Attestation Update – A&A for CPAs

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Sentencing position papers filed with court in Scott London insider trading case

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The U.S. Attorney and Scott London both filed their sentencing position papers on April 7. This is in advance of the sentencing, expected this month.

Mr. London will file his sentencing position brief under seal, according to a filing from his attorney. That means we won’t be reading his arguments, as presented in the filing, anytime soon.

The government’s filing mentions there will be a sentencing hearing on April 21, 2014 at 8:00 a.m. That means that as of 4/7, the hearing is still set for 4/21, as previously mentioned in court filings.

The US Attorney is recommending 3 years in prison, 3 years supervised release, and a $100,000 fine. (There’s also a $100 special assessment. I have no idea {yet} what that is for.)

Prison term

The government recommendation is 36 months in prison. This is also the recommendation of the federal probation officer.

Federal sentencing guidelines point toward a term of 46 to 57 months. That is mitigated by Mr. London accepting responsibility immediately, his lack of previous criminal record, and having previously led an exemplary life. The filing also acknowledges Mr. London has “serious collateral punishment” for the crime.

The filing spends a few pages arguing against Mr. London’s position that only the foreseeable gains should enter into the sentencing calculation, not the total amount of actual proceeds. The difference of his thinking that there was $200K of gains versus the actual gains of $1.27M makes a big difference in the sentencing calculation. The government filing quotes a variety of sources, all of which seem to be making the point that it is the total haul, not what you knew about, that enters into sentencing guidelines.

A few comments on this being a minor incident – the filing says:

Thus, this as not a “mistake” or a “lapse in judgment.” This was a calculated and corrupt arrangement – – one that generated approximated $70,000 in secret profits to defendant and more than $1 million in proceeds to Shaw.

One argument in support of that idea is the government’s characterization that Mr. London seemed unconcerned about resuming the scheme at Mr. Shaw’s prodding. We know that request came at the request of the FBI and those conversations were recorded. The discussions weren’t along the lines of something like “yeah, they’ll do okay this quarter”, but were in fact quite detailed in terms of results, and the likely impact on stock prices. The government alleges that Mr. London said, on tape, something about there will be more opportunities for them to make money.

An interesting tidbit in the government filing says that probation would send a message that insider trading isn’t serious. I can’t tell if that reference to probation is a straw man or actually rebutting an argument that is in play. My guess is for the straw man option – if it were a serious argument, then it seems to me there would be pages of rather strong rebuttal. (See update below)

Trust and reputation are neither an internal control nor a mitigating factor

In the audit world, CPAs often say trust is not an internal control. On the contrary, having an extremely high level of trust is a prerequisite for handing cash, and especially payroll records. Trusting your bookkeeper is a minimum skill to do the job.

The government filing (p 22) acknowledges many letters of support from Mr. London’s friends, acquaintances, and colleagues. Those letters describe a diligent, hard-working accountant who had great trust from his colleagues. The filing argues that creates a higher responsibility to protect confidential information and is not a mitigating factor.

Ironically, it is that extremely high trust that KPMG, its clients, and Mr. London’s colleagues had in him that enabled him to have access to the information on which he committed insider trading.

As for the serious collateral consequences, the filing points out those are the direct results of Mr. London’s individual choice of action.

Restitution and fine

The government filing indicates the KPMG has not requested restitution. Thus restitution is not part of the sentencing. Public comments from KPMG indicate that will take place through civil litigation.

Federal guidelines indicate a fine of between $10k and $100k is indicated, according to the filing. The government argues for $100K on the basis that fines are designed to be punitive and the presentencing report indicates he has the ability to pay that amount.

The L.A. Times has a brief story today: KPMG auditor should get 3 years for insider trading, prosecutors say.

Update:  Oops. The filing by Mr. London actually did request probation. I missed references to that in my reading of the government’s filing. See update here. Several minor typos and grammar errors were corrected in this post.

Update: 14 months.

Written by Jim Ulvog

April 8, 2014, 15:37 pm at 3:37 pm

Posted in Audits

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  1. […] was filed on 4/7; item #47 on the docket. I discussed the government’s recommendation here and […]


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