Ex-KPMG LLP partner Scott London, who led the firm’s audit practice in Los Angeles, was charged with passing inside tips about Herbalife Ltd. (HLF:US) and Skechers USA Inc. in exchange for cash, jewelry and concert tickets.
London’s tips included discussions of rumors that Herbalife would go private, according to a criminal complaint filed today in federal court in Los Angeles. London told his friend, Bryan Shaw, about the rumor in a recorded phone call, according to the complaint.
“That is going to be where you make a ton of money,” London told Shaw, according to the complaint. “What you do is you start just buying in small blocks, right, so it doesn’t draw attention, you know, then it doesn’t look unusual at all.”
London, 50, of Agoura Hills, California, is charged with one count of conspiracy to commit securities fraud through insider trading, federal prosecutors said today in a statement. London provided confidential information about KPMG clients to Shaw over several years that Shaw used to make trades that generated more than $1 million dollars in illegal proceeds, prosecutors said.
“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,” U.S. Attorney Andre Birotte Jr. in Los Angeles said in the statement.
From late 2010 to March 2013, London gave Shaw confidential tips about earnings announcements by KPMG clients, including Herbalife, Skechers and Deckers Outdoor Corp. (DECK:US), according to the statement.
Harland Braun, London’s lawyer, and Nathan Hochman, Shaw’s lawyer, didn’t immediately return calls seeking comment on the allegations. Shaw hasn’t been charged by prosecutors.
London is expected to appear in federal court in Los Angeles today, prosecutors said. If convicted, he faces a prison term of as long as five years, prosecutors said.
The U.S. Securities and Exchange Commission said today in a statement that it sued London and Shaw in federal court in Los Angeles.
Herbalife rose 2.9 percent to $38.28 today in New York Stock Exchange composite trading (HLF:US), climbing as much as 7.7 percent during the session.
Herbalife doesn’t comment on rumors in the marketplace, Barb Henderson, a company spokeswoman, said today in an e-mail.
On Feb. 19, Shaw called London and they discussed whether Shaw should buy Herbalife shares ahead of the company’s earnings release after the close of the market later that day, an FBI agent said in affidavit supporting the criminal complaint.
London advised Shaw “to take a pass on this one,” saying that hedge fund manager Bill Ackman was driving down Herbalife’s share price, according to the affidavit. London and Shaw discussed how billionaire investor Carl Icahn’s purchase of a block of Herbalife shares had caused the stock to jump.
London then mentioned rumors that had been spread about Herbalife going private, according to the affidavit.
Icahn, reported a 13 percent stake in Herbalife on Feb. 14 and said he would seek talks with the nutritional supplements company. Strategic alternatives for Cayman Islands-based Herbalife may include taking it private, he said in an SEC filing.
London and Shaw first met at a country club and were close friends and golfing partners, the SEC said in a statement. London said that he wanted to help Shaw when his friend’s family-owned jewelry business began faltering in the economic downturn, according to the SEC.
In exchange for the tips, Shaw gave London tens of thousands of dollars in cash, prosecutors said. The exchanges typically took place on a side street near Shaw’s office, prosecutors said.
Shaw made $450,000 in profits from Herbalife call options ahead of the company’s May 2, 2011, earnings announcement, when the stock rose about $6 after the company reported record earnings and raised its forecast, prosecutors said.
Shaw said in a February interview with federal prosecutors that he paid London about 10 percent of his profit from trades in cash and jewelry. Shaw also bought London expensive meals and spent as much as $45,000 on concert tickets, including to Bruce Springsteen, for himself and London.
In 2011, Shaw gave London a $12,000 Rolex Daytona Cosmograph watch in exchange for information about a particular KPMG client, prosecutors said.
Following his Feb. 8 interview with investigators, Shaw voluntarily began to cooperate with the government and record in-person meetings with London and telephone calls, according to the affidavit. The FBI directed Shaw not to trade in Herbalife, according to the filing.
“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 a statement yesterday. “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.”
Seth Oster, a spokesman for KPMG in Montvale, New Jersey, didn’t immediately return a call seeking comment on the complaint against London.
The case is U.S. v. London, 13-mj-01058, U.S. District Court, Central District of California (Los Angeles). The SEC case is Securities and Exchange Commission v. London, 13-02558, U.S. District Court, Central District California (Los Angeles).
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