I first wrote about Scott London in April 2013, soon after he had been arrested on insider trading charges. He was sentenced to 14 months in prison and was released early, for good behavior, earlier this year. I was listening to my regular Planet Money podcast last week and, like an awesome Christmas gift, they were interviewing Scott London about what he did and why he did it.
London spoke about how, when he was an audit partner at KPMG, he started sharing non-public information on his clients with a golfing buddy. It is not as though London did not know that what he was doing was both unethical and illegal. He speaks about how much training KPMG gave to employees, training that he himself gave at times. Yet, when his friend’s business was struggling and his friend asked for just a little help, Scott London was able to rationalize what he did. In his mind, the money that Bryan Shaw, the friend, was making was small and this made what he was doing not so bad. This is something that happens often in fraud stories. Most frauds start small, either because the fraudster is testing the waters or because the fraudster initially intends to just take a little to cover their perceived need. It is generally because the initial idea of a fraud is small so it does not seem like a big deal and will not hurt anyone. it is a good reminder that when you are looking into or for fraud, you should not just look for large amounts. The fraudsters are going to do what they can to stay under the radar and many are going to be committing in ways that minimize, in their minds, what they are doing.
All in all, Shaw paid London about $70,000 in cash and gifts, while Shaw made $1.27 million from the insider trading. I was amused to hear London’s shock at how much money Shaw made trading on the information that he got from London. You see, when Shaw asked for the tips, he proposed that they share the money equally. It was funny that London was shocked to find out that the person who had partnered with him in an illegal pursuit had been less than honest with him. I suppose he had not heard that there is no honor among thieves. I am not sure if he was surprised because he realized how much more money he should have been paid or if he thinks he would have nipped the insider trading in the bud had he known just how much money was at stake (making the crime a bigger deal than he imagined).
During the podcast, the Planet Money folk discussed whether insider trading is a victimless crime. They struggled to find who is hurt by the trading. They came to their conclusions about who is hurt and you can also read various others opine. When I look at insider trading and think about who can be seen as victims, I have a long list. If you are competing in what you believe is a level playing field but where some parties know more than you do, it is just about a given that those parties are going to beat you every time. And, in this day and age where many retirement and savings plans involve trading on the stock market, why would you even bother if you knew that there were people making lots of money, primarily because they had inside information that you were not privy to?
There are so many layers in the Scott London story that could fill a book and, one such book, by James Ulvog, about Scott London’s fraud is well worth a read. Hearing from Scott London himself was a great gift and is a lesson in insider trading, tone at the top, how easily a fraud can begin and the consequences of taking the path that he took. Thank you Santa and Planet Money!