First Insider Trading Prosecution Based Exclusively on Use of Rule 10b5-1 Trading Plans
A federal jury in Los Angeles convicted 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 using Rule 10b5‑1 trading plans.
“When Terren Peizer learned significant negative news about Ontrak, he set up Rule 10b5-1 trading plans to sell shares before the news became public and to conceal that he was trading on inside information,” said Principal Deputy Assistant Attorney General Nicole M. Argentieri, head of the Justice Department’s Criminal Division. “With this verdict, the jury convicted Peizer of insider trading. This is the Justice Department’s first insider trading prosecution based exclusively on the use of a trading plan, but it will not be our last. We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith.”
“Corporate executives and other insiders hold major power in our economy, but with that power comes responsibility,” said U.S. Attorney Martin Estrada for the Central District of California. “It is important that executives, such as this defendant, be held accountable when they line their own pockets at the expense of shareholders. That is why I created our office’s Corporate Crime and Securities Fraud Strike Force. Today’s verdict sends a clear message that everyone, including corporate executives, must abide by the law.”
According to court documents and evidence presented at trial, Terren S. Peizer, 64, a resident of Santa Monica, California, and Puerto Rico, avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material non-public information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract. In May 2021, Peizer entered into his first Rule 10b5-1 trading plan shortly after learning that the relationship between Ontrak and the customer was deteriorating and that the customer had expressed serious reservations about continuing its contract with Ontrak. Peizer later learned that the customer informed Ontrak of its intent to terminate the contract. Then, in August 2021, Peizer entered into his second Rule 10b5-1 trading plan approximately five minutes after Ontrak’s chief negotiator for the contract informed Peizer that the contract likely would be terminated.
“As a CEO, Mr. Peizer abdicated his responsibilities by using his position to conceal trading on material non-public information in order to avoid the losses shareholders suffered,” said Acting Assistant Director in Charge Krysti Hawkins of the FBI Los Angeles Field Office. “The FBI is committed to investigating illegal trading practices and holding offenders accountable in order to ensure fairness and trust in the marketplace.”
In establishing his Rule 10b5-1 plans, Peizer refused to engage in any “cooling-off” period—the time between when he entered into the trading plan and when he sold Ontrak stock—despite warnings from multiple brokers, Ontrak’s Insider Trading Compliance Officer, and several attorneys. Instead, Peizer began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 19, 2021, just six days after Peizer adopted his second Rule 10b5-1 plan, Ontrak announced to the public that the customer had terminated its contract and Ontrak’s stock price declined by more than 44%.
The jury convicted Peizer of one count of securities fraud and two counts of insider trading. He is scheduled to be sentenced on Oct. 21 and faces a maximum penalty of 25 years in prison on the securities fraud count and 20 years in prison on each of the insider trading counts. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.
The case is part of a data-driven initiative led by the Criminal Division’s Fraud Section to identify executive abuses of 10b5-1 trading plans. A Rule 10b5-1 trading plan, which allows a corporate insider of a publicly traded company to set up a plan for selling company stock, can offer an executive a defense to insider trading charges. However, the defense is unavailable if the executive is in possession of material, non-public information at the time he or she enters into the 10b5-1 trading plan. Additionally, a plan does not protect an executive if the trading plan was not entered into in good faith or was entered into as part of an effort or scheme to evade the prohibitions of Rule 10b5-1.
The FBI investigated the case. The Justice Department appreciates the substantial assistance of FINRA’s Criminal Prosecution Assistance Group.
No comments:
Post a Comment