The Multi-Million-Dollar Wages of Sin

When it comes to corporate fraud, the obvious question that you have to ask is: “Why does anyone think they can get away with it?” But when you look at the sweetheart deal that Walter Forbes, chairman of scandal-plagued Cendant, will get after announcing yesterday that he will resign, the answer seems obvious: “Because even when you get caught, the right people can still take home a truckload of money.”

The details of the Cendant scandal are by now well known, though familiarity has not made them any less astonishing. Over the course of the past three years, high-ranking executives at CUC International (Forbes’ old company, which merged with HFS to form Cendant) routinely booked phony revenues in order to meet analysts’ estimates. At the end of each year, when accountants came in to perform their annual audits, these same executives cooked the books by moving future revenues into the current fiscal year and by simply falsifying records. In total, CUC reported as much as $300 million in non-existent earnings.

Even in the face of this, Forbes was determined to stay in office at Cendant and to become CEO of the company in the year 2000. But Friday saw 44 Cendant executives take the remarkable step of signing a public letter calling on him to resign or be fired, and Henry Silverman, Cendant’s current CEO, has been distancing himself from Forbes almost from the beginning of this debacle. Since the Cendant board was equally divided between former HFS and former CUC directors, Forbes’ position within the company was relatively unassailable. But even Forbes had to see that it’s impossible to run a company when most of its managers think you’re either a crook or a shnook.

Forbes has always insisted, and continues to insist, that he knew nothing about the fraud at CUC. That seems, on the one hand, utterly improbable. On the other hand, if true it indicates a level of managerial incompetence that is hard to reconcile with Forbes’ public image as a “technological visionary” who had transformed the landscape of retailing. CUC’s entire business was built on getting customers to sign up for buyers’ clubs. It didn’t have inventory in the classic sense, nor was it building giant factories all around the globe. If Forbes wasn’t paying close attention to the revenue these buyers’-club memberships were generating, what, exactly, was he doing?

Setting up deals, apparently. The CUC-HFS merger, which brought Forbes four million shares in Cendant stock, worth at the time something like $100 million, instantly transformed CUC into a retailing powerhouse. CUC’s stock had languished for almost a year before the merger, and although the market initially reacted negatively to the deal, within a couple of months the company was being compared to powerhouses like Cisco, Microsoft, and Disney because of the supposed reliability of its growth prospects. Those growth prospects, of course, were based on numbers that CUC execs picked from the ether.

Actually, to be more accurate, they picked the numbers from analysts’ projected targets for the company. In that sense, Walter Forbes is one of the first CEOs in memory whose career was destroyed because his company hit, rather than missed, estimates. And his demise is testimony to the truly dark side of the emphasis on “shareholder value.” When companies are more concerned with propping up their stock prices than running their businesses, it’s hardly surprising that fraud starts to seem like a reasonable tool.

The real story of what happened to Walter Forbes will be well-worth reading if it ever comes out. For the spectacle of the last few months has resembled nothing so much as a melodrama set in some Third World kleptocracy, with Forbes the tinpot dictator holding out and refusing to accept what everyone already knew–that his future was over. Less than a year ago, Forbes was acclaimed by Wired magazine as the man who was “inventing the future of retailing.” Today, he’s the man who wrecked a company. But, like all deposed autocrats, he’s leaving with lots of gold packed into his suitcases. Forbes’ severance package will total $48 million, including $35 million in cash. Who says crime … well, you know the rest.