Ernst & Young Auditors Could Face SEC Charges

Three auditors who worked for Ernst & Young may be charged by the Securities and Exchange Commission for their role in an alleged accounting fraud that cost Cendant Corp. $3.2 billion, people familiar with the case said.

The SEC’s enforcement staff has notified the men that it plans to recommend that the commission file charges against the three, who audited books at CUC International Corp., the people said. CUC merged with HFS Inc. in 1997 to form Cendant.

Ernst & Young and Cendant aren’t targets of the investigation, the people said.

Cendant has never fully recovered from a one-day $14-billion drop in its market value after Chief Executive Henry Silverman disclosed the fraud in April 1998.

“This is a message that the auditors have to understand, and they and their attorneys have to be more committed to reaching a settlement,” said Duke University law professor James Cox.

The agency sent the men Wells notices, which give each a chance to persuade SEC officials not to file the charges. The SEC may seek to fine the three auditors or bar them from auditing public companies after it files charges.

Several Ernst & Young auditors also face a criminal investigation over the CUC audits, and at least one has testified to a grand jury in Newark, N.J., the people said. They declined to say whether the three who got the Wells notices -- Marc Rabinowitz, Ken Wilchfort and Simon Wood -- are targets of the criminal probe.

Wilchfort’s and Wood’s lawyers declined to comment. Rabinowitz’s attorney, Gerald Krovatin, didn’t return calls seeking comment. Wilchfort and Rabinowitz are partners at the world’s fourth-largest accounting firm. Wood has left the New York-based firm.

Cendant’s former chairman, Walter Forbes, and ex-vice chairman, E. Kirk Shelton, face a criminal trial on charges of inflating earnings at CUC for a decade to boost share price and fund acquisitions. Three former CUC executives have pleaded guilty and are cooperating with prosecutors in the case.

Cendant claims Wilchfort, Rabinowitz and Wood worked closely with the CUC executives who pleaded guilty and that Rabinowitz vouched for the accuracy of CUC’s books in several meetings with HFS executives before the merger.

Cendant has sued Ernst & Young, alleging in its complaint that “rather than exposing the fraud, E&Y; chose to facilitate it and reap millions of dollars in audit fees.”