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Ex-KPMG auditor freed on $150,000 bond in tips-for-cash scheme

As investors Carl Icahn and William Ackman bickered loudly on TV earlier this year about their opposing bets on Herbalife, two other men were discussing the company in a different context: getting non-public information to trade ahead of the stock's next move.

Referring to Icahn's announcement that he had purchased a large stake in the nutritional products company, one of the men said: "I wish you would've known that he was going to release that and we could've made some money."

The other replied: "Yeah, that would've been nice."

The conversation was part of a call California jeweler Bryan Shaw recorded and later shared with the Federal Bureau of Investigation to help in their investigation of his longtime golf partner, Scott London. At the time, London was a senior KPMG auditor who had been leaking inside information about his corporate clients to Shaw.

U.S. authorities filed criminal and civil charges on Thursday against London, who is accused of passing Shaw non-public information about five of KPMG's clients.

On Thursday afternoon, a federal judge in Los Angeles freed London on a $150,000 bond, ordered him to turn over his passport, and directed the former KPMG auditor not to make contact with Shaw unless in the company of attorneys.

London's attorney, Harland Braun, said his client intended to plead guilty when he is formally arraigned on May 17.

"Had my client been asked to give information for cash, he would have said no," Braun told reporters in the courthouse hallway after the proceeding. "This is that gray area, when you talk at the country club. But once you take money, you're dead."

KPMG CEO John Veihmeyer said on Thursday his firm will take legal action against London in the near future. However, he said there was no reason to believe the financial statements of the companies involved are materially misstated.

"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," Veihmeyer said.

According to prosecutors, Shaw made about $1 million trading on the tips and gave London roughly 10 percent of his profits on each of the trades in the form of cash, jewelry, concert tickets and free meals.

One gift for London was a Rolex Daytona Cosmograph watch valued in 2011 at $12,000. Another, $10,000 wrapped into a bundle of $100 bills. Shaw told the FBI he believed he spent between $25,000 and $45,000 in concert tickets for the two of them, including a Bruce Springsteen event.

Braun disputed the amounts, saying his client only received about $35,000. London turned over $7,500 in cash and the Rolex at the courthouse.

"I can't understand why he took the money," the attorney said. "He didn't need it."

How to Play it

Prosecutors charged London, a Los Angeles-based auditor, with one count of conspiracy to commit securities fraud for giving Shaw information about public companies, including, Herbalife Ltd, Skechers USA Inc and Deckers Outdoor Corp.

Deckers did not respond to multiple calls and emails seeking comment. Herbalife and footwear maker Skechers disclosed earlier this week that KPMG had quit as their auditors in response to the matter.

According to the complaint filed in federal court in Los Angeles, London also advised Shaw on the best ways to trade on the information.

For instance, he told Shaw about a merger between KPMG client RSC Holdings and United Rentals Inc and reassured his friend about trading on the takeover because "regulators were not looking for 'small fish,'" according to the complaint.

United Rentals spokesman Fred Bratman told Reuters by phone: "We are not a party to this case, but we will obviously cooperate and provide any assistance that we can to the appropriate authorities."

He did not confirm or deny that KPMG was the auditor of RSC Holdings.

London also told Shaw about a takeover of Pacific Capital Bancorp by Union Bank, according to the charges. Tom Taggart, the spokesman for Pacific Capital's current parent, Union Bank, declined to comment.

The case has already cost London his job. 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 that he passed on information to his friend, but did not know he would trade on it.

Braun, London's lawyer, told Reuters on Wednesday that London's statements to the press were incorrect and ill-advised.

Legal experts said it was rare for insider trading suspects such as London to make public statements and it could cause more problems for him.

C. Evan Stewart, partner at Zuckerman Spaeder in New York, who routinely represents clients charged with insider trading and who is not involved in the 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."

London's attorney, Braun, told reporters on Thursday that his client came forward to talk with the Wall Street Journal about his involvement in the scheme because he was trying to protect KPMG and its employees.

Shaw, through his lawyer, also spoke to the press earlier. In a statement that lawyer Nathan Hochman emailed to Reuters on Thursday, Shaw admitted he received non-public information from London during a two-year period ending in 2012.

"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," he added.

Of the two sets of comments, it is London's that have potential to do more 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."

[Source: By Emily Flitter, Reuters, New York, 11Apr13]

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small logoThis document has been published on 12Apr13 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.