CHAIRMAN OF PUBLICLY TRADED HEALTH CARE COMPANY CONVICTED OF INSIDER TRADING

A federal jury in Los Angeles recently convicted Terren Peizer, the former CEO, executive chairman, and chairman of the board of directors of Ontrak Inc., a publicly traded health care company, for engaging in an insider trading scheme utilizing Rule 10b5‑1 trading plans. This conviction marks the first insider trading prosecution based exclusively on the use of such trading plans.

DETAILS OF THE CASE:

According to court documents and trial evidence, Peizer, 64, a resident of Santa Monica, California, and Puerto Rico, strategically used Rule 10b5-1 trading plans to sell shares of Ontrak Inc. before the public was made aware of significant negative news about the company. Peizer avoided over $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material non-public information regarding the potential termination of Ontrak's largest customer contract.

In May 2021, Peizer learned of the deteriorating relationship between Ontrak and its largest customer, who expressed serious concerns about continuing the contract. Peizer then entered into his first Rule 10b5-1 trading plan. Later, in August 2021, just minutes after being informed that the contract was likely to be terminated, Peizer entered into his second Rule 10b5-1 trading plan. On August 19, 2021, Ontrak announced the termination of the contract, leading to a 44% decline in its stock price.

Despite warnings from multiple brokers, Ontrak’s Insider Trading Compliance Officer, and several attorneys, Peizer refused to observe a “cooling-off” period—the time between the establishment of the trading plan and the sale of stock. Instead, he began selling shares on the next trading day after establishing each plan.

LEGAL IMPLICATIONS:

Peizer was convicted of one count of securities fraud and two counts of insider trading. He is scheduled to be sentenced on October 21 and faces a maximum penalty of 25 years in prison for the securities fraud count and 20 years in prison for each of the insider trading counts. The exact sentence will be determined by a federal district court judge, who will consider the U.S. Sentencing Guidelines and other statutory factors.

SIGNIFICANCE:

This case is notable as it represents the Justice Department’s first insider trading prosecution based solely on the use of Rule 10b5-1 trading plans. Principal Deputy Assistant Attorney General Nicole M. Argentieri emphasized that this conviction should serve as a warning to corporate executives that trading plans established in bad faith will not shield them from prosecution.

U.S. Attorney Martin Estrada for the Central District of California highlighted the importance of holding corporate executives accountable for their actions, especially when they exploit their positions for personal gain at the expense of shareholders. This case underscores the efforts of the Corporate Crime and Securities Fraud Strike Force to ensure that all corporate insiders abide by the law.

FUTURE OUTLOOK:

The conviction of Terren Peizer is part of a broader initiative by the Criminal Division’s Fraud Section to use data-driven approaches to identify and prosecute executive abuses of Rule 10b5-1 trading plans. This initiative aims to maintain fairness and trust in the marketplace by holding offenders accountable for illegal trading practices.

The FBI, which investigated the case, along with substantial assistance from FINRA’s Criminal Prosecution Assistance Group, played a crucial role in securing this landmark conviction.

CONCLUSION:

This case sets a significant precedent in the enforcement of insider trading laws and highlights the Justice Department’s commitment to prosecuting corporate executives who misuse trading plans to conceal illegal activities. It serves as a reminder that transparency and adherence to legal standards are paramount in maintaining the integrity of the financial markets.

For further updates on this case and other legal developments, stay tuned to our blog. If you have any questions or need legal advice, please contact our firm.