2 Former Cendant Execs Indicted on Charges of Inflating Earnings
Cendant Corp.’s former Chairman Walter A. Forbes and former Vice Chairman E. Kirk Shelton were indicted on charges of inflating company earnings in what prosecutors called one of the biggest securities frauds ever.
Forbes and Shelton, who have denied wrongdoing, resigned in 1998 from New York-based Cendant, a marketing and franchising company of such chains as Days Inn hotels and Century 21 real estate brokers.
The criminal and civil fraud charges contend Forbes, 58, and Shelton, 46, contributed to a decade-long fraud scheme mostly at CUC International Inc., a Cendant predecessor. Cendant has restated three years of results, saying that former CUC executives inflated earnings before charges by $500 million.
A federal grand jury in Newark, N.J., on Wednesday indicted Forbes and Shelton, and the Securities and Exchange Commission filed a civil fraud lawsuit in Newark federal court.
“Some call this kind of manipulation ‘earnings management,’ ” said Robert Cleary, the U.S. attorney in New Jersey. “Investors who watched helplessly as their share values plunged call it ‘fraud.’ ”
Forbes and Shelton were charged with conspiracy and wire fraud for conspiring with subordinates to use fraudulent accounting methods to inflate income, the U.S. attorney’s office said. Both face a maximum of five years in prison and a $250,000 fine on each of the two counts. They also face possible fines in the SEC case.
The SEC said its separate civil case alleges the men “directed a massive financial fraud while selling millions of dollars worth of the company’s stock.”
CUC, a marketer of discount membership clubs, merged with HFS Inc., a hotel and real estate franchiser, to form Cendant in December 1997. Forbes was CUC’s founder and chairman before he became Cendant’s top executive. Shelton was CUC’s president.
After Cendant made a post-merger announcement that it had found CUC accounting abuses, its stock tumbled 46% in one day to $19.06, erasing $14 billion in market value. On Wednesday, Cendant shares dipped 5 cents to close at $13.08 on the New York Stock Exchange.
Three other former Cendant executives, including former Executive Vice President Cosmo Corigliano, pleaded guilty in June to participating in the CUC accounting fraud. Corigliano cooperated in the investigation that led to Wednesday’s indictment.
“We intend to contest the charges with great vigor,” said Forbes’ attorney, Brendan V. Sullivan Jr. of Washington.
Shelton’s attorney, Martin J. Auerbach of New York, blamed Corigliano for the fraud.
“Mr. Shelton did not participate in the fraud that occurred at CUC/Cendant and is innocent of all the charges brought against him,” Auerbach said.
Forbes and Shelton both refused to testify in the SEC inquiry, asserting their constitutional rights against self- incrimination, the SEC said.
A Cendant spokesman said: “The employees and shareholders of our company have moved well beyond this episode in our history.”
Cendant has agreed to pay $2.83 billion to settle a class-action fraud lawsuit, the largest settlement ever of a securities fraud case. CUC’s former auditor, Ernst & Young, settled another investor suit for $335 million.
Cendant, which had $3.8 billion in revenue last year, has agreed to buy Avis Group Holdings Inc., the world’s No. 2 car-rental company, next month. Cendant franchises Days Inn, Howard Johnson, Ramada Inn and other hotels; real estate brokers such as Century 21 and Coldwell Banker; and Jackson Hewitt tax-preparation services.
