On June 23, 2025, Terren Peizer, the former Chief Executive Officer and Chairman of Ontrak Inc. (“Ontrak”), a Miami-based publicly traded healthcare company, was sentenced to 42 months in prison for engaging in an insider trading scheme using Rule 10b5-1 stock trading plans to avoid losses of more than $12.5 million. Mr. Peizer was also ordered to pay a fine of $5.25 million and forfeit more than $12.7 million in ill-gotten gains.
Background
A Rule 10b5-1 plan is a written plan for trading securities that satisfies the conditions of Rule 10b5-1(c). Any person executing pre-planned transactions under a Rule 10b5-1 plan that was entered into in good faith at a time when the person was unaware of material nonpublic information has an affirmative defense against accusations of insider trading, even if the actual trades made under the plan are executed at a time when the person may be aware of material nonpublic information that would otherwise subject that person to liability under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or Rule 10b-5. Accordingly, Rule 10b5-1 plans are especially useful for people presumed to have inside information, such as officers, directors and other affiliates.
The Case
The prosecution argued that, in May 2021, Mr. Peizer entered into his first Rule 10b5-1 trading plan shortly after learning about a deteriorating relationship between Ontrak and its largest customer. The customer, which represented more than half of Ontrak’s revenue, had serious reservations about continuing its contract with Ontrak. The prosecution further alleged that, in August 2021, Mr. Peizer entered into his second Rule 10b5-1 trading plan minutes after Ontrak’s chief negotiator for the contract told Mr. Peizer that the contract would likely be terminated.
In adopting the Rule 10b5-1 plans, Mr. Peizer refused to engage in a “cooling-off” period between entering the plan and selling securities, despite warnings from brokers, attorneys and other executives, and instead, sold securities on the trading day after establishing each plan. Six days after Mr. Peizer adopted his second Rule 10b5-1 plan, Ontrak publicly announced that the customer had terminated the contract and its stock price dropped by more than 44%. Mr. Peizer was found guilty after a 10-day jury trial of one count of securities fraud and two counts of insider trading in June 2024 relating to his use of Rule 10b5-1 plans in bad faith to evade insider trading laws.
Best Practices
To avoid a similar result, officers, directors and other affiliates looking to adopt a Rule 10b5-1 plan must ensure that the individual is not in possession of material nonpublic information when entering into the plan. Changes to Rule 10b5-1(c) in 2022, after the events of this case, set forth more prescriptive rules about the elements required to use the affirmative defense of a Rule 10b5-1 plan. Before adopting a Rule 10b5-1 plan, individuals should consult legal counsel to ensure compliance with applicable rules and regulations under the Exchange Act and to discuss whether there are any risks or disclosure associated with the adoption of the plan.
Next Steps
The Department of Justice has indicated that it will continue to investigate misuse of Rule 10b5-1 plans. If you have questions about setting up a Rule 10b5-1 plan, determining appropriate uses of a Rule 10b5-1 plan, or ensuring compliance with the rules and regulations under the Exchange Act, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.