CUC International: Encyclopedia II - CUC International - Accounting scandal

CUC International - Accounting scandal

Less than one year after the new brand was introduced, the company became involved in what was then the biggest accounting scandal in corporate history. Cendant disclosed in April 1998 that for about a decade prior to the merger, CUC had fraudulently overstated its income by over US$500 million. This caused Cendant stock to plummet from $39 to $20 in a single day, costing shareholders about US$14 billion. (This scandal was later eclipsed by the Enron and Worldcom scandals of 2001.)

The president of CUC, Kirk Shelton, was convicted in January 2005 of 12 counts of fraud and related charges, and sentenced to 10 years in prison; the criminal trial of the CEO, Walter Forbes, is still underway as of October, 2005. The Securities and Exchange Commission brought civil charges against Forbes and Shelton for the "long-running financial fraud", which, it alleged, started in 1985. The SEC stated that CUC inflated its books in order to inflate its stock price, which allowed it to use its stock to buy other companies; and in turn these mergers and acquisitions were executed in order to generate financial reserves and purchase reserves that were intended to be "big enough to bury the fraud".

Shelton and Forbes were tried together; although Shelton was convicted of all 12 charges brought, the jury was unable to reach a verdict (a "hung jury") for Forbes on any charge. He is being retried.

In addition to his prison term, Shelton was ordered to pay Cendant US$3.27 billion in restitution. Cendant is unlikely to ever receive this amount, as according to the payment schedule of US$2,000 per month ordered by the judge, it will take Shelton over 134,000 years to pay the full amount.

Cendant's CFO and two accountants pled guilty in 2000 to several fraud and related charges as part of the long-running fraud.

After the scandal, the original "Comp-U-Card" division was bought out by some remaining executives and reorganized into a company called Trilegiant.

Adapted from the Wikipedia article "Accounting scandal", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki