On March 1, 2023, the U.S. Department of Justice announced the first insider trading prosecution based exclusively on Rule 10b5-1 Trading plans. As stated plainly in a Harvard Law School post, “Rule 10b5-1 plans are passive investment schemes (plan holders relinquish direct control over transactions), which provide a mechanism for companies and corporate insiders to purchase and sell securities of such company when they have [material non-public information]…” Generally, under Rule 10b5-1 transactions must occur during a predefined period, under a pre-existing plan established when the insider was not aware of any material, non-public information. Like all defenses and exceptions to otherwise prohibited acts, Rule 10b5-1 has nuances and must be followed strictly.
According to the DOJ’s recent announcement (and the U.S. Securities and Exchange Commission’s announcement on the same matter), Terren S. Peizer, the CEO and Chairman of the Board of Directors of Ontrak Inc., a California-based healthcare treatment company, was charged with insider trading. Mr. Peizer allegedly learned that Ontrak’s contract with its largest customer (who contributed more than half of Ontrak’s revenue) was at risk of termination. Between May and August 2021, Mr. Peizer entered into his first 10b5-1 trading plan after learning of complaints from its largest customer. According to the SEC, Mr. Peizer “attested at the time that he was unaware of any material nonpublic information concerning the company, executed the 10b5-1 plan, and sold nearly 600,000 of Ontrak shares worth more than $19.2 million.” Mr. Peizer’s concerns were confirmed when the customer informed Ontrak of its intent to terminate its contract in August 2021. Mr. Peizer allegedly entered into his second Rule 10b5-1 trading plan about an hour after learning from Ontrak’s negotiator that the customer likely would terminate the contract. In the second plan, Mr. Peizer allegedly sold 45,000 more shares of stock worth more than $1.9 million, according to the SEC.
On August 19, 2021, soon after Mr. Peizer entered into the second Rule 10b5-1 plan, Ontrak announced that the customer terminated the contract and its stock fell over 44 percent. The SEC alleged that Mr. Peizer’s stock sales let him avoid more than $12.7 million in losses. According to the SEC, Mr. Peizer “adopted the Rule 10b5-1 plans while Peizer was aware of material nonpublic information and as part of a scheme to evade insider trading prohibitions and that, therefore, Peizer cannot take advantage of any affirmative defense available to corporate insiders under Rule 10b5-1.”
For his alleged actions, Mr. Peizer faces parallel actions by the SEC and DOJ. The SEC charged Mr. Peizer with violating antifraud provisions of the federal securities laws. The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and an officer and director bar for Peizer. The DOJ charged Mr. Peizer with one count of engaging in a securities fraud scheme (up to 25 years in prison) and two counts of insider trading (up to 20 years in prison for each charge). The actual prison sentence, if Mr. Peizer is convicted, will be rendered after consideration of several factors, including the federal sentencing guidelines.
One easily overlooked part of this case is the fact the “investigation is part of a data-driven initiative led by the Fraud Section to identify executive abuses of 10b5-1 trading plans.” The government continues its use of data analysis in nearly all facets of its investigations and enforcement actions. Data analysis (along with whistleblowers) is becoming a common enforcement tool in white-collar enforcement actions.
The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with white-collar criminal and federal investigations. If you need assistance with such a matter, please contact us today.