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Deloitte Wins Lawsuit…Former Partner Loses

In a ruling on Dec 29, former Deloitte partner, Thomas Flanagan, from Chicago, was found liable for violating the accounting firm’s conflict of interest policies. These policies extend for stock and options trading of the firm’s clients. Clients of the company include Motorola Corp, Allstate Corp and Walgreen Co. Flanagan who was a 30 year employee of the company, was also found to have concealed these trades from Deloitte.

deloitte%20logo.jpgA further hearing has been set to determine the extent of the penalty held against Flanagan, but reports indicate that the company is seeking monetary damages which may include Flanagan’s retirement benefits. Flanagan has not made a statement regarding the case. He has said that some of his investments were allowed by the SEC, such as those in which he did not have specific interactions with client’s or those clients that were not from the Chicago office where he was employed.

Flanagan, a senior partner and Vice Chairman for the company embarrassed the company and left the company vulnerable to a variety of liability exposures from clients. In addition, the company is now shaken because of the additional regulatory scrutiny about the independence of the auditor. Within the accounting industry, there are strict rules about trading simply because employees have so much access to the private information of their clients that they could affect the pricing of the client’s securities. Numerous times during the trial, Flanagan invoked his Fifth Amendment rights.

Many of the company’s clients have had to do their own investigation to determine the involvement of Flanagan with their individual accounts. Walgreens, USG Corp and Allstate have conducted investigation that have found that Flanagan did not have involvement with their specific audits.

The company, Deloitte, says that Flanagan made investments into the company’s audit clients and others more than 300 times between the period of 2001 to 2008. In some of those transactions, evidence showed that Deloitte was trading on non public information which is illegal. As of yet, the US Securities and Exchange Commission has not brought charges in the case.

Flanagan’s involvement in such transactions was detailed numerous times in the case. One instance poses Flanagan attending a meeting of Allstate’s audit committee in which a draft of the company’s second quarter earnings statement was circulated. The company planned to announce significant increases in full year earnings at that time. This occurred on July 17, 2006. The following day, Flanagan purchased call options in Allstate stock. He later sold them on July 20th, the day after Allstate’s earnings went public and the price of the stock purchased rose considerably. The stock saw an 85 percent gain in those days.

Flanagan is also charged with concealing his holdings from the company. The company requires individuals to report investments they or their immediate families own. In numerous instances, Flanagan would record unauthorized holdings into the company’s computer tracking but would go back later the same day to correct such entries indicating that he had disposed of holdings when in fact he had not.

According to reports, Deloitte did not know of Flanagan’s wrongdoing until August of 2008. At that time, the SEC contacted Deloitte in regards to an audit for Walgreens in 2007. Flanagan purchased stock in Option Care Inc a week before Walgreens announced that it would buy the company in July of 2007. Flanagan did serve as an advisory partner on that audit. Flanagan resigned from his position with Deloitte as soon as the company contacted him regarding the SEC inquiry.

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