It has shades of a Hollywood crime story.

Share story

It has shades of a Hollywood crime story.

An accountant and a jeweler are longtime friends and golf partners. But then the down-on-his-luck jeweler convinces the accountant to pass along private information about clients, and uses the insider information to play the stock market and win big. Bags of cash swap hands in alleys. Then the feds get wind of the scam. The jeweler turns state’s witness and amid a spiral of wire taps and surveillance photos, the men’s reputations unravel and their mea culpas play out on a very public stage.

On Thursday, federal prosecutors and the Securities and Exchange Commission filed criminal and civil charges against fired KPMG accounting partner Scott London for conspiracy to commit securities fraud through insider trading. The 24-page criminal affidavit alleges that London, 50, provided confidential information about KPMG audit clients Herbalife Ltd., Skechers USA Inc., Uggs maker Deckers Outdoor Corp., RSC Holdings and Pacific Capital to Bryan Shaw, a close friend, from late 2010 until last month. Prosecutors allege that Shaw made more than $1.2 million in illicit profits by trading in advance of company announcements on earnings results or mergers.

The government alleges that on some occasions, London called Shaw two to three days before press releases were issued for KPMG clients and read confidential information from the draft releases to Shaw. London, who worked for KPMG for nearly 30 years, also disclosed confidential information about impending mergers concerning KPMG clients before that information was made public. He discussed how to structure Shaw’s purchases of the stock in certain companies in order to protect them from being discovered, according to the complaint.

The government’s complaint quotes Shaw as saying that he expressed concerns to London in late 2011 about trading ahead of RSC Holdings’ sale to United Rentals, but that London told him not to worry because regulators weren’t looking for “small fish.”

Shaw passed London “tens of thousands of dollars in cash” in bags over the years for the information, according to the government. London also received a $12,000 Rolex watch, as well as jewelry for his wife and concert tickets. London’s lawyer Harland Braun has said London received “about $25,000” over several years. The SEC puts the cash sum at least $50,000.

The scandal has unfolded in pieces this week. Late Monday, KPMG announced that it fired a Los Angeles partner who leaked nonpublic information about companies that KPMG worked with. On Tuesday, nutritional supplement maker Herbalife and shoe seller Skechers announced that they were the companies whose information was leaked. On Wednesday, London publicly identified himself through his lawyer and issued a statement saying that he deeply regretted his actions and was just trying to help a friend struggling after his family-run jewelry business began faltering in the economic downturn.

Thursday brought one of the remaining pieces of the puzzle when Bryan Shaw identified himself as that friend. The two men had met at a country club several years earlier and became close friends and golfing partners.

In a statement through his lawyer, Nathan Hochman, Shaw said he received information from London “about a number of companies” from 2010 to 2012. He said that he had “profited substantially” from trading stocks based on that information, but he didn’t provide details.

“I cannot begin to apologize for my incredibly stupid actions,” said Shaw. “There is no excuse for my wrongful conduct. I accept full and complete responsibility for what I have done and know that I will spend the rest of my life trying to make up for my tragic lapses of judgment.”

Hochman said Thursday that Shaw received a government subpoena several months ago and has been cooperating with the investigation. “As part of that cooperation, he agreed to make monitored phone calls with Mr. London, and have monitored meetings with him as well,” Hochman said in a phone interview.

London has said that he never leaked any documents, and has described the interactions as his friend asking whether a stock was a good buy and London offering suggestions.

London made his first court appearance Thursday afternoon in Los Angeles and was released on $150,000 bond, with his wife putting up $50,000 in cash and the deed to their Agoura Hills, Calif., home. Braun said Thursday that London will plead guilty to the criminal charge when he next appears in court on May 17.

London discovered that he was the target of an investigation when the FBI came to his home and showed London a picture of him accepting cash, Braun said. London then spoke with investigators for three hours, admitting his role. Braun said that his client came to him chiefly concerned about protecting KPMG from the scandal’s fallout. Braun maintains that London’s honesty in admitting his sole culpability “saved the country from a stock market crash” that could have ensued if investors, spooked by the prospect that KPMG’s audits were widely tainted, started selling off stock in many companies.

In a statement late Thursday, KPMG’s CEO John Veihmeyer said he was “appalled” by the details that emerged in the complaint against London. He said that because of London’s alleged actions, KPMG would step down as independent auditor of Herbalife and Skechers. But he added that there was no reason to believe the company’s financial statements were inaccurate.

Veihmeyer said KPMG also planned to take legal action against London. “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,” he said.

The SEC is seeking unspecified penalties and restitution against London and Shaw. The criminal charge against London carries a maximum penalty of 5 years in prison, and a fine of at least $250,000.

Special Correspondent Linda Deutsch reported from Los Angeles. Rexrode reported from New York.