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August 4, 2010

Former Deloitte vice-chair settles SEC charges

Former Deloitte US vice-chairman Thomas
Flanagan has agreed to pay more than $1m to settle charges of
insider trading involving several Deloitte audit clients.

The US Securities and Exchange Commission
(SEC) alleged Flanagan traded in the securities of Deloitte clients
while serving as a liaison between those companies’ management
teams and Deloitte’s audit engagement teams.

The liaison role meant Flanagan had access to
advance earnings results and other non-publicly available
information about listed audit clients Best Buy, Sears and
Walgreens, as well as the firm’s consulting client Motorola.

Flanagan traded in the securities of these and
other companies while in possession of confidential information and
also tipped off his son Patrick Flanagan, who then traded on the
basis of non-public information, the SEC alleged.

The SEC said Thomas Flanagan’s illegal trades
resulted in profits of more than $430,000 and Patrick Flanagan’s
illegal trades resulted in profits of more than $57,000.

Violation

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SEC enforcement division director Robert
Khuzami said Thomas Flanagan’s insider trading violated one of the
most fundamental rules of public accounting.

“All audit firms should learn from this
unfortunate episode and employ vigorous controls designed to ensure
compliance with the SEC’s auditor independence rules,” Khuzami
said.

In addition to the court-filed complaint
alleging illegal insider trading, the SEC also settled
administrative proceedings regarding claims that Thomas Flanagan
violated the SEC’s auditor independence rules on 71 occasions
between 2003 and 2008 by trading in the securities of nine Deloitte
audit clients.

Accountants are not independent if they own or
control securities in the clients they audit.

As a result, the SEC administrative order
found Thomas Flanagan caused and wilfully aided and abetted
Deloitte’s violations of the SEC’s auditor independence rules.

According to the SEC, Flanagan concealed his
trades in the securities of Deloitte’s clients and circumvented
Deloitte’s independence controls.

Flanagan failed to report the prohibited
trades to Deloitte, lied to Deloitte about his compliance with its
independence policies and provided false information to Deloitte’s
personal income tax preparers about the identity of the companies
whose securities he traded.

Without admitting or denying the SEC’s
allegations, Thomas Flanagan agreed to pay a penalty and costs
totalling $1.05m. He has also been banned from practice in the
US.

Without admitting or denying the SEC’s
allegations in the complaint, son Patrick agreed to pay a penalty
and costs totalling $123,000.

Deloitte ruling

Deloitte US won a lawsuit filed against
Flanagan in January when the Delaware Chancery Court ruled the
former partner had “obviously” breached the firm’s independence
policies when making some trades.

The judge stated that Deloitte was not aware
of Flanagan’s actions and only started an investigation when the
SEC contacted the firm to enquire about which employees were
working on the audit of Walgreen in 2007.

Thomas Flanagan worked at Deloitte for 38
years and rose to the position of vice chairman of clients and
markets.

 

Related articles

Deloitte US wins insider trading case
against former employee

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