After deadlocks in two previous trials, a jury this week found Walter A. Forbes, 63, guilty of conspiracy to commit securities fraud and making false statements in a massive fraud in 1999 that threatened travel and real estate company Cendant Corp. soon after its creation.
Cendant was created in December 1997 through a merger of membership-based consumer services company CUC International and HFS Inc., a travel and real estate services company.
Cendant officials announced accounting problems in 1998, stating that “a ‘widespread and systemic’ fraud had occurred at the merged company that included improperly recognizing fictitious revenues, falsely coding services sold to customers and fraudulently manipulating merger reserves,” according to court documents.
A report adopted by Cendant’s board of directors found that CUC officials had inflated that company’s operating income by about $500 million from May 1995 to August 1998, court documents state.
The financial fallout was severe — the company lost $14.2 billion in market value in a single day and the company’s stock tumbled 47 percent per share in response to the revelations.
Several former CUC officials resigned or were terminated from newly formed Cendant as the scandal unfolded. Forbes — who had served as CUC chairman, CEO and president — was forced to resign in July 1998.
Prior to the merger, HFS had emerged as a real estate powerhouse. The company acquired Century 21, Coldwell Banker and ERA real estate companies from August 1995 to May 1996. Over the past year, Cendant officials have divided the company’s various operating segments into a series of separate companies and its real estate division is now an independent company called Realogy.
The U.S. Attorney’s Office for the District of New Jersey announced that Forbes was convicted Tuesday on three of four counts against him — he was found not guilty of securities fraud. The jury deliberated for two hours on Friday and all day on Monday, the office reported.
The maximum penalty for the conspiracy count against Forbes is five years in prison and a $250,000 fine, while the maximum penalty for each of the two counts of making false statements is 10 years in prison and a $1 million fine, the U.S. Attorney’s Office reported.
U.S. Attorney Christopher J. Christie said in a statement, “We are gratified by today’s verdict.”
Forbes is scheduled to be sentenced Jan. 17. His lawyer this week had asked the judge to declare a mistrial but the judge denied the request.
E. Kirk Shelton, Forbes’ co-defendant in the original trial who was the former CUC president and briefly served as Cendant’s vice chairman following the merger, has been sentenced to 10 years in prison and ordered to pay $3.275 billion in restitution to shareholders related to the accounting fraud.
The U.S. Attorney’s Office stated that Forbes and Shelton “were charged with supervising a decade-long accounting scheme that inflated income at Cendant predecessor company CUC International and helped sustain increasing stock values at CUC and then Cendant.”
Henry Silverman, former CEO for HFS who became Cendant chairman amid the financial debacle, testified against Forbes earlier this month. Silverman is now CEO for Realogy Corp. A spokesman for Realogy did not offer a comment about Forbes’ conviction.
Since financial problems stemming from the CUC-HFS merger were brought to light, a series of other high-profile corporate accounting scandals followed. In another case unrelated to the CUC-HFS deal, Homestore Inc. was nearly crushed by a financial fraud several years ago that brought down that company’s CEO and a range of other company managers.
Homestore, now known as Move Inc., operates several property-search sites. In that case, Stuart Wolff, 43, was sentenced earlier this month to 15 years in federal prison and ordered to pay a $5 million fine and restitution to victims relating to a financial scheme that artificially inflated revenues and led the company to restate its earnings.
Wolff was found guilty of conspiracy, filing false statements with the U.S. Securities and Exchange Commission, lying to accountants, fraudulent insider trading, and falsification of corporate books and records, and he is appealing his conviction.
Wolff had served as chairman and CEO of Homestore from 1997-2002, and 10 others connected with the fraud at Homestore have also been scheduled for sentencing.