Walter Forbes, then aged 30, set up Comp-U-Card (CUC) in 1973 with Kirk Shelton.The company sold membership cards that allowed customers to buy goods and services from selected firms at discounted rates. During the 1980s and early 1990s the firm grew, attracting 30 million customers. It also started buying other companies, culminating in a 1997 merger with HFS Incorporated, which owned various franchises and hotel chains. The newly merged firm was renamed Cendant in 1997.
What was the scam?
From the 1980s onwards Forbes and Shelton systematically manipulated earnings to give the impression that their company was more profitable than it actually was, keeping CUC's share price high. This allowed the firm to use its shares to buy other companies more cheaply than they would otherwise have been able to. The fraud reached a peak in the run-up to the merger with HFS, with more than $500m of fictitious profits created between 1995 and 1997, mostly through the creation of false orders, and manipulation in the accounts of the company's reserves.
What happened next?
Shortly after the merger, two CUC managers, Casper Sabatino and Steven Speaks, told Cendant's new chief financial officer that they had been told to help manipulate earnings. Speaks immediately told CEO Henry Silverman about the allegations. Cendant immediately notified the financial community about the irregularities, causing its shares to plummet. Forbes was forced to resign as chairman shortly afterwards. In 2001 Shelton and Forbes were indicted for fraud and insider trading (due to a stock sale shortly before the fraud was uncovered), and were eventually sentenced to ten and 12 years in jail respectively.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lessons for investors
The scandal would end up wiping $14bn from the value of Cendant shares and bonds, far outstripping the $2.9bn that the company paid to shareholders in a lawsuit. The biggest losers were HFS's shareholders, who received Cendant stock in exchange, only to see the value of the newly merged company plunge. If a company that you invest in merges with another company, consider whether you want to invest in the new entity, rather than just automatically holding onto the shares.
-
Rightmove: Asking prices edge closer to record peakAsking prices have been driven up by the top-end of the market, Rightmove has found. But how does the situation look in your area?
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
-
Christopher Columbus Wilson: the spiv who cashed in on new-fangled radiosProfiles Christopher Columbus Wilson gave radios away to drum up business in his United Wireless Telegraph Company. The company went bankrupt and Wilson was convicted of fraud.
-
Great frauds in history: Philip Arnold’s big diamond hoaxProfiles Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.
-
Great frauds in history: John MacGregor’s dodgy loans
Profiles When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131
-
Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme
Profiles The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true – thousands of policyholders who had handed over large sums were left with nothing.
-
Great frauds in history: Alan Bond’s debt-fuelled empireProfiles Alan Bond built an empire that encompassed brewing, mining, television on unsustainable amounts of debt, which led to his downfall and imprisonment.
-
Great frauds in history: Martin Grass’s debt bingeProfiles AS CEO of pharmacy chain Rite Aid. Martin Grass borrowed heavily to fund a string of acquisitions, then cooked the books to manage the debt, inflating profits by $1.6bn.
-
Great frauds in history: Tino De Angelis’ salad-oil scamProfiles Anthony “Tino” De Angelis decided to corner the market in soybean oil and borrowed large amounts of money secured against the salad oil in his company’s storage tanks. Salad oil that turned out to be water.
-
Great frauds in history: Gerard Lee Bevan’s dangerous debtsProfiles Gerard Lee Bevan bankrupted a stockbroker and an insurer, wiping out shareholders and partners alike.
