Feds Issue First Indictment Related to 10b5-1 Plans

After months of signaling a crackdown was coming, the federal government has broken new ground by issuing its first indictment against an executive, based solely on the use of so-called 10b5-1 plans.

A quick refresher: Rule 10b5-1 of the Securities Exchange Act of 1934 “provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases.” For decades, it has provided the legal foundation for corporate insiders to buy and sell shares of their companies’ stocks by creating schedules to trade securities. Amid fears that executives and board directors have abused 10b5-1 plans by trading on inside information, the Securities and Exchange Commission enacted changes in December 2022 to the rules governing the plans.

So far, however, enforcement against abuses of 10b5-1 plans has been more a matter of theory than practice. That changed with the filing of an indictment on February 24 by the Department of Justice in the U.S. District Court for the Central District of California against the founder of California-based health care company Ontrak Inc. DOJ is alleging that Terren S. Peizer used 10b5-1 plans to avoid roughly $12.5 million in losses thanks to his knowledge of material nonpublic information. The SEC filed a parallel complaint against Peizer on March 1. (Peizer resigned from his positions at Ontrak a day later.)

At issue are multiple stock trades made by Peizer in 2021, around the same time that Ontrak’s relationship with its largest customer, insurance company Cigna, was deteriorating. According to the indictment, Peizer, who served as the company’s executive chairman and chairman of the Board of Directors, set up one 10b5-1 plan in May 2021 and another in August 2021 to dump Ontrak shares, knowing that the company was on thin ice with Cigna. By the time Ontrak publicly disclosed it had lost its contract with the insurer, DOJ said Peizer had offloaded around $20 million worth of the company’s stock. Ontrak’s stock lost nearly half its value following the announcement.

Among the notable details in the indictment, authorities claim Peizer rebuffed efforts by brokers to persuade him to delay selling the securities for 30 days after establishing the 10b5-1 plans, commonly known as a “cooling-off period.” He wouldn’t have had a choice under the amended rules for 10b5-1 plans, which call for moratoriums on trading for the later of 90 days after the adoption or modification of the plans or “two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification).” Perhaps that speaks to the potential impact of the amended rules going forward.

DOJ noted in a release on the indictment that a “data-driven initiative” to finger abuses of 10b5-1 plans triggered the investigation of Peizer in the first place. Meanwhile, the coordinated actions between the SEC and DOJ on this case feel as though it is part of an “all-of-government” effort to police the plans. In other words, this probably won’t be the last time we’ll hear about a corporate insider landing in hot water over 10b5-1 plans.

Latest Articles

A Flurry of Audit Activity at PCAOB, FASB

There is no indication of the typical “summer slowdown” at the Public Company Accounting and Oversight Board or the Financial Accounting Standards Board. In fact, the PCAOB and FAS...

Read More

New Rules Have SPACs Down, But Not Dead

Soon after the Securities and Exchange Commission announced the final version of new rules to protect investors in special purpose acquisition companies, industry analysts and news...

Read More

SEC Chimes in on Early Cybersecurity Disclosures

Earlier this year, we offered readers three lessons from the initial wave of disclosures made under new cybersecurity rules issued by the Securities and Exchange Commission in 2023...

Read More