In April, we issued an alert discussing the U.S. Securities and Exchange Commission ("SEC") and Department of Justice’s ("DOJ") expansion of insider trading to 10b5-1 plans. On June 21, 2024, a federal jury in California convicted Terren Peizer, former founder and CEO of Ontrak Inc., for securities fraud and insider trading based on two 10b5-1 plans he entered into to sell Ontrak securities.1 After the conviction, the head of the DOJ’s Criminal Division, Principal Deputy Assistant Attorney General Nicole Argentieri issued a warning to company insiders: "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. We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith."
Peizer is the first insider to be prosecuted and convicted of insider trading based exclusively on the use of a Rule 10b5-1 trading plan. Rule 10b5-1 plans typically provide an affirmative defense for corporate insiders buying and selling company stock as long as their trading plans are adopted in good faith and before the insider becomes aware of material nonpublic information ("MNPI"). Prosecutors alleged that Peizer was aware of MNPI when he entered into two 10b5-1 plans in May and August 2021, which helped him avoid more than $12.5 million in losses. Peizer was convicted on two counts for selling Ontrak shares based on his May and August trading plans. He was also convicted of making false misrepresentations in his trading plans for the purpose of executing the insider trading scheme. The case is part of a DOJ initiative to use data to root out alleged abuses of Rule 10b5-1 plans.
Key Takeaways
As we stated in April, public companies should consider the following with input from counsel:
- Insiders should enter into trading plans in good faith. Directors and executive officers entering into 10b5-1 plans must attest that, at the time of the creation of the plan, they are not aware of MNPI about the issuer or its securities and that they are adopting the plan in good faith and not as part of a scheme to evade prohibitions of Rule 10b5.2 This may require analysis and counsel’s assessment of whether an individual has MNPI at the time that they execute their 10b5-1 plan. In addition, all those adopting a 10b5-1 plan must act in good faith with respect to the plan for the duration of the plan.
- Importance of reviewing 10b5-1 plans and processes. Prior to entering into 10b5-1 plans, legal counsel should review the plan to confirm compliance with all the conditions of Rule 10b5-1, as amended in 2022, including the required cooling-off period prior to the start of trading.
Elisha Mvundura (White & Case, Law Clerk, New York) contributed to the development of this publication.
1 Press Release, U.S. Dep’t of Just., Chairman of Publicly Traded Health Care Company Convicted of Insider Trading (June 21, 2024), https://www.justice.gov/opa/pr/chairman-publicly-traded-health-care-company-convicted-insider-trading
2 Press Release, U.S. Sec. & Exch. Comm'n., SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures (Dec. 14, 2022), https://www.sec.gov/news/press-release/2022-222
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