April 2013

Consequences – insider trading edition – #2

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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

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Failing the front-page-of-The-Wall-Street-Journal test twice in one week

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“How will this look on the front page of the Wall Street Journal?” is a handy question to use when pondering what to do about an accounting or auditing issue. It’s useful for any business decision.

I’ve used that for myself and as an illustration for clients and other people I’m talking to. It provides a good way to frame up how a decision will look to other people.

For the second time this week, Mr. Scott London, formerly a partner at KPMG, has seen how this question plays out.

The front page of the Wall Street Journal today has a headline across three columns:

Secret Recordings,

Cash in Insider Sting

How would you like to be the subject of the article?

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Consequences – insider trading edition #1

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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

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KPMG partner arraigned – might plead guilty – hint on how to avoid jail time?

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Former KPMG partner Scott London was arraigned today according to several news reports. He is free on $150,000 bail.

His attorney suggested Mr. London will plead guilty at the May 17 hearing.

Check out:

An idea on why there’s the admission during first interview and likely fast guilty plea

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SEC files complaint against former KPMG partner

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The SEC has filed a civil action against former KPMG partner Scott London and his golf buddy accusing them of trading on inside information.

You can read the SEC’s press release here and see a copy of the complaint here.

You can read the WSJ’s article here and find the SEC’s complaint here.

The SEC alleges that the golf buddy made illegal profits of at least $1.27M (paragraph 7 on page 2).

Whether the SEC’s or FBI’s estimate of gains is correct, my recollection of several on-line articles suggests those amounts indicate the pair is exposed to some serious jail time.

Related articles in reverse chronological order:

KPMG partner indicted for insider trading. Indictment shows fiasco is far worse than shown in initial reports

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The KPMG insider trading fiasco is far worse that indicated in first reports.

  • The amounts allegedly paid to the partner are larger than initial reports.
  • The government alleges confidential information was passed on 5 companies, not 2. 
  • The government alleges the CPA partner actively planned with his golf buddy when to buy and sell which stocks and options.

The Wall Street Journal had the first report I saw announcing Scott London, regional PIC at KPMG in LA has been indicted for securities fraud on Thursday morning – Substantially expanded article from the first announcement is here:  Former KPMG Partner Charged.

The indictment is available on FoxBusiness – Ex-KPMG Exec Charged in Insider Trading Scam.

The indictment has a number of interesting comments: …

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Initial highlights of insider trading by KPMG partner

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A now-former partner of the LA office of KPMG, Scott London, is in boiling hot water for alleged insider trading.

Lots of news out. I will give a general overview. Lots more news will be out in the next few days, I’m sure.

Brief outline

He allegedly gave ideas about companies where he was the audit partner to a buddy at a golf club. The feds tumbled to odd trading patterns in said buddy’s portfolio and investigated.

The former partner hired an attorney before his first interview with the FBI and SEC. That’s a good move.

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Live example of the ‘Wall Street Journal’ test

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If you want to test a decision, ask yourself how this will look on the front page of the Wall Street Journal.

We see an example of that test in today’s WSJ.

Front page.

Above the fold.

Big font covering 4 columns.

Here’s the headline:

Trading Case Embroils KPMG

Partner who Audited Herbalife and Skeechers Admits Giving Stock Tips to Friend

How’s that looking?

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Frequently asked questions on the Peer Review program in California

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The California Board of Accountancy has a great FAQ posted here. It covers a lot of general questions on the peer review program.

Check it out.

Good discussion of the transition to reporting your peer review status every two years when you renew your license. Remember the phase-in was over three years.

That two-year reporting requirement doesn’t mean you have to get a peer review every two years. Just that you have to report your status when you renew every two years. Will likely get you into the situation where you tell the board about one specific peer review report on two consecutive renewals.

Internal control, 1860s edition – safes

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OLYMPUS DIGITAL CAMERA

(All photos by James Ulvog are from the Wells Fargo museum in Old Town park in San Diego.)

There are a few basics of internal control you will always hear from your CPA. The concepts have been around a looooong time.

Things like split access to the safe. Also, use storage containers that would reveal any unauthorized access.

Those concepts were used on the stagecoaches in the 1860s as shown at the Wells Fargo Museum in San Diego.

The strong boxes used to transport gold and currency were extremely rugged. You can see pictures above and below that I took while touring the museum last year. Several things are quite visible.

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