Trading Case Embroils KPMG- Partner who Audited Herbalife and Skechers Admits Giving Stock Tips to Friend.

"A former KPMG LLP partner admitted passing on stock tips about clients to a friend who gave him cash and gifts, in a scandal that led the big accounting firm to resign as auditor for two companies. Scott London, the partner in charge of audits of Herbalife Ltd. and Skechers USA Inc. until KPMG fired him last week, told The Wall Street Journal Tuesday that I regret my actions in leaking nonpublic data to a third party. Mr. London said his leaks started a few years back, adding that KPMG bore no responsibility for his actions. What I have done was wrong and against everything he believed in, said Mr. London, who was based in Los Angeles for the accounting firm. The Federal Bureau of Investigation and the Securities and Exchange Commission are looking into allegations of insider trading in the shares of certain KPMG clients, said people familiar with those probes."

"The investigations are the latest sign of authorities efforts to crack down on insider trading. They are a fresh black eye for a Big Four accounting firm, following widespread criticism by regulators and investors of audit firms failure to flag problems at large banks and securities firms in the years leading up to the financial crisis. In resigning the two audit accounts, KPMG said it was withdrawing its blessing on the financial statements of Herbalife, a nutrition company, for the past three years and of Skechers, a shoe company, for the past two. KPMG stressed, however, that it had no reason to believe there were any errors in the companies books. Both companies said they are moving to find new auditors. Herbalife has been in the middle of a tug of war between hedgefund manager William Ackman who has questioned the companys business model and bet on its stock to fall and Herbalife investors Carl Icahn and Daniel Loeb. Herbalife shares fell 3.8% Tuesday, while Skechers shares rose 2%. Neither KPMG nor Mr. London named the recipient of Mr. Londons tips. The recipient isnt associated with a hedge fund or other professional investor, said one person familiar with the matter. Mr. London said he didnt pass any documents but spoke to the person by phone. He said he gave the person no real significant information usually theyre doing well, or theyre not doing well. The person traded on the information, butI am not aware of how much he profited, Mr. London said. Mr. London said the person gave him a discount on a watch, bought him dinners from time to time and on a couple of occasions gave him $1,000 to $2,000 in cash. Harland W. Braun, a lawyer for Mr. London, had a somewhat higher estimate of how much Mr. London received. His client hasnt reached a deal to settle any allegations that may result, the lawyer said. He described Mr. London as trying to minimize the possible damage caused by his actions to KPMG as well as help the authorities. KPMG doesnt expect the events to lead to its resigning from any additional audit engagements, according to a person familiar with the firms thinking. The Skechers and Herbalife accounts are the only ones in which Mr. London was the partner in charge of the audit, this person said."

"Allegations that audit partners have exploited confidential client information havent happened often, say legal experts. Audit partners obviously have access to potential insider information, by the nature of their job, said Howard Schiffman, a partner at law firm Schulte Roth & Zabel LLP and a former SEC trial attorney. However, weve not seen a large number of enforcement actions in this area, particularly involving the major accounting firms. One exception to this general rule: Thomas P. Flanagan, a former Deloitte & Touche LLP partner in Chicago, was sentenced last year to 21 months in prison after he pleaded guilty to securities fraud. Authorities said Mr. Flanagan made $430,000 in illegal profits by trading on information about Deloitte clients such as Best Buy Co., Walgreen Co., Sears Holdings Corp. and Motorola Inc. U.S. companies and audit firms typically dont identify the individual partners who supervise each audit. Mr. London wasnt named in Herbalife or Skechers filings as the KPMG partner in charge of their outside audits. A 2011 proposal from the governments auditindustry regulator would require such partners to be identified. Some other countries already have such a requirement. In this case, the alleged insider trading was detected by federal investigators, rather than the audit firm, according to people familiar with the matter. KPMG appears confident its systems werent to blame, said one of those people. Skechers said in a statement it was informed that its lead audit partner from KPMG was under federal investigation for allegedly providing nonpublic information about clients, including Skechers, to a third party in exchange for money. David Weinberg, chief financial officer of Skechers, said he wasnt told what information about Skechers was allegedly divulged, or to whom. KPMG has been Skecherss auditor since before 1999, the year it went public, and Mr. London audited Skechers for two multiyear stretches, according to Mr. Weinberg, who recalls having dinner with Mr. London on several occasions. He was one of the last guys I would ever suspect of doing this, said Mr. Weinberg. The need for firms such as Skechers and Herbalife to have a new firm reaudit financial statements is not trivial in terms of time and expense and disruption, said Joseph Carcello, an accounting professor at the University of Tennessee. KPMG clients CVB Financial Corp., a banking company, and insurer Unico American Corp. said Tuesday they were monitoring the situation after learning their information wasnt involved. Rogue employees do these types of things, but the question is, what controls does KPMG have to ensure that this kind of thing does not happen or will not happen in the future? said Lester Aaron, chief financial officer for Unico American. Rogue is also a term KPMG used for the employee it fired. Chris Myers, president of CVB Financial, the holding company for Citizens Business Bank, said KPMG has been very succinct with their comments.

1. What principles of the Professional Code of Conduct were violated and how?"