It was the Starbucks sting.
The defining moment in the KPMG insider-trading scandal took place over coffee at a Starbucks in the San Fernando Valley, where the accountant at the center of the case was set up by his longtime friend.
Scott London thought the friend, jeweler Bryan Shaw, invited him for a casual get-together until the man handed London an envelope containing $5,000 in cash. It was clear the money was a payoff for supplying privileged information that London gleaned from his job at KPMG.
Unbeknownst to London, the FBI had orchestrated the sting and was secretly photographing it.
A few days later, FBI agents showed up at London's Agoura Hills home. They confronted him with the photos and advised him to hire a lawyer.
"They just showed up and said, 'You're subject to an investigation,'" London said in an interview Tuesday night with The Times. "I felt about as bad as you could feel. It was as if everything I had earned and accomplished was gone."
Late Wednesday, Shaw issued a statement acknowledging his role in the insider trading. "I cannot begin to apologize for my incredibly stupid actions. There is no excuse for my wrongful conduct."
Shaw, whose family runs Shaw Diamond Co. in Encino, said he "profited substantially" from stock tips that London gave him in multiple companies. London told The Times Tuesday that he began giving tips to Shaw because his friend's jewelry company had run into financial trouble.
"I expect that my actions will result in significant civil and criminal consequences, but I realize that this is the painful price I will pay for my transgressions," he said.
Shaw allegedly profited from information London provided to him from 2010 to 2012 on two of London's L.A.-area clients, nutritional products company Herbalife Ltd. and footwear maker Skechers USA Inc.
KPMG last week fired London, who had been an L.A-based partner. The firm resigned Tuesday as the outside auditor for the two companies. Herbalife and Skechers are now scrambling to find new accountants.
London and Shaw are awaiting the next step: potential civil action and criminal prosecution. The Justice Department and Securities and Exchange Commission are investigating.
The trading scandal is taking a big toll on London, who had been at KPMG for nearly three decades, his lawyer, Harland Braun, said Wednesday.
"His life is ruined. He's 50 years old. He's going to lose the rest of his career, humiliate his family, perhaps lose his freedom," Braun said.
His client received $25,000 to $35,000 from Shaw over the years — not much for someone whose income was "way into six figures," his lawyer said.
The stakes in the scandal are high for accounting powerhouse KPMG, which is scrambling to retain credibility with clients. The scandal also tainted Herbalife, which already had been ensnared in a separate controversy over the legitimacy of its accounting practices.
But as much as anything, the sting that nabbed London demonstrates the lengths to which the government is going in pursuit of wrongdoers large and small.
As part of an intensive dragnet, securities regulators have stepped up measures in recent years to root out insider trading. They've enlisted stock exchanges and brokerage firms to aid the cause.
"I would call it a crusade," said Ernest Badway, a former SEC enforcement attorney who is now a defense attorney in New York. "This is something they just are locked onto — almost with a religious fervor — and they are not going to let it go, at least in the near term."
Brokerages are required to conduct surveillance of suspicious trading. Some firms use computer programs to flag stock trades that seem to be timed too perfectly and net big profits.
In this case, the improper trading appears to have been detected by the brokerage firm at which Shaw traded shares of Herbalife and Skechers. Shaw's trading results were just too good to believe, Braun said.
"If you keep hitting it right too much, they begin to think there's something fishy going on," Braun said.
Until Tuesday, London led a comfortable but otherwise unremarkable life.
The Los Angeles native lives on a quiet Agoura Hills cul-de-sac with his wife, Michelle, and their two children. His personal financial record is clean, with no bankruptcies or legal judgments. Since 1986, he's been a certified public accountant.
He started at KPMG in 1984 after graduating from Cal State Northridge with a degree in accounting, according to his LinkedIn page. He oversaw 900 workers at KPMG, according to an online profile to a group of which he belonged.
He became chairman of the Los Angeles Sports Council in 2011. The nonprofit issued a news release at the time saying London played on the baseball team at Northridge and pitched batting practice to his son's high school baseball team.
Cal State Northridge disputed that Wednesday, saying London never played baseball at the school. "I looked and he's not listed anywhere," said Bob Vazquez, a spokesman for the university's athletic department.
As for London's relationship with Shaw, Braun said the two are no longer speaking.
After Shaw's brokerage account was suspended, the two men decided to cease their scheme, according to Braun. "Scott and the other guy said, 'Let's stop this.'"
By then, it was too late.Copyright © 2014, Los Angeles Times