Regulation

Report: Cendant’s Silverman Knew about Fraud

Documents are said to prove that the former chief executive learned of the scheme days before the CUC purchase was closed.
Stephen TaubSeptember 27, 2007

Ever since the accounting scandal broke at Cendant Corp. during the 1990s, its then-chief executive Henry Silverman maintained he was an innocent victim because the fraud took place at CUC International before it was acquired by Cendant’s predecessor company, HFS.

But new legal documents seem to show that Silverman was not totally in the dark about the accounting scheme at the time the merger was completed, according to The New York Post.

In 1998, just days before the deal went through, Silverman may have learned about the accounting fraud, according to The Post. The paper reported that his knowledge of the scheme was suggested by documents related to a probe conducted by the Wilkie Farr law firm for the Cendant board. That investigation was at the heart of a lawsuit filed by CSI Investment Partners, a private-equity firm.

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Silverman, currently chairman and CEO of Realogy, a privately held real estate holding company spun off from Cendant, first learned of troubles at CUC on March 6, 1998, when Scott Forbes, then Cendant’s accounting chief, told him that he had been asked earlier that day to “help [CUC] creatively justify” $165 million in accounting entries, according to The Post.

Two days later, Silverman convened a weekend meeting at his house, the newspaper reported, citing a deposition from Jim Buckman, Cendant’s former general counsel, who attended the meeting. At that meeting, Buckman advised that E. Kirk Shelton, a former vice chairman of Cendant, and Cosmo Corrigliano, another CUC executive, “should be gone” from the company, according to The Post report. Also at the meeting, a discussion took place as to whether the U.S. Attorney’s office should be told about the disclosures.

On March 9, Corrigliano told Silverman that $439 million of CUC’s income between 1996 and 1998 was “non-operating,” according to The Post, suggesting the company was not as strong as many outsiders thought. Silverman did not respond to a request for comment from CFO.com.

Cendant’s accounting fraud was the largest before Enron and WorldCom. When the fraud came to light, Cendant’s market cap plunged by $14 billion in one day.

In 2005, Shelton received 10 years in prison for his role in the fraud. In January 2007, former chairman Walter Forbes was sentenced to 12 years and seven months in prison. Each was ordered to pay $3.275 billion in restitution.

Last fall, in his third trial, Forbes was found guilty of conspiracy to commit securities fraud and two counts of making false statements. He was found not guilty of a fourth count, securities fraud. In 2005, Shelton was convicted of conspiracy, mail fraud, wire fraud, securities fraud, and making false statements to the SEC. Corigliano was sentenced in January 2007 to three years probation, including six months of home confinement with electronic monitoring and 300 hours of community service.

Also in January, Anne Pember, former controller with CUC who pleaded guilty to fraud in 2000, was sentenced to two years of probation and 200 hours of community service. And Casper Sabatino, a CUC accountant in charge of external reporting who also pleaded guilty in 2000 to a single count of fraud, received two years of probation as well.

In April, Pember settled charges with the SEC. Under the deal, she was required to pay $100,000 and was prohibited from serving as an officer or director of a public company.