Former KPMG Executive Admits Trading Insider Tips for Cash and Gifts

Federal agents secretly photographed a former senior KPMG executive accepting a cash payment in exchange for secret information about the companies he audited, according to a person with direct knowledge of the case.

The sting operation, executed by the F.B.I. a few weeks ago at a Starbucks in the San Fernando Valley, outside of Los Angeles, led KPMG to fire the former executive, Scott I. London.

Though he has yet to be charged by the government, Mr. London admitted to leaking the confidential data about two of his clients â€" the nutrition supplement maker Herbalife and the footwear manufacturer Skechers. As a result, KPMG resigned as auditor for the two companies.

“What I have done was wrong and against everything that I had believed in,” Mr. London said in a statement. “I spent nearly 30 years at KPMG and I dedicated my entire life to that firm.”

Mr. London passed the information to a longtime friend and frequent golf partner, who has yet to be identified.

The government acted after receiving reports of suspicious trading in the brokerage accounts of Mr. London’s friend. The friend then turned against Mr. London, according to the person with direct knowledge of the case.

After the Starbucks sting, F.B.I. agents showed up at Mr. London’s home and confronted him with the evidence.

Mr. London, who was the partner in charge of the audit practice for KPMG in Southern California and a prominent figure in Los Angeles business circles, said in a statement that the leaks started several years ago “in an effort to help out someone whose business was struggling.”

But Mr. London did not provide the tips solely out of kindness. He also accepted about $25,000 in cash and other gifts, including a Rolex watch, the person briefed on the case said.

“I have no idea what I was thinking,” said Mr. London, in an interview with The Los Angeles Times, which had reported on the sting operation. “I don’t know why there was a lapse of judgment, but there was.”

Mr. London could not be reached on Wednesday.

The United States attorney’s office in Los Angeles and the Securities and Exchange Commission there are both investigating the case. Government lawyers have interviewed Mr. London, who is cooperating with the government, and are weighing charges against him, according to the person briefed on the case.

The episode has been a major headache for both Herbalife and Skechers. KPMG withdrew its certification of the companies’ financial statements for the last few years, explaining that Mr. London’s actions had compromised the audits. But the auditor also emphasized that it had no reason to think that the reports were erroneous. In any case, the companies have to find a new auditor and have their financials redone.

Mr. London said in his statement that his tips did not involve divulging any confidential company documents but was instead “in the form of a suggestion.” The friend, Mr. London said, would ask how his clients were doing and he would give him his thoughts on whether the companies’ stocks were a buy or a sell.

Appearing on CNBC Wednesday afternoon, Harland Braun, Mr. London’s lawyer, said that his client knew that he was violating the law.

“But he just can’t understand why he did it, and it’s hard to understand why he did it,” Mr. Braun said. “It makes no sense. He’s looking back on the years that he did it. It made no sense from a dollar-and-cents point of view; it made no sense in terms of his ethics. He’s not trying to justify it in the slightest.”

Mr. Braun painted a dire picture of his client’s prospects.

“It’s pretty grim,” the lawyer told CNBC. “His life is ruined. He’s 50 years old, he’s lost his career, he’ll probably lose his license, he’s been disgraced, and he may have to do some jail time. That’s the best-case scenario. It’s a very grim reminder of the consequences for anyone who wants to leak any insider information.”