A Merger Made in Hell The inside story of the decade's dumbest deal. One man ran his company like boot camp, the other like summer camp. Which is why, even before the Cendant scandal broke, it was already...
By Peter Elkind

(FORTUNE Magazine) – When it's finally over, years from now--when all the criminal probes and SEC sanctions and shareholder lawsuits are put to rest--the debacle of Cendant Corp. will likely loom as a landmark in Wall Street's annals of breaching faith. A master dealmaker bought a pig in a poke. An acclaimed visionary stood revealed as a Wizard of Oz. An accounting fraud that was both massive and brazen lay exposed. Incredibly, a merger that was orchestrated to delight the market--arranged by two of Wall Street's favorite CEOs--ended up costing investors billions. Coming on the heels of several smaller book-cooking scandals, Cendant naturally became a potent symbol of the most egregious excesses of the great bull market of the 1990s. If there was rot buried inside this company, then what company could you trust?

The product of a $14 billion "merger of equals" consummated in late 1997, Cendant had joined together HFS, a franchising powerhouse run by Henry Silverman, and CUC International, a membership-club giant led by Walter Forbes. Silverman, of course, was the dealmaker. Wall Street had long seen him as one of corporate America's great wealth builders--an image he both cultivated and reveled in. Forbes was the visionary, a man who could spin the future in ways investors found irresistible. For most of the 1990s they could do no wrong.

But when the fraud was exposed earlier this year, the Street turned on them viciously. CUC, it was revealed, had been padding its results since at least 1995, creating more than $500 million of imaginary profits to meet Wall Street's expectations. Forbes' insistence that he had no knowledge of the scheme was viewed as laughable, pathetic--or both. When, after a short, messy power struggle, Silverman managed to force Forbes out, the only complaint anyone heard was that he was being given far more money to go away--$47.5 million--than he deserved.

But Silverman did not emerge unscathed either. His reputation as a genius dealmaker was shredded. And his reputation as a CEO who could deliver for Wall Street was also wrecked. "The premium success story of the 1990s was HFS," moans Silverman today. "We blew it up with this one transaction." Now, he tells friends, "I feel like a schmuck."

In the months since Cendant "blew up"--its share price falling from $41 to less than $10, its market cap dropping by some $29 billion, from $38 billion to $9 billion--most of the headlines have focused on the accounting fraud, as well they should. It's a big part of the story, and as this account shows, the tale of its unraveling is a riveting one.

But it's not the only story here, and it might not be the most important one. Even without the accounting fraud, the marriage of Forbes' CUC and Silverman's HFS was a disaster waiting to happen. Well before they reached the altar, the two executives had developed a deep distrust of--even contempt for--each other. Their corporate cultures clashed horribly. Their rival management teams acted more like entrenched armies than merger partners. Under the misbegotten terms of the merger, Silverman was supposed to turn the business over to Forbes on Jan. 1, 2000, but it seems plain now that he had no intention of doing so.

That the two men went through with the deal anyway--that they managed to convince themselves that they could somehow make it work--shows how blinded they had become by Wall Street's approbation. Cendant is the story of an accounting fraud, without question. But it's also a case study in what happens when the quest to please the market--the search for the greater multiple, the bigger market cap, the fabulous growth rate--takes precedence over common sense.

I coulda been a contender," Henry Silverman is saying angrily. "I was a contender." It's August, several weeks after Walter Forbes has left the company. But Silverman is still seething at what happened--at how the CUC deal laid him low. As he sees it, his big mistake was trusting Forbes, who then "betrayed" him. His choicest comments about Forbes are unprintable--and it soon becomes clear that he is fixated on his former merger partner. He has already taken steps--such as retaining an outside investigator to dig into Forbes' expense account habits--that could well lead to legal action aimed at recovering millions. Silverman claims that this is being done solely for the benefit of Cendant shareholders, but it's hard to escape the feeling that it's revenge Silverman seeks.

In fact, Silverman's real mistake was in thinking that he could work with anyone as a full and equal partner, much less someone as different from him as Walter Forbes. At 58, Silverman is a control freak, pure and simple. He wants to see, and know, everything: monthly financial statements, weekly cash-flow reports, occupancy numbers, average rental rates. He grills his top deputies at three-hour monthly meetings and peppers them with daily faxes and phone calls. "Overcommunicate!" he implores.

Trained as a tax lawyer, Silverman made his name cutting deals for investor groups that included such roguish personalities as Michael Milken and corporate raider Saul Steinberg. But he burned with the desire to run his own show. "I'd played second banana for a lot of years to a lot of people," he says. "I'd paid my dues."

HFS, launched in 1990, was his big chance. He took the company public in 1992, at a split-adjusted $4 a share, with franchising rights to Howard Johnson, Days Inn, and Ramada, a trio of tarnished hotel brands. Five years and dozens of deals later, he'd built a $2 billion company that was the world's biggest franchiser of real estate brokerages, controlled 500,000 hotel rooms, and owned interests in rental cars, home mortgages, vacation time-sharing, corporate relocation, and other businesses. HFS made its money by charging franchising fees--up-front payments and a piece of the action--to anyone who wanted to open a Century 21 office, or an Avis outlet, or any of the other brands HFS controlled.

Silverman's desire to be in control even extended to HFS's stock price. To be sure, HFS was climbing on the back of an annual earnings growth rate of more than 60%--earnings growth fueled both by Silverman's incessant dealmaking and by his shrewd management. But the stock also got a considerable boost from his obsession with Wall Street. "What turns him on is watching the stock price go up," says Cendant vice chairman Steve Holmes, who has worked for Silverman since 1982. He was a regular at investment conferences, where he could sell the HFS story. He kept his own office in Manhattan--rather than at HFS headquarters in Parsippany, N.J.--the better to be in touch with the Street. He even had his investor-relations officers call up portfolio managers to urge them to buy more stock. Did it work? Without question: In 1996 the stock hit its all-time high of $79--a 2,000% return. Silverman shared in the stockholders' bounty, accepting lavish stock option awards worth hundreds of millions.

One thing Silverman did not spend much time worrying about was the human factor--the "small stuff," he calls it. This was especially true when he was considering a takeover. "If Henry thinks it's a good deal, he'll do it even if somebody says, 'You won't get along with that guy,'" says Mike Leven, CEO of U.S. Franchise Systems, who worked for five years under Silverman. "He makes a rational decision that soft issues can be handled if the hard issues are correct." Of course, in a straight acquisition, Silverman always held the trump card: If he didn't like the managers of the company he was buying, he could fire them all and install his own.

If anyone should feel betrayed, Walter Forbes is saying, it is he, not Silverman. Yes, the accounting fraud was a terrible blow, but it was as much a surprise to him as it was to Silverman--he'd simply had no idea this had been going on at CUC. "I was no less outraged, and no less affected, than Henry," he says, sitting in the kitchen of his New Canaan, Conn., estate. Yet Silverman, instead of treating him as an equal partner, reacted as though he were the enemy. Silverman pushed him out of the company. And Silverman, Forbes believes, has gone out of his way to besmirch his good name. He points, for instance, to details of his extravagant expense account that were leaked to the press: "I see no reason to put that all in the press except...to tarnish my reputation." Silverman's behavior, he adds later, is "Machiavellian."

One presumes that this angers the 55-year-old Forbes, though it's hard to tell. If Silverman visibly seethes, Forbes is oddly languid. Only the touchiest questions draw anything more than a shrug or a raised eyebrow. He seems bizarrely detached from the drama in which he had played such a central role.

But then, detachment has long been a hallmark of Walter Forbes' career. "I never ran the shop," he says now--for which he makes no apologies. Viewing his role as "the visionary," he left the grubby details to underlings. He preferred to spend his time out of the office, trolling for acquisitions, playing rainmaker, and traveling to conferences, where he could issue grand pronouncements ("Retailing is dead" was a favorite) and hobnob with famous CEOs like Bill Gates. Former associates say he took as much as two months off a year and kept golf clubs in his office, frequently ducking out for a round in the afternoon. (Forbes denies this.) Even when Forbes was around, he spent so much of his time thinking up dreamy ideas that his staff called him "the Tooth Fairy."

Born into wealth, Forbes earned an MBA from Harvard in 1968 and later joined a Cambridge, Mass., consulting firm, where he ran its venture capital arm. It was there that he stumbled upon the company that would one day be known as CUC. It was called Comp-U-Card, and though he would often later be described as the founder, that wasn't true. The company had been started by a man named Robert Perlman, who had come to Forbes in search of venture capital.

Perlman's company served essentially as a broker for consumer products. It used computers to build a database containing the best prices available for washers, dryers, stereos, and televisions, and it distributed free membership cards allowing consumers to place phone orders. Customers got their products at a tidy discount from retail, even after Comp-U-Card charged a modest markup. Since it carried no inventory of its own, the business had little overhead.

In the early 1970s this was a radically new idea. Forbes, who was smitten by the still-distant notion of "electronic shopping," provided Perlman some capital and went on his board. But within a few years, the two men had a falling out, largely because Forbes had bigger ambitions for the business than Perlman. In March 1976, Forbes used his board position to oust Perlman--who responded by camping out for several days in his office. (His wife supplied food to him in a trash can he lowered from his window.) The standoff ended with Forbes buying out Perlman for $100,000.

As the new CEO, Forbes made one key change in Perlman's concept: He began charging annual membership fees for access to the service and marketing it as a discount-shopping club. Though the operation was losing money, Forbes always managed to find capital to keep it going. By pitching his far-off vision of shopping from home by computer, he made it sound sexy and futuristic--even though the more mundane reality was that the company did almost all of its business by old-fashioned telephone, using 800 numbers. No matter. In 1983, after burning through $14 million of private investors' cash, Forbes took the company public. Despite losing $2.5 million on $4 million in revenues the previous year, Comp-U-Card went public at 25 times sales.

Not long afterward, Forbes finally figured out how to make Comp-U-Card profitable: He struck deals with credit card giants like Citibank and Banc One to hawk shopping memberships to their card customers. As the company, recast as CUC International, took off, Forbes launched or acquired more than a dozen new membership operations, everything from a discount travel club to a club for fishermen. By 1997, CUC's reported annual revenues topped $2.3 billion.

Throughout, Forbes continued to describe CUC's business model in futuristic terms. He talked constantly about the Internet--though only a sliver of the company's sales are conducted online even today. He talked about how CUC's lack of overhead made it a "virtual business." He explained that the company's ever-expanding membership rolls--and the fact that the renewal rate for members was an impressive 70%--gave CUC a predictable "annuity-like" stream of earnings. This was the essence of the Forbes "vision," and though there were occasional critics who thought it was a house of cards, the Street fell for it. For all the accolades Wall Street accorded Silverman, Forbes' vision got him something Silverman coveted: a high price/earnings multiple. By 1997, CUC stock, which stood at about $25 a share, had a P/E ratio approaching 30.

In retrospect, it was somewhat inevitable that Henry Silverman and Walter Forbes would find each other. On the surface, at least, an HFS-CUC merger had a certain logic. HFS's most valuable untapped asset was the millions of affluent consumers who passed through its franchising system. In theory, a crack direct-marketing operation, such as CUC's, could draw them into membership clubs--and turn them into a huge new profit center.

But there were also the stock market imperatives that both men cared so much about. As CUC and HFS grew, they needed ever larger acquisitions to fuel future growth--and such deals were getting harder to find. Recalls Forbes: "Both of us were starting to tell Wall Street to lower expectations." Though HFS's growth remained strong, Wall Street's belief that it would soon slow had caused the stock to sputter, much to Silverman's frustration. A merger that combined both HFS's strong earnings and CUC's high multiple--while simultaneously creating a new profit center--would add billions to their combined market cap. That dream is what drove the deal.

This time, though, Silverman couldn't just swoop in and buy the company, as he usually did. Though HFS made more money and its stock had been the better performer for most of the 1990s, CUC had the larger market cap, thanks to its high P/E ratio. In fact, when Forbes first approached Silverman about a combination in January 1997, the discussion focused on CUC's acquiring HFS. By April, when the two men got serious, they were talking about a "merger of equals." Over dinner at the Four Seasons in New York City, they outlined a deal.

Given Silverman's need for control, it's hard to understand why he would agree to a merger that would force him to share power. Perhaps it was a case of his not letting the "small stuff" stand in the way of an attractive deal. Or maybe Silverman thought that if he threw his counterpart a few sops, Forbes would stay out of his way. Silverman himself implies as much: "We let him pick the name of the company," he complains--as if Forbes was supposed to be satisfied with that. "We let him pick out the colors of the company."

Whatever the case, Silverman's excitement over the prospect of the merger caused him to sign on to all sorts of things he would soon regret. First, the agreement called for Silverman to serve as CEO immediately after the merger--and for his team to run the combined companies--while Forbes acted as chairman of the board. But the two men were to switch jobs on Jan. 1, 2000, with Forbes' executive team replacing Silverman's. Second, the agreement called for the directors of both companies to be combined into one unwieldy 28-member board--half from HFS and half from CUC--and included a provision that no change could be made in the executive terms without the approval of 80% of the directors. Third, the new company would maintain separate corporate headquarters, in New Jersey (HFS) and Connecticut (CUC). And even while Silverman and his team ran the overall company, CUC would be allowed to retain its separate management structure. A more cumbersome arrangement would be hard to imagine--even if the companies had meshed well.

Which, it soon became apparent, they did not. The most obvious fact about HFS and CUC--one that was clear long before the merger closed in December--is that their cultures were utterly incompatible. While Silverman ran the tightest of ships, Forbes' operation was deliberately haphazard. Individual divisions of CUC were largely left to their own devices; accounting systems were primitive; monthly financials were "soft." There was no long-term planning. CUC executives were actually proud of this looseness; to them, it showed that they had remained "entrepreneurial" even as the company had grown into a $2-billion-a-year business. But HFS executives were horrified. "They were like children playing at business," scoffs Cendant general counsel James Buckman, one of Silverman's top lieutenants.

What's more, the better the two sides got to know each other, the less they liked each other. CUC's president, for instance, was 42-year-old E. Kirk Shelton, who had been at Forbes' side virtually his whole career. Shelton was the person who ran CUC day to day. Every important corporate decision and piece of information passed through his office. Yet when the HFS staff began asking him for information--especially hard numbers--they found him resistant and quickly concluded that he was not a team player. They also found him greedy (though in truth the merger produced a feeding frenzy--featuring salary hikes, accelerated vesting of options, and fat severance provisions--among top executives on both sides). On the eve of the deal's public unveiling, Shelton negotiated a covenant for himself that would give him a $25 million payout if he were not made COO of Cendant after two years. "I want a 'big bang' because you can fire me," Silverman says Shelton told him. (Shelton, through his attorney, declined to be interviewed.) Silverman, whose own option package, post-merger, would make him a billionaire on paper, went along. But when other HFS executives discovered what Shelton had done, they were furious.

The HFS team also resented the way Forbes seemed to be positioning Shelton to become CEO of Cendant after Silverman and Forbes had taken their turns. In fact, both HFS and CUC executives say Forbes had told them that he intended to step aside and turn the reins over to Shelton shortly after becoming CEO. (Forbes denies having any such plan, but acknowledges that he viewed Shelton as the "most likely" candidate to succeed him.) As for Forbes, the HFSers quickly came to regard him as an empty charmer, unwilling to do the hard work it took to run a real company.

Forbes, meanwhile, was taking an equally dim view of the HFS team, seeing its members as bureaucratic and overbearing. Even before the merger was complete, Forbes had begun complaining to Silverman that it felt more like an HFS "takeover" than a real merger of equals. He says he had always suspected that Silverman would want to remain "CEO for life" and he had "hard-wired" the deal to guard against that.

As the mutual mistrust grew, true due diligence was nearly impossible. When the HFS side asked CUC for access to key nonpublic information, permission was denied. After all, the CUC executives explained, if the deal cratered, HFS might purchase a CUC competitor. Typically, HFS would send in its outside auditors to inspect randomly selected financial data. In this case, no matter how hard they tried, they could never get access to that level of financial detail--or anything even close to it. Though assured by Ernst & Young, CUC's outside accounting firm, that the company was pristine, the HFS executives had no way to confirm it themselves. The HFS team did, however, look into rumors that Forbes was a womanizer. It swept the local courthouse for claims of sexual discrimination and harassment. None were found. (Forbes calls such rumors "outrageous.")

Despite Silverman's disillusionment, he never once suggested calling off the merger. For one thing, during the six months leading up to the closing, CUC kept reporting gangbuster numbers. "Every time I was nervous," he says, "they would show up with another quarter of spectacular earnings." For another, Silverman had already begun selling the deal to Wall Street--explaining, among other things, that it would "sustain earnings growth" for the foreseeable future. After some initial doubts, the Street had bought into the deal, and the stocks of both companies were rising in anticipation.

There was one other reason. As Silverman would later explain it, "This business [CUC] was producing 20% to 30% growth in a company where nobody worked. Once you overlaid our standards, we figured this could be a gold mine." The implications of that statement, though, are astounding: If Silverman was planning to impose "our standards," it meant that he no longer viewed the deal as a true merger of equals.

And, in fact, he didn't. Says Buckman: "Certainly by the time the merger closed, some of us had come to the conclusion that these guys were amateurs. We all thought that unless there was a magical conversion over the ensuing two years, it was a joke that these two guys [Forbes and Shelton] could actually succeed to the management of the company." Silverman himself concedes that he was "nervous" about the prospect of turning over the company to Forbes and Shelton. "A combination of an absentee manager and a guy who is not a team player--that's a lethal cocktail for a company with a $30 billion market cap," he says. But how was Silverman going to prevent Forbes from becoming CEO in two years? That apparently hadn't yet been figured out. Still, says Buckman, "Henry was thinking he would be able to manage around this."

He took an early run at doing just that. On Nov. 25, a month before the merger closed, Silverman faxed a "confidential" letter to Forbes' home, suggesting a six-month extension of their respective terms as CEO. More critically, he also suggested that the old HFS businesses continue to report to him even after Forbes became CEO. Forbes says he just ignored the letter.

No one really knows whether Walter Forbes was aware of the massive fraud buried deep inside CUC. Certainly, though, his agreement to merge with HFS suggests that he may well be telling the truth when he says that he was in the dark. After all, given Silverman's hands-on management style, there was simply no way a fraud that big was going to escape his notice once he was running the combined companies.

On the other hand, as Silverman's troops began to assert control over the former CUC divisions--causing yet more tension between the factions--at least one Forbes move would later raise a few eyebrows. He made a plea to Silverman to preserve CUC's financial-reporting autonomy--in particular, to maintain the key roles of CFO Cosmo Corigliano and his top deputy, corporate controller Anne Pember. Instead of having CUC's division controllers report their numbers directly to the former HFS executives now in charge of Cendant's financials, he asked that they continue to deal with Pember and Corigliano, who would consolidate the results and pass them along. Grudgingly, Silverman agreed.

But not for long. No matter what the reporting structure, Silverman had made clear it that he expected prompt, detailed monthly financial reports. By the end of February, however, the Cendant financial officers still hadn't seen CUC results from January; the slow flow of CUC numbers was also placing the company at risk of missing the deadline for filing its 10-K with the SEC. Threatening to take the issue to the board, Silverman told Forbes they had to cut Corigliano and Pember out of the process; the CUC controllers needed to report their numbers directly to Cendant's chief accounting officer, Scott Forbes (no relation to Walter). This time Walter Forbes folded.

On March 6, Scott Forbes drove up to Stamford, Conn., to meet with CUC executives--including Shelton, Corigliano, and Pember--about the new reporting arrangements. As Scott Forbes now recalls it, when he got there, Shelton handed over a piece of paper that surprised him: a schedule showing $165 million in revenue "adjustments" for Comp-U-Card, CUC's largest division, in 1998. Shelton quickly explained that the company had counted on moving that amount from merger reserves into income. "We want you to help us figure out how to creatively do this," Shelton allegedly said. Now Forbes wasn't just surprised, he was shocked: Merger reserves are supposed to be used only for one-time merger-related costs, such as severance packages--and they are certainly not supposed to be used to boost earnings. (Although a second person at the meeting corroborated this account, Shelton denies ever making the comment about reserves.)

But that wasn't all. It turned out that CUC had actually pulled a similar stunt in 1997, to the tune of $100 million. To Silverman this was truly horrifying news, for it meant that Cendant might have to take the awful step of restating its previous year's earnings. There was no doubt at all what that would do to the new company's credibility--or to its stock price, which had been rising smartly.

The CUC executives quickly offered explanations for the transfers, and CUC's auditor, Ernst & Young, assured Silverman's people that a public restatement was not required. But the Cendant CEO was not mollified. Furious, he told Walter Forbes that Shelton and Corigliano had to go. No one had told him that to meet its numbers, CUC was planning to move $165 million from reserves into income in 1998, he railed. Nor had he ever been informed about the nonrecurring income in 1997. "I can't have people working with me that lie to me," he said. Silverman says that Forbes assured him that he knew nothing about the situation and agreed to discuss it later--after he returned from a vacation in Hawaii with Shelton.

Silverman and Forbes met on April 1, in a room Forbes had rented at the St. Regis Hotel in Manhattan. Even though Silverman's office was only a block away, Forbes had insisted on meeting at the hotel. ("I figured he had the room wired," says Silverman. "I was totally paranoid by then.") Walter's entire management team had to go, Silverman declared. What's more, he added, Forbes should step down too. According to Silverman, Forbes, sounding "meek" and apologetic, agreed.

But Forbes now insists he agreed to nothing. He says that he didn't fight to save his managers because they wanted to leave anyway. Regarding his own departure, Forbes says, "Henry made some sort of offer to me vaguely.... I didn't take it very seriously."

In fact, during the next few days, attorneys representing Cendant and the top CUC executives began negotiating their departures. Forbes insists that there were no such talks on his behalf. But Silverman says there were indeed negotiations for Forbes' departure, which broke down only after Forbes demanded a huge payout. Silverman was pleased nonetheless. Shelton and Corigliano were practically out the door. And Forbes, he felt confident, would never stick it out to the year 2000.

Eight days later, the other shoe dropped. At what was supposed to have been a routine budget meeting with Cendant's top financial executives, two midlevel CUC accounting executives laid out a devastating account of widespread fraud at CUC. One of them, Steven Speaks, was the controller of the company's Comp-U-Card division. The other, Casper Sabatino, was CUC's corporate vice president of accounting. But they both told the same story: The company's impressive growth had been a lie. The only way CUC had met its numbers was by making them up.

What the two men laid out that day--and what emerged in the weeks to follow--was a scandal of astonishing proportions, involving 17 of the company's 22 business units and more than 20 CUC controllers. Though they could not say how high up the involvement went, they both said they had been instructed to commit fraud by Corigliano and Pember. (Corigliano, through his attorney, denies any involvement in impropriety. Pember's attorney did not return calls for comment.)

All told, auditors would later conclude, the company had recorded $511 million in bogus pretax income, which inflated earnings (before charges) by more than one-third over three years. In 1997 some 61% of the company's net income had simply been made up. The book-cooking had grown progressively larger. Records were backdated and falsified. Material was concealed from the company's outside auditors.

Sabatino matter-of-factly described making improper adjustments to boost quarterly earnings by $176 million during the first three quarters of 1997; he said Corigliano had ordered the changes, explaining that they were needed to meet Wall Street expectations. Speaks, in turn, told of how, just three months before, Pember had ordered him to find a "home" on Comp-U-Card's 1997 books for an extra $55 million--money the company needed to hit analysts' targets. Speaks told company investigators that he stayed up until 1 a.m. concocting seven pages of fictitious accounting entries. He'd originally prepared the entries in large round numbers--amounts such as $5 million. But Pember had ordered him to keep the numbers below $3 million and add pennies to the figures to make them look less suspicious. Another time, as Speaks was about to walk into a budget meeting attended by Cendant executives, Pember and Corigliano pulled him aside and told him they had new numbers for him to present. They handed him a sheet of paper inflating the revenues he'd forecast by some $200 million.

By the following Tuesday, Silverman and his top lieutenants had satisfied themselves that they were indeed dealing with bigtime fraud, requiring public disclosure. Willkie Farr & Gallagher, a New York law firm, was retained as special counsel to head up an outside investigation for the board audit committee. Arthur Andersen was brought in to do the forensic accounting work.

And, finally, Walter Forbes was told. He was "shocked," he told Silverman--but also angry that he had been left in the dark for five days. "As chairman of the board, I should have known the second Henry knew," he says. Replies Silverman: "I didn't tell Walter because I didn't know who was complicit."

The next morning, a SWAT team of Arthur Andersen auditors, backed by private security officers, prepared to descend upon CUC's offices in Connecticut, where they would change locks, seal file cabinets, and seize personal computers. A press release was prepared for after the market's close, announcing the discovery of "potential accounting irregularities" requiring an earnings restatement for 1997 of up to $115 million. Silverman was quoted as saying Cendant officials had been misled "by certain members of the former CUC management."

As the moment of the announcement grew near, the Cendant executives felt a sense of dread. Buckman told his boss: "Henry, I know you're not a New Testament person, but there's a passage where Jesus is in the Garden of Gethsemane and says, 'Father, if you could take this cup away from my lips...'" He adds now, "You knew that life was going to be shitty from that point forward."

He was right. When Cendant shares opened the following day, the stock plunged from almost $36 to about $19, lopping a staggering $14 billion off Cendant's market cap. Volume was 108 million shares--the largest for any stock in NYSE history. And three shareholder suits were filed by the end of the day.

The obvious solution was for Walter Forbes to leave the company. After all, even if he hadn't known about the fraud, it had taken place on his watch. But under the terms of the "merger of equals," Silverman couldn't simply push Forbes out. And Forbes, feeling he was being unfairly blamed, refused to slink away. Instead, the two men became leading actors in an almost farcical public power struggle that would do even more damage to Cendant's credibility.

An emergency board meeting was held--and broke into bitter squabbling. After all, the board was evenly split between CUC and HFS loyalists--and Forbes, ludicrously, had convinced CUC directors that Silverman had concocted the scandal just to take over.

Each man viewed the other's actions entirely through the prism of their ongoing war. Silverman, usually the dispassionate businessman, told friends he felt as if he'd been "raped." "I had difficulty looking at [Forbes]," Silverman adds. But when Silverman sent executives out on a road show to give investors a true picture of CUC's business--a picture the fraud had hidden--it was Forbes' turn to feel violated. "[I]t appears that you are hell-bent on 'bashing' CUC," he wrote, in a private May 29 letter to Silverman, which was reviewed by FORTUNE. "It has been suggested that perhaps you are letting a personal agenda--getting rid of me to assure that you remain CEO--blind you to what is in Cendant's best interests. Henry," he added, "your motives are transparent...."

Silverman shot back that day. "To urge me, as you seem to do, to not properly portray accurate information about our businesses," he wrote, "appears to be of similar ilk with the conduct that brought us to this situation. I will not do that."

By then, despite all the private sparring, Silverman had come to view Forbes as "irrelevant"--and had quietly communicated that view to Wall Street. Forbes, he whispered, would never become CEO. But in early July, Forbes flatly told the New York Times that "I intend to be CEO" in the year 2000, as the merger agreement stipulated. Outraged, Silverman resolved to end the standoff quickly. The uncertainty --and the disclosure that the fraud was far worse than originally thought--was causing investors to flee.

Secretly, Silverman prepared to launch an extraordinary strike: a proxy fight aimed at his own company. It would seek a shareholder vote to oust Forbes--and another to replace five CUC directors with a slate of candidates loyal to Silverman, including Darla Moore, New York investor Leon Black, and Jackie Robinson's widow, Rachel. Cendant's board was scheduled to meet July 28; if Forbes didn't resign then, Silverman planned to drop his bomb the next day. By the time of the meeting, the documents had been drafted. But, as it turned out, Silverman didn't need them, and his plan remained a secret.

He had found other means to force Forbes' departure. A Silverman loyalist had collected the signatures of 44 top Cendant managers--including six who had worked for CUC--calling for Forbes' ouster. In addition, Cendant had launched an investigation into $3 million of Forbes' expense-account spending--including the rental of hotel rooms close to his Connecticut home. (Forbes says he rented the rooms for business meetings.)

Of course, even Forbes' resignation didn't go smoothly. The HFS directors wanted to fire him for cause--"I didn't want to pay him a nickel," says Brian Mulroney, the former Canadian prime minister--while the CUC directors insisted there was no need for him to go.

Ultimately, the two sides struck one last expensive compromise: In exchange for tendering his resignation, Forbes would receive the $47.5 million severance package that was in his original contract. The company would indemnify him for the fraud--unless it turned out he had known something about it. Silverman took the added title of chairman, and all but four of Forbes' 14 directors would step down. Finally, Cendant belonged to Silverman.

If Henry Silverman figured that Forbes' departure would remove the load weighing down Cendant shares, he was sorely mistaken. Despite strong earnings on the HFS side of the business, the company's stock continued its fall; from a high of $41, it currently hovers around $10 a share.

And more trouble lies ahead. Over 70 shareholder suits have been filed, and the company faces messy litigation with CUC's old auditor, Ernst & Young, over its failure to detect the fraud.

Government investigations will likely drag on for years. Speaks, his attorney tells FORTUNE, already has reached agreement with federal prosecutors to serve as a "cooperating government witness" against higher-ups at CUC. The roles of Walter Forbes and Kirk Shelton in the fraud will receive further scrutiny. Though the board investigation found no proof that they had been involved, it blamed them for "creating an atmosphere of loose controls" that made the fraud possible. (Neither Corigliano nor Pember appeared before the board.)

Meanwhile, Silverman has started undoing the ill-fated merger, shedding CUC assets. He recently paid $400 million to terminate a $3.1 billion acquisition that Cendant had planned to complement the CUC business. And he has brought in consultants to assess the viability of the core membership-club operation--which, of course, was what he was after in the first place.

Silverman's net worth took a beating along with his reputation. With Cendant stock down by 75%, the paper value of his options had shrunk by more than $1 billion. At first, Silverman said he would not reprice Cendant options for his company's top executives. But then, a few weeks later, he did exactly that.

Despite everything, Silverman continues to believe that the marriage with CUC would have worked brilliantly--but for the accounting fraud. "There was a method in this madness," he says now with a shrug. "Or so I thought."