Deloitte & Touche has sued former vice chairman Thomas Flanagan, claiming that he profited from stock trades using inside information about the firm's audit clients.

The suit, filed Oct. 29 in a Delaware court, accuses Flanagan of violating Deloitte's policies on independence and conflicts of interest, in addition to improperly trading in the securities of Deloitte's audit clients. Flanagan has been a partner at Deloitte for about 30 years, most recently serving as an advisory partner in Deloitte's Chicago office for a number of audit clients. He abruptly resigned about two months ago after a regulatory agency brought the questionable trades to the firm's attention.

The complaint accuses Flanagan of repeatedly lying to Deloitte about "clandestine" trading activities in his annual written certifications, and concealing the existence of his brokerage accounts to avoid detection of his conduct. Flanagan has still not disclosed all of the facts about his trading to the firm.

According to the complaint, in July 2007, Flanagan purchased stock in the acquisition target of an audit client for whom he served as advisory partner about a week before the acquisition was publicly announced, without disclosing the trade to Deloitte. In August of this year, the firm was asked by a regulatory agency to provide the names and titles of all the personnel who were on the client's engagement team.

Later that month the regulatory agency asked about a number of other clients for whom Flanagan was an auditor or advisory partner. Only after Deloitte questioned him did Flanagan admit that regulators had contacted him as part of the investigation. He became uncomfortable with the regulators' questions, broke off contact, and retained legal counsel, resigning from the firm soon thereafter.

The firm also accused Flanagan of trading in put and call options of at least 12 Deloitte audit clients between January 2005 and June 2008, including seven clients for whom he served as advisory partner.

"Deloitte unequivocally condemns the actions of this individual, which are unprecedented in our experience," said the firm in an e-mailed statement. "His personal trading activities were in blatant violation of Deloitte's strict and clearly stated policies for investments by partners and other professional personnel. Further, it appears that he intentionally skirted our system for reporting and tracking investments. We are taking this very seriously and are conducting our own investigation into the matter."

The lawsuit accuses Flanagan of breach of fiduciary duty, breach of contract and fraud. Deloitte is seeking repayment with interest of all the money Flanagan received following his initial breach of contract and fiduciary duty, along with a declaration that the firm does not owe him any other compensation. The firm is also seeking an award of compensatory damages from him.

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