KPMG resigns from Herbalife, Skechers and faces FBI probe
THE details of an insider trading scandal that hit one of the world’s largest accounting firms, KPMG, have emerged after it resigned as auditor of two US corporations amid an FBI investigation.
The two California-based companies — nutritional products group Herbalife and footwear maker Skechers — confirmed separately that KPMG had left as their auditor in connection with the leaks. The FBI’s Los Angeles office is investigating the matter, according to a source familiar with the situation.
Skechers chief financial officer David Weinberg said in an interview that Scott London had been the lead auditor for Skechers and had resigned after the leaks.
Mr Weinberg said that Mr London had admitted to sharing inside information. “It came as quite a surprise. I liked him a lot. I trusted him, obviously.”
Senior KPMG executives visited Skechers on Monday and told Mr Weinberg about the misconduct, he said. They said no questions were raised about the company’s financial reports and that they believed Mr London was the only auditor involved, he said.
Mr London issued a statement by e-mail in which he admits to leaking information by phone over a period of years to a person who traded on the information. Mr London said he was trying to help a person whose business was struggling.
“I regret my actions in leaking nonpublic data,” he said. “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.”
Mr London was not immedi- ately available for comment.
The California native worked at KPMG for 29 years. A baseball lover, London became chairman of the LA Sports Council in 2011. He is also listed as director on the board of the Los Angeles Chamber of Commerce for last year.
Shares of Herbalife closed down 3.8% at $36.95, while Skechers shares were up 1.9% at $21.91 on Tuesday.
“This is and will be disruptive to the stock, but hopefully not the company,” said Timothy Ramey, an analyst at investment services firm DA Davidson yesterday.
He downgraded Herbalife shares to “neutral” from “buy”.
Herbalife said in a statement that KPMG’s resignation had nothing to do with the company’s accounting practices or the integrity of its management — issues called into question by the high-stakes drama between hedge
This individual violated the firm’s rigorous policies and protections and betrayed the trust of clients and colleagues
fund titans Bill Ackman and Carl Icahn over the company.
KPMG said it had resigned as the outside auditor for two clients due to the actions of a senior partner, who was in charge of the audit practice at its Los Angeles business unit. The announcement did not identify the partner or the companies involved. It said the partner provided inside information about its clients to someone who had used that information in stock trading.
“The partner was immediately separated from the firm,” KPMG said. “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.”
When the KPMG resignations became known on Monday, the identity of the partner involved was unknown. Mr London’s name only emerged late on Tuesday.
The Public Company Accounting Oversight Board, which polices audit companies, proposed in 2011 that the firms be required to disclose the names of individual engagement partners in audit reports, as they must in some other countries.
That proposal has not been made a US rule. Some audit critics said it should be to make auditing more transparent, though audit firms have resisted this idea for a variety of reasons.
KPMG is the smallest of the big four global accounting and audit firms. It reported revenue of $23bn last year, up 1.4% from the year before. The other three firms are PwC, Deloitte and Ernst & Young. All are US-based and operate affiliate networks around the world.
Any controversy over KPMG’s dealings could hurt the firm’s reputation. In 2005, KPMG narrowly avoided a criminal indictment by agreeing to pay $456m in a deferred prosecution settlement with US authorities over its sale of tax shelters. Three years earlier, smaller rival Arthur Andersen collapsed over its auditing work for energy company Enron.
In addition, KPMG partners were the only ones so far to have been sued by the US Securities and Exchange Commission in connection with the global financial crisis. Reuters, Bloomberg