Tag Archives: insider trading

On the Record

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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!

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When To Fold ‘Em

Sports-betting

We are a household of sports fans and this tends to be just about the only live television that we watch. Because we can’t fast forward through the commercials during live games, I have watched commercials about daily fantasy sports. A lot of commercials about daily fantasy sports (DFS). It doesn’t matter whether it is DraftKings or FanDuel, as they both seem just about the same. I have heard about how you can win millions, practically for free, and about how easy it all is. I know nothing about fantasy sports, and I have come away mostly irritated by how ubiquitous the advertising is than wanting to try out the daily fantasy sports scene. I also don’t trust them when they tell me that I could win money for nothing and, instead, I wonder how they could claim to give away so much money for nothing and still pay for the many, many ads that are everywhere we look.

Answers came to me at the beginning of October, when a DFS scandal hit the news. As the story went, a DraftKings employee released key information earlier than he should. This information, if known, would give someone a tactical edge when playing fantasy football. The same employee also won $350,000 betting at FanDuel. Even though this doesn’t look good, DraftKings says they are certain that, even with an extra $350,000 in his pocket, their employee did not act improperly – he merely made a mistake. As I read the story, I shook my head in disbelief. I was surprised by several things. First of all, I was surprised to discover that Daily Fantasy Sports betting is not considered to be gambling. Now, I know hardly anything about daily fantasy sports, so it may indeed be a game of skill and not luck. However, especially with terms like “betting” used when talking about it, it sure does look a lot like gambling. That said, interviews that I have seen and read show those who spend a lot of money on DFS referring to it as investing. Nevada recently shut down DraftKings and FanDuel, declaring that DFS is gambling and that the two companies need licences before they can operate in that state. So, in that regard, let’s go with more and more people are agreeing with me on the whole “is it gambling” question.

More surprising, though, was the employee betting. To have a company that runs the betting allow its employees to bet as well smacks of impropriety, regardless of whatever steps the companies claimed they took to keep things on the up and up. Both FanDuel and DraftKings would not let their employees bet with them but those same employees, armed with whatever insider information they might (or might not) have, were able to go to competitor sites and bet there. And bet they did and how surprised are we to find out that the top winners in daily fantasy sports tended to be employees of DraftKings and FanDuel (though never from their own employer, of course).

As I read articles and watched news pieces on what was going on in the Daily Fantasy Sports realm, I kept exclaiming, to anyone within earshot, “who thought this was okay? How could they think it was okay?”

I couldn’t believe that management at this company could look at the set up was acceptable. Maybe they did, or maybe they just thought they could get away with it but it has me wondering about what operation and control policies other entities have in place that either do not protect them and their assets, or even put them at greater risk. Just because you institute a rule, it does not mean that it is a good or useful rule. For instance, DraftKings employees, with all the inside information they potentially had access to, could not place a bet with their employer, DraftKings. However, they could log into FanDuel, their competitor and use their edge when placing bets there. And the policy was mirrored by FanDuel. Looking in from the outside, both companies appeared to be acting unethically, and just about always, perceptions are as powerful as reality. If it looks as though someone is having a $350,000 party with your money, the facts will matter very little to you.

It might feel very managerial to make rules in your organization, but if all they serve to do is fill operations manuals and make you feel good, they are achieving less than nothing. It is worse than not making rules at all because, at least when you don’t have regulations, you have no illusions about whether or not you are protected. On the other hand, creating a free for all entity may make you feel like the cool kid and may even have people clamoring to work for you. However, among those clamoring, it is almost guaranteed, will be those seeing ample opportunity to commit fraud and perhaps lay waste to your business. There are very important reasons why people like me preach setting up your business in ways that prevent and detect fraud and two of these reasons are protecting your assets and protecting your reputation.

Now, FanDuel and DraftKings are finding themselves on the defensive and being given the cold shoulder by entities who do not want to be tainted by the growing scandals. They are being investigated by state and federal authorities, and are now scrambling to clean up an image that would never have been sullied if they had formed their operating and control structures correctly and ethically, in practice and appearance, from the get go. Now they are tripping over themselves, doing things like creating self-regulatory bodies in order to regain the trust of the public. Judging from what I have read, that is not working very well – something that happens when a company has betrayed the public’s trust. Instead these companies are being put under the microscope and their reputation is taking a beating. They are on the defensive now and all of this could have very easily been avoided. If you are running a business, you should ensure that you consult with a qualified professional to avoid issues such as:

  • Conflict of interest in perception and reality;
  • Approaches that compromise your reputation; and
  • Procedures that may cross legal lines.

Spending time and resources doing things property in the first place is less costly, in dollars and reputation, than trying to clean things up after the damage is done. That kind of disaster can be very difficult to come back from. Is it something you are ready to bet on?

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Who’s Toning the Top?

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This week, Scott London, a KPMG ex-partner was busted. It was the getting busted that resulted in him going from partner to ex-partner. It turns out that, for several years, Scott London had been passing on non-public information about at least two of his clients, Herbalife and Skechers, to a golfing buddy, Bryan Shaw. Shaw then used this information to make over a million dollars on the stock market. London was caught during an FBI sting that included a photo of him receiving a bag of money from Shaw in a parking lot. A parking lot. Straight out of the movies. It is a very interesting case that is still unfolding. We are learning a lot about how and what happened and perhaps we shall also learn why it happened. Why did this KPMG partner (at the time) decide to share confidential client information with his friend and take expensive gifts and cash, a fraction of his annual salary, for this information? Discovering the motivations will be interesting but right now, this case has me thinking about another issue.

This case brings up, to me, the issue of “the tone at the top”. This is the example that a company’s management sets that may affect how ethically employees may behave. As a CPA, forensic accountant and a former auditor, I know that ethics are a big part of our education and continuing education. The stress on ethics is part of why CPAs have been found to be the most trusted business professionals, according to surveys. In addition to the required ethics continuing education that credentialed forensic accountants, and CPAs, have to complete, laws and firm policies go a long way to trying to ensure that an accounting professional is objective and, in many cases, independent from his or her client. For example, audit firms practice partner rotation with their public company clients. This means that every five years public firms will have a new partner managing their audit. Also, forensic accountants, before accepting an assignment, will run a check to ensure that there is no conflict of interest. Even the appearance of a lack of independence can result in people not trusting their accountant, whether that accountant is performing an audit or forensic services.

There are many rules and regulations to try to maintain the integrity of the accounting profession but as partners are at the top of the totem pole, it is very important to know who is watching those at the top? What is being done to make sure that those at the top are not abusing their positions of power by compromising their ethics. The evidently casual way that Scott London shared confidential information with his golf buddy implies that he either did not believe that there would be significant consequences if he were caught or that he would not get caught at all. Although he took his actions outside of the control systems created by the audit firms which include the disclosure of investments to prevent a conflict of interests, there were the investigations by other agencies, the FBI in this case, that flagged Shaw’s suspicious trades. That is a comfort. Hopefully, as this case and story unfold we will have the full power of the law descend upon London for his insider trading. In addition to the charges being leveled against London by the FBI and the SEC, KPMG has stated that it will be bringing legal actions against London. It should be more than lip service. KPMG and other CPA firms must realize that how they deal with their most powerful and senior practitioners goes a long way to ensuring that they remain trusted and held in high esteem.

Granted, every profession will have bad apples – unscrupulous people who have little regard for the profession. When it comes to being a CPA, a license where members agree to practice according to very high standards, it is imperative that those who are caught violating the code of conduct and the law are dealt with strictly. Partners of the Big Four accounting firm are more in the spotlight than other accountants and it should be clear that a position of power does not exempt one from discipline – in fact, the position of power should mean that you are more disciplined.

Finally, according to the United States Golf Association, London has a handicap of 10 and Shaw’s handicap is 12. Generally, a lapse in honesty tends to extend beyond just one event. A person who is gaming one system is likely gaming others. It is probably a good idea to check on that handicap, though I doubt either of those two men will be playing golf any time soon (at least I hope they are too busy paying for their behavior to do so).

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