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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

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.

 

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Deloitte US wins insider trading case against former employee

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