Insider Trading Scandal Now Plagues Herbalife

By Monica Wolfe,

Shutterstock photo

On April 8 KPMG LLP released a press statement saying they had resigned effective immediately as the auditing firm for both Herbalife ( HLF ) and Skechers USA ( SKX ). This resignation came after the company found out that one of its auditors was profiting from discussing nonpublic information with investors in these companies.

KPMG LLP is one of the big four auditing firms in the US. It provides tax, audit and advisory services for large corporations as well as on the individual level.

While the name of the Herbalife audit has not been publicly announced, T he Wall Street Journal claims that the KPMG partner was Scott London, whose LinkedIn page says he has been with the firm for 29 years.

The press release dated Monday, April 8, 2013 states:

Late last week, we were informed that the partner in charge of KPMG's audit practice in our Los Angeles business unit was involved in providing non-public client information to a third party, who then used that information in stock trades involving several West Coast companies. The partner was immediately separated from the firm.

KPMG's 22,000 partners and employees unequivocally condemn this individual's rogue actions. 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.

KPMG is resigning two clients after concluding today that the firm's independence has been impacted as a result of this individual's behavior, and we have informed those companies it is necessary to withdraw our auditor reports. We have no reason to believe that the financial statements of these companies have been materially misstated.

We regret the impact this individual's actions may have had on any of our clients. KPMG remains committed to the highest standards of professionalism, integrity and quality, and we are dedicated to the capital markets we serve.

Following this press release, Herbalife made a statement saying that KPMG resigned "solely due to the impairment of KPMG's independence resulting from its now former partner's alleged unlawful activities, and not for any reason related to Herbalife's financial statements, its accounting practices, the integrity of Herbalife's management or any other reason."

Unfortunately for Herbalife, this insider trading scandal comes at a bit of an uncomfortable time. Recently Guru Bill Ackman verbally attacked the company by saying that it was distorting the financial information it gave investors.

Despite the fact that the company has not had any disagreements with KPMG's audits from the beginning of the year through Monday, Herbalife has withdrawn its audits for fiscal years 2010 through 2012.

"Such reports should no longer be relied upon as a result of KPMG's lack of independence created by the circumstances described above," Herbalife stated. Herbalife still maintains that its audit committee and management "continue to believe that its financial statements covering the referenced periods fairly represent the affected fiscal years."

Herbalife has still not disclosed what the inside information was. CNBC made the assumption that it might be the earnings data for the first quarter that Herbalife is set to announce on April 29.

In regards to Skechers, SAC Capital announced a 5.1% stake in the company yesterday after close. So now not only does SAC have to deal with its own insider trading case that already cost it over $600 million, but it might just have another one dumped in its lap.

Both the SEC and the FBI office in Los Angeles are investigating the alleged insider trading involving the former KPMG employee.About GuruFocus: tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing
Referenced Stocks: HLF , SKX

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