Gavin Howe
Cendant Corp. was involved in an accounting scandal, which led to the company breaking into four independent companies. Cendant Mobility Services was also sued for breach of implied contract, and the court awarded the plaintiff $850,000.
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What You'll Learn
Accounting fraud
Cendant was involved in an accounting scandal, which was uncovered in April 1998. The scandal was the result of massive accounting improprieties at CUC, which had been acquired by Cendant throughout the 1990s. CUC's Vice Chairman, E. Kirk Shelton, was reported to have inflated the company's revenue by $500 million over a period of three years. In 1997, he reported a net income of $55.4 million when the true result was a net loss of $217.2 million.
Cendant's Board of Directors launched an investigation and discovered that the former management team of CUC, including its top executives Walter Forbes and Kirk Shelton, had been fraudulently preparing false business statements for several years. This resulted in one of the largest financial scandals of the 1990s.
The accounting fraud cost the company and its investors billions of dollars. After the scandal was uncovered, Forbes and Shelton were forced to resign. In March 2001, they were indicted by a federal grand jury and sued by the Securities and Exchange Commission, which accused them of directing the fraud. Forbes was sentenced to 12 years in prison in 2007, while Shelton served 8 of his 10-year sentence before being released early for good behaviour.
The scandal had a significant impact on Cendant's stock price, which plummeted as a result of the fraud becoming public knowledge. Shareholders with stakes in the company lost considerable amounts of money, leading to a massive class action lawsuit against Cendant. In 2000, a judge authorized over $3 billion in payments to shareholders by way of settlement from Cendant.
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Shareholders lost money
Cendant was involved in an accounting scandal in 1998, which resulted in shareholders losing a lot of money.
Cendant, a travel and real estate company, lost $14 million in stock prices in a single day. Shares tumbled from $41 per share to almost $12. This was the result of massive accounting improprieties at CUC, which was uncovered by Cendant just months after the two companies merged. Cendant's Vice Chairman, E. Kirk Shelton, was reported to have inflated the company's revenue by $500 million over a period of three years. He had reported a 1997 net income of $55.4 million when the true 1997 result was a net loss of $217.2 million.
The accounting scandal was the largest case of accounting fraud in the country's history at the time, and it ultimately cost the company and its investors billions of dollars. Following the fraud debacle, Cendant began selling businesses to reduce its debt and repair the financial damage. In 2000, a judge authorized over $3 billion in payments to shareholders by way of settlement from Cendant.
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Class action suit
Cendant was involved in an accounting scandal in the 1990s, which was the largest case of accounting fraud in the country's history at the time. The company had been fraudulently preparing false business statements for several years, with Vice Chairman E. Kirk Shelton inflating the company's revenue by $500 million over a period of three years.
This resulted in a massive class action suit against Cendant, with shareholders seeking reparations for the damages caused by their accounting fraud. In 2000, a judge authorized over $3 billion in payments to shareholders by way of settlement from Cendant. Forbes and Shelton were ordered to pay $3.28 billion in restitution, and Forbes was sentenced to 12 years in prison in 2007. Shelton served 8 of his 10-year prison sentence.
Cendant began selling businesses to reduce its debt and repair the financial damage caused by the accounting scandal. The company eventually broke up into four independent companies and dropped its name.
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Breach of implied contract
Cendant was involved in an accounting scandal, which led to the company breaking into four independent companies. Cendant Mobility Services was sued for breach of implied contract, with the court awarding the plaintiff $850,000. Some states recognise the "implied covenant of good faith and fair dealing" exception, meaning that there must be a "just cause" for firing an employee. Good faith violations could include making up a reason to fire an employee because you want to hire cheaper labour or because you don't want to offer them benefits they're entitled to. If an employee is fired for unjust reasons or company policies are broken, an employee can file a wrongful termination claim.
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Merger with HFS Incorporated
Cendant Corporation was formed in December 1997 through a $14 billion merger between HFS Incorporated and CUC International. The merger combined the travel and hotel holdings of HFS with CUC’s direct marketing business. The new company was named Cendant, and it retained its core business as a direct marketer, but it also specialised in hotel franchises, car rentals, travel agencies and its consumer software operations, Cendant Software.
The merger of these two companies, which between them owned a virtual monopoly in the worldwide market for full-service timeshare exchange services, caused the FTC to require the parties to divest one of their timeshare exchange companies to re-establish a viable competitor in the market.
Cendant's stock price initially surged after the merger. However, the company was unable to fully restore its stock price seven years later after an accounting scandal. Cendant recorded over $500 million in merger, integration, asset impairment, and restructuring charges for the CUC-side costs associated with the merger. CUC and Cendant routinely overstated the restructuring charges and the resultant reserves and would then use the reserves to offset normal operating costs—an improper earnings management scheme. The company’s improper reversal of merger and acquisition-related restructuring reserves resulted in an overstatement of operating income by $217 million.
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Frequently asked questions
Cendant was involved in an accounting scandal, which was the largest case of accounting fraud in the country's history.
Cendant was found to have inflated its revenue by $500 million over a period of three years.
Former CEO Walter Forbes and Vice Chairman E. Kirk Shelton were found to have been fraudulently preparing false business statements for several years.
Cendant's stock prices plummeted, resulting in a massive class action suit against the company. Forbes and Shelton were ordered to pay $3.28 billion in restitution and Forbes was sentenced to 12 years in prison in 2007.
Yes, under the leadership of Henry Silverman, Cendant bounced back from the accounting scandal and outperformed the markets in the early 2000s.
