Greek Gross Government Debt

Date: 1998
Published July 12th, 2017
Ron Rimkus, CFA

Cendant Corporation was created by merging an ethical company with an unethical company. The unethical company was CUC International (CUC) and the ethical company was Hospitality Franchise Services (HFS). Although both companies were highly acquisitive before their 1997 merger, CUC used deceptive accounting practices to inflate its reported earnings. After the merger, CUC management (led by Walter Forbes) took over and continued these practices in the new Cendant Corporation. An investigation revealed that CUC had practiced unethical accounting since at least 1988, continuing until these deceptive practices came to light in 1998. Further investigation suggested that CUC management’s fraudulent practices went back even further, starting as early as 1983. CUC came to depend on an ongoing stream of falsified financial statements, hiding their fraud and projecting an image of growth and health.



  • 1989: The stock price of CUC International, one of the merger partners that later form Cendant Corporation, plummets amid questions about the company’s accounting methods, which appear to inflate earnings and cash flow. CUC executives acknowledge the error and adjust methods.
  • 1990s: HFS (Hospitality Franchise Services) acquires a great deal of debt by engaging in multiple hotel franchise purchases. The financing strategy is criticized for benefiting executives but hurting the long-term health of the company.
  • 1993 – 1998: CUC managers engage in various aggressive financial accounting techniques, including adjusting financial statements to inflate earnings and better match analyst predictions. These practices are hidden from auditors.
  • 1996: CUC and HFS begin merger talks “to support the rapid growth of both companies.”
  • 28 May 1997: The merger between CUC and HFS is formally announced.
  • September 1997: The CUC company auditor, Ernst & Young, attempts to verify the company’s cash balances three months early because of the pending merger.
  • December 1997: The $14 billion merger between HFS and CUC is completed. Cendant Corporation, the name of the merged organizations, is led by HFS founder Henry Silverman. The new company combines HFS travel and hotel holdings with CUC’s direct marketing business. Holdings include Avis Car Rental, Howard Johnson, Days Inn, and Ramada. Silverman is named CEO, and CUC founder and CEO, Walter Forbes, assumes leadership as Chairman of the Board of the combined company. The terms of the merger include retaining separate accounting operations for the two companies for a period of time.
  • January 1998: Cendant stock reaches $33 a share and then peaks in early April 1998 at $41 a share.

Central Events

  • March 1998: When CUC stalls on completing requested financial reports, the HFS accounting team is sent to help. Unexplained and suspect merger reserve and merger savings funds listed in the CUC books raise additional concerns.
  • April 1998: Accounting “discrepancies” at CUC are revealed. Cendant launches an internal investigation of the company’s accounting.
  • 16 April 1998: Cendant releases a report admitting that 1997 earnings were overstated by $100 million. The stock price falls from $36 to $19 that day, eventually falling to $11 by August 1998.
  • June 1998: The US SEC officially launches an investigation of Cendant’s accounting.


  • June 1998: The shareholders sue Cendant for accounting fraud related to accounting discrepancies at CUC.
  • 28 July 1998: Silverman and the Cendant board of directors force Walter Forbes to resign. Silverman becomes Chairman of the Board.
  • 27 August 1998: Arthur Andersen delivers the results of its forensic audit to the Cendant board of directors. The audit reveals that CUC has overstated revenues and pretax income by more than $500 million over three years.
  • 25 January 1999: Cendant sues the CUC accounting firm Ernst & Young, which blames CUC executives.
  • December 1999: Cendant settles a class action shareholder lawsuit for $2.83 billion. Ernst & Young settles a lawsuit with shareholders for $335 million.
  • 14 June 2000: The SEC brings fraud charges against seven former CUC officials/executives. Three CUC executives plead guilty to accounting fraud. Silverman claims HFS had no knowledge of CUC’s accounting practices prior to the merger.
  • 2001: Forbes and E. Kirk Shelton, former CUC vice chairman, are indicted for fraud.
  • 10 May 2004: Forbes and Shelton are finally brought to trial.
  • 14 May 2004: Cosmo Corigliano, the former chief financial officer of CUC, reaches a settlement with the SEC whereby he pleads guilty to securities fraud and agrees to pay back to the company $14 million in exchange for a light sentence (three years of probation). This move clears him to testify against Forbes, among others.
  • 2005: Shelton is convicted of conspiracy, securities fraud, mail fraud, wire fraud, and making false filings with the SEC.
  • October 2006: Forbes is found guilty of conspiracy and of two counts of submitting false reports to the SEC in overstating his company’s earnings by more than $250 million. He is acquitted on a fourth count, securities fraud.

Investment Principles

Principle #1

The market’s endorsement of a particular company or management team is not pertinent to a due diligence process.

Principle #2

A company’s auditors may be unaware of the fraud because the company is maintaining two sets of books.

Principle #3

Orchestrating plausibility in the false set of books requires widespread illicit cooperation among many people.

Principle #4

Mergers and acquisitions give bad actors opportunities to enrich themselves by overstating earnings to help hit earnings targets, by overstating reserves that are subsequently released into earnings (by reallocating business units and revaluing assets and liabilities), and by the structuring of compensation contracts.

Principle #5

Changes of financial reporting structures create opportunities to identify bad actors.

Principle #6

Many participants in corporate fraud willingly do things they know are wrong because they can assign blame to their superiors.

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2 Former Cendant Execs Avoid Prison in Scandal.” 2007. NBC News (31 January).

Barrett, Amy. 1998. “Cendant: Who’s to Blame?Business Week (16 August).

Briloff, Abraham J. “A Pathological Probe of a Pool of Pervasive Perversion.” Baruch College.

Cendant Closes Fraud Case.” 1998. CNN Money (27 August).

Cendant Corporation — Company Profile, Information, Business Description, History, Background Information on Cendant Corporation. Reference for Business. 2016.

Ex-executives Admit Guilt. CNN Money, 2000. 14 June, 2000.

DeVries, Delwyn, and Jack E Kiger. 2004. “Journal Entries and Adjustments — Your Biggest Fraud Danger.” Journal of Corporate Accounting and Finance, vol. 15, no. 4 (May/June): 57–62.

Elkind, Peter. 2000. “Cendant Case Scorecard: Government 3; Book-Cookers 0.Fortune, CNN Money archive article.

Elkind, Peter. 1998. “A Merger Made in Hell.Fortune (9 November).

Fink, Ronald. 1998. “Hear No Fraud, See No Fraud, Speak No Fraud.CFO Magazine (1 October).

Lipton, Joshua. 2007. “No Leniency for Walter Forbes.”

Morgenson, Gretchen. 2004. “Sunday Money; Before Enron, There Was Cendant.New York Times (9 May).

SEC. 2000. “SEC Enforcement Actions against Former Top Financial Officers and Managers at CUC International” (14 June).

Additional Reading

Marshall, Jordan Ray. 2004. “Using Topside Journal Entries to Conceal Fraud.” University of Tennessee Honors Thesis Project.

Securities and Exchange Commission vs. Walter Forbes and E. Kirk Shelton. 2001. SEC Litigation Release (28 February).