Walter Forbes, former chairman of Cendant Corp., and E. Kirk Shelton, an executive vice president, were charged by the U.S. Securities and Exchange Commission with fraudulently overstating the income of the former CUC International Corp., a Stamford, CT, direct marketing firm that sold memberships in discount buying clubs.
CUC merged with Parsippany, NJ-based HFS Inc., a franchiser of brand names such as Ramada, Avis and Century 21, in December 1997 to form Cendant.
To increase CUC's stock price, the executives inflated quarterly and annual operating income and earnings, the SEC alleged in a civil suit filed in U.S. District Court in New Jersey.
“By inflating income and earnings, CUC management intentionally created for investors the illusion of a growing, highly profitable and successful enterprise,” the SEC suit said, adding that from 1995 to 1997, pre-tax operating income was inflated by more than $500 million.
Separate from the civil suit, federal prosecutors in Newark, NJ, charged each defendant with one count of conspiracy and one count of wire fraud. The complaint alleged that Forbes directed the fraud from its beginnings in 1985. Shelton was accused of joining in the scheme from at least 1991 on.
Forbes and Shelton will be arraigned on the indictment in the coming weeks. If convicted, they face a maximum penalty of five years in prison and a $250,000 fine for each count.
New York-based Cendant said in a statement: “Since the discovery of the fraud at the former CUC nearly three years ago, we have supported any effort seeking to hold accountable all persons responsible. That view has not changed. We have always cooperated fully with the authorities when asked and will continue to do so.”