April 10, 2013

Alleged leaks at auditor cause trouble for Herbalife, Skechers

KPMG fires the person accused in the insider trading and resigns as the companies’ auditor.

The Associated Press

NEW YORK  — Accounting firm KPMG has resigned as the auditor for Herbalife, a dietary supplements maker, and for the shoe retailer Skechers after a rogue partner allegedly leaked information about the companies to someone who then used the information to trade stocks.

click image to enlarge

Trading specialists confer at the post that handles Herbalife at the New York Stock Exchange. Accounting firm KPMG resigned as the auditor for Herbalife and Skechers after a partner allegedly leaked information about the companies.

2013 Associated Press File

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.

Still, the development is a headache for both companies. 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 broke the news 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 didn’t reveal the partner’s identity. It announced the dismissal in a statement late Monday in which it also said it was resigning as auditor for two companies it didn’t identify.

Herbalife and Skechers confirmed Tuesday that they were they companies involved. Skechers said KPMG told it the ex-partner provided the information in exchange for money and is under federal investigation.

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 for trading, but it was halted later in the morning. Both stocks resumed trading later Tuesday. Herbalife fell $1.42, or 3.7 percent, to $36.97. Skechers rose 42 cents, or 1.9 percent, to $21.93.

The development comes at an awkward time for Herbalife. Activist investor Bill Ackman has publicly attacked Herbalife, saying it distorts financial information it gives to investors. His rival Carl Icahn has vehemently disagreed and has increased his stake in the company.

In February, the wrangling boiled over in public as Ackman and Icahn got into a shouting match on live television.

Herbalife has gone on the defensive against Ackman, disputing his characterization of the company and saying 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.”

Los Angeles-based Herbalife sells energy drinks and stress management pills and recruits people to work as independent sales staffers.

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