Insider Sales, Suits Citing Fraudulent Selling Techniques Likely To Drag Wyndham's Performance In Stale Bull Market

| About: Wyndham Worldwide (WYN)
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Summary

Wyndham lost a $20 million punitive judgment against a former employee citing fraudulent selling techniques in its timeshare unit. Other suits are mounting.

Franz Hanning, head of the timeshare unit, has reached an agreement with the company to exit his responsibilities.

Wyndham officers have been on a two year streak of selling shares, with some officers left with very little holdings of the company's equity.

As our 8-year bull market grows stale, the appetite for vacation ownership will dry up.

Its been a great run, but Wyndham will likely underperform as the bull market grows stale, and fall sharply during the next bear market.

I was shocked when I opened up the Nasdaq site to see which Wyndham (NYSE:WYN) officers had been accumulating stock as their value story increased, and found that they have been dumping shares for two years. So I looked deeper, and while the company has several strengths, many of their growth strategies are drying up, and at least one has been determined illegal. My guess is that is why those who are in the know are selling.

Let's look at the whole thing, then each piece:

  • Wyndham recently lost a lawsuit in California in which a jury handed down a $20 million punitive judgment citing fraudulent predatory selling techniques to the elderly.
  • There are several other class action lawsuits mounting as the state attorneys general are starting to get involved.
  • Franz Hanning, head of the timeshare unit, is leaving the company. It is unclear whether this is related to the predatory selling techniques or the lawsuits, but the timing is suspicious.
  • Wyndham officers have been on a selling spree for the last two years. Those who would have the greatest knowledge of the status of the legal suits own almost no stock.
  • Vacation ownership is great when wealth is going up, but in a bear market, it is one of the first things cut.

For these reasons, the stock, which has underperformed the S&P500 for the last two years, is likely to dramatically underperform when the market turns, and so the time to sell is now.

California Law Suit

The Dolan Law Firm issued a press release on November 18th, 2016, declaring

"A San Francisco jury awarded $20 million to Trish Williams, a former Wyndham timeshare sales representative, who was wrongfully terminated for reporting timeshare fraud on the elderly."

She reported fraudulent selling to elderly customers in 2010, in which false promises were made verbally. According to the press release,

These sales practices included "TAFT" days, which stands for "Tell Them Any F@#*ing Thing" days, where employees were encouraged to say anything to make a sale as long as they didn't put it in writing. The highest selling sales agent was quoted as saying, "I sold my soul to the devil. I can say whatever I want so long as I don't put it in writing, that's why Wyndham has good lawyers."

Since this happened in 2010, what is unclear is how many more of these cases could be filed, and how many cases could be brought by Wyndham customers. This is a huge unknown liability that could mount into the billions of dollars. Because of this verdict, every dollar of revenue that Wyndham has collected in the last seven years could be brought under question in a class action suit.

Other lawsuits

In New Jersey, there is a class action suit that claims that Wyndham has violated the New Jersey Consumer Fraud Act (CFA) and the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA). They are claiming that the resort fees charged to customers violate these acts.

A similar suit has also been filed in Pennsylvania.

Wyndham faces a wrongful termination and retaliation against two whistleblowers who filed a suit similar to the one that rendered a $20 million punitive judgment.

In all, according to a search of Law360, there are 468 lawsuits pending involving Wyndham, including 111 contract, 100 personal injury, and 99 civil rights suits.

Franz Hanning Termination

On November 28, 2016, Wyndham Worldwide Corporation announced that it has mutually agreed with Franz Hanning that he is resigning as head of the company's timeshare business unit. It is unclear whether this is related to the $20 million whistle blower judgment, but it did occur 10 days later, so the timing is very suspicious.

Wyndham Officers on a Selling Spree

Logging into the Nasdaq website, one finds that Wyndham officers have been on a selling spree for the last two years, with several officers holding very little Wyndham stock. In the last three months, insiders have sold 93,635 shares and purchased only 5,784 shares, and this with a decreasing price, where they should be buying if they believed in the company. Here is a summary of the sales and holdings of those officers over the last two years:

Stephen Holmes CEO 495,819 1,095,515
Geoff Ballotti CEO Hotels 34,696 91,730
Franz Hanning CEO Timeshare 59,327 62,084
Gail Mandel CEO Destination 10,149 40,273
Tom Anderson EVP Real Estate 37,553 36,642
Tom Conforti CFO 113,796 91,504
Mary Falvey C HR O 54,266 67,417
Scott McLester General Counsel 52,294 23,056
Officer Position Shares Sold Shares Held

Looking at this table, it is again suspicious that the CFO and General Counsel have both sold more than their current ownership in the last two years. These two should have the best granular visibility of the potential liability for all the lawsuits that the company is defending.

Stale Bull Market

The last point that will likely drag on Wyndham performance over the next several years is that vacation ownership grows stronger in a bull market, and sales wane during a bear market. Since we are in a very stale bull market, and likely to see a correction in the next 2-3 years, Wyndham sales will likely go down during the next bear market, especially in the timeshare unit.

Summary

In summary, a huge legal suit, firing of the timeshare president, significant insider selling and waning market forces will likely force Wyndham shares to stagnate and underperform the market for the foreseeable future. Selling shares now would be prudent, with the next buying opportunity likely 6-12 months into the next bear market, but only if the integrity of the company, its leadership and its practices turns around between now and then.

A better investment, for those who might like to have exposure to the timeshare space, would be Marriott Vacation Club (NYSE: VAC), which has outperformed Wyndham since its inception, and also has significantly less legal exposure, with only 70 suits pending compared to Wyndham's 468, also according to Law360.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.