CALIFORNIA – The former CEO of Ontrak Inc. was sentenced, June 23, to 42 months in federal prison for an insider trading scheme to avoid $12.5 million in losses, according to the U.S. Department of Justice (DOJ).
Terren Scott Peizer, 65, a resident of Santa Monica and Puerto Rico was sentenced by United States District Judge Dale S. Fischer, who also ordered him to pay a $5.2 million fine and $12.7 million in restitution.
At the conclusion of a 10-day trial in June 2024, a jury found Peizer guilty of one count of securities fraud and two counts of insider trading.
“Terren Peizer betrayed the trust of Ontrak’s investors, trading on inside information to offload company stock before a substantial price decline,” said Justice Department’s Criminal Division head Matthew R. Galeotti.
He adds that the Criminal Division will combat sophisticated securities market frauds using available tools.
Rule 10b5-1 can defend executives against insider trading charges
The case is part of a DOJ initiative targeting executive abuses of 10b5-1 trading plans. Rule 10b5-1 plans can defend executives against insider trading charges.
However, the defense doesn’t apply if the executive has material nonpublic information when entering the 10b5-1 plan.
In addition, a plan offers no protection if it wasn’t made in good faith or was part of a scheme to evade Rule 10b5-1.
Peizer avoided $12.5 million in losses
Peizer avoided losses of approximately $12.5 million by using two Rule 10b5-1 plans while aware of nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract, according to the DOJ.
In May 2021, Peizer initiated his first 10b5-1 plan after learning of Ontrak’s deteriorating relationship with its largest customer, and that the customer had expressed serious reservations about continuing its contract with Ontrak.
Peizer later learned the customer intended to terminate the contract.
Then, in August 2021, Peizer entered into his second 10b5-1 plan one hour after Ontrak’s negotiator told him the contract was likely to be terminated.
Ontrak’s stock dropped over 44%
Peizer skipped the “cooling-off” period when setting his 10b5-1 plan – the time between when he entered into the plan and when he sold stock – ignoring warnings from brokers, an Ontrak executive, and attorneys.
Instead, Peizer began selling shares of Ontrak on the next trading day after establishing each plan.
On August 19, 2021, six days after Peizer adopted his August 10b5-1 plan, Ontrak announced the contract termination, causing its stock to drop over 44%.
The FBI investigated the case, with assistance from the Financial Industry Regulatory Authority’s (FINRA) Criminal Prosecution Assistance Group.
