Summary

The recently unsealed indictment of health care company Ontrak for insider trading marks the first criminal prosecution alleging an executive’s fraudulent use of a 10b5-1 trading plan to facilitate unlawful trades.

The Upshot

• Rule 10b5-1 allows corporate insiders to sell company stock by establishing a plan that specifies share price, amount, and transaction date in advance. As long as the insider selling company stock is acting in good faith and not abusing the plan, trading under Rule 10b5-1 can be used as a defense to allegations of insider trading.
• Ontrak’s CEO and Chairman of the Board, Terren S. Peizer, allegedly entered into two Rule 10b5-1 trading plans while already in possession of material non-public information, and used those plans to sell Ontrak stock prior to a 44-percent drop in the stock’s value.
• In a parallel civil case, the SEC filed suit in the Central District of California accusing Mr. Peizer of engaging in insider trading.

The Bottom Line

Attorneys in Ballard Spahr’s Securities Enforcement and Corporate Governance Litigation practice are poised to advise companies and corporate insiders seeking to use Rule 10b5-1 plans to trade, and to help them ensure they are abreast of all regulations and aware of best practices.

On March 1, 2023, an indictment filed in the Central District of California was unsealed, charging the CEO of Ontrak Inc., a public health care company, with allegedly engaging in insider trading. While many corporate executives have been charged with insider trading, this case marks the first criminal prosecution alleging an executive fraudulently used a 10b5-1 trading plan to facilitate their unlawful trades. Additionally, this case demonstrates a concerted effort by the DOJ and SEC to crack down on what the two agencies perceive as the abuse of these commonly-used plans.

Rule 10b5-1, amended by the SEC in December 2022, allows corporate insiders to sell company stock by setting up a plan that specifies share price, amount, and transaction date in advance. The idea behind these plans is that if an insider commits to trade on a pre-arranged schedule they cannot take advantage of access to material nonpublic information. Accordingly, trading pursuant to a Rule 10b5-1 plan can serve as a defense to allegations of insider trading, as long as the insider selling company stock is acting in good faith and not abusing the plan to otherwise engage in unlawful insider trading.

As alleged, Ontrak’s CEO and Chairman of the Board, Terren S. Peizer, entered into two Rule 10b5-1 trading plans while already in possession of material non-public information. Specifically, Peizer was allegedly aware that one of Ontrak’s largest customers was planning to terminate its contract with Ontrak. Mr. Peizer allegedly set up his first 10b5-1 trading plan in May 2021, after learning that the customer had expressed concerns about continuing its contract with Ontrak. Then, one hour after learning that the customer would likely terminate its contract with Ontrak, Mr. Peizer allegedly set up his second 10b5-1 trading plan.

Mr. Peizer then allegedly began selling Ontrak shares just one trading day after establishing each of his 10b5-1 plans, ignoring advice from brokers to engage in a “cooling-off” period before beginning to sell the stock. Six days after Mr. Peizer entered into his second 10b5-1 plan, the customer terminated its contract with Ontrak, and Ontrak’s stock price dropped by over 44 percent following public disclosure of that material event.

In a parallel civil case, the SEC also filed suit in the Central District of California accusing Peizer of engaging in insider trading.

These cases serve as a warning to companies and corporate insiders seeking to use Rule 10b5-1 plans to trade. Attorneys in Ballard Spahr’s Securities Enforcement and Corporate Governance Litigation practice are poised to advise companies and corporate insiders seeking to use Rule 10b5-1 plans to trade, and to help them ensure they are abreast of all regulations and aware of best practices.

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