It's the corporate equivalent of a priest hearing your confession, then using it to blackmail you.
In a highly unusual announcement, Herbalife Ltd. said Tuesday that its auditor, KPMG LLP, had resigned. The reason: the accounting firm had learned that one of its partners was involved in alleged illegal insider trading in Herbalife's stock.
In an earlier statement, KPMG said it had fired a Los Angeles partner after it discovered that the person had provided "non-public client information" to a third party, who used it in stock trades involving several companies.
Of course, this is one of the last reasons any company – and particularly Herbalife – wants to be in the headlines. The seller of dietary supplements is still contending with the unwanted attentions of one Bill Ackman, who has charged that the firm is ultimately a pyramid scheme, which the company flatly denies.
On Tuesday, Herbalife said in a statement that KPMG's resignation was "solely" linked to its partner's alleged unlawful activities and had nothing to do with the company's financial statements, accounting practices, or "the integrity of [its] management."
Accountants – together with lawyers and boards of directors – are the ultimate keepers of company secrets. So when they betray that trust, it comes as a bit of a shock.
"It doesn't happen very often," said Peter Fontaine of NewGate Partners, a legal firm focused on the accounting industry. "The profession is pretty sensitive to the fact that they do have access to confidential information – about IPOs, mergers, acquisitions, and other things long before companies have to disclose it to the public."
Still, some recent cases reveal that they're not immune to the allure of insider trading.
Last October, Thomas Flanagan, a former vice-chairman of Deloitte & Touche, was sentenced to 21 months in prison after pleading guilty to insider trading in the stocks of Deloitte clients between 2005 and 2008.
And last August, the U.S. Securities and Exchange Commission accused an accountant in Georgia of using confidential information gleaned from a client to engage in insider trading.
Federal prosecutors and the SEC are investigating the KPMG partner for leaking confidential information, The New York Times reported on Tuesday.
KPMG, for its part, said it doesn't believe any financial statements were "materially misstated."
(Joanna Slater is the Globe's New York Bureau Chief.)
Return to Streetwise home page.