Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Number of Scott London’s insider trading incidents based on cross-referencing SEC action, plea agreement, and FBI complaint.

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FBI surveillance photo of Mr. Shaw passing $5,000 to Mr. London. Photo is included in the criminal complaint available in PACER system and thus is a public document.

FBI surveillance photo of Mr. Shaw passing $5,000 to Mr. London. Photo is included in the criminal complaint available in PACER system and thus is a public document.

Previously discussed the SEC enforcement action against now-felon, formerly-living-on-top-of-the-world KPMG regional audit partner Scott London for his insider trading activities.

After reading the criminal complaint along wot the SEC’s action, I now think the actual number of incidents of insider trading is two or three times more than even the SEC claims.

The enforcement action listed 18 specific incidences of insider-trading. This is larger than any number I’ve seen previously, which drew my interest. My recollection is there had been around a dozen or so incidents. Decided to compare three documents to see what they show about the extent of insider-trading. I looked at:

If you want to read the plea agreement and criminal complaint, I provided links here.

The plea agreement states there were at least 14 incidents. The criminal complaint cites a slightly small number but that is a soft estimate by Mr. London. What caught my attention is the SEC enforcement action lists 18 incidents.

The SEC’s listing includes:

Deckers 10/28/10 Financial results for fiscal third quarter
Herbalife 11/1/10 Financial results for fiscal third quarter
Skechers 2/16/11 Financial results for fiscal fourth quarter and year end
Herbalife 2/22/11 Financial results for fiscal fourth quarter and year end
Skechers 4/27/11 Financial results for fiscal first quarter
Herbalife 5/2/11 Financial results for fiscal first quarter
Skechers 7/27/11 Financial results for fiscal second quarter
Herbalife 8/1/11 Financial results for fiscal second quarter
Skechers 10/26/11 Financial results for fiscal third quarter
Deckers 10/27/11 Financial results for fiscal third quarter
RSC Holdings 12/15/11 Agreement to be acquired by United Rentals, Inc.
Skechers 2/15/12 Financial results for fiscal fourth quarter and year end
Herbalife 2/21/12 Financial results for fiscal fourth quarter and year end
Deckers 2/23/12 Financial results for fiscal fourth quarter and year end
Pacific Capital 3/9/12 Agreement to be acquired by UnionBanCal Corporation
Deckers 4/26/12 Financial results for fiscal first quarter
Herbalife 2/19/13 Financial results for fiscal fourth quarter and year end
Deckers 2/28/13 Financial results for fiscal fourth quarter and year end

 

The count of cited incidents by client is:

  • 6 – Herbalife
  • 5 – Deckers
  • 5 – Sketchers
  • 1 – RSC Holdings
  • 1 – Pacific Capital

The plea agreement states there were at least 14 incidences with six specifically listed. Those six are:

Herbalife 5/2/2011
United Rental 12/16/2011
Herbalife 2/21/2012
Deckers 2/23/2012
Union bank 3/12/2012
Deckers 4/26/2012

 

Those 6 are included in the SEC’s list.

Plea agreement does not refer to anything after the April 2012 incident. Everything that happened in February 2013 and later would have taken place after the FBI got involved. I’m guessing that anything from 2/8/13 forward could be argued as entrapment and therefore was left out of the plea agreement.

More detail from the criminal complaint

Comparing the initial criminal complaint with the plea agreement and SEC enforcement action shows the depth of contact between Mr. Shaw and Mr. London.

For starters, the complaint cites several conversations from the FBI’s interview with Mr. Shaw on 2/8/13.  From the description it seems that there were three separate conversations about the Pacific Capital incident in March 2012. There were two or three separate conversations about the RSC acquisition, one of which was after the announcement of the acquisition. Reading the FBI agent’s description of those events with my accountant’s brain, it sure seems to me like each of those conversations would have been an independence failure and another incident of sharing confidential inside information.

Those conversations were counted as two incidents by the SEC and two incidents in the plea agreement. Again, using my simple accountant brain it seems like those conversations could have been charged as five or six incidents. Whether chargeable or not by the SEC and DOJ, there are still multiple moral failures related to the two cited incidents.

Regardless of the number of incidents charged, what that tells me is that there is a good chance each of those 18 cited incidents could involve multiple conversations, each of which would be an ethical, independence, moral, and criminal violation.

More times inside information was discussed

If you’re so interested, read the criminal complaint for conversations between Mr. Shaw and Mr. London after the FBI’s interview of Mr. Shaw on 2/8/13. There are multiple conversations between the two players, only two of which are cited by the SEC as incidents of passing insider information. Look at the extensive, ongoing conversations.

Here’s what I noted:

  • January 2013 – Mr. Shaw asserts Mr. London made a call to him in January about Herbalife. That assertion is not mentioned in either the plea agreement or SEC enforcement action.
  • 2/8/13 – FBI interviews Mr. Shaw. There were no cited incidents between this date and April 2012.
  • 2/14/13 – The two discuss Herbalife and that their earnings guidance will be increased for the next year. An ethical and criminal violation, seems to me.
  • 2/19/13 – Criminal complaint says there is a series of calls regarding Herbalife. This is cited in the SEC action as one specific incident of passing insider information.
  • 2/20/13 – The pair discussed prospects for Deckers and Herbalife. Another ethical and criminal violation.
  • 2/21/13 – Mr. London recommends slowly acquiring Herbalife stock in anticipation of them possibly going private. Another ethical and criminal violation.
  • 2/21/13 – Mr. Shaw passes $5000 in currency to Mr. London. Currency provided by FBI. Exchange was under surveillance by FBI. The pair discussed a strategy of how to make money in Herbalife. Apart from passing on the money, this is another ethical and criminal violation.
  • 2/28/13 – Discuss Deckers’ earnings result. This is cited in the SEC enforcement action as a specific incident.
  • 3/4/13 – Discuss whether it is okay to sell Deckers’ stock. Yet another ethical and criminal violation.
  • 3/7/13 – Mr. Shaw passes another $5000 in currency to Mr. London. This is the exchange that generated the now infamous photograph appeared on the front page of newspapers around the planet. Photo is at the top of this post. While in the parking lot Mr. London indicated it would be a good time to sell the Deckers’ options. Yet again, apart from passing the currency this is another insider-trading violation.
  • 3/20/13 – The FBI interviews Mr. London at his home. This is the first indication to Mr. London that he was under investigation.
  • 4/3/13 – With legal counsel present, Mr. London is interviewed by the FBI, the SEC, and prosecutors from the US Attorney’s office (i.e. DoJ).

Why all the FBI-supervised and recorded conversations?

When confronted, Mr. London immediately confessed. He quickly negotiated and signed a plea agreement. He has made several comments that the FBI-controlled phone calls and the two stings were unnecessary since he would have immediately confessed.

The FBI’s strategy is obvious even to me. Mr. London could have easily denied everything Mr. Shaw said. If that was the case, the feds would only have had a he-said, he-said case at trial, which would have been so weak as to not be worth taking to trial.

Gathering recorded evidence of at least 8 conversations and 2 photographed payments would have provided enough evidence to convict even if Mr. London denied everything and claimed entrapment. When Mr. London confessed, all the FBI-supervised contacts were unnecessary.

How do you count the number of incidents?

None of those items after the FBI interview with Mr. Shaw were mentioned in the plea agreement. Two of those items were mentioned in the SEC’s enforcement action. There are 6 incidents described in the criminal complaint which get no further mention.

In my simple brain that looks like eight incidents of severe violation of trust, extreme independence violation, and obvious criminal behavior.

None of those rolled into the plea agreement, which actually makes sense because there could be an argument whether there was entrapment since Mr. Shaw made all those calls and initiated those two meetings under the control of the FBI. Only two of those eight exchanges made it into the SEC action.

What does the background on the two early incidents and the extensive contact between the two during the month of the FBI’s investigation tell me? Looks to me like there was a far larger amount of contact between Mr. Shaw and Mr. London that was ethically and legally tainted than the mere 18 incidents cited by the SEC.

I’ll make a guess that there were two or three or four times as many incidents of passing inside information than were cited by the SEC.

What do you think?

Do I overstate?

Did I miss something?

What do you see when putting the three documents next to each other?

Written by Jim Ulvog

January 12, 2016, 8:15 am at 8:15 am

Posted in Audits, Other stuff

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2 Responses

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  1. Each enforcement action uses as much and no more than it needs to close the deal. That’s why you’ll see in other auditor inside tradingbactions that the offenses cited are also onky what is needed anything else takes more time and is overkill I have been told. My big question is why no discoplinary action against KPMG for its lapses in supervisng? I could say the same for Deloitte which has had more than one very senior guy commit independence violations.

    Francine McKenna

    January 12, 2016, 10:02 am at 10:02 am

    • Hi Francine:

      That is what I had been thinking. When the regulators or prosecutors can prove a few incidents, they have enough to convict at trial if needed. More importantly, they have enough that the offender knows there is more than enough to sink him (in this case a him). Anything more than what it takes to get a consent or plea deal takes unnecessary time and gives someone room to quibble and argue. Also takes away time from someone else who needs to be dealt with.

      Also, 18 incidents are enough to explain to everyone watching that this wasn’t an accidental slip at a dinner party or too much discussion in the elevator. This was flagrant, a pattern, and long running.

      The learning point for me is this wasn’t just 18 phone calls. It wasn’t just stepping over the line a dozen or two times. These aren’t in the gray areas. More likely it was 40 or 80 or 100 violations, each with the opportunity to say “this stops today.”

      It is better described as living on the wrong side of the dividing line between right and wrong, not just stepping over the line. Pitching a tent there and camping. Going on repeated week-long backpacking trips to the depth of the forests over yonder, miles beyond the gray line between legal and illegal.

      I wonder if that is also the reason for no sanctions against KPMG and Deloitte. In the KPMG situation, the perpetrator was teaching ethics classes. He put his finger on his lips to shush people on the elevator. There is no indication anywhere than anyone else at KPMG had a clue what was going on. How could the SEC win that case at trial?

      Thanks for taking the time to comment.

      Jim

      Jim Ulvog

      January 12, 2016, 17:23 pm at 5:23 pm


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