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While Herbalife's financial statements for the fiscal years ended December 31 in 2010, 2011 and 2012, will be withdrawn, the nutrition company said its audit committee and management believe that the statements "fairly present, in all material respects, the financial condition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Skechers' reports for fiscal years 2011 and 2012 will be withdrawn.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.
Shares of Herbalife jumped Thursday after the nutritional supplement company said billionaire investor Carl Icahn will be allowed to nominate two board members.
Herbalife (HLF) shares ended the day up 7%. The stock was briefly halted on the news.
Under the terms of a deal with Icahn's holding company, Herbalife agreed to have Icahn nominate two members to the company's board, which will grow to 11 directors. The new board members will MOREBen Rooney - Feb 28, 2013 4:39 PM ET
JC Penney's latest tangle has many folks speculating about whether there's another hedge fund battle brewing.
The retailer said it received a Notice of Default from law firm Brown Rudnick, which claims to represent an "ad hoc" group who hold more than 50% of JC Penney's bonds due in 2037.
JC Penney says the notice is "utterly without merit" but it's raised speculation as to who is behind this so-called ad hoc MORECatherine Tymkiw - Feb 5, 2013 12:33 PM ET
Shares of Herbalife (HLF) bounce back from a sharp drop Monday morning after the New York Post reported that the company is the subject of a federal investigation. Herbalife's stock fell nearly 13% shortly after the open but finished the day up more than 1%.
The investigation was revealed after the Federal Trade Commission disclosed a list of 192 complaints against Herbalife from the past seven years in response to a Freedom of Information Law request MOREHibah Yousuf - Feb 4, 2013 4:01 PM ET
Super Carl? Activist Carl Icahn has been racking up some pretty big wins in the past few weeks. Now, add Chesapeake Energy (CHK) to that list.
Chesapeake Energy's stock is up more than 6% Wednesday, following the company's announcement that its controversial CEO and founder Aubrey McClendon would step down immediately and retire on April 1, 2013.
Icahn was a key force behind McClendon's ouster. Early last year, investors discovered that MOREMaureen Farrell - Jan 30, 2013 12:43 PM ET
Hedge fund titans Bill Ackman and Carl Icahn squared off over Herbalife (HLF) Friday afternoon. And it was like a scene from a kindergarten playground.
For 30 minutes, the two lobbed insults at each other on CNBC as Ackman's bet on Herbalife's stock falling to zero drew the ire (and a litany of insults) from Icahn.
After listening to the confrontation, the public now knows a few things about these two.
For one, MOREMaureen Farrell - Jan 25, 2013 3:30 PM ET
It's Herbalife's turn.
As hedge fund titans Bill Ackman and Dan Loeb square off over the company's sales practices, the company's top executives played defense.
"We are confident that you will see that we're a legitimate company with legitimate customers," Herbalife CEO Michael Johnson told investors and analysts gathered at the Four Seasons in midtown Manhattan Thursday. Johnson called the opportunity to address the crowd "unusual but incredible."
Ackman, who runs Pershing MOREMaureen Farrell - Jan 10, 2013 10:31 AM ET
Hedge fund manager Bill Ackman outlined why he and his team of analysts have dubbed the nutritional supplement company Herbalife (HLF) as a "pyramid scheme" at a conference in New York Thursday morning.
Herbalife's stock dropped nearly 4% Thursday, its second straight day of sharp drops. The vitamin maker's stock dropped more than 12% Wednesday, after CNBC reported that Ackman had been betting against the stock for most of 2012. MOREMaureen Farrell - Dec 20, 2012 12:52 PM ET
Chasing David Einhorn can be a dangerous investing game. Investors in a tiny ethanol company should consider themselves warned.
Ethanol producers, particularly BioFuel Energy (BIOF), have been struggling this year. The drought in the Midwest isn't going away, and in late August, BioFuel Energy's investors learned that revenues for the first half of 2012 were down 20% from 2011.
But for the past two weeks, shares of BioFuel Energy, which are still MOREMaureen Farrell - Sep 17, 2012 4:47 PM ET
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