Cendant faked $500M in revenue — the merger unraveled and $14B in market cap vanished

Cendant Corporation was formed on 18 December 1997 by the merger of HFS (Hospitality Franchise Systems) and CUC International. Just four months later, in April 1998, Cendant uncovered massive accounting fraud at CUC. Vice Chairman E. Kirk Shelton and the former CUC management team had been fraudulently inflating revenue for years.

Shelton inflated CUC's revenue by $500 million over three years. He reported a 1997 net income of $55.4 million when the true result was a loss of $217.2 million. When the fraud was announced, Cendant's stock tumbled from $41 to nearly $12, destroying $14 billion in market capitalization. It was one of the largest accounting frauds of the 1990s.

Shelton was indicted in March 2001 and sentenced to 10 years in prison, serving 8 years before being released for exemplary behavior. Walter Forbes, CUC's founder and CEO, was forced to resign. The case became a textbook example of how merger due diligence can fail when the target company's books are fraudulent.