Every day seems to bring fresh troubles for Cendant Corp., the mega-conglomerate forged last December from discount-club operator CUC International and franchiser HFS, Inc., whose wide range of brands includes Century 21, Coldwell Banker and ERA, as well as Avis, Ramada, Howard Johnson and others.

The latest revelation: all four members of the audit committee now looking into accounting fraud at CUC may have personal or financial ties to CUC or HFS, reports the July 24, 1998, edition of the Wall Street Journal.

Investors had stepped up their four-month-long sell-off following news earlier in the week that the head of the audit committee had ties to CUC. Now there's no turning back for some.

"I can't see any reason to remain," says an executive at a large New York multimedia firm who owns a few hundred shares of Cendant (NYSE:CD). "All the signs are pointing south."

Cendant's fall from grace began in April, when the company disclosed that accounting problems would squash the current year's earnings and force it to revise and reduce the previous year's numbers. The result was an instant 46.5% stock plunge that depleted the company's market value by $14 billion.

But the blood-letting didn't stop there. In mid-July, the company announced that the accounting irregularities at CUC were not only greater than first believed, but were "systematic and affected the accounting records of all the major business units of CUC," according to Cendant CFO Michael P. Monaco. Current estimates are that CUC posted about $300 million worth of bogus revenue over three years, and that the wrongdoing could eat into Cendant's 1997 earnings by twice as much as expected.

The alleged fraud is also being investigated by the U.S. Attorney in Newark, NJ (Cendant's headquarters are in nearby Parsippany, NJ) and the Securities and Exchange Commission.

Meanwhile, there's been discord at the top. Alliances on Cendant's board are now split between chief executive officer Henry R. Silverman, who ran HFS (which stands for Hospitality Franchise Services) prior to the merger, and Cendant chairman Walter Forbes, the former head of CUC International and the man slated to take the helm of the merged company in 2000. At issue is whether to remove Silverman or Forbes from office, a decision that would require approval of 80% of the board.

Shareholders, even long-time supporters of the company, have been losing faith. Investment houses and mutual fund managers like Stein Roe & Farnham and Sit Investment Associates are selling off significant chunks of their positions in Cendant, reports USA Today. Individual investors have been taking their cue from the falling ticker and from dire forecasts in the press, such as columnist James J. Cramer's warning in the July 27, 1998, issue of Time Magazine to "sell a stock at the first whiff of accounting irregularities."

Since April, the stock price has taken a free-fall to around $16 per share, off a 52-week high of more than $41.

Others aren't satisfied with just dumping their shares. On July 16, the New York law firm of Wolf Haldenstein Adler Freeman & Herz filed a class action suit in the US District Court of New Jersey on behalf of Cendant shareholders. The suit names Cendant and officers and directors of the company, and claims that the company knew back in April that its financial problems were far more extensive than reported, but held back this information from shareholders.

Can Cendant recover from this severe beating? What will the company's next move be? How will this affect Cendant's real estate empire -- which includes three of the four largest real estate franchisers, as well as relocation and mortgage services companies?

RealTimes will continue to follow the Cendant story, reporting on how the fate of the company might affect your business, your home and your bottom line.

Published: July 24, 1998

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