, the majority’s interpretation
violates the “ ‘cardinal principle of 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 super-
fluous, void, or insignificant.’ ” TRW Inc. v. Andrews, 534
U.S. 19, 31 (2001) (quoting Duncan v. Walker, 533 U.S. 167,
174 (2001)).

Congress could have written the statute differently. The
SEC might have been able to promulgate regulations so inter-
preting the statute. Congress didn’t, the SEC hasn’t, and we
mustn’t.2
2
I can only assume that the majority’s insouciance for these canons of
statutory construction stems from its desire to give effect to what it per-
ceives as Congressional intent. Setting aside the principle that Congress’
words are the best evidence of its intent, the majority’s description of Con-
gress’ intent in enacting Section 1103 does not support the majority’s
interpretation of “extraordinary payments.” According to the majority,
Congress’ purpose in enacting Section 1103 was to prevent “persons,
companies, and pensions plans” from being “left holding an empty bag”
while, by contrast, corporate insiders are well compensated. Maj. Op. at
3398 “By the time the authorities have been alerted to the fraud,” explains
the majority, “it’s too late [because] the assets of the company have
already disappeared . . . . In the meanwhile, the disappearance of such
funds impoverishes and damages the issuer itself . . . .” Id. at 3398. Like-
wise, the majority quotes Representative Sensenbrenner’s explanation that
Section 1103 would prevent “top executives” from “pilfer[ing] the assets
of the company.” Id. at 3399 (citing 148 Cong. Rec. H4685 (daily ed. July
16, 2002)). If it was assets “disappear[ing]” and being “pilfer[ed]” while
people and pension plans were left holding an “empty bag” and issuers
were “impoverishe[d]” that so concerned Congress, wouldn’t the size of
the payment rather than the circumstances surrounding the payment have
been of utmost importance? Tellingly, although he did not limit “extraor-
dinary payments” to “huge bonuses,” Representative Sensenbrenner iden-
tified no other example of an “extraordinary payment[ ].”
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3435
B.

Second, even had the majority not rewritten the statute and,
indeed, written the very term at issue out of the statute, its
interpretation is unworkable as a practical matter. The major-
ity first interprets “extraordinary payments” as those “that
would not typically be made by a company in its customary
course of business,” Maj. Op. at 3417 (emphasis added).
Thus, as the majority explains, “[t]he standard of comparison
is the company’s common or regular behavior.” Id. (emphasis
added). This alone raises a significant practical concern. Pre-
sumably, terminating the CEO’s and CFO’s employment is
never done “by a company in its customary course of busi-
ness.” Id. (emphasis added). I think we can all agree that these
events do not occur, for any given business, each Monday
morning as the doors open for business. Does this mean, then,
that any payment to a departing CEO, CFO or, for that matter,
any officer or director may be subject to escrow? As men-
tioned before, even if the payment is not a golden parachute,
but a mere gold watch (or even a gold-plated watch)? Can this
really be what Congress meant by “extraordinary”? And if
not, upon what articulable principle ingrained in the standard
adopted by the majority could we arrive at a contrary conclu-
sion?3
3
The majority cites three cases for the proposition that this court has
previously relied on evidence of a company’s own past practices to deter-
mine “extraordinary expenses.” Maj. Op. at 3417 n.2. In the first, the court
held that a brokerage firm’s commissions were excessive because “[n]o
reasonable broker could think it could fairly charge commissions so high”
and rejected the brokerage firm’s asserted defense that it “provided unique
and special services and [thus] incurred [relatively] high expenses.”
Atlanta-One, Inc. v. SEC, 100 F.3d 105, 107-08 (9th Cir. 1996) (emphasis
added). In other words, the court compared the brokerage firm’s commis-
sions and expenses not to its prior practice, but to what the “reasonable”
broker might charge and to what services were typically offered in the
industry. That is what should happen here. In the remaining two cases, the
governing statute or rule of law called for a comparison between the
expense claimed extraordinary and the company’s past practice. In re
3436 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
This practical concern is made worse by the majority’s con-
cession that we must do more than compare what the subject
company is doing now merely with what it has done in the
past. From a company-specific test, the majority daintily dips
its toe in Lake Eversharp:4 “Evidence of the company’s devia-
tion from an ‘industry standard’ — or the practice of similarly
situated businesses — also might reveal whether a payment is
extraordinary.” Id. at 3418. Well, which one is it? What the
subject company has done in the past or what other companies
have done? That is, is the test internal to the subject company
or external to practices of the industry in which the company
competes? What if under the internal test the payment is not
extraordinary, but under the external test it is? Or vice-versa?
Does the internal trump the external, or is it the other way
around? Or, must the payment be extraordinary under both
tests? Are we going to say nothing more than that the matter
will be dealt with on a “case-by-case” basis, that favorite ploy
to avoid a statement of principle?

The majority takes refuge in its assertion that “the statute
does not compel any specific method of making the determi-
nation but allows for the consideration of a variety of factors,
as the situation may warrant,” id., and in its mandate that “the
determination of whether a payment is extraordinary will be
a fact-based and flexible inquiry.” Id. at 3418. Standards that
call for an evaluation of the totality of the circumstances are,
of course, well known to the law, but they are workable only
when those circumstances are compared against a known,

United States Trustee, 32 F.3d 1370, 1374 (9th Cir. 1994) (bankruptcy
trustees seeking reimbursement of expenses); Frito-Lay, Inc. v. Local
Union No. 137, International Brotherhood of Teamsters, Chauffeurs,
Warehousemen and Helpers of America, 623 F.2d 1354, 1365 n.11 (9th
Cir. 1980) (company suing for damages resulting from an unlawful strike).
Of course, Gemstar had no such past practice; the cited cases are inappo-
site.
4
The Eversharp Company used to advertise its wares: “Compare! Com-
parison proves!”.
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3437
fixed standard. Here, by contrast, the majority proffers two
standards that, depending on the facts of the case, may very
well conflict.

III.

Because as the statute is written “extraordinary” modifies
“payments” rather than the circumstances under which those
payments were made, and because the majority’s standard
principally requiring a comparison to the past practice of the
company at issue is unworkable, I must interpret “extraordi-
nary payments” to mean payments not usual or ordinary rela-
tive to those made by other comparable companies, under
circumstances which have not resulted in an investigation by
securities agencies, but which are otherwise comparable. Fac-
tors to be considered in identifying comparable companies
may include their size (measured in terms of annual revenues,
annual net profit, market capitalization, some other appropri-
ate measure, or a combination of these considerations)5 and
the industry or market in which they do business.6 Relevant
comparable circumstances may include the position of those
5
Such financial measures of the revenue size of the company that made
the payments at issue may be artificially inflated as a result of the securi-
ties violations in which it is alleged to have engaged. Appropriate adjust-
ments should and can be made to compensate for this.
6
No two companies are identical, but adjustments can be made to com-
pensate for any material peculiarities of a given company. Comparisons of
this sort are daily made, for example, in equalization of property tax
assessments in the real property field, where the value of a subject prop-
erty is determined by the value of comparable properties as measured by
such factors as the square footage, location, size of buildings and probable
income. After determination of comparability, adjustments are made to
compensate for peculiarities individual to the subject property. Thus, for
example, if the subject property has a lis pendens or an unrecorded ease-
ment claimed against it, the value will likely be adjusted downwards. A
similar method is used in condemnation actions. Likewise, in the field of
traded securities, the market adjusts stock prices for companies with com-
parable earnings, but with, for example, dissimilar litigation or investiga-
tional backgrounds.
3438 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
whose employment is being terminated, the length of their
tenure, and the reason their employment was terminated.
However, I reiterate that the comparison should not be to pay-
ments made by other companies that were engaged in conduct
which ultimately resulted in investigation by securities agen-
cies.7

Nor is this an undertaking to which federal courts are unac-
customed or for which they are ill-equipped. Legislation
which uses relative adjectives to proscribe activities is hardly
unknown to the law. Statutes and law commonly prohibit “ex-
cessive” verdicts and sanction “unreasonable” behavior. E.g.,
State Farm Mutual Automobile Insurance Co. v. Campbell,
538 U.S. 408, 416 (2003) (“The Due Process Clause of the
Fourteenth Amendment prohibits the imposition of grossly
excessive or arbitrary punishments on a tortfeasor.”); Cal.
Civ. Proc. Code § 657 (permitting modification or vacatur of
a judgment where the award of damages is “[e]xcessive or
inadequate”); Restatement (Second) of Torts § 282 (defining
“negligence” as “conduct which falls below the standard
established by law for the protection of others against unrea-
sonable risk of harm”). It is not beyond the judiciary’s capac-
ity to interpret and apply statutes which prohibit “excessive”
or “unreasonable” amounts. Indeed, trial and appellate courts
are called upon to do so every day.8 And, as is of particular
7
The majority, then, misstates my position when it states:
The dissent suggests that to establish what is “extraordinary,” the
government must offer evidence of what constitutes “usual or
ordinary payments to a CEO and a CFO under [comparable] cir-
cumstances,” i.e., payments contemplated under threat of delist-
ing, 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 possibly
committed a basket full of crimes.
Maj. Op. at 3420.
8
For instance, courts are often called upon to determine whether awards
of attorney’s fees are “reasonable.” See Pennsylvania v. Delaware Valley
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3439
relevance here, courts are even asked whether some remuner-
ation constitutes “extraordinary payment.” An example is the
line of cases which determines whether payments made by a
corporation to an employee are deductible from gross income
as “ordinary and necessary” business expenses or, rather, are
“extraordinary payments” disallowed as a deduction. See, e.g.,
LabelGraphics, Inc. v. IRS, 221 F.3d 1091, 1095 (9th Cir.
2000) (explaining that a corporation may deduct “a reasonable
allowance for salaries or other compensation for personal ser-
vices actually rendered” and noting as one of the factors rele-
vant in making this determination “a comparison of the
employee’s salary with those paid by similar companies for
similar services”) (citing Elliotts, Inc. v. IRS, 716 F.2d 1241
(9th Cir. 1983)).

Whether the adjective is “excessive,” “unreasonable” or
“extraordinary,” the cases in which those terms appear use
similar processes of judgment. The trier-of-fact determines
first what constitutes “adequate compensation,” “reasonable

Citizens’ Council for Clean Air, 478 U.S. 546, 562 (1986) (“There are
over 100 separate statutes providing for the award of attorney’s fees; and
although these provisions cover a wide variety of contexts and causes of
action, the benchmark for the awards under nearly all of these statutes is
that the attorney’s fee must be ‘reasonable.’ ”). “ ‘The most useful starting
point for determining the amount of a reasonable fee is the number of
hours reasonably expended on the litigation multiplied by a reasonable
hourly rate,’ ” id. at 564, and it is “[t]he fee applicant [that] has the burden
of producing satisfactory evidence, in addition to the affidavits of its coun-
sel, that the requested rates are in line with those prevailing in the commu-
nity for similar services of lawyers of reasonably comparable skill and
reputation.” Jordan v. Multnomah County, 815 F.2d 1258, 1263 (9th Cir.
1987). Likewise, courts daily determine what are “extraordinary” fees in
probate courts across the country. But, unlike the district court here, those
probate courts have elaborate statutes, rules of procedure and case author-
ity to guide them in determining what services by estate representatives
are “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 (Ct. App. 1965).
3440 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
care,” or “customary or ordinary payments.” Such determina-
tions require evidence which consists of similar factual situa-
tions which can be compared to the case at hand. If the case
at hand falls outside the bounds permitted in the comparison
cases, that result is deemed “excessive,” “unreasonable,” or
“extraordinary.”

A.

Here, the SEC limited its proof in its Section 1103 applica-
tion to an investigating attorney’s affidavit. 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) of companies with comparable financial state-
ments and operating results. Undoubtedly, their payments
were large — extraordinary, even, relative to what federal
judges or, for that matter, most anyone is paid.9 Such pay-
ments may be called “golden parachutes” or “golden hand-
shakes” in the press, but purple prose is not enough to prove
a statutory requirement in court. For enforcement of the secur-
ities laws of the United States, evidence of what is usual or
ordinary for comparable companies under circumstances
which have not resulted in an investigation by securities agen-
cies but which are otherwise comparable, is necessary to dis-
9
But not quite “anyone.” For example, the average value of severance
packages awarded in fiscal year 2000 to CEOs of companies in the S&P
500, conservatively calculated, is more than $11.4 million. See Paul Hodg-
son, Golden Parachutes and Cushion Landings: Termination Payments
and Policy in the S&P 500, at 18-21 (2003). Of course, some CEOs are
awarded severance packages that are worth many multiples of the average.
E.g., Chad Terhune et al., “Coke Tradition: CEOs Go Better With a Fat
Send-Off,” Wall Street Journal, June 11, 2003, at B1 (reporting M. Doug-
las Ivester’s “exit package” upon being “ousted” as Chairman and CEO
of Coca-Cola in February 2000 as $119 million); Sam Zuckerman, “The
Fall and Rise of David Coulter,” San Francisco Chronicle, May 25, 2002,
at A1 (reporting David Coulter’s severance package after being “uncere-
moniously ousted” as CEO of Bank of America and “le[aving] San Fran-
cisco with his reputation in tatters” as “nearly $100 million”).
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3441
tinguish “extraordinary payments” and to order their escrow
pursuant to Section 1103. Such evidence was not adduced in
the district court; that absence requires the reversal of the
judgment of the district court.10

B.

The remaining factors on which the majority relies are
either irrelevant or fail to evidence that the payments here
were extraordinary. Thus, because I interpret “extraordinary”
to modify “payments” rather than the circumstances under
which those payments were made, that “ ‘the termination
agreements were executed as part of the process of removing
both Leung and Yuen from their positions as Gemstar Offi-
cers,’ ” that “the bonuses appear to be fruit of the alleged
fraudulent financial results,” that the “executives [were]
resigning under fire from key management positions,” and
that the payments were made “in the shadow of misstated rev-
enues, misleading public statements, securities fraud investi-
gations, plunging stock prices, . . . public relations debacles,
. . . [and] Yuen’s and Leung’s inability to certify Gemstar’s
books as accurate,” Maj. Op. at 3419-20, is irrelevant. Like-
wise, because I believe that the relevant comparison is to
other companies rather than to Gemstar’s past practices, that
the “negotiated Termination Agreement payments here are
five and six times greater than Yuen’s and Leung’s base sala-
ry,” that “the component amounts that make up the lump sum
payments are different than the amounts due under their
employment agreements,” that “the termination fees are dif-
ferent from what they may have been entitled to under exist-
ing agreements,” and that “the vacation pay item did not exist
under their contracts,” id. at 3419-20, also is, absent evidence
of other companies’ practices, irrelevant.
10
Nor, frankly, would requiring such evidence be particularly onerous
for the SEC. Evidence in the form of expert testimony or an affidavit or
declaration comparing the payments under scrutiny with other executives’
compensation packages is readily ascertainable from public filings. See
supra note 8.
3442 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
This, then, leaves only three factors on which the majority
relies that at best serve as evidence that either Gemstar or
Yuen and Leung themselves believed the payments to be
extraordinary and, thus, as circumstantial evidence that they
were extraordinary: (1) 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,’ ” and “ ‘[t]he Board, the Special Committee, and the
Intervenors Yuen and Leung were each represented by sepa-
rate sets of counsel’ ”; (2) that “Yuen would not discuss these
matters with the Commission, choosing instead to assert his
Fifth Amendment privilege”; and (3) that Gemstar reported
the terms of the termination agreements in a Form 8-K filing.
Id. at 3419-20.

As for the negotiation of the termination agreements, noth-
ing in the record suggests that this extended negotiation con-
stitutes a deviation from the norm for corporate decision-
making of this type under circumstances not resulting in an
investigation by securities agencies, but which are otherwise
comparable. Indeed, for all the persons involved in the negoti-
ations, not one presented evidence before the district court
that the period or mechanics of the negotiations were out of
the ordinary. 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
with respect to the termination of Yuen’s and Leung’s
employment with Gemstar.

Further, even on their own terms, these negotiations are not
particularly suspicious given the context. To begin, as the
declaration of Yuen’s and Leung’s counsel shows, Gemstar-
TV Guide was the product of a merger between, on the one
hand, an off-shore company founded by Yuen and Leung and,
on the other, TV Guide, a subsidiary of News Corporation,
itself a large telecommunications company. Yuen and Leung
presented uncontradicted evidence that their revenue-
 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL 3443
producing strategies differed, if not clashed, with those of
News Corporation. Whereas Yuen and Leung were interested
primarily in raising revenue attributable to the corporation’s
sales, the minority owners, Gemstar’s current management,
were in part interested in publicizing one of their sister corpo-
rations through Gemstar’s operations, without paying Gem-
star any advertising revenue. Such a strategy would increase
revenues for the sister corporation, but not for Gemstar. As
owners and officers in Gemstar, Yuen and Leung would not
share in the profits of the sister corporation.

In addition, in the event that Yuen or Leung were termi-
nated “without cause,” as they were, lengthy and complex
employment agreements governed their termination pay-
ments. Yuen and Leung had three different components for
calculation of their Annual Incentive Bonuses. Complex
enough when based on the company’s past performance, com-
putations also had to be done for future payments, with the
consequent and predictable squabbling over methods for pro-
jecting future financial performance. Thus, in view of Gem-
star’s revenue structure, the conflicting strategies, and the
complex schemes for computation of termination payments, it
is not the least bit surprising that the negotiations pertaining
to Yuen’s and Leung’s departures would be lengthy and that
all interested parties would be represented by counsel.

As for Yuen asserting his Fifth Amendment privilege, it is
hard to imagine what inference this raises given the context.
Yuen had been the CEO of a company that the SEC was
investigating for securities violations. It is more likely than
not that his invocation says a great deal more about those
alleged securities violations than it does about whether his
payment was extraordinary.

Last, a Form 8-K filing is required from an “issuer of secur-
ities when substantial events occur . . . .” Scherk v. Alberto-
Culver Co., 417 U.S. 506, 528 n.6 (1974). In this era of
heightened corporate vigilance, it is not surprising that Gem-
3444 SEC v. GEMSTAR-TV GUIDE INTERNATIONAL
star 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 percent 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 event,
there was also no evidence of whether other “issuers” had
made similar reports for similar sums paid to similarly depart-
ing upper management. A “substantial event” may or may not
coincide with an “extraordinary payment.” Only evidence of
comparable events and circumstances can tell us.

IV.

The majority’s interpretation of “extraordinary payments”
may very well best empower the SEC to remedy the outra-
geous corporate misconduct that gave birth to the Sarbanes-
Oxley Act. However, we are not a junior varsity legislature,
see Mistretta v. United States, 488 U.S. 361, 427 (1989)
(Scalia, J., dissenting), and must take Congress at its word,
see Bifulco, 447 U.S. at 401, ever cognizant that Congress and
the Judiciary alike are in the business of using language pre-
cisely. Where Congress fails to do so, it should not look to the
Judiciary for a remedy — nor need it.

Section 1103 empowers the SEC to escrow “extraordinary
payments,” not payments made under extraordinary circum-
stances, particularly where “extraordinary circumstances”
means little if anything more than that the company is under
investigation for securities violations. Further, if it is to be a
workable standard, the relevant comparison must be not to the
company at issue, but to other comparable companies, under
circumstances which have not resulted in an investigation by
securities agencies, but which are otherwise comparable.
Because the SEC failed to adduce any such relevant evidence,
I would vacate the district court’s order and permit the SEC
the opportunity to do so. Accordingly, I respectfully dissent.