Newark, New Jersey-Walter A. Forbes, who built a small company into the huge Cendant Corp., was an active participant in a fraud that resulted in the company's reporting more than $500 million in phony profits, the government charged Wednesday.
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, New Jersey. At the same time, the Securities and Exchange Commission filed a civil fraud case against the two men.
The charges, which both men 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 based largely on the testimony of three other officials of the company who pled guilty to similar charges last year.
"Some call this kind of manipulation 'earnings management,'" said Robert J. Cleary, the U.S. attorney in Newark. "Investors who watched helplessly as their share values plunged call it fraud."
Forbes and 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. Cendant is the franchisor of Entrepreneur's Franchise 500 companies Century 21 Real Estate Corp., Coldwell Banker Real Estate Corp., Days Inn Worldwide Inc., Howard Johnson International Inc., Jackson Hewitt Tax Service, Knights Franchise Systems Inc., Ramada Franchise Systems Inc., Super 8 Motels Inc., Travelodge Hotels Inc. and Wingate Inns International Inc.
"Soon after the Cendant merger," the SEC 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 SEC did not say where it had obtained that information.
At the time of the merger, Forbes was chairman and CEO of CUC, and Shelton was president and COO.
Forbes issued a statement Wednesday through his lawyer, Brendan V. Sullivan, saying, "I am totally innocent of the charges brought against me and will fight them in court."
Shelton's lawyers issued a statement denying the accusations and saying, "When all the evidence emerges, Mr. Shelton's innocence will be clear."
The indictments against Forbes and 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 New York Times