Ex-Deloitte Partner Pleads Guilty to Insider Trading

Jack Humphrey, Regulatory journalist
August 10, 2012 /

A former partner at auditing and consulting firm Deloitte and Touche LLP has pleaded guilty to a charge alleging he obtained material, nonpublic information about several Deloitte clients.

Thomas P. Flanagan, 64, of Chicago, used allegedly used confidential information to make illegal trading profits. The U.S. Attorney’s Office for the Northern District of Illinois filed criminal charges against Flanagan on July 11, 2012 in the U.S. District Court for the Northern District of Illinois. Flanagan is scheduled to be sentenced on October 25, 2012.

The criminal charges arose out of the same facts that were the subject of a civil action that the SEC filed against Flanagan and his son, Patrick T. Flanagan, on August 4, 2010. Flanagan, a certified public accountant, worked at Deloitte for 38 years and rose to the level of Vice Chairman of Clients and Markets.

The complaint alleged that Flanagan traded on nine occasions between 2005 and 2008 in the securities of multiple Deloitte clients and a company acquired by a Deloitte client using nonpublic information that he learned through his duties as a Deloitte partner.

The information had not yet been disclosed to the public and concerned material, market-moving events such as earnings results, earnings guidance, and acquisitions. Thomas Flanagan’s illegal trading resulted in profits of over $430,000. On four occasions, Thomas Flanagan relayed the nonpublic information to his son Patrick Flanagan who then traded based on that information. Patrick Flanagan profited more than $57,000.

The SEC also instituted related administrative and cease-and-desist proceedings on August 4, 2010, finding that 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. The SEC’s settled administrative order found that during the time Flanagan owned or controlled these securities, Deloitte issued audit reports to the nine audit clients in which it stated that the financial statements contained in the reports had been audited by an independent auditor.

However, due to Flanagan’s ownership of the audit clients’ securities, Deloitte was not independent. The companies then filed with the SEC annual reports and proxy statements which included the false audit reports.

As a result, the SEC’s administrative order found that Flanagan caused and willfully aided and abetted Deloitte’s violations of the SEC’s auditor independence rules under Regulation S-X and also caused and willfully aided and abetted the companies’ violations of the reporting and proxy provisions of the Securities Exchange Act of 1934.

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

Thomas Flanagan agreed to pay penalties totaling $1,051,042, and consented to an order barring him from practicing before the SEC as an accountant.


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