Herbalife wasn’t knowingly involved the insider trading scheme that revolved around a now-former KPMG partner. But the nutritional supplements company still played a major role all the same.
As part of a criminal complaint filed in court on Thursday, federal investigators detailed how the onetime KPMG executive, Scott I. London, improperly shared confidential information about a number of companies.
Though Mr. London began sharing information about Herbalife to his golfing buddy, Bryan Shaw, in early 2011, the focus of the complaint centers on a series of calls in mid-February this year.
As KPMG’s senior partner for the Southern California region, Mr. London was privy to Herbalife’s books â€" putting him in a unique position at a company whose stock sometimes swung dramatically because of public criticisms by the prominent investor William A. Ackman.
During a Feb. 14 call, Mr. London leaked elements of Herbalife’s latest earnings report, five days before the company was set to disclose them. In particular, the accountant said that not only were the results better than expected, but that his client planned to raise its financial guidance.
“The numbers are slightly better than the street’s estimates … and they are raising the guidance,†Mr. London told Mr. Shaw, according to the complaint.
On Feb. 19, the two men spoke as Mr. London was on his way to Herbalife’s offices to certify his client’s financial statements before they went out later that day. Mr. Shaw told his friend that he was willing to get back into things “and make both of us some money.â€
The duo then chatted about how Mr. Ackman’s continued bet against the company would affect the stock’s movement. Mr. London expressed caution, given the volatility.
Later on, the two discussed how news that Carl C. Icahn had purchased a big slug of Herbalife shares had propelled the company’s stock price. Mr. Shaw lamented not knowing about the move, which “could’ve made some money.â€
Mr. London replied, “Yeah, that would have been nice.â€
The accountant then noted rumors swirling around the markets at the time about a potential leveraged buyout of Herbalife. “That is going to be where you make a ton of money … because, you know, we’ll know that,†he said.
Then he outlined a classic strategy of insider-trading schemes:
“What we oughta do is, when I know that it’s gonna start happening, what you do is you start just buying in small blocks, right, so it doesn’t draw attention and then, you know, then it doesn’t look unusual at all.â€
Herbalife hasn’t disclosed any plans to take itself private, and given the current controversy may have a hard time finding a willing buyer.
