AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1998.
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On March 16, 1998, American International Group, Inc. submitted the
following letter regarding the application of Cendant Corporation to acquire
control of American Bankers Insurance Group, Inc. ("American Bankers") to state
insurance commissioners in Florida, Arizona, Georgia, New York, South Carolina
and Texas, respectively.
AMERICAN INTERNATIONAL GROUP, INC.
70 PINE STREET
NEW YORK, N.Y. 10270
March 16, 1998
Commissioner William Nelson Director John A. Greene
Department of Insurance State of Arizona
State Treasurer's Office Department of Insurance
State of Florida 2910 North 44th Street, Suite 210
State Capitol Phoenix, AZ 85018-7526
Plaza Level Eleven
Tallahassee, FL 32399-0300
Commissioner John Oxendine Superintendent Neil D. Levin
Department of Insurance Department of Insurance
State of Georgia State of New York
2 Martin Luther King, Jr. Dr. 25 Beaver Street
Floyd Memorial Building New York, NY 10004
704 West Tower
Atlanta, GA 30334
Director Lee P. Jedziniak Commissioner Elton Bomer
State of South Carolina Texas Department of Insurance
Department of Insurance P.O. Box 149104
1612 Marion Street Austin, TX 78714-9104
P.O. Box 100105
Columbia, S.C. 29202-3105
Re: Application of Cendant Corporation to Acquire Control
of American Bankers Insurance Group, Inc.
American International Group, Inc. ("AIG") writes to respond
to the letter dated February 23, 1998 that you received from Henry Silverman on
behalf of Cendant Corporation ("Cendant," the "Cendant Letter") purportedly
addressing the fundamental criticisms raised by AIG in our letter to you dated
February 11, 1998 (the "AIG Letter"). Cendant's responses do nothing to minimize
the criticisms raised in our original letter. Moreover, Cendant simply chooses
to ignore many of the issues we raised. Cendant's failure to disclose in its
application the many issues we raised and its questionable and selective
responses to these issues further demonstrate that Cendant is unfit to become a
controlling person of American Bankers Insurance Group, Inc. ("ABIG"). Cendant's
acquisition of ABIG would be extremely prejudicial to the policyholders and
financial strength of the ABIG insurance subsidiaries domiciled in your states
(the "Domestic Insurers").(1)
A. CENDANT HAS FAILED TO RESPOND TO AIG'S FUNDAMENTAL FINANCIAL
Cendant's letter contains little more than hollow rhetoric and
the assertion that Wall Street loves Cendant, neither of which should provide
any comfort to you or American Bankers' policyholders. Cendant utterly fails to
address the implications of its negative tangible net worth, its high leverage
and its exposure to non-insurance risks. AIG responds here to several of
Cendant's more disingenuous responses.
THE VIEWS OF WALL STREET ANALYSTS ARE NOT RELEVANT TO THE
INSURANCE REGULATORY PROCESS. Despite the fact that Cendant's president and CEO,
Henry Silverman, does not own a single share of Cendant's stock,(2) Cendant has
offered numerous citations from Wall Street analysts about Cendant's growth
opportunities, marketing capabilities and the prospects for its stock price in
an attempt to justify the approval of its Form A application. Insurance
companies, however, are not regulated by Wall Street analysts, whose interests
(1) The Domestic Insurers are (1) Florida: American Bankers Insurance
Company of Florida, American Bankers Life Assurance Company of Florida,
and Voyager Service Warranties, Inc.; (2) Arizona: American Reliable
Insurance Company and Condeaux Life Insurance Company; (3) Georgia:
Voyager Indemnity Insurance Company, Voyager Life and Health Insurance
Company, and Voyager Life Insurance Company; (4) New York: Bankers
American Life Assurance Company; (5) South Carolina: Voyager Property &
Casualty Insurance Company; and (6) Texas: Financial Insurance
(2) Henry Silverman, Form 3, Mar. 4, 1998 (attached as Exhibit 1).
are far different from those of insurance regulators. Wall Street analysts serve
only the interests of stockholders and investors, and not policyholders and
claimants. Indeed, many darlings of Wall Street -- like Henry Silverman -- have
achieved their status with securities analysts by engaging in acquisitions and
divestitures, asset stripping and financial manipulations that have harmed the
institutions they have acquired and dissected. Further, in regulated industries
the interests of stockholders and investors frequently do not align themselves
with the interests of the public that insurance regulators must protect.(3)
Cendant's response demonstrates its lack of knowledge and appreciation for the
fiduciary responsibility and delicate balance that insurance regulators must
maintain between the interests of policyholders and shareholders.
HISTORY SHOWS WALL STREET'S VIEWS DO NOT ENSURE THE FINANCIAL
HEALTH OF REGULATED BUSINESSES. Because they focus on short-term shareholder
returns, securities analysts in many cases pay little attention to the long-term
financial health of underlying businesses. History is replete with examples of
former Wall Street "high-fliers," such as Cendant, that have crashed and
descended into bankruptcy. Silverman's experience with Days Inns and Telemundo
typifies this approach. More generally, securities analysts are frequently wrong
in their predictions. For example, the securities analysts whom Cendant cites as
expressing "unabashed exuberance" about Cendant are cut from the same cloth as
the securities analysts who expressed unqualified exuberance for such companies
as Executive Life, Baldwin United and Mutual Benefit Life.
(3) Florida's insurance holding company statute and the caselaw
interpreting it recognize this critical distinction between the
interests of shareholders and policyholders, and when reviewing a Form
A application, the Department is charged with focusing on the interests
of the policyholders. See Fla. Stat. Section 628.461.
Cendant can offer the commentary of securities analysts only
as evidence of the current strength of their stock price, not their long-term
financial strength. Stock prices can be fleeting, however, and provide little
support to insurance company subsidiaries when they are in need.
INSURANCE REGULATORS' AND POLICYHOLDERS' VIEWS ARE MOST
IMPORTANT. The insurance regulatory system has been established to protect the
public's interests. The past practices of Cendant, its predecessor companies and
its principals strongly suggest that Cendant will not measure up to the high
standards you have established for the financial condition and management
conduct of an insurance holding company. Furthermore, Cendant's response is
devoid of any discussion of what either insurance regulators or policyholders
think of Cendant. Unlike securities analysts, who constantly change their minds
about stocks, regulators and policyholders must look to financial strength far
into the future. The time to stop an unsound acquisition is now, when your
department has the most power to protect policyholder interests. Once you give
your approval, the only remedy is salvage, not prevention.
CENDANT'S HIGH LEVERAGE. Cendant does not deny that it has a
debt-to-equity ratio of 52.6% -- an extraordinary level for a would-be insurance
holding company. To deflect the Department's attention from this disturbing
fact, Cendant invents new financial measures to justify this leverage. These new
financial measures -- the so-called "ratio of net indebtedness --i.e., debt less
cash and cash equivalents and marketable securities -- to common equity"
(Cendant Letter at p. 6) and "the ratio of net indebtedness to total capital
(net debt plus equity)" (id. at pp. 6-7) -- are a transparent attempt to
convince your Department not to apply time-tested insurance regulatory concepts
in analyzing Cendant's leverage. To our knowledge, these
measures have never been used in the insurance regulatory community or, for that
matter, by rating agencies.
If you do consider Cendant's current assets (cash, cash
equivalents and marketable securities) in Cendant's leverage calculations, you
must then consider Cendant's current liabilities in the calculations -- after
all, current assets must be available first to pay current liabilities.
Additionally, you must also consider whether Cendant has properly classified
liabilities as current or non-current on its balance sheet. For example, Cendant
has inappropriately classified deferred membership income as a non-current
liability in its balance sheet, which results in an overstatement of Cendant's
working capital position. No matter how one calculates Cendant's leverage,
proper consideration of Cendant's deferred membership income and working capital
position would increase Cendant's leverage ratios.
Moreover, all of Cendant's debt must be considered in
calculating its leverage ratios. Although more than half of Cendant's current
outstanding indebtedness may be convertible into common equity, Cendant's debt
holders may never exercise their conversion rights. Cendant's convertible debt
may now be "in the money," but if Cendant's stock price drops holders of
convertible debt will prefer to continue holding debt and collecting interest.
Even now, holders of Cendant's convertible debt obviously prefer to collect
interest instead of holding Cendant's common stock, which pays no dividends.
We do agree emphatically with Cendant's observation that sound
insurance companies maintain a lower ratio of debt-to-equity than other
companies because of the additional leverage they incur by having substantial
obligations to policyholders. This is precisely why permitting Cendant to
acquire ABIG would prejudice the policyholders and
thereafter ABIG's financial strength. An insurance company simply cannot pay
claims with intangible assets.
DOWNTURNS IN CENDANT'S CYCLICAL NON-INSURANCE BUSINESSES WILL
SUBSTANTIALLY REDUCE CENDANT'S CASH FLOW. Cendant's cash flow is only as strong
as its underlying businesses. These underlying businesses (hotels, travel, car
rental, real estate and mortgage) are highly cyclical. Cendant's practice of
asset stripping may remove the actual hotels, cars and franchise offices from
Cendant's balance sheet, but it does not eliminate the risks of those
businesses. Avis, Days Inns, Century 21 and other Cendant franchisees still face
substantial risks. The franchisees will rent fewer rooms and cars, and sell
fewer houses, when the economy is less robust than it has been in the last few
years. When that happens, Cendant will receive significantly lower franchise
royalties. Additionally, in bad times Cendant's franchise fees and royalties
will be a bigger burden on franchisees, who will press for lower fees, look to
Cendant for financial support, or fail. Cendant's franchise model in fact adds
risk to Cendant's cash flows because Cendant has little control over the flight
or failure of its franchisees aside from reducing fees. Cendant's cash flows are
also subject to poor performance by its franchisees.(4) As the franchise
businesses supplying Cendant's cash go through hard times or fail, so ultimately
will Cendant's source of cash flow.(5)
(4) Cendant attempts to refute Consumer Reports' negative appraisal of
Ramada and Howard Johnson by referring to an "Overall Image Summary."
(Cendant Letter at p. 18.) However, Cendant neither includes this
report in its exhibits to its letter nor indicates by whom the report
(5) Even in the best of times, the franchise business is plagued by
uncertainty and volatility. For example, the most recent Days Inns of
America Uniform Franchise Offering Circular shows that between 1994 and
1996 Days Inns lost more franchises through sale or
Silverman has relied on leverage in these same businesses in
the past, with disastrous results for the businesses involved. You only need to
look at the Cendant Letter to understand why Days Inns went into bankruptcy
after Silverman leveraged it with more than $600 million of debt:
Mr. Silverman left Days Inns in November of 1989, two years
before it filed for bankruptcy. During that ensuing two-year
period after his departure, material significant events such
as the Gulf War, the recession and the collapse of the
high-yield bond market resulted in a significant reduction in
domestic travel and the ability to refinance maturing
high-yield corporate debt and thus had a significant impact on
Days Inns' performance.
(Cendant Letter at p. 18.) Silverman may have left Days Inns two years before it
filed for bankruptcy, but the damage was done on his watch. The significant
financial leverage Days Inns took on during Silverman's tenure placed the
company in such a weak position that it could never survive the inevitable
The recent near replay of the Gulf War serves as a stark
reminder that it is not unrealistic to expect a repetition of the events that
led to the failure of Days Inns. What will happen to the businesses on which
Cendant depends upon for cash flow to service its own debt during an economic
downturn and where will Cendant then turn to for resources to service its
termination than it opened. During this time period, 747 Days Inns
franchises were sold or terminated, while only 431 new franchises were
opened. (Days Inns of America Uniform Franchise Offering Circular, Dec.
1997, p. 53 (attached as Exhibit 2).) Similarly, at the end of 1996,
Howard Johnson had 456 licensed franchises, or 15% fewer franchises
than it had in 1994. In 1995 alone the company terminated 116
franchises, nearly double the closings of the previous year. (Howard
Johnson Uniform Franchise Offering Circular, Feb. 1998, Appendix D
(attached as Exhibit 3).)Figures for 1997 are not yet available.
debt? If you allow Cendant to acquire ABIG there is every indication that
history will repeat itself, and ABIG's policyholders will be the big losers.
Moreover, even in good times Cendant's "operating" cash flow
does not accurately reflect the cash necessary to run Cendant's businesses.
Although Cendant states that it has minimal capital expenditures, in fact it
must make substantial cash payments to acquire mortgage servicing rights and to
replace assets under leasing programs. During the nine-month period ended
September 30, 1997, Cendant had net cash outflows related to these two items in
excess of $1.0 billion. Cendant does not classify these items as operating cash
flows, but they are essential to the operation of Cendant's businesses and must
be considered in evaluating Cendant's "free cash flow."
NEGATIVE TANGIBLE NET WORTH. As of September 30, 1997, Cendant
had at least $4.6 billion in intangible assets on its balance sheet, resulting
in negative tangible net worth. This is a plain and simple fact, and Cendant
does not deny it. Cendant instead tries to confuse the issue by asserting that
its intangibles are "stable" and by invoking the ratings of credit rating
agencies. (Cendant Letter at p. 10.) Moreover, Cendant amortizes these
intangible assets over periods ranging up to 40 years. Just for acquisitions
through 1996 -- the most current information Cendant has made public -- Cendant
has booked almost $2 billion in intangible assets amortized over 40 years.
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14A-6(e)(2))
[ ] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SOURCE (IN MILLIONS) AMORTIZATION PERIOD
(Source: Cendant Form 8-K, Feb. 16, 1998, pp. F-17 -- F-19 (attached as Exhibit
This accounting treatment may inflate Cendant's current income, but the risk is
always there that these intangible assets will disappear.
Deferred membership acquisitions costs, franchise agreements,
goodwill and deferred costs, and expenses are all intangible assets. In fact,
the value and ultimate recoverability of the intangible assets are based on very
subjective assumptions of potential future cash flows. They are not
"receivables," as Cendant has chosen to characterize them in their response,
because the amount is neither fixed nor determinable. Nobody owes Cendant
these sums payable over the next forty years. The uncertainty of recoverability
of intangible assets is a subject that receives significant attention from the
accounting profession. The accounting standards for intangible assets are
presently under review. The proposed changes would shorten amortization periods
which would, in turn, result in lower future earnings for Cendant.
Again you need only look at Cendant's own comments in their
letter about the failure of Amre, Inc. to demonstrate the uncertainties in
recoverability of intangible assets: "HFS lost all of its investment along with
the rest of the Amre stockholders and also lost substantially all of the license
fees payable to it." (Cendant Letter at p. 18.) At one time these license fees
were an asset on HFS's balance sheet. They evaporated with Amre's failure.
This is another area where Cendant has demonstrated their lack
of knowledge and appreciation for the insurance regulatory process. The
statutory balance sheet of an insurance enterprise is presented on a
conservative basis. Certain assets (which may have a recognized value in
non-insurance corporations) are accorded no value. Insurance regulators put zero
value on intangible assets because they are not readily convertible into cash.
Thus, if you subject Cendant's balance sheet to the same high standards you have
established for insurance companies -- as you should do in this case to protect
the policyholders of the Domestic Insurers -- Cendant falls far short of the
mark. Its intangible assets must be accorded no value, and it must be recognized
that its negative tangible net worth severely limits its flexibility in adverse
economic circumstances. An insurance holding company cannot contribute negative
tangible net worth to its insurance subsidiaries. Claims simply cannot be paid
out of intangible assets.
THE SERIOUS IMPLICATIONS OF CENDANT'S RESTRUCTURING CHARGES.
In our prior letter, we identified the substantial restructuring charges that
Cendant and its predecessor companies have taken in numerous acquisitions. (AIG
Letter at pp. 19-20.) The Securities and Exchange Commission has undertaken an
ongoing investigation into abusive accounting practices through which companies
have included ordinary expenses in restructuring costs, which has resulted in
the appearance that the company's operating income is higher than it actually
is. It is simply impossible to tell from Cendant's financial statements what it
and its predecessor companies have included in their extremely large
restructuring charges and whether the companies' reported operating income is
accurate. The size of these charges raises the prospect, however, that Cendant
has materially inflated its reported operating income by charging current
operating expenses against its restructuring reserves.
B. CENDANT FAILS TO RESPOND TO THE CRITICISM THAT IT LACKS EXPERIENCE IN
AND AN UNDERSTANDING OF THE INSURANCE BUSINESS.
While purporting to address AIG's criticism concerning its
lack of experience and understanding of the insurance business, Cendant's
actions and comments demonstrate a profound lack of both. AIG's statement
concerning Cendant's limited experience in the insurance industry is an
indisputable fact. Cendant's "experience" is limited to supervising assets of
less than $20 million in New York and Colorado, and Avis' self-insurance
Cendant offers few insights into how it intends to manage
ABIG's insurance business. Cendant's statements concerning its projections for
increasing ABIG's earnings expose Cendant's inexperience and fundamentally
misguided approach to the business of insurance. Silverman has stated publicly
that Cendant would realize $140 million in pre-tax earnings from
revenue growth in the next year through its acquisition of ABIG.(6) If ABIG's
current methods are used to achieve this growth, and Cendant maintains ABIG's
current leverage ratio, ABIG would have to write $4 billion in gross premiums
- --which amounts to $2.8 billion in net premiums --and Cendant would have to
provide ABIG with $800 million to $900 million in additional capital. This
amount of additional premiums exceeds ABIG's current business. If, however,
Cendant intends to realize this growth through its own direct marketing
operations, then all of the concerns AIG raised in its letter and reiterates
here will come into play.
It is also telling that Cendant's Chairman, Walter Forbes, has
stated the primary reason Cendant is interested in acquiring ABIG is to gain
access to the Company's credit card files, which would greatly enhance Cendant's
direct marketing efforts. What Forbes fails to realize is that these credit card
files do not belong to ABIG but to the financial institutions that are the
source of ABIG's business.
CENDANT DOES NOT SEE ABIG AS AN INSURANCE COMPANY AND DOES NOT
INTEND TO TREAT IT AS ONE. Astoundingly, Cendant attempts to minimize the
seriousness of its inexperience in the insurance business by asserting that
"American Bankers is not truly an insurer." (Cendant Letter at p. 16 (emphasis
added).) Cendant contends that all it needs is the experience of its direct
marketing business to run this pseudo-insurer. (See id.) While these assertions
may come as a shock to you and your Department -- and to insurance regulators
everywhere who rightly apply state insurance statutes to ABIG -- they are
consistent with the
(6) Henry Silverman, Remarks at Cendant's Analysts Conference, Jan. 27,
1988, at pp. 7-8 (attached as Exhibit 5). In its Preliminary
Registration Statement, Cendant equivocated and said that a substantial
portion of these earnings would be realized by the year 2000. Cendant
Corporation Form S-4, Feb. 20, 1998 (attached as Exhibit 6).
recent pronouncements of Walter Forbes. As we noted in our February 11 letter,
Forbes recently went on record asserting the novel -- and false -- proposition
that "[a]nybody can provide insurance, but you've got to be able to sell it."(7)
Since we sent our letter, Forbes has raised further concerns by suggesting that
ABIG will simply be one more source of cash flow for Cendant's insatiable
acquisition machine, which he predicted will consume THREE TO FOUR COMPANIES A
MONTH!(8) Forbes candidly justifies Cendant's business plan by saying, "We
really believe in the acquisition strategy. Why? Well there's no time to build
anymore. . . . Internal growth, frankly, is not a strategy I understand."(9)
Forbes continues to tout Cendant as a "virtual company with no assets, only cash
flow. When we buy a company with assets, we spin them off immediately like we
did with Avis."(10)
Cendant's management clearly has no practical understanding of
the realities of the insurance business. When this lack of understanding and
experience is combined with Cendant's business plan for immediate hypergrowth,
the result will be disastrous for ABIG's policyholders and the public.
CENDANT'S EXPERIENCE WITH REGULATED INDUSTRIES. Cendant
contends that neither it nor Silverman "avoids regulated industries." (Cendant
Letter at p. 19.) The fact is that after his sole foray into a regulated
industry -- predictably, the gaming business -- Silverman swore
(7) Barbara De Lollis, Cendant Turns Up Heat in Pursuit of Insurer, Miami
Herald, Feb. 4, 1998 (emphasis added) (attached as Exhibit 7).
(8) Comments of Walter A. Forbes at the New York Capital Roundtable, March
(9) Cendant Chairman Sounds Off on M & A, Mergers & Acquisitions Report,
Mar. 9, 1998 (emphasis added) (attached as Exhibit 8).
(10) Id.; see also Todd Pitock, Virtual Synergies: HFS and CUC
International, Hemispheres, Feb. 1998 (attached as Exhibit 9).
off dealing with regulators. This comes as no surprise given Silverman's poor
track record before the gaming regulators:
- In June 1995, the State of Indiana decided not to award a
gaming license to a joint venture consisting of Henry
Silverman's National Gaming Corp. and Century Casinos, Inc.
for a proposed casino in Switzerland County, Indiana.(11)
- On July 18, 1995, the Illinois Gaming Board announced that it
would not approve the proposed acquisition of Par-A-Dice
Gaming Corp. by Henry Silverman's National Gaming Corp.
because of concerns about the highly leveraged capital
structure of the proposed transaction.(12)
It was after this unsuccessful and costly attempt to break into the casino
business that Silverman was reported to have decided to avoid regulated
industries. (See AIG Letter at p. 33.)
CENDANT'S STATEMENTS ABOUT AIG. Unlike Cendant, insurance is
AIG's business; and unlike Cendant, AIG has decades of experience underwriting
policies and paying claims as one of the premier AAA-rated insurance companies
in the world. Further, while AIG is perfectly comfortable leasing vehicles from
Cendant's franchisees (see Cendant Letter at p. 17 n.) -- a
(11) National Lodging Corp. Form 10-K, Dec. 31, 1995, pp. 9, 17 (attached as
Exhibit 10); National Lodging Corp. Proxy Statement, Aug. 8, 1996, p.
10 (attached as Exhibit 11).
(12) National Gaming Corp. Proxy, Oct. 13, 1995, p. 19 (attached as Exhibit
12); National Lodging Corp. Form 10-K, Dec. 31, 1995, pp. 10, 16
(attached as Exhibit 13); National Lodging Corp. Proxy Statement, Aug.
8, 1996, p. 11 (attached as Exhibit 14).
business in which the franchisees appear to be competent(13) -- as an insurer
and a member of the guaranty funds in your state, AIG would not entrust Cendant
with policyholder funds.(14)
(13) Of course, this conclusion is tempered by recent legal difficulties
Cendant's car rental company has faced for allegedly discriminatory
practices. In 1996, three African-American women filed suit against
Avis, alleging that they were denied rental cars in North Carolina and
South Carolina because of their race. (See Martha Waggoner, Avis Owner
Wants to End Franchise Accused of Racial Bias, Associated Press, Nov.
27, 1996 (attached as Exhibit 15); Lisa Miller, Avis Again Accused of
Discriminating Against Minorities Seeking to Rent Cars, Wall Street
Journal, Oct. 15, 1997 (attached as Exhibit 16); James Madore, 3 Black
Women Have Sued/Headquarters Trying to Avoid Class-Action, Wilmington
Morning Star, Sept. 12, 1997 (attached as Exhibit 17).) The New York
Attorney General has been investigating complaints against Avis
alleging discriminatory practices in New York since March 1997 (see
Lisa Miller, Justice Department Probes Allegations that Avis Practiced
Discrimination, Wall Street Journal, Oct. 17, 1997 (attached as Exhibit
18)), and two days before Avis' initial public offering, on October 14,
1997, the Pennsylvania Attorney General filed a complaint against Avis
alleging a clear pattern of racial discrimination, (see Fisher Sues
Avis Rent-A-Car and Its Franchise in Central Pennsylvania for
Discrimination, Press Release from the Office of the Attorney General,
Commonwealth of Pennsylvania, Oct. 14, 1997) (attached as Exhibit 19)).
Silverman's initial response to these lawsuits was dismissive: "We only
lost one account, Oprah Winfrey. She used to rent four cars a year, I
think." (Dwight Oestricher, HFS's Silverman Says He Has No Intention of
Leaving Company, Dow Jones News Service, Apr. 3, 1997 (attached as
Exhibit 20).) Recently, Silverman has taken these investigations and
lawsuits more seriously. In January 1998, Avis settled the North
Carolina action -- which had evolved into a class action -- by paying
$1.875 million in damages and $1.4 million in attorneys' fees. (Avis
Rent A Car, Inc. Form S-1, Feb. 23, 1998, p. 40 (attached as Exhibit
21).) Apparently, the U.S. Department of Justice is currently
conducting an investigation into Avis' business practices (see Lisa
Miller, Justice Department Probes Allegations that Avis Practiced
Discrimination, Wall Street Journal, Oct. 17, 1997 (Exhibit 18)), and
the New York investigation is still ongoing, (see James Madore,
Pennsylvania, N.Y. Authorities to Pursue Bias Cases Against Avis,
Pittsburgh Post Gazette, Dec. 25, 1997 (attached as Exhibit 22)).
(14) Cendant asserts without further explanation that "it is AIG, not
Cendant, that faces significant exposure from the Asian economic
crisis." (Cendant Letter at p. 9.) This is not true. AIG's exposure in
Asia is limited because all of AIG's claims are payable in local
C. CENDANT FAILS TO ADDRESS ISSUES CONCERNING CHARACTER AND BUSINESS
SILVERMAN'S NUMEROUS BANKRUPTCIES. In our letter, we
identified several companies that filed for bankruptcy protection either during
or shortly after Silverman's affiliation with them. (AIG Letter at pp. 20-22,
23-25, 27-28.) In response, Cendant fails to offer any explanation of
Silverman's conduct that would defuse the concerns raised by this pattern of
corporate failures. As noted above, Cendant attempts to blame the failure of
Days Inns on "events such as the Gulf War, the recession and the collapse of the
high-yield bond market." (Cendant Letter at 18.) But Cendant simply concedes the
critical point: Silverman's financing of Days Inns placed it in the precarious
position that resulted in its collapse when political and economic conditions
changed. An insurance company must be grounded on a firm financial foundation to
provide policyholders continuous protection -- especially in changing and
Cendant attempts to divert your attention from Silverman's
involvement in the Telemundo bankruptcy by addressing purported suggestions
never made by AIG -- e.g., "that there is something nefarious about Silverman's
former affiliation with Blackstone Capital Partners." (Id. at p. 18.) What AIG
did say -- and what Cendant does not dispute -- is that after leaving as the
president and CEO of Telemundo Group, Inc. and joining Blackstone as a general
partner, Silverman remained on Telemundo's board of directors during the period
that the company attempted to restructure its debt, then defaulted on all of its
debt, and was forced into
(15) Cendant's attempt to dismiss the other genuine concerns about Days Inns
raised in the AIG letter by stating that the transactions were "fully
disclosed" in SEC filings and "were undertaken while Days Inns was a
closely held company" (Cendant Letter at p. 18), offers no explanation
or defense of Silverman's business practices.
involuntary bankruptcy. (AIG Letter at pp. 24-25.) AIG concluded -- and Cendant
does not disagree -- that Telemundo's demise had nothing to do with Blackstone
but everything to do with Silverman's mismanagement of the company.
Again, Cendant's response that Silverman's "HFS lost all of
its investment along with the rest of the Amre stockholders and also lost
substantially all of the license fees payable to it" (Cendant Letter at p. 18),
provides little comfort to your Department or to policyholders of the Domestic
Insurers. The fact remains uncontested that Amre's demise occurred after HFS
acquired it, after HFS installed a new management team and after HFS appointed a
new chairman of Amre. In little more than a year after HFS became involved with
it, Amre's stock went from $5.00 to $28.75 a share, and then plummeted to 43.75
cents a share at which time the company filed for bankruptcy protection.
Cendant offers no response concerning Goldome Savings Bank's
foreclosure on Dallas Parc Associates and Henry R. Silverman's River Parc Hotel
in Miami, Florida. The hotel had only been open for seven months before the bank
initiated the foreclosure after Silverman's partnership defaulted on loans
totaling $14.9 million. In July 1985, the hotel was sold at public auction to
Goldome Savings Bank for a nominal bid of $500,000.(16)
Since sending our February 11 letter, we have learned that in
July 1985, another partnership in which Silverman was a partner, Provo
Excelsior, Ltd., defaulted on a loan obtained from the City of Provo, Utah. At
the time, Provo Excelsior, Ltd. owned and operated a 250-room
(16) Silverman v. Worsham Brothers Co., 625 F. Supp. 820 (S.D.N.Y. 1986)
(attached as Exhibit 23). See also Ernest Blum, Hotel Riverparc's Woes
Attributed to City's Overcapacity; Miami Property Placed in
Receivership, Travel Weekly, May 17, 1984 (attached as Exhibit 24);
Charles Kimball, Cricket Club Units Are Sold, Miami Herald, July 28,
1985 (attached as Exhibit 25).
luxury hotel called the Provo Excelsior Hotel. As a result of Provo Excelsior
Ltd.'s loan default, the City of Provo defaulted on interest payments owed on
$12 million of Industrial Revenue Bonds that the city had issued in 1983 to
finance the hotel. The bond defaults, in turn, led to four years of contentious
litigation in federal courts in Utah and Oklahoma.(17)
We have also learned that in November 1985, Supermarket
Services, Inc., a privately-held Linden, New Jersey-based distributor of health
and beauty aids filed a petition for protection under Chapter 11 of the federal
bankruptcy statutes. At the time Supermarket Services, Inc. filed for
bankruptcy, Silverman was a director of the company, and his investment
partnership, Reliance Capital Group, L.P., owned 25% of the company's stock.(18)
SILVERMAN'S BREACH OF HIS FIDUCIARY DUTIES THROUGH HIS
MISMANAGEMENT OF TELEMUNDO'S PENSION PLAN. The Second Circuit Court of Appeals
held that Silverman violated his fiduciary duties pursuant to Sections 208 and
404 of ERISA by mismanaging Telemundo's Pension Plan. While Cendant's overly
simplistic response is that "the matters at issue were technical and legal in
nature and . . . Silverman . . . [was] represented by counsel to American
Bankers Insurance Group, Inc." (Cendant Letter at 19), the Court's holding
concerning Silverman's misconduct is unambiguously clear:
(17) Complaint, pp. 18-19, in Homestead Savings and Loan Association v.
Provo Excelsior Limited, No. 86-C-0423G, (D. Utah 1986) (attached as
Exhibit 26); Verified Answer of Henry R. Silverman, pp. 1-2, in General
Electric Capital Corp. v. Peter S. Edelman, Robert L. Schwartz, Henry
R. Silverman, and Adrian B. Werner, No. 112348/93 (N.Y. County Sup. Ct.
1993) (attached as Exhibit 27); see also Ken Cook, St. Louis Firms
Share Siscorp Woes, St. Louis Business Journal, July 14, 1986 (attached
as Exhibit 28).
(18) Debtors Petition Under Chapter 11, Exhibit C, p. 3, (attached as
Exhibit 29), Debtors Disclosure Statement, p. 34 (attached as Exhibit
30) and Statement of Financial Affairs for Debtor Engaged in Business,
p. 15 (attached as Exhibit 31), in In Re Supermarket Services, Inc.,
No. 85-B-11921 (Bankr. S.D.N.Y. 1985); Schedule A-3(b), pp. 1-2
(attached as Exhibit 32).
[Silverman's] duty of loyalty to [his] own plan members did
not extend to giving [him] a windfall at the expense of the
New Blair participants. [Silverman's] conduct was inconsistent
with the strict duty owed to the New Blair participants.
Therefore, we hold that [Silverman's] actions in this case
violated [his] fiduciary duties under Section 404 as well as
the specific mandate of Section 208 of ERISA.
* * *
[Silverman] ignored the interest of the New Blair members, for
whom [he] was acting as a fiduciary, and allocated the entire
amount to the Telemundo participants, even though 83% of the
300 electing participants were in fact New Blair members. By
allocating the entire surplus to the Telemundo Plan,
[Silverman] violated [his] fiduciary duty under Section 404 of
ERISA to the New Blair participants.(19)
The disturbing conclusion is that Silverman's self-dealing and misconduct were
so egregious that even representation by excellent counsel could not save
Silverman from himself.
SILVERMAN'S INVOLVEMENT IN THE BUS STOP DEBACLE. Cendant is
also silent on the issue of Silverman's involvement in the Bus Stop debacle.
Since writing our letter, we have learned more about this matter. In February
1979, the Federal Bureau of Investigation (FBI) and the U.S. Attorney's office
in New York City began an investigation into the awarding of a multi-million
dollar bus shelter contract to Convenience & Safety Corporation, a company
controlled by Silverman and New York financier Saul P. Steinberg. Convenience &
Safety Corp. records were subpoenaed and a grand jury convened to examine the
contract award.(20) On March 15, 1979, the New York City Commissioner of
Investigation, Stanley N. Lupkin, launched his own
(19) John Blair Communications, Inc. Profit Sharing Plan v. Telemundo Group,
Inc. Profit Sharing Plan, 26 F.3d 360, 367-68, 370 (2d Cir. 1994)
(attached as Exhibit 33).
(20) Charles Kaiser, Bus-Stop Shelter Concern Accuses New York Officials of
Impropriety, New York Times, Feb. 26, 1979 (attached as Exhibit 34).
full-scale investigation into the awarding of the bus shelter contract to
Convenience & Safety Corp.(21)
On April 16, 1980, a Convenience & Safety lobbyist, former New
York State Senator Jack E. Bronston was indicted by a federal grand jury in New
York City on two counts of fraudulently breaching his fiduciary duty. On January
2, 1981, Bronston was convicted in U.S District Court in Manhattan and sentenced
to four months in prison. He was subsequently disbarred by the New York Bar
The final report of the New York City Investigation Commission
probe into the awarding of the bus shelter contract award revealed that despite
assurances from the New York County District Attorney's office that they would
not be prosecuted for any transaction about which they testified, Silverman and
Steinberg had invoked their Fifth Amendment right against self incrimination and
refused to testify before the Commission.(23) Because of their refusal to
testify, Convenience & Safety Corp. was barred from future bidding on the bus
Despite Silverman's refusal to testify, Steinberg's estranged
wife illuminated certain aspects of Silverman's role in the matter in a sworn
In about the month of August, 1978, Mr. Silverman and my
husband, Saul, were together in the library of our Park Avenue
apartment and I was present. They said they were expecting a
telephone call from Mr. Jack Bronston who, they said, was
(21) Charles Kaiser, Full Inquiry Set in City's Action on Bus Shelters, New
York Times, Mar. 6, 1979 (attached as Exhibit 35).
(22) Attorney is Indicted; Mayor Koch to Void Bus Shelters Bidding, Wall
Street Journal, Apr. 17, 1980 (attached as Exhibit 36); Arnold H.
Lubasch, Bronston Gets 4 Months in Bus-Stop Fraud Case, New York Times,
January 3, 1981 (attached as Exhibit 37).
(23) City of New York, Department of Investigation, Anatomy of a Municipal
Franchise: New York City Bus Shelter Program 1973-1979, An
Investigative Report, July 1981, p. 16 n.17 (attached as Exhibit 38).
working with Comptroller Goldin on political contributions
which they had agreed to make to his campaign. When the call
came, Mr. Steinberg spoke with Mr. Bronston personally, he
became enraged and shouted into the telephone that it was
"blackmail." He said that he had committed to Goldin for
$25,000.00, he called Bronston a moron, an idiot and a
subhuman being. He said "I never promised $100,000.00 to
anybody." The conversation ended on that tone.
Prior to the conversation, Steinberg and Silverman
had come into the room together. They were cheerful and very
optimistic about the bus shelter business because they said
that they had been assured that Comptroller Goldin would get
the contract with their company approved by the City. They
discussed who they could get to make contributions for them
. . . . They discussed the possibility of me making a
contribution, but Saul decided that it would be too close to
him and dismissed the idea.
After the conversation with Bronston, Silverman asked
Saul, in substance, "It's gone from $25,000.00 to $100,000.00
and how do we know that we're going to get the contract?"
. . .
* * *
On a number of occasions, I heard Saul say to
Silverman concerning the bus stop shelter deal that Silverman
might have to take the rap for him and go to jail. On every
such occasion, Silverman showed clear signs of stress and
Court papers confirm that Silverman and Steinberg also invoked
their rights under the Fifth Amendment and refused to answer questions when they
appeared before the federal grand jury investigating the bus shelter contract
and also refused to testify at Bronston's trial.(25) While the prosecution noted
that the failure of Silverman, Steinberg and others to cooperate had made its
task more difficult, the evidentiary record against Bronston was substantial:
As the Court observed, there was a marked failure of
recollection by each of these witnesses, who were closely
identified with Bronston, as to what Bronston said or
(24) Affidavit of Laura Steinberg, dated April 28, 1980 (attached as Exhibit
(25) Government's Sentencing Memorandum, p. 5 (attached as Exhibit 40), and
Trial Transcript, October 14, 1980, p. 16 (attached as Exhibit 41), in
United States v. Bronston, No. 80 Cr. 224 (MP) (S.D.N.Y. 1980).
did at these meetings. However, Bronston himself has never
publicly discussed his activities.
While willing witnesses may have been sparse, the
documentary proof of Bronston's malfeasances was overwhelming
-- and startling.(26)
D. CENDANT FAILED TO RESPOND TO NUMEROUS SERIOUS ISSUES RAISED BY AIG.
It is telling that Cendant chooses simply to ignore and offers
no explanation concerning its, its predecessors', and its principals' past
business practices and the serious questions to which these practices give rise.
AIG identified and described these practices in detail in the AIG Letter,
including the following:
- Burdening acquired companies with substantial
restructuring charges and terminating large numbers
of employees (AIG Letter at pp. 19-20);
- Flipping the acquired businesses and stripping them
of assets and income (id. at pp. 7-10);
- Dealings between Silverman and his inner circle of
colleagues and the companies he has managed (id. at
pp. 28-30); and
- Cendant's exposure to various commitments and
contingent liabilities that AIG identified. (id. at
These practices by Cendant evidence a lack of the character
and fitness necessary to control the Domestic Insurers. Cendant's conscious
failure to address these practices either generally or in the context of its
proposed acquisition of ABIG speaks strongly in favor of denying Cendant's Form
(26) Government's Sentencing Memorandum, pp. 5-6 (attached as Exhibit 42).
We are confident that your Department will recognize Cendant's
unsuitability to control ABIG. If you wish AIG's assistance in obtaining further
information, please do not hesitate to call upon us.
AMERICAN INTERNATIONAL GROUP, INC.
Chairman and Chief Executive Officer
cc: Mr. Henry R. Silverman
Mr. David Fox
(Skadden, Arps, Slate, Meagher and Flom, LLP,
Counsel to Cendant Corporation)
Mr. R. Kirk Landon
(Chairman of the Board of Directors,
American Bankers Insurance Group, Inc.)
EXHIBITS TO AIG'S LETTER OF MARCH 16, 1998
RE: APPLICATION OF CENDANT CORPORATION TO ACQUIRE CONTROL OF
AMERICAN BANKERS INSURANCE GROUP, INC.
1 Henry Silverman, Form 3, Mar. 4, 1998.
2 Days Inns of America Uniform Franchise Offering Circular, Dec.
1997, p. 53.
3 Howard Johnson Uniform Franchise Offering Circular, Feb. 1998,
4 Cendant Form 8-K, Feb. 16, 1998, pp. F-17-- F-19.
5 Henry Silverman, Remarks at Cendant's Analysts Conference,
Jan. 27, 1988, pp. 7-8.
6 Cendant Corporation Form S-4, Feb. 20, 1998 (excerpt).
7 Barbara De Lollis, Cendant Turns Up Heat in Pursuit of
Insurer, Miami Herald, Feb. 4, 1998.
8 Cendant Chairman Sounds Off on M & A, Mergers & Acquisitions
Report, Mar. 9, 1998.
9 Todd Pitock, Virtual Synergies: HFS and CUC International,
Hemispheres, Feb. 1998.
10 National Lodging Corp. Form 10-K, Dec. 31, 1995, pp. 9, 17.
11 National Lodging Corp. Proxy Statement, Aug. 8, 1996, p. 10.
12 National Gaming Corp. Proxy, Oct. 13, 1995, p. 19.
13 National Lodging Corp. Form 10-K, Dec. 31, 1995, pp. 10, 16.
14 National Lodging Corp. Proxy Statement, Aug. 8, 1996, p. 11.
15 Martha Waggoner, Avis Owner Wants to End Franchise Accused of
Racial Bias, Associated Press, Nov. 27, 1996.
16 Lisa Miller, Avis Again Accused of Discriminating Against
Minorities Seeking to Rent Cars, Wall Street Journal, Oct. 15,
17 James Madore, 3 Black Women Have Sued Headquarters/Trying to
Avoid Class-Action, Wilmington Morning Star, Sept. 12, 1997.
18 Lisa Miller, Justice Department Probes Allegations that Avis
Practiced Discrimination, Wall Street Journal, Oct. 17, 1997.
19 Fisher Sues Avis Rent-A-Car and Its Franchise in Central
Pennsylvania for Discrimination, Press Release from the Office
of the Attorney General, Commonwealth of Pennsylvania, Oct.
20 Dwight Oestricher, HFS's Silverman Says He Has No Intention of
Leaving Company, Dow Jones News Service, Apr. 3, 1997.
21 Avis Rent A Car, Inc. Form S-1, Feb. 23, 1998, p. 40.
22 James Madore, Pennsylvania, N.Y. Authorities to Pursue Bias
Cases Against Avis, Pittsburgh Post Gazette, Dec. 25, 1997.
23 Silverman v. Worsham Brothers Co., 625 F. Supp. 820 (S.D.N.Y.
24 Ernest Blum, Hotel Riverparc's Woes Attributed to City's
Overcapacity; Miami Property Placed in Receivership, Travel
Weekly, May 17, 1984.
25 Charles Kimball, Cricket Club Units Are Sold, Miami Herald,
July 28, 1985.
26 Complaint, pp. 18-19, in Homestead Savings and Loan
Association v. Provo Excelsior Limited, No. 86-C-0423G (D.
27 Verified Answer of Henry R. Silverman, pp. 1-2, in General
Electric Capital Corp. v. Peter S. Edelman, Robert L.
Schwartz, Henry R. Silverman, and Adrian B. Werner, No.
112348/93 (N.Y. County Sup. Ct. 1993).
28 Ken Cook, St. Louis Firms Share Siscorp Woes, St. Louis
Business Journal, July 14, 1986.
29 Debtors Petition Under Chapter 11, Exhibit C, p. 3, in In Re
Supermarket Services, Inc., No. 85-B-11921 (Bankr. S.D.N.Y.
30 Debtors Disclosure Statement, p. 34, in In -- Re Supermarket
Services, Inc., No. 85-B- 11921 (Bankr. S.D.N.Y. 1985).
31 Statement of Financial Affairs for Debtor Engaged in Business,
p. 15, in In Re Supermarket Services, Inc., No. 85-B-11921
(Bankr. S.D.N.Y. 1985).
32 Schedule A-3(b), pp. 1-2, in In Re Supermarket Services, Inc.,
No. 85-B-11921 (Bankr. S.D.N.Y. 1985).
33 John Blair Communications, Inc. Profit Sharing Plan v.
Telemundo Group, Inc. Profit Sharing Plan, 26 F.3d 360 (2d
34 Charles Kaiser, Bus-Stop Shelter Concern Accuses New York
Officials of Impropriety, New York Times, Feb. 26, 1979.
35 Charles Kaiser, Full Inquiry Set in City's Action on Bus
Shelters, New York Times, Mar. 6, 1979.
36 Attorney is Indicted; Mayor Koch to Void Bus Shelters Bidding,
Wall Street Journal, Apr. 17, 1980.
37 Arnold H. Lubasch, Bronston Gets 4 Months in Bus-Stop Fraud
Case, New York Times, January 3, 1981.
38 City of New York, Department of Investigation, Anatomy of a
Municipal Franchise: New York City Bus Shelter
Program 1973-1979, An Investigative Report, July 1981, p. 16
39 Affidavit of Laura Steinberg, dated April 28, 1980.
40 Government's Sentencing Memorandum, p. 5, in United States v.
Bronston, No. 80 Cr. 224 (MP) (S.D.N.Y. 1980).
41 Trial Transcript, October 14, 1980, p. 16, in United States v.
Bronston, No. 80 Cr. 224 (MP) (S.D.N.Y. 1980).
42 Government's Sentencing Memorandum, pp. 5-6, in United States
v. Bronston, No. 80 Cr. 224 (MP) (S.D.N.Y. 1980).
Avis Goodwill $334.0 40 years
Avis Trademark $400.0 40 years
Resort Condominiums $477.7 40 years
Coldwell Banker Franchise $218.7 35 years
Coldwell Banker Goodwill $351.8 40 years
Other 1996 Acquisitions: $187.4 40 years
Coldwell Banker Trust $218.5 40 years
Avis Rental Car (27.5% $154.0 40 years
owned by Cendant)