Takeaways from an Insider Trading Trial For In-House Counsel

In June 2024, the US Department of Justice tried Terren S. Peizer, founder and former CEO of Ontrak, Inc. in the United States District Court for the Central District of California. It was the DOJ’s first insider trading trial involving a Rule 10b5-1 Plan.

According to an article by law firm Morrison Foerster, the DOJ presented evidence that Peizer disregarded advice that he observe a cooling-off period before trading stock in Ontrack, and made false statements in Rule 10b5-1 plan certifications. A jury found Peizer guilty on all counts. He will be sentenced in October 2024 and is expected to appeal.

Ontrak is a publicly traded healthcare company. Peizer dodged more than $12.5 million in losses by entering into, and then trading under two Rule 10b5-1 trading plans.

He did so after learning that Ontrak’s largest customer, a major health service that accounted for more than half of Ontrak’s revenue, would soon terminate its relationship with the company.

The charges in Peizer were filed soon after recent amendments to Rule 10b5-1, which mandate cooling-off periods and other new requirements. The amendments weren’t in effect when Peizer’s trades were made. The SEC brought a parallel civil enforcement against Peizer.

In their article, Morrison Foerster discusses some takeaways for in-house counsel. It notes that both the DOJ and SEC are increasingly focused on investigating alleged insider trading involving Rule 10b5-1 plans.

First, if the government decides that an individual was in possession of material nonpublic information (MNPI) when a Rule 10b5-1 plan was adopted, charges are likely.

The article suggests that companies should update their advice to executives and employees regarding Rule 10b5-1 plans. Avoid overlapping plans, and consider requiring executives and employees to certify that they are not aware of MNPI at the time the Rule 10b5-1 plan is adopted.

The DOJ has signaled its commitment to pursuing additional insider trading prosecutions under Rule 10b5-1 plans while in possession of MNPI. Both the DOJ and the SEC are increasing their use of data analytics to identify potentially unusual or suspicious trading patterns.