More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
The Securities and Exchange Commission on Thursday charged the former partner in charge of KPMG’s Pacific Southwest audit practice, Scott London, and his friend, Bryan Shaw, with insider trading on nonpublic information about firm clients.
The SEC alleges that London tipped Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements.
The two men had met at a country club several years earlier and became close friends and golfing partners, according to the SEC. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn.
In exchange for the illegal trading tips, the SEC said that Shaw paid London at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif., jewelry store. Shaw also gave London an expensive Rolex watch as well as other jewelry, meals and tickets to entertainment events.
London, who lives in Agoura Hills, Calif., and worked at KPMG for nearly 30 years, recently informed the firm that he was under investigation by the SEC and criminal authorities for insider trading in the securities of several KPMG clients. The firm immediately fired him.
The U.S. Attorney’s Office for the Central District of California announced criminal charges against London the same day.
“London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex,” said George S. Canellos, acting director of the Division of Enforcement, in a statement.
Michele Wein Layne, director of the SEC’s Los Angeles Regional Office, added, “As a leader at a major accounting firm, London’s conduct was an egregious violation of his ethical and professional duties.”
According to the SEC’s complaint filed in federal court in Los Angeles, London began providing Shaw with nonpublic information in October 2010 and the misconduct continued for the next 18 months. Shaw and London communicated almost exclusively using their cell phones, although on at least one occasion London disclosed nonpublic information in the presence of others during a golf outing.
According to the SEC’s complaint, “London was the lead partner on several KPMG audits including Herbalife and Skechers USA, and he was the firm’s account executive for Deckers Outdoor Corp. Therefore, London was able to obtain material, nonpublic information about these companies prior to their earnings announcements or release of financial results.” Shaw, who lives in Lake Sherwood, Calif., “routinely traded at least a dozen times on the inside information he received from London. He grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers and Deckers,” the SEC said.
According to the SEC’s complaint, “in addition to the bags of cash and the Rolex watch valued at $12,000, Shaw gave London several pieces of expensive jewelry for his wife and routinely covered the costs of dinners and concerts the two men shared along with their families.”
The SEC’s complaint charges London and Shaw with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently ordering them to disgorge ill-gotten gains plus pay prejudgment interest and financial penalties, and enjoining them from future violations of these provisions of the federal securities laws.
The SEC’s investigation began in mid-2012 and is continuing.
Read Compliance Officers Behaving Badly on AdvisorOne.