KPMG Partner Assured Coconspirator Who Handed Him Bags Of Cash In Parking Lots That Insider Trading Wasn’t Really IllegalBy Matt Levine
I don’t want to give you legal advice, but on the other hand you could be getting it from a worse source. Scott London for instance:
[Insider trader Bryan] Shaw said that in approximately July 2012, he received a notice from Fidelity Brokerage Services that Fidelity was putting a hold on his investment account. Shaw said that he immediately called LONDON and expressed his concern that their insider trading had been discovered. Shaw said that LONDON reassured him that there was no reason for concern, and explained that insider trading was like counting cards at a casino in Las Vegas – if you were caught, they simply ask you to leave because they cannot prove it.
Oops! Six months later the FBI got to Shaw, inducing him to cooperate to save himself, and today they charged London with criminal insider trading.1 It’s tempting to conclude that the moral of this story is “never take legal advice from an accountant,” though realistically it’s more like “never take legal advice from your criminal co-conspirator.”
This case is very weird. I mean the actual case is pretty boring: London, as a KPMG audit partner on a bunch of West Coast accounts, got earnings information before it became public, and then he gave it to Shaw, and then Shaw bought stock and options and made money on it and then literally delivered literal bags filled with literal cash to London to thank him for the tips. After Shaw started cooperating he met with London, wearing a wire, and this happened:
In advance of the meeting, agents from the FBI provided Shaw with $5,000 in cash, which was placed into a manila envelope and then wrapped inside a black paper bag, which was consistent with how Shaw had described his concealing previous cash payments he had made to LONDON.
Oh you put the cash in an envelope inside a bag? They’ll never catch you!
I’ve never understood the psychology of insider trading: Shaw supposedly made about $1.2 million, and paid London $50,000 of it, which I can’t imagine being worth going to jail for. But reading this complaint you get the sense that they got psychic satisfaction out of the drama of it: “ooh, look at us, we’re big-shot insider traders! With our black paper2 bags!” London’s inside information was not exactly full of drama and insight:
Shaw asked LONDON whether he should buy [HLF], and LONDON said that typically the stock price would go up based on the earnings that were going to be released, but that the stock was very volatile so it was hard to know. LONDON again confirmed that the guidance was going to be raised, but said that he would “find out exactly.” …
LONDON and Shaw discussed how the stock price for Herbalife had jumped recently when Carl Icahn bought a large block of its stock. Shaw told LONDON, “I wish you would’ve known that he was going to release that and we could’ve made some money.” LONDON responded, “Yeah, that would’ve been nice.”
LONDON then referenced rumors that had been spread recently about Herbalife going private, which had been discussed in various news reports. LONDON stated, “That is where you make a ton of money … because, you know, we’ll know that.” LONDON then advised that if that were to take place, “What we oughta do is, when I know that it’s gonna start happening, what you do is you start just buying in small blocks, right, so it doesn’t draw attention and then, you know, then it doesn’t look unusual at all.”
Basically they got together and fantasized about finding a merger to insider trade on. As opposed to their insider trading on Deckers:
Shaw asked LONDON, regarding Deckers stock, if “it could go up a little bit?” LONDON responded, “It could go up a little bit.” LONDON said he was not sure how the stock would respond. Shaw then asked LONDON if he agreed they should “buy a little, if it goes up, then we made a little money.” LONDON responded, “Yeah … I think that’s fine.”
Zzzz. Incidentally: Deckers, huh? Deckers is a public company and a KPMG audit client. Shaw and London insider traded in five stocks, all KPMG audit clients. Two are no longer public – to be fair, they were both bought out and Shaw insider traded before each merger, so, yeah, good work big shots – and two are Herbalife and Skechers, which are now-former KPMG audit clients. That leaves Deckers. Why is KPMG still okay auditing them?
The answer appears to be that while London was the audit partner for Skechers and Herbalife, meaning that he signed their audit opinions with the full faith and credit of KPMG, he was only the “account executive” for Deckers, which means that he basically took Deckers executives out for drinks and was all “hey, so, accounting, huh?” Auditors need to be “independent in fact and appearance” of their audit clients; apparently having a current or former audit partner insider trading in your clients ruins that fact and/or appearance, while having a current or former “account executive” doing so doesn’t. I dunno. If you were Deckers would you be pissed? Would you fire KPMG? If you were Herbalife would you be pissed? Would you demand that KPMG come back? The decision about when KPMG has to resign – and leave Skechers and Herbalife without audited financials and in theoretical danger of delisting – and when it can just get by with an apology, seems pretty metaphysical.
Still the weirdest thing about the case might be that both Shaw and London have released teary public statements confessing to everything and saying how sorry they are. These are people with lawyers. Paid lawyers! Shaw has been cooperating with the FBI since February so I guess he’s got some upside in cooperating to the press, but what is London’s angle? Here’s his lawyer’s take:
“But he just can’t understand why he did it, and it’s hard to understand why he did it,” Mr. Braun said. “It makes no sense. He’s looking back on the years that he did it. It made no sense from a dollar-and-cents point of view; it made no sense in terms of his ethics. He’s not trying to justify it in the slightest.” …
“It’s pretty grim,” the lawyer told CNBC. “His life is ruined. He’s 50 years old, he’s lost his career, he’ll probably lose his license, he’s been disgraced, and he may have to do some jail time.3 That’s the best-case scenario. It’s a very grim reminder of the consequences for anyone who wants to leak any insider information.”
Well it’s a useful reminder, too. Some people seem to have been underestimating those consequences.
1. And the SEC brought civil insider trading charges against both of them. Shaw seems not to have been charged criminally, because he was cooperating I guess, but he still might be.
2. Are “black paper bags” really a thing?
3. Umm some? As Peter Henning points out, London is on the hook for all of Shaw’s $1.2mm in profits, even though he himself only got about $50k, even though he didn’t know how much Shaw was trading, and even though Shaw himself hasn’t yet been charged. I eyeball that at a little under 2 years.