Cendant Execs’ Fraud Trial Opens
Two former top executives of Cendant Corp. for years managed a conspiracy to inflate the company’s earnings, enriching themselves and costing investors billions of dollars, federal prosecutors told a jury Monday during opening statements at their fraud trial.
Cendant’s former chairman, Walter Forbes, and former vice chairman, E. Kirk Shelton, are accused of inflating revenue by $500 million at Cendant’s predecessor, CUC International, to drive up the stock price.
Both have pleaded not guilty in U.S. District Court to charges of conspiracy, securities fraud, mail fraud, wire fraud and lying to the Securities and Exchange Commission. Forbes also is charged with insider trading for selling $11 million worth of Cendant stock a few weeks before the accounting scandal was made public.
“They both ran a criminal conspiracy to lie about CUC earnings,” prosecutor James McMahon said. “You’ll hear they directed it. And you’ll hear by virtue of their ownership in CUC stock they profited from it.”
Prosecutors said they planned to call as witnesses CUC financial officials who say they participated in the conspiracy and have pleaded guilty.
Forbes’ lawyer told jurors he intended to prove Forbes’ innocence. “Walter Forbes had no knowledge of wrongdoing,” said lawyer Brendan V. Sullivan Jr. “Walter Forbes relied on skilled auditors.”
Sullivan said the government’s case depended heavily on evidence from Cendant’s former chief financial officer, Cosmo Corigliano, who has agreed to plead guilty to fraud charges and is expected to testify against Forbes and Shelton.
Sullivan blamed the wrongdoing on Corigliano and accused him of selling $23 million worth of stock in March 1998, just a month before the fraud was reported.
“There was really one route out,” Sullivan said. Corigliano “had to make a plea bargain and he had to give the government something. He gave them Walter Forbes to save his own life.”
The trial may last as long as six months, prosecutors said.
Prosecutors said the fraud involved the arbitrary adjustment of revenue and expense figures each quarter to meet the targets of analysts. At the end of each fiscal year, the fraud would be covered up by transferring money from a fund for merger-related costs to make it look like revenue.
“It’s about making earnings up, it’s about lying about CUC’s earnings,” McMahon said.
The bulk of the alleged fraud took place in the mid-1990s and came to light after CUC merged with HFS Inc. in 1997 to form Cendant, a franchiser of brand names such as Ramada, Avis and Century 21 realty and owner of Budget Rent-A-Car.
When the improprieties came to light, Cendant’s stock price dropped from $35.62 to $19.06 in a single day. Shares of Cendant closed down 75 cents Monday at $21.68 on the New York Stock Exchange.
McMahon accused Shelton of making a last-ditch effort to recruit HFS people into the conspiracy. At the same time, Forbes was dumping CUC shares, prosecutors said.
“He was doing that while knowing the earnings of CUC had been fraudulently inflated,” McMahon said.
The case is being handled by the U.S. attorney’s office for New Jersey, where Cendant was based before it moved to New York. The case was transferred in March to Hartford at the request of the defendants.
