Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Consequences – insider trading edition #1

with 2 comments

Let’s examine the consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information. I’ve discussed that here and here.

For some time I’ve been writing on the tragedy of fraud with a focus on the consequences that befall the perpetrator. I’ll continue that discussion by looking at the public reports for this situation.

Is possible jail the only bad thing on the horizon? Not quite. There’s a long list of bad things in view.

As you read this, keep in mind my comments include a mixture of reported facts and my guesses & assumptions. I’ll try to label the discussion accordingly.

Let’s explore the consequences, assuming the reality is the same as what has been reported. Here’s the list I can think of:

  • Jail time
  • Criminal fines
  • Legal fees for criminal case
  • Civil fines
  • Criminal tax enforcement
  • Publicity
  • Loss of employment
  • Loss of reputation
  • Loss of professional license
  • Limited future employability
  • Litigation from employer
  • Legal fees for civil litigation
  • Financial devastation

Jail time

The alleged insider trading has led to a criminal indictment on one count for conspiracy to commit securities fraud through insider trading.

Multiple sources have said the maximum jail time is five years in prison. Mr. London’s attorney is quoted as saying he will plead guilty at a May 19 hearing. It is up in the air what the sentence will be, but the feds have been pushing hard to get serious jail time for insider trading.

Looks to me like time in the federal pen is likely.

Criminal fines

There are serious fines on the table as part of the criminal charges.

I’ve not researched the federal code, so will go with the maximum penalties outlined by Walter Hamilton in the Los Angeles Times, In KPMG insider trading case, crime and blunders alleged:

The federal charge of conspiracy to commit securities fraud through insider trading carries a statutory maximum penalty of five years in prison and a fine of $250,000, or twice the gross gain or loss from the offense.

Just trying to do insider trading can cost you $250,000. With allegedly successful trades on the table alleged by the SEC to have gains in the range of $1.27 million, the criminal penalty could be something in the range of $2.5 million. That of course assumes a conviction and further proof the SEC’s numbers are correct. The numbers in the indictment are a little lower, I think.

Legal fees for criminal case

Mr. London retained a high-powered attorney. I have no clue what fees are involved to get that kind of talent on board. But I know the rates are going to be extremely high.

I’d also make a very wild guess that attorney will have several of his staff working the case. I’d make another wild guess that everyone involved has been working a lot of hours every week since the FBI’s first visit.

That will cost a fortune.

Civil fines

The SEC has filed civil enforcement charges. I don’t have enough experience in the public securities world to know what enforcement looks like for future employment bans or the additional civil penalties mentioned or any other consequences the SEC is asking for in items II , IV, and V at the end of the enforcement filing.

We can just look at item III which asks for disgorging illegal trading profits, which the SEC claims is $1.27 million.

That means likely penalty from the SEC is at least $1.27 million. I have no idea if there is a multiplier of some sort. Anyone care to comment on that?

Reports in the criminal indictment that Mr. London admitted that he disclosed inside information during his interview with the SEC and FBI might make it a bit hard to defend against the SEC’s claims, although granting use immunity enters the issue in ways that I don’t understand.

To be continued.

Written by Jim Ulvog

April 12, 2013, 10:24 am at 10:24 am

Posted in Audits

Tagged with ,

2 Responses

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  1. Jim, What about divorce and/or impact on his family?

    Francine McKenna

    April 12, 2013, 10:40 am at 10:40 am

    • I’ll add that. Thanks for the reminder.

      Can you imagine having to explain to your wife that the reason the FBI showed up at your door at 6 am is because you’ve been breaking the law? Over the last three years? How do you explain to your kids you likely will go to jail?

      Yes, I’ll add that to the list.

      Jim Ulvog

      April 12, 2013, 11:32 am at 11:32 am


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