Secret Recordings, Cash in Insider Sting

The Wall Street Journal, April 12, 2013

Criminal insider trading charges were brought by federal prosecutors against Scott London, a former KPGM LLP partner who the government said reaped more than $50,000 in cash and gifts, including a $12,000 Rolex watch, for providing stock tips that enabled a friend to make at least $1,200,000 in illicit profits. The alleged stock tip scheme had its roots in a 2005 meeting at a Los Angeles area golf club and eventually involved tips on five public companies. In a recent sting operation, federal agents bundled bags of $100 bills and recorded Mr. London accepting them.

The authorities said that Mr. London provided a Los Angeles jeweler dealer, Bryan Shaw, with advance notice of earnings releases or merger plans on the companies. Mr. Shaw allowed federal agents to record calls with Mr. London and wore a recording device when meeting with him. London told The Wall Street Journal that he received little more than a discount on a watch, dinners, and on a couple of occasions, parcels of $1,000 to $2,000 in cash. He also said he provided only general assessments of companies as doing well or not doing well.

The prosecutors said that London sometimes called Shaw two or three days before a company’s financial results were due to be reported and read him a draft of the coming release. Shaw then traded on such information at least a dozen times, according to the SEC. They added that Shaw gave London bags of cash, as well as paying for jewelry for Mr. London’s wife, restaurant meals for his family and tickets to Bruce Springsteen concert and other events.

Mr. Shaw told prosecutors he gave Mr. London “usually about 10% of his overall profits” from trades based on the tips, according to the criminal complaint. The criminal complaint went on to say that Shaw said the cash was always handed over in person, often in a side street behind his business. Mr. London would “usually remark that Shaw was too generous and did not have to pay him for the information” but still would take the envelopes stuffed with $100 bills wrapped in $10,000 bundles. Shaw added that in 2011 he gave London a Rolex Daytona Cosmograph watch worth about $12,000.

Both London and Shaw have admitted wrong doing and said they expected to face civil and criminal action. Mr. London, a 29-year KPMG veteran who supervised more than 50 audit partners and 500 employees, could face up to five years in prison and up to $250,000 in fines if convicted on a federal charge of conspiracy to commit securities fraud.

Comment: I spent eight years in public accounting and this is hard for me to imagine. All firms stress and train employees to never comment about companies their firm audits, whether locally or nationally. Mr. London supervised 50 audit partners and 500 employees so knew well that sharing financial information was forbidden and absolutely illegal. This mess doesn’t just include Mr. London and Mr. Shaw. This is a black eye for KPMG, a Big Four accounting firm that has had to resign and retract audited financial statements for at least two clients.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics