Scott London, the former partner in charge of KPMG’s Pacific Southwest audit practice, talked about what led up to his fraud conviction and insider trading charges during a webinar before he begins a 14-month prison term next month.
London pleaded guilty last year to passing along inside information about several of KPMG’s audit clients to a friend, jeweler Bryan Shaw, who used the information to trade stocks of companies such as the weight loss and nutrition firm Herbalife and the shoe manufacturer Skechers (see SEC Charges Former KPMG Partner with Insider Trading and Former KPMG Auditor Scott London Pleads Guilty to Insider Trading).
During a webinar hosted by Gary Zeune, CPA, of the Pros and Cons LLC, London expressed remorse for his role and admitted he had rationalized his behavior, preferring to think he was merely assisting a friend with money problems.
“I rationalized the problem in my head and I said, All right, well, I’m helping this guy out. Who’s it going to hurt? He’s taking $10,000 or $15,000. It’s wrong, but it was a weighing of risk and reward, if you will.”
Shaw was ultimately accused of making more than $1.6 million in profits over a two-year period.
London, who is 51, married, and the father of two children, said he started at KPMG in 1984 and over the years rose through the ranks, making partner in 1995. In 2004 he took over the Southwest audit practice and managed it in California until April 2013, when he was arrested. At the time he managed over 500 employees and 400 clients, along with the profit and loss for the office. “It was a great gig, a great firm,” he recalled.
London said he had followed in the footsteps of his father, who ran a tax practice for many years.
“I enjoyed what I did very much,” he said of his years at KPMG. “I spent a great deal of time doing a lot of different things, but I think I learned a lot from the interaction with people, learning how to be a leader of people, and how to help bring out the best from people along the way.”
He said he developed relationships with his fellow employees and clients, as well as personal ones with friends like Shaw. “You reach a time in your life where something happens that might lead to a potential impairment of your judgment,” he said. “I certainly knew better, all of the rules, but things happen in somewhat of a perfect storm with an individual, his situation, my situation, and the rest unfortunately is history.”
London frequently was privy to inside information about clients but said he never considered acting on it until Shaw began prodding him. “Back in 1999, I met Shaw,” said London. “We played golf, and with my wife and I, we went out for dinner from time to time. Occasionally we went out on a weekend trip, and we did things as couples. We became good friends. We would play golf and get dinner, and Shaw would be asking me questions about my work. It was no more than your wife asking you questions about how was work today and so forth. I might have said things like I have to go out of town for a certain client. We’d start talking about why I’m going out of town. Or I might just mention that some of the products that my client is selling are doing really well. I’m fairly confident that it was nothing that was not public. Some of my comments were, shall we say, inappropriate. But Shaw watched the stock market very carefully. He was able to make his own conclusions about what to do in the stock market. I think that he slowly got wind of the fact that hey, maybe, I could play the market based on what I’m hearing. He took what I was telling him and put 2 and 2 together and got 4 and started making trades.”
In the fall of 2010, Shaw informed London that he had made several trades based on the information he had heard from London. “I was extremely upset and I shouted, That’s not right, you can’t do that,’” London recalled. “That kind of went back and forth and unfortunately there’s a line there. You end up getting to a point where you cross that line and at some point during the latter part of 2010 he was talking about his business troubles and so forth. He started talking about some [deals] that would make him some more money and he asked me if I would do this. We went back and forth and he again started trading in what I would consider to be small dollars, but ultimately it’s like the slippery slope. It just got deeper and deeper and deeper, and I unfortunately crossed over that line and provided him with nonpublic data that he traded on.”
Shaw closely followed the market and a few days before one of London’s audit clients would release its earnings announcement, he called up London and asked what was going on with the client. “Sometimes I would say nothing,” said London. “I never shared with him a release. I just kind of gave him broad terms about what might be happening with a particular stock. You can see that over a period of time, a year or a year and a half, that it advanced to what it ultimately became.”
London explained his motivation in part as sympathy for Shaw’s financial troubles. Shaw, who pleaded guilty to the scheme last year and was sentenced earlier this month to five months in prison, was a jeweler who had inherited the business from his father. London noted that after the 2008 financial crisis, the jewelry industry was struggling as many consumers avoided big-ticket purchases. Shaw’s store was in an office building, not in a shopping mall, and much of it came from word of mouth. His clientele was still mainly his father’s old customers, who were aging and not buying much jewelry anymore.
“At that time what was going on in his life was really the impetus behind why he was doing what he was,” said London. “Yes, I was scared, yes, I was concerned, yes, I did some soul searching and saying to myself, Why am I doing this?’ But never did I consider broadly the potential repercussions that could have happened and are still happening.”
London admitted that he rationalized the insider trading. “I weighed the risk,” he said. “Financially there was no motivation. At first he wasn’t giving me any money, nor did I ever ask. I wasn’t doing it for that. It was just the risk of helping out a friend who was struggling and not doing well versus the risk itself. I can tell you, I didn’t spend a great deal of time thinking about the firm or the client, my family or anything like that. That is really the takeaway—when you get to that line, make sure you really think about who might be impacted.”
London said he has not spoken with Shaw in a year and a half, but he believes Shaw also rationalized the behavior in his own mind, thinking that if he managed to get away with making more and more money on his trades without being caught, then it was OK. London felt regret from the beginning.
“I just thought that every time I was doing it, what I was doing was wrong,” he said. “But again, I continued to rationalize it, that nothing would ever be found out and no one would be worse off. The pain was always there, but unfortunately I didn’t go back to my ethics on which I was trained. I didn’t fall back on those.”
He said he was aware of his training and ethics courses and the emphasis on auditor independence. “It was a difficult time during those 16, 17 months,” he acknowledged.
Arrest and Prison
After law enforcement learned of the scheme, they convinced Shaw to cooperate, and the FBI photographed London accepting a $5,000 bribe from him in early 2013.
London found out that he had been caught on March 20 of last year, the same day as his wife’s birthday. “The FBI was outside my house for about two hours before they actually came to my door,” he recalled. “They waited for my son to go to school. They knocked on the door, identified themselves and said, Could we come in? We want to talk with you about your relationship with Bryan Shaw and there’s a team at his house right now.’ The FBI’s principal concern was they really believed that with this money involved that there were a dozen Bryan Shaws, that there was a ring, whether it involved other people at the firm or whether it involved other people I had passed information to. They asked me point blank, How many other people are you passing information to?’ and I said, There is actually no one. I admit that I have passed information to Mr. Shaw and I don’t know how much he made.” But I told them there was no one else involved.”
One of the agents advised London to hire an attorney and then give him a call, leaving behind his business card.
“I remember his last words: Think about the question I asked, think about anybody else that you might have come into contact with that might be involved. It’s in your best interest to let us know.’ Again I told him there was nobody else. They sincerely believed that there was. Up to that point, that had been the worst day of my life. There have been certain days that unfortunately have eclipsed that after the fact. Having to spend about an hour alone with my wife after they left and to sit down with her and tell her everything, that was a day that I don’t think I can ever forget. She was absolutely unaware. Obviously she was very disappointed. In the end, her reaction was similar to most of my friends.”
Next month London will be heading to a minimum-security prison where he will begin serving his 14-month sentence. He may receive a reduction for good behavior or spend some of the time in a halfway house or home confinement, depending on a variety of factors. “I’ll deal with that as it comes along with all the other challenges,” he said.