KPMG Resigns As Auditor Of Herbalife, Skechers After Partner Admits To Insider Trading

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No doubt Pershing Square’s Bill Ackman was dancing a jig this morning. Shares of Herbalife Ltd—which Ackman has long called a “pyramid scheme” and bet $1 billion the stock will drop—were halted for about two hours ahead of news that KMPG resigned as its auditor after finding one of its partners engaged in illegal insider trading. Likewise, shares in Skechers USA Inc were halted in connection to the same leak.

The FBI is now investigating the matter, which led to an almost 4 percent drop in Herbalife shares when trading in the nutritional products group resumed. According to a KPMG spokesperson, the company’s lead auditor at Skechers, Scott London, resigned after the leaks, admitting to sharing insider information. London, a 50-year-old California native, had been with KPMG for 28 years and is listed as a 2012 director on the board of the Los Angeles Chamber of Commerce. He allegedly provided information about Herbalife and Skechers to a third party who then used the information to trade and make a profit. But according to sources, the third party was not a financial institution, hedge fund or any other party who might have great influence on stock prices.

“KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason,” an Herbalife statement said.

Later in the day, analyst Timothy S. Ramey downgraded Herbalife from “buy” to “neutral,” and lowered its price target from $78 to $38. The report, published by DA Davidson, stated,

“In light of today’s announcement that Herbalife’s former auditor KPMG has resigned and withdrawn its audit reports on Herbalife’s financial statements for 2010, 2011 and 2012, we are downgrading the shares… There is no reason to feel differently about Herbalife, its prospects, its historic performance, or our outlook. Our EPS estimates are unchanged. Yet as a stock, it will be a serious problem to be out of compliance (through no fault of their own) with NYSE requirements; and potentially breach their loan covenants. We are reducing our long-term target to $90, previously $180 which encapsulates our view that there is heightened risk and volatility near-term, but excellent value in the longer term.”

The downgrade was likely welcomed by Ackman, who has shorted more than 20 million shares of Herbalife and set a price target of $0. But others, such as hedge funders Daniel Loeb and Carl Icahn—who have each taken long positions on the multi-level marketing company—are most likely white knuckling it as the company’s stock continues to fluctuate in the aftermath of the KPMG scandal.