A part-time Santa Monica resident has been indicted in a multi-million dollar insider trading case.
According to the US Attorney’s Office Terren S. Peizer, who splits time between Puerto Rico and Santa Monica, is the CEO and Chairman of the Board of Directors of Ontrak Inc., a Nevada-based publicly traded health care company. He allegedly 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.
Rule 10b5-1 trading plans can offer an executive a defense to insider trading charges. However, the defense is unavailable if the executive is in possession of material, nonpublic information at the time he or she enters into the 10b5-1 trading plan. Additionally, a plan does not protect an executive if the trading plan was not entered into in good faith or was entered into as part of an effort or scheme to evade the prohibitions of Rule 10b5-1.
In May 2021, Peizer allegedly entered into his first 10b5-1 trading plan shortly after learning that the relationship between Ontrak and the customer was deteriorating and that the customer had expressed serious reservations about continuing its contract with Ontrak.
"Mr. Peizer is accused of using his insider knowledge as CEO of a publicly traded company to line his own pockets in violation of his duty to his company and its shareholders," said United States Attorney Martin Estrada. "Mr. Peizer allegedly exploited material nonpublic information and tried to shield himself with a rule designed to ensure a fair and level playing field for all investors. With this indictment, we again affirm that the law applies equally to all and that corporate executives who unlawfully denigrate the integrity of our financial markets will be held accountable."
Peizer has denied all the accusations.
“Mr. Peizer is innocent," said a statement from David Willingham, counsel to Mr. Peizer. "The government has clearly overreached in this case, especially since they have disregarded the good faith discussions regarding the facts and circumstances of this inquiry which took place before these cases were filed without any prior notice.”
The indictment alleges that Peizer later learned that the customer informed Ontrak of its intent to terminate the contract. Then, in August 2021, Peizer allegedly entered into his second trading plan approximately one hour after Ontrak’s chief negotiator for the contract confirmed to Peizer that the contract likely would be terminated.
In establishing his trading plans, Peizer allegedly refused to engage in any "cooling-off" period – the time between when he entered into the plan and when he sold stock – despite warnings from two brokers. Instead, Peizer allegedly began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 19, 2021, just six days after Peizer adopted his August plan, Ontrak announced that the customer had terminated its contract and Ontrak’s stock price declined by more than 44%.
"Today’s groundbreaking insider trading indictment demonstrates that the Department of Justice, together with our law enforcement partners, will not allow corrupt executives to misuse 10b5-1 plans as a shield for insider trading," said Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division. "As this case shows, we have embraced the use of data to proactively identify and investigate fraud as we continue to ensure that ordinary investors are on an equal playing field with corporate insiders."
"The FBI and our partners are committed to holding insiders accountable at all levels, including those who act in bad faith when establishing trading plans in order to evade regulations," said Assistant Director in Charge Donald Alway of the FBI Los Angeles Field Office. "Americans must have trust in the marketplace and that can only be achieved when offenders who violate their obligations are held responsible."
Peizer is charged with one count of engaging in a securities fraud scheme and two counts of securities fraud for insider trading. If convicted, he faces a maximum penalty of 25 years in prison on the securities fraud scheme charge and 20 years in prison on each of the insider trading charges.
The The Securities and Exchange Commission has also filed charges over the incident.
"We allege that Mr. Peizer, armed with inside knowledge, avoided millions in losses that ordinary investors suffered. That’s insider trading, even when the trading is done through a 10b5-1 trading plan," said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. "Few things undermine trust in the markets more than insiders abusing their positions for personal advantage; the SEC remains committed to investigating such abuse and holding bad actors accountable."
The SEC’s complaint, filed in U.S. District Court in the Central District of California, charges Peizer and the company he set up to facilitate his stock sale with violating antifraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and an officer and director bar for Peizer.
The indictment represents the first time that the Department of Justice has brought criminal insider trading charges stemming from an executive’s use of a 10b5-1 trading plan. The investigation is part of a data-driven initiative led by the Fraud Section to identify executive abuses of 10b5-1 trading plans.
The U.S. Attorney’s Office said an indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.
If you believe you are a victim in this case, please contact the Fraud Section’s Victim Witness Unit toll-free at (888) 549-3945 or by email at victimassistance.fraud@usdoj.gov. For additional information and case event updates, please visit www.justice.gov/criminal-vns/case/united-states-v-terren-s-peizer.
Ciaran McEvoy, U.S. Attorney’s Office Public Information Officer
