KPMG LLP fired the head of its Los Angeles audit practice after learning that he provided inside information to someone who used it to trade stocks.
The partner, Scott London, was the lead auditor for Skechers U.S.A. Inc., according to David Weinberg, the shoemaker’s chief financial officer. Herbalife Ltd. and Skechers said in statements that KPMG is withdrawing as their auditor. The Justice Department and the Securities and Exchange Commission are investigating the partner’s actions, according to people with knowledge of the situation.
“It came as quite a surprise,” Weinberg said in an interview. “I liked him a lot, I trusted him obviously.”
Senior KPMG executives visited Skechers Monday and told Weinberg about the misconduct, he said. They said no questions were raised about the company’s financial reports and that they believe London is the only auditor involved, he said.
The KPMG executives said that London told them he had sold secrets about the footwear maker, according to Weinberg. The information was sold to an individual, according to one of the people with knowledge of the situation. London didn’t return messages seeking comment.
KPMG said stock trades tied to its former partner involved several U.S. West Coast companies. It didn’t identify them or the executive. Herbalife, a nutrition company based in the Cayman Islands, has a main office in Los Angeles, while Skechers is based in Manhattan Beach, California.
KPMG’s employees “unequivocally condemn this individual’s rogue actions,” the firm said in a statement on its website. “This individual violated the firm’s rigorous policies and protections, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for KPMG’s long-standing culture of professionalism and integrity.”
The accounting firm said it has no reason to believe the affected companies’ financial results were materially misstated.
“They didn’t question the numbers, they didn’t question management,” Weinberg said.
Herbalife shares fell 3.8 percent to $36.95 Tuesday in New York after a trading halt. The company said in a statement that KPMG’s resignation had nothing to do with the accuracy of its financial results, accounting practices or management.
Herbalife is fighting accusations from Bill Ackman, founder of New York hedge fund Pershing Square Capital Management LP, that it uses inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme. The company has repeatedly denied the allegations, saying it is retail-oriented and sells products with unique ingredients.
Timothy Ramey, an analyst at D.A. Davidson & Co., said Tuesday in a report that it may take as long as a year for Herbalife’s next auditor to complete their review of the company. The company may not be able to buy back stock during that period, he said.
“This is and will be disruptive to the stock, but hopefully not the company,” Ramey said. He lowered his rating on the company to neutral from buy.
Seth Oster, a spokesman for KPMG in New York, declined to comment beyond the company’s statement, as did Barb Henderson, a spokeswoman for Herbalife. Calls for comment to the U.S. Attorney’s Office in Los Angeles weren’t immediately returned.
U.S. regulators including the SEC have repeatedly accused audit-firm employees of abusing access to corporate information for insider trading. A former Deloitte & Touche LLP partner and his son agreed to pay more than $1.1 million in 2010 to settle claims they traded on information about that firm’s customers. In 2008, two former employees of PricewaterhouseCoopers LLC were fined for using client information to buy stock before takeovers.
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