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From Securities Regulation Daily, April 11, 2013

SEC Charges Former KPMG Partner With Insider Trading

By Rodney F. Tonkovic, J.D.

The SEC has filed an enforcement action charging the former partner in charge of KPMG LLC’s Pacific Southwest audit practice with insider trading. According to the complaint, Scott London provided his friend and co-defendant, Bryan Shaw, with material nonpublic information about five clients. Shaw made at least $1.27 million in illicit profits by knowingly trading on the material, nonpublic information that London provided him (SEC v. London, April 11, 2013).

The Commission claims that London used his position at KPMG to misappropriate material, nonpublic information regarding the securities of five of the firm's clients: Herbalife, Ltd; Skechers USA, Inc.; Deckers Outdoor Corp.; RSC Holdings, Inc.; and Pacific Capital Bancorp. The information given to Shaw, the owner and operator of a struggling jewelry business who had met London at a country club several years earlier, concerned the companies’ upcoming release of financial results and earnings or merger announcements. Shaw traded on this information, and, in exchange, paid London $50,000 in cash and provided him with, among other benefits, jewelry, meals, and tickets to entertainment events.

London began providing Shaw with nonpublic information in October 2010 and the last tip occurred in February 2012. In April 2013, London informed KPMG that he was under investigation by the SEC and criminal authorities for insider trading and was promptly terminated. KPMG subsequently resigned two clients and withdrew their affected audit reports after concluding that its independence had been impacted by London's conduct.

Both London and Shaw publicly admitted to their conduct, which the Commission stated was in violation of the antifraud provisions of the Exchange Act. The Commission stated that London's conduct was a knowing breach of his fiduciary duty to KPMG and its clients and that Shaw knew, or was reckless in not knowing, that the information given him was confidential. The SEC seeks permanent injunctions prohibiting future violations, disgorgement of ill-gotten gains together with prejudgment interest, and civil penalties.

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