The Commission filed another settled insider trading case
involving a father and son. This case is unusual in two respects. First, the
father is Thomas P. Flanagan, a CPA who was the Vice Chairman of Deloitte,
resident in its Chicago office, and his son, Patrick is the COO of a private
company in the health care business. Second, approximately two years ago,
Deloitte discovered the insider trading and filed suit against Mr. Flanagan (discussed here). SEC
v. Flanagan, Civil Action No. 10-CV 4885 (N.D. Ill. Filed Aug. 4, 2010).
Thomas Flanagan, according to the SEC, traded on inside
information he obtained through his position at Deloitte on nine separate
occasions between 2005 and 2008. He traded in the securities of Best Buy Co.,
Inc., Motorola, Inc., Walgreens Company, Option Care, Inc. and Sears Holding
Corporation. In each instance, the information was market moving non-public
material information. For example, on October 1, 2007 Walgreens was set to
announce a significant decrease in earnings per share for the period. This
would be the first earnings decrease in nearly a decade. After learning about
the pending announcement Thomas Flanagan tipped his son who purchased options.
Later he also purchased options though an account he controlled. Similarly,
after learning prior to the announcement that Walgreens had taken substantial
steps toward making a tender offer for Option Care, he again tipped his son who
traded, as did Thomas Flanagan.
In making 71 purchases of securities, Thomas Flanagan used
several accounts he controlled. He also circumvented procedures at Deloitte,
failed to report the trades as required, lied to the firm about his compliance
with its independence policies and gave false information to its personal
income tax preparers about the identity of the companies whose securities he
traded. Overall Thomas Flanagan had trading profits of over $430,000. His son
had profits of about $57,000.
To resolve the insider trading case, Mr. Flanagan and his
son each consented to the entry of a permanent injunction prohibiting future
violations of Exchange Act Sections 10(b) and 14(e). Thomas Flanagan also
agreed to pay disgorgement and prejudgment interest of $557,158 and a penalty
of $493,884. Patrick Flanagan agreed to pay disgorgement and prejudgment
interest of $65,614 and a penalty of $57,656.
A separate administrative proceeding based on Rule 102(e)
alleged that, of the 71 trades Thomas Flanagan placed based on inside
information, 62 were in the securities of audit clients for whom he was serving
on Deloitte's engagement team as the advisory partner. If the auditor has an
ownership interest in the client, he is not independent. Yet Deloitte's audit
clients filed reports with the Commission stating that their financial
statements had been audited by an independent audit firm. To resolve the
administrative proceeding, Thomas Flanagan consented to the entry of an order
denying him the privilege of appearing or practicing before the Commission as
an accountant. See also Litig. Rel. 21612 (Aug. 4, 2010).
Program: The Vanishing Line Between Civil
And Criminal Securities Fraud: Sunday August 8, 2010, 10:30 a.m. at the ABA
Annual Convention, San Francisco, CA. Co-chairs: Thomas O. Gorman and Frank C.
Razzano. Panelists include: Hon. Cormac Carney, U.S. Dist. Court (C.D. Cal.),
Greg Anders, Deputy Asst. AG, Criminal Division, DOJ; Michael Dicke, Associate
Director - Enforcement, SEC, San Francisco; Ellen Podgar, Professor of Law,
Stetson Univ. and Cheryl Evans, Special Counsel, National Chamber Law Reform
Project.
For more cutting edge commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
Gorman.