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Lessons From L’affaire Scott London: Don’t Talk About Your Clients While Quoting Caddyshack

I love Peter Henning's suggestion that ex-KPMG partner Scott London was swapping Caddyshack quotes with his golfing buddy. Everyone having few drinks after playing a round inevitably sees someone walk by with a hideous headpiece and says, "When you buy a hat like this I bet you get a free bowl of soup." I think it's a law in Florida that you have to recite that line. 

The unnamed tippee provided London with "a discount on a watch, a few dinners and occasional cash payments of $1,000 to $2,000 in return for the confidential information" on Herbalife and Skechers.
 
[sinking in]
 
Uh huh, okay. Look, I don't want to rub salt in a wound here, but for God's sake, man — this was really dumb. I know you know. You said so yourself. But right now, your wife can't even look at you. I mean, you're not Eliot Spitzer, but everyone who is reading about this story is giving you facepalm. The kind of facepalm that leaves fingerprints on your temples from squeezing them in utter disbelief. 
 
Sorry, I won't harp. We were talking about golf movies and insider trading. Henning explains what London has in store: 
There is a good chance that criminal charges will be filed because of Mr. London’s prominent position as KPMG’s lead audit partner for Herbalife and Skechers. Prosecutors will want to send a message that any improper disclosure of client information will be punished.
 
The potential sentence from a criminal prosecution will depend in large part on the amount of any gains or losses avoided by the friend. Mr. London’s cooperation will certainly be helpful, and may allow him to avoid prison if the trading resulted in only small gains. But if the benefits were worth more than $200,000, then federal sentencing guidelines would recommend a prison term of about a year, and higher as the dollar figure grows.
 
The S.E.C. can be expected to file civil charges, and the usual price for a settlement is a penalty equal to the benefits derived from the trading activity, plus disgorgement of any profits or benefits received. Even though Mr. London does not appear to have traded for his own benefit, under the law, he is responsible for any profits of his tippee and will have to pay the price.
As anyone that has ever worked in a Big 4 firm can testify, talking about work in a social setting is unavoidable because you spend 100% of your time outside of work with…co-workers! Usually it's people on your team but even if you're speaking to other people within the firm, it's natural to ask about the clients you're working on. And everyone more or less knows there's this unspoken understanding this client gossip is between prudent business colleagues and is not, ya know, for outsiders. To take that even a step further, if you're an auditor, thinking about trading a client's stock is like thinking about going on serial killing spree — it doesn't even occur to you because "WHOA. THAT IS SO MESSED UP."  
 
Scott London's situation was a little different, obviously, as the in-charge of the Los Angeles audit practice. He was a man about town, serving as the Chairman of the Los Angeles Sports Council and other nonprofits. An enormous part of his job was talking business with people outside KPMG. "We can do this for you, we can do that for you. How 'bout Kobe? Yuk, yuk, yuk."
 
And as we all know, a lot of these guys (yes, guys) get a lot of business down on the golf course and at the club. But sharing information about specific clients to a golfing buddy that had a struggling business? [getting upset again] Maybe professional judgment likes to relax at the club, too? 
 
London says his "heart sank" when he learned his pal was trading on the info. That sounds a lot like someone who was hoping — PRAYING — his words were going in one ear and out the other. But when the inevitable happened, he was overcome with disappointment rather than surprise.  
 
Sigh. But as Henning notes, professors nationwide now have another real-world example for classroom discussion:
Mr. London is likely to become well-known in university accounting programs for what not to do as an auditor, a lesson in how anyone can commit a crime when they betray a trust.
In other words, Scott London will be a legend. So he's got that going for him. Which is nice.