The United States Department of Justice on Wednesday unsealed an indictment alleging a Santa Monica man traded his company’s stock based on insider information.
Terren S. Peizer is CEO and chairman of the Board of Directors of Ontrak, a publicly traded health care company based in Nevada. The company’s website also lists him as its founder.
He has been charged with one count of participating in a securities fraud scheme and two counts of securities fraud by insider trading, the DOJ said in a news release.
Peizer, 63, used improperly used Rule 10b5-1, which was specifically designed to protect against insider trading, to avoid more than $12.5 million in losses, according to the DOJ. This is the first prosecution on criminal insider trading charges stemming from this type of plan, prosecutors said.
“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,” the release explained. “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.”
Prosecutors claim Peizer, who splits his time between Santa Monica and Puerto Rico, entered “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” in 2021.
That information included the knowledge that a relationship between Ontrak and a major customer was “deteriorating” and news from the company’s chief negotiator that “the contract would likely be terminated,” prosecutors said.
Peizer entered into the second plan about an hour after hearing the news from the negotiator, prosecutors allege.
“The indictment alleges that, in establishing his 10b5-1 plans, Peizer refused to engage in any ‘cooling-off’ period, despite warnings from two brokers, and began selling shares of Ontrak on the next trading day after establishing each plan,” the release said. “The indictment further alleges that, on August 19, 2021, just six days after Peizer adopted his August 10b5-1 plan, Ontrak announced that the customer had terminated its contract, and Ontrak’s stock price declined by more than 44%.”
U.S. Attorney Martin Estrada said Peizer violated his responsibility to his company and its shareholders in order to “line his own pockets.”
“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,” Estrada said. “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.”
If convicted of all charges, Peizer could face up to 65 years in prison, 25 for the alleged securities fraud scheme and 20 for each insider trading charge.