Insider trading trips up Herbalife
Partner in L.A. office accused of illegal insider trading
KPMG abruptly quits as auditor, trading paused; Skechers also hit.
The bizarre tussle between billionaires over the legitimacy of Herbalife took a strange turn Tuesday after the vitamin seller’s auditor suddenly resigned.
Trading in the company was halted for about two hours Tuesday and resumed trading about 11:30 a.m. ET. The halt came ahead of the news that KPMG had resigned as its auditor af- ter finding one of its auditors was engaging in illegal insider trading.
The Securities and Exchange Commission would not comment on the situation nor would it say whether it is investigating the matter. Footwear maker Skechers was pulled into the same controversy as trading in its shares was halted, too, because it was audited by the same office of KPMG.
Herbalife shares ended down 3.8% for the day. Skechers closed up 1.9%.
The KPMG auditor involved was Scott London, says Skechers CFO David Weinberg. He says London was the lead partner on the company’s audit for roughly eight of the past 13 years. Skechers has not been contacted by regulators, Weinberg says.
London was lead auditor for just Skechers and Herbalife, said a source familiar with the matter. London had given information about the companies to a third party, which used the information to trade and make a profit, the source said. But that third party was not a financial institution nor a hedge fund or other party able to have a big influence on the stock prices, said the source, who was not authorized to speak on the matter.
It’s just the latest black eye for the accounting profession, says Mark Cheffers of Audit Analytics. The timing is especially discouraging since the accounting business has been working to repair its stained image following the flurry of accounting mishaps of the early 2000s, he says. “This is a sad day for the accounting profession,” Cheffers says.
Herbalife said the resignation had nothing to do with problems at the company. Herbalife’s statement said, “KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason.”
In a press release Tuesday, Skechers said, “In connection with its res- ignation, KPMG has publicly stated that it has ‘no reason to believe that the financial statements of Skechers have been materially misstated.’ ”
KPMG said in a release Tuesday that it took swift action against the individual and resigned from the Herbalife account due to the conflicts that became clear. KPMG said, “Late last week, we were informed that the partner in charge of KPMG’s audit practice in our Los Angeles business unit was involved in providing nonpublic client information to a third party, who then used that information in stock trades involving several West Coast companies.” KPMG said the “partner was immediately separated from the firm.”