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Former KPMG Partner Charged With Insider Trading

The SEC alleges that Scott London (L) 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.
Source: SEC
The SEC alleges that Scott London (L) 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.

U.S. prosecutors in California filed criminal charges against Scott London, a former senior auditor at KPMG in Los Angeles, of conspiracy to commit securities fraud for passing nonpublic information about three companies to a friend who traded on it.

The U.S. Securities and Exchange Commission filed a corresponding civil complaint against London. According to the criminal complaint, London used his position as auditor for KPMG clients Skechers, Herbalife and Deckers to tip his friend Bryan Shaw.

"The public has every right to fully expect a level playing field in our financial markets," said U.S. Attorney André Birotte Jr.

"As alleged in the complaint, Mr. London chose to betray the trust placed in him as a financial auditor and to tip the trading scales for the benefit of insiders like himself."

(Read More: The Dumbest Insider Trading Scheme Ever Alleged)

Shaw made over $1 million on the trades and gave London cash and jewelry in return, the complaint said.

The investigation has already cost London his job and forced KPMG to resign as the auditor for nutritional products group Herbalife and footwear maker Skechers.

It has also prompted some public confessions rarely seen in insider trading cases. Soon after news of the case broke earlier this week, London admitted to the Wall Street Journal he had passed on information about the companies to his friend but said he did not know his friend would trade on it.

London's lawyer told Reuters on Wednesday that was incorrect and that his client did profit from the exchange of the information. The lawyer, Harland Braun, said the case was clear-cut and called the investigation "contained."

As for his client's statements to the press, Braun admitted they were ill-advised. Legal experts said it was rare for insider trading suspects like London to make public statements, and it could cause more problems for him.

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C. Evan Stewart, partner at Zuckerman Spaeder in New York who routinely represents clients charged with insider trading and who is not involved in London's case, said it was hard to see a reason for London's statements.

"I've never seen anything like this in 36 years of practice," he said. "That's certainly not a strategy I would be employing under these circumstances."

Shaw, through his lawyer, also spoke to the press. In a statement his lawyer, Nathan Hochman, emailed Reuters on Thursday, Shaw admitted he had received non-public information from London during a two-year period ending in 2012 and added: "I cannot begin to apologize for my incredibly stupid actions. There is no excuse for my wrongful conduct."

London and Shaw golfed together, according to London's lawyer.

When Shaw's brokerage firm noticed its client's unusual trading patterns, it cut him off and Shaw and London agreed to end their arrangement. But when U.S. authorities later approached Shaw about his trading, he agreed to cooperate, restarted his tip-sharing relationship with London and recorded him passing on non-public information.

"Over the past several months, I have fully cooperated with the FBI, the SEC and the U.S. Department of Justice in their ongoing investigation of this matter," Shaw said in his statement.

(Read More: Carl Icahn: Why I'm Betting on Herbalife)

"I expect that my actions will result in significant civil and criminal consequences, but I realize that this is the painful price I will pay for my transgressions."

Of the two sets of comments, it is London's that have potential to do further damage, according to Stewart.

"Mr. London was a very senior KPMG guy who had been counseled by very experienced lawyers on this subject I'm sure on numerous occasions, and then to be out there chatting with the Wall Street Journal about this, it's a very significant setback for his now former firm."

A spokesman for KPMG did not immediately respond to a request for a comment.

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