Former KPMG audit Partner Scott I. London brought great shame to the accounting profession this week by being charged with conspiracy to commit securities fraud through insider trading. After nearly 30 years with KPMG, London went down in flames after being caught passing insider information on audit clients of the Los Angeles office to his “friend,” Bryan Shaw.

Proving once again that there is no honor among thieves, Shaw got caught first, and then sold out his friend Scott to the Feds.  He helped them get a gorgeous trail of evidence, including phone calls and photographs of the crime.  Both are now charged with insider trading.

The insider trading involved five public companies which were audit clients of KPMG in Los Angeles: Herbalife, Skechers USA, Deckers Outdoor, RSC Holdings, and Pacific Capital Bancorp. London would give Shaw information on earnings releases coming, and Shaw would trade ahead of the news to profit from anticipated spikes in the stock prices of the companies.

Apparently Scott London even told Bryan Shaw how to do the trades to avoid detection!!!

It happened between 2010 and 2012, and is alleged to have netted Shaw almost $1.3 million of profits from trading stocks and options. The trades included:

• October 2010 – Herbalife and Deckers trades
• February 2011 – Skechers and Herbalife trades
• April 2011 – Skechers trade
• May 2011 – Herbalife trade
• July 2011 – Skechers trade
• August 2011 – Herbalife trade
• October 2011 – Skechers and Deckers trades
• December 2011 – RSC Holdings trade
• February 2012 – Herbalife and Deckers trades
• March 2012 – Pacific Capital trades
• April 2012 – Deckers trade

The complaint in the civil case the SEC has brought against London and Shaw is interesting, and the affidavit of the FBI agent in the criminal case is even better, providing for an entertaining bedtime story. But there is one crime curiously missing from the tale. Income tax fraud.

London got bags of money totaling about about $50,000, a Rolex, and some meals and tickets to concerts. We can safely assume that London got between $50,000 and $100,000 from the scheme, and we can also safely assume that he “forgot” to report that income on his tax returns.

But how do the feds miss something like this? Our government cries about needing more tax revenue. It’s tax season. And yet this bit of nonsense from London and Shaw doesn’t even merit a mention of income tax fraud?

Hopefully the fun won’t be over just yet, and the IRS and FBI will talk to one another so Mr. London can square up with the taxing authorities!

Reminding us that stupid is as stupid does, London risked his 30-year career and his freedom for a pittance. London told the LA Times that Shaw only profited about $100,000 on the trades. That means London is even more stupid than originally thought. Did he really believe Shaw only made $100,000 on all of these trades with material insider information?

Shaw was making seven figures (and helping the feds build a case against his buddy), and London got $50,000 to $100,000.  That sounds like a fair split, doesn’t it? I would expect a bigtime auditor to be a little better with numbers and negotiate a better deal for himself. If London is that dumb, I can be pretty sure that he also forgot to report that income to the Internal Revenue Service.