On March 1, 2023, the U.S.Department of Justice (DOJ) and Securities and Exchange Commission (SEC) brought insider trading charges against Terren S. Peizer, the founder, Executive Chairman, and Chairman of the Board of Directors of Ontrak, Inc. for trading pursuant to Rule 10b5-1 trading plans that were established while he was allegedly in possession of Ontrak’s material non-public information (MNPI).[1] In doing so, Peizer allegedly avoided losses of more than $12.5 million. This marks the first time the DOJ has filed a criminal insider trading case based solely on trades placed pursuant to a Rule 10b5-1 plan.[2] Further, these charges come on the heels of the SEC’s recent amendments to Rule 10b5-1, which mandate cooling-off periods and other new requirements for these plans.[3] Although those amendments were not in effect when Peizer traded, these cases show that the DOJ and SEC are aggressively analyzing trading under Rule 10b5-1 plans, including where the trades result only in avoided loss.

Key Takeaways

• The DOJ and SEC both announced that their charges against Peizer are part of a “data‑driven initiative” to identify executive abuses of Rule 10b5-1 trading plans, in line with a trend we identified in our November 9, 2022 client alert.[4] The government will soon have much more data to sift through given the new disclosure requirements adopted by the SEC on December 14, 2022.[5]
• The government will challenge Rule 10b5-1 plan affirmative defenses to insider trading charges where it concludes that the trade was in possession of MNPI at the time of the plan’s adoption.
• Companies should update their advice to executives and employees regarding Rule 10b5-1 plans, including as to avoiding overlapping plans, and entering into any plans in good faith while unaware of MNPI.
• The DOJ and SEC focused on evidence of Peizer’s alleged disregard of advice that he observe a cooling-off period before trading and alleged false statements in Rule 10b5-1 plan certifications.

Overview of the Insider Trading Charges

According to the DOJ and SEC, Peizer avoided more than $12.5 million in losses by entering into, and then trading pursuant to, two Rule 10b5-1 trading plans while allegedly in possession of MNPI that Ontrak’s largest client would terminate its relationship with the company. From April 2021 to September 2021, Ontrak, a California-based publicly traded healthcare company, earned more than half of its revenue from its largest customer, a major global health services company (the “Customer”).

Beginning in March 2021, Peizer learned that the Customer was considering terminating its contract. By the end of April 2021, the Customer significantly reduced its list of members for potential enrollment in Ontrak’s healthcare program. On May 2, 2021, Ontrak made significant concessions to the Customer in an attempt to address the Customer’s dissatisfaction.

According to the DOJ and SEC, the next day, Peizer contacted a brokerage firm to set up a Rule 10b5-1 trading plan. The first brokerage firm he contacted allegedly advised him that he needed to observe a cooling-off period. Peizer then contacted another brokerage firm, which initially said that it did not require a cooling-off period but later advised (but did not require) a 30-day cooling-off period. On May 10, 2021, Peizer established a Rule 10b5-1 plan, began trading the very next day and, over the next few months, sold around $19.2 million worth of Ontrak stock.

On May 18, 2021, the Customer informed Ontrak that it intended to terminate its relationship with the company by year-end. Peizer allegedly learned this information on the same day and received regular updates throughout the spring and summer of 2021—including via his own communications with the Customer—indicating that a termination was forthcoming. According to the DOJ and SEC, Peizer nevertheless set up a second Rule 10b5-1 trading plan on August 13, 2021. Again, he was allegedly advised to observe a cooling-off period but began selling three days later, and between August 16, 2021, and August 19, 2021, Peizer sold additional shares worth $1.9 million.

On August 19, 2021, Ontrak announced that the Customer would not continue its contract with Ontrak after December 31, 2021, and Ontrak’s stock price fell 44 percent. According to the DOJ and SEC, Peizer avoided more than $12.5 million in losses by selling shares when he did. The DOJ charged Peizer with one count of engaging in a securities fraud scheme and two counts of securities fraud for insider trading, and the SEC brought a parallel civil suit for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b5-1 thereunder and Section 17(a) of the Securities Act of 1933.

Conclusion

We expect federal investigations into suspicious trading under Rule 10b5-1 plans to continue, especially given both the DOJ’s and SEC’s use of data analytics to identify potentially unusual or suspicious trading patterns and the SEC’s enactment of its new rules. Accordingly, companies should update their insider trading compliance programs, and insiders should be vigilant about creating or amending Rule 10b5-1 plans only when they have no knowledge of MNPI.

[1] Release No. 23-228, CEO of Publicly Traded Health Care Company Charged for Insider Trading Scheme (Mar. 1, 2023); Release No. 2023-42, SEC Charges Ontrak Chairman Terren Peizer With Insider Trading (Mar. 1, 2023). Rule 10b5-1 plans are intended to provide companies and corporate insiders an affirmative defense to insider trading. Under such plans, insiders are permitted to buy or sell a predetermined number of shares at a predetermined time, but only if they adopt such plans while they do not possess MNPI.

[2] Release No. 23-228, CEO of Publicly Traded Health Care Company Charged for Insider Trading Scheme (Mar. 1, 2023).

[3] Morrison Foerster Client Alert, “U.S. SEC Adopts Amendments to Rule 10b5-1 and Requires Related Disclosures” (Dec. 22, 2022).

[4] Morrison Foerster Client Alert, “The Rise of Rule 10b5-1 Enforcement and How Companies Can Mitigate Risk of DOJ and SEC Actions” (Nov. 9, 2022).

[5] Morrison Foerster Client Alert, “U.S. SEC Adopts Amendments to Rule 10b5-1 and Requires Related Disclosures” (Dec. 22, 2022).

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