CUC Inflated Income, Cendant Jury Told

A former company accountant who worked for former Cendant Corp. Chairman Walter Forbes and Vice Chairman E. Kirk Shelton told jurors Monday that merger funds were used to inflate income.

Testifying at the executives’ criminal fraud trial, accountant Casper Sabatino said Cendant predecessor CUC International Inc. set aside a “merger reserve” of $3.4 million to buy Welcome Wagon International, while only about $1.5 million was needed.

The balance became a “cushion” that could be transferred illegally to inflate CUC earnings, Sabatino said in U.S. District Court in Hartford, Conn. CUC bought Welcome Wagon, which provided moving services, for about $20 million in 1995. About $500 million in CUC earnings was restated for 1995, 1996 and 1997.

CUC, which offered discounts on dining, car repair, insurance, banking and home shopping, merged with franchiser HFS Inc. in 1997 to form Cendant, the largest U.S. travel and real estate services company.

Forbes, 61, and Shelton, 49, knew accountants were cooking the books and falsely reporting income to the Securities and Exchange Commission, federal prosecutors contend.

They each face up to 40 years in prison if convicted of charges of wire, mail and securities fraud. Forbes, who was CEO of CUC, and Shelton, its president, say they didn’t know what accountants were doing and are innocent. Their trial began in April.

Sabatino is cooperating with prosecutors in an effort to get a lighter sentence on a charge of aiding and abetting wire fraud.

Cendant shares rose 9 cents to $23.94 on the New York Stock Exchange.