Consequences – insider trading edition #1
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
The alleged insider trading has led to a criminal indictment on one count for conspiracy to commit securities fraud through insider trading.
Multiple sources have said the maximum jail time is five years in prison. Mr. London’s attorney is quoted as saying he will plead guilty at a May 19 hearing. It is up in the air what the sentence will be, but the feds have been pushing hard to get serious jail time for insider trading.
Looks to me like time in the federal pen is likely.
Criminal fines
There are serious fines on the table as part of the criminal charges.
I’ve not researched the federal code, so will go with the maximum penalties outlined by Walter Hamilton in the Los Angeles Times, In KPMG insider trading case, crime and blunders alleged:
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.
Just trying to do insider trading can cost you $250,000. With allegedly successful trades on the table alleged by the SEC to have gains in the range of $1.27 million, the criminal penalty could be something in the range of $2.5 million. That of course assumes a conviction and further proof the SEC’s numbers are correct. The numbers in the indictment are a little lower, I think.
Legal fees for criminal case
Mr. London retained a high-powered attorney. I have no clue what fees are involved to get that kind of talent on board. But I know the rates are going to be extremely high.
I’d also make a very wild guess that attorney will have several of his staff working the case. I’d make another wild guess that everyone involved has been working a lot of hours every week since the FBI’s first visit.
That will cost a fortune.
Civil fines
The SEC has filed civil enforcement charges. I don’t have enough experience in the public securities world to know what enforcement looks like for future employment bans or the additional civil penalties mentioned or any other consequences the SEC is asking for in items II , IV, and V at the end of the enforcement filing.
We can just look at item III which asks for disgorging illegal trading profits, which the SEC claims is $1.27 million.
That means likely penalty from the SEC is at least $1.27 million. I have no idea if there is a multiplier of some sort. Anyone care to comment on that?
Reports in the criminal indictment that Mr. London admitted that he disclosed inside information during his interview with the SEC and FBI might make it a bit hard to defend against the SEC’s claims, although granting use immunity enters the issue in ways that I don’t understand.
To be continued.
Consequences – insider trading edition – #2
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
Tracy Coenen opens up the discussion of income tax fraud in her post Scott London’s Other Crime.
After pointing out that an accountant ought to be able to get a better deal than something under $100K for something around $1.2M of illegal profits, she moves on to the tax issue.
She is making a not-so-wild guess that Mr. London probably didn’t include the $50K of cash, $12K watch, and $12K or $20K of concert tickets in his 1040. Even if the concert tickets were worth a fraction of that, the numbers are substantial.
That could be something in the range of $60K to $80K over the years 2010 through 2012.
It is my guess that Big 4 partners have seriously messy tax returns because, based on my rather limited knowledge of partnership tax law, they pick up a tiny fraction of every income and expense line item of the firm.
As a result, I’ll guess partners don’t prepare their own returns. That means he would have had to tell the KPMG tax department to add another $10K or $30K of “other” income to his return each year. That would generate far too many questions, for which there wouldn’t be good answers.
I’ll agree with Ms. Coenen that chances are high that he didn’t get those payments included on his 1040.
Thus, there is a good chance he may have some future conversations with the Criminal Investigation Department with follow-up criminal enforcement action.
That discussion likely ends with back taxes, interest & penalties, along with the possibility of more jail time.
One commenter at Ms. Coenen’s post pointed out the California Franchise Tax Board will likely be paying Mr. London a visit. They will want money. Don’t know if they push hard for jail time.
Publicity
Mr. London was featured on the front page of the Wall Street Journal on April 10.
He made it again on April 12. Twice in one week
Exhibit A to the criminal indictment is the FBI’s photo of him accepting an envelope which the FBI claims contained a $5,000 payment. You’ve seen the picture. It is plastered all over the internet. It’s the illustrating photo for much of the reporting in the last few days. That’s all the ‘evidence’ most readers will need to conclude he’s guilty as sin.
That photo was at the top center of the WSJ’s front page on 4-12, only without the grey-out face on his golf buddy that appeared in the copy at the end of the indictment.
He also had reporters following him around which resulted in a background article at the Wall Street Journal – Question in KPMG Case: Why? The article gives the name of his wife, when he graduated from college (1984), his alma mater, name of the city where they live, when they bought their house and how much they paid for it, and background on one child (boy, attends a named high school, plays on baseball team).
Oh, and that article appeared on page B1 of the WSJ on 4-13 – that’s the front page of the second section. Not the place I want to spread around my bio information. Hmm. Does that mean he made the front page of the WSJ three times in one week?
Most high-profile business writers have already run major articles discussing him and his alleged actions.
Every business writer in the country will be talking about him for the next few weeks.
Oh. And since we’re in the internet age, most of those articles will never, ever go away. Some may disappear, but not many.
His great-great-grandchildren will be able to read almost all of those articles when they are surfing the ‘net 70 or 80 years from now.
Previous post: jail time, criminal fines, legal fees for criminal case, civil fines
Next post: loss of employment, reputation, and professional licensing
Consequences – insider trading edition – #3
Is possible jail the only bad thing on the horizon for a CPA who allegedly committed 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.
This post discusses the possible consequences of:
- loss of employment,
- loss of reputation,
- loss of professional licensing
First two posts in this series are here and here.
Loss of employment
Mr. London’s employment was terminated week before last.
Public reports indicate he was the regional partner in charge of audit practice. That is a very major position which obviously would have very high levels of compensation.
Audit PIC. For the region. Of a Big 4 firm.
That is a dream position that few CPAs could ever hope to achieve. The opportunities, experiences, authority, and compensation would be astounding.
I have no idea what the comp is for a regional audit PIC of what is probably the second most lucrative region in the country. I’ll make a wild guess it’s over 1 million a year. Maybe two. By the way, I’m pulling numbers out of the air.
Even making a low assumption of $1M, that’s a huge amount of money for a CPA. He was getting paid in a couple of weeks what many people make a year.
If you scoff at that amount, keep in mind he is producing more economic value for his employer than his salary.
He was creating far more economic value in one or two weeks with his brain than most people create in a year.
That income is gone.
He could have worked for another 10 or 15 years. That means he’s out somewhere between $10 and $30 million.
Gone.
Loss of reputation
His reputation is shot.
Even if the publicity dies off this afternoon and even if the tax investigation doesn’t go into the criminal realm and even if the SEC enforcement efforts were to somehow collapse and even if his attorney could successfully make an argument for no jail time and even if his current net worth is so large that he can absorb the financial hit to maintain his lifestyle and even if he can somehow afford retirement, his reputation is destroyed.
Completely, totally, utterly destroyed.
As the ‘why did he do it?‘ conversation gets going, there will be dozens of business writers pondering in public the psychological makeup of the disgraced CPA. There will be tens or hundreds of thousands of readers pondering those arm-chair assessments wondering “is it narcissism, hubris, greed, or arrogance. Hmm, I think it was…”. His friends, former colleagues, and buddies from the golf course will all be wondering.
How would you like to have around one-tenth of the professionals in your field working through an amateur assessment of your mental health?
Loss of professional license
If any of what’s been alleged is proven true, is there any doubt the California Board of Accountancy will start enforcement action down the road?
I’m quite confident they will get involved. Think it through with me – his attorney said publicly he will plead guilty, which (if correct) means a felony conviction (which won’t be going up for appeal if there’s a guilty plea) for insider trading on client information obtained during the course of providing audit services. Yeah, they’ll get involved.
Just as a guess, I think the most likely outcome of that journey will be the loss of his license.
The board obviously takes their time in enforcement actions, because they must of necessity let the criminal and civil cases run. That is a very good thing, by the way.
On the other hand, with the speed of the indictment and his attorney saying he plans to plead guilty in just over four weeks from now, the civil and criminal cases could be cleared up remarkably quick. The CBA might be able to move fast on this.
Fast or slow, I think we can all see the outcome.
So he’s lost a great job, has destroyed his reputation, and will likely lose his CPA license. And the list of consequences isn’t complete.
Next post – possible litigation from employer
Consequences – insider trading edition – #4
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 post will cover one possible consequence: the possibility of being sued by KPMG.
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
Previous posts have discussed:
- 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
Litigation from employer
The chairman and CEO of KPMG sent out a statement last Thursday evening. Let’s just say he is not amused.
You can see the comment in quite a few places. I first read it in Francine McKenna’s article at Forbes – KPMG Statement on Scott London Criminal and Civil Charges.
There are two particular items I noticed:
I was appalled to learn of the additional details about Scott London’s extraordinary breach of fiduciary duties to our clients, KPMG and the capital markets.
Early public comments indicated there were two clients involved. The criminal indictment said there were five. Sitting in my little corner of the audit world that was a surprise.
The CEO’s comments above indicate that may have been a surprise to KPMG leadership. Again, I have no idea what happened behind closed doors, but reading between the lines, that comment suggests that Mr. London may have not fully disclosed the extent of his activities to his employer. I’m basing my wild guess on the “additional details” comment. An alternative could be ‘additional details’ could be the brazenness and intentionality that is alleged in the indictment.
Well that’s just a guess on my part. Take a look at this comment, which Ms. McKenna emphasized:
KPMG will be bringing legal actions against London in the near future.
What could that involve?
For the non-CPAs in my audience, let me walk through what that comment means to me.
Remember that KPMG withdrew three years of audit opinions for Herbalife and two years for Sketchers?
That means another audit firm will have to be brought in to re-audit Herbalife for three years and re-audit Sketchers for two years.
That will cost a ton of money. How much?
Michael Rapoport gives a hint in the WSJ, Bad Week for KPMG Could’ve Been Worse:
Herbalife paid KPMG a total of $11.2 million in fees for the firm’s last three years worth of audits; Skechers paid $1.7 million for its 2011 audit and hasn’t yet disclosed its 2012 audit fees.
On one hand, it won’t take three times as long to re-audit three years as it would to audit one year. So there should be some savings from being able to do three sets of compliance tests or three sets of substantive tests all at the same time. You could test three sets of a particular disclosure for not much more time that it would take to test one year.
A lot of tests will be easier to perform with two year’s hindsight. Two years after the fact it’s really easy to test allowances for losses, whether for inventory, receivables, returns, or warranties.
On the other hand, the risk is far higher than usual for multiple reasons. So that means it could take longer to re-audit three years than to perform the three years initially.
Let’s pull a number out of thin air by making the huge assumption that it will take as much time to re-audit as it did to perform the audits the first time. Let’s also assume the Sketchers audit in 2012 cost as much as 2011.
So, taking the numbers mentioned by Mr. Rapoport, that would suggest the re-audit fees could be something in the range of $14.6 million (11.2 + 1.7 + 1.7).
Those two companies won’t want to eat those costs. Why are they out that money? Because KPMG as a firm is no longer independent. The companies will likely look to KPMG to pick up the tab.
Sitting at my tiny little desk in my tiny little corner of the audit world I’m guessing that KPMG can either write a check today to reimburse the companies for those fees or they can write a check after they get sued. With my little bity understanding of risk management, seems to me KPMG would be far better off to put a blank check in the mail this afternoon. Or just have the new firms just send their bills directly to the KPMG CEO.
KPMG is not going to want to absorb that $15 million hit. Why are they going to have to write the check? Because of Mr. London’s alleged actions.
They will be looking to him to cover the cost.
Thus, we get back to the CEO’s comment.
KPMG will be bringing legal actions against London in the near future.
(By the way, keep in mind I’m an accountant, not an attorney, and I’m not giving any stock advice, and my comments here are based on what I know from reading a lot over the last few days, and I’m just a little ol’ sole practitioner. Wouldn’t be wise to read more into what I say than what I actually said.)
There is a very good chance the former partner will lose his equity in the firm and his retirement. There is a smaller chance he could write a really big check to his former employer.
Attitudes inside firm
An anonymous article at Going Concern from a KPMG insider gives some hint of the mood inside the firm. Check out KPMG Insider: Partners Fell Betrayed By Scott London’s Actions. If you’re still reading my overly long post, you will want to check out that article.
In my opinion, the feelings of betrayal amongst partners described by the author is a strong indication this is a radical departure from the firm culture. If what is alleged is true, Mr. London appears to be an extreme outlier.
One major thing described by the author is the internal communication. Look at this comment to see the very clear, unadorned reaction from the CEO. An email from him
…was one of the simplest and most powerful items I’ve seen come across the email in response to a firm event. Our chairman [John Veihm