UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 42934 / June 14, 2000

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1273 / June 14, 2000

ADMINISTRATIVE PROCEEDING
File No. 3-10226

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Paul Hiznay ("Hiznay" or "Respondent").

II.

In anticipation of the institution of these administrative proceedings, Hiznay has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, without admitting or denying the findings set forth below, except as to jurisdiction of the Commission over him and over the subject matter of these proceedings, which Respondent admits, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") set forth below.

Accordingly, it is ordered that proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted.

III.

FACTS

The Commission makes the following findings:¹

A. RESPONDENT

Paul Hiznay, age 37, was a mid-level Accounting Manager at the Comp-U-Card division of CUC International Inc. ("CUC") from July 1995 until October 1997. During that time he ran the day-to-day activities of Comp-U-Card's accounting operations in Trumbull, Connecticut. Hiznay is a certified public accountant and resides in Trumbull, Connecticut.

B. OTHER RELEVANT ENTITIES

1. HFS Incorporated ("HFS") was a Delaware corporation that had its headquarters in Parsippany, New Jersey, and was principally a controller of franchise brand names in the hotel, real estate brokerage, and car rental businesses. Its securities were registered pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange ("NYSE").

2. CUC was a Delaware corporation that had its headquarters in Stamford, Connecticut, and was principally engaged in membership-based consumer services, such as auto, dining, shopping, and travel "clubs." CUC's securities also were registered pursuant to Section 12(b) and traded on the NYSE.

3. Cendant Corporation, a Delaware corporation with its headquarters in New York City, was created through the December 17, 1997, merger of HFS and CUC. Cendant provides 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. For corporate law purposes, Cendant is CUC. Pursuant to the Agreement and Plan of Merger between CUC and HFS, on December 17, 1997, HFS was merged with and into CUC, with CUC continuing as the surviving corporation and changing its name to Cendant Corporation. As of March 1, 2000, Cendant's common stock, Income PRIDES, and Growth PRIDES were registered pursuant to Section 12(b) of the Exchange Act and traded on the NYSE. Cendant's 6.45% Trust Originated Preferred Securities, 7 3/4% Notes due 2003, and 3% Convertible Subordinate Notes due 2002 were registered pursuant to Section 12(g) of the Exchange Act.

C. THE SCHEME

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. In the earlier years of the scheme, they relied in large part on manipulating recognition of the company's membership sales revenue. The CUC senior managers also improperly utilized two liability accounts related to membership sales, consistently maintaining inadequate balances in the accounts and on occasion reversing the accounts directly into operating income. 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. Finally, 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.

CUC senior management supervised the scheme over the course of each fiscal year. Beginning in at least 1988, senior management regularly made certain aggregate changes to CUC's reported quarterly financial results. Accordingly, at the end of each of the company's first three fiscal quarters, CUC senior managers directed subordinate financial reporting personnel at CUC corporate headquarters to add whatever amounts were needed in order to bring CUC's quarterly income up to analysts' expectations. Thus, for each of the first three quarters of a CUC fiscal year, the CUC senior managers artificially inflated revenues and decreased operating expenses. In conjunction with these income statement changes, the senior managers also cosmetically altered certain CUC balance sheet items.

At the end of each fiscal year, the CUC senior managers implementing the scheme inflated the company's annual results as recorded on its books and records, so that the books and records would be consistent with the financial results already released and so that CUC's reported annual income would, in fact, meet the expectations of Wall Street analysts. As the scheme progressed over the course of several years, larger and larger year-end adjustments were required. The scheme added more than $500 million to pre-tax operating income during the fiscal years ended January 31, 1996; January 31, 1997; and December 31, 1997. ²

D. HIZNAY'S INVOLVEMENT

1. Making Unsupported Post-closing Entries

Although Hiznay was not a senior manager at CUC and was not involved in the aggregate adjustments of CUC's reported quarterly results, from July 1995 to October 1997 Hiznay took steps which helped to carry out CUC senior managers' scheme to inflate earnings.

In early 1997, at the direction of senior management, Hiznay approved a series of entries reversing the commissions payable liability account into revenue at Comp-U-Card. CUC paid commissions to certain institutions on sales of Comp-U-Card 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. Comp-U-Card 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.³

Accordingly, in February 1997, Hiznay received a schedule from the Comp-U-Card controller setting forth the amounts, effective back-dates, and accounts for a series of post-closing entries reducing the commissions payable account by $9.12 million and off-setting that reduction by increases to Comp-U-Card revenue accounts. Hiznay approved the entries and had his staff enter them. Save for his superior's written instructions, the entries were unsupported. They all carried effective dates spread retroactively over prior months. The entries reversed the liability account directly into revenues, a treatment that, under the circumstances, was not in accordance with Generally Accepted Accounting Principles.

Because the entries carried effective dates spread retroactively over November and December of 1996 and January of 1997, they inflated CUC income by $9.12 million for the fiscal year ended January 31, 1997. After the Cendant merger, however, the company changed from a CUC fiscal year-end of January 31 to a Cendant fiscal year-end of December 31. As a function of that change, CUC's January 1997 financial results were reported in both the CUC fiscal year ended January 31, 1997, and the Cendant fiscal year ended December 31, 1997. Because $2.85 million of the improper February 1997 commissions payable reversals had effective dates in January 1997, that $2.85 million also inflated Cendant's income for the fiscal year ended December 31, 1997.

Hiznay received a second schedule of post-closing entries from the Comp-U-Card controller in February 1997. This second schedule listed the amounts, effective back-dates, and accounts for seventy-seven journal entries reducing a large CUC merger reserve by $35 million, with off-setting entries decreasing various Comp-U-Card operating expense accounts. Again, Hiznay approved the entries and had his staff enter them. Again, save for his superior's written instructions, the entries were unsupported, and they all carried effective dates spread retroactively over prior months.

Because these merger reserve reversal entries carried effective dates spread over November and December of 1996 and January of 1997, they inflated CUC income by $35 million for the fiscal year ended January 31, 1997. Again, however, the December 1997 change in fiscal year-end meant that some of the entries inflated income twice. Because $10 million of the improper merger reserve reversals had effective dates in January 1997, that $10 million also inflated Cendant's income for the fiscal year ended December 31, 1997.

2. Keeping Rejects and Cancellations Off-Books

During his time at the Comp-U-Card division, Hiznay inherited, but then supervised, a long-standing Comp-U-Card practice of keeping membership sales cancellations and rejects off Comp-U-Card's books during part of each fiscal year. Certain Comp-U-Card membership products were processed through various financial institutions that billed their members' credit cards for new sales and charges related to the various membership products. When Comp-U-Card recorded membership sales revenue from such a sale, it would allocate a percentage of the recorded revenue to cover estimated cancellations of the specific membership product being sold, as well as allocating a percentage to cover estimated rejects and chargebacks.⁴ Comp-U-Card used these percentage allocations to establish a membership cancellation reserve.

Over the years, CUC senior management had developed a policy of keeping rejects and cancellations off the Comp-U-Card general ledger during the last three months of each fiscal year. Instead, during that quarter, the rejects and cancellations appeared only on cash account bank reconciliations compiled by the Comp-U-Card accounting personnel in Trumbull, Connecticut. The senior managers then directed the booking of those rejects and cancellations against the membership cancellation reserve in the first three months of the next fiscal year. Because rejects and cancellations were not recorded against the membership cancellation reserve during the final three months of the fiscal year, the policy allowed CUC to hide the fact that the reserve was dramatically understated at each fiscal year-end. At its January 31, 1997, fiscal year-end, the balance in the CUC membership cancellation reserve was $29 million, and the Comp-U-Card accounting personnel were holding $100 million in rejects and $22 million in cancellations off-books.⁵ Failing to book cancellations and rejects at each fiscal year-end also had the effect of overstating the company's cash position on its year-end balance sheet.

E. FALSE FILINGS AND STATEMENTS

Between Hiznay's arrival at Comp-U-Card in July 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, CUC and Cendant filed with the Commission false and misleading periodic reports and other filings. Those reports and filings included, directly or by incorporation, financial statements that misrepresented the companies' financial conditions and results of operations, overstating their income and their earnings.

IV.

VIOLATIONS OF THE
EXCHANGE ACT REPORTING PROVISIONS

Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file annual reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979).

As discussed above, between Hiznay's arrival at Comp-U-Card 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. Based on the conduct described above, Hiznay was a cause of the companies' violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder.

V.

Based on the foregoing, the Commission finds that Hiznay caused CUC's and Cendant's violations of Section 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder.

VI.

In view of the foregoing, the Commission deems it appropriate to accept Respondent's Offer and to impose the sanctions agreed to therein. In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission and other authorities.

Accordingly, IT IS HEREBY ORDERED that

Hiznay, pursuant to Section 21C of the Exchange Act, cease and desist from violating, and from causing future violations of, Section 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder.

By the Commission.

Jonathan G. Katz
Secretary

¹ The Commission's findings herein are made pursuant to Respondent's Offer and are not binding upon any other person or entity in these or any other proceedings.

² CUC's fiscal year ended on January 31. After the December 17, 1997, merger, Cendant adopted a fiscal year ending December 31.

³ For purposes of this Order, "post-closing journal entries" means entries that are made after a reporting period has ended, but before the financial statements for the period have been filed, and that have effective dates spread retroactively over prior weeks or months.

⁴ Rejects resulted when the credit card to be charged was over its limit, closed, or reported as lost or stolen. Chargebacks resulted when a credit card holder disputed specific charges related to a particular membership program.

⁵ Although the reserve was already seriously understated, in February 1997, Hiznay, again at the direction of the Comp-U-Card controller, approved a series of unsupported post-closing entries that reduced the membership cancellation reserve by $15 million, with the off-setting entries decreasing Comp-U-Card expense accounts or increasing Comp-U-Card revenue accounts.

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