The Wall Street Journal-20080216-The Buzz- Cendant Case Costs Ernst Almost --36-300 Million More

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The Buzz: Cendant Case Costs Ernst Almost $300 Million More

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Ernst & Young LLP settled for nearly $300 million a lawsuit brought against it by Cendant Corp., according to a securities filing late last year by a former Cendant subsidiary. In its suit, Cendant alleged that Ernst negligently failed to detect a massive fraud during its audits of a unit of the company.

Ernst had already, in 2000, paid out $335 million to Cendant shareholders as a result of the fraud. That is believed to be the largest-ever settlement by an auditor related to work for a single client. Cendant itself paid $2.85 billion to settle that shareholder litigation.

In a statement Friday, Ernst said: "This case was about a collusive management fraud that occurred over 10 years ago and led to two convictions and three guilty pleas by Cendant's former executives. While we had a strong case and believe we would have prevailed before a jury, this settlement allowed us to put this matter behind us and bring an end to nearly a decade of litigation and its attendant costs."

While the most recent settlement doesn't eclipse the size of Ernst's first Cendant payout, it is still one of the largest payments made by an audit firm. In 2007, for example, PricewaterhouseCoopers LLP agreed to pay $225 million to settle audit-malpractice claims arising from its audit of Tyco International Ltd. Deloitte & Touche LLP, in late 2006, said it would pay $210 million to resolve claims related to Adelphia Communications Corp.

According to Cendant's lawsuit, the fraud by senior managers of a subsidiary, CUC International Inc., started in 1986 and involved them inflating the unit's operating income. From 1995 to 1997 alone, Cendant alleged, CUC inflated its income by about $500 million.

Cendant was created through a 1997 merger of CUC, which ran travel clubs and other membership programs, and HFS Inc., an owner of hotel, car-rental, and real-estate franchises. Cendant's announcement in April 1998 that it had discovered accounting irregularities at CUC caused its stock to lose $14 billion in value in one day.

Walter Forbes, CUC's former chairman and chief executive, was sentenced to 12 years and seven months in prison.

Cendant in 2006 broke itself up into four units. It spun off its real-estate brokerage arm, Realogy, as well as its hospitality- services business, Wyndham Worldwide. The company also sold its travel-services business, Travelport, to an affiliate of private- equity firm Blackstone Group. Cendant retained its car-rental operations and is now named Avis Budget Car Rental LLC.