WILMINGTON, Delaware, April 8 (Reuters) - U.S. accounting firm Deloitte & Touche LLP [DLTE.UL] won a court ruling on Wednesday allowing it to proceed with efforts to recover compensation from a long-time former audit partner it accuses of improperly trading in client stocks.
Deloitte, one of the “Big Four” accounting firms, sued Thomas Flanagan in October for breach of fiduciary duty and breach of contract, saying the 30-year partner who had risen to vice chairman of the firm had secretly hidden trades in shares of Deloitte’s audit clients and lied about it to the firm.
But Flanagan’s lawyers had asked the Delaware court to dismiss Deloitte’s claims against him, arguing that some compensation was protected by the U.S. Employee Retirement Income Security Act (ERISA) and that Deloitte failed to state an actual claim of damages.
The harm to Deloitte could be “dramatic,” but “imprecise,” Paul Lockwood, a Skadden Arps Slate Meagher & Flom lawyer representing Deloitte, told the court on Wednesday.
Deloitte claimed in its complaint that between January 2005 and 2008, Flanagan engaged in numerous trades of put and call options with respect to securities of at least 12 of Deloitte’s audit clients, for seven of which he was Deloitte’s advisory partner. Flanagan resigned from Deloitte about two months before the lawsuit was filed, according to the complaint.
Lockwood said Deloitte has suffered the actual costs of a U.S. Securities and Exchange Commission investigation, lawyer fees and the time of senior leaders of the firm, but that it would be take time to calculate or prove the future damage to the firm’s reputation for independence.
“The independence policy is really the most important thing to this business. If you’re not independent then you’re not going to be an auditing firm,” Lockwood said, noting the collapse of Arthur Andersen after its audit of Enron Corp.
Lockwood said Flanagan had violated Deloitte’s independence policy more than 250 times over a four-year period.
Delaware Chancery Court Vice Chancellor John Noble denied Flanagan’s motion to dismiss, saying it was too early to say Deloitte could not prove how much damage had been done to the firm by his actions, and decisions about which compensation would be protected by ERISA could be sorted out later.
“The decision is more one of timing, than it is of substantive law,” Noble said, noting it is possible Deloitte may have substantial, or even incalculable damages.
Lockwood said the cost of the case to Deloitte has likely already equaled or exceeded what it is seeking to recover from Flanagan.
J. Kevin McCall, a Jenner Block attorney representing Flanagan, had argued that Deloitte could not seek to recover all compensation paid to Flanagan over his career, and that the firm would have to prove actual damages to show that the damages it is seeking from Flanagan were proportional.
“Regardless of the egregiousness of the conduct alleged, or proven, you can’t forfeit ERISA benefits,” McCall told the court. He also said there was no allegation in the complaint that Deloitte’s independence had been compromised by Flanagan’s actions.
McCall declined to comment after the court’s ruling.
Lockwood said Deloitte would not seek recovery of benefits that could be proven to be protected by ERISA.
The case is Deloitte LLP v. Thomas P. Flanagan, Court of Chancery, Delaware, No. 4125. (Reporting by Emily Chasan; Editing by Gary Hill)
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