The North Ranch Country Club is like many golf clubs dotted around southern California.
Nestled between the Santa Monica Mountains and the Los Padres National Forest, it has immaculate greens and a well-heeled clientele. BMWs, Mercedes and Jaguars packed its driveway this week while a vigilant security guard shooed away visitors.
The absence of prying eyes and ears might explain why the course became the setting for an insider trading scandal that has embarrassed KPMG and resulted in the filing of a criminal charge against Scott London who, until last week, was in charge of its southern California audit practice.
It was at North Ranch seven years ago that Mr London, an athletic, dark-haired father of two, first met Bryan Shaw, the owner of a family-run jewellery wholesaler in Encino, an affluent community in the San Fernando Valley. They became fast friends, frequently meeting for golf games and going out for family dinners.
By 2009 their friendship turned into an allegedly illegal trading scheme. Mr Shaw’s business was suffering from the economic downturn; Mr London, who had built a successful 29-year career at KPMG, decided to help, he told authorities. In 2010 he began sharing foolproof tips about five companies the firm audited, authorities allege.
Over the next 18 months, Mr London passed earnings information about Herbalife, Skechers and Deckers to Mr Shaw. He also gave him early information about takeovers involving RSC Holdings and Pacific Capital, prosecutors allege. Mr Shaw made $1m from the trades.
They often met on a side street beside Mr Shaw’s jewellery wholesaler in Encino, where they exchanged bundles of cash, $100 bills stuffed into a manila envelope and wrapped in a black paper bag. Mr Shaw gave his friend about 10 per cent of his profits in cash, a $12,000 Rolex Daytona Cosmograph watch, and between $25,000 and $45,000 in concert tickets, including seats to see Bruce Springsteen.
On Thursday, prosecutors with the US attorney’s office in Los Angeles charged Mr London with one count of conspiracy to commit securities fraud. He faces up to five years in prison.
It marked the end of a tumultuous and unusual week that saw his career and storybook life quickly unravel. The Securities and Exchange Commission sued Mr London and Mr Shaw: Mr Shaw, through his lawyer, said his actions were “incredibly stupid” and he expected to face criminal charges.
Mr Shaw was lying low this week. He lives on an exclusive gated street in Thousand Oaks, a few miles from the golf course. A neighbour said the Shaws were a “really nice” family and he had arranged for her to buy a diamond ring.
Founded in 1957 by Fred Shaw, the family diamond wholesaler is located in an Encino office building next door to the Los Angeles Singles dating service. It was closed and phone calls were not answered.
Mr London grew up in Los Angeles and attended California State University at Northridge, where he was a pitcher, shortstop and outfielder on the college baseball team. After graduating in 1984 with a degree in accounting, he went to work for KPMG.
He carved out a comfortable life in Agoura Hills, where he pitches batting practice for his son’s high school baseball team, and serves as president of its fundraising arm. In 2010 and 2011, Mr London organised the annual golf tournament fundraiser for the team at the North Ranch Country Club. Last year he was a runner-up in a $150 sweeps tournament at the club.
A neighbour said Mr London was a family man, often seen tossing a baseball with his son in the cul-de-sac. He was also supportive of his daughter’s dance and theatre classes when she was in high school. The Londons lived modestly, this neighbour said, and opened their home for Christmas parties. “Scott’s a nice guy,” said the neighbour. “If I was going out of town he’d take my trash cans in.”
Mr London checked all the boxes of a successful businessman. He was president of the LA Sports Council and served on the board of the LA Chamber of Commerce with local business people, bankers and academics. Other posts included a board position with the Elizabeth Glazer Pediatric Aids Foundation and the Child and Family Guidance Center.
Mr London told authorities he did not initially realise Mr Shaw had traded on the information when he began funnelling it to him in 2010. But soon they were chatting on their cell phones exchanging information for cash and gifts. The men got into a rhythm of talking before quarterly earnings.
In February 2012, Mr London tipped off Mr Shaw in advance of Union Bank’s takeover of Pacific Capital Bancorp. They spoke 31 times over the next 31 days as Mr Shaw went on a buying spree of Pacific Capital Bancorp stock and call options. When the deal was announced, Pacific Capital Bancorp stock rose 57 per cent, netting Mr Shaw a $365,000 profit.
Five months later, in July, Fidelity froze Mr Shaw’s bank account. Mr Shaw told authorities Mr London reassured him that he need not worry, explaining “insider trading was like counting cards at a casino in Las Vegas – if you were caught, they simply ask you to leave because they cannot prove it”.
They took a break, but six months later, in January 2013, Mr London called to say Herbalife would be a good stock to buy, authorities allege.
By this time the authorities were on to him. The next month, Mr Shaw agreed to co-operate with the FBI. With two FBI agents by his side, Mr Shaw dialled Mr London and secretly recorded their phone conversation.
On the call Mr London told him Herbalife’s earnings, which were to be released several days later, “are slightly better than the street’s estimates”.
Five days later, they spoke again about Herbalife. Mr London advised Mr Shaw that if Herbalife were to go private, “what you do is you start just buying in small blocks, right, so it doesn’t draw attention and then, you know, then it doesn’t look unusual at all”.
A few days later they made plans to meet so Mr Shaw could give him “a little cash,” according to the criminal complaint.
The FBI gave Mr Shaw $5,000 in cash, which he placed in a manila envelope wrapped into a black paper bag, just as they had before. He handed over the packet on the side street near Mr Shaw’s jewellery shop, while hidden FBI agents snapped photos.
A week later on March 7, the men met again in a Starbucks car park for another exchange. Mr Shaw, wearing a black overcoat, taped a body wire to his chest and handed a bag with $5,000 in cash to Mr London, who was in a dress shirt. The FBI videotaped and recorded the exchange.
As they stood between the parked cars, Mr London recommended Mr Shaw take profits in one stock, saying: “We’re gonna have, we’ll have more, more, um, you know, opportunities.”
Three weeks later, on March 20, two FBI agents knocked on Mr London’s door, located on the cul-de-sac where he played catch with his son.
Mr London said he gave information only to Mr Shaw. “There’s nobody else,” he told authorities, according to the complaint. He hired veteran criminal defence lawyer Harland Braun to represent him.
Once caught, Mr London agreed to co-operate. On April 3, he arrived at the US attorney’s office in downtown LA where he confessed to a room of FBI agents, SEC investigators and prosecutors.
Mr Braun told KPMG and the following day Mr London was fired, one year shy of his 30th anniversary with the firm. On Monday KPMG resigned as auditor of Skechers and Herbalife saying “that the firm’s independence had been impacted” due to insider trading.
As the news made its way through the Valley, on Tuesday Mr London issued an unusual and lengthy statement saying that he does “regret my actions in leaking non-public data to a third party regarding the clients I served for KPMG. Most importantly, and I cannot emphasise this enough, is that KPMG had nothing to do with what I did.”
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