Scout Tufankjian for The New York TimesA Herbalife distributor in New York.2:07 p.m. | Updated
Federal authorities in Los Angeles are investigating a former senior executive at KPMG on suspicion of leaking secret information to a stock trader, according to people with direct knowledge of the inquiry.
Scott I. London, the partner in charge of the audit practice for KPMG in Southern California, was fired by his employer because of the suspected passing of confidential data to an unnamed individual, a person briefed on the matter said.
The case involves alleged tips about confidential data related to Herbalife, the seller of nutritional supplements, and Skechers USA, the footwear maker, according to these people. On Tuesday morning, both Herbalife and Skechers announced that KPMG had resigned as their auditor.
Both the United States attorney’s office in Los Angeles and the Securities and Exchange Commission’s outpost there are investigating the case, people briefed on the matter said.
Skechers added that, according to KPMG, the former partner in question – Mr. London — was cooperating with authorities.
Skechers paid $50 million last year to resolve claims of false advertising.Mr. London, 50, could not immediately be reached for comment. He worked at KPMG for 29 years, according to a profile on LinkedIn. A resident of Agoura Hills, California, Mr. London serves as chairman of the L.A. Sports Council and sits on the board of directors of the Los Angeles Area Chamber of Commerce.
The news of possible insider trading emerged in an unusual fashion late on Monday, when KPMG announced on its Web site that it had fired a senior partner in its Los Angeles office because of the suspected passing of confidential information to an unnamed individual “who then used that information in stock trades involving several West Coast companies.”
The firm said it had to resign as auditor from several companies “after concluding today that the firm’s independence has been impacted” because of the partner’s behavior. It added that the partner acted “with deliberate disregard for KPMG’s longstanding culture of professionalism and integrity.”
A government action against the former KPMG partner would add to the recent push by prosecutors and securities regulators to root out insider trading, a campaign that has yielded about 180 civil actions and more than 75 criminal prosecutions.
The news added to a swirl of publicity surrounding Herbalife, a supplement seller that has been in the middle of a well-publicized battle involving several hedge fund managers. William A. Ackman of Pershing Square Capital Management has said that he believes Herbalife is a “pyramid scheme,” and he has a $1 billion bet in the place that the price of the stock will drop. On the other side of the trade is the activist investor Carl C. Icahn, who owns a large position in Herbalife shares.
Herbalife, based in Los Angeles, said that KPMG had informed the company on Monday afternoon it was resigning as auditor because its independence had been impaired.
In its announcement, Herbalife said it believed its financial accounts for its last three fiscal years remained accurate. But KPMG, citing concerns about its independence, withdrew its audits for those years. KPMG also said that its resignation was in no way related to Herbalife’s “financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason.”
It is unclear when Herbalife will hire a new auditor, though any such firm would probably take a fresh look at the company’s financial records.
David Weinberg, the chief financial officer of Skechers, said in a statement that he believed none of the company’s audited filings misstated its results or financial condition. Still, KPMG was withdrawing its audit reports for the company’s last two fiscal years.
The emergence of a possible insider trading case involving KPMG emerged in an unusual fashion late on Monday, when the firm announced on its Web site that it had fired a senior partner in its Los Angeles office.
The news is an embarrassment to KPMG, which came under scrutiny last decade for its role in marketing tax shelters. Two former KPMG partners are serving prison terms for selling fraudulent tax shelter schemes to clients.
Tim Connolly, a KPMG spokesman, did not immediately respond to a request for comment.
In the statement issued Monday evening, KPMG said the firm’s “22,000 partners and employees unequivocally condemn this individual’s rogue actions.” The firm did not name the companies whose confidential information was disclosed as part of the scheme.
Skechers, too, has been in the cross hairs of regulators. Last year, it agreed to pay $50 million to resolve federal and state accusations that it misled the public with false advertising related to its “toning shoes.” The company claimed in its ads, including one featuring Kim Kardashian, that the sneakers would help consumers tone muscles and lose weight.
