The Case Is Part of a Data-Driven Initiative by the Criminal Division’s Fraud Section
A federal jury in Los Angeles has convicted Terren S. Peizer, the former CEO and chairman of Ontrak Inc., a publicly traded healthcare company, of engaging in an insider trading scheme using Rule 10b5-1 trading plans.
Peizer, 64, a resident of Santa Monica, California, and Puerto Rico, avoided more than $12.5 million in losses by selling shares based on non-public information regarding the potential termination of a major contract, according to court documents and evidence presented at trial. He was found guilty of one count of securities fraud and two counts of insider trading.
His sentencing is scheduled for October 21, with potential penalties of up to 25 years for securities fraud and 20 years for each insider trading count.
“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, in a released statement. “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.”
Peizer established his first Rule 10b5-1 trading plan in May 2021, shortly after learning about the deteriorating relationship between Ontrak and its largest customer.
He adopted a second plan in August 2021, minutes after being informed that the contract was likely to be terminated. Despite warnings from multiple brokers and Ontrak’s compliance officers, Peizer began selling shares the next trading day after establishing each plan. On August 19, 2021, Ontrak announced the termination of the contract, leading to a 44% drop in its stock price.
“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. “Today’s verdict sends a clear message that everyone, including corporate executives, must abide by the law.”
Acting Assistant Director in Charge Krysti Hawkins of the FBI Los Angeles Field Office stated, “The FBI is committed to investigating illegal trading practices and holding offenders accountable to ensure fairness and trust in the marketplace.”
The case is part of a data-driven initiative by the Criminal Division’s Fraud Section to identify abuses of Rule 10b5-1 trading plans, which are meant to allow corporate insiders to sell stock without facing insider trading charges.
However, the plans offer no protection if an executive is in possession of material, non-public information when entering the plan or if the plan is established in bad faith.
