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Corporate fraud refers to large organizations that deceive their investors, analysts and auditors about the real financial condition of a corporation. Corporate fraud results not only in financial losses of the investors, but also creates great potential damage to the U.S. economy.
The problems seem to be mounting for former KPMG Auditing Partner Scott London. On April 11, 2013, the Securities and Exchange Commission issued a press release.
The SEC alleges that Scott London tipped Bryan Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements. The two men had met at a country club several years earlier and became close friends and golfing partners. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn. In exchange for the illegal trading tips, Shaw paid London at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store. Shaw also gave London an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.
Criminal charges for insider trading were then brought by the Federal Bureau of Investigation saying he gave a stock-trading friend inside information about his firm’s clients in exchange for cash, jewelry and expensive dinners. The prosecutors version of Mr. London’s activities conflicted significantly with London’s statement that the information he gave his buddy was sparse and that his involvement in the stock trades was minimal.
Mr. London was arraigned and is free on $150,000 bail. Harlan Braun, defense attorney for Scott London, has said that he expects his client to plead guilty at a hearing set for May 17th.
KPMG LLP Chairman and CEO John Veihmeyer issued the following statement upon reviewing the criminal complaint filed against former partner Scott London.
“I was appalled to learn of the additional details about Scott London’s extraordinary breach of fiduciary duties to our clients, KPMG and the capital markets. We unequivocally condemn his actions, and deeply regret the impact that his violations of trust and the law have had on our clients and our people. KPMG will be bringing legal actions against London in the near future.
“As a result of his unlawful activities, it was clear that our independence had been impaired with respect to the two companies for which he served as lead partner, Herbalife and Skechers. Due to this impairment, we were professionally obligated to take the regrettable action to resign as the independent auditor for these two companies and withdraw our previously issued audit reports. The sole reason for these steps was the actions of our former partner and we have no reason to believe that their financial statements are materially misstated.”
What’s particularly odd about this case is the fact that Scott London freely admitted sharing inside information for profit in his first interview with the FBI, SEC and U.S. Attorney General and the fact that immediately following his arraignment his attorney made a public statement that his client intends to plead guilty. Despite these unusual circumstances, Defense Counsel has also publicly stated that he does not expect his client to face any jail time?
So how is this possible? If convicted of all charges, Mr. London faces a prison term of as long as five years. The current environment is that federal prosecutors have been pushing hard for the past several years for white collar criminals to get hard time for insider trading. Having already admitted publicly to sharing inside information with his golf buddy, what leverage does Mr. London possibly have with the Feds to avoid spending several years in jail?
The FBI has just recently released a revised list of frauds on their web page entitled: Frauds From A to Z. The topics covered range from Adoption Scams and Credit Card Fraud to Insurance and Internet Fraud. For most categories, the FBI website provides both an overview of the fraud itself and tips for how to avoid being caught up in the fraud.
If it sounds too good to be true, it usually is a fraud. Americans are defrauded out of $120 million annually in Lottery Scams.
Here are a few examples of how the schemes work:
You receive a call, an e-mail, or a letter telling you that you’ve won a large sum of money in a foreign lottery you don’t remember entering. To claim your “winnings,” you’ll have to provide your bank account number so your winnings may be deposited into your account.
You’re told you’ve won a sizable lottery and are asked to wire a few thousand dollars to a “customs agent” to cover duties and taxes. But after wiring the money, you’re contacted again and told you must send even more money to collect your prize.
You receive a congratulatory letter in the mail along with a check for $5,000. You’re instructed to cash the check, then wire a portion of the funds to a foreign address to cover taxes and fees, keeping the remaining money as your “lottery winnings.” A few days after doing so, your bank notifies you that the check was counterfeit and you now must repay it the $5,000.
Gupta, the former global head of the consulting firm McKinsey & Company, as well as a former director at both Goldman Sachs and Proctor & Gamble, has been charged with conspiracy and securities fraud, in a government investigation that so far has resulted in 59 convictions. What is somewhat unique in this high profile case is that government investigators do not have actual recordings of Mr. Gupta passing insider information but they are using a combination of phone records, trading records and wire taps of Raj Rajaratnam and Rajat Gupta to compare the information on these recordings to Mr. Gupta’s actions.
The Gupta case has all of the intrigue that was associated with the trials of Ivan Boesky
in the 1980’s. Possible witnesses in the Gupta case include such high profile people as Lloyd C. Blankfein, the Chief Executive of Goldman Sachs; Gary D. Cohn, the bank’s president; A.G. Lafley, the former CEO of Proctor & Gamble; Kenneth I. Chenault, CEO of American Express; Bryon Trott, the former Goldman banker who oversaw Warren Buffett’s investment; and Steven Peikin, a Sullivan & Cromwell lawyer.