Former KPMG Partner Scott London Talks Insider Trading Conviction

By:
CHRIS GAETANO
Published Date:
Jul 7, 2014

Last year, Scott London, a former KPMG audit partner, pled guilty to sharing confidential data about firm clients with Bryan Shaw, a golfing buddy who used the information to buy and sell stocks. After cooperating with federal agents, Shaw was sentenced to five months behind bars; London, who had worked for KPMG for nearly three decades, reports for his own 14-month stint in a federal prison this month. But he made another stop first—serving as the subject of a live ethics CPE webcast last week. The Trusted Professional caught up with London to discuss his very public fall. What follows is an edited and condensed version of the interview.

Let’s talk about Bryan Shaw, the friend to whom you gave inside information. How did you meet?

I met him at my country club, and we started playing golf around 1999, 2000 or so. Our kids are of somewhat similar ages, so we had common interests. We just hit it off and did things socially over a period of time, and advanced the relationship toward becoming very good friends. Sometime in 2010 ... I effectively crossed over a line and agreed to give him nonpublic information. That’s when things changed.

Did you ever attempt to justify what you were doing?

I never really rationalized or justified it. If there was any rationalization, it was based upon my belief that the volume and activity of trading was low and therefore so small that, well, who could get hurt? Those types of thoughts would sometimes enter my mind, but most of the time I just wasn’t thinking about it at all.

You had attempted to stop at one point but later started up again. What was going through your mind?

I’ve put a lot of thought into that. It started in November 2010 and then ended in May of 2012, and really, in defense, the reason we stopped was that his trading account was closed. He got a note from Fidelity that said they were very suspicious of some of his trading activity and didn’t want him as a customer.

We said, ‘This is stupid, we shouldn’t do this,’ and we mutually agreed to stop. And from May 2012 to January or early February of 2013 there was no discussion [about KPMG clients]. We went along with our friendship. We may have gone to Vegas for a Super Bowl trip. But then in late January, early February, it effectively started back up, but only because he had been contacted by the FBI, who had set up the sting. [Ed. note: According to the New York Times, Shaw began to cooperate with authorities in order to catch London in the act of leaking information.] So the only reason we got back into it was the FBI. There was a series of phone calls, somewhere between four and six, from Shaw to myself, [with him] wanting to do this. I pushed back and said we were done and I didn’t [want to continue]. … He said, ‘My business is still struggling, anything to help out,’ and, ultimately, he just leveraged our friendship and I agreed to provide him with data again.

What was it like breaking the news to your family?

My dad was a CPA. He passed away in 1999, which is a good thing, I think, because if he was alive to see what I did, I don’t think he would be very proud of me.… It was hard telling my kids who I think had [me] up on a pedestal. They’re in college and we always taught them pretty good morals and ethics. My kids are very well adjusted and understand values. And then I had to sit in front of them and say dad’s going to get arrested and is going to lose his job. It was very difficult but, at the same time, my family has been very supportive, as have many of my friends. There is not one friend who was not supportive. So that’s been a silver lining in this kind of thing.

In general, the CPA profession places a very strong emphasis on ethics and yet we clearly see that, in your case, there was a breakdown. Is there anything that you think could actually help to create more ethical CPAs?

I don’t think there’s anything wrong with the infrastructure and compliance processes at all the firms—I think the nature of the compliance process in KPMG and its systems are extremely robust. This is merely a case of one rogue individual making some personal mistakes and not seriously thinking through the repercussions they would have on friends, family, career, finances, clients and so forth. I believe these are mutually exclusive events—I don’t think you could attribute what went on with me to any weaknesses or flaws in the system of compliance that currently exists with firms, based on my experience with KPMG.
I think the bottom line is that firms do everything humanly possible to prevent violations. Normally, fraud is detected in a way that doesn’t come through the audit process, and that’s my situation here. It was detected by one of the regulators of unusual activity, but the bottom line is that the process at the firms is significantly robust to prevent typical activity.

CPAs need to take ethics CPE every year. Do you think you failed it, it failed you, or both?

That is one of the things I’m least proud of. I took the ethics and compliance training for about 20 some odd years and I knew it—it was ingrained my head. I understood the independence rules, ethics and so forth. I was also in a position of having had to deal with noncompliance in my own firm, with people who had inadvertent independence issues, like taking out a loan from a bank that’s a client—that’s a serious independence violation.

I guess it was more perception over substance, though. I understood the rules, but there was just a complete lack of consideration of those rules when I did what I did. I knew those rules, I understood them, but I still allowed my professional standards to be lowered to do what I did, and almost every day I think, ‘What the hell was I thinking—I know better!’ It’s something that will likely haunt me the rest of my life.

Beyond rules and regulations, though, did you think also of the morality of the situation? 

I understood the moral consequences. I understood that I was using my position of trust, [of having] access to information other people didn’t. I knew what I was doing was wrong. I acknowledge the lack of judgment, but I won’t say I didn’t know it was wrong. I knew that, and just like—if you want to throw in an analogy—if you have an affair and you’re married, you know it’s wrong, but there are reasons you want to do it. They’re two completely different issues, but it’s just human nature that sometimes you can’t explain why you do what you do. I think the only explanation I have is I allowed personal emotions, vis–à–vis the friendship I had with Shaw, to get in the way of my ethical and moral standards, and that’s part of being a human being. We make mistakes, and that is why I did it. It doesn’t justify it—I know it was wrong. I’m totally to blame, but if you look for cause and effect, that could be it. 

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