The Department of Justice is cracking down on executive insider trading, with the former CEO of a healthcare company the latest to be convicted under a new agency initiative.
Insider Trading Case
The former CEO of publicly traded healthcare company Ontrak was convicted of insider trading by a federal jury in Los Angeles on Friday.
Convicted on 3 Counts
64-year-old Terren Scott Peizer served as the head of the Nevada-based company and was also on its board of directors. He has been found guilty of committing one count of securities fraud and two counts of insider trading.
Customer Relationship Changes
In 2021, one of Omtrak’s main clients began to express reservations about its relationship with Ontrak, signaling the possibility of a withdrawal from its contract.
Avoiding $12.5 Million Loss
Peizer then became aware that the company was preparing to terminate its contract with the healthcare company. Peizer subsequently sold his shares in the company to avoid a $12.5 million loss in stock value.
What He Did
“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.
Trading Plans
Rule 10b5-1 allows company executives and other insiders to set up trading plans for the stocks they own in their publicly traded corporation.
An Insider Trading Strategy
These plans are also frequently used by executives to get ahead of accusations of insider trading. However, such as in the case of Peizer, the use of these plans is indefensible if the trader is found to have non-public information about the stock before establishing a 10b5-1 plan.
The Main Evidence
These two trading plans employed by Peizer and his management team were the main pieces of evidence presented to the jury during the 10-day trial to prove his guilt.
Warned to Wait
Peizer was warned by his brokers, attorneys, and fellow executives at Ontrak to wait before selling his shares. However, he dropped them on the next trading day following the news.
44% Drop in Shares
Once the news of the contract was announced to the public, Ontrak shares fell by 44% in value.
Abdicating Responsibility as CEO
“As a CEO, Mr. Peizer abdicated his responsibilities,” said Krysti Hawkins of the FBI Los Angeles Field Office. “By using his position to conceal trading on material non-public information in order to avoid the losses shareholders suffered.”
Big Step for Federal Agencies
The case signals a major step for federal agencies like the DOJ to convict and penalize company executives who violate trading laws.
First, But Not the Last
“With today’s verdict, the jury convicted Peizer of insider trading,” said Argentieri. “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.”
Trading in Bad Faith
“We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith,” she concluded.
A New Initiative
According to the DOJ press release the federal investigation into Peizer’s training is part of a new initiative set by the Fraud Section of the agency, specifically to identify insider trading committed with the use of the 10b5-1 trading plan.
Data-Driven Investigation
The initiative is being carried out with the help of data that can “proactively identify and investigate fraud,” according to Assistant Attorney General Kenneth A. Polite, Jr.
Maintaining Innocence
Peizer stepped down from his position as Ontrak CEO immediately after his indictment in March last year. His attorney David Willingham maintains his innocence and has confirmed that Peizer will appeal the verdict.
Recommended by Management
During the trial, he claimed that Peizer did not knowingly commit insider trading as he only purchased the trading plans at the recommendation of his management team at the time.
“A Travesty of Justice”
“In our view, this result is a travesty of justice, as Terren Peizer is innocent of these charges,” Willingham said in an emailed statement. “We will not rest until it is overturned.”
Potentially Decades in Prison
Peizer will be sentenced in October and is facing a maximum penalty of 25 years for securities fraud and 40 years for both counts of insider trading.
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The content of this article is for informational purposes only and does not constitute or replace professional financial advice.