2001-07-18 -- Forbes and Shelton -- Superseding Indictment -- News Release

New Indictment Returned Against Former Cendant Executives; Charges Include Alleged Fraud Against New Jersey Pension Fund

NEWARK - A federal grand jury today returned new charges against the former chairman and vice chairman of Cendant Corp., including allegations that they defrauded the New Jersey state pension fund, U.S. Attorney Robert J. Cleary announced.

The Superseding Indictment adds allegations of securities fraud as part of the Conspiracy originally charged in Count One; securities fraud in Count Two; mail fraud in Count Three and Count Four; and making false statements to the Securities and Exchange Commission in Count Six.

The original two-count Indictment, returned on Feb. 28, charged Walter A. Forbes, 58, of New Canaan, Conn., and E. Kirk Shelton, 46, of Darien, Conn., with conspiracy and wire fraud. Forbes and Shelton will likely be arraigned on the new Indictment within the next two weeks. The case is assigned to U.S. District Judge William H. Walls.

The securities fraud count, as well as the count alleging false statements to the SEC, each carry a maximum penalty of 10 years in prison and a $1 million fine. The remaining counts each carry a maximum penalty of five years and a $250,000 fine.

Each of the counts in the Superseding Indictment concerns an alleged conspiracy, in which Forbes and Shelton and at least three subordinates, between the late 1980s and 1998, routinely used fraudulent accounting methods to overstate operating income for Cendant and its predecessor company CUC International, Inc. The result, according to the Indictment, was that operating earnings per share of the companies were fraudulently inflated for more than a decade.

The scheme allowed CUC to artificially inflate its stock price and use the stock to acquire other companies and, ultimately, make it a more attractive merger partner with HFS, Inc., according to the charges.

Cendant was created by the merger of Stamford, Conn.-based CUC and Parsippany, N.J.-based HFS in December 1997. When the fraud was disclosed by company officials in April 1998, Cendant's stock value plummeted, resulting in billions of dollars in losses to Cendant shareholders.

New details and allegations appear in Count Three, which alleges that the defendants mailed a false quarterly shareholder report to a shareholder in Morristown. The report falsely stated that in the second quarter of fiscal 1997 CUC had earned $.24 per share before one-time expenses, according to the Superseding Indictment.

Count Four alleges that the defendants filed with the SEC a false quarterly report inflating per-share earnings. It also charges that the defendants issued a false proxy statement to shareholders soliciting their votes in favor of the merger of HFS and CUC.

That proxy statement was received by the Division of Investment of the State of New Jersey, Department of the Treasury, which was an existing shareholder in both CUC and HFS, according to the Indictment. The pension fund held retirement funds for firemen, teachers and other public employees.

Count Six alleges specifically that in March 1998 the defendants filed a false annual report for Cendant to the SEC in Washington.

Forbes and Shelton's co-conspirators pleaded guilty in federal court in Newark on June 14, 2000. As part of cooperating plea agreements, the three defendants admitted participating in the conspiracy and acting under the instructions of their superiors. The co-conspirators are:

• Cosmo Corigliano, 41, of Old Saybrook, Conn., CUC's chief financial officer and subsequently a Cendant executive vice president. Corigliano pleaded guilty to one count of conspiracy to commit mail and wire fraud and make false statements in reports to the SEC and one count of wire fraud.

• Anne Pember, 41, of Madison, Conn., a former director of accounting at the CUC division Comp-U-Card and CUC controller. Pember pleaded guilty to one count of conspiracy to commit mail and wire fraud.

• Casper Sabatino, 48, of Sherman, Conn., a CUC accountant in charge of the company's external reporting. Sabatino pleaded guilty to one count of aiding and abetting wire fraud.

Corigliano, Pember and Sabatino each face a maximum penalty of five years in prison and a $250,000 fine on each of the charges. They pleaded guilty before Judge Walls and await sentencing.

According to the Indictment, Forbes, Shelton and the co-conspirators sought to support and increase the price of CUC stock by consistently reporting that its operating income was growing by at least 25 percent a year. That caused the price of CUC stock to rise from a split-adjusted $1.56 per share on Aug. 23, 1989 - the first day CUC stock was traded on the New York Stock Exchange - to approximately $32.13 per share on Dec. 17, 1997, the date of the merger with HFS that created Cendant.

Beginning in approximately 1995, according to the Indictment, Forbes, Shelton and the co-conspirators determined that CUC would be unable to continue reporting increases in operating income of at least 25 percent per year unless they began to inflate CUC's reported earnings on an even larger scale. In large part for the specific purpose of securing the means to inflate earnings on such a scale, the participants arranged for CUC to acquire Ideon Group, Inc. in 1996 and to merge with HFS, Inc. to form Cendant in 1997. Both transactions enabled CUC to establish large, artifically inflated merger reserves which the participants then used to inflate earnings.

Forbes and Shelton allegedly took pains to ensure that CUC quarterly earnings closely matched Wall Street analyst predictions. They made certain that CUC's earnings never fell even slightly short of the analysts' consensus prediction, for fear of triggering a decline in the CUC stock price, according to the Indictment.

Scheme participants allegedly kept members of the analyst community well informed as to anticipated earnings growth and inflated CUC earnings each quarter to whatever extent necessary to achieve the company's previously disclosed earnings target for the quarter.

At the end of each of the first three quarters in a fiscal year, if the consolidated earnings of CUC's operating units failed to meet projections, Corigliano and the other participants allegedly simply adjusted them upward by whatever amount was necessary to meet the target. They then publicly reported the result.

At the end of a fiscal year, to allow CUC to withstand its annual audit, the conspirators allegedly made fraudulent entries on the books of CUC's operating units to support any fraudulent earnings previously reported for the year.

Shelton and Forbes allegedly kept track of the scheme with the help of a provisional plan for inflating earnings which they closely guarded and referred to as their "cheat sheet." This document listed amounts that could be added to CUC's reported earnings for the year by means of fraudulent entries, including amounts from merger reserves, according to the Indictment.

Cleary credited Special Agents of the FBI, under the direction of Kevin Donovan, Special Agent in Charge of the FBI's Newark Office, and Postal Inspectors of the U.S. Postal Inspection Service, under the direction of Kevin J. Burke, Inspector in Charge in Newark, for their skill and persistence in investigating the case.

The government is represented in the case by Assistant U.S. Attorneys Paul A. Weissman and John J. Carney of the U.S. Attorney's Office Frauds and Public Protection Division.

Defense attorneys:

Forbes: Brendan V. Sullivan, Jr., Esq. Washington

Shelton: Martin Auerbach, Esq. New York

Corigliano: Gary Naftalis, Esq. New York

Pember: Helen Gredd, Esq. New York

Sabatino: Edward Dauber, Esq. Newark