KPMG Resigns as Auditor for Herbalife and Skechers Following Disclosure of Insider Trading

When trading on Herbalife HLF was halted early Tuesday, speculation on Wall Street became the hottest new game in town. The game didn’t last long.

Herbalife auditor KPMG told Herbalife late Monday that it was resigning, effective immediately, as Herbalife’s independent accountant after discovering that a Los Angeles senior partner had participated in insider trading of Herbalife securities.

KPMG fired the partner, later identified by CNBC as Scott London, saying he had led accounts for several West Coast clients. Trading of Herbalife shares resumed around 11:30 a.m. Tuesday.

Bill Ackman and Carl Icahn have waged a long and public feud over Herbalife, with Ackman saying he regards the company as an illegal pyramid scheme, the basis for his short position. Icahn says the company is legit and sound, and has backed up his opinion with an equally strong investment.

Although it’s early in the week, it’s been a long one for Ackman, who has been forced to eat a hefty helping of crow, thanks to the decline of J.C. Penney JCP, and the related ousting of CEO Ron Johnson, someone Ackman picked for the job.

In a statement, KPMG said its resignation as auditor resulted 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.”

If this is the full extent of the story, the effect on Herbalife might be minimal. The effect on KPMG is another matter.

On Tuesday, Skechers USA SKX announced that KPMG resigned as its auditor Monday as well. The reason? Misconduct by KPMG's lead Audit Engagement Partner (now known to be London) on the Skechers account. In what might look like a photocopy of the Herbalife statement, KPMG said it has “no reason to believe that the financial statements of Skechers have been materially misstated.”

Herbalife and Skechers have both started the search for replacement auditors.

In late news, Reuters reported that the FBI has begun an investigation into insider trading allegations, involving Herbalife and Skechers and aimed at a senior partner (London) at KPMG. Depending on the outcome, this case that could severely damage one of the world's largest accounting firms.

Meanwhile, shares of Herbalife were down about five percent at $36.48 in late afternoon trading, Tuesday. Skechers was up nearly three percent at $22.10.

At the time of this writing, Jim Probasco had no position in any of the mentioned equities.