Trading Places
TP
The Year 2012
As recent as 2012, the actions of Scott London risked the reputation of an entire profession. Mr. London was a senior audit partner at accounting firm KPMG, LLP in the firm’s Los Angeles office. Through his employment, he had access to the detailed financial records of KPMG clients. This kind of information is clearly material nonpublic information, and London was required by his fiduciary duty to keep that information private. But a combination of compassion, greed and a lack of ethics corrupted London and prompted him to share his inside information with his golfing buddy, Bryan Shaw.
Shaw was a part owner of Shaw Diamond Company of Encino, California and had befriended Scott London at their shared country club, the North Ranch Country Club. The two soon became regular golfing partners and fast friends. After the 2008 economic crash, Shaw’s family business was in dire straits, and London decided to help his friend out with stock tips involving KPMG clients. Specifically, London passed along earnings information about Herbalife, Sketchers and Deckers to Shaw and also gave him early information on potential mergers involving RSC Holdings and Pacific Capital. According to the SEC complaint, Shaw netted $1 million from the illicit trades. Shaw and London would often meet near Shaw’s diamond store and make covert exchanges of thousands of dollars in manila envelopes wrapped in black paper bags. Mr. Shaw even gave his good friend a Rolex watch for his troubles.
In a recorded telephone conversation, London offered the following advice to Shaw to avoid detection: “What you do is you start just buying in small blocks, right, so it doesn’t draw attention and then, you know, then it doesn’t look unusual at all.” Despite London’s warning to Shaw, Shaw had other plans on how he would use the trading information. When London tipped Shaw in advance of Union Bank’s takeover of Pacific Capital in February 2012, Shaw went on a buying bonanza of Pacific Capital stock and call options. When the deal was announced, Pacific Capital share price rose 57% and Shaw profited $365,000. This transaction proved to be “the straw that broke the camel’s back”. Mr. Shaw’s bank froze his account and alerted the SEC to the potential of insider trading. Shaw immediately contacted London and London told Shaw not to worry and that “insider trading was like counting cards at a casino in Las Vegas; if you were caught, they simply ask you to leave because they cannot prove it.” But the SEC and FBI were biding their time, building their case and waiting for a slip up.
That slip up came in January of 2013 when London was working on an audit for Herbalife. He noticed that the Herbalife’s actual earnings were better than what was being estimated by Wall Street. London thought this would be a good opportunity for Shaw to buy some Herbalife stock, since typically better than expected earnings reports usually leads to a bump in a company’s stock price. London passed the information to Shaw, and Shaw purchased the shares.
The FBI made their move and approached Shaw first. He quickly agreed to cooperate and helped them continue to gather evidence against London. He continued to play along with the Herbalife deal, but this time he was recording his clandestine telephone conversations. When the time came for the exchange, the FBI followed along and recorded the entire conversation. The jig was up and a few weeks later, on March 20th, the FBI paid Scott London a visit at his picture-perfect house, on the picture-perfect cul-de-sac,with his picture-perfect neighbors looking on in shock. Mr. London had no choice but to admit to everything and come clean. He maintained that Bryan Shaw was the only person he gave information to and through his lawyer issued a lengthy statement in an attempt to save KPMG’s reputation. “I regret my action in leaking non-public data to a third party regarding the clients I served for KPMG. Most importantly, and I cannot emphasize this enough, is that KPMG had nothing to do with what I did.” KPMG was forced to resign as auditor of Skechers and Herbalife.
As shown in this chapter, insider trading has plagued the financial markets for centuries; it is no surprise that Garrett, Ken and Matthew were attracted to the concept. But as we’ll see later on in this e-case, all good schemes must come to an end.