http://www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/Managing-China-risks-fraud-corruption-201203.pdf
KPMG Cancels Audits Over Insider Trading Inquiry
By PETER LATTMAN and MICHAEL J. DE LA MERCED 8:28 p.m. | Updated
For a company that promotes clean living, the nutritional supplement maker Herbalife has had a messy history.
Its founder died in 2000, at age 44, from an accidental combination of alcohol and antidepressants. For years, the company was mired in lawsuits related to its use of the banned stimulant ephedrine. In recent months, it has been at the center of a public brawl involving prominent hedge fund managers, with one calling Herbalife “a pyramid scheme.”
On Tuesday, things got even messier for Herbalife when it found itself in the middle of an insider trading scandal.
Documents: Herbalife statementScott I. London, the partner in charge of the audit practice for KPMG in Southern California, was fired by the accounting firm. Though he has not been charged or entered a plea, Mr. London admitted to wrongdoing in a statement issued through his lawyer on Tuesday. Mr. London said was “embarrassed” and that he regretted “my actions in leaking nonpublic data to a third party regarding the clients I served for KPMG.”
He said the leaks began a few years ago “to help out someone whose business was struggling.” Mr. London did not identify the individual, but he said he would on occasion give that person his thoughts on whether his clients’ stocks were a good buy or not. “No one in the firm knew what I did,” he added.
On Tuesday morning, both Herbalife and Skechers announced that KPMG had resigned as their auditor. Herbalife said KPMG told it that the auditor’s independence had been impaired and that it had no option but to withdraw its audit reports on Herbalife for the fiscal years ended Dec. 31, 2010, 2011 and 2012.
Skechers said KPMG had withdrawn its audit reports for the last two fiscal years. Skechers added that, according to KPMG, the former partner in question — Mr. London — was cooperating with authorities.
Both the United States attorney’s office in Los Angeles and the Securities and Exchange Commission are investigating the case, people briefed on the matter said. They spoke anonymously because they were not authorized to speak publicly about the case.
Mr. London, 50, worked at KPMG for nearly 30 years. A resident of Agoura Hills, Calif., Mr. London is a prominent figure in business circles, serving as chairman of the Los Angeles Sports Council and sitting on the board of the Los Angeles Area Chamber of Commerce.
A government action against the former KPMG partner would add to the recent push by prosecutors and securities regulators to root out insider trading, a campaign that has yielded about 180 civil actions and more than 75 criminal prosecutions. While the majority of the prosecutions have involved Wall Street traders and corporate executives, a number of those charged have been advisers to companies — bankers, lawyers, accountants and consultants — who are entrusted with secret information by their clients.
Last year, Thomas P. Flanagan, a former partner at Deloitte & Touche, received a 21-month prison sentence after admitting to making more than $400,000 from illegal trading in the shares of Deloitte clients including Best Buy and Walgreen.
The news of a potential leak from KPMG emerged in an unusual fashion late on Monday, when the firm announced on its Web site that it had fired a senior partner in its Los Angeles office. His dismissal, KPMG said, was related to possible insider trading involving several West Coast companies. KPMG said it had to resign as auditor from two companies “after concluding today that the firm’s independence has been impacted” because of the partner’s behavior.
Herbalife’s involvement in the case raised eyebrows on Wall Street, where the supplement maker’s stock has become the subject of a nasty feud between two prominent investors. William A. Ackman of Pershing Square Capital Management has called Herbalife “an inherently fraudulent company” and has a $1 billion bet in place that the price of the stock will drop. On the other side of the trade is the activist investor Carl C. Icahn, who has a large holding in Herbalife shares.
Herbalife, based in Los Angeles, said KPMG informed it on Monday afternoon that it was resigning as auditor because its independence had been impaired. KPMG also said its resignation was in no way related to Herbalife’s “financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason.”
In its announcement, Herbalife said it believed that its financial accounts for its last three fiscal years remained accurate. It is unclear when Herbalife will hire a new auditor, though any such firm would probably take a fresh look at the company’s financial records.
At least one analyst viewed the KPMG news as a negative for Herbalife even though, apparently, the company was not at fault. Timothy S. Ramey of D. A. Davidson & Company lowered his rating on the company’s shares, explaining that the withdrawn audit opinions could cause it to violate its loan covenants.
He also noted that a new auditor could take as long as year to complete its review of the company.
In Tuesday trading, Herbalife shares closed down $1.44, or 3.75 percent, at $36.95.
The chief financial officer of Skechers, David Weinberg, also said in a statement that he believed that none of the company’s audited filings had misstated its results or financial condition.
Skechers shares closed up 40 cents, or 1.85 percent, at $21.91.
Skechers, too, has been the subject of a recent controversy. Last year, it agreed to pay $50 million to resolve federal and state accusations that it deceived the public with false advertising related to its “toning shoes.” The company claimed in its ads, including one featuring Kim Kardashian, that the sneakers would help consumers gain muscle and lose weight.
For KPMG, the insider trading investigation is a setback. The accounting firm has worked hard to rehabilitate its reputation after coming under scrutiny last decade in a wave of corporate accounting scandals and the firm’s role in the marketing of fraudulent tax shelters. KPMG paid large nine-figure settlements to resolve lawsuits related to accounting scandals at the drugstore chain Rite Aid and Oxford Health Plans. In 2005, the firm paid a $456 million penalty to the government related to tax fraud.
Tim Connolly, a spokesman for KPMG, did not respond to requests for comment. In its statement issued on Monday evening, KPMG said the firm’s “22,000 partners and employees unequivocally condemn this individual’s rogue actions.” It added that the partner had acted “with deliberate disregard for KPMG’s longstanding culture of professionalism and integrity.”
Accounting experts said that the case highlighted a weakness in the country’s auditing rules. In the United States, a company’s financial reports name its auditors, but the individuals overseeing the audit do not have to sign their names. As a result, the securities filings made by Herbalife and Skechers had only KPMG’s name but not Mr. London’s.
Two years ago, the Public Company Accounting Oversight Board proposed a rule that would require the partner in charge of the audit to disclose his or her name. The industry has pushed back, arguing that accountants would open themselves to liability. The rules proponents counter that such a requirement would create more accountability and transparency, as well as improve audit quality.
“That is how it’s done in much of the rest of the world,” said Lynn E. Turner, a managing director at the consultancy LitiNomics and a former chief accountant at the S.E.C., in an e-mail. “It is a shame the P.C.A.O.B. has elected not to move forward with this significant proposal.
[this of course taints any future advice that KPMG puts out about trades and investments in China...Rigghht] me CD....They have a branch in Vancouver BC Canada
hmmm. See PDF above
REGULATION
RCMP eyes Silvercorp investigation
The RCMP is formally assessing whether to pursue a full-blown investigation of Silvercorp Metals Inc. after a Globe and Mail story showed the Vancouver company may be helping pay for a police probe against its detractors in China.
Canadian citizen Huang Kun, who contributed research to a negative analyst report that questioned Silvercorp’s production from its mining operations in China, was arrested by Chinese police in December. The company strongly rebutted the report’s assertions. Mr. Huang has been unable to leave the country for more than eight months while police attempt to build a case of “criminal defamation” against him.
After being released from custody in January, Mr. Huang was rearrested in July and is currently in jail in the city of Luoyang in Henan province, where Silvercorp’s flagship mine is located. The Globe and Mail has obtained documents that may suggest Silvercorp and its executives were working in concert with local authorities and helping to pay for the investigation against the Canadian and his associates in China.
Copies of receipts for hotel stays made by one of the police officers investigating Mr. Huang in China appear to show they were paid for by a Silvercorp subsidiary. In a Globe interview before he was rearrested, Mr. Huang also provided licence plate numbers to vehicles he said were used to transport him by the Chinese police. The licence numbers match those of vehicles registered to Silvercorp’s subsidiary in China.
As well, a court filing made by Silvercorp in New York appears to contain information from one of Mr. Huang’s laptops that was seized by the Chinese police when he was arrested.
Silvercorp chairman and chief executive officer Feng Rui has strongly denied the allegations and accuses Mr. Huang and his associates, a group of short-sellers including Mr. Huang’s employer Jon Carnes of EOS Funds in Vancouver, of lying and fabricating evidence. Silvercorp officials did not respond Friday to requests for comment on the RCMP probe.
Mr. Huang’s detention appears to be part of a larger push-back by Chinese authorities against those challenging the business practices and credibility of Chinese firms. Legal experts have said Silvercorp’s alleged actions could be a violation of both Chinese and Canadian law.
Now the RCMP is looking into the matter in response to a complaint. “What we would call this would be an assessment phase. That’s what we call it. Somebody has made a complaint,” said RCMP Superintendent Eric Mattson, the officer in charge of federal policing for southern Alberta.
The case is being handled by the RCMP’s International Anti-Corruption Unit in Calgary. The bureau is responsible for investigating possible illegal actions by Canadian firms operating in foreign jurisdictions including cases of bribing foreign officials.
“Something that would be an offence in Canada, whether it occurs outside of Canada, is an offence in Canada,” Superintendent Mattson said. In the case of Silvercorp, the Mounties will determine whether or not there is sufficient evidence to move forward and the probe “may or may not” move into a formal investigation phase, he said.
In 2011, the Anti-Corruption unit was responsible for a case that saw Calgary’s Niko Resources Ltd. plead guilty to a charge of violating Canada’s Corruption of Foreign Public Officials Act. Niko paid a fine of $8.2-million as part of a sentence imposed for providing the former state minister for energy and mineral resources of Bangladesh with a vehicle worth more than $190,000, as well as paying for approximately $5,000 worth of non-business travel for the same government official.
The International Anti-Corruption Unit’s probe into Silvercorp is separate from an investigation opened by the Mounties’ Integrated Market Enforcement Team (IMET) in Vancouver last year. The IMET investigation was launched at the request of Silvercorp after Mr. Huang, Mr. Carnes and others anonymously published the negative research report on Silvercorp last year.
Mr. Huang, who has yet to be formally charged, said in a previous interview that the Chinese police interrogating him had claimed their investigation was being conducted in conjunction with the RCMP.
Duncan Pound, an RCMP media relations officer in British Columbia, said that is not true. “We don’t have any kind of joint investigation going on with the Chinese in this case.”
Amanda Reid, a spokesperson for the Department of Foreign Affairs and International Trade in Ottawa, said “Canadian officials are providing consular assistance,” to Mr. Huang, who is from Vancouver.
“We are in contact with local authorities and monitoring the situation closely,” Ms. Reid said.
Silvercorp has previously provided third-party reports countering the short-sellers’ allegations that the company has overstated its production and resource grades. The company also hired KPMG Forensics to audit its financial statements. Silvercorp said KPMG gave it a clean bill of health, although the company did not release the report to the publi
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