A federal judge in California has sentenced Ontrak Inc CEO and founder Terren Peizer to three and a half years in prison in a groundbreaking $20m insider trading case.
The sentence followed an insider trading conviction on accusations that he based a $20m share sale on material nonpublic information (MNPI) that his company, a behavioral healthcare provider, was about to lose its biggest client, Cigna.
US District Judge Dale S Fischer sentenced him to a 42-month prison term a year after he was convicted of insider trading – the first guilty verdict based solely on an executive’s use of what are called 10b5-1 trading plans.
A Rule 10b5-1 plan, established under SEC regulations, allows corporate insiders to sell company stock according to a predetermined trading plan, even during periods when they might otherwise be restricted due to possession of MNPI. These plans provide an affirmative defense against insider trading accusations by demonstrating that trades were executed according to a pre-established plan rather than based on newly acquired inside information.
The judge also ordered Peizer to pay a $5.25m fine and forfeit more than $12.7m in illicit gains. A lawyer for Peizer has said the case will be appealed and contends the evidence at trial showed Peizer did not commit insider trading.
Peizer is the first executive ever convicted in a criminal case based exclusively on the abuse of Rule 10b5-1 trading plans, according to the Department of Justice (DOJ).
In other words, Peizer was charged with using the procedures that the SEC offers executives to prevent illegal insider trading to actually carry out his scheme.
Desperate text messages
As detailed in various court documents, Peizer was sending increasingly frantic text messages to a confidant and Ontrak executives about the potential loss of Cigna, a major client, in the months before he set up a trading plan to sell Ontrak stock.
Prior to the Cigna deal, though, Ontrak had previously lost another big client, identified in court documents as Aetna, which led to $265m of Peizer’s personal wealth being wiped out after Ontrak’s stock price plummeted on the news.
After losing Aetna, Peizer appears to have been desperate to try to maintain a deal with Cigna, and, despite stepping away from the CEO role after the Aetna deal failed in 2021, he lingered on as as executive chairman, remaining in regular contact with Ontrak’s CEO by text, according to court records.
Behind the scenes, Peizer described himself in a text message as “fixated” on the potential loss of Cigna, with Ontrak’s survival largely dependent on maintaining the relationship, DOJ said.
Court documents show Peizer’s anxiety over the situation, which played out in his text messages. He wrote to an Ontrak consultant, “We just need to save [Cigna] and we are on our way.” Peizer also texted the Ontrak CEO, “Please just save [Cigna] … then we will get back ‘OnTrak.’”
The case is part of a data-driven initiative by the DOJ’s criminal fraud division to identify executive abuses of 10b5-1 trading plans, the Department stated.
Peizer told the consultant the situation with Cigna felt “eerily” like the Aetna situation, calling it a “nightmare.” That was on May 1, 2021. Three days later, Peizer started looking at ways to sell his Ontrak holdings, court documents show.
Peizer avoided $12.5m in stock losses by selling his shares before certain information was made public and the stock price dropped more than 40%, authorities said. In 2023, the DOJ filed charges and the SEC filed a civil complaint about Peizer’s trading.
Defense counsel contended Peizer simply wanted to exercise warrants about to expire, pay off some loans and purchase a house. Furthermore, Peizer expressed his intentions to sell his expiring warrants long before Cigna aired any problems over its deal with Ontrak.
According to authorities, Peizer got in touch with a broker to set up a Rule 10b5-1 trading plan. The broker told Peizer he would need to wait 30 days for the cooling-off period between the time he set up the plan and when he could start selling stock.
Peizer got in touch with a different broker and asked whether their firm had a cool-down period. The second broker didn’t require one, although an employee at the firm emailed Peizer on May 10 that it was “industry best practice” to wait the 30 days and advised over email that not abiding by it would give the appearance of impropriety.
Peizer’s lawyer issued a statement about the district court’s ruling, saying: “His management team – including its insider trading compliance officer – approved of his trading plans as lawful before he traded. This procedure and those trading plans were supposed to protect Mr Peizer. But with its mind already made up, the government never bothered to learn all the key facts before filing charges against him, and continued to distort the justice process throughout trial and sentencing.”
But DOJ contended that Peizer got the 10b5-1 plan approved by falsely certifying to Ontrak’s chief financial officer that the plan was not a result of access to MNPI.
Data-driven DOJ
The case is part of a data-driven initiative by the DOJ’s criminal fraud division to identify executive abuses of 10b5-1 trading plans, the Department stated.
The DOJ initiated a program in 2020 to use data analytics to detect potential collusion in public procurement in connection with its Procurement Collusion Strike Force (PCSF). And the DOJ and other agencies expanded their data analytics and data mining capabilities to combat other fraud schemes, including healthcare fraud, securities fraud, and even tax evasion.
In 2022, Matt Galvin, a former executive for Anheuser Busch InBev, the world’s largest brewer, joined the Justice Department to help fight white-collar crime after championing the use of machine learning to help companies detect and prevent employee misconduct at AB InBev. Galvin is no longer at DOJ, but the in-house data-analytics team remains.
Speaking about the case at hand, Matthew Galeotti, Head of the Justice Department’s Criminal Division, said: “Terren Peizer betrayed the trust of Ontrak’s investors, trading on inside information to offload company stock before a substantial price decline.
“Today’s just sentence reflects the Criminal Division’s hard work and commitment to prosecuting frauds that harm American investors. The Criminal Division will use the tools at its disposal to combat sophisticated frauds that exploit our securities markets.”
