KPMG has resigned as auditor of Herbalife and Skechers after learning that a senior partner in its Los Angeles office had allegedly provided insider information about the companies to an outside party, who traded on the information.
KPMG declined to comment about the companies' identities. Both Herbalife and Skechers confirmed the news in statements.
In a statement, KPMG said it had been informed last week about the partner's actions and has since fired that employee.
"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 long-standing culture of professionalism and integrity," the firm said in a statement.
KPMG told both the companies that it was necessary to withdraw its auditor reports, but assured that it has "no reason to believe that the financial statements of these companies have been materially misstated."
While Herbalife's financial statements for the fiscal years ended December 31 in 2010, 2011 and 2012, will be withdrawn, the nutrition company said its audit committee and management believe that the statements "fairly present, in all material respects, the financial condition and results of operations" of Herbalife.
Skechers' reports for fiscal years 2011 and 2012 will be withdrawn. The shoe company said it has started the search for replacement auditors but was unable to provide and estimate of when the re-audit of 2011 and 2012 will be completed.
The news quickly became a hot topic among traders on StockTwits, especially given Herbalife's time in the spotlight and the attention it's drawn from major hedge fund managers.
While Bill Ackman of Pershing Square has accused the company of operating a pyramid scheme, activist investors Carl Icahn and Dan Loeb, founder of New York-based Third Point, threw their support behind Herbalife, and purchased separate stakes in the company.
So another point for Team Ackman? It's still unclear. So far, the insider trading scandal only directly damages the reputation of the ex-KPMG partner and more broadly the audit firm.
But as DA Davidson analyst Tim Ramey points out, it could down the line.
Ramey said that his outlook on the company has not changed, but noted that the implication of KPMG's resignation creates a "serious problem" for Herbalife's stock due to compliance issue with the New York Stock Exchange's requirements. He downgraded the stock to neutral and took his price target down to $38 a share from a lofty $78.
While Ramey expects Herbalife to hire a new auditor quickly, performing new audits and establishing financial control could take as long as a year.
"We assume HLF will get an NYSE de-listing notice because of the withdrawn audit opinion," wrote Ramey. "However, we believe it is highly unlikely they will be delisted."
Traders also got clever with their jokes, given the other big story of the day with JC Penney finally getting rid of CEO Ron Johnson after a troubled year-and-a-half.