This presentation addresses material covered in all weeks and all TCOs. Instead of a written final exam, you will work to read, analyze, and evaluate...

International Financial Reporting (Chapter 8)

Major Case:

The Merger of HFS and CUCHFS Incorporated (HFS) was principally a controller of franchise brand names in the hotel, real estate brokerage, and car rental businesses including Avis, Ramada Inn, Days Inn, and Century 21. Comp-U-Card (CUC) was principally engaged in membership-based consumer services such as auto, dining, shopping, and travel “clubs.” Both securities were traded on the NYSE. Cendant Corporation was created through the December 17, 1997, merger of HFS and CUC. Cendant provided certain membership-based and Internet-related consumer services and controls franchise brand names in the hotel, residential real estate brokerage, car rental, and tax preparation businesses.1The information for this case comes from a variety of litigation releases on the SEC Web site including: www.sec.gov/litigation/admin/34-42935.htm (June 14, 2000); www.sec.gov/litigation/admin/34-42934.htm (June 14, 2000); www.sec.gov/litigation/admin/34-42933.htm (January 24, 2001); www.sec.gov/litigation/litreleases/lr16587.htm (April 30, 2003); and www.sec.gov/litigation/complaints/comp18102.htm (April 30, 2003).Overview of the SchemeThe Cendant fraud was the largest of its kind until the late 1990s and early 2000s. Beginning in at least 1985, certain members of CUC's senior management implemented a scheme designed to ensure that CUC always met the financial results anticipated by Wall Street analysts. The CUC senior managers utilized a variety of means to achieve their goals including:• Manipulating recognition of the company's membership sales revenue to accelerate the recording of revenue• Improperly utilizing two liability accounts related to membership sales that resulted from commission payments• Consistently maintaining inadequate balances in the liability accounts and on occasion reversing the accounts directly into operating incomeWith respect to the last item, to hide the inadequate balances, senior management periodically kept certain membership sales transactions off-books. In what was the most significant category quantitatively, the CUC senior managers intentionally overstated merger and purchase reserves and subsequently reversed those reserves directly into operating expenses and revenues. CUC senior management improperly wrote off assets—including assets that were unimpaired—and improperly charged the write-offs against the company's merger reserves. By manipulating the timing of the write-offs and by improperly determining the nature of the charges incurred, the CUC senior managers used the write-offs to inflate operating income at CUC. As the scheme progressed over the course of several years, larger and larger year-end adjustments were required to show smooth net income over time. The scheme added more than $500 million to pretax operating income during the fiscal years ended January 31, 1996; January 31, 1997; and December 31, 1997.

SEC Filings against CUC and Its Officers

SEC complaints filed on June 14, 2000, alleged violations of the federal securities laws by four former accounting officials including Cosmo Corigliano, CFO of CUC; Anne M. Pember, CUC controller; Casper Sabatino, vice president of accounting and financial reporting; and Kevin Kearney, director of financial reporting. The allegations against Corigliano included his role as one of the CUC senior officers who helped engineer the fraud, and he maintained a schedule that management used to track the progress of their fraud. Corigliano regularly directed CUC financial reporting managers to make unsupported alterations to the company's quarterly and annual financial results. The commission alleged that Corigliano profited from his own wrongdoing by selling CUC securities and a large number of Cendant securities at inflated prices while the fraud he helped engineer was under way and undisclosed.

The commission alleged that Pember, the former CUC controller, was the CUC officer most responsible for implementing directives received from Corigliano in furtherance of the fraud including implementing directives that inflated Cendant's annual income by more than $100 million, primarily through improper use of the company's reserves. According to the SEC, Pember profited from her own wrongdoing by selling CUC and Cendant stock at inflated prices while the fraud she helped implement was under way and undisclosed.

Sabatino and Kearney, without admitting or denying the commission's allegations, consented to the entry of final judgments settling the commission's action against them. The commission's complaint alleged that Sabatino was the CUC officer most responsible for directing lower-level CUC financial reporting managers to make alterations to the company's quarterly financial results.

In the first of the three separate administrative orders, the commission found that Steven Speaks, the former controller of CUC's largest division, made or instructed others to make journal entries that effectuated much of the January 1998 income inflation directed by Pember. In a second separate 468469administrative order, the commission found that Mary Sattler Polverari, a former CUC supervisor of financial reporting, at the direction of Sabatino and Kearney, regularly and knowingly made unsupported alterations to CUC's quarterly financial results.

In a third administrative order, the commission found that Paul Hiznay, a former accounting manager at CUC's largest division, aided and abetted violations of the periodic reporting provisions of the federal securities laws by making unsupported journal entries that Pember had directed. Hiznay consented to the issuance of the commission's order to cease and desist from future violations of the provisions.

In a fourth and separate administrative order the commission found that Cendant violated the periodic reporting, corporate recordkeeping, and internal controls provisions of the federal securities laws, in connection with the CUC fraud. Among other things, the company's books, records, and accounts had been falsely altered, and materially false periodic reports had been filed with the commission, as a result of the long-running fraud at CUC. Simultaneous with the institution of the administrative proceeding, and without admitting or denying the findings contained therein, Cendant consented to the issuance of the commission order, which ordered Cendant to cease and desist from future violations of the provisions.

On February 28, 2001, the SEC filed a civil enforcement action in the U.S. District Court for the District of New Jersey against Walter A. Forbes, the former chair of the board of directors at CUC, and E. Kirk Shelton, the former vice chair, alleging that they directed a massive financial fraud while selling millions of dollars' worth of the company's common stock. For the period 1995–1997 alone, pretax operating income reported to the public by CUC was inflated by an aggregate amount of over $500 million. Specific allegations included:

Forbes, CUC's chair and CEO, directed the fraud from its beginnings in 1985. From at least 1991 on, Shelton, CUC's president and COO, joined Forbes in directing the scheme.• Forbes and Shelton reviewed and managed schedules listing fraudulent adjustments to be made to CUC's quarterly and annual financial statements. CUC senior management used the adjustments to artificially pump up income and earnings, defrauding investors by creating the illusion of a company that had ever-increasing earnings and making millions for themselves along the way.• Forbes and Shelton undertook a program of mergers and acquisitions on behalf of CUC in order to generate inflated merger and purchase reserves at CUC to be used in connection with the fraud. Forbes and Shelton sought out HFS as a merger partner because they believed the reserves that would be created would be big enough to bury the fraud. To entice HFS management into the merger, Forbes and Shelton inflated CUC's earnings and earnings projections.• Forbes and Shelton profited from their own wrongdoing by selling CUC and Cendant securities at inflated prices while the fraud they had directed was under way and undisclosed. The sales brought Forbes and Shelton millions of dollars in ill-gotten gains.• After the Cendant merger, Forbes served as Cendant's board chair until his resignation in July 1998. At the time of the merger, Shelton became a Cendant director and vice chair. Shelton resigned from Cendant in April 1998.Specific Accounting Techniques Used to Manage EarningsLoosely speaking, earnings management occurs when a company determines its net income based on meeting desired goals rather than through the application of GAAP. Companies can manage earnings in a variety of ways including accelerating the recording of revenue, delaying the recording of expenses, adjusting write-offs and write-downs, and utilizing reserves to smooth net income over time. We discussed these techniques in Chapter 7.Making Unsupported Postclosing EntriesIn early 1997, at the direction of senior management, Hiznay approved a series of entries reversing the commissions payable liability account into revenue at CUC. The company paid commissions to certain institutions on sales of CUC membership products sold through those institutions. Accordingly, at the time that it recorded revenue from those sales, CUC created a liability to cover its commissions payable obligation. CUC senior management used false schedules and other devices to support their understating of the commissions payable liability and to avoid the impact that would have resulted if the liability had been properly calculated. Furthermore, in connection with the January 31, 1997, fiscal year-end, senior management utilized this liability account by directing post-closing entries moving amounts from the liability directly into revenue.2

SEC SettlementsBetween Hiznay's arrival at CUC in July 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, CUC and Cendant filed false and misleading annual reports with the commission that misrepresented their financial results, overstating operating income and earnings and failing to disclose that the financial results were falsely represented.The commission's complaint alleged that Sabatino, by his actions in furtherance of the fraud, violated, or aided and abetted violations of, the antifraud, periodic reporting, corporate record-keeping, internal controls, and lying to auditors provisions of the federal securities laws. Sabatino consented to entry of a final judgment that enjoined him from future violations of those provisions and permanently bar him from acting as an officer or director of a public company.Kearney consented to entry of a final judgment that enjoined him from future violations of those provisions, ordered him to pay disgorgement of $32,443 in ill-gotten gains (plus prejudgment interest of $8,234), and ordered him to pay a civil money penalty of $35,000. Kearney has also agreed to the issuance of a commission administrative order that barred him from practicing before the commission as an accountant, with the right to reapply after five years.Corigliano, Pember, and Sabatino each pleaded guilty to charges pursuant to plea agreements between those three individuals and the SEC. Pursuant to his agreement, Corigliano pleaded guilty to a charge of wire fraud, conspiracy to commit mail fraud, and causing false statements to be made in documents filed with the commission including signing CUC's periodic reports filed with the commission and making materially false statements to CUC's auditors. Pember pleaded guilty to a charge of conspiracy to commit mail fraud and wire fraud. Sabatino, pursuant to his agreement, pleaded guilty to a charge of aiding and abetting wire fraud.In another administrative order, the commission found that Paul Hiznay aided and abetted violations of the periodic reporting provisions of the federal securities laws, in connection with actions that he took at the direction of his superiors at CUC. Among other things, the commission alleged that Hiznay made unsupported journal entries that Pember had directed. Additional orders were entered against lower-level employees.Actions against Cendant and Walter A. Forbes, Former Board ChairThe commission found that Cendant violated the periodic reporting, corporate recordkeeping, and internal controls provisions of the federal securities laws, in connection with the CUC fraud in that the company's books, records, and accounts had been falsely altered, and materially false periodic reports had been filed with the SEC.On December 29, 2009, the SEC announced a final judgment against Walter A. Forbes, the former chair of Cendant, arising out of his conduct in the Cendant fraud.4 The commission alleged that Forbes orchestrated an earnings management scheme at CUC to improperly inflate the company's quarterly and annual financial results during the period 1995 to 1997. CUC's operating income was improperly inflated by an aggregate amount exceeding $500 million.The final judgment against Forbes, to which he consented without admitting or denying the commission's allegations, enjoined him from violating relevant sections of the securities laws and bars him from serving as an officer or director of a public company.Allegations against the OfficersKenneth Wilchfort and Marc Rabinowitz were partners at Ernst & Young (EY), which was responsible for audit and accounting advisory services provided to CUC and Cendant. During the relevant periods, CUC and Cendant made materially false statements to the defendants and EY about the company's true financial results and its accounting policies. CUC and Cendant made these false statements to mislead the defendants and EY into believing that the company's financial statements conformed to GAAP. For example, as late as March 1998, senior Cendant management had discussed plans to fraudulently use over $100 million of the Cendant reserve to create fictitious 1998 income, which was also concealed from the defendants and EY. CUC and Cendant made materially false statements to the defendants and EY that were included in the management representation letters and signed by senior members of CUC's and Cendant's management. The statements concerned, among other things, the creation and utilization of merger-related reserves, the adequacy of the reserve established for membership cancellations, the collectibilty of rejected credit card billings, and income attributable to the month of January 1997.5The written representations for the calendar year 1997 falsely stated that the company's financial statements were fairly presented in conformity with GAAP and that the company had made available all relevant financial records and related data to EY. Those written representations were materially false because the financial statements did not conform to GAAP and, as discussed further, the company's management concealed material information from the defendants and EY.In addition to providing the defendants and EY with false written representations, CUC and Cendant also adopted procedures to hide its income-inflation scheme from the defendants and EY. Some of the procedures that CUC and Cendant employed to conceal its fraudulent scheme included (1) backdating accounting entries; (2) making accounting entries in small amounts and/or in accounts or subsidiaries the company believed would receive less attention from EY; (3) in some instances ensuring that fraudulent accounting entries did not affect schedules already provided to EY; (4) withholding financial information and schedules to ensure that EY would not detect the company's accounting fraud; (5) ensuring that the company's financial results did not show unusual trends that might draw attention to its fraud; and (6) using senior management to instruct middle and lower level personnel to make fraudulent entries. Notwithstanding CUC and Cendant's repeated deception, defendants improperly failed to detect the fraud. They were aware of numerous practices by CUC and Cendant indicating that the financial statements did not conform to GAAP and, as a consequence, they had a duty to withhold their unqualified opinion and take appropriate additional steps.

Improper Establishment and Use of Merger ReservesThe company completed a series of significant mergers and acquisitions and accounted for the majority of them using the pooling-of-interests method of accounting.6 In connection with this merger and acquisition activity, Company management purportedly planned to restructure its operations. GAAP permits that certain anticipated costs may be recorded as liabilities (or reserves) prior to their incurrence under certain conditions. However, here CUC and Cendant routinely overstated the restructuring charges and the resultant reserves and would then use the reserves to offset normal operating costs—an improper earnings management scheme. The company's improper reversal of merger and acquisition related restructuring reserves resulted in an overstatement of operating income by $217 million.The EY auditors provided accounting advice as well as audit services to CUC and Cendant in connection with the establishment and use of restructuring reserves. The auditors excessively relied on management representations concerning the appropriateness of the reserves and performed little substantive testing despite evidence that the reserves were improperly established and utilized.One example of auditor failures with reserve accounting is the Cendant reserve. Cendant recorded over $500 million in merger, integration, asset impairment, and restructuring charges for the CUC-side costs purportedly associated with the merger of HFS and CUC. The company recorded a significant portion of this amount for the purpose of manipulating its earnings for December 31, 1997, and subsequent periods and, in fact, Cendant had plans, which it did not disclose to defendants and EY, to use a material amount of the reserve to artificially inflate income in subsequent periods.In the course of providing accounting and auditing services, the auditors failed to recognize evidence that the company's establishment and use of the Cendant reserve did not conform to GAAP. For example, CUC and Cendant provided EY with contradictory drafts of schedules when EY requested support for the establishment of the Cendant reserve. The company prepared and revised these various schedules, at least in part, as a result of questions raised and information provided by the defendants. The schedules were inconsistent with regard to the nature and amount of the individual components of the reserve (i.e., component categories were added, deleted, and changed as the process progressed). While the component categories changed over 471472time, the total amount of the reserve never changed materially. Despite this evidence, the auditors did not obtain adequate analyses, documentation, or support for changes they observed in the various revisions of the schedules submitted to support the establishment of the reserves. Instead, they relied excessively on frequently changing management representations.The company planned to use much of the excess Cendant reserve to improperly increase operating results in future periods. During the year ended December 31, 1997, the company wrote off $104 million of assets that it characterized as impaired as a result of the merger. Despite the size and timing of the write-off, the defendants never obtained adequate evidence that the assets were impaired as a result of the merger and, therefore, properly included in the Cendant reserve. In fact, most of the assets were not impaired as a result of the merger.

Cash Balance from the Membership Cancellation ReserveCUC and Cendant also inflated income by manipulating their membership cancellation reserve and reported cash balance. Customers usually paid for membership products by charging them on credit cards. The company recorded an increase in revenue and cash when it charged the members' credit card. Each month, issuers of members' credit cards rejected a significant amount of such charges. The issuers would deduct the amounts of the rejects from their payments to CUC and Cendant. CUC and Cendant falsely claimed to EY auditors that when it resubmitted the rejects to the banks for payment, it ultimately collected almost all of them within three months. CUC and Cendant further falsely claimed that for the few rejects that were not collected after three months, it then recorded them as a reduction in cash and a decrease to the cancellation reserve. The cancellation reserve accounted for members who canceled during their membership period and were entitled to a refund of at least a portion of the membership fee, as well as members who joined and were billed, but never paid for their memberships.At the end of each fiscal year, the company failed to record three months of rejects (i.e., it did not reduce its cash and decrease its cancellation reserve for these rejects). CUC and Cendant falsely claimed to the defendants and EY that it did not record rejects for the final three months of the year because it purportedly would collect most of the rejects within three months of initial rejection. According to CUC and Cendant, the three months of withheld rejects created a temporary difference at year-end between the cash balances reflected in the company's general ledger and its bank statements. The rejects were clearly specified on reconciliations of the company's numerous bank accounts, at least some of which were provided to EY and retained in its workpapers. CUC and Cendant falsely claimed to the defendants and EY that the difference between the general ledger balance and bank statement balance did not reflect an overstatement of cash and understatement in the cancellation reserve since it collected most rejects. In fact, the majority of rejects were not collected. By not recording rejects and cancellations against the membership cancellation reserve during the final three months of each fiscal year, CUC and Cendant dramatically understated the reserve at each fiscal year-end and overstated its cash position. CUC and Cendant thus avoided the expense charges needed to bring the cancellation reserve balance up to its proper amount and the entries necessary to record CUC and Cendant's actual cash balances.The rejects, cancellation reserve balance, and overstatement of income amounts for the period 1996–1997 are as follows:($ in millions)DateRejectsCancellation Reserve BalanceUnderstated Reserve/Overstated Income1/31/96$ 72$37$351/31/97100292812/31/971373737

The EY defendants did not adequately test the collectibility of these rejects and the adequacy of the cancellation reserve and instead relied primarily on management representations concerning the company's successful collection history and inconsistent statements concerning the purported impossibility of substantively testing these representations.Membership Cancellation RatesThe company also overstated its operating results by manipulating its cancellation reserve. The cancellation reserve accounted for members who canceled during their membership period. A large determinant of the liability associated with cancellations was CUC and Cendant's estimates of 472473the cancellation rates. During the audits, CUC and Cendant intentionally provided EY with false estimates that were lower than the actual estimated cancellation rates. This resulted in a significant understatement of the cancellation reserve liability and an overstatement of income. To justify its understated cancellation reserve, CUC and Cendant provided to EY small, nonrepresentative samples of cancellations, which understated the actual cancellation rates. The defendants allowed the company to choose the samples. EY did not test whether the samples provided were representative of the actual cancellations for the entire membership population.Audit OpinionEY issued audit reports containing unqualified audit opinions on, and conducted quarterly reviews of, the company's financial statements that, as already stated, did not conform to GAAP. The Securities Exchange Act requires every issuer of a registered security to file reports with the commission that accurately reflect the issuer's financial performance and provide other information to the public. By reason of the foregoing, the firm aided and abetted violations of the securities laws.Class Action LawsuitsA class action suit by stockholders against Cendant and its auditors, with the largest pension funds in the lead, alleged that stockholders paid more for Cendant stock than they would have if they had known the truth about CUC's income. The lawsuit ended in a record $3.2 billion settlement. Details of the settlement follow.The law firm of Barrack, Rodos and Bacine (BR&B) was one of two lead counsels for the class in In re Cendant Corporation Litigation. That firm was retained by the two largest state pension funds and the largest municipal pension funds in the country—the New York State Common Retirement Fund, California Public Employees' Retirement System, and New York City Pension Funds—to represent it in the lawsuits. Each of the funds had suffered losses in the range of $30 million. Through its prosecution of the case, BR&B succeeded in certifying a class of purchasers of Cendant and CUC publicly traded securities during the period from May 31, 1995, through August 28, 1998, and recovering for the class nearly four times more than had ever been recovered in the history of federal securities law class actions. By the time the dust had settled, BR&B had achieved recoveries of more than $3.3 billion for the class, as well as highly significant corporate governance changes negotiated as part of the settlement with Cendant. Notably, the $3.3 billion recovery represented nearly 40 percent of the damages suffered by class members, and provided very significant payments—in a number of cases, in excess of $100 million—for the largest claimants, many of which were public pension funds.7By December 1999, BR&B announced on behalf of the lead plaintiffs the landmark $2.85 billion settlement with Cendant that far surpassed the recoveries in any other securities law class action case in history. Until the settlements reached in the WorldCom case in 2005, this stood as the largest recovery in a securities class action case, by far, and clearly set the standard in the field. In addition to the cash payment by Cendant, which was backed by a letter of credit that the company secured to protect the class, the Cendant settlement included two other very important features. First, the settlement provided that in the event Cendant or the former HFS officers and directors were successful in obtaining a net recovery in their continuing litigation against EY, the class would receive one-half of any such net recovery. As it turned out, that litigation lasted another seven years—until the end of 2007—when Cendant and EY settled their claims against each other in exchange for a payment by EY to Cendant of nearly $300 million. Based on the provision in the Cendant settlement agreement and certain further litigation and a court order, in December 2008 the class received another $132 million. This brought the total recovered from the Cendant settlement to $2.982 billion.

The EY defendants did not adequately test the collectibility of these rejects and the adequacy of the cancellation reserve and instead relied primarily on management representations concerning the company's successful collection history and inconsistent statements concerning the purported impossibility of substantively testing these representations.

Membership Cancellation Rates

The company also overstated its operating results by manipulating its cancellation reserve. The cancellation reserve accounted for members who canceled during their membership period. A large determinant of the liability associated with cancellations was CUC and Cendant's estimates of 472473the cancellation rates. During the audits, CUC and Cendant intentionally provided EY with false estimates that were lower than the actual estimated cancellation rates. This resulted in a significant understatement of the cancellation reserve liability and an overstatement of income. To justify its understated cancellation reserve, CUC and Cendant provided to EY small, nonrepresentative samples of cancellations, which understated the actual cancellation rates. The defendants allowed the company to choose the samples. EY did not test whether the samples provided were representative of the actual cancellations for the entire membership population.

Audit Opinion

EY issued audit reports containing unqualified audit opinions on, and conducted quarterly reviews of, the company's financial statements that, as already stated, did not conform to GAAP. The Securities Exchange Act requires every issuer of a registered security to file reports with the commission that accurately reflect the issuer's financial performance and provide other information to the public. By reason of the foregoing, the firm aided and abetted violations of the securities laws.

Class Action Lawsuits

A class action suit by stockholders against Cendant and its auditors, with the largest pension funds in the lead, alleged that stockholders paid more for Cendant stock than they would have if they had known the truth about CUC's income. The lawsuit ended in a record $3.2 billion settlement. Details of the settlement follow.

The law firm of Barrack, Rodos and Bacine (BR&B) was one of two lead counsels for the class in In re Cendant Corporation Litigation. That firm was retained by the two largest state pension funds and the largest municipal pension funds in the country—the New York State Common Retirement Fund, California Public Employees' Retirement System, and New York City Pension Funds—to represent it in the lawsuits. Each of the funds had suffered losses in the range of $30 million. Through its prosecution of the case, BR&B succeeded in certifying a class of purchasers of Cendant and CUC publicly traded securities during the period from May 31, 1995, through August 28, 1998, and recovering for the class nearly four times more than had ever been recovered in the history of federal securities law class actions. By the time the dust had settled, BR&B had achieved recoveries of more than $3.3 billion for the class, as well as highly significant corporate governance changes negotiated as part of the settlement with Cendant. Notably, the $3.3 billion recovery represented nearly 40 percent of the damages suffered by class members, and provided very significant payments—in a number of cases, in excess of $100 million—for the largest claimants, many of which were public pension funds.7

By December 1999, BR&B announced on behalf of the lead plaintiffs the landmark $2.85 billion settlement with Cendant that far surpassed the recoveries in any other securities law class action case in history. Until the settlements reached in the WorldCom case in 2005, this stood as the largest recovery in a securities class action case, by far, and clearly set the standard in the field. In addition to the cash payment by Cendant, which was backed by a letter of credit that the company secured to protect the class, the Cendant settlement included two other very important features. First, the settlement provided that in the event Cendant or the former HFS officers and directors were successful in obtaining a net recovery in their continuing litigation against EY, the class would receive one-half of any such net recovery. As it turned out, that litigation lasted another seven years—until the end of 2007—when Cendant and EY settled their claims against each other in exchange for a payment by EY to Cendant of nearly $300 million. Based on the provision in the Cendant settlement agreement and certain further litigation and a court order, in December 2008 the class received another $132 million. This brought the total recovered from the Cendant settlement to $2.982 billion.

Second, Cendant was required to institute significant corporate governance changes that were far-reaching and unprecedented in securities class action litigation. Indeed, these changes included many of the corporate governance structural changes that would later be included within the Sarbanes-Oxley Act of 2002. They included the following:• The board's audit, nominating, and compensation committees would be comprised entirely of independent directors (according to stringent definitions, endorsed by the institutional investment community, of what constituted an independent director).• The majority of the board would be independent within two years following final approval of the settlement.• Cendant would take the steps necessary to provide that, subject to amendment of the certificate of incorporation declassifying the board of directors by vote of the required super-majority of shareholders, all directors would be elected annually.• No employee stock option could be “re-priced” following its grant without an affirmative vote of shareholders, except when such re-pricings were necessary to take into account corporate transactions such as stock dividends, stock splits, recapitalization, a merger, or distributions.4734747In Re: Cendant Corporation Litigation, 264 F3d 201 264 F.3d 201 (3rd Cir. 2001), http://openjurist.org/264/f3d/201/in-re-cendant-corporation-litigation.The Settlement with Ernst & YoungTen days after reaching agreement on the Cendant settlement, BR&B finalized negotiations of an equally impressive settlement with EY. On December 17, 1999, it was announced that EY had also agreed to settle the claims of the class for $335 million. This recovery was and remains today as the largest amount ever paid by an accounting firm in a securities class action case. The recovery from EY was significant because it held an outside auditing firm responsible in cases of corporate accounting fraud. The claims against EY were based on EY's “clean” audit and review opinions for three sets of annual financial statements, and seven quarterly financial statements, between 1995 and 1997, but that it had failed to review quarterly reporting packages by CUC subsidiaries; it did not require adequate documentation for the company's merger reserves and “top-side” adjustments; and it failed to review the company's general ledgers.The district court approved the settlements and plan of allocation in August 2000, paving the way for Cendant and EY to fund the settlements. Approximately one year later, in August 2001 the settlements and plan of allocation were affirmed on appeal by the U.S. Third Circuit Court of Appeals. And, in March 2002 the U.S. Supreme Court determined that it would not hear any further appeals in the case.

Task 3: Complete and submit your PowerPoint presentation in the Week 8 Dropbox.