Hedge Funds Did Not Receive Tips In KPMG Insider-Trading Scandal

Apr 10 2013 | 10:30am ET

Hedge funds were not the beneficiary of the tips about Herbalife and Skechers leaked by a former KPMG partner—leaks that led KPMG to resign as those companies' auditor.

Scott London, the Los Angeles-based partner who was fired on Friday, said he had given some non-public information to one person. That person, whom London said was "someone I'd known from the golf club," is not linked to a hedge fund or any other professional investor, The Wall Street Journal reports, but he has not been identified.

Herbalife, a nutritional supplements company, has been at the center of a battle between two prominent hedge fund managers, Pershing Square Capital Management's William Ackman and Carl Icahn, with the former calling the company a pyramid scheme.

Facing both criminal and Securities and Exchange Commission probes, London said yesterday, "I regret my actions in leaking nonpublic data to a third-party."

"What I have done was wrong and against everything" he believed in, London added.

London said the leaks "started a few years back," and that he generally offered "no real significant information—usually 'they're doing well', or 'they're not doing well.'" But London admitted that, "one he told me he had traded, that's when my heart sank. We had discussions this wasn't right—I knew it was wrong—but it just happened."

"I can't understand why I did it," he said.

"I felt guilt about it regularly—I can't explain it to be honest with you," London added. "I look back at when this started and I can't explain it… I guess [the] best way to describe it is that humans make mistakes."

London said he was not sure how much his friend profited from his tips, and said that he received a discount on a watch, dinners and several thousand dollars in cash from him.

London is cooperating with the investigation.

KPMG, which London said bore "no responsibility" for his action, has withdrawn its certifications of Herbalife's and Skecher's financial statements for the last three and two years, respectively, although it said it has no reason to believe they contain errors.

For Herbalife, already reeling under Ackman's blows, the scandal has it batting away new questions about its future. Yesterday, it denied that KPMG's resignation would imperil its listing on the New York Stock Exchange or lead to a default on its loans.

"We believe we are currently in compliance with New York Stock Exchange listing requirements and we do not anticipate that the NYSE will initiate any type of proceeding to delist the company," Herbalife said. "Earlier today, the company proactively reached out to NYSE officials regarding its detailed plan to replace KPMG and will keep the exchange fully apprised of those efforts. In addition, the company has confirmed that KPMG’s resignation as the company’s auditor and KPMG’s withdrawal of its prior audit opinions will not result in a default under Herbalife’s existing credit facilities."

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