Thursday, August 16, 2012

Former Deloitte Partner on Outside Audit Engagements Pleads Guilty to Insider Trading Involving Firm’s Client Companies

A former partner at a major accounting firm pleaded guilty to engaging in insider trading after he obtained material, inside information about publicly-traded client companies and used the information himself and shared it with a relative to make illegal trading profits.  The defendant, a certified public accountant, was a partner in the Chicago office of Deloitte & Touche LLP when he engaged in insider trading between December 2006 and May 2008. The former partner pleaded guilty to one count of securities fraud, admitting that he received illegal profits totaling approximately $420,000, and his relative, who was not charged, received at least $58,000 in illegal profits.  The former partner is free on his own recognizance while awaiting sentencing on Oct. 25, 2012, by U.S. District Judge Robert M. Dow Jr.  Securities fraud carries a maximum sentence of 20 years in prison and a $5 million fine.  A written plea agreement anticipates an advisory U.S. Sentencing Guidelines range of 37 to 46 months in prison, with the government recommending a sentence at the low end of the guideline range.

The action, announced by the Department of Justice, is part of efforts underway by the Financial Fraud Enforcement Task Force , which was created by President Obama in November 2009 to wage an aggressive and coordinated effort to investigate and prosecute financial crimes. The SEC, a member of the Task Force, assisted in the investigation. 

According to the plea agreement, the CPA was the advisory partner on Deloitte’s engagements with Best Buy, Walgreens and Sears, and in that capacity served as a liaison between the client’s audit management team and Deloitte’s audit engagement team.  He also served on Deloitte’s non-audit engagement team with Motorola.  As a result, he learned material, inside information about these clients, including quarterly earnings results and possible acquisition targets.  The outside auditor knew that he owed a fiduciary duty to Deloitte and its clients to maintain the confidentiality of the inside information and that he was prohibited from obtaining any financial interest in an audit client, as well as disclosing or trading on the basis of inside information. Despite this duty, the auditor admitted that he illegally bought and sold securities using accounts that he owned or controlled, including accounts in his name and jointly with his wife, two of his sons, and a trust account for which he served as trustee.  He also admitted tipping a relative, identified as Individual A, so that Individual A could benefit from trading on the inside information that he had received.

In 2010, the former partner paid slightly more than a $1 million to settle an SEC civil enforcement action.  The settlement, in which the former partner neither admitted nor denied the SEC’s allegations, included $493,884 in disgorged profits, an equal amount in civil penalties and pre-judgment interest. (SEC v. Flanagan, ND Ill., AAER No. 3164, August 4, 2010).

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