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Deloitte Wins Summary Judgment Against Former Partner for Fiduciary Duty and Related Claims

By Francis G.X. Pileggi

Deloitte LLP v. Flanagan, No. 4125-VCN (Del Ch., Dec. 29, 2009), read opinion here.  Prior Delaware opinions dealing with the Deloitte firm and its former partners have been highlighted on this blog here.

Overview

This Delaware Court of Chancery opinion addresses claims against a former Deloitte partner for breach of contract, breach of fiduciary duty and fraud in connection with allegations of insider trading with information obtained from clients for whom Deloitte performed audit services.

Procedural  Posture

The procedural context was a motion for partial summary judgment which was granted in favor of Deloitte. The Court's description of the standard for summary judgment, and it various nuances, is more complete than I have seen in most opinions, including reference to Rule 56(c) that allows for partial summary judgment on liability only. See Slip op. at 6 and 7.  Also explained is the well-established truism that breach of contract claims are especially appropriate for summary judgment motions. See footnotes 52 and 53.

Issues Addressed

The agreement that the former Deloitte partner involved in this case signed with Deloitte required him to refrain from trading in the shares of companies for whom Deloitte provided audit and related services. Also required contractually was a periodic reporting of the shares held by all Deloitte partners. The Court was satisfied with the evidence presented of multiple examples of the former partner both failing to abide by this contractual obligation and misrepresenting his non-compliance. The same evidence also satisfied the elements for a breach of the elements of a fiduciary duty claim, but at this stage, when only liability was being decided, the Court determined that it need not delve into the issue of whether the contract claim and fiduciary duty claim overlapped, or whether one needed to be chosen over the other. See page 17 and footnote 68. See also footnote 78 discussing the AICPA standards for auditors, requiring independence and the need to avoid the appearance of impropriety.

The Court also discussed the elements of common law fraud compared with equitable fraud (also  sometimes called negligent misrepresentation.) See pages 18 and 21.

The definition of the term "scienter" was discussed in the context of fraud claims related to insider trading. See page 21. This discussion includes an excellent weaving of the elements of a state law claim with concepts often used in connection with securities law claims. Also notable was the defendant's use of his Fifth Amendment right not to incriminate himself 800 times in his deposition and the Court's observation that in a civil case (unlike in a criminal case), the exercise of that right may result in an adverse inference. See footnote 90.

Full post as published by Delaware Corporate and Commercial Litigation Blog on December 29, 2009 (boomark / email).