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Cendant Former Executives Forbes, Shelton Indicted
Newark, New Jersey, Feb. 28 (Bloomberg) -- Cendant Corp.'s former chairman, Walter A. Forbes, and its former vice chairman, E. Kirk Shelton, were indicted today on charges of inflating company earnings, in what prosecutors have called one of the biggest securities frauds ever.
The indictment alleges that Forbes and Shelton used fraudulent accounting methods for a decade to overstate operating income at CUC International Inc., which merged with HFS Inc. in December 1997 to create Cendant. The fraud allegedly continued in early 1998 at Cendant, a marketing and franchising company that operates Days Inn hotels and Century 21 real-estate brokers.
After Cendant made a post-merger announcement that it had found CUC accounting abuses, its stock tumbled 46 percent in one day in April 1998, to $19.06, erasing $14 billion in market value. The stock has since fallen further, to $12.96 in recent trading.
Forbes, 58, and Shelton, 46, were indicted by a federal grand jury in Newark. The Securities and Exchange Commission also filed a civil lawsuit in Newark alleging that the men inflated earnings before charges by $500 million from 1995 to 1997.
``Some call this kind of manipulation `earnings management,''' U.S. Attorney Robert Cleary said in a statement. ``Investors who watched helplessly as their share values plunged call it `fraud.'''
Forbes, CUC's founder and chairman, and Shelton both resigned in 1998 from New York-based Cendant. Both men were charged with conspiracy and wire fraud for allegedly collaborating with three subordinates to inflate income through fraudulent accounting methods.
They face up to five years in prison and a $250,000 fine on each of two counts, as well as millions of dollars in possible penalties in the SEC case.
`Massive Financial Fraud'
In its civil complaint, the SEC alleged that the men ``directed a massive financial fraud while selling millions of dollars worth of the company's stock.''
The indictment alleges that Forbes and Shelton conspired with former Cendant Executive Vice President Cosmo Corigliano, former CUC senior Vice President Anne Pember, and former CUC accountant Casper Sabatino. All three pleaded guilty last June and are cooperating with prosecutors.
Lawyers for Forbes and Shelton denied the allegations.
``We intend to contest the charges with great vigor,'' said Forbes' attorney, Brendan V. Sullivan Jr. of Washington, D.C.
Shelton's attorney, Martin J. Auerbach of Manhattan, 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.
Civil Settlements
Cendant has agreed to pay $2.83 billion to settle a class- action fraud lawsuit, the largest settlement ever of a securities- fraud case. It also agreed to pay $340 million in rights to company PRIDES shares, which are derivative securities based on Cendant common stock.
CUC's former auditor, Ernst & Young LLP, 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.
Forbes got a $47 million severance package when he resigned and later, under legal pressure, repaid $2.3 million in travel and entertainment expenses to the company.
Cendant has said that if Forbes pleads guilty or is convicted of a crime in connection with the accounting irregularities, it will seek ``substantial monetary damages'' from him. The company has already said it is seeking such compensation from Shelton.
Forbes, Shelton and eight other board members resigned shortly after Cendant discovered the CUC irregularities. Henry Silverman, Cendant's chief executive and formerly HFS's top executive, became chairman, and remains in that post today.
An internal 1998 Cendant inquiry faulted both Forbes and Shelton, among others, for the accounting abuses. Forbes said at the time, ``There is and was no way I could or should have known about the fraud.'' CUC's auditors ``consistently signed off on clean audits,'' he said.
Feb/28/2001 15:54 ET
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