In Re Gemstar-TV Guide International, Inc. Securities Litigation 02-CV
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1 BERNSTEIN LITOWITZ BERGER ti & GROSSMANN LLP 2 ALAN SCHULMAN (Bar No . 128661 ) ROBERT S . GANS (Bar No. 214420) 3 BLAIR A. NICHOLAS (Bar No . 178428 ) 12544 High Bluff Drive, Suite 15 0 4 San Diego, CA 92130 = 0 Tel: (858) 793-0070 5 Fax: (858) 793-0323 6 Attorneys for Plaintiffs and Lead Counsel for the Clas s 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 WESTERN DIVISION 1 1 In re GEMSTAR-TV GUIDE Master File No . 02-2775-MRP (PLAx) INTERNATIONAL INC . 12 SECURITIES LITIGATION CLASS ACTION 13 SECOND AMENDED CLASS 14 ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL 15 SECURITIES LAWS 16 17 This Document Relates To : 18 All Actions. 19 20 21 22 23 24 25 26 27 28 SECOND AMENDED CLASS ACTION COMPLAINT Master File No. 02-2775-MRP (PLAx) I 1. INTRODUCTION 2 1 . This securities class action is brought on behalf of plaintiffs and other 3 persons and entities who purchased or otherwise acquired Gemstar-TV Guide 4 International Inc.'s ("Gemstar" or the "Company") common stock between June 1, 5 2000 and April 1, 2002 (the "Class Period"), to recover damages caused by 6 defendants' violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 7 1934 ("Exchange Act"), §§ 11 and 15 of the Securities Act of 1933 (the "Securities 8 Act"), and Securities and Exchange Commission ("SEC") Rule 1Ob-5 . 9 II. SOURCES OF ALLEGATIONS 10 2. The allegations below are pled based on one or more of the following 1 1 sources of information: 12 (a) Source 1 : Director of Finance ("Director of Finance" or 1 3 "DF") . Throughout the Class Period, the Director of Finance reported directly to 14 ~ defendants Henry Yuen ("Yuen") and Elsie Leung ("Leung"). The Director of 15 Finance is a certified public accountant and was personally responsible, together 16 with Leung, for the recognition and the reporting of Gemstar's licensing an d 17 advertising revenues. The Director of Finance spoke with Yuen and Leung on a 18 weekly basis concerning finance, accounting and SEC reporting issues at Gemstar . 19 The Director of Finance sought approval from Yuen and Leung on all transaction s 20 Gemstar recognized as revenue that exceeded $2 million . Based on the Director of 21 Finance's personal interactions with Yuen and Leung, the Director of Finance has 22 first hand knowledge of Yuen's and Leung's decisions and participation in certain 23 of the transactions detailed below. 24 (b) Source 2 : Vice President of Scientific-Atlanta ("VP. of 25 Scientific-Atlanta" or "VPSA") . The V.P. of Scientific-Atlanta was responsible fo r 26 all negotiations concerning the extension of Scientific-Atlanta's license agreement 27 with Gemstar prior to its expiration on July 23, 1999 . Between December 199 7 28 and June 1999, the V.P. of Scientific-Atlanta spoke on numerous occasions wit h -1- SECOND AMENDED CLASS ACTION COMPLAINT Master File No. 02-2775-MRP (PLAx) 1 Yuen and Gemstar's General Counsel, John Orlick, concerning the license 2 agreement between Scientific-Atlanta and Gemstar, and the expiration of th e 3 license agreement. 4 (c) Source 3 : Corporate Counsel of Fantasy Sports ("Corporate 5 Counsel" or "CC"). Corporate Counsel drafted, negotiated and finalized all 6 contracts and agreements entered into between Fantasy Sports Inc. and Gemstar. 7 Corporate Counsel also attended and participated in all meetings, conference calls 8 and negotiations between representatives of Gemstar and Fantasy Sports, includin g 9 meetings and negotiations between Yuen, Leung, Toby DeWeese (Gemstar's Vice 10 President of Corporate Development), Dave Barber (Gemstar's Manager of 11 Corporate Development), Patrick Hughes (Chief Executive Officer of Fantas y 12 Sports) and Bill Kunkin (Director of Fantasy Sports) . 13 (d) Source 4 : Senior Vice President ("Senior VP" or "SVP") . The 14 Senior VP was employed at Gemstar from early 2001 until March 2002 and 15 reported directly to Yuen and Leung. The Senior VP was responsible for 16 maintaining the accounting systems at Gemstar and participated in numerous 17 meetings and conference calls with Yuen and Leung concerning the Company's 1 8 accounting practices and systems . 19 (e) Source 5: Marketing Manager ("Marketing Manager" or 20 "MM"). The Marketing Manager was employed in the Company's advertisin g 21 department during the Class Period . The Marketing Manager created marketing 22 li campaigns to support Gemstar's TV Guide advertising sales and had direct contact 231 with Yuen and Leung with respect to advertising transactions and the recognitio n 24 of revenues from these transactions . 25 (f) Source 6 : The Securities and Exchange Commission ("SEC") . 26 On October 17, 2002, the SEC commenced a formal order of investigation entitle d 27 In the Matter of Gemstar-TV Guide International, Inc., Commission File No . LA- 28 2590 ("Formal Investigation") . The Formal Investigation was commenced to -2- SECOND AMENDED CLASS ACTION COMPLAINT Master File No . 02-2775-MRP (PLAx) 1 determine whether Gemstar and any of its former and present officers, directors, o r 2 1 others, violated the federal securities laws in connection with accounting for, and 3 II public reports of, Gemstar's financial performance in the Company's 1999, 2000 , 4 11 2001 and 2002 Forms 10-K and 10-Q . During the Formal Investigation, the SEC 5 issued over 100 subpoenas to witnesses for the production of documents and too k 6 11 investigative testimony from over 55 witnesses, for a total of over 100 days o f 7 testimony. The SEC took over three days of testimony from Leung. On April 1 , 8 1 1 2003, the SEC took one day of general background testimony from Yuen. While 9 Yuen appeared for further testimony on April 23, 2003, he asserted his Fifth 10 Amendment privilege to all questions from the SEC relating to the Formal 11 Investigation. The SEC has also taken the deposition of Gemstar's former 12 Executive Vice President and General Counsel, John Orlick . Based on the 13 information obtained from over 55 witnesses, on June 19, 2003, the SEC filed a 14 formal complaint against Yuen and Leung entitled Securities and Exchange 15 Commission v. Henry C. Yuen and Elsie M Leung, No. CV 03-4376 (C .D . Cal.). 16 On September 30, 2003, the SEC filed an amended complaint . The SEC has 17 charged Yuen and Leung with violations of the federal securities laws for 18 fraudulently misleading investors by overstating and misreporting Gemstar's 19 revenues and other financial results between 2000 and 2002 . The SEC's 20 complaints are based on facts discovered during the SEC's formal investigation 21 and detail previously non-public facts regarding Yuen's and Leung's knowledge 22 and participation in the scheme to mislead investors about Gemstar's financia l 23 performance. The Director of Finance has reviewed the SEC complaints an d 24 stated, based on personal knowledge, that the facts detailed in the SEC complaint s 25 are true and accurate . 26 (g) Source 7 : Gemstar-TV Guide International ("Gemstar" or 27 "GMST"). During the Class Period, Gemstar disseminated press releases and filed 28 documents with the SEC, including Forms 10-Q, 10-K, 8-K and 4 . After the Class -3- SECOND AMENDED CLASS ACTION COMPLAINT Master File No. 02-2775-MRP (PLAx) 1 11 Period, Gemstar filed restated Forms 10-Q and 10-K with the SEC . The restated 2 SEC filings set forth the errors contained in Gemstar 's prior reported financial 3 results, explain why the financial statements were erroneously reported at the tim e 4 11 the financial statements were prepared, and details the Company's restate d 5 I financial results for each quarterly and annual period during the Class Period . 6 (h) Source 8 : KPMG LLP ("KPMG"). Throughout the Class 7 Period, KPMG served as Gemstar' s outside auditor. KPMG performed quarterly 8 and annual reviews of Gemstar's reported financial results . KPMG met with Yuen 9 and Leung following each quarter to discuss the status of the Company' s 10 outstanding receivables and large transactions and required Yuen and Leung to sig n 11 "management representation letters" attesting to their representations to KPMG In 12 addition, KPMG audited Gemstar's annual financial statements and relied o n 13 representations by Yuen and Leung concerning the purported accuracy o f 14 ~ Gemstar's repo rted financial results and compliance with GAAP. 15 III. JURISDICTION AND VENU E 16 3 . This Court has jurisdiction over the subject matter of this class action 17 pursuant to § 27 of the Exchange Act, 15 U.S .C . § 78aa, as well as pursuant to § 2 2 18 of the Securities Act, 15 U.S .C . § 77v. The claims alleged herein arise under 19 §§ 10(b) and 20(a) of the Exchange Act, 15 U.S .C . §§ 78j(b), 78n and 78t(a), and 20 Rules lOb-5 promulgated thereunder by the SEC, 17 C .F.R. §§ 240 .10b-5 and 21 §§ 11 and 15 of the Securities Act, 15 U.S .C . §§ 77k and 77o . In connection with 22 the acts, conduct and other wrongs complained of herein , the defendants , directly 23 or indirectly, used the means and instrumentalities of interstate commerce, the 24 United States mails , and the facilities of a national securities exchange . 25 4 . Venue is proper in this District pursuant to § 27 of the Exchange Act , 26 1 15 U.S .C. § 78aa and § 22 of the Securities Act, 15 U .S .C . § 77v. Many of the acts 27 and transactions giving rise to the violations of the federal securities law s 28 complained of herein, including the preparation and dissemination to the investing -4- SECOND AMENDED CLASS ACTION COMPLAINT Master File No.