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SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16910 / February 28, 2001

ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1372

Securities And Exchange Commission v. Walter A. Forbes and E. Kirk Shelton, Civil Action No. 01-987(AJL) (D.N.J. Feb. 28, 2001)

SEC CHARGES WALTER A. FORBES AND E. KIRK SHELTON, FORMER TOP OFFICERS OF CUC INTERNATIONAL INC., AND CENDANT CORP., WITH DIRECTING AND PROFITING FROM A MASSIVE FINANCIAL FRAUD

The Securities and Exchange Commission today filed a civil enforcement action in the U.S. District Court for the District of New Jersey against Walter A. Forbes and E. Kirk Shelton, the top two former officers of CUC International Inc. ("CUC"), alleging that they directed a massive financial fraud while selling millions of dollars worth of the company's common stock. For the period 1995-1997 alone, pre-tax operating income reported to the public by CUC was inflated by an aggregate amount of over $500 million. The Commission, among other relief, seeks disgorgement of their fraudulent stock gains (with prejudgment interest), payment of civil money penalties, orders barring Forbes or Shelton from serving as an officer of a public company, and injunctions against violations of the federal securities laws.

CUC merged with HFS Incorporated on December 17, 1997, to form Cendant Corporation ("Cendant"). The litigation results from the Commission's investigation of a long-running financial fraud that began at CUC in the 1980s and continued until its discovery and disclosure by Cendant in April 1998. Upon disclosure of the fraud, the price of Cendant common stock plummeted, causing billions of dollars in losses for investors.

SEC Director of Enforcement Richard H. Walker said, "As this case graphically illustrates, large, complex, and long-running financial frauds often originate at the highest levels of a company. When senior officers entrusted by investors to run public companies engage in fraud, the Commission will respond aggressively to assure continued investor confidence in the quality of financial reporting."

The Commission's complaint alleges the following:

Forbes, CUC's Chairman and Chief Executive Officer, directed the fraud from its beginnings in 1985. From at least 1991 on, Shelton, CUC's President and Chief Operating Officer, joined Forbes in directing the scheme.

Forbes and Shelton reviewed and managed schedules listing fraudulent adjustments to be made to CUC's quarterly and annual financial statements. CUC senior management used the adjustments to artificially pump up income and earnings, defrauding investors by

creating the illusion of a company that had ever-increasing earnings and making millions for themselves along the way.

Forbes and Shelton undertook a program of mergers and acquisitions on behalf of CUC in order to generate inflated merger and purchase reserves at CUC to be used in connection with the fraud. Forbes and Shelton sought out HFS as a merger partner because they believed the reserves that would be created would be big enough to bury the fraud. To entice HFS management into the merger, Forbes and Shelton inflated CUC's earnings and earnings projections. Soon after CUC merged with HFS to create Cendant, Forbes and Shelton explicitly congratulated each other on being masterful "financial engineers" who had been able to nurture the fraud through the years and who had assured their continued success by duping HFS into agreeing to a merger with CUC.

Forbes and Shelton profited from their own wrongdoing by selling CUC and Cendant securities at inflated prices while the fraud they had directed was underway and undisclosed. The sales brought Forbes and Shelton millions of dollars in ill-gotten gains.

After the Cendant merger, Forbes served as Cendant's Chairman of the Board until his resignation in July 1998. At the time of the merger, Shelton became a Cendant director and Vice Chairman. Shelton resigned from Cendant in April 1998.

The Commission seeks to enjoin Forbes and Shelton from violating Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b) and 14(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, 13b2-2, and 14a-9. In addition, as noted above, the Commission seeks disgorgement of their fraudulent stock gains, prejudgment interest, civil money penalties and orders barring Forbes and Shelton from serving as an officer and director of a public company.

The Commission previously brought related civil actions and administrative proceedings against seven individuals, as well as against the issuer. In those actions, the Commission charged among others, CUC's former Chief Financial Officer, Controller and Senior Vice President, Vice President of Accounting and Reporting, and Director of Financial Reporting. See Litigation Release No. 16587 (June 14, 2000); Exchange Act Rel. No. 42933 (June 14, 2000); Exchange Act Rel. No. 42934 (June 14, 2000); Exchange Act Rel. No. 42935 (June 14, 2000); Exchange Act Rel. No. 42936 (June 14, 2000); Exchange Act Rel. No. 43034 (July 13, 2000). These actions remain pending as to Cosmo Corigliano and Ann Pember.

The Commission acknowledges the assistance provided by the U.S. Attorney for the District of New Jersey. The Commission's investigation in this matter is continuing.

http://www.sec.gov/litigation/litreleases/lr16910.htm

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