By Frank Byrt
A former KPMG LLP senior audit partner faces federal criminal and civil charges for his involvement in a web of deceit that included tipping off a friend about upcoming corporate earnings releases and merger announcements.
Former KPMG partner Scott London was charged April 11 in federal court in Los Angeles with conspiring to commit securities fraud through insider trading. Prosecutors allege he received more than $50,000 in cash and gifts, including a $12,000 Rolex watch, for providing stock tips that enabled a friend to make at least $1.2 million in illicit profits.
London was a twenty-nine-year veteran at the Big Four accounting firm, who supervised more than fifty audit partners and 500 employees.
He could face up to five years in prison and up to $250,000 in fines if convicted on the federal charge of conspiracy to commit securities fraud.
In addition to the federal criminal complaint, both London and his coconspirator, Bryan Shaw, were charged in a related civil suit by the Securities and Exchange Commission (SEC). Both have admitted wrongdoing and said they expect to face civil and criminal action.
"The Securities and Exchange Commission alleges that Scott London tipped Bryan Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements", the agency said in an April 11 press release.
"The two men had met at a country club several years earlier and became close friends and golfing partners. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn", the SEC said.
According to the SEC's complaint, London began providing Shaw with nonpublic information in October 2010, and the misconduct continued for the next eighteen months. "Shaw and London communicated almost exclusively using their cell phones, although on at least one occasion, London disclosed nonpublic information in the presence of others during a golf outing", the SEC said.
This year, Shaw allowed federal agents to record calls with London and wore a recording device when meeting with him while Federal Bureau of Investigation (FBI) agents listened in.
"London was the lead partner on several KPMG audits, including Herbalife and Skechers USA, and he was the firm's account executive for Deckers Outdoor Corporation. Therefore, London was able to obtain material, nonpublic information about these companies prior to their earnings announcements or release of financial results", said the SEC.
Shaw "routinely traded at least a dozen times on the inside information he received from London", the SEC said. "He grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers."
The SEC alleges that London also gained access to inside information about impending mergers involving two former KPMG clients – RSC Holdings and Pacific Capital. "London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its December 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012."
"As a leader at a major accounting firm, London's conduct was an egregious violation of his ethical and professional duties", said Michele Wein Layne, director of the SEC's Los Angeles Regional Office.
London's lawyer, Harland Braun, said his client plans to plead guilty to the criminal charge at a court appearance May 17. London turned over his Rolex watch to the FBI as well as $7,500 in cash, the lawyer said. London was freed on $150,000 bond after the hearing April 11.
KPMG LLP Chairman and CEO John Veihmeyer said in an April 11 statement that after reviewing the criminal complaint, he was "appalled to learn of the additional details about Scott London's extraordinary breach of fiduciary duties to our clients, KPMG, and the capital markets.
"As a result of his unlawful activities, it was clear that our independence had been impaired with respect to the two companies for which he served as lead partner, Herbalife and Skechers", Veihmeyer said. "Due to this impairment, we were professionally obligated to take the regrettable action to resign as the independent auditor for these two companies and withdraw our previously issued audit reports. The sole reason for these steps was the actions of our former partner, and we have no reason to believe that their financial statements are materially misstated."
Veihmeyer said KPMG will bring legal action against London in the near future.
London told KPMG he was under investigation by the SEC and criminal authorities for insider trading in the securities of several KPMG clients last week, and the firm immediately terminated him.