Back in September 2013 I briefly discussed the SEC’s enforcement action against former KPMG partner Scott London over his insider trading activities: Ex-KPMG partner banned from practice before the SEC; sentencing date is in December.
Just realized last week I had not actually read the enforcement action. So I went back and took a look at it. You can find it here.
One thing that jumped out at me was the SEC asserted there were 18 specific incidences of passing inside information. That prompted me to dig a little deeper and write this and the next post.
Why going to this detail? Seems to me there is some ongoing interest in Scott London’s case. I am not aware of anyone who has chronicled the story in the depth that I’ve gone into. Perhaps that’s because there’s relatively limited interest in an old case. Perhaps nobody else is interest in such trivial details as the exact number of insider-trading incidents. I’ll dive into the details anyway. Perhaps I’m just weird, but I’m interested.
Here goes…
Context of timing
The SEC Accounting and Auditing Enforcement is dated September 27, 2013.
4/11/13 – Both the SEC complaint and criminal complaint from the FBI were filed.
5/25/13 – Mr. London signed a plea agreement with the Department of Justice.
9/27/13 – The SEC action was completed.
12/27/13 – Effective date Mr. London surrendered his CPA license.
I don’t know much about the regulatory world for public companies because I stay far, far, far away from that world in my CPA practice. That means I don’t know how to read the timing of the final action and am not able to really understand any nuance about the imposed sanctions. I’m using this case to learn a bit more.
Enforcement action
The SEC enforcement action is built around two issues. First by trading inside information Mr. London lost his independence in regard to the five clients for which he shared confidential information. The line of reasoning is that receiving cash from his buddy’s insider-trading gave him a direct financial interest, meaning he was no longer independent.
The second issue appears to be that by losing his independence he made KPMG non-independent. In turn that means when those five clients submitted reports to the SEC their reports contain financial statements from a non-independent auditor. Thus in turn the registrants did not comply with regulations requiring financial statements which are audited by an independent CPA. Essentially Mr. London’s actions invalidated his client’s filings with the SEC.
The technical findings of the SEC will likely only be understandable to people who deal with securities laws. Those findings are:
1a) Based on the foregoing, the Commission finds that London (a) willfully aided and abetted and caused KPMG’s violations of Rule 2-02(b)(1) of Regulation S-X; and (b) willfully aided and abetted and caused the Audit Clients’ violations of Sections 13(a), 14(a) and 14(c) of the Exchange Act, and Rules 13a-1, 13a-13, 14a-3 and 14c-2 promulgated thereunder.
b) Based on the foregoing, the Commission finds that London engaged in improper professional conduct pursuant to Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.
If those comments are incomprehensible, take it from me those are serious problems.
Sanctions
The sanctions from the SEC are:
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London shall cease and desist from committing or causing any violations and any future violations of Sections 13(a), 14(a) and 14(c) of the Exchange Act and Rules 13a-1, 13a-13, 14a-3 and 14c-2 promulgated thereunder, and of Rule 2-02(b)(1) of Regulation S-X.
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London is denied the privilege of appearing or practicing before the Commission as an accountant.
In the securities world those are severe sanctions.
Next post: How many incidents were there? Comparison of the insider-trading incidents as reported by the SEC, filed plea agreement, and initial FBI complaint.