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'New York Times' case: Math Whiz vs Media Moguls

New York Times Cases in the News
Read the "New York Times" case and answer questions.
Textbook: Understanding and Managing Organizational Behavior, 5/E

'The Math Whiz vs. the Media Moguls in a Battle for Millions'
by Richard Siklos, April 3, 2006, p. C1, C5.

Amid the flash of the Internet bubble, Henry C. Yuen, the chairman and chief executive of Gemstar-TV Guide International, did things his way.

Henry C. Yuen, top in 2000, is in a protracted legal struggle with Rupert Murdoch, bottom, over Mr. Yuen's management of Gemstar and its troubled accounting.

John C. Malone, the head of Liberty Media, tried with Mr. Murdoch to take over the Gemstar program guide.

Despite running a company worth more than $20 billion in early 2000 and being partners with Rupert Murdoch's News Corporation, he operated out of low-rent offices in Pasadena, Calif. A visitor to the headquarters recalls that using a fax machine required unplugging the telephone because there was only one line. A former Gemstar employee recalled Mr. Yuen driving to lunch four blocks from the office, but then parking two blocks away to avoid paying a valet charge.

But even as Mr. Yuen was pinching pennies, he was manipulating hundreds of millions in revenue to make the company look more profitable, according to prosecutors and investors.

Mr. Yuen was forced out as Gemstar's chairman and chief executive more than three years ago, after the company acknowledged that revenue had been inflated and the stock price collapsed. News Corporation's involvement with Mr. Yuen - it owns 41 percent of Gemstar - resulted in 2002 in a $6 billion write-down, the biggest such hit Mr. Murdoch has taken in his storied career.

An investigation into Mr. Yuen's conduct by the Securities and Exchange Commission, and a tangle of other litigation, show that Mr. Yuen, a mathematician and lawyer who built Gemstar by developing and aggressively defending patents for television viewing, still casts a long shadow over the News Corporation and Mr. Murdoch.

News Corporation, through Gemstar, has pursued Mr. Yuen with unusual vigor, going so far as to file a victim statement asking a court to overturn Mr. Yuen's plea agreement in a criminal case. In addition to his other legal troubles, including a class-action lawsuit, Mr. Yuen faces an arbitration dispute with Gemstar, in which Mr. Murdoch seeks to force Mr. Yuen to return earnings totaling some $100 million, including $2 million in annual salary he still receives under the severance agreement.

Neither Mr. Murdoch nor Mr. Yuen would comment for this article. But several people who work closely with Mr. Murdoch say Gemstar's tough stance has been a response to Mr. Yuen's hardball tactics.

"Rupert doesn't look back, he doesn't spend a lot of time thinking about Henry," Lawrence A. Jacobs, group general counsel for the News Corporation, said in an interview. He added, however, "This is one of the few people we've ever dealt with who clearly committed fraud."

Ripples from the Gemstar debacle go beyond financial losses. Gemstar represented the beginnings of a partnership between News Corporation and the media billionaire John C. Malone that has become hotly contentious.

Last month, in a civil action brought by the S.E.C., a federal district judge in Los Angeles ruled that Mr. Yuen had committed accounting fraud while running Gemstar by misrepresenting some $200 million worth of revenue in seven transactions from 1999 to 2002. At a hearing Wednesday, the judge, Mariana R. Pfaelzer, will deliberate on the S.E.C.'s request that Mr. Yuen pay more than $60 million in restitution. Mr. Arkin said his client intended to appeal. Separately, a spokesman for the United States attorney in Los Angeles said a criminal inquiry on Mr. Yuen was continuing.

Mr. Yuen, who is 57, has maintained that he was the target of an orchestrated effort by Mr. Murdoch's allies to commandeer the business he had built.

His lawyer, Stanley S. Arkin, asserted: "To some extent, this company, News Corporation, set out to blow up my guy and they did it. It's too bad it came to this. I think we have severely diminished our opportunity to benefit from the genius of Henry Yuen and his vision and entrepreneurship."

Gemstar's early chapters were far more promising for Mr. Yuen. The son of a Hong Kong lawyer, he moved to the United States when he was 17 to study mathematics at the University of Wisconsin and then at the California Institute of Technology in Pasadena. At Caltech, he became friends with another doctoral student, Daniel Kwoh, with whom he would found Gemstar in 1989. "He played soccer very well, even though he was kind of smallish - he was very fast, very decisive," Mr. Kwoh recalled in an interview.

Mr. Yuen went on to gain a law degree from Loyola University. He put his knowledge of math and law together with Mr. Kwoh to invent VCR Plus, a patented system for simplifying the way people program their videocassette recorders. Although relatively few people used VCR Plus, Gemstar was able to persuade both hardware makers and publishers of TV listings, including Mr. Murdoch's TV Guide, to pay license fees for it.

Mr. Yuen's next innovation was to buy up companies that had developed interactive programming guides that would help navigate the growing numbers of TV options.

Mr. Yuen could be ruthless. Outside Gemstar, he acquired the nickname "patent terrorist" for his willingness to sue potential partners like Thomson Electronics or Time Warner. Framed copies of the company's patents decorated the conference room.

Within the company, he was abrupt and secretive as a chief executive, and former colleagues say his only confidant was Elsie M. Leung, Gemstar's longtime chief financial officer. Three Gemstar employees said Mr. Yuen would suddenly turn to Ms. Leung in meetings with other executives and begin speaking with her in Cantonese. "I would not say of Henry that sweetness and diplomacy were his strong suit," Mr. Arkin said.

In another of Mr. Yuen's many legal tangles, he has been in lengthy litigation with his ex-wife, Molly Yuen, the mother of two of his four children. She contended in a 1996 lawsuit that Mr. Yuen forged her signature on divorce documents a decade earlier and that she was not aware of the faked divorce for years. She argued that the divorce was intended to deprive her of a claim on Mr. Yuen's growing fortune. Mr. Yuen denied the accusations and, although the divorce matter was settled in 2000, the couple remains in litigation over payments Mr. Yuen stopped making to her two years later.

Mr. Kwoh left the company in 1997 after what he described as a dispute over business strategy, which he declined to elaborate on. Although he and Mr. Yuen both live in Pasadena, they have not spoken since, Mr. Kwoh said.

Mr. Malone and Mr. Murdoch had tried separately and together to buy out Mr. Yuen. They both coveted Gemstar's rich profit margins from licensing; in 1998 the company had a profit of $38.7 million on revenue of $126 million. Indeed, amid the hoopla over convergence at the time, Mr. Yuen thought that his on-screen guide would be the ultimate toll-keeper for the media and told colleagues that Gemstar would someday be bigger than Microsoft.

After his efforts to buy Gemstar failed, Mr. Malone became a big shareholder in TV Guide by merging a company with his own on-screen guide business into it. Then in 1999, Mr. Murdoch proposed to Mr. Yuen that Gemstar acquire TV Guide for $9.2 billion in stock. This time, he agreed, with conditions: Mr. Murdoch would end up the biggest shareholder, but he would get an employment contract putting him firmly in charge for five years. Mr. Yuen next turned to buying companies to produce so-called electronic-book readers. Mr. Murdoch hailed Mr. Yuen in Business Week magazine as "a brilliant strategist."

But cultures and strategies clashed. Mr. Murdoch felt that TV Guide was being neglected in favor of Mr. Yuen's electronic ventures. He began convening weekly management meetings at TV Guide's offices in New York that Mr. Yuen would attend by teleconference. According to one person who attended, Mr. Yuen would often put the meeting on hold after only a few minutes, leaving the sound of Muzak coming through the speaker as his contribution.

In private meetings, Mr. Murdoch and Peter Chernin, News Corporation's president, pressed Mr. Yuen to replace Ms. Leung as chief financial officer. Mr. Yuen refused. Mr. Yuen's lawyers described this as "a campaign to take over Gemstar and oust Dr. Yuen" in court filings, but News Corporation officials and lawyers deny this. They say they became increasingly concerned that Gemstar, under Mr. Yuen and Ms. Leung's direction, was overstating the growth prospects for the electronic publishing guides.

The Gemstar board began an internal investigation that led to revenue restatements that would total some $330 million. As the accounting issues became public in 2002, Gemstar's stock withered and the boardroom turned venomous. Mr. Yuen and Mr. Murdoch met several times - accompanied only by Mr. Arkin on Mr. Yuen's side or Mr. Chernin with Mr. Murdoch - to negotiate a graceful exit for Mr. Yuen.

Those negotiations led to Mr. Yuen's and Ms. Leung's departures in November 2002. But to Mr. Yuen's surprise, a nearly $30 million severance negotiated with Mr. Murdoch was placed in escrow by Gemstar at the behest of the S.E.C.

Mr. Yuen has admitted that shortly after Gemstar received a broad subpoena from the S.E.C., he deleted information from a hard drive in his Gemstar office, including e-mail and corporate documents. Then, the day before he was scheduled to testify before the S.E.C., Mr. Yuen installed a program that erased other files. A week later, he had the hard drive removed from his office, according to the criminal plea he entered into last year.

Mr. Yuen's lawyers say this was an error in judgment, not an admission that he had committed fraud. In pleading guilty to the obstruction charge last October, Mr. Yuen had agreed to serve six months of home detention and spend two years on probation. But both the S.E.C. and Gemstar, in its victim's brief, petitioned a federal district judge, John Walter, to reject the deal.

Richard L. Stone, a lawyer for Gemstar with Hogan & Hartson in Los Angeles, argued that as a result of the conduct by Mr. Yuen and others, Gemstar had already paid more than $70 million to settle shareholder lawsuits, plus a $10 million fine to the S.E.C.

In addition to the billions of dollars in market value Gemstar's shareholders had lost, Mr. Stone said, Gemstar has incurred more than $100 million in legal fees related to investigating and pursuing Mr. Yuen.

In December 2005, Judge Walter rejected the terms of the plea and Mr. Yuen withdrew it.

Last year Mr. Yuen struck a deal with the S.E.C. under which he would have paid some $14 million and avoided trial. But Mr. Yuen insisted that the money come from the frozen $30 million severance. When the judge rejected that request, Mr. Yuen told his lawyer, "I have no other funds." This was unexpected, given that, among other earnings, Mr. Yuen had sold $59 million of Gemstar stock in the spring of 2002.

The S.E.C.'s case against Mr. Yuen proceeded to trial, where he and Ms. Leung testified that he did not knowingly order or commit any accounting fraud. In her ruling against Mr. Yuen on March 20, Judge Pfaelzer wrote that she "did not find the testimony of either Yuen or Leung to be persuasive or credible."

All the others implicated in the Gemstar troubles, including Ms. Leung; Gemstar's auditor, KPMG; and three other former Gemstar executives have agreed to settle the S.E.C. claims against them. KPMG had paid $10 million, and Ms. Leung has agreed to pay $1.35 million.

For Mr. Murdoch's company, one of the scars from its involvement with Mr. Yuen is a deal it concluded with Mr. Malone shortly after the merger, in September 2000. Mr. Malone traded his 21 percent interest in Gemstar-TV Guide for a roughly 12 percent nonvoting interest in the News Corporation that, combined with 6 percent he already held, made him the conglomerate's largest shareholder outside the Murdoch family. Given the coming collapse in Gemstar shares, that proved to be a brilliant move for Mr. Malone. Two years ago, he surprised Mr. Murdoch by converting his stock into voting shares. Last year, Mr. Murdoch put in place a poison pill to stave off his erstwhile friend and partner.

Gemstar now occupies a relatively quiet corner of the News Corporation. Mr. Murdoch's and Mr. Yuen's vision for the electronic programming guide as a major money maker has yet to materialize. Gemstar shares closed on Friday at $3.06, down from $41 in 2000.

Mr. Yuen has spent much of his time since Gemstar at a house in the Pasadena hills and at another house in Laguna Beach, Calif. People close to Mr. Yuen wonder why he did not move on from Gemstar while he had the chance. Had he taken the buyout offers for the company in the late 1990's, he would have walked away with $300 million.

Another former member of Gemstar's management team, who, like others interviewed for this article asked not to be identified because of the litigation surrounding Mr. Yuen, recalled asking Mr. Yuen shortly after the merger with TV Guide why he had not cashed out. Mr. Yuen's response: "Sitting at the beach with all that money is my idea of hell."

Questions for Discussion:

1. Based on the material in the case and the chapter content, how would you describe Henry Yuen's
personality?
2. How might his personality and the situation he was in have contributed to his actions at Gemstar?
3. How would you characterize his abilities?
4. Based on the information in the case, do you think he is high or low on emotional intelligence?
Why? Be specific.

Solution Summary

Questions for Discussion:

1. Based on the material in the case and the chapter content, how would you describe Henry Yuen's
personality?
2. How might his personality and the situation he was in have contributed to his actions at Gemstar?
3. How would you characterize his abilities?
4. Based on the information in the case, do you think he is high or low on emotional intelligence?
Why? Be specific.

Answer is about 555 words.

$2.19