The KPMG insider trading scam was far more profitable than earlier known and went longer than thought.
Scott London, the disgraced ex-auditor from KPMG's office in Los Angeles, has been charged in a federal complaint with one count of conspiracy to commit securities fraud through insider trading.
"The public has every right to fully expect a level playing field in our financial markets," U.S. Atty. André Birotte Jr. said. "As alleged in the complaint, Mr. London chose to betray the trust placed in him as a financial auditor and to tip the trading scales for the benefit of insiders like himself."
The 24-page affidavit alleges that London provided confidential information about KPMG clients to Bryan Shaw, a close friend, over a period of several years and that Shaw used this information to make highly profitable securities trades that generated more than $1 million in illegal proceeds.
In an interview with The Times on Tuesday, London had claimed the insider tips only led to a profit of about $100,000 for Shaw.
The criminal complaint filed in federal court Thursday also portrays London as far more culpable and intimately involved in all details of the trading scandal than he had previously acknowledged with The Times and other media outlets.
In some cases, London called Shaw two to three days before press releases of KPMG clients were issued and read him the details that would soon be made public. He also tipped him off to mergers and even strategized with Shaw on how to conceal his trading so that the two would not be caught.
"Mr. London's alleged activity paints a disturbing picture in which confidential information was compromised for personal greed at the expense of the investing public," said Bill L. Lewis, the assistant director in charge of the FBI's Los Angeles field office. "The FBI is committed to investigating allegations of insider trading and holding its beneficiaries accountable."
In a separate action on Thursday, the U.S. Securities and Exchange Commission (SEC) announced the filing of civil charges against London and Shaw.
From late 2010 and continuing until March 2013, London secretly passed "highly sensitive and confidential information" to Shaw regarding upcoming earnings announcements by certain KPMG clients, including Herbalife, Skechers, and Deckers Outdoor Corp., before that financial information was disclosed to the public.
In exchange, Shaw gave London tens of thousands of dollars in cash, typically instructing London to meet him on a side street near Shaw's business in order to give him bags containing $100 bills wrapped in $10,000 bundles.
Shaw also gave London a Rolex Daytona Cosmograph watch worth an estimated $12,000, as well as jewelry and concert tickets, in exchange for the confidential information.
As part of the government's investigation of London's insider trading scheme, Shaw agreed to cooperate with federal authorities and recorded conversations with London. In recorded conversations, London told Shaw specific details about upcoming earnings announcements for Herbalife and another KPMG client, Deckers Outdoor Corp.
In one call, London referenced rumors that had been spread about Herbalife going private, and told Shaw that if that took place, "[t]hat is going to be where you make a ton of money." London suggested that if he learned that Herbalife was going to go private, "what we oughta do is, when I know that it's gonna start happening, 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."
On two occasions, acting at the direction of the FBI, Shaw met with London and gave him cash as supposed payment for confidential information about KPMG clients. In the first instance, London met with Shaw on a street corner in Encino and accepted a bag with $5,000 in cash as payment for confidential information about Herbalife's earnings announcement in February.
London later met with Shaw in a parking lot in Woodland Hills and accepted another bag with $5,000 in cash, which was supposedly London's share of the illegal profits from trades based on confidential information about Decker's February earnings announcement. In accepting the money, London told Shaw that they would have more opportunities to make money in the future.
London is expected to make his initial court appearance in U.S. District Court on Thursday afternoon at the Roybal Federal Courthouse in downtown L.A.
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.