Insider trading allegations at KPMG show that the practice is more prevalent than you think

So much drama over energy drinks.
So much drama over energy drinks.
Image: Larry French/AP Images for Herbalife
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Insider trading allegations in the US have mainly involved hedge funds. Now accounting firm KPMG is being hit with similar claims.

KPMG resigned as auditor for two companies after a senior KPMG partner was fired over suspicions of providing insider information on the firms to another person, who used it to trade in the firms’ stock. One was Herbalife, the seller of protein shakes and energy drinks. Trading was halted this morning in shares of Herbalife and also of shoe maker Skechers, for which KPMG is also the auditor, leading to speculation that it is the other affected client.

The most common and high-profile insider trading cases have involved hedge funds, like SAC Capital. At the end of March, the FBI arrested Michael Steinberg, so far the most senior person at the hedge fund to be apprehended in an investigation that seems to be drawing closer to SAC Capital’s head, Steven Cohen.

But the KPMG situation is a reminder of how many groups of people outside a company can know its inside information. There are accountants, lawyers, consultants, bankers, recruiting firms, marketing and advertising agencies, and others. The temptations to trade on privileged information are frequent. And while today’s news is a blow to KPMG, it’s not the only Big Four accounting firm to face such allegations. A former Deloitte & Touche partner pleaded guilty to insider trading accusations last year for trades made on Best Buy, Sears and other companies.

KPMG’s resignation also puts another twist in the saga of Herbalife. As a result of the news, Herbalife has had to withdraw its audit reports for 2010-2012. That could help activist investor Bill Ackman, who has accused Herbalife of using misleading sales tactics and making most of its money by recruiting new distributors for its products instead of selling to actual customers, thus making it a pyramid scheme. Ackman had already said KPMG should think hard before approving Herbalife’s finances. It will be interesting to see how a new auditor will assess the company.