Back in November, 2008, Deloitte sued its former vice chairman for trading in securities of the firm’s audit clients. The SEC has filed its case against Thomas Flanagan and included his son, Patrick Flanagan.
The SEC alleged Flanagan traded in the securities of multiple Deloitte clients on the basis of inside information that he learned through his duties as a Deloitte partner, resulting in profits of more than $430,000. Flanagan also tipped his son Patrick, who earned profits of more than $57,000 based on the inside information.
“21. Between 2003 and 2008, Flanagan made 71 purchases of stock and options in the securities of Deloitte audit clients. Flanagan made 62 of these purchases in the securities of Deloitte audit clients while serving as the Advisory Partner on those audits.
22. On at least 9 occasions between 2005 and 2008, Flanagan traded on the basis of material nonpublic information. Flanagan traded on the basis of material nonpublic information about Best Buy, Motorola, Sears, and Walgreens. On at least 4 occasions, Flanagan tipped Patrick who also traded based on this material nonpublic information.”
What took the SEC so long?
The insider trading problem had already been uncovered at least eighteen months ago. Flanagan had violated the Deloitte policy on trading on audit clients’ securities. He failed to report his trading activity and failed to include some brokerage accounts in Deloitte’s trade tracking system.
Since he used Deloitte Tax for his personal returns, he falsified the names of the securities on his tax returns. (I wonder if Deloitte tax would have run the tax return’s securities against the restricted list?)
The Flanagans agreed to pay more than $1.1 million to settle the SEC’s charges. Thomas Flanagan paid disgorgement with prejudgment interest of $557,158, a penalty of $493,884, and is banned from appearing or practicing before the SEC as an accountant. Patrick Flanagan paid a disgorgement with prejudgment interest of $65,614, and a penalty of $57,656.
How could you catch them?
One question is how could you improve your insider trading policy and procedures to stop this?
If someone is going to conceal their trading activity in clear and knowing violation of the insider trading policy, it’s hard to catch them. You can’t find the account if the employee does not tell you about the account. You need to make them aware of the insider trading policy and that their job is on the line for violation of the policy.
The next step is to review tax returns and tie them back to trades. The employee is then at risk for failure to report income to the IRS. (That’s how they got Al Capone.) In Flanagan’s case he went so far as to fake his tax returns.
How Did Flanagan Get Caught?
According to the Deloitte complaint (.pdf) the SEC investigated trading activity for a particular client who had announced an acquisition of a public company in July 2007. I assume the SEC saw an uptick in trading and options activity. Looking back at the SEC complaint, it looks like that incident was when Walgreens’ purchased Option Care. It’s typical in a public M&A deal for the SEC to question the companies’ advisers when the see unusual trading activity around the time of the deal. That exposed Flanagan’s activity to Deloitte in August of 2008.
Did Flanagan not think that he would eventually get caught? Francine McKenna places the blame a compliance failure at Deloitte.