KPMG LLP fired the head of its Los Angeles audit practice after learning that he provided inside information to someone who used it to trade stocks.
The partner, Scott London, was the lead auditor for Skechers U.S.A. Inc. (SKX), according to David Weinberg, the shoemaker’s chief financial officer. Herbalife Ltd. (HLF) and Skechers (SKX) said in statements that KPMG is withdrawing as their auditor. The U.S. Justice Department and the Securities and Exchange Commission are investigating the partner’s actions, according to people with knowledge of the situation.
“It came as quite a surprise,” Weinberg said in an interview. “I liked him a lot. I trusted him, obviously.”
Senior KPMG executives visited Skechers on April 8 and told Weinberg about the misconduct, he said. They said no questions were raised about the company’s financial reports and that they believe London is the only auditor involved, he said.
The KPMG executives said that London told them he had sold secrets about the footwear maker, according to Weinberg. The information was sold to an individual, according to one of the people with knowledge of the situation.
London issued a statement by e-mail in which he admits to leaking by phone over a period of years to a person who traded on the information. London, who didn’t return messages for comment, said he was trying to help a person whose business was struggling.
“I regret my actions in leaking non-public data,” London said in the statement. “KPMG had nothing to do with what I did. The firm bears no responsibility in this matter. These actions were by my choice and mine only.” His statement was published earlier by the Wall Street Journal.
London told the Journal that casual conversation with the person who made the trades began at a golf club in 2010. Discussions concerned Herbalife and Skechers, he told the newspaper, adding that it wasn’t until the second or third conversation that he realized the individual was trading on the information.
Partners at large audit firms generally make about $1 million a year, Brian Mayhew, an accounting professor at the University of Wisconsin at Madison, said yesterday in a phone interview. They are often hired as board members at other companies when they leave, he said.
“It’s very surprising it’s a partner and that-senior a partner,” Mayhew said. “To put that all at risk by sharing insider information is perplexing.”
KPMG said stock trades tied to its former partner involved several U.S. West Coast companies. It didn’t identify them or the executive. Herbalife, a nutrition company based in the Cayman Islands, has a main office in Los Angeles, while Skechers is based in Manhattan Beach, California.
“KPMG’s action was pretty extraordinary,” Mayhew said. “They’ve resigned from both the audits, which is a strong move on their part.”
The accounting firm’s employees “unequivocally condemn this individual’s rogue actions,” KPMG said in a statement on its website. “This individual violated the firm’s rigorous policies and protections, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for KPMG’s long-standing culture of professionalism and integrity.”
The firm said it has no reason to believe the affected companies’ financial results were materially misstated.
“They didn’t question the numbers, they didn’t question management,” Weinberg said.
Harland W. Braun, an attorney for London, said KPMG isn’t a target of the investigation. London confessed his actions to investigators last week, then informed KPMG, Braun said in a phone interview. The third party is cooperating, Braun said.
Herbalife shares fell 3.8 percent to $36.95 yesterday in New York after a trading halt. The company said in a statement that KPMG’s resignation had nothing to do with the accuracy of its financial results, accounting practices or management.
Herbalife is fighting accusations from Bill Ackman, founder of New York hedge fund Pershing Square Capital Management LP, that it uses inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme. The company has repeatedly denied the allegations, saying it is retail-oriented and sells products with unique ingredients.
London said his actions didn’t affect audits at Herbalife and Skechers.
“With regard to Herbalife, there was no information leaked during 2012, accordingly, none of what I did had anything to do with Herbalife’s continuing battles with investors over the company’s business practices,” London said in the statement.
Timothy Ramey, an analyst at D.A. Davidson & Co., said in a report that it may take as long as a year for Herbalife’s next auditor to complete a review of the company. Herbalife may not be able to buy back stock during that period, he said.
“This is and will be disruptive to the stock, but hopefully not the company,” Ramey said. He lowered his rating on the company to neutral from buy.
Seth Oster, a spokesman for KPMG in New York, declined to comment beyond the company’s statement, as did Barb Henderson, a spokeswoman for Herbalife. Calls for comment to the U.S. Attorney’s Office in Los Angeles weren’t immediately returned.
U.S. regulators including the SEC have repeatedly accused audit-firm employees of abusing corporate access for insider trading. A former Deloitte & Touche LLP partner and his son agreed to pay more than $1.1 million in 2010 to settle claims they traded on information about that firm’s customers. In 2008, two former employees of PricewaterhouseCoopers LLC were fined for using client information to buy stock before takeovers.
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