[ by Howard Haykin ]

A 38-Year Veteran and Deloitte's Vice Chairman of Clients and Markets, Disgracefully "Throws Away" His Life and That of His Son."

The SEC announced its retirement present for Thomas Flanagan, who pleaded to one count of criminal securities fraud for engaging in insider trading after he obtained material, nonpublic information about several Deloitte clients. 

Federal Judge Robert Dow, Jr., of the U.S. District Court for the Northern District of Illinois sentenced Flanagan to 21 months of incarceration, followed by supervised release of 12 months and ordered Flanagan to pay a $100,000 penalty.   The former Deloitte & Touche LLP partner used the inside information for his own trading profits, and he also it with a relative. 

SEC Findings and Allegations.   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 Flanagan, on 8/4/10.  According to the SEC complaint, Thomas Flanagan, CPA, worked at Deloitte for 38 years, and rose to the level of Vice Chairman of Clients and Markets.

Flanagan is alleged to have traded on 9 occasions between 2005 and 2008 in securities of multiple Deloitte clients and a company acquired by a Deloitte client - each time while in possession of 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 made more than $430K in illegal profits.  On 4 occasions, he got his son involved, relaying the nonpublic information to son Patrick who then traded based on that information and made over $57K.

Additional SEC Findings of Violations.   The SEC also instituted related administrative and cease-and-desist proceedings on 8/4/10, finding that Flanagan violated the SEC's auditor independence rules on 71 occasions between 2003 and 2008 by trading in the securities of 9 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 9 audit clients while representing it was independent.  However, because of Flanagan's ownership of the audit clients' securities, Deloitte was not independent. These Deloitte clients thus filed annual reports and proxy statements with the SEC that included audit reports with false statements.  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.  Flanagan allegedly 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.

Alleged Rule Violations, Agreed Upon Sanctions.    The SEC charged Thomas and Patrick Flanagan with violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3. The SEC's administrative action found that Thomas Flanagan caused and willfully aided and abetted Deloitte's violations of Rule 2-02(b)(1) of Regulation S-X, and caused and willfully aided and abetted the clients' violations of Sections 13(a) and 14(a) of the Exchange Act, and Rules 13a-1, 13a-13, and 14a-3 thereunder. Without admitting or denying the SEC's allegations in the complaint and the findings in the administrative order,

Thomas Flanagan settled the SEC charges by agreeing to pay $1051K in disgorgement, prejudgment interest, and civil penalties.  He is further denied the privilege of appearing or practicing before the SEC as an accountant. Son, Patrick Flanagan settled SEC charges by agreeing to pay $123K in disgorgement, prejudgment interest, and a civil penalty.

For further details, go to:  [SEC Litigation Release 22524, 10/31/12]  as well as:

[Litigation Release No. 21612, 8/4/10]   [ Litigation Release 22441, 8/9/12].