Who should get credit for discovering the insider trading by KPMG former partner Scott London and his golfing buddy, Brian Shaw?
I think the answer is FINRA.
This article, Spy team is Wall Street regulator’s weapon against insider traders, suggests it was FINRA who first noticed the unusual trading and then turned that information over to other parties.
FINRA can only do research and then turn over their info to the appropriate law enforcement agency. The article says
The Wall Street watchdog has no subpoena power, so it turns over its findings to government agencies. And they’ve been turning in tips to the SEC at an unprecedented pace.
Earlier in the article, there is this comment:
It was information passed on by Finra that helped lead to their arrests in April, Assistant U.S. Atty. James Bowman said.
Fidelity Investment’s involvement
Mr. Zeune recollected that Fidelity Investment first identified the fraud. That comment did ring a bell.
I did a word search on the SEC charges (available here) and the federal indictment (available here) and quickly browsed both documents. I didn’t notice any mention of either Fidelity or FINRA as the source. Maybe I missed it.
The published reports I have on hand mention that Fidelity freezing the account was the first sign to Mr. London and Mr. Shaw that the feds might be on to them. Here are two comments:
Wall Street Journal – Secret Recordings, Cash in Insider Sting
The first sign of trouble came in July 2012, when Fidelity Brokerage Services froze Mr. Shaw’s trading account, according to the criminal complaint. Fidelity said it doesn’t discuss customer matters.
Los Angeles Times – In KPMG insider trading case, crime and blunders alleged
London, a former auditor at KPMG, and Shaw, an Encino jeweler, kept trading even after Fidelity Investments suspended Shaw’s brokerage account, according to the Justice Department complaint.
Both reports use neutral verbs and don’t specify who first noticed the suspicious trading. They just identify that Fidelity froze the account.
Freezing the account produced Mr. London’s comment comparing insider trading to card counting in Vegas. From page 13 of the indictment (link above):
Shaw said that LONDON reassured him that there was no reason for concern, and explained 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.
Mr. London was quite wrong on the insider trading idea and I’m guessing the casinos can do far more than just walk you to the door.
So the sequence isn’t quite clear, but putting the pieces together suggests FINRA noticed the trading first. There are some not-yet-disclosed additional steps between FINRA’s discovery and Fidelity’s freezing the account. Presumably the SEC and perhaps other agencies were involved. My guess, based on mere recollection, is the FBI got involved late fall/early winter, well after the brokerage account was frozen.
At some point I’d like to piece together more of the puzzle and write in more detail. Stay tuned for more.
Update: I identified Mr. Zeune as the reader who asked the question. Thanks for asking. Anyone have more info to help answer the question?
Additional update: After further reading, I’m not quite so sure FINRA get the credit. See followup post here.