Prosecutors Charge Former KPMG Partner in Insider Trading Scheme

A criminal case against former KPMG auditor Scott London asserts that London gave a friend insider information about clients in return for an estimated $50,000 in cash, jewelry and pricey dinners, the Los Angeles Times reported. The case, filed April 11 in federal court in Los Angeles, states that London told his friend, Bryan Shaw, when to buy and sell and how to attract little attention while making $1.2 million in profits. Companies involved included Herbalife and Skechers.

New York-based KPMG (FY11 net revenue of $5.36 billion) issued a statement by Chairman and CEO John Veihmeyer: “I 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. We unequivocally condemn his actions, and deeply regret the impact that his violations of trust and the law have had on our clients and our people. KPMG will be bringing legal actions against London in the near future.” The firm has resigned as auditors to the two companies.

Andre Birotte, U.S. attorney for Los Angeles, told the Times that it’s important to go after insider-trading cases. “He was an auditor at a company that was entrusted to protect the information of respected companies,” Birotte said. “To take that information and provide t to at least one other individual for profit feeds into that perception that the markets are tilted and only for those who are privileged and have inside information.”

The case also brings up a rule considered, but not enacted, by the Public Company Accounting Oversight Board (PCAOB), which would have required public disclosures of audit engagement partners. The proposal, to require auditors to add their names to audited financial statements, was proposed in late 2011.

“We don’t know how many other audits of public companies this person did,” said Lynn Turner, referring to London, in the Chicago Tribune. The former chief accountant for the U.S. Securities and Exchange Commission also said, “It is a shame the PCAOB has elected not to move forward with this significant proposal.” Some observers believe the case will give PCAOB the push it needs to require auditor identification.

In other news, the PCAOB is scheduled to hold six forums to share information about PCAOB activities and hear comments from auditors as well as discuss the JOBS Act and how it may affect standard-setting for auditors of smaller public companies. The first will be held June 6 in Seattle. Find the schedule at http://pcaobus.org/Featured/Pages/SmallBusinessForums.aspx