Forbes, Walter
Walter A. Forbes is a former chairman of Cendant Corp., a New York-based global provider of real estate, travel and direct-marketing-related consumer and business services. Forbes resigned as chairman under immense pressure in 1998 during an accounting scandal. Authorities are trying to determine the level of involvement by top executives in Cendant's accounting irregularities. Forbes has repaid nearly $2.3 million in travel- and entertainment-related expenses.
U.S. Accuses Top Cendant Executives of Fraud
The New York Times
By Floyd Norris
March 1, 2001
Walter A. Forbes, who built a small company into the huge Cendant Corporation, was an active participant in a fraud that resulted in the company's reporting more than $500 million in phony profits, the government charged yesterday.
Mr. Forbes, the former chairman of Cendant, and E. Kirk Shelton, the former vice chairman, were indicted on fraud charges by a federal grand jury in Newark yesterday. At the same time, the Securities and Exchange Commission filed a civil fraud case against the two men.
The charges, which both denied, contend that the fraud went on for more than a decade, with company officials systematically altering financial statements to increase profits to impress investors. The charges against the two men appear to be largely based on the testimony of three other officials of the company who pleaded guilty to similar charges last year.
"Some call this kind of manipulation `earnings management,' " said Robert J. Cleary, the United States attorney in Newark. "Investors who watched helplessly as their share values plunged call it fraud."
Mr. Forbes and Mr. Shelton built CUC International, which began as a membership organization offering consumer products and travel services, into a large company that took over numerous other companies, culminating in a 1997 merger with HFS Inc. to form Cendant. The merged company controlled brands like Avis rental cars, Days Inn motels, Century 21 real estate and the Jackson Hewitt tax-preparation service.
"Soon after the Cendant merger," the S.E.C. said in its complaint, which was also filed in Newark, "Forbes and Shelton explicitly congratulated each other on being masterful `financial engineers' " who had assured their continued success "by duping HFS into a merger with CUC." The S.E.C. did not say where it had obtained that information.
At the time of the merger, Mr. Forbes was chairman and chief executive of CUC and Mr. Shelton was president and chief operating officer.
Mr. Forbes issued a statement yesterday through his lawyer, Brendan V. Sullivan, saying, "I am totally innocent of the charges brought against me and will fight them in court." Mr. Shelton's lawyers issued a statement denying the accusations and saying, "When all the evidence emerges, Mr. Shelton's innocence will be clear."
The indictment of the two top executives reflects an increasing willingness of prosecutors to bring criminal charges in cases where they conclude that investors were defrauded by a deliberate falsification of books. Garth H. Drabinsky, the former chief executive of Livent, a theater production company, was indicted in 1999, and Albert J. Bergonzi and Jay P. Gilbertson, former co-presidents of HBO & Company, a medical software concern, were indicted in September. Mr. Drabinsky is fighting extradition from Canada, and the case of the two HBO & Company executives has not come to trial.
Richard Walker, the director of enforcement for the S.E.C., said: "The results of our cases show that financial fraud is not confined to very small and obscure companies, but is increasingly prevalent in large companies traded on major stock markets as well. Last year, we brought more enforcement actions involving financial fraud and reporting abuses than ever before, and our inventory of such cases remains large." He said 19 chief executives faced S.E.C. civil cases in 2000.
The S.E.C. is now known to be investigating accusations of fraud or improper financial reporting at such major companies as Waste Management, Lucent Technologies and Xerox.
The securities agency said the accounting fraud at Cendant was the largest ever prosecuted, and it put investor losses at $19 billion.
Mr. Forbes, 58, of New Canaan, Conn., became chief executive of Comp-U-Card International, as CUC was then known, in 1976. He cultivated a reputation as a visionary who foresaw the possibility of consumers shopping by computer decades before wide use of the Internet made that possible. Mr. Shelton, 46, of Darien, Conn., joined the company in 1981 and became president in 1991.
But even as the company grew rapidly, the government contends that it was fraud, not operating results, that produced much of the profit.
Cosmo Corigliano, formerly CUC's chief financial officer; Anne Pember, formerly CUC's controller; and Casper Sabatino, a CUC accountant, pleaded guilty to fraud charges last June but have not been sentenced. They admitted to participating in the filing of fraudulent financial statements for many years and said that senior officials had directed the fraud. Mr. Corigliano said fraud had been going on at CUC since he joined it in 1983, the year the company went public.
According to the indictment, CUC executives maintained what they called a "cheat sheet" that "listed amounts the conspirators could add to CUC's reported earnings for the year by means of various fraudulent entries." Each quarter, the government charged, they would use the sheet to adjust quarterly earnings to meet Wall Street expectations, and then each year they would make additional adjustments to make the fraud less clear to auditors.
The Cendant matter has already become one of the most expensive in history. The company has settled shareholder suits for $2.8 billion, and the former auditors for CUC, Ernst & Young, have agreed to pay $335 million. Cendant's current management is pursuing civil litigation against the auditors, contending that they knew of the fraud and covered it up, accusations the auditors deny. Ernst & Young has retained David Boies as its lawyer in the civil case.
With charges now filed against the entire top management of CUC from before the merger, a question now is whether Ernst & Young will face government charges. Neither the S.E.C. nor the United States attorney's office would comment on that. A spokesman for Ernst & Young said it was cooperating with the investigation.
The charges covered by the indictment said the "cheat sheet" was maintained by Mr. Corigliano and did not cite other documents linking Mr. Forbes and Mr. Shelton to fraud. The S.E.C. charges said Mr. Shelton regularly reviewed and authorized fraudulent changes to the books, while Mr. Forbes did so less frequently and sometimes acted through Mr. Shelton.
There has been speculation that prosecutors might offer Mr. Shelton a deal to testify against Mr. Forbes, but Mr. Shelton's lawyers, Stephen E. Kaufman and Martin J. Auerbach, showed no indication yesterday that they were interested in such a deal. They said Mr. Shelton "worked with an unflinching commitment to honesty and the truth during his 17 years" at the company and "did not participate in the fraud that occurred."
The indictments against Mr. Forbes and Mr. Shelton of one count of conspiracy and one count of wire fraud carry maximum penalties of 10 years in prison and fines of $500,000.
The potential civil liability is great. Both men made large amounts of money selling CUC stock when share prices were high, and the S.E.C. asked that they be ordered to "provide a complete accounting of and to disgorge the unjust enrichment realized," plus interest. The commission said that Mr. Forbes sold 1.2 million shares, and Mr. Shelton nearly 600,000 shares, from January 1995 through April 1998, when the fraud was exposed.
The government contends that the fraud began by 1985, however, with Mr. Forbes involved from the beginning, and that Mr. Shelton joined it no later than 1991. So sales of stock before 1995 could also be included in assessing the men's profits.
The large potential liability appears to be what is holding up a settlement by Mr. Corigliano and Ms. Pember of charges filed by the S.E.C. against them. Both sold substantial quantities of stock during the period in which they have admitted helping to prepare false financial reports.
CUC gained a big Wall Street following in the years when it seemed to be growing rapidly. The company went public in 1983 at $1.21 a share, adjusted for subsequent splits. After the merger with HFS that created Cendant, the stock price rose to a high of $41.69 on April 6, 1998, shortly before the fraud was discovered. Mr. Forbes, Mr. Shelton and seven others resigned on July 28 that year.
Shares of Cendant fell 5 cents yesterday, to $13.08, twice the low of $6.50 it reached in the fall of 1998 but less than a third of the peak price.
The company, whose chief executive now is Henry R. Silverman, the former head of HFS, issued a statement saying it "supported any effort seeking to hold accountable all persons responsible."
Jeb Bush
Ideon Corporation
Jeb Bush - Board of Directors - Bush sat on Ideon's audit committee, the watchdog of financial and management integrity.
Cendant Employees Awake to Discover A 15% Average Loss On Their 401k Stake
Cendant - Jackson Hewitt Inc. And Arthur Andersen To Develop New Tax Software System
"Arthur Andersenwill help us enhance our current core tax engine and upgrade our ProFiler system to be faster and much more efficient," said Jackson Hewitt Inc. President and COO, Dan Tarantin. "The new system will provide numerous benefits to our franchisees, including the option of preparing returns in either a forms-based method or via our traditional decision-tree interview."
"Given their extensive tax industry expertise, we’re excited to have Arthur Andersen’s assistance in the upgrading of our technology," said Tarantin. "Due to our tremendous growth over the last few years our customer base has doubled, and the newly enhanced ProFiler system will help to support our growing franchise base."
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Jeb Bush joined board of company mired in trouble
"Kahn in early 1995 even wrote the former president: "First let me tell you how happy we are to have your son, Jeb, on our board of directors. . . . He is a great asset to the team."
Then there was the paycheck. Ideon paid directors a whopping $50,000 a year, plus $2,000 per meeting and $500 per telephone conference. That was the largest sum paid to directors of any major public company in Jacksonville, and possibly in all of Florida.
What's not to like? Everything, it turns out. Ideon already was in trouble when Bush joined the board in January 1995.
By 1996, Kahn was out. Ideon was then sold to CUC International. Ideon's directors faced lawsuits claiming stock manipulation. Now, more than two years later, Cendant -- the successor company to CUC -- is struggling to recover after discovering years of accounting fraud attributed, in part, to CUC's purchase of Ideon.
Politically, the Ideon aftermath worries the Bush campaign. In fact, Bush assembled a 15-page Ideon statement and visited major Florida newspapers to defend his role.
Kahn at first had grandiose plans for a quirky array of new services -- selling credit card perks for golfers, a "Family Protection Network" membership club to help find missing children and a line of Vatican-approved art objects. The services were never fully tested. They flopped and Ideon began gushing red ink.
Some of Kahn's ideas were a stretch. He wanted the pope's blessing to introduce a Catholic credit card. He also wasted a lot of company funds. Kahn once bought $10,000 place mats for the company jet. He hired consultants like convicted Wall Street felon Martin Siegel.
Bush said he was angry when he heard about Siegel. "I couldn't believe it," he said.
Despite a second-quarter 1995 loss of $46.7-million, Bush said Ideon's board initially accepted Kahn's free-spending ways. The directors counted on revenue growth. They did demand Siegel be fired. Bush said he pushed to dismiss Kahn and sell the company.
But lawsuits against Ideon directors, as well as the company's own regulatory filings, paint a different picture. As directors, Bush and his Republican fund-raiser friend Thomas Petway sat on Ideon's audit committee, the watchdog of financial and management integrity. Many of Bush's fellow outside directors -- who were supposed to represent shareholder interests -- had cut cozy business deals with Ideon. In some cases, they got six-figure consulting fees on top of their directors pay.
..By August 1996, Ideon was sold for $375-million to CUC. The sale included indemnification for directors against lawsuits. Good news, considering the lawsuits charge Ideon and its directors with stock manipulation. The cases were settled early this year for $15-million. Bush and the other directors paid nothing.
Kahn denied that board members were in the dark about company spending. "I was not alone," he told Business Week magazine last year. "The board knew about everything. . . . They set me up for being the fall guy, not that I'm without sin. I was hung out to dry."
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A Pathological Probe of A Pool of Pervasive Perversion - By Abraham J. Briloff, Ph.D., CPA - Emanuel Saxe Distinugished Professor Emeritus - Baruch College, New York.
"On August 28, 1998, Arthur Andersen & Co. (“AA”) rendered its “Report to the Audit Committee of the Board of Directors of Cendant Corporation” reporting on its forensic audit of CUC International, Inc., in the wake of disclosures in mid-April that accounting irregularities had been discovered at CUC (which merged in December 1997, with HFS to form Cendant)."
Plan Calls For Jail Time For Execs
When the government decides to prosecute a case, it can take years for it to come to trial. For example, four years ago, Cendant Corporation was shocked to discover that it had acquired a company, CUC International, that had inflated itself by $400 million. Since then, three lower-level workers have pleaded guilty to wire fraud but the president, Kirk Shelton, and the chairman, Walter Forbes, have yet to go to trial.
THE BUSH FAMILY, WE DO CRIME BETTER