Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Consequences of insider trading incident

leave a comment »

Consequences – insider trading edition #1

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.

Consequences – insider trading edition – #2

Is possible jail the only bad thing on the horizon for a CPA accused of insider trading? Not quite. There’s a long list of bad things within view.

This series of posts is examining the consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information. For some time I’ve been writing on the tragedy of fraud with a focus on the consequences that befall the perpetrator.

This post discusses the possible consequences of:

  • Criminal tax enforcement
  • Publicity

Criminal tax enforcement

Tracy Coenen opens up the discussion of income tax fraud in her post Scott London’s Other Crime.

After pointing out that an accountant ought to be able to get a better deal than something under $100K for something around $1.2M of illegal profits, she moves on to the tax issue.

She is making a not-so-wild guess that Mr. London probably didn’t include the $50K of cash, $12K watch, and $12K or $20K of concert tickets in his 1040. Even if the concert tickets were worth a fraction of that, the numbers are substantial.

That could be something in the range of $60K to $80K over the years 2010 through 2012.

It is my guess that Big 4 partners have seriously messy tax returns because, based on my rather limited knowledge of partnership tax law, they pick up a tiny fraction of every income and expense line item of the firm.

As a result, I’ll guess partners don’t prepare their own returns. That means he would have had to tell the KPMG tax department to add another $10K or $30K of “other” income to his return each year. That would generate far too many questions, for which there wouldn’t be good answers.

I’ll agree with Ms. Coenen that chances are high that he didn’t get those payments included on his 1040.

Thus, there is a good chance he may have some future conversations with the Criminal Investigation Department with follow-up criminal enforcement action.

That discussion likely ends with back taxes, interest & penalties, along with the possibility of more jail time.

One commenter at Ms. Coenen’s post pointed out the California Franchise Tax Board will likely be paying Mr. London a visit. They will want money. Don’t know if they push hard for jail time.

Publicity

Mr. London was featured on the front page of the Wall Street Journal on April 10.

He made it again on April 12. Twice in one week

Exhibit A to the criminal indictment is the FBI’s photo of him accepting an envelope which the FBI claims contained a $5,000 payment. You’ve seen the picture. It is plastered all over the internet. It’s the illustrating photo for much of the reporting in the last few days. That’s all the ‘evidence’ most readers will need to conclude he’s guilty as sin.

That photo was at the top center of the WSJ’s front page on 4-12, only without the grey-out face on his golf buddy that appeared in the copy at the end of the indictment.

He also had reporters following him around which resulted in a background article at the Wall Street Journal – Question in KPMG Case: Why? The article gives the name of his wife, when he graduated from college (1984), his alma mater, name of the city where they live, when they bought their house and how much they paid for it, and background on one child (boy, attends a named high school, plays on baseball team).

Oh, and that article appeared on page B1 of the WSJ on 4-13 – that’s the front page of the second section. Not the place I want to spread around my bio information. Hmm. Does that mean he made the front page of the WSJ three times in one week?

Most high-profile business writers have already run major articles discussing him and his alleged actions.

Every business writer in the country will be talking about him for the next few weeks.

Oh. And since we’re in the internet age, most of those articles will never, ever go away.  Some may disappear, but not many.

His great-great-grandchildren will be able to read almost all of those articles when they are surfing the ‘net 70 or 80 years from now.

Previous post: jail time, criminal fines, legal fees for criminal case, civil fines

Next post: loss of employment, reputation, and professional licensing

Consequences – insider trading edition – #3

Is possible jail the only bad thing on the horizon for a CPA who allegedly committed insider trading? Not quite. There’s a long list of bad things within view.

This series of posts is examining the consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information.

This post discusses the possible consequences of:

  • loss of employment,
  • loss of reputation,
  • loss of professional licensing

First two posts in this series are here and here.

Loss of employment

Mr. London’s employment was terminated week before last.

Public reports indicate he was the regional partner in charge of audit practice. That is a very major position which obviously would have very high levels of compensation.

Audit PIC. For the region. Of a Big 4 firm.

That is a dream position that few CPAs could ever hope to achieve. The opportunities, experiences, authority, and compensation would be astounding.

I have no idea what the comp is for a regional audit PIC of what is probably the second most lucrative region in the country. I’ll make a wild guess it’s over 1 million a year. Maybe two. By the way, I’m pulling numbers out of the air.

Even making a low assumption of $1M, that’s a huge amount of money for a CPA.  He was getting paid in a couple of weeks what many people make a year.

If you scoff at that amount, keep in mind he is producing more economic value for his employer than his salary.

He was creating far more economic value in one or two weeks with his brain than most people create in a year.

That income is gone.

He could have worked for another 10 or 15 years. That means he’s out somewhere between $10 and $30 million.

Gone.

Loss of reputation

His reputation is shot.

Even if the publicity dies off this afternoon and even if the tax investigation doesn’t go into the criminal realm and even if the SEC enforcement efforts were to somehow collapse and even if his attorney could successfully make an argument for no jail time and even if his current net worth is so large that he can absorb the financial hit to maintain his lifestyle and even if he can somehow afford retirement, his reputation is destroyed.

Completely, totally, utterly destroyed.

As the ‘why did he do it?‘ conversation gets going, there will be dozens of business writers pondering in public the psychological makeup of the disgraced CPA.  There will be tens or hundreds of thousands of readers pondering those arm-chair assessments wondering “is it narcissism, hubris, greed, or arrogance. Hmm, I think it was…”.  His friends, former colleagues, and buddies from the golf course will all be wondering.

How would you like to have around one-tenth of the professionals in your field working through an amateur assessment of your mental health?

Loss of professional license

If any of what’s been alleged is proven true, is there any doubt the California Board of Accountancy will start enforcement action down the road?

I’m quite confident they will get involved. Think it through with me – his attorney said publicly he will plead guilty, which (if correct) means a felony conviction (which won’t be going up for appeal if there’s a guilty plea) for insider trading on client information obtained during the course of providing audit services. Yeah, they’ll get involved.

Just as a guess, I think the most likely outcome of that journey will be the loss of his license.

The board obviously takes their time in enforcement actions, because they must of necessity let the criminal and civil cases run. That is a very good thing, by the way.

On the other hand, with the speed of the indictment and his attorney saying he plans to plead guilty in just over four weeks from now, the civil and criminal cases could be cleared up remarkably quick. The CBA might be able to move fast on this.

Fast or slow, I think we can all see the outcome.

So he’s lost a great job, has destroyed his reputation, and will likely lose his CPA license. And the list of consequences isn’t complete.

Previous posts here and here.

Next post – possible litigation from employer

Consequences – insider trading edition – #4

Is possible jail the only bad thing on the horizon for a CPA accused of insider trading? Not quite. There’s a long list of bad things within view.

This post will cover one possible consequence: the possibility of being sued by KPMG.

This series of posts is examining the consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information

Previous posts have discussed:

  • 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

Litigation from employer

The chairman and CEO of KPMG sent out a statement last Thursday evening. Let’s just say he is not amused.

You can see the comment in quite a few places. I first read it in Francine McKenna’s article at ForbesKPMG Statement on Scott London Criminal and Civil Charges.

There are two particular items I noticed:

I was appalled to learn of the additional details about Scott London’s extraordinary breach of fiduciary duties to our clients, KPMG and the capital markets.

Early public comments indicated there were two clients involved. The criminal indictment said there were five. Sitting in my little corner of the audit world that was a surprise.

The CEO’s comments above indicate that may have been a surprise to KPMG leadership. Again, I have no idea what happened behind closed doors, but reading between the lines, that comment suggests that Mr. London may have not fully disclosed the extent of his activities to his employer. I’m basing my wild guess on the “additional details” comment. An alternative could be ‘additional details’ could be the brazenness and intentionality that is alleged in the indictment.

Well that’s just a guess on my part. Take a look at this comment, which Ms. McKenna emphasized:

KPMG will be bringing legal actions against London in the near future.

What could that involve?

For the non-CPAs in my audience, let me walk through what that comment means to me.

Remember that KPMG withdrew three years of audit opinions for Herbalife and two years for Sketchers?

That means another audit firm will have to be brought in to re-audit Herbalife for three years and re-audit Sketchers for two years.

That will cost a ton of money. How much?

Michael Rapoport gives a hint in the WSJ, Bad Week for KPMG Could’ve Been Worse:

Herbalife paid KPMG a total of $11.2 million in fees for the firm’s last three years worth of audits; Skechers paid $1.7 million for its 2011 audit and hasn’t yet disclosed its 2012 audit fees.

On one hand, it won’t take three times as long to re-audit three years as it would to audit one year. So there should be some savings from being able to do three sets of compliance tests or three sets of substantive tests all at the same time. You could test three sets of a particular disclosure for not much more time that it would take to test one year.

A lot of tests will be easier to perform with two year’s hindsight. Two years after the fact it’s really easy to test allowances for losses, whether for inventory, receivables, returns, or warranties.

On the other hand, the risk is far higher than usual for multiple reasons. So that means it could take longer to re-audit three years than to perform the three years initially.

Let’s pull a number out of thin air by making the huge assumption that it will take as much time to re-audit as it did to perform the audits the first time. Let’s also assume the Sketchers audit in 2012 cost as much as 2011.

So, taking the numbers mentioned by Mr. Rapoport, that would suggest the re-audit fees could be something in the range of $14.6 million (11.2 + 1.7 + 1.7).

Those two companies won’t want to eat those costs. Why are they out that money?  Because KPMG as a firm is no longer independent.  The companies will likely look to KPMG to pick up the tab.

Sitting at my tiny little desk in my tiny little corner of the audit world I’m guessing that KPMG can either write a check today to reimburse the companies for those fees or they can write a check after they get sued. With my little bity understanding of risk management, seems to me KPMG would be far better off to put a blank check in the mail this afternoon. Or just have the new firms just send their bills directly to the KPMG CEO.

KPMG is not going to want to absorb that $15 million hit. Why are they going to have to write the check? Because of Mr. London’s alleged actions.

They will be looking to him to cover the cost.

Thus, we get back to the CEO’s comment.

KPMG will be bringing legal actions against London in the near future.

(By the way, keep in mind I’m an accountant, not an attorney, and I’m not giving any stock advice, and my comments here are based on what I know from reading a lot over the last few days, and I’m just a little ol’ sole practitioner. Wouldn’t be wise to read more into what I say than what I actually said.)

There is a very good chance the former partner will lose his equity in the firm and his retirement. There is a smaller chance he could write a really big check to his former employer.

Attitudes inside firm

An anonymous article at Going Concern from a KPMG insider gives some hint of the mood inside the firm. Check out KPMG Insider: Partners Fell Betrayed By Scott London’s Actions. If you’re still reading my overly long post, you will want to check out that article.

In my opinion, the feelings of betrayal amongst partners described by the author is a strong indication this is a radical departure from the firm culture. If what is alleged is true, Mr. London appears to be an extreme outlier.

One major thing described by the author is the internal communication. Look at this comment to see the very clear, unadorned reaction from the CEO. An email from him

…was one of the simplest and most powerful items I’ve seen come across the email in response to a firm event. Our chairman [John Veihmeyer] sent a simple email, just a few paragraphs, not even on the normal firm letterhead with his picture. Attached to the email was a copy of the complaint. In simple terms, the email said, “Everyone read this complaint. Read what this guy did. Know that we don’t stand for it and know that we won’t tolerate it.” No BS, no fluff and no leaving it up to us to read the complaint on Going Concern. I’ve had a chance to have some candid conversations with John Veihmeyer before and this email reflected those. Pundits can pick it apart but for me it was the kind of response I wanted from my firm.

He sent out a copy of the indictment and asked everyone to read it.  That e-mail is quite consistent with the restrained we will be pursuing legal action comment in the press release last week.

Not only has the firm thrown him under the bus, sounds like they are going to put the bus in reverse and drive over him again. Then back up further, get a running start, and run over him with the other tires.

I’m thinking a suit to recover $15M for damages would be more educational for all the partners, professional staff and support staff than a dozen hours of ethics training. The message? If anyone else ever does this again, or anything even vaguely similar, rest assured the firm will grind you into dust.

No classtime necessary – it would only take 2 emails. One attaching the text of the suit and the other with the court order to pay up.

So the answer to the question is yes, there are a lot of bad consequences to insider trading.

Previous posts here, here, and here.

Next post:  financial and emotional consequences.

Consequences – insider trading edition – #5

Is possible time in jail the only bad thing on the horizon for a CPA accused of insider trading? Not quite. There’s a long list of bad things within view.

This series of posts is examining the possible consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information.

This post will discuss

  • Poster child for (fill in the blank)
  • Stress on marriage
  • Impact on family

Previous posts are here, here, here, and here.

Poster child for (fill in the blank for your favorite agenda)

Mr. London will be cited as ultimate proof of whatever bias or prejudice an observer has.

After all, what do you expect from:

  • the Big 4
  • a CPA
  • anyone who got their degree from a public college
  • somebody in the big offices that doesn’t have a clue about trying to get by in a small market – I’ll betcha’ he never had to hustle week after week to get another 25k engagement before the end of the year or lose his bonus
  • a firm that doesn’t disclose the name of the lead audit partner
  • someone who’s been around too long
  • someone who came up through the ranks too fast
  • a smug, fat-cat, capitalist pig who’s obviously at the top of the 1%-ers
  • the same firm that gave us that tax disaster
  • someone in the ivory tower that never gets his hands dirty, ‘cuz you know a regional audit PIC doesn’t have a clue what it’s like down here in the trenches

I’ve already heard or read five of the above comments.

For the next few years his name will be proof for a person’s favorite hobby-horse. I think that’s confirmation bias.

Stress on marriage

I know nothing of his marriage other than he is married. The publicity, indictment, possible/likely jail, and financial trauma will put severe pressure on his marriage.

This trauma would be a strain on the most healthy marriage.

I hope his marriage stands strong in the midst of this and that he draws tremendous strength from his beloved. I sincerely hope she is able to help him through this trying time. I really do hope that.

Can you imagine the pain of having to tell your spouse the real reason for the FBI making a 6:00 a.m. visit to your home?

Can you image having to tell her that you likely will go to jail?

I’ll make this next comment really vague – Once upon a time I had the opportunity to be in the room during a meeting in which a person confessed the scope of an embezzlement to the employer while said person’s spouse was present in the room. That was a horrible time. The look on that spouse’s face is a major reason I wrote the tragedy of fraud series.

Impact on family

Can you imagine telling your little girl that her hero is going to jail? Yes my princess, daddy did some bad things.

In this case, published reports indicate the couple has two children, one of whom is a boy and plays on the high school baseball team. I’m sure the two children have better technology with better access to the ‘net than me.

They have been able to follow the news and read all about the disaster as it unfolds.

They can also read the same snotty, mean-spirited comments at the end of news reports that I’ve read.

Can you imagine the pain of the conversations in which Mr. London had to tell his teenage children that what they will soon read in the papers is true? And that yes, he probably will go to jail?

Can you imagine the pain the children will have from the nasty comments they will get at school?

Mr. London will always know that he alone is the direct cause of every bit of his children’s pain. He is the cause of his wife’s tears.

Next post: armchair psychoanalysis, reduced employment prospects, and financial devastation.

Consequences – insider trading edition – #6

Is possible time in jail the only bad thing on the horizon for a CPA accused of insider trading? Not even close. There’s a long list of bad things within view.

This series of posts is examining the possible consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information.

This post will discuss

  • Fodder for armchair psychoanalysis
  • Limited future employability
  • Legal fees for civil litigation
  • Financial devastation

Previous posts are here, here, here, here, and here.

Fodder for armchair psychoanalysis

If it is proved that he did what he is accused of doing, the “why?” conversations will run for months, if not years.

The conversations in print have already started.

Can you imagine being the subject of thousands of conversations by peers in your profession wondering about your mental state?

Is it arrogance? Hubris?

Greed? Stupidity? (I’ve already seen those comments in anonymous postings.)

Does he have some mental illness?

Is he a pathological liar? (Already saw that comment as if it was a statement of fact.)

There will be lots of published articles expounded at length on his motivations and character defects behind the motivation.

CPAs thinking in terms of the fraud triangle will pick apart news reports looking for motivation, opportunity, and rationalization.

The nastiness will run for a long time. Doesn’t matter whether any of the pure speculation is true, or helpful, or grounded in even one fact, or contain any shred of logic.

The psuedo-psychological examinations will be around. For years. In print. Available to everyone with an internet connection.

Limited future employability

With the horrible publicity, visible firing, possible SEC sanctions, and possible loss of his license, his opportunities for gainful employment between now and when he hits retirement age are extremely limited.

I have no idea what the court orders look like in the federal system. For research on other blog posts I’ve written, I have read a few of the court orders for criminal cases in San Bernardino County, California, where I live. They contain clauses that make a person with financial skills essentially unemployable.

One set of court orders I read required the individual to disclose to a potential employer his conviction and the circumstances behind it. The individual is not allowed to have custody of anyone else’s cash and cannot be a signer on someone else’s bank account. That just about rules out any employment using the skills that particular person has.

From what I’ve read in the past, the SEC enforcement action will have some rather strong terms attached to it which will further limit employment opportunities with any company that has any involvement with the securities market.

How much you suppose his future earnings are going to drop? Think it will only be 90% (i.e. a drop to maybe $100k a year)? Or will be more like 95% or 98%?

Legal fees for civil litigation

It will take some serious time from some highly skilled attorneys to handle the litigation promised by KPMG.

That talent? Expensive. The bill? Big.

Financial devastation

I can’t even make any wild guesses on the final tally for all of the consequences I’ve listed. I’m thinking it will be measured as a percentage of his lifetime earnings.  Perhaps an amount equal to 25%, 50%, or maybe 100% of all the money he’s ever earned.

It is sufficient to say the impact on the family finances will be devastating.

Even if the CPA or his golf buddy have enough assets to cover the cost, it will be a catastrophe. There are very few people who could absorb those costs and still be financially stable afterwards.

Next post: conclusion (finally!)

Consequences – insider trading edition – the conclusion #7

Jail is really, really bad. Are there any other consequence on the horizon for a CPA accused of insider trading?

Oh yeah. There’s a really long list of really bad things in the really near future.

This series of posts has examined the possible consequences on the horizon for Mr. Scott London, former KPMG partner, as a result of his indictment for allegedly trading on insider information. The Feds have accused him of passing on inside info to a golf buddy who in turn allegedly made over a million bucks in trading.

Previous posts: 1, 2, 3, 4, 5, and 6.

Why this series?

My hope, perhaps just a silly dream, is that focusing on the horrible consequences that fall on the head of people who do bad things will deter a few people from doing bad things.

It’s too late for Mr. London, but not for others.

The Consequences, not an exhaustive list

Let’s revisit the consequences, making the big assumption that the reality is the same as what has been alleged.

The list of consequences is long and the impact huge.

  • 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
  • Litigation from employer
  • Poster child for favorite cause
  • Stress on marriage
  • Impact on family
  • Fodder for armchair psychoanalysis
  • Limited future employability
  • Legal fees for civil litigation
  • Financial devastation

Full disclosure:

I worked for Peat, Marwick, Mitchell before the name change to KPMG. I had the utmost respect for all my colleagues while working in the Albuquerque office. Still have a lot of respect for the firm. I’ve had no involvement with PMM/KPMG since leaving the firm, other than working for a bank which had PMM as their auditor. I run a one-person firm that is infinitesimally small compared to KPMG, so they aren’t much competition for me (ahhh, maybe I should turn that the other way around….nah).  Filter my comments as you wish.

Let me know your ideas

Did I miss any consequences?

Bryan Shaw pleads guilty for conspiracy in KPMG insider trading fiasco because he’s guilty. Oh, and a really small additional consequence for Mr. London – #8

The tippee in the KPMG insider trading case, Bryan Shaw, entered a guilty plea Monday on one count.

Check out the identical headlines (no, they aren’t from the same reporter or picked up on from a wire service):

Sentencing is set for September 16.

Why did he plead guilty? Because he is.

Check out this very unlawyerly like comment from his lawyer:

“He pled guilty because he is guilty,” Hochman said. “Mr. Shaw, as he’s been heard saying, made some incredibly stupid decisions.”

Admitted payments to Scott London include $60k in cash, an expensive watch (claimed to be worth $12k), jewelry for Mr. London’s wife (no description of items or value), concert tickets, along with “expensive” meals. I’ve not seen indication of the size of Mr. London’s total haul.

In addition to all the other consequences facing Mr. London, picture the look on his wife’s face when she realized that really lovely piece of jewelry her husband picked out so carefully for their anniversary was actually from Mr. Bryan. And will cost jail time. And will likely go the U.S. Treasury.

You know it won’t be a pleasant dinner when the conversation starter is: “So tell me honey, which of the pieces of jewelry you have lovingly given me in the last two years did you actually buy?”

Mr. London will be in court May 30, which is Thursday of next week.

An additional consequence of insider trading – knowing your name is in every newspaper in the country – Former KPMG partner enters guilty plea – #9

As expected, former regional audit PIC Scott London entered a guilty plea on Monday to one count of securities fraud. Sentencing is set for October 21, 2013.

In the 90 minutes since I saw the first report, over 30 hits show up on an internet search. I’m sure there will be many dozens more in the next few hours.

Three initial articles I saw:

Consequences – insider trading edition – #10

Here are a few more consequences awaiting in the near future for Mr. Scott London, former KPMG partner, as he awaits sentencing after his guilty plea to trading on insider information.

These are pulled from his court filing in September.  Going Concern has posted a copy of the filing by Mr. Scott London taking exception to the pre-sentencing report from the United States Probation Office. You can find the filing here.

Here are some more consequences and more detail on some I’ve mentioned before:

  • Jail time – The sentencing report suggests 36 months. Mr. London’s attorney is suggesting something in the range of 18-24 months is more appropriate.
  • Criminal fine – The pre-sentencing report suggests a $100K fine. Mr. London’s attorney suggests $25K.
  • Legal fees – Take a look at that filing linked above. There was some serious legal time that went into drafting that filing. Those hours are expensive.
  • Loss of current annual income of $900,000. This would run from now, when Mr. London is aged 51 through his mandatory retirement at age 60.
  • Loss of appreciation on pension; identified as $2M over next 10 years.

Here is one I would not have guessed at:

  • Complete loss of work friends and colleagues – All of his friends and acquaintances at KPMG are banned from having any contact with Mr. London in any manner. This is by KPMG direction. Seems to me a wise move. The consequence of that ban is none of them can give him any leads for possible future employment. Nor can they encourage or comfort him in his situation.

I’ll update the list as more consequences come to mind.

More consequences of insider trading – #11

Previous post explained Mr. Scott London surrendered his CPA license as a consequence of his guilty plea to insider trading. This discussion will go through the timing of the disciplinary process and outline a few more well-deserved consequences Mr. London has earned.

Update #74, which contains a summary of the action can be found here. The formal disciplinary action can be found here.

Timing

The disciplinary order has the Accusation attached to it. Here’s the timing, which is interesting because I’ve never looked at one of these in detail.

The federal PACER system shows a plea agreement was entered on 7/1/13.

Complaint AC-2014-10 is dated 8/21/13. It contained three causes for discipline, all of which are rolled into the comments published in Update #74.

The stipulation agreement says that Mr. London admits all the accusations. In the harsh legal words used in such admissions:

Respondent admits the truth of each and every charge and allegation in Accusation No. AC-2014-10, agrees that cause exists for discipline and hereby surrenders his Certified Public Accountant License No. 46174 for the CBA’s formal acceptance.

Mr. London signed the stipulation on 10/15/13.

An Assistant AG for the state signed it on 10/28/13.

The disciplinary action was dated 11/27/13 and became effective 12/27/13.

Other consequences

Small dollar penalty –

If Mr. London were to apply for reinstatement of his license, he will have to reimburse CBA $1,637.50 for costs of the investigation. Since that is a conditional payment and I think it is unlikely he will reapply, that isn’t really a consequence. For one thing, if he reapplies, the settlement specifically says everything in it will be considered as a part of his request.

Legal costs –

Mr. London retained legal counsel to represent him in the disciplinary process. Usually malpractice insurance would cover the legal costs of a state investigation. I’m guessing that Big 4 partners don’t carry malpractice insurance as individuals. I think that means he paid this attorney out of his own pocket. It is separate counsel from the attorney who handled the federal criminal case.  So you can count the legal costs for this action as another part of the earned consequences of his illegal behavior.

Quick action –

This action by CBA moved fast. The complaint was filed (8/21) about seven weeks after his plea deal (7/1). The negotiations for settlement were resolved in another eight weeks (10/15). The deal was official after about six weeks (11/27) and was effective a month later (12/27).

This moved fast.  I would have guessed this might take a year or more for the disciplinary action to be finished. My guess on why it moved so quick is that Mr. London quickly agreed to surrender his license.

Self-identification in your job –

Here’s another consequence, this time in the emotional realm.

Many people get their identity from their work. This is even more so for men – us guys often get our sense of worth from our work. That’s why lots of guys have a real struggle when they retire. I’m guessing this is even more pronounced for those of us in professional fields.

Last fall, Mr. London signed away his professional credentials. He’s been an accountant since college and was a well-respected and well-compensated Big 4 partner for 18 years.

It’s a wild guess, but I’ll make a guess that he has a large part of his identity and self-worth tied up in being a CPA.

He signed that away on 10/15 and saw his license officially disappear on 12/27. That has likely caused a hurt that will take a long time to heal.

Please keep in mind I’m not complaining about his consequences or feeling sorry for him. He worked hard to earn every little bit of the consequences he is getting.

Why this discussion then?

This specific situation provides a great study for the rest of us about the consequences of our actions. I hope this will be a learning opportunity for all of us.

Full disclosure: Just so everyone knows, the California Board of Accountancy is the regulatory agency with oversight authority of my CPA practice. Also, I worked for KPMG for a few years, way back when it was call Peat, Marwick Mitchell.

Previous lists are compiled here.

Judicial consequences and small consequences for insider trading – #12

Now we can count some of the hard and soft consequences in Scott London’s insider trading journey.

Jail time

From news reports of the day, here is his sentence:

  • 14 months in jail
  • 36 months probation after jail
  • Unknown community service after jail
  • $100,000 fine.

He must report by July 18. One minor consequence is he knows for the next 85 days he will have to walk into jail. I would make a wild guess the anticipation of that will produce quite a few sleepless nights.

I’ll have more detail when the official sentencing document is available on-line.

Just like the TV show Cheers, eeeeverybody knows your name

Here is a small consequence:

He gets to see his name splashed all across the twitterverse and tons of news reports.

At 6:30 the evening of his sentencing, I did a fast browse on Twitter for “Scott London.” A cursory review found 12 different people tweeting with that exact phrasing, plus my tweets. Those 12 people have about 72,000 followers. Didn’t check for any other wording.  (Didn’t include my 0.05K followers.) Granted there’s a lot of overlap of followers in that group, but still…a huge number of people saw tweets about his sentencing.

In addition, a search on Google for “Scott London” identified 64 news articles in the last six hours on his sentencing. My two posts weren’t picked up in the search yet.

I’ll make a guess the front page of the Wall Street tomorrow covers the sentencing. What do you think the odds are on that famous photo being on the front page? Again.

The sentencing will be in the next issue of every business magazine and in many newspapers tomorrow.

Update: Wow, I called that one wrong. The Wall Street article was on page C3. No photo at all.

Additional consequences of insider trading – #13

On June 25, 2014, Scott London was interviewed at length in a webcast presented by The Pros and The Cons.  During the interview, Mr. London shared several more aspects of the consequences of his illegal insider trading.

Add the following items to the long list of consequences of illegal behavior.

Knowing you will be a case study decades into the future – after one interviewer mentioned this would be a great case study for the Harvard business review, Mr. London said he knows that will be the case. He hates to be the subject of case studies but doesn’t think there would be a better example.

Embarrassment for your child during a college classMr. London’s older child, a daughter, is studying accounting. One day in class they were discussing ethics with Mr. London’s situation as the topic of the day. Great. Mr. London’s daughter gets to sit in class as they discuss the foolishness of her dad. Imagine having your daughter sitting through a discussion of how stupid and foolish your dad is and wondering how long he’s been doing this illegal stuff and some of the students sure do hope he gets a lot of jail time.

Just imagine the number of times his daughter will hear the comment over the next 20 years: “Nice to meet you.  London.. London… Are related to that guy from KPMG?”

Embarrassment for your extended family – Mr. London’s brother was recently playing racquetball with a buddy. The buddy was joking around, wondering on the court how his brother will look in zebra stripes.

Those close to you get to tell you how stupid you were – shortly after the visit from the FBI, Mr. London explained the whole situation to his wife, who had no clue what was going on. At the end of the explanation her comment was “that’s the most stupid thing you’ve ever done.”

When he explains things to close friends the usual comment is to say something like “that was stupid.”

Comment from one person was “What the h*** were you thinking?”

Extended financial consequences – Mr. London indicated that with a felony conviction he will not be able to refinance his house. I wasn’t aware of that, and hadn’t thought about it, but it makes sense. That would be a pretty severe risk factor for anyone who’s looking at a credit decision.

There’s no place to park your investments – He indicated he was asked (I doubt it was much of a request) to close his investment accounts. So where would you move your investments? How could you ever hold mutual funds, stocks, or bonds again if no one will let you open an account?

Harm to charities you believe in – You serve on a charity’s board of directors because you believe in their cause and want to help them. Mr. London was asked to resign all of his board memberships. Each of those charities has also suffered direct consequences. He did not go into details, but the publicity of his illegal behavior hurt the charities he believed in.

The consequences of criminal behavior just keep piling up.

 

Copyright © 2013, 2014 James L. Ulvog

Written by Jim Ulvog

April 20, 2013, 8:55 am at 8:55 am

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: