A federal jury in Los Angeles has convicted Terren S. 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 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 today’s 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, Peizer avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while possessing material non-public information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract. In May 2021, Peizer entered his first Rule 10b5-1 trading plan shortly after learning about deteriorating relations between Ontrak and its customer. He later learned that the customer intended to terminate the contract. In August 2021, Peizer entered his second Rule 10b5-1 trading plan approximately five minutes after being informed by Ontrak’s chief negotiator for the contract that termination was likely.
“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.”
Peizer established his Rule 10b5-1 plans without engaging 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 on the next trading day after establishing each plan. Six days after adopting his second Rule 10b5-1 plan on Aug. 19, 2021, Ontrak announced publicly that its customer had terminated its contract leading to a more than 44% decline in Ontrak's stock price.
The jury convicted Peizer of one count of securities fraud and two counts of insider trading. He is scheduled for sentencing on Oct. 21 and faces a maximum penalty of 25 years in prison for securities fraud and 20 years for each insider trading count.
The case forms part of a data-driven initiative led by the Criminal Division's Fraud Section aimed at identifying executive abuses of Rule 10b5-1 trading plans.
The FBI investigated this case with substantial assistance from FINRA's Criminal Prosecution Assistance Group.
Trial Attorneys Matthew Reilly and Della Sentilles from the Criminal Division's Fraud Section along with Assistant U.S Attorney Ali Moghaddas from California's Central District are prosecuting this case.