Accounting scandal
On April 16, 1998, less than one year after the new brand was introduced, Cendant disclosed that for three years prior to the merger, CUC had fraudulently overstated its income by over US$500 million. This caused Cendant stock to plummet from $39 to $20 in a single day, eventually reaching $9,[10] and costing shareholders about US$14 billion. Cendant/CUC was eventually required to pay more than US$2.85 billion in class action settlements to shareholders.[11]
The Securities and Exchange Commission brought civil charges against CUC's president Kirk Shelton and CEO and chairman Walter Forbes, for the "long-running financial fraud" which, it alleged, started in 1995. The SEC stated that CUC inflated its books in order to inflate its stock price, which allowed it to use its stock to buy other companies, and in turn these mergers and acquisitions were executed in order to generate financial reserves and purchase reserves that were intended to be "big enough to bury the fraud".[12]
Shelton was convicted in January 2005 of 12 counts of fraud and related charges and sentenced to 10 years in prison. Shelton and Forbes were tried together. Although Shelton was convicted of all 12 charges brought, the jury was unable to reach a verdict for Forbes on any charge. A hung jury also deadlocked Forbes' second trial and a third trial was set for September 2006.[13] Retried and convicted, he was sentenced to 12 years on January 17, 2007.[14] The former CUC chief financial officer Cosmo Corigliano, former comptroller Anne Pember and former accountant Casper Sabatino all pleaded guilty in June 2000 to several fraud and related charges.[10][15]
In addition to their prison terms, Shelton and Forbes were each ordered to pay Cendant US$3.275 billion in restitution.[14] Cendant is unlikely to ever receive the full amount, as according to the payment schedule of US$2,000 per month ordered by the judge, it would take over 134,000 years to pay.
Investigators found that over US$500 million in non-existent company income had been reported during 1996 and 1997.[10] Membership sales revenue had been overreported and membership cancellations information held back, allowing for the company's earnings to be manipulated at will. With too much debt and too little real income, however, the real resources of the company were dwindling, despite the considerable flotation of the stock numbers. As the imaginary books and the real company finances diverged more and more, the requirements of appearances became greater. Even the cooked books were insufficient to cover all of the company's losses, at which time it turned to mergers with, and acquisition of, new companies. Purchased companies' assets could be similarly inflated, and the increase either boost operating income or write off losses.[10] The misreporting of assets by CUC from 1995 to 1997 is similar to that performed during the Enron scandal and other more recent frauds.[16]
