Former Deloitte Partner Thomas Flanagan Sentenced to 21 Months For Insider Trading

SEC v. Thomas P. Flanagan, et al.,Case No. 10-cv-04885 (N.D. Ill.).  On October 31, 2012, the SEC announced that Thomas P. Flanagan was sentenced to 21 months of incarceration followed by supervised release of 12 months.  Flanagan must also pay a $100,000 penalty.  Flanagan, a former Deloitte and Touche LLP partner, pleaded guilty to one count of criminal securities fraud for engaging in insider trading after he obtained material, nonpublic information about several Deloitte clients.

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.  The SEC’s complaint alleged that Thomas Flanagan worked at Deloitte for 38 years.  Flanagan traded on several occasions in the securities of Deloitte clients while in possession of nonpublic information.  Thomas Flanagan’s trading resulted in profits of over $430,000.  Also Thomas Flanagan tipped his son Patrick Flanagan who then traded based on that information.  Patrick Flanagan realized profits of more than $57,000.

The SEC also instituted related administrative and cease-and-desist proceedings.  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 audit reports containing these 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 Exchange Act.

Without admitting or denying the SEC’s allegations in the complaint and the findings in the administrative order, Thomas Flanagan consented to the entry of an order of permanent injunction, to pay disgorgement with prejudgment interest and civil penalties totaling $1,051,042, and to a denial of the privilege of appearing or practicing before the SEC as an accountant.  Without admitting or denying the SEC’s allegations in the complaint, Patrick Flanagan consented to the entry of an order of permanent injunction and to pay disgorgement with prejudgment interest and a civil penalty totaling $123,270.

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