Friday, November 24, 2006
The Second Circuit, in an unpublished summary order (available below), upheld the conviction of E. Kirk Shelton, the former vice chairman of Cendant, on conspiracy, wire fraud, securities fraud, and false statement to the SEC counts. Shelton was convicted in 2004 in a trial in which his co-defendant, former Cendant CEO Walter Forbes, had a mistrial declared because of jury deadlock. Forbes was recently convicted in a third trial in the matter. The case arose out of a large-scale accounting fraud at CUC International before it merged with HFS to form Cendant in 1997. Shelton received a ten-year sentence, and he had been free on bond pending appeal. He will likely have to report to the Bureau of Prisons to begin his term in the next four to six weeks.
The Second Circuit rejected Shelton's argument that the district court improperly gave an "ostrich instruction" to prove the conspiracy and fraud counts. The appellate court noted that the evidence at trial included testimony from a co-conspirator that while reviewing a document about using reserves to meet quarterly earnings targets Shelton tore it up and said, "I guess I never saw that document." The Second Circuit also upheld the sentence over Shelton's objection that the district court improperly enhanced his sentence for having a leadership role in the offense, arguing that he could not have consciously avoided knowledge for an ostrich instruction and been a leader of the fraud. The court found that there was sufficient evidence to support the enhancement. The fact that the Second Circuit affirmed in a short (six pages), unpublished opinion indicates that it is even less likely an appeal to the Supreme Court will be granted, if Shelton ever tries to pursue one.
Shelton's troubles are not over, even with a substantial jail sentence looming. The government has filed a civil suit challenging Shelton's transfer of approximately $37 million in assets to family members and what prosecutors allege are "straw" companies to hide assets after the fraud came to light. Cendant is also seeking repayment of $22 million it advanced to Shelton for his attorney's fees that he likely agreed to repay if found guilty of a crime that harmed the company. Working through the collateral consequences of the conviction will likely take years, from a case that began over five years ago. A USA Today article (here) discusses the case. (ph)