As someone who handles litigation and white-collar criminal matters, I’m often troubled by my clients’ corporate audit department. It will author lengthy, non-privileged reports about processes at companies that don’t work. Those reports put everyone on notice about those failing processes. The reports list a bunch of “action items” that should be undertaken to correct those processes. In my experience, companies rarely have the time, money or desire to put into place all of the suggested corrections. And, bam! You have negligence or recklessness or even willful blindness.
But here’s a story about a corporate auditor who allegedly did more than simply write a report that caused heartburn for outside counsel. Steven Dombrowski was the Director of Audit for Allscripts Healthcare Solutions, Inc. Allscripts’ common stock traded on NASDAQ. Mr. Dombrowski was recently indicted in the Northern District of Illinois for insider trading.
According to the indictment, Mr. Dombrowski and his team were “responsible for auditing and testing the processes and procedures Allscripts used to compute and report its financial performance.” Allscripts had a written corporate policy against insider trading that defined what was “material non-public” information. The company enforced a “blackout period” during which employees could not trade on Allscripts’ stock. The blackout period began 15 days before the end of a quarter and ended two days after the quarterly earnings announcement.
The Government alleges that Mr. Dombrowski had a trading account in his wife’s maiden name. As part of his job, he had access to information about Allscripts’ “quarterly expenses, sales, revenues, and earnings.” According to the indictment, Mr. Dombrowski then engaged in transactions designed to take advantage of the information he knew. This was not a massive scheme; the Government alleges that Mr. Dombrowski profited by $286,211.
For example, the indictment alleges that when Mr. Dombrowski learned in April 2012 that Allscript’s upcoming quarterly results were going to be lower than expected, he engaged in “transactions that he designed to be profitable if the price of Allscripts stock declined,” such as buying put options.
The SEC simultaneously filed a complaint in the Northern District of Illinois, accusing Mr. Dombrowski of violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint also demands that he disgorge “all of his ill-gotten gains” and also named his wife as a relief defendant to disgorge any gains since the trades were made using her account.
This isn’t a major insider trading scheme–either in size or duration. But it’s no doubt troubling for other public companies to wonder whether the person they have put in charge of auditing the company is violating company policy and the law.