NEW YORK (Reuters) - U.S. accounting firm Deloitte & Touche LLP has won a lawsuit against a former top executive it accused of improperly trading in stocks and options of the firm’s clients, including Motorola Inc and Best Buy Co Inc.
A Delaware court sided with Deloitte in the case in an opinion dated December 29, saying the former executive, Thomas Flanagan, had “obviously” been in violation of his employers’ independence policies in making certain trades.
Deloitte had sued Flanagan in Delaware Chancery Court in October 2008 for breach of fiduciary duty, fraud, 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.
“Because an auditor sells, at base, its independence and integrity, the firm relies heavily on the purported honesty and independence of its professionals,” Vice Chancellor John Noble, of the Delaware Court of Chancery, wrote in his opinion.
Deloitte said in its complaint that starting as early as 2005, Flanagan had made more than 300 trades in shares of Deloitte’s audit clients, including several clients for which he was Deloitte’s advisory partner.
Meanwhile, Flanagan specifically told the firm he was not trading in client stocks, which are restricted under the firm’s independence policies, according to the complaint.
Dozens of times, Flanagan entered his holdings in Deloitte’s system, then quickly “corrected” entries to indicate he had disposed of restricted securities, but in fact continued to hold them, according to court documents in the case.
A lawyer for Flanagan and a Deloitte representative were not immediately available to comment on the court decision.
According to the judge’s opinion, Deloitte was unaware of the trades until the U.S. Securities and Exchange Commission contacted the company looking to find out which Deloitte employees were working on the audit for Walgreen Co in 2007. At the time, Walgreen had just announced its acquisition of Option Care, and Flanagan allegedly purchased stock in Option Care one week before Walgreen publicly announced the acquisition, according to court papers.
He was also accused of trading in securities of Deloitte clients Best Buy, Allstate Corp, Motorola, and other firms, often while working directly on the companies audits.
Flanagan resigned from Deloitte in 2008 about two months before the lawsuit was filed, according to the original complaint. The SEC has not announced any charges against Flanagan.
In court proceedings in the case, Flanagan has exercised his Fifth Amendment right against self incrimination, according to court papers.
Deloitte is seeking repayment of salary, benefits and other damages from Flanagan in the case. The court said it will later issue directions on how the decision should be implemented.
The case is Deloitte LLP v. Thomas P. Flanagan, Court of Chancery of the State of Delaware, No. 4125-VCN.
Reporting by Emily Chasan; Editing by Tim Dobbyn