Free Reply to Response - District Court of Connecticut - Connecticut

Case 3:02-cr-00264-AHN

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UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT UNITED STATES OF AMERICA, Plaintiff, v. WALTER A. FORBES and E. KIRK SHELTON, Defendants. : : : : : : : : : : Criminal Action No. 3:02 CR 00264 (AWT)

DECEMBER 28, 2005

CENDANT CORPORATION'S REPLY MEMORANDUM IN FURTHER SUPPORT OF ITS MOTION FOR AN ORDER COMPELLING DEFENDANT TO COMPLY WITH THE COURT'S AUGUST 12, 2005 RESTITUTION ORDER Cendant Corporation ("Cendant") respectfully submits this Reply Memorandum in Further Support of its Motion for an Order Compelling Defendant to Comply with the Court's August 12, 2005 Restitution Order.1

1

Capitalized terms used herein have the meanings ascribed to them in Cendant's moving brief (Cendant Corporation's Motion for an Order Compelling Defendant E. Kirk Shelton to Comply with the Court's August 12, 2005 Restitution Order, dated November 15, 2005 "Cendant Mem."). Citations to "Shelton Mem." refer to Shelton's Memorandum of Law in Opposition to Motion for an Order Compelling Defendant E. Kirk Shelton to Comply with the Court's August 12, 2005 Restitution Order, dated December 14, 2005. Citations to "App." are to the Appendix accompanying Cendant's motion and the Cendant Mem.

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Introduction On November 15, 2005, Cendant filed this motion to compel in order to cure Defendant E. Kirk Shelton's ("Shelton") failure to comply with the Court's August 12, 2005 Restitution Order's ("Restitution Order") unambiguous terms. Instead of responding to Cendant's motion with an argument that at least poses as meritorious, the essence of Shelton's opposition is to ignore the problem by attempting to make the motivation and honesty of Cendant the issue. But the fact remains that Shelton, who has kept himself busy over the past few months transferring his assets as revealed recently by the government, has failed to abide by the terms of the Restitution Order and his diversions cannot obscure the clear and uncomplicated facts underlying this matter.2 Shelton offers nothing but falsehoods and tortured logic to support his specious claim that he is in compliance with this Court's order that he deposit $15 million in a "lump sum." Having been convicted of fraud through accounting manipulations and found to be a perjurer, Shelton resorts to familiar habits in opposing this motion. According to Shelton, the plain meaning of a "lump sum" means something other than its plain meaning -- i.e., something less than an exact and fixed $15 million. To reach this conclusion, Shelton mischaracterizes the Restitution Order, mischaracterizes Cendant's motion and mischaracterizes his employment
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The United States Government submitted a Memorandum in Opposition to Defendant Shelton's Motion for Permission to Travel to Vail, Colorado for the Christmas Holiday, dated December 8, 2005 ("Government Mem."). In that document, the United States referred to "recent bank transfers" on behalf of Shelton and further stated that "The United States has recently learned that Shelton has engaged in what appear to be suspicious bank transactions...." Id., at p. 2.

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agreement in hopes that he will draw attention away from his unsupported arguments. But, as explained below and in Cendant's moving brief, Shelton is wrong on each account and he should be compelled to comply with the terms of the Restitution Order.

Argument I. SHELTON HAS FAILED TO COMPLY WITH THE RESTITUTION ORDER A. The Insurance Policies Are Worth Less Than Shelton Claims (Responding to Shelton Mem. at Pages 2-3)

Shelton offers two arguments in response to Cendant's contention that the three splitdollar life insurance policies initially purchased for Shelton by Cendant are worth less than the $3,583,473 value ascribed to them by Shelton.3 (See Cendant Mem. at 4-7). First, Shelton claims that Cendant forfeited any interest in the policies by failing to continue paying the premiums after Shelton was discharged from the company for cause.4 (Shelton Mem. at 2). Second, Shelton claims that Cendant's failure to object to the inclusion of the policies as a component of the lump sum payment, which was approved by both the Probation Department

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Shelton's argument that Cendant's motion is nothing more than a surreply to his Motion to Stay the Restitution Order should be ignored. The rules permit Cendant to move before this Court for affirmative relief. That is precisely what Cendant has done here. Regardless of whether or not Cendant breached the employment agreement, Shelton has previously admitted that Cendant still has at least some interest in the cash surrender value of each policy (see App. Tab H at 2), and, thus, that his $15 million "lump sum" deposit with the Clerk is insufficient. His attempt to retract this admission now should be rejected.

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and this Court, forecloses any complaint about their use now. (See id. at 3). Shelton is wrong on both counts. First, the irony of Shelton attempting (unsuccessfully) to avail himself of the protections of his employment agreement should not be overlooked.5 There can be no question that the employment contract between Shelton and CUC, including the life insurance provisions, was induced by fraud. To be sure, at the time Shelton entered into the employment agreement in May 1997, he had already engaged in accounting fraud which he allowed to go undetected for almost another full year, as the jury essentially found earlier in this proceeding. Surely the CUC board of directors would not have agreed to any employment contract with Shelton had he disclosed his wrongdoing to them prior to signing the agreement. In short, Shelton cannot shield his violation of the Restitution Order by invoking purported rights from a contract he fraudulently induced Cendant to enter into, a contract which is voidable under well-settled Connecticut law. See Harold Cohn & Co. v. Harco Int'l, LLC, 72 Conn. App. 43, 49-50 (2002). In any event, Cendant was perfectly within its rights in ceasing to pay the yearly premiums for Mr. Shelton's insurance policies after his employment with Cendant was terminated for cause based on his role in the accounting fraud for which he was subsequently convicted. As discussed in Cendant's moving brief (see Cendant Mem. at 6-7), the company was only obligated to continue to make the premium payments for each policy if Shelton did
5

The Employment Agreement referenced is attached to the Cendant Mem. See App. Tab G, Meisner Aff. Ex. 4.

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not breach any of the covenants contained within Section IX of his employment agreement. Section IX(C)(ii) expressly states that during the time of Shelton's employment Shelton will not commit any act that in any way injures Cendant's interests. Shelton's conviction of defrauding Cendant and its shareholders, and this Court's determination that Cendant was the victim of Shelton's crimes, is more than a sufficient basis to conclude that Shelton breached this covenant. Shelton's only response to this argument is to claim that Section IX of the employment agreement is nothing more than a covenant not to compete. (See Shelton Mem. at 2-3). But a complete reading of Section IX reveals that the non-compete provisions are only part of the covenants made by Shelton in that portion of the agreement. To be sure, Section IX(c)(ii) -the provision of the employment agreement at issue here -- states in relevant part: During the Restricted Period, the Executive will not make any statements or perform any acts intended to or which may have the effect of advancing the interest of any existing or prospective competitors of the Company or any of its affiliates or in any way injuring the interests of the Company or any of its affiliates. Thus, despite his protestations to the contrary, Shelton's interpretation of this provision renders the phrase "or in any way injuring the interest of the Company or any of its affiliates" mere surplusage in violation of clear principles of contract construction applied by Connecticut courts.6 See Connecticut Co. v. Division 425, Amalgamated Ass'n of St., Elec. Ry. & Motor Coach Employees, 147 Conn. 608, 617 (1960) ("Every provision of the contract

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Shelton's employment agreement is to be construed under Connecticut law.

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must be given effect if it can reasonably be done, because parties ordinarily do not insert meaningless provisions in their agreements."); See also A. M. Larson Co. v. Lawlor Ins. Agency, Inc., 153 Conn. 618, 620 (1966) ("The plaintiff's claimed construction, as adopted by the court, renders the quoted phrase mere surplusage and inoperative in the contract of insurance."); Bell v. Allstate Ins. Co., 38 Conn. Supp. 480, 482 (1982) ("The plaintiff's construction would render the provision '(including payments due members of his/her immediate family)' meaningless and mere surplusage. The proffered construction is therefore unreasonable and inapplicable under the circumstances.").7 Second, Shelton's argument that Cendant waived any opportunity to object to the inclusion of the insurance policies as a component of the "lump sum" payment because it failed to complain at the time the Probation Department and this Court were considering the issue is specious at best. Cendant was not involved in (or consulted by) the Probation Department's consideration of what assets were appropriate for inclusion in the lump sum payment. Likewise, Cendant was not party to the proceedings before this Court where the insurance policies were approved as part of the lump sum payment. If it had been, the company would have asserted these arguments at that time. In any event, Shelton fails to

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Shelton's claim that Section IX of the employment agreement is nothing but a covenant not to compete is belied by a plain reading of that section. For example, the very first provision of Section IX (which Shelton also breached) states that Shelton will "furnish information as may be in his possession and fully cooperate with the Company and its affiliates as may be requested in connection with any claim or legal action in which the Company . . . is or may become a party." (See App. Tab G, Meisner Aff. Ex. 4).

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even suggest that he made the Probation Department and this Court aware of Cendant's preexisting financial interest in the policies at the time he was given permission to include them in the lump sum payment. His failure to be candid with this Court and the Probation Department is not grounds to deny Cendant its right to oppose his conversion of Cendant's property. B. The Cendant Stock Is Insufficient (Responding to Shelton Mem. at Page 3)

Shelton's only opposition to Cendant's argument that his deposit of Cendant stock was insufficient is to claim that "[t]he Court's order did not preclude the deposit of assets which fluctuate in value." (Shelton Mem. at 3). Shelton is wrong. There can be no dispute as to the Restitution Order's meaning of "lump sum" -- it is a single, complete payment that is no less than $15 million in value. This payment was ordered so that once Shelton's appeals were exhausted, Cendant would immediately receive $15 million of the $3.2 billion in restitution owed to it. Permitting Shelton to deposit assets that fluctuate in value defeats the purpose of the lump sum payment requirement. Accordingly, Shelton should be compelled either to replace this variable asset with one subject to a fixed value or, at the very least, be compelled to supplement his deposit to make up for the loss in value.

II.

Shelton Should be Enjoined from Spending or Transferring Any Assets Beyond Ordinary Living Expenses (Responding to Shelton Mem. at Page 4) In light of the facts set forth in Cendant's moving brief (see Cendant Mem. at 8-10),

and the additional suspicious money and asset transfers outlined in the government's

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opposition to Shelton's motion for an adjustment in his conditions of bail, the order compelling Shelton to comply with the Restitution Order should also specifically enjoin Shelton from transferring, dissipating or shielding his assets. (See id.). If Shelton wishes to incur an expense beyond his ordinary and necessary living costs, he should be required to submit a proposal for such expenditure to the Court (or the Court's designee), on notice to Cendant and the U.S. Attorney, for approval.

Conclusion For the foregoing reasons and the reasons set forth in Cendant's moving brief, Cendant's Motion to Compel should be granted and Shelton should be ordered immediately to comply with the terms of the Restitution Order.

Dated: Harford, Connecticut MOVANT - CENDANT CORPORATION

By: /s/C. Donald Neville________________________ Robert E. Kaelin - ct11631 [email protected] C. Donald Neville ­ ct24001 [email protected] Murtha Cullina LLP CityPlace I - 185 Asylum Street Hartford, Connecticut 06103-3469 Telephone: (860) 240-6000 Facsimile: (860) 240-6150 Its Attorneys

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Of Counsel: Samuel Kadet - ct07880 [email protected] SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Four Times Square New York, New York 10036-6522 Telephone: (212) 735-3000 Facsimile: (212) 735-2000

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CERTIFICATE OF SERVICE I hereby certify that a copy of the foregoing Cendant Corporation's Reply Memorandum In Further Support Of Its Motion For An Order Compelling Defendant To Comply With The Court's August 12, 2005 Restitution Order was mailed, first class, postage prepaid on December 28, 2005 to: Counsel For The U.S. Government James McMahon, Esq. Richard J. Schechter, Esq. Norman Gross, Esq. United States Attorney's Office District of New Jersey 970 Broad Street, Suite 700 Newark, NJ 07101 Counsel For E. Kirk Shelton Hope C. Seeley, Esq. Hubert Santos, Esq. Santos & Seeley, PC 51 Russ Street Hartford, CT 06106 Law Offices of Thomas P. Puccio Thomas P. Puccio, Esq. 230 Park Avenue, Suite 301 New York, NY 10172 Day, Berry & Howard LLP Stanley A. Twardy, Jr., Esq. Gary H. Collins, Esq. CityPlace 1, 185 Asylum Street Hartford, CT 06103 MilBank, Tweed, Hadley & McCloy, LLP Scott A. Edelman, Esq. Thomas A. Arena, Esq. 1 Chase Manhattan Plaza New York, NY 10005-1413 Barry S. Simon Williams & Connolly 725 12th St., N.W. Washington, DC 20005-5901 Brendan V. Sullivan, Jr. Margaret A. Keeley Robert M. Cary Williams & Connolly 725 12th St., N.W. Washington, DC 20005-5901 James T. Cowdery Thomas J. Murphy Cowdery, Ecker & Murphy 750 Main St., Suite 910 Hartford, CT 06103-4477 Alfred U. Pavlis Daly & Pavlis 107 John St. Southport, CT 06490

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Scott A. Edelman Edward A. Stelzer Kylie Davidson Thomas A. Arena Milbank, Tweed, Hadley & McCloy-NYC One Chase Manhattan Plaza New York, NY 10005 Daniel E. Reynolds Lankler, Siffert & Wohl 500 Fifth Ave., 33rd Fl. New York, NY 10110-3398 Helen Gredd Lauren Freundlich Lankler, Siffert & Wohl 500 Fifth Ave., 33rd Fl. New York, NY 10110-3398 Douglas S. Eakeley R. Scott Thompson Lowenstein, Sandler, Kohl, Fisher & Boylan 65 Livingston Avenue Roseland, NJ 07068-1791 Joel H. Thompson Shelley R. Sadin Zeldes, Needle & Cooper 1000 Lafayette Blvd., PO Box 1740 Bridgeport, CT 06601-1740 Alan R. Friedman Gary P. Naftalis Michael Tremonte Kramer, Levin, Naftalis & Frankel 919 Third Ave. New York, NY 10022-3903

Christopher K. Kiplok Derek J.T. Adler William R. Maguire Hughes, Hubbard & Reed One Battery Park Plaza, 12th Floor New York, NY 10004-1482 Joel B. Casey Peter W. Hull McCarter & English Cityplace I - 185 Asylum St. 36th Fl. Hartford, CT 06103-3495 Richard C. Tynan Halloran & Sage One Goodwin Sq., 225 Asylum St. Hartford, CT 06103 Robert Fettweis Wolf Block Brach Eichler 101 Eisenhower Pkwy. Roseland, NJ 07068 Ralph G. Elliot Tyler Cooper & Alcorn Cityplace-35Th Floor Hartford, CT 06103-3488 Harold James Pickerstein Pepe & Hazard 30 Jelliff Lane Southport, CT 06890-1436

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Peter W. Tomlinson Saul B. Shapiro Gregory L. Diskant Patterson, Belknap, Webb & Tyler LLP 1133 Avenue of the Americas New York, NY 10036-6710 Audrey Strauss Fried, Frank, Harris, Shriver & Jacobson One New York Plaza, 25th Floor New York, NY 10004-1980 Ira B. Grudberg Jacobs, Grudberg, Belt & Dow, P.C. 350 Orange St., Po Box 606 New Haven, CT 06503-0001 Ethan A. Levin-Epstein Garrison Leven-Epstein Chimes & Richardson 405 Orange Street New Haven, CT 06511

Melinda Hardy U.S. Securities & Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Faisal M. Zubairi Kirkpatrick & Lockhart LLP ­ NJ One Newark Center Newark, NJ 07102 Ed Dauber Greenberg Dauber Epstein & Tucker One Gateway Center Newark, NY 07102 Christopher J. Christie James McMahon John J. Carney Ralph J. Marra, Jr. Richard J. Schechter US Attorney's Office 970 Broad Street, Suite 700 Newark, NJ 07102 /s/C. Donald Neville C. Donald Neville ­ ct24001

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