Ethics in the accounting profession

The accounting fraud is Cendant Corp whose predecessor corporation was CUC International

Please read SEC release 16910 dated Feb 28,2001

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Issues to be discussed what was the specific GAP violated? 

What factor played a role in the occurrence of the fraud? 

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Litigation Release No. 16910 / February 28, 2001


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


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

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

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

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