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Published:April 14th, 2013 19:32 EST
Most Important Lesson for Syndicators: Don`t Mess with the SEC.

Most Important Lesson for Syndicators: Don`t Mess with the SEC.

By Joel G. Block (Mentor/Columnist)

I`ve been consumed by this week`s news story about the KPMG insider trading case where Scott London, the senior partner of the audit department in charge of the Pacific Southwest region, sold confidential information to a stock trader. I`m glued to this story because it`s personal: I went to college with this senior audit partner in the early 1980`s. This is somebody that many of my friends are good friends with. He`s in the Los Angeles business community and I`ve rubbed elbows with him on numerous occasions.

What`s worse, these actions negatively affect an industry that I hold in high regard. This man has single handedly tarnished the accounting business across the country in ways that we can`t yet imagine.

Financial auditors protect the sanctity of our capital markets. They are the security guards at the doors of the system. This story is like a cop going bad.

Trust is the basis for our markets to function;
Trust is the basis for our economy to function;
Without trust in the government, the money in our pocket is just green paper;

You probably know that the senior partner overseeing the audit for Herbalife Ltd. and Skechers USA Inc. plus three other companies involved in merger transactions, sold information about those companies before that information was released to the public.

This is not only a crime, which is being prosecuted by the SEC and other federal agencies, but it also damages the reputation of the company where he was an employee for 29 years. KPMG is one of the Big 4 accounting firms with 145,000 professionals, including more than 8,000 partners, in 152 countries. Revenues totaled $22.7 billion for the fiscal year ending September 30, 2011. This is a big outfit.

The impact to his company may reach into the many hundreds of millions of dollars. And I wouldn`t be surprised if the 8,000 partners don`t get a bonus this year, because all of the excess profits will go to solving the problems created by London.

Where do all those losses come from? First of all, KPMG had to terminate it`s relationship with two very high profile and substantial clients. That is worth about $5M a year for many years into the future, conservatively about $50 million. Then the last 3 years of audits have to be redone for these now former clients which KMPG should pay for plus an inconvenience fee ". That`s $20 to $50 million. Not to mention, KMPG will probably be sued by shareholders of those companies, who claim that they lost money because there was improprieties in the stock pricing based on the way that things were handled, and there`ll have to be some settlement of those issues. That will be many millions more. Don`t forget about millions in attorney fees for such a big company as KPMG.

Additionally, KPMG suffers because other clients around the country wake up one day and say we can`t be affiliated with a company who has at a minimum an image problem. This is the wildcard: it`s the really big question facing clients of the firm. If clients start defecting, KPMG could implode. This is not expected but a severely tarnished reputation is what took Arthur Anderson down 11 years ago.

And finally, the best college recruits around the country who join these accounting firms each year are likely to want to stay away from KPMG now because it`s no longer the cherry on top of the cake. Accountants prefer companies with little controversy.

Other tremendous problems come from this as well. I have to imagine that auditors from the other big four accounting firms will come under scrutiny as a result of this very unusual criminal activity. Considering all of the accountants across the country and around the world, and considering how much confidential information they are privy to, it`s very rare to hear of this type of breach. So in general, the big accounting firms do a good job. But it wouldn`t surprise me if the Public Company Accounting Oversight Board (the agency that oversees financial auditors) implements new, tough standards, similar to the way that the federal government keeps track of its employees who deal in secret information.

For example, CIA and the FBI employees are scrutinized every year as to their financial condition. They have to list assets, income, and other personal information for an annual audit by the agency. Perhaps the accounting firms will subject their partners to something similar. And if the amount of money that they started with of the beginning of the year is different from the amount that they ended with at the end of the year, by an amount that is more than the income that they made during that year, they will have some explaining to do.

I`m really hot under the collar about this because in general, accountants are smart people and they`re honest people. And although there are stereotypes and jokes made about accountants, by and large the trust that underlies the economic well being of our society is very much facilitated by accountants. These are good people and it`s unfortunate that one bad apple has done some much damage.

This guy`s salary was probably $1M a year and he sold secrets for $5,000 here, and $5,000 there. So if he took in $100,000 in the course of the three years, that`s barely a month`s pay. The auditor has completely wrecked his career and everything else that he stands for and he hardly got anything for it. Was this worth embarrassing his family, losing his CPA license, his future ability to earn money and all of his net worth?

And by the way, since large sums of cash are involved in this transaction, I am sure the Internal Revenue Service will have some interest in talking to these guys too. Remember, the revenue officers read the newspapers like we do.

I don`t know what happens to a guy like this, or why a guy like this unravels in this way, but if you`re going to take other people`s money in under your management and control, and you`re going to be privy to secrets and have to make important decisions, be responsible about it. Not everyone has the personal disciple to be in such a responsible position.

A number of lessons that come out of this, but one of the most important lessons for syndicators is don`t mess with the SEC. At the end of the day, the long arm of the law always wins. Be honest and play by the rules: there`s plenty of money to go around.

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If you have an opinion or thought on this topic, please write a comment on my website. Share this story with your friends. Thank you for being one of our loyal readers. We appreciate you and are rooting for your success. Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenues and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and is an astute investor.

Joel is CEO of Bullseye Capital , a full-service real estate company supporting owners and buyers of real estate assets with brokerage, leasing, property management, and mortgage services. Joel is also the founder of the Bullseye Capital Real Property Opportunity Fund, LLC which is an investment company that acquires distressed real estate by working with accredited investors.

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