Back in March 2023, the DOJ unsealed an indictment against Terren Peizer, formerly the executive chair of Ontrak, Inc., representing the first time, according to the press release, that the DOJ brought “criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.”  The DOJ charged that Peizer entered into a fraudulent scheme using 10b5-1 plans and engaged in insider trading, both of which charges carry stiff criminal penalties.  Peizer, the DOJ alleged, “avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.”  According to the WSJ, the trial continued for nine days.  On Friday, Bloomberg reports, a jury in the U.S. District Court for the Central District of California found Peizer “guilty of one count of securities fraud and two counts of insider trading.”  In a statement, Peizer’s counsel, as reported by Law360, said that the “testimony from all the witnesses at trial showed that Mr. Peizer did not operate the company, and relied on his management team for updates….That same management team told Mr. Peizer that there was no material nonpublic public information at the time he entered in his trading plans, and those plans were supposed to protect him. Mr. Peizer was entitled to rely on that advice. In our view, this result is a travesty of justice, as Terren Peizer is innocent of these charges. We will not rest until it is overturned.” The head of the DOJ’s criminal division observed, in the DOJ press release, that when 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….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.” Notably, Peizer wasn’t just convicted despite his use of 10b5-1 plans, he was convicted because of his use—a use that the jury found to be fraudulent.

Background.  Very briefly (based on the DOJ indictment as well as an SEC complaint on the same facts), Peizer was the founder and, at various times, the Executive Chair and Chair of the Board of Ontrak, a publicly traded “behavioral health company that contracts with health plans to identify members whose chronic disease will improve with behavior change, and then provides those members with additional healthcare solutions.”  Ontrak had expressly stated that it was highly dependent on four key customers. But in March 2021, the company announced that its then-largest customer was terminating its contract, which led the stock to fall precipitously.  Toward the end of March 2021, its next largest customer indicated that it was dissatisfied with Ontrak’s services and considering terminating its contract. By the end of April 2021, that customer had communicated its intent to terminate. Negotiations ensued. Peizer, it was alleged, had been informed of this potential termination, and, on May 10, Peizer asked Ontrak’s CEO for a reading of the tea leaves. On the same day, established his first 10b5-1 plan.

Was Peizer’s failure to accept 30-day cooling-off periods in his Rule 10b5-1 plans a pivotal allegation? In setting up his plan, it was alleged, Peizer advised his broker that he wanted to exercise warrants that expired in August and sell the shares under Rule 10b5-1.  The broker recommended a 30-day cooling-off period, which was a brokerage firm rule, potentially negotiable, but only to 14 days. Peizer replied that a 30-day cooling-off period “would condense the sales and have a more negative share price impact”; he declined to establish a plan with that broker, and instead opted for a broker that did not mandate a cooling-off period. Nevertheless, even the second brokerage house advised that a 30-day cooling-off period was industry best practice.  What’s more, DOJ alleged, the broker advised Peizer that the absence of a cooling-off period “together with the ‘rapid transaction executions subsequent to plan adoption’ might ‘create an appearance of impropriety and call into question whether a plan adopter had MNPI…at the time of plan adoption.’’’  The DOJ press release observed that, 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.’’

In establishing the May plan—apparently, his first—Peizer, the DOJ charged, falsely represented that he had no MNPI. From May 11, 2021 through July 20, 2021, Peizer sold almost 600,000 shares under his 10b5-1 plan for proceeds of around $19 million. After the customer notified Ontrak of its intention to terminate its contract at year end, attempts were made to salvage the relationship.  On August 13, a sales employee, in response to Peizer’s question, told Peizer that he thought the customer would terminate its contract. One hour later, the DOJ charged, Peizer established his second 10b5-1 plan providing for the sale of just over 450,000 shares. Once again, there was no cooling-off period and, once again, in setting up the plan, Peizer represented that he had no MNPI. But Peizer was able to sell only 45,000 shares under the plan before the customer formally notified Ontrak of termination.  Ontrak announced the termination in a Form 8-K the next day, indicating that it did “not expect this decision to have a material negative impact on our previously stated revenue and margin expectations for FY 2021.” However, Ontrak estimated expected 2022 revenues at a level 57% below analysts’ estimates.  Ontrak’s stock price fell 44% on the day of the announcement, down to $11.68. On February 27, 2023, Ontrak’s stock closed at $0.6795.  By selling ahead of the announcement, the DOJ charged, Peizer avoided almost $13 million in losses.

The DOJ charged Peizer with one count of engaging in a securities fraud scheme and two counts of securities fraud for insider trading.  (For a more detailed discussion of the background of the case, see this PubCo post.)

The trial.  The WSJ reports that “[m]uch of Peizer’s trial turned on what he knew about the possible loss of the [major] Ontrak customer,” which Ontrak needed “to keep investors’ hopes alive. Peizer was Ontrak’s chairman, founder and biggest shareholder, giving him firm control. He wasn’t in charge of dealing with [the customer], but executives kept him in the loop about their effort to save the $90 million deal with the health-insurance company.”  According to the WSJ, prosecutors claimed that Peizer knew about the expected customer loss when he created the plan. Peizer’s defense counsel, Law360 reports, “contended throughout the trial that Peizer simply wanted to exercise warrants about to expire, pay off some loans and purchase a house. Furthermore, they argued that Peizer expressed his intentions to sell his expiring warrants long before [the customer] aired any problems over its deal with Ontrak.” 

Law360 reports that, during closing arguments, the DOJ “described Peizer as a clever ‘Wall Street whiz’ who wanted to dump his shares with an advantage over other investors and exploit the system without using a 30-day cooling-off period since Peizer knew that his company was going to meet a similar fate” with the loss of this second customer as it did with the loss of the first customer. ‘[Peizer] had seen this movie before, and he did not like the ending,’ [the DOJ] explained, reminding jurors the defendant lost over $250 million in stock values when Ontrak share prices dropped over 45% when news broke of [the first customer’s] termination. Peizer intended to cheat investors before it all came crashing down and ‘before history repeated itself.’” 

Counsel for Peizer, Law360 reports, “maintained that the prosecution’s evidence falls apart, as the only shares Peizer ever sold were from the expiring warrants, and that Peizer actually wanted to wait to sell them, but that Ontrak’s board rejected his request to extend that deadline. None of the shares Peizer sold were Ontrak common stock.”…If Peizer really knew catastrophe was going to strike in the spring of 2021 and that [the customer] was going to end its contract, it’s questionable as to why he’d only sell warrants that were set to expire, and not any common stock….Importantly, Peizer sold most of his shares after news broke of [the customer’s termination in August 2021…‘So if Mr. Peizer is the whiz kid, the mastermind, whose goal was to cheat the market, he’s either really bad at insider trading, or the government’s theory is wrong.’”  In addition, counsel argued, Peizer had actually been optimistic about the progress of the negotiations with the customer. What’s more, according to the WSJ, “Peizer’s defense said Ontrak’s chief financial officer…signed off on his use of the trading plan and certified that Peizer didn’t have material nonpublic information.” Peizer’s counsel “said his client was allowed to rely on his management team’s advice about his ability to trade freely. Executives ‘told Mr. Peizer that there was no material nonpublic public information at the time he entered in his trading plans, and those plans were supposed to protect him….Mr. Peizer was entitled to rely on that advice.’” In addition, Law360 reports, Peizer’s counsel noted that ”Ontrak’s in-house counsel…, who had over 30 years of securities litigation experience, also agreed with [the CCO/CFO’s] good-faith assessment of the plans.” 

According to Law360, the jurors “deliberated for roughly six hours….Peizer showed little emotion as the verdict was read, but did shake his head each time one of the guilty counts was read.” The WSJ reports that Peizer was convicted on “one count of making false misrepresentations in the May and August trading plans for the purpose of executing the insider trading scheme. The two other counts were for the specific selling of shares executed on May 11, 2021, and on Aug. 16, 2021, respectively.” Peizer will be sentenced in October, and “faces a maximum penalty of 25 years in prison on one securities-fraud charge and 20 years in prison on each of two insider-trading counts.” The DOJ indicated that this “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.”

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