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September’s terrorist attacks, the loss of thousands of lives, and the United States’ plans to retaliate may have shaken the religious faith of some Americans. But not James Buckman. The general counsel of Cendant Corp., a native New Yorker, stepped up his churchgoing that month. At lunchtime he walked the few blocks from his midtown Manhattan office to attend Mass at St. Patrick’s Cathedral. There, the devout Catholic and committed capitalist says, he found “spiritual fortification.” “One thing [Jesuits] all believe is that each human being is endowed with free will,” says Buckman, whose high school and college were run by Jesuits. The terrorists “someday will have to account for their actions,” he says, but “there’s no intervening God who will step in” before the final reckoning. The GC has other, more temporal, concerns. On Sept. 17, when the New York Stock Exchange reopened after the attacks, Cendant’s stock got hammered along with that of many airlines, cruise lines, and hotel chains. A third of the New York-based company’s $4 billion in 2000 revenue came from its travel-related businesses: hotel franchises, rental cars, and timeshare resorts. When the closing bell rang on Sept. 21, Cendant’s stock was at $11.03 a share, down 39 percent in just one week. The plunge was a painful reminder of a more difficult time. Cendant — formed in 1997 by the merger of HFS Incorporated and CUC International Inc. — saw its stock hit a similar low in 1998. That year it was learned that CUC may have overstated earnings before charges for the mid-1990s by as much as $500 million. The Cendant/CUC scandal would be called one of the biggest back-office frauds in U.S. history, eclipsing similar accounting messes at Waste Management Inc., McKesson HBOC Inc. and MicroStrategy. While such a fiasco would have killed many companies — or at least knocked existing management out of office — Cendant’s senior executives from the HFS side stayed put. That included Buckman, who, as HFS’ top legal officer, oversaw the due diligence that failed to detect CUC’s alleged fraud. Shareholders deserve better than that, says a leading industry activist. “Either you’re responsible or irresponsible,” says Nell Minow, editor of The Corporate Library, a publication on corporate governance. HFS senior executives have “got to be held accountable for what ultimately happened there.” The scandal has taken a financial toll on Cendant. So far, the company has spent about $50 million to fight lawsuits related to the accounting fiasco, and $2.83 billion to settle just one case; others are pending. But the litigation has not kept the company down. Cendant’s top brass remained — and led the travel and real estate leader to a market-defying comeback. Even as the U.S. economy was slowing, Cendant’s revenues doubled in the first half of 2001. Between January and July, its share price climbed nearly 100 percent. Growth was fueled by internal expansion and strategic acquisitions. In the late 1990s, the dynamic duo of CEO Henry Silverman and his pal Buckman returned to what they do best: buying promising companies and making them even more profitable. When the terrorists struck this fall, the pair were on the verge of closing two important deals: a $1.8 billion purchase of Galileo International Inc., the world’s second-largest travel reservation firm, and the acquisition of discount travel retailer Cheap Tickets Inc., for an estimated $280 million. Now the attacks and U.S. war plans make uncertain the wisdom of those purchases — and cast a cloud over Cendant’s immediate future. Could consumers’ fear of traveling, in the aftermath of the hijackings, succeed where the CUC scandal failed, and unravel Cendant? Or have the company’s leaders positioned the business so that it can withstand another crisis? For Buckman, keeping Cendant out of trouble is a professional duty. But there’s more to it than that. He was educated in the spirit of the Jesuits, a 460-year-old order of the Catholic church focused on integrating spirituality and service with everyday life and work. For Buckman, saving Cendant and clearing his own reputation are also a moral obligation. DEALMAKERS’ DUET No matter how hard he works, or how deep his faith, Buckman, 57, can’t do it alone; his fate is intertwined with Silverman’s. That was evident in mid-September. In the weeks after the terrorist attacks, the two spent hours in meetings with top managers struggling to assess the damage to Cendant holdings. In late September, Silverman told Wall Street analysts that the company was sharply lowering its fourth-quarter and 2002 earnings estimates as a result of the anticipated drop in its travel businesses. That’s the pair’s modus operandi. Silverman — a lawyer turned investment banker turned entrepreneur — has the vision and sells it to the world. The 61-year-old chairman, president, director, and CEO tours the country, talking to investors and the media. Buckman prefers to remain behind the scenes, doing his part to turn Silverman’s dreams into reality. Buckman is “reserved,” says Silverman. “Like any good GC, he views his role as protecting me from myself.” Unlike many GCs who see themselves primarily as businessmen and potential CEOs, Buckman describes himself as a counselor and facilitator — a traditional lawyer. “I don’t think he aspires to be Silverman,” says Buckman’s close friend J. Kirk Quillian, a partner at the Atlanta firm of Troutman Sanders. “He has never wanted to hold himself out as a kingmaker or the ruler of the roost.” Colleagues describe Buckman as modest, even though the lawyer holds the rank of vice-chairman (a title not many GCs attain), serves on Cendant’s board of directors, and has considerable input on acquisitions. Counsel who have sat opposite the pair at the dealmaking table note his clout. Says Bart Friedman, a partner at New York’s Cahill Gordon & Reindel (who represented Avis Group Holdings Inc. in Cendant’s bid for the shares that it did not already own): “Jim is Henry’s partner, and not just hired staff. You could smell that.” Silverman and Buckman have worked together smoothly for the better part of 17 years, even though their backgrounds are quite different. Silverman’s father was CEO of the commercial finance company Talcott National Corp. Buckman’s dad drove a train for the New York Central Railroad. Silverman, who is Jewish, attended prep schools. Buckman went to parochial schools. Perhaps their synergy stems from some of their striking similarities. Both are native New Yorkers, borough boys no less. Silverman is from Brooklyn; Buckman, from the Bronx. Both come across as elegant, but approachable. And, most importantly, both have the same drive: to do smart, profitable deals and get them done efficiently. The two met in Atlanta in 1984, when they were on the same side of Reliance Group Holdings Inc.’s purchase of Days Inns of America Inc. Buckman was then an M&A and securities partner at Troutman Sanders. Reliance was his client, and Silverman ran the leveraged buyout fund for Reliance corporate raider Saul Steinberg. Buckman recalls that Silverman “was very decisive. He did not believe in getting too tied up in negotiating every detail. He never believed … in having to get the last nickel off the table.” Says Silverman of Buckman: “I saw intelligence, loyalty, morality, but also, and very importantly, I took notice of his abilities as a ‘closer’ of deals.” After the Days Inns transaction was completed, Silverman hired Buckman as the hotel chain’s general counsel. The Days Inn deal marked “the start of the Silverman version of franchising,” says Terry Bridges, a Troutman Sanders partner who worked with Buckman and Silverman at the time. “They would take a normal business, and then suddenly turn it into a franchise … . Normally you build the other way.” Silverman and Buckman were separated for a time by the 1989 sale of Days Inns. (Buckman returned to Troutman Saunders.) But when Silverman launched his own venture, the New Jersey-based franchising conglomerate Hospitality Franchise Systems (later shortened to HFS), he asked Buckman to be his GC. In 1992 the lawyer relocated his wife and three daughters from Atlanta to New Jersey. In the years that followed, Silverman and Buckman executed rapid-fire acquisitions of famous brands, such as Century 21 Real Estate Corp. and Travelodge Hotels Inc. Often they’d avoid getting stuck with the properties’ risky assets, but hold on to their valuable trademarks. The result: HFS wowed Wall Street with average annual revenue growth of 54 percent in five years. HFS’ split-adjusted share price soared from $4 at the time of its IPO in 1992 to $80 in 1997 — when talks about the ill-fated merger with CUC began. DERAILED RETIREMENT PLANS The deal with CUC was supposed to be the duo’s capstone. HFS would merge with CUC, a Stamford, Conn.-based direct marketing outfit. Silverman, Buckman, and then-CFO Michael Monaco would lead Cendant for two years and then fade into lesser roles, even retire, ceding their posts to CUC’s top brass. The companies concluded the merger in 1997, and christened the new entity Cendant — a name suggestive of the word “ascendant.” But that upward momentum didn’t materialize. On April 9, 1998, financial executives from HFS pressed accountants at Cendant Membership Services (a division that included former CUC properties) to explain certain entries on a balance sheet. Unsubstantiated “adjustments” were detected on CUC’s 1997 financial statements. Silverman and Monaco broke the news to Buckman. “My jaw just dropped,” the GC recalls. “I said, ‘This can’t be right. People don’t do these things.’ ” The pair resolved to determine the extent of the problem quickly, and then make a public disclosure. The markets were closed the next day for Good Friday. For Buckman, this was a time to lean on his faith. He believed he’d done nothing wrong. He felt duped. “ I needed to go to church then more than ever,” he says. “There was very little at that point I could do. This was an accounting issue.” Still, the legal and financial implications “weighed heavy on my mind,” says Buckman — and figured prominently in his prayers on Easter Sunday. Buckman has looked to Catholicism for solace and support throughout his life. He attends Sunday Mass at Park Avenue’s Church of St. Ignatius Loyola. As a student at Fordham Preparatory School, he often turned for guidance to then-headmaster Father Eugene O’Brien. Says O’Brien: “Jim was always looking to search for and nurture ideals.” BRACING FOR THE ONSLAUGHT Those ideals would be tested in the months and years ahead. On April 15, 1998, Cendant announced that “accounting irregularities” had led to an overstatement of its 1997 pretax operating income by as much as $115 million. Internal and governmental investigations later revealed that CUC executives had doctored their books by more than $500 million from 1995 through 1997. Ultimately, the Securities and Exchange Commission and the Department of Justice traced the scheme back to the 1980s. Investors recoiled, slashing the company’s stock price in half, to less than $20 a share on April 15. But the approximately $14 billion loss in market cap was only the beginning of Cendant’s stock slide. Its share price would nosedive to $7.50 by early October 1998. Says Buckman: “Because of [the CUC executives'] conduct, people like me, Silverman, and [fellow HFS vice-chairman Stephen] Holmes were tarred and pilloried, and associated with a company’s name that had become paired in the public’s mind with fraud.” Cendant “was besmirched everyplace,” recalls David Fox, the company’s outside counsel at New York’s Skadden, Arps, Slate, Meagher & Flom. Discomfort with Cendant management lingered in the financial community, says Thomas Graves, an equity analyst at Standard & Poor’s. But, he says, “there’s something to be said for management stability.” That’s how Cendant’s board saw it. There were no campaigns to push the former HFS execs out of the new company, says ex-Cendant board member Brian Mulroney, the former prime minister of Canada (now senior partner at Montreal’s Ogilvy Renault.) “The board felt that Henry Silverman and his team had done everything reasonable and thoughtful and appropriate — and then some — to ensure that the shareholders were protected,” Mulroney says. “I never felt like I was fighting for my job,” says Buckman, “only for my net worth.” LEGAL FALLOUT Three years later, the scandal is still making headlines. In June 2000 CUC’s former CFO, controller, and accountant in charge of external reporting pleaded guilty to various mail and wire fraud charges. Each man faces a maximum of five years in prison, as well as a $250,000 fine on every charge. The three — who say they were just following orders from CUC’s senior management and are cooperating with prosecutors — have yet to be sentenced. The criminal trials of former CUC chairman Walter Forbes and vice chairman E. Kirk Shelton are set for May 2002. (Both men declined to comment.) Until the criminal cases are resolved, there’s a hold on trials involving private civil suits against Cendant. Still, in December 1999 the company was able to settle the major shareholder class action suit, which was the company’s biggest roadblock in the way of economic recovery. The cost to Cendant was a whopping $2.83 billion — the largest settlement of a securities fraud case in U.S. history. The plaintiffs had claimed $8.5 billion in damages. “These were very, very tense negotiations,” says plaintiffs’ counsel Max Berger of New York’s Bernstein Litowitz Berger & Grossmann, who’s famous for winning the precedent-setting discrimination case against Texaco Inc. Although the complaint Berger filed faults the HFS executives for inadequate due diligence, the attorney doesn’t lay blame at Buckman’s door. “This was a financial fraud, and ordinarily speaking, the GC would not be involved in taking a look at the financial books and records of the company that they were merging with. So I wouldn’t particularly point the finger at Jim Buckman.” But the GC and his company are pointing fingers. Cendant — along with some of its past and current executives and board members — sued CUC accountants Ernst & Young International in New Jersey federal court in 1999. The charges: The firm’s accountants were negligent; they should have discovered and exposed CUC’s alleged fraud. The Cendant suit seeks to clear its executives’ names and recoup losses for them, the company, and the shareholders. But Buckman describes it in moral terms. “I believe E&Y [accountants] compromised their integrity,” he says. And “every time that integrity is compromised, the whole system is at risk.” E&Y steadfastly denies Cendant’s allegations. In its countersuit, the accounting firm claims damage to its reputation, saying that the HFS charges are “transparent attempts by Cendant’s management to avoid responsibility for their own wrongdoing and incompetence, which included lying to E&Y and dragging HFS into a doomed merger.” Shareholders’ rights activist Minow questions whether Buckman and his fellow officers shirked their fiduciary obligations: “The goal of any kind of internal system has to be one of checks and balances. You can’t just say, ‘Well, we’re relying on Ernst & Young,’ because accountants are subject to all sorts of conflicts of interest.” CONFLICT OF INTEREST? There’s another interesting complication to the Cendant litigation: Buckman’s many, simultaneous roles. The very man directing Cendant’s defense is also a named plaintiff and defendant in a web of claims involving his employer. Berger, for one, found it “strange dealing with somebody who was a named defendant as well as a legal representative for the company.” But, he says, Buckman’s personal involvement didn’t seem to affect his judgment. However, Berger says, “it was clear [that Buckman] was taking moral offense at being accused of wrongdoing.” (Buckman utterly rejects any suggestion that he and his colleagues from HFS failed to conduct adequate due diligence, or that executives deliberately shortchanged shareholders.) To manage Cendant’s litigation over the CUC mess, Buckman brought over then-GC of Avis, John “Jack” Carley, and made him Cendant’s senior VP for legal and regulatory affairs. Carley, a former GC of the Federal Trade Commission, had gone to Yale Law School with Buckman. These days, Carley says, he keeps a delicate balance between reporting to Buckman and preserving the chief legal officer’s integrity as a potential witness. (Buckman and others are personally represented in the E&Y and shareholder matters by James Kreissman at New York’s Simpson Thacher & Bartlett as well as by former New Jersey federal judge Herbert Stern, now a partner at Roseland, N.J.’s Stern Greenberg & Kilcullen.) BACK FROM THE BRINK As Cendant tried to leave the CUC disaster behind, its board fumbled. In late 1998 it repriced large portions of all employees’ options, including top management’s, to reflect the drop in the company’s stock price. The move was greeted with protests from the investment community. Buckman, also a member of the board, defends what he calls the “infamous repricing,” saying: “We believed that the officers of our company during this period performed very well in that catastrophic situation. We wanted to keep the management team intact.” Top executives did remain — and they were very much the richer for it. By 2000, Silverman was the fifth-highest-paid CEO in the United States, according to Forbes. His combined salary and bonus was $7.6 million. He also cashed out $129 million in options last year. Buckman ranked number 11 on the Corporate CounselGC Compensation Survey for his total cash compensation in 2000 of $1.3 million. His gain on options exercised in 2000 was $7.2 million. Cendant management earned that money, Buckman says, by engineering the business’s comeback. Revenue in 2000 was $3.93 billion; in the first half of 2001 alone it was $3.7 billion. Silverman, Buckman, and company accomplished this feat by first going into retreat after the CUC revelations. To raise cash and streamline the sprawling conglomerate, they sold off assets. Between December 1998 and November 1999, Cendant disposed of 18 business units for a total sum of $4.5 billion. Proceeds went to repurchasing Cendant stock and reducing the company’s debt load. The moves burnished the company’s image on Wall Street, says Phua Young, a research analyst at Merrill Lynch & Co., Inc. After the sales the company was clearly divided into four service areas: hospitality, cars (rentals and parking garages), financial, and real estate. By late last year Buckman and Silverman were able to go on the offensive again. Cendant acquired the timeshare business Fairfield Communities Inc. for $690 million, as well as the 82 percent of Avis shares that it didn’t already own, for $937 million. This summer Cendant launched bids for Galileo and Cheap Tickets. In just a short time, says Young, Wall Street’s attitude went from “Oh, my gosh, why are they buying things again?” to an expectation that the company would do more acquisitions. Silverman says he was relieved. “There was a sense,” says the CEO, “that the tide had turned and the credibility we’d worked so hard to establish during the HFS days was returning.” Then, of course, the world changed. WARTIME ECONOMY The travel industry was already suffering when the terrorist attacks brought tourism to a halt in mid-September. But a full-blown recession could seriously hurt Cendant’s online travel acquisitions, car rental properties, and hotel franchises, which include Super 8 Motels Inc., and Howard Johnson International Inc. Citing the downturn, on Sept. 17 Jolson Merchant Partners Group LLC lowered its rating on Cendant stock from a “strong” to a “long-term” buy. On September 25 Standard & Poor’s Thomas Graves downgraded the stock from “accumulate” to “hold.” On September 28 Cendant dramatically lowered its earnings estimates for the fourth quarter of 2001 and for 2002. Silverman told Wall Street that consumers’ travel fears would worsen what was normally a weak quarter for Cendant. Still, he said, Cendant wouldn’t suffer as much as airlines or upscale resorts might because “most of our hospitality division serves road-based travelers.” One Wall Street analyst agrees with that assessment. Jay Leupp, a managing director at Robertson Stephens Inc., remains optimistic on the company’s long-term growth. He has kept his “strong buy” rating on the stock because, he says, “we believe Cendant’s diversification lessens its direct exposure.” After all, Leupp says, the terrorist attacks should not have as negative an impact on Cendant’s real estate and financial services divisions. The leading franchiser of residential real estate brokerages, Cendant owns Century 21 Real Estate Corp. and Coldwell Banker Real Estate Corp. Holdings in the financial services sector include Jackson Hewitt Inc. “Cendant has aggressively positioned its portfolio for growth,” says Merrill Lynch’s Young. Cendant’s recent dealmaking in the travel sector is going forward — and may still pay off. But Silverman announced Sept. 28 that the company would defer the launch of its new travel portal. Just as Cendant’s latest acquisitive streak was gathering steam, the company once again was forced to shift from dealmaking to damage control. But Buckman, now a veteran of both business modes, says he’s no more anxious than usual, either for his own safety or his company’s. “You grow up in New York City, you’re always looking over your shoulder,” Buckman quips, showing a touch of the gallows humor that Silverman says helped pull them through the CUC crisis. And, where caution fails, there’s always faith. Related Chart: Cendant’s Ascension
Cendant Corp. Headquarters:New York CEO:Henry Silverman GC:James Buckman Revenue in 2000:$3.9 billion Net income in 2000:$602 million Employees:28,000 Businesses:Hotel franchises, including AmeriHost Inn, Days Inn, and Super 8 brands; car rental offices including Avis Group Holdings; real estate holdings including Century 21 and Coldwell Banker Source: Hoovers Online, Cendant.com

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