Please read this and answer the questions in the file doc. The other file doc is note taken from class that aid in answering these questions. The other pdf files are for extra reading if needed.

https://www.sec.gov/litigation/admin/2013/34-70549.pdf

Confidential Client Information Case 1a: Scott was KPMG's Lead Audit Engagement Partner on the Herbalife and Skechers engagements. London was also KPMG's Partner-in-Charge of the firm's Pacific Southwest business unit audit practice that served each of the above-referenced Audit Clients. 1b: 5 companies. 1c: Herbalife, Skechers, Deckers, RSC Holdings and Pacific Capital 1d: London provided Shaw with material nonpublic information that London received in the course of his employment with KPMG, concerning financial results, earnings, guidance and or merger announcements by the Audit Clients, with the knowledge or belief that Shaw intended to use the information to trade in the companies' securities in advance of the following public announcements. 2a: Note: 1a. Had authority over 50 audit partners, VP 1b. 5 companies 1c. Herbalife, Sketchers 1d. Did not do anything wrong for auditing procedures, accused of using confidential information. Auditor cannot disclose confidential information of client to anyone. SEC document focuses on auditor independence. Why does SEC focus on auditor independence, to protect investing public, less concerned about auditor duty to not disclose confidential information. From point of view of SEC not concerned with confidential information 2a. Rule 301, member will not disclose private information. AICPA rules are broader than SEC rules, rules applies not just to auditors, tax preparers consulting to mergers acquisition. Anyone who comes across confidential information has to follow rule 301. 2b. If someone tells you something in confidence, but don't want that to get out. By telling others about it, betraying the trust and confidence. It is wrong to betray confidence, not just hurt feelings but significant financial damage. 2c. All investors should be at same levels in terms of knowing key facts. One of reasons why so many people like invest stock market, there are less problems with inequality than other countries. 2d. Goes against idea that all public should be at the same level in terms of what they know. Unfairly know more than others and have a disadvantage in trading. 2e. 3a. 18 US Code 71, 3b. United States Department of Justice not SEC, criminal prosecution is very serious can result in people going to prison 3c. 4a. 4b. SEC for civil, only fine and loss of practicing an audit 4c. Deloitte audit partner 4d. 5a. KPMG restricted lists, blackouts. Auditor cannot own stock in audit client. 5b. If Scott London emailing Bryan Shaw people can detect, if talking in person there is no way to pick it up. Hard to put a stop to problems. Try to convince people not to do it. SEC manages to catch people who do this stuff. 8. Didn't have pressure, didn't need money, didn't owe friend. Had information. He wanted to help friend. Not a rational decision. Sometimes people get to really high level in corporation, they lose sight of reality, law does not apply to them Confidential Client Information Case Professor Fuerman - Auditing (revised 4/18/16) Please begin by reading the SEC Accounting and Auditing Release of September 27, 2013 here. 1a. What was Scott London's position at KPMG? 1b. As a result of his position, how many companies did Scott London likely have confidential information on? 1c. Which five companies is Scott London charged with misusing confidential information on? 1d. How did Scott London misuse confidential information on these five companies? In other words, what is he accused of having done? 2a. There is a Rule regarding Confidential Client Information in the AICPA Rules of Conduct. What number is this Rule, and what is the general rule, regarding this Rule? 2b. Did Scott London violate this Rule? 2c. Pretend this Rule does not exist. Would it be ethical - to the company and its management - for Scott London to do what he did? Why? 2d. Pretend this Rule does not exist. Would it be ethical - to the investors in this company - for Scott London to do what he did? Why? 2e. Pretend this Rule does not exist. Would it be ethical - to the public at large - for Scott London to do what he did? Why? 3a. There is a criminal law regarding the kind of misuse of confidential client information that Scott London misused. Is this a Federal law or a state law? What is this law? 3b. Who prosecutes this kind of criminal law in the United States? 3c. What are the possible consequences of conviction of violating this criminal law? 4a. There is a civil law regarding the kind of misuse of confidential client information that Scott London misused. Is this a Federal law or a state law? What is this law? 4b. Who prosecutes this kind of civil law in the United States? 4c. What are the possible consequences of conviction of violating this civil law? 4d. Have other employees of the Big 4 been accused of violating this civil law or a similar civil law? 5a. What quality control measures or mechanisms do KPMG and other CPA firms have to prevent a Scott London problem? 5b. Obviously, the Scott London problem was not prevented by KPMG's quality control measures. Brainstorm - what sort of quality control measure or measures could prevent a future Scott London problem? 6. In January 2016, the PCAOB submitted to the SEC, for its approval, two new rules (Rule 3210, Amendments, and Rule 3211, Auditor Reporting of Certain Audit Participants) and one new form (Form AP). Among other things, these will require that the name of the audit engagement partner, for all audits of US publicly held companies, be disclosed to the public. Do other countries require this disclosure? See page 8 in the PCAOB December 15, 2015 Release at http://pcaobus.org/Rules/Rulemaking/Docket029/Release-2015-008.pdf Do you think such a requirement would help prevent a future Scott London problem? Why or why not? Also, what are the overall pros and cons of such a requirement? 7. On April 25, 2014, Scott London was sentenced by Judge George Wu. What sentence did Scott London receive? Do you feel this was an appropriate sentence, under the circumstances? 8. This is a hard question to answer. Scott London has admitted he had a lapse of judgment, but does not know why he had a lapse of judgment and did what he did. Speculate as to why Scott London did what he did. First listen (you also can read the transcript) to this radio interview of Scott London: http://www.npr.org/2016/01/07/462230406/an-insider-trader-caught-on-tape-tells-all 1 2 3 4 5 6 7 8 LYNN M. DEAN, Cal. Bar No. 205562 Email: deanl@sec.gov WILLIAM S. FISKE, Cal. Bar. No. 123071 Email: fiskew@sec.gov Attorneys for Plaintiff Securities and Exchange Commission Michele Wein Layne, Regional Director Lorraine B. Echavarria, Associate Regional Director John W. Berry, Regional Trial Counsel 5670 Wilshire Boulevard, 11th Floor Los Angeles, California 90036 Telephone: (323) 965-3998 Facsimile: (323) 965-3908 9 UNITED STATES DISTRICT COURT 10 CENTRAL DISTRICT OF CALIFORNIA 11 12 13 SECURITIES AND EXCHANGE COMMISSION, 16 COMPLAINT Plaintiff, 14 15 Case No. vs. SCOTT LONDON AND BRYAN SHAW, Defendants. 17 18 19 20 Plaintiff Securities and Exchange Commission (the \"SEC\") alleges as follows: JURISDICTION AND VENUE 21 22 23 24 25 26 27 1. The SEC brings this action pursuant to Sections 21(d) and 21A of the Securities Exchange Act of 1934 (\"Exchange Act\"), 15 U.S.C. 78u(d) & 78u-1. 2. This Court has jurisdiction over this action pursuant to Sections 21(e), 21A and 27 of the Exchange Act, 15 U.S.C. 78u(e), 78u-1 & 78aa. 3. In connection with the conduct described in this complaint, Defendants, directly or indirectly, made use of the means or instrumentalities of 28 1 1 2 interstate commerce, or the mails, or the facilities of a national securities exchange. 4. Venue is proper in this district under Section 27 of the Exchange Act, 3 15 U.S.C. 78aa, because a substantial portion of the conduct alleged in this 4 complaint occurred within the Central District of California. As alleged in this 5 complaint, much of the conduct arose out of Defendant Scott London's 6 misappropriation of material non-public information while he worked in Los 7 Angeles, California and out of Defendant Bryan Shaw's trading on that 8 information while living and working in Lake Sherwood and Encino, California, 9 respectively. 10 11 SUMMARY OF THE ACTION 5. This SEC enforcement action concerns insider trading by Defendants 12 Scott London (\"London\") and Bryan Shaw (\"Shaw\") between 2010 and 2012 in 13 the securities of five companies which were clients of KPMG LLP (\"KPMG\"). 14 London, until his recent termination resulting from his conduct alleged in this 15 complaint, was a lead partner at KPMG and used his position at KPMG to 16 misappropriate material, non-public information regarding these five companies. 17 He passed this material, non-public information, which concerned the companies' 18 upcoming release of financial results and earnings or merger announcements, to his 19 friend and co-Defendant Shaw, who then traded in the companies' securities using 20 that information. 21 6. By providing Shaw with material, non-public information concerning 22 KPMG clients, London breached a duty of trust and confidence that he owed to 23 KPMG and clients he audited. London and Shaw have both admitted their illegal 24 conduct. London also notified KPMG of his actions on or about April 5, 2013, 25 causing the firm to immediately terminate him. 26 27 7. Shaw made at least $1.27 million in illicit profits by knowingly trading on the material, non-public information that London provided him in 28 2 1 violation of London's duty of trust and confidence owed to KPMG and clients he 2 audited. In exchange for this information, Shaw paid London $50,000 in cash and 3 provided him with jewelry, meals and tickets to entertainment events, as well as 4 other benefits. 5 8. By engaging in this conduct, Defendants London and Shaw violated 6 Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Exchange Act Rule 7 10b-5, 17 C.F.R. 240.10b-5. The SEC, therefore, seeks permanent injunctions 8 prohibiting future violations, disgorgement of ill-gotten gains together with 9 prejudgment interest, and civil penalties. 10 11 DEFENDANTS 9. Scott London, CPA, age 50, resides in Agoura Hills, California. 12 Until his termination on April 5, 2013, London was the partner in charge of 13 KPMG's Pacific Southwest audit practice. He had been employed by KPMG since 14 1984, and has been licensed as a CPA in California since 1987. London is licensed 15 as a CPA in Nevada as well. 16 17 10. Bryan Shaw, age 52, resides in Lake Sherwood, California. Shaw is the owner and operator of a jewelry business located in Encino, California. 18 19 RELEVANT ENTITIES 11. KPMG LLP is a Delaware limited liability partnership and the U.S. 20 member firm of the KPMG network of independent member firms affiliated with 21 KPMG International Cooperative, a Swiss entity. KPMG is registered with the 22 Public Company Accounting Oversight Board. At all relevant times and 23 continuing to the present, KPMG has provided auditing and other services to a 24 variety of companies whose securities are registered with the SEC and traded in 25 U.S. markets. 26 27 12. Herbalife, Ltd. (\"Herbalife\") is a Cayman Islands corporation whose offices are located in Los Angeles, California. Herbalife is a global network 28 3 1 marketing company that sells weight loss, nutritional supplements, and other 2 products through a network of independent distributors. Herbalife's common stock 3 is registered with the SEC pursuant to Section 12(b) of the Exchange Act, and its 4 shares trade on the New York Stock Exchange. Until April 8, 2013, Herbalife was 5 a KPMG audit client. On April 9, 2013, Herbalife filed a Form 8-K announcing 6 that KPMG had concluded it was not independent because of alleged insider 7 trading in the company's securities by one of KPMG's former partners. KPMG 8 resigned as Herbalife's auditor and withdrew its previously issued audit reports for 9 the fiscal years ended December 31, 2010, 2011 and 2012. 10 13. Skechers USA, Inc. (\"Skechers\") is a Delaware corporation whose 11 offices are located in Manhattan Beach, California. Skechers designs and markets 12 footwear for men and women. Skechers's common stock is registered with the 13 SEC pursuant to Section 12(b) of the Exchange Act, and its shares are traded on 14 the New York Stock Exchange. Until April 8, 2013, Skechers was a KPMG audit 15 client. On April 9, 2013, Skechers filed a Form 8-K announcing that KPMG had 16 concluded it was not independent because of alleged insider trading in the 17 company's securities by one of KPMG's former partners. KPMG resigned as 18 Skechers' auditor and withdrew its previously issued audit reports for the fiscal 19 years ended December 31, 2011 and 2012. 20 14. Deckers Outdoor Corp. (\"Deckers\") is a Delaware corporation 21 whose offices are located in Goleta, California. Deckers is a designer, producer, 22 marketer and brand manager of footwear, apparel and accessories. Deckers's 23 common stock is registered with the SEC pursuant to Section 12(b) of the 24 Exchange Act, and its shares are traded on the Nasdaq Global Select Market. 25 Deckers is a KPMG audit client. 26 27 15. RSC Holdings, Inc. (\"RSC Holdings\") was a Delaware corporation whose offices were located in Scottsdale, Arizona. RSC Holdings was an 28 4 1 equipment rental provider. RSC Holdings's common stock was formerly 2 registered with the SEC pursuant to Section 12(b) of the Exchange Act, and its 3 shares were traded on the New York Stock Exchange. On May 15, 2012, RSC 4 Holdings terminated its securities registration with the SEC pursuant to Rules 12g- 5 4(a)(1) and 12h-3(b)(1)(i) of the Exchange Act. RSC Holdings was a KPMG audit 6 client. 7 16. Pacific Capital Bancorp. (\"Pacific Capital\") was a Delaware 8 corporation whose offices were located in Santa Barbara, California. Pacific 9 Capital was a bank holding company. Pacific Capital's common stock was 10 formerly registered with the SEC pursuant to Section 12(b) of the Exchange Act, 11 and its shares were traded on The Nasdaq Stock Market. On December 18, 2012, 12 Pacific Capital terminated its securities registration with the SEC pursuant to Rules 13 12g-4(a)(1) and 12h-3(b)(1)(i) of the Exchange Act. Pacific Capital was a KPMG 14 audit client. 15 16 17 FACTS A. Defendants London and Shaw 17. Until he was terminated on April 5, 2013, London was the partner in 18 charge of KPMG's Pacific Southwest audit practice. He was the lead partner on 19 several KPMG audits, including the audits of the financial statements of Herbalife 20 and Skechers. He was also the account executive for Deckers, also a KPMG client. 21 18. Shaw and London first met one another in 2005, shortly after Shaw 22 joined a country club where London was a member. He and London quickly 23 became close friends, frequently playing golf together, as well as regularly 24 socializing with each other's families. 25 19. In 2010, London began providing Shaw with material, non-public 26 information concerning certain KPMG clients. Shaw's family-run jewelry 27 business had begun faltering in 2009 as a result of the economic downturn, and 28 5 1 London has admitted that he was trying to help Shaw due to his economic 2 situation. 3 20. Shaw knew, or was reckless in not knowing, that the information 4 London was providing him was non-public, and that London should not have been 5 doing so. Shaw also knew, or was reckless in not knowing, that he should not have 6 traded on the basis of the information he received from London. 7 21. Shaw and London communicated about the non-public information 8 almost exclusively using their cellular telephones, although on at least one 9 occasion, London disclosed non-public information in the presence of others 10 during a golf outing. 11 B. 12 London and Shaw Engaged in Insider Trading 1. 13 14 Trading in Advance of Earnings Announcements and Releases of Financial Results for Herbalife, Skechers and Deckers 22. London was the lead audit partner at KPMG for Herbalife and 15 Skechers, and therefore was able to obtain material, non-public information 16 regarding each company before each company announced its earnings or issued its 17 financial results. He was also the KPMG account executive for Deckers and 18 therefore was able to obtain material, non-public information regarding Deckers 19 before its earnings announcements. 20 23. Prior to public announcements, Shaw received material non-public 21 information from London about numerous earnings announcements and releases of 22 financial results for Herbalife, Skechers and Deckers. Shaw traded upon that 23 information by purchasing either options or stock, which he then sold following 24 these announcements and releases. London provided material non-public 25 information and Shaw traded on the following announcements and releases: 26 27 (a) The earnings announcement for Deckers's third quarter 2010 results took place on October 28, 2010. On that same date, and in advance of the 28 6 1 earnings announcement, Shaw purchased 25 call options for Deckers common 2 stock. Deckers's stock price increased 7.6% after the announcement. 3 (b) Herbalife's Form 10-Q for the third quarter of 2010 was 4 released on November 1, 2010. On October 27 and October 28, 2010, in advance 5 of the release, Shaw purchased 35 call options for Herbalife common stock. 6 Herbalife's stock price increased 3.38% after its Form 10-Q was released. 7 (c) The earnings announcement for Skechers's fourth quarter 2010 8 results took place on February 16, 2011. Between January 25 and February 16, 9 2011, Shaw placed over 20 telephone calls to London. On February 15 and 16, 10 2011, in advance of the earnings announcement, Shaw purchased 215 put options 11 for Skechers common stock. Skechers's stock price did not materially change 12 following the announcement. 13 (d) Herbalife's Form 10-K for the fiscal year ended December 31, 14 2010 was released on February 22, 2011. Between January 25 and February 22, 15 2011, Shaw placed over 20 telephone calls to London. Between January 27 and 16 February 16, 2011, in advance of the release, Shaw purchased 210 call options and 17 1,300 shares of Herbalife common stock. Herbalife's stock price increased 9.16% 18 after its Form 10-K was released. 19 (e) The earnings announcement for Skechers's first quarter 2011 20 results took place on April 27, 2011. Between April 1 and April 25, 2011, Shaw 21 placed at least ten telephone calls to London. Between April 19 and April 26, 22 2011, in advance of the earnings announcement, Shaw purchased 425 put options 23 for Skechers common stock. Skechers's stock price declined 7.5% after the 24 earnings announcement. 25 (f) Herbalife's Form 10-Q for the first quarter of 2011 was released 26 on May 2, 2011. Between April 1 and April 30, 2011, Shaw placed more than 10 27 telephone calls to London. Between April 27 and May 2, 2011, in advance of the 28 7 1 release, Shaw purchased 305 call options for Herbalife common stock. Herbalife's 2 stock price increased 13.26% after its Form 10-Q was released. 3 (g) The earnings announcement for Skechers's second quarter 2011 4 results took place on July 27, 2011. Between July 15 and July 25, 2011, Shaw 5 placed three telephone calls to London. Between July 19 and July 21, 2011, in 6 advance of the earnings announcement, Shaw purchased 1,195 put options and 7 short sold 10,000 shares of Skechers's common stock. Skechers's stock price 8 increased 18.5% after the announcement. 9 (h) Herbalife's Form 10-Q for the second quarter of 2011 was 10 released on August 1, 2011. Between July 15 and August 1, 2011, Shaw placed six 11 telephone calls to London. Between July 22 and August 1, 201, in advance of the 12 release, Shaw purchased 769 call options and 5,000 shares of Herbalife common 13 stock. Herbalife's stock price increased 5.68% after its Form 10-Q was released. 14 (i) The earnings announcement for Skechers's third quarter 2011 15 results took place on October 26, 2011. Shaw and London spoke by telephone on 16 October 26, 2011 for seven minutes. On October 26, 2011, in advance of the 17 earnings announcement, Shaw purchased 140 put options for Skechers common 18 stock. Skechers's stock price declined 5.5% after the announcement. 19 (j) The earnings announcement for Deckers's third quarter 2011 20 results took place on October 27, 2011. Shaw and London spoke by telephone on 21 October 26, 2011 for seven minutes. On October 26, 2011, in advance of the 22 earnings announcement, Shaw purchased 55 call options for Deckers common 23 stock. Deckers's stock price increased 10.8% after the announcement. 24 (k) Herbalife's Form 10-K for the fiscal year ended December 31, 25 2011 was released on February 21, 2012. Between February 6 and February 21, 26 2012, Shaw placed over 15 telephone calls to London. Between February 10 and 27 February 21, 2012, in advance of the release, Shaw purchased 345 call options for 28 8 1 Herbalife common stock. Herbalife's stock price increased 6.96% after its Form 2 10-K was released. 3 (l) The earnings announcement for Deckers's fourth quarter 2011 4 results took place on February 23, 2012. Between February 6 and February 23, 5 2012, Shaw placed over 15 telephone calls to London. On February 22 and 6 February 23, 2012, in advance of the earnings announcement, Shaw purchased 155 7 put options for Deckers common stock. Deckers's stock price declined 13.8% 8 after the announcement. 9 (m) The earnings announcement for Deckers's first quarter 2012 10 results took place on April 26, 2012. Between April 17 and April 26, 2012, Shaw 11 placed at least five telephone calls to London. Between April 19 and April 26, 12 2012, in advance of the earnings announcement, Shaw purchased 222 put options 13 for Deckers common stock. Deckers's stock price declined 25.38% after the 14 announcement. 15 24. 16 17 Shaw realized gross profits of at least $714,389 from the trades identified and described in sub-paragraphs 23(a)-(m) above. 2. Trading in Advance of Merger Announcements for RSC Holdings 18 and Pacific Capital 19 a. 20 25. The RSC Holdings and United Rentals Merger RSC Holdings was a KPMG audit client until at least December 2011. 21 On December 15, 2011, United Rentals, Inc. (\"United Rentals\") announced that it 22 was acquiring RSC Holdings for $18 per share, in a cash and stock transaction 23 valued at $1.9 billion. 24 26. In advance of this announcement, London learned information about 25 RSC Holdings's upcoming merger with United Rentals while in KPMG's Phoenix 26 office on other business. London initiated a call to Shaw on December 14, 2011 27 and shared with Shaw material, non-public information concerning the merger. 28 9 1 27. Acting on London's tip, between December 14 and 15, 2011, and in 2 advance of the announcement of the merger, Shaw purchased 27,000 shares of 3 RSC Holdings common stock. Following the announcement of the merger, RSC 4 Holdings's stock increased 58%, on volume of 63 million shares, compared to the 5 prior day's volume of less than one million shares. Shaw sold his RSC Holdings 6 stock shortly after the announcement, and realized a profit of at least $191,000. 7 b. 8 9 28. The Pacific Capital and Union Bank Merger Pacific Capital was a KPMG audit client until at least March 2012. On March 9, 2012, UnionBanCal Corporation (\"Union Bank\") announced that it 10 had acquired Pacific Capital for $46 per share in a transaction valued at $1.5 11 billion. 12 29. Based on his position at KPMG, London had access to non-public 13 information concerning Pacific Capital and its upcoming merger with Union Bank 14 in advance of the merger announcement. Sometime in early February 2012, 15 London tipped Shaw and provided him with material, non-public information 16 about the merger. 17 30. Acting on London's tip, between February 8 and March 9, 2012, and 18 in advance of the announcement of the merger, Shaw purchased 12,225 shares of 19 Pacific Capital common stock and 120 call options. After the announcement, 20 Pacific Capital's stock increased 57% on increased trading volume of 2.1 million 21 shares, as compared to 13,000 shares traded on the prior day. Shaw ultimately 22 realized a profit of at least $365,000 on the Pacific Capital stock and call options 23 he purchased. 24 C. 25 Shaw's Kickbacks to London 31. Shaw compensated London for passing him non-public information. 26 Shaw paid London over $50,000 in cash, which he usually delivered to London in 27 bags outside of Shaw's Encino, California jewelry store. Additionally, Shaw 28 10 1 routinely covered the costs of dinners and concerts the two men shared along with 2 their families, even though London's income was significantly higher than Shaw's. 3 Finally, Shaw gave London several pieces of expensive jewelry for his wife, and 4 gave London a Rolex watch that Shaw valued at $12,000. 5 32. London received approximately $50,000 in compensation in cash, 6 jewelry, and entertainment expenses in exchange for the information he provided 7 to Shaw. In making tips to Shaw, London also obtained personal benefits, 8 including, without limitation, reputational enhancement as a source of stock tips, 9 gratitude for being the cause of trading profits, and the ability, through his 10 misappropriation of information concerning corporate announcements and pending 11 acquisitions and attendant breach of duty to his employer and its clients, to confer 12 \"gifts\" of trading profits on his friend. 13 D. 14 The Aftermath 33. On or about April 4 or 5, 2013, London informed KPMG that he was 15 under investigation by the SEC and criminal authorities for insider trading in the 16 securities of several of KPMG's clients. KPMG promptly terminated London. On 17 April 8, 2013, KPMG announced that it was \"resigning two clients after 18 concluding today that the firm's independence has been impacted as a result 19 [London's] behavior, and we have informed those companies it is necessary to 20 withdraw our auditor reports.\" KPMG resigned as the auditor of Herbalife and 21 Skechers, and withdrew its audit reports for Herbalife's fiscal years 2010, 2011 22 and 2012, and its audit reports for Skeckers's fiscal years 2011 and 2012. Both 23 companies filed Form 8-Ks announcing this news on April 9, 2013, and there was 24 a temporary halt in the trading in the securities of both issuers that day. 25 34. On the afternoon of April 9, 2013, London publicly released a 26 statement in which he expressed his regret for his \"actions in leaking non-public 27 data to a third-party regarding the clients [he] served for KPMG.\" The statement, 28 11 1 which does not name Shaw, further states that his tips were done \"in an effort to 2 help out someone whose business was struggling,\" and that he \"spoke on the 3 phone\" with Shaw, providing him with \"suggestion[s]\" as to which stocks to 4 purchase, and that Shaw \"traded on the information.\" The full text of London's 5 April 9th statement is reprinted in the attached Appendix A. 6 35. Shaw also issued a public statement on April 10, 2013, in which he 7 similarly expressed regret for his \"wrongful conduct.\" In his statement, he stated 8 that \"[d]uring 2010 through 2012, I received non-public information from Scott 9 London about a number of companies and then profited substantially from stock 10 trades based upon that information.\" He further stated: \"I accept full and complete 11 responsibility for what I have done\" and \"expect that my actions will result in 12 significant civil and criminal consequences.\" The full text of Shaw's April 10th 13 statement is reprinted in the attached Appendix B. 14 E. 15 London's Breach of His Fiduciary Duty to KPMG and Its Audit Clients 36. As a partner at KPMG, London owed a fiduciary duty of trust and 16 confidence to KPMG. As a fiduciary, he was obligated to keep his firm's client 17 information confidential and not to misappropriate it for his own financial or 18 personal benefit. 19 37. As the lead KPMG audit partner for Herbalife and Skechers, London 20 was also a temporary insider of Herbalife and Skechers, and therefore owed a 21 fiduciary duty of trust and confidence to those clients. Herbalife and Skechers 22 shared confidential information about their respective earnings and financial results 23 for the corporate purpose of allowing KPMG to conduct its audits and reviews of 24 the companies' financial results. London owed a duty to these clients and 25 breached this duty when he tipped Shaw in advance of the earnings announcements 26 and release of financial results by Herbalife and Skechers. 27 38. By providing Shaw with the material non-public information that 28 12 1 London misappropriated from KPMG and its audit clients, London breached a duty 2 of trust or confidence he owed to KPMG and its audit clients. 3 F. 4 Materiality of the Non-Public Information Provided by London to Shaw 39. For each of the instances described above where London 5 misappropriated confidential and non-public information about KPMG clients and 6 provided that information to Shaw, that information was material because it would 7 be important to a reasonable investor in making his or her investment decision. 8 There is a substantial likelihood that the disclosure of the information 9 misappropriated by London and on which Shaw traded would have been viewed by 10 a reasonable investor as having significantly altered the total mix of information 11 available to investors. 12 G. 13 Defendants' Scienter 40. London has admitted that he knew that passing material non-public 14 information to Shaw was wrong, and acknowledged taking annual ethics training at 15 KPMG which explicitly prohibited employees from disclosing inside information 16 regarding clients. 17 41. Because of his experience as an audit partner at KPMG with 18 responsibility for auditing publicly-traded companies, London was, or should have 19 been, familiar with the federal securities laws concerning insider trading. 20 42. London knew or was reckless in not knowing that if he obtained 21 access to confidential information in the course of his work at KPMG that he 22 should maintain such information in confidence and not use that information to his 23 personal benefit. 24 43. Shaw acted with scienter by trading in the securities of Herbalife, 25 Skechers, Deckers, RSC Holdings and Pacific Capital while he was aware of 26 material, non-public information he obtained from London. 27 44. At all relevant times, Shaw knew, or was reckless in not knowing, that 28 13 1 London, due to his position in the audit services unit at KPMG, had access to 2 material, non-public information about earnings releases, financial results and 3 prospective mergers involving KPMG's audit clients. 4 45. Shaw knew, or was reckless in not knowing, that if he obtained access 5 to confidential information to which London had access in connection with his 6 employment at KPMG, that Shaw should maintain such information in confidence 7 and not use that information to his personal benefit. 8 9 10 46. Shaw knew, or was reckless in not knowing, that the information provided to him by London regarding Herbalife, Skechers, Deckers, RSC Holdings and Pacific Capital was confidential and material, non-public information. 11 CLAIM FOR RELIEF 12 Fraud In Connection With The Purchase Or Sale Of Securities 13 Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder 14 15 16 47. The SEC realleges and incorporates by reference paragraphs 1 through 46 above. 48. As alleged above, while a partner at KPMG, Defendant London 17 learned material non-public information concerning KPMG audit clients. At all 18 relevant times, London owed KPMG and its audit clients a fiduciary duty, or 19 similar duty of trust or confidence, to maintain such information in confidence. 20 49. London, in breach of fiduciary duty or similar relationship of trust or 21 confidence owed to KPMG and its audit clients, misappropriated the material, non- 22 public information described above from KPMG and its audit clients in breach of 23 his duties to them and used that information to tip Shaw, with whom he had a 24 friendship. 25 50. Shaw knew, or was reckless in not knowing, that the information he 26 received from London was material, non-public information that London had 27 misappropriated from KPMG and its clients, and that it was unlawful for Shaw to 28 14 1 2 use the information for his benefit. 51. Shaw used the information he received from London to purchase and 3 trade securities in Herbalife, Skechers, Deckers, RSC Holdings and Pacific Capital 4 for his own benefit. 5 52. The misappropriated information was material because it would be 6 important to a reasonable investor in making his or her investment decision. There 7 is a substantial likelihood that the disclosure of the misappropriated information 8 would have been viewed by a reasonable investor as having significantly altered 9 the total mix of information available to investors. 10 53. At all relevant times, London and Shaw acted knowingly and/or 11 recklessly by misappropriating material, non-public information about the earnings 12 announcements and financial results of Herbalife, Skechers and Deckers, and the 13 acquisitions of RSC Holdings and Pacific Capital, and, in Shaw's case, purchasing 14 and trading in the securities of those issuers on the basis of that information. 15 Because he was aware of the material non-public information at the time he 16 purchased the securities, Shaw traded on the basis of that material non-public 17 information. 18 54. By engaging in the conduct described above, London and Shaw, 19 directly or indirectly, in connection with the purchase or sale of securities, by the 20 use of means or instrumentalities of interstate commerce, or the mails, or the 21 facilities of a national securities exchange, with scienter: 22 a. employed devices, schemes, or artifices to defraud; 23 b. made untrue statements of material facts or omitted to state 24 material facts necessary in order to make the statements made, 25 in light of the circumstances under which they were made, not 26 misleading; and/or 27 28 15 1 c. 2 3 engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon any person. 55. By engaging in the foregoing conduct, London and Shaw violated, 4 and unless enjoined will continue to violate, Section 10(b) of the Exchange Act, 15 5 U.S.C. 78j(b), and Exchange Act Rule 10b-5, 17 C.F.R. 240.10b-5. 6 7 PRAYER FOR RELIEF WHEREFORE, the SEC respectfully requests that the Court: 8 9 10 I. Issue findings of fact and conclusions of law that London and Shaw committed the alleged violations. 11 12 II. Issue judgments, in a form consistent with Fed. R. Civ. P. 65(d), 13 permanently enjoining Defendants London and Shaw and their agents, servants, 14 employees, attorneys and those persons in active concert or participation with 15 them, who receive actual notice of the order by personal service or otherwise, from 16 violating Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5 17 thereunder, 17 C.F.R. 240.10b-5. 18 III. 19 Order London and Shaw to disgorge the illegal trading profits described 20 herein, plus prejudgment interest. 21 IV. 22 Order London and Shaw to pay civil penalties under Section 21A of the 23 24 25 Exchange Act, 15 U.S.C. 78u-1. V. Retain jurisdiction of this action in accordance with the principles of equity 26 and the Federal Rules of Civil Procedure in order to implement and carry out the 27 terms of all orders and decrees that may be entered, or to entertain any suitable 28 16 1 application or motion for additional relief within the jurisdiction of this Court. 2 3 VI. Grant such other and further relief as this Court may determine to be just and 4 necessary. 5 Dated: April 11, 2013 6 7 8 Lynn M. Dean William S. Fiske Attorneys for Plaintiff Securities and Exchange Commission 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17