Takeaways for In-House Counsel from DOJ’s First Insider Trading Trial Involving a Rule 10b5-1 Plan

On June 21, 2024, a jury in California federal court found a former chief executive officer of a publicly traded healthcare company guilty of insider trading in United States v. Peizer, the first criminal insider-trading case based solely on trades placed pursuant to a Rule 10b5-1 trading plan. The insider-trading charges in Peizer came on the heels of recent amendments to Rule 10b5-1, which mandate cooling-off periods and other new requirements for these plans.[1] Although those amendments were not in effect when the defendant in Peizer traded, this case underscores that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC), which brought a parallel civil enforcement action, are closely scrutinizing trading under Rule 10b5-1 plans, including where trades result only in avoided loss.

Key Takeaways

• DOJ and SEC announced that the charges against Terren S. Peizer were 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.[2] Both DOJ and SEC are increasingly focused on investigating alleged insider trading involving Rule 10b5-1 plans.

• The government will challenge Rule 10b5-1 plan affirmative defenses to insider-trading charges where it concludes that the individual was in possession of material nonpublic information (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. Companies should also consider requiring executives and employees to certify that they are not aware of MNPI at the time the Rule 10b5-1 plan is adopted.

DOJ’s Allegations and Factual Background

DOJ alleged that Terren S. Peizer, founder and former CEO of Ontrak, Inc., 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 allegedly 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.

The next day, Peizer allegedly 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 the Customer 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 DOJ, 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 DOJ, Peizer avoided more than $12.5 million in losses by selling shares when he did.

DOJ’s Criminal Charges and the Trial

In March 2023, DOJ charged Peizer with one count of securities fraud, in violation of 18 U.S.C. § 1348, and two counts of securities fraud, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, for insider trading in the sale of Ontrak shares. 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 and Section 17(a) of the Securities Act of 1933. We previously covered the DOJ’s and SEC’s filing of charges against Peizer in our March 2023 client alert.[3]

In June 2024, DOJ tried Peizer in the United States District Court for the Central District of California. At trial, DOJ focused on evidence of Peizer’s alleged disregard of advice that he observe a cooling-off period before trading and his alleged false statements in Rule 10b5-1 plan certifications in order to demonstrate criminal intent. Following the two-week trial and approximately six hours of deliberations, the jury found Peizer guilty on all counts. Peizer, who is scheduled to be sentenced in October 2024, is expected to appeal his conviction.

Conclusion

Against the backdrop of Peizer’s conviction, DOJ has signaled its commitment to pursuing additional insider-trading prosecutions of individuals for trading pursuant to Rule 10b5-1 plans while in possession of MNPI.[4] We expect the DOJ’s and SEC’s scrutiny of trading under Rule 10b5-1 plans to increase with the use of data analytics to identify potentially unusual or suspicious trading patterns. 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] Morrison Foerster Client Alert, “U.S. SEC Adopts Amendments to Rule 10b5-1 and Requires Related Disclosures” (Dec. 22, 2022).

[2] 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).

[3] Morrison Foerster Client Alert, “Terren Peizer Insider Trading Case” (Mar. 1, 2023).

[4] 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); Release No. 24-797, Chairman of Publicly Traded Health Care Company Convicted of Insider Trading (June 21, 2024).