In this Thursday, Feb. 28 2013, photo, a pair of specialists confer at the post that handles Herbalife on the floor of the New York Stock Exchange. Accounting firm KPMG has resigned as the auditor for Herbalife, a dietary supplements maker, and the shoe retailer Skechers after a rogue partner allegedly leaked information about the companies to someone who used it for insider trading. (AP Photo/Richard Drew, FIle)
Tuesday, April 09, 2013 9:25 pm
KPMG resigns as auditor for Herbalife, Skechers
By CHRISTINA REXRODEAP Business Writer
KPMG said it has fired the partner and has no reason to believe there were any problems with the financial reports of Herbalife or Skechers.
Skechers said KPMG told it that the ex-partner provided the inside information in exchange for money and is under federal investigation. An SEC spokesman declined to comment. A message left for the U.S. attorney's office in Los Angeles was not immediately returned.
KPMG confirmed media reports that the fired partner was Scott London, the executive in charge of the firm's audit practice in Southern California. It wasn't clear who he allegedly leaked information to. There was no answer at a home phone number listed for London.
The development is a headache for both Herbalife and Skechers. KPMG withdrew its recent audit reports of both companies, because it felt its own independence had been compromised.
David Weinberg, chief operating officer and chief financial officer of Skechers, was spending Tuesday looking for a new auditor. He learned the news Monday afternoon, when two KPMG employees came to tell him in person.
"I don't think it's catastrophic because we have the greatest confidence in the financial statements that were released and that he (the KPMG partner) acted alone," Weinberg said.
Still, he called the news "an unfortunate development" as the company prepares to report first-quarter earnings, and said he was shocked when he learned it. He didn't think there was anything he could do differently as he looks for a new auditor: "I don't know that it's up to me to give them a polygraph test," he said.
KPMG initially announced late Monday that it had fired a partner who had leaked private information about clients. It said then that it was resigning as auditor for two of its clients, but didn't identify them.
Herbalife and Skechers made their own announcements on Tuesday confirming that they were they companies involved.
KPMG sought to distance itself from the partner. In its statement, the firm said: "This individual violated the firm's rigorous policies and protections, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for KPMG's longstanding culture of professionalism and integrity."
Investors knew something was wrong when Herbalife shares failed to open along with the rest of the stock market Tuesday morning. Skechers did open as normal, but it was halted later in the morning.
Both stocks resumed trading later Tuesday, but with disparate results. Herbalife fell $1.44, or nearly 4 percent, to $36.95. Skechers rose 40 cents, or nearly 2 percent, to $21.91.
The development comes at an especially awkward time for Herbalife. Activist investor Bill Ackman has publicly attacked Herbalife, saying it distorts the financial information it gives to investors. His rival Carl Icahn has vehemently disagreed and has increased his stake in the company. In February, the dogfight boiled over into the public arena as Ackman and Icahn got in a shouting match on live television.
Herbalife has gone on the defensive against Ackman, disputing his characterization of the company and saying that Ackman wants to push the stock down for his own benefit.
Timothy Ramey, an analyst at D.A. Davidson & Co., downgraded Herbalife to neutral from buy. He noted that Tuesday's development was not Herbalife's fault, and said the fundamentals of the business were unchanged. Still, he said, the KPMG development could cause "heightened risk and volatility near-term."
"We assume the process of hiring a new auditor will go quickly - maybe days or weeks," Ramey wrote. "However, the new auditor will have to perform its own audit and re-establish its own review of financial controls. We estimate this process could take as long as a year - we guess HLF would be lucky to file their 2013 10-K on time."
Late Tuesday, Herbalife issued a statement saying it believes it is in compliance with New York Stock Exchange listing requirements and that it does not expect the exchange to take any actions toward delisting the company. It said it contacted the NYSE about its plans for replacing KPMG.
Los Angeles-based Herbalife sells energy drinks and stress management pills and recruits people to work as independent sales staffers. On its website, it promises to "change people's lives" either by the chance to sell Herbalife products, or the chance to take them.
Skechers, which is based outside of Los Angeles, is a well-known shoe seller.
AP Business Writers Marcy Gordon and Michelle Chapman contributed.