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.