London, 50, was charged by federal prosecutors in Los Angeles with passing inside information about Herbalife Ltd. (HLF) and Skechers USA Inc. in exchange for cash, jewelry and concert tickets. Harland Braun, London’s lawyer, said after his client’s initial court appearance yesterday that he expects him to plead guilty at his arraignment set for May 17.
London’s tips included discussions of rumors that Herbalife would go private, according to a criminal complaint filed yesterday in federal court in Los Angeles. London told his friend Bryan Shaw, who cooperated with investigators, about the rumor in a recorded phone calls in February, according to the complaint.
“That is going to be where you make a ton of money,” London told Shaw, 52, 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, of Agoura Hills, California, is charged with one count of conspiracy to commit securities fraud through insider trading. He is accused of giving confidential information about KPMG clients over several years to Shaw, who used the tips 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 a statement yesterday.
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), according to the U.S. attorney’s statement.
London also tipped Shaw about impending mergers involving former KPMG clients RSC Holdings Inc. and Pacific Capital Bancorp, the U.S. Securities and Exchange Commission said in a separate statement.
U.S. Magistrate Judge Charles Eick in Los Angeles yesterday ordered London, who hadn’t been arrested, to post bail of $150,000. Eick also required London to surrender his passport and barred him from having any contact with Shaw.
If convicted, London faces a prison term of as long as five years, prosecutors said. Braun said he hoped London could avoid jail without saying what sentence he would be seeking.
London’s honesty after the scheme was discovered avoided a possible investigation of hundreds of audits done at KPMG and even possibly a stock market crash, Braun said. London “never dreamed” Shaw made as much as he did from the information he gave him, Braun said.
The SEC filed a civil lawsuit yesterday against London and Shaw in federal court in Los Angeles. Shaw, of Lake Sherwood, California, made more than $1.2 million in illicit profits, according to the complaint.
Nathan Hochman, Shaw’s lawyer, didn’t immediately return a call seeking comment on the allegations. Shaw hasn’t been charged by prosecutors.
Herbalife rose 2.9 percent to $38.28 yesterday in New York Stock Exchange composite trading, 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 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 its 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 profit 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 and other stocks he discussed with London, 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 an April 10 statement. “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.”
Braun told reporters yesterday that some of the information Shaw provided to the FBI according to the affidavit was “bogus,” including that Shaw spent $25,000 to $45,000 on concert tickets.
KPMG Chairman and Chief Executive Officer John Veihmeyer said in a statement yesterday that the audit firm will bring legal action against London.
“I was appalled to learn of the additional details about Scott London’s extraordinary breach of fiduciary duties to our clients, KPMG and the capital markets,” Veihmeyer said. 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.’’
KPMG has resigned as independent auditor for Herbalife and Skechers, two companies for which London was the lead partner. The firm said in the statement it had no reason to believe the companies’ financial statements were materially misstated.
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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