Lining up to take on Cendant Pension funds seek to lead suits alleging false statements

Stakes get higher

Company's accounting irregularities caused shares to fall 46%

Legal affairs

June 28, 1998|By Sean Somerville | Sean Somerville,SUN STAFF

Soon after Cendant Corp.'s announcement April 15 that accounting irregularities threatened to cut its 1997 profits by $115 million, the shareholder lawsuits came fast and furious.

At least a dozen firms pounced on Cendant, alleging it filed false statements and officials improperly sold shares. They sought to sign up stock owners as the company's shares fell by as much as 46 percent, wiping out $13 billion of shareholder wealth. This month, the stakes got higher when three other players quietly joined the fray: California, New York State and New York City pension funds.

The pension funds -- three of the nation's largest -- filed a motion to become the lead plaintiffs in the suits against Cendant, the huge owner of the former PHH Corp. in Hunt Valley and O'Conor, Piper & Flynn-ERA in Timonium.

Experts said the funds' involvement raised the stakes for Cendant.

"I think this indicates that it's not going to be business as usual," said Patrick S. McGurn, vice president of Institutional Shareholder Services, a Bethesda-based corporate governance research firm whose clients include companies and institutional investors. "In the eyes of the defendant, I think they'll take it much more seriously."

Ordinarily, he said, white shoe Wall Street lawyers clash with firms that specialize in representing individual shareholders. Both sides know the rules and are inclined to negotiate toward a fast settlement.

But if the motion is granted, it might be different this time as shareholders take on Cendant, a big company based in Connecticut and New Jersey that was formed last year by the merger of HFS Inc., a rapidly growing hotel and real estate franchiser, and CUC International, which sells millions of memberships in dining, travel and shopping discount clubs.

Cendant declined to comment, saying it doesn't discuss pending litigation. In previous statements, Cendant said it had retained Willkie, Farr & Gallagher of New York as legal counsel. That firm hired Arthur Anderson LLP to conduct an investigation. The investigation and any required changes will be completed this summer, the company has said.

In the meantime, experts said that as lead plaintiffs, the pension funds are not likely to settle on the cheap. And they might try to influence the company's management.

"Their involvement would suggest that they're angling for changes within the company to create a better return," said Charles Elson, a professor at Stetson University's College of Law in Gulfport, Fla.

The accounting problems that caused the company's troubles originated at CUC International Inc. At issue is whether CUC properly recorded its expenses of recruiting club members.

The one-day tumble of the stock from more than $36 to about $19 cost the three pension funds, which collectively own 11.7 million shares, about $89 million. Shares closed Friday at $21.4375.

In addition to alleging that Cendant made false and misleading statements, the pension funds and other shareholders said former officers and directors of the company sold or filed intentions to sell more than 4 million shares before the April 15 disclosure.

Brad Pacheco, a spokesman for the California Public Employees Retirement System (CalPERS), said the fund's board decided May 18 to move forward with the motion without disclosing specifics. The motions, filed June 11 in U.S. District Courts in New Jersey, Connecticut and Pennsylvania, marked the first time any of the funds had sought to lead a shareholder suit and the first time they had worked together.

"We must take the necessary steps to protect our investment on which our members and their families rely," said William D. Crist, president of CalPERS board of administration. "We expect Cendant's board to act promptly to restore our losses and investor confidence."

CalPERS, which owns 4.5 million Cendant shares, is the nation's largest public pension fund. With assets of more than $140 billion, it owns stock in 1,700 companies and provides retirement and health benefits to more than 1 million employees and their families.

McGurn of Institutional Shareholder Services said the funds' prominent role was made possible by the Private Securities Litigation Reform Act of 1995, which made it easier for institutions to become lead plaintiffs.

He said the legislation eliminated "the race to the courthouse," which describes the awarding of lead plaintiff status to the first law firm to file a lawsuit.

Because pension funds are generally long-term, "passive" investors that buy stocks attached to certain indexes, they are more interested than other investors are in the sound management of companies.

"When the big institutions jump in, it's not necessarily for money damages," Elson of Stetson University said. "They are seeking long-term change because they are long-term investors."

Among the questions CalPERS will consider, Pacheco said, are whether the board is being held accountable and whether the board is holding management accountable.

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