On December 23, Planet Money aired an interview with Scott London: Episode 671: An Insider Trader Tells All. He is the now-felon, formerly KPMG regional audit partner who earned 14 months in federal housing for insider trading.
There are a couple of new pieces of information in the interview. More on that in a moment.
Rumbi Bwerinofa discusses the interview at Figuring Financial Forensics: On The Record.
She was amused at the description of Mr. London’s shock at finding out the amount of the gains realized by his buddy, Bryan Shaw. In the interview Mr. London says he was in a car with his attorney driving him somewhere as Mr. London read in the newspaper the amount of the gains being in the range of over a million dollars. He asked his attorney to pull the car over because he thought he was going to be physically ill.
Ms. Bwerinofa points out fraud usually develops this way. Schemes start small and then grow to something huge. Having been given only $70,000, Mr. London thought this was still in the range of small potatoes.
She ponders whether Mr. London had previously pondered the idea that there is no honor among thieves. He apparently did not consider that his cheating friend could be cheating him.
Mr. London pointed out in the interview, and earlier comments, that the proceeds were going to be split three ways. That would imply that the total illicit gains would have been in the range of $200,000 or so. Not well over $1,000,000, perhaps as much is $1.6M.
Willfully crossing the line?
We need to be careful of drawing too many inferences from the interview because it was heavily edited (as expected) with many of Mr. London’s comments spliced together with commentary by the interviewers. That means I don’t know the sequence of comments in the interview or the context of any one discussion or the sentences before & after the aired comment. With that qualifier in mind, I do want to point out a few things.
As an indicator of how deeply he knew this was wrong, Mr. London said that on occasion he and staff would get on the elevator at the 30th floor and chat about work. There were many times when other people got on the elevator and he put a finger to his lips as a signal to everyone to stop talking. He mentioned that friends would jokingly ask him for stock tips and he would say nah, can’t do that.
The interview suggests Mr. London willfully crossed the line. My previous impression was that he gradually crossed the line into illegality.
His story goes:
Brian said, “Hey, I know how we can both make a little bit of money. You give me information, I’m gonna trade on it. I will split it three ways. I keep a third, you keep a third, and the government gets a third for income taxes, capital gains taxes.”
The interviewer says Mr. London said no when Mr. Shaw first raised the idea.
Here is where I get confused. I would expect that many professionals would respond to such a request with a string of obscenities. I hope most professionals would provide a forceful and unequivocal ‘no’.
I don’t understand how you could maintain a friendship with someone who repeatedly asks you to break the law. Such a person is not your friend. This is a far bigger philosophical question that I need to ponder some more.
How did he then give in? The spliced comments say:
It’s a battle. The simple version, on one side is that I knew it was wrong, it’s stupid. And the other side is, well, he’s a good friend and I trusted him.
He thought Mr. Shaw would only be trading $10,000 or $15,000, and it would be okay.
It is possible the explicit request came after Mr. Shaw made insider trades based on casual comments without Mr. London knowing and then dropped that specific news to Mr. London. Then he suggested stepping up to intentional leaks of info.
This interview shows there was a point where Mr. London intentionally crossed the line, regardless of when each of the conversations took place.
The transfers of cash previous to the FBI sting had been in restaurants or somewhere inside indoors. This time Mr. Shaw asked to meet him in the parking lot. That led to the now-infamous photo of Mr. London accepting an envelope. He said it had 50 $100 bills. The interviewer asked what you do with that much money. Mr. London said he stored it in his sock drawer at home.
There’s a short discussion of motivation in the interview. The interviewer asked, did Mr. London do this for the thrill? No. To make his friend like him more? No.
Interviewer summarized the remainder of that phase of the interview by saying Mr. London did it to help his friend and didn’t think they would get caught.
Interviewer says Mr. London indicated he specifically passed information about a dozen times. (Update: SEC enforcement action lists 18 specific incidents of passing inside information.)
Comment in the interview is Mr. London spent one month in solitary when he arrived in prison. As I’ve mentioned before that was due to a mixup in that Mr. London and Mr. Shaw were at the Lompoc facility simultaneously. Wouldn’t work to have the big target and the guy that rolled over on him walking around in the same prison. Thus, Mr. London was put in solitary.
Mr. London indicates his friends are still standing by him. He was able to resume “100%” of his personal life. The only exception he mentioned elsewhere in the interview is his country club asked him to resign his membership.
His friends have told him to his face that he is an idiot. But they stand by him as a friend.
Mr. Shaw does not want to talk to media.
The interviewer called Mr. Shaw for comment as a part of the story. That’s what good journalists do. After the interviewer identified himself on the phone, Mr. Shaw indicated he did not want to talk.
The interviewers struggled with the idea of why insider trading is wrong. They tried to understand how it can be illegal if there’s no specifically identifiable person who was harmed. The person selling the stock wanted to sell and was freely willing to do so at the price Mr. Shaw paid. And the person buying at a higher price from Mr. Shaw was willing to do so at that higher price.
They resolved that confusion when they understood the profits realized really belong to some investor who would have otherwise realized the gain when the stock went up. The lack of an explicitly identifiable victim does not change that the underlying issue is theft.
Check out the full interview. If you have read much of my discussions of Mr. London, you will enjoy the 18 minute interview