Healthcare CEO Faces Charges of Making Illicit Stock Sales in Prearranged Trades

The case, which will be prosecuted by the Justice Department’s fraud section and the Los Angeles U.S. attorney’s office, is novel because it focuses on Mr. Peizer’s use of a so-called 10b5-1 trading plan. Executives and corporate directors have used the prearranged trading plans to sell while immunizing themselves against claims of insider trading. Regulators recently revised the rule governing 10b5-1 plans to address concerns that some executives abused them.

An Ontrak spokesperson didn’t respond to a request for comment.

A lawyer for Mr. Peizer, who was charged with one count of securities fraud and two counts of insider trading, said the CEO is innocent. “The government has clearly overreached in this case, especially since they have disregarded the good-faith discussions regarding the facts and circumstances of this inquiry, which took place before these cases were filed without any prior notice,” said attorney

David Willingham.

The Wall Street Journal reported on potential abuses of 10b5-1 plans in articles published in June 2022 and December 2012, both of which were cited in the new version of the regulation. 

Mr. Peizer, 63 years old, is a former trader at investment bank Drexel Burnham Lambert Inc. He received immunity from federal prosecutors in the late 1980s for cooperating with their investigation of

Michael Milken,

who was Drexel’s head of junk bonds. Mr. Milken pleaded guilty to securities fraud and other charges in 1990 and served almost two years in prison. Former President

Donald Trump

granted him a pardon in 2020.

Ontrak’s stock rose as high as $95 in January 2021, despite the company not reporting profits since at least 2013, according to data from

FactSet.

The company’s shares dropped 46% in March 2021 after it disclosed that a first major customer, health insurer Aetna, had terminated its participation with Ontrak. 

Mr. Peizer was also aware of a deteriorating relationship with Cigna, the indictment says. In the beginning of May 2021, he described Ontrak’s relationship with Cigna in a text message as “a nightmare.” On May 18, Cigna informed Ontrak that it intended to terminate their contract by the end of the year, the indictment says. The company didn’t immediately disclose that information to shareholders. 

Mr. Peizer adopted his first trading plan that month, which was created to sell about 596,300 shares he had purchased through a warrant exercise. The warrants were due to expire in August of that year, the SEC said in its court complaint.

One brokerage firm that Mr. Peizer contacted to create the trading plan told him he would need to wait 30 days to begin selling, according to the SEC’s lawsuit. Mr. Peizer declined to work with that broker-dealer and instead approached a different firm that said he wouldn’t have to wait to begin selling, the SEC’s lawsuit says. Mr. Peizer represented at the time that he didn’t have any material nonpublic information, the court complaint says. 

The second brokerage firm began selling Mr. Peizer’s shares the day after the plan was created, the indictment states. 

According to the indictment and securities filings, Mr. Peizer created a second trading plan on Aug. 13, 2021. He made his first trade under that plan three days later, when he sold 15,000 shares at an average price of $21.98, according to data from research firm VerityData.  

A few days after he began trading—on Aug. 19—Ontrak disclosed that it had lost a second major customer whose contract was worth $90 million over three years. Ontrak later confirmed the customer was Cigna. The news sent Ontrak’s shares down 45% to $11.68, according to FactSet. Mr. Peizer sold 45,000 shares over three days in August before the disclosure, according to VerityData. 

In all, Mr. Peizer sold about $24 million of Ontrak stock in 2021 under 10b5-1 plans as the stock declined from $32 in May to under $10 in the fall of 2021. The stock now trades under $1.

His trading under the plans avoided him losses of over $12 million, according to the indictment, which was returned in Los Angeles federal court.

Glenn Leon, chief of the Justice Department’s fraud section, said at the American Bar Association conference in Miami on Wednesday that prosecutors discovered Mr. Peizer’s trades using analytical tools that allow them to sift through data for suspicious trades by executives who used 10b5-1 plans.

The name for the trading plans stems from a rule the SEC passed in 2000, known as Rule 10b5-1. It provided a safe harbor for company insiders to trade legally as long as they created the plan when they didn’t have material nonpublic information. The SEC says the more time passes between when the plan is created and when an executive starts trading, the less likely that the trader can benefit from material nonpublic information.

The rule had its shortcomings, however. Some insiders sold shares less than a month after adopting their plans, or initiated new plans right before earnings announcements. Another approach has been to adopt multiple 10b5-1 plans and later selectively cancel the ones that wouldn’t work to the insider’s benefit. 

In December, the SEC updated Rule 10b5-1, adding stricter requirements such as a cooling-off period of at least 90 days after a plan is adopted or modified. Executives can’t trade during that window. Companies were required to begin complying with the revised regulation on Monday.

Speaking in an interview at the Miami conference on Wednesday, SEC Enforcement Director

Gurbir Grewal

said regulators had “seen a lot of abuse” of 10b5-1 plans, motivating the decision to update the rules. But the new rules won’t stop regulators from looking backward for instances in which executives may have misused trading plans, he said.

“If there is historical conduct that was violative of the rules as they were, we’ll bring those cases,” Mr. Grewal said.

Write to Dave Michaels at [email protected]

Corrections & Amplifications
Mr. Peizer created a second trading plan on Aug. 13, 2021, according to the indictment and securities filings, and made his first trade under that plan three days later, according to VerityData. An earlier version of this article incorrectly said he did so on Aug. 11 and made his first trade under the plan five days later. (Corrected on March 1)

The case, which will be prosecuted by the Justice Department’s fraud section and the Los Angeles U.S. attorney’s office, is novel because it focuses on Mr. Peizer’s use of a so-called 10b5-1 trading plan. Executives and corporate directors have used the prearranged trading plans to sell while immunizing themselves against claims of insider trading. Regulators recently revised the rule governing 10b5-1 plans to address concerns that some executives abused them.

An Ontrak spokesperson didn’t respond to a request for comment.

A lawyer for Mr. Peizer, who was charged with one count of securities fraud and two counts of insider trading, said the CEO is innocent. “The government has clearly overreached in this case, especially since they have disregarded the good-faith discussions regarding the facts and circumstances of this inquiry, which took place before these cases were filed without any prior notice,” said attorney

David Willingham.

The Wall Street Journal reported on potential abuses of 10b5-1 plans in articles published in June 2022 and December 2012, both of which were cited in the new version of the regulation. 

Mr. Peizer, 63 years old, is a former trader at investment bank Drexel Burnham Lambert Inc. He received immunity from federal prosecutors in the late 1980s for cooperating with their investigation of

Michael Milken,

who was Drexel’s head of junk bonds. Mr. Milken pleaded guilty to securities fraud and other charges in 1990 and served almost two years in prison. Former President

Donald Trump

granted him a pardon in 2020.

Ontrak’s stock rose as high as $95 in January 2021, despite the company not reporting profits since at least 2013, according to data from

FactSet.

The company’s shares dropped 46% in March 2021 after it disclosed that a first major customer, health insurer Aetna, had terminated its participation with Ontrak. 

Mr. Peizer was also aware of a deteriorating relationship with Cigna, the indictment says. In the beginning of May 2021, he described Ontrak’s relationship with Cigna in a text message as “a nightmare.” On May 18, Cigna informed Ontrak that it intended to terminate their contract by the end of the year, the indictment says. The company didn’t immediately disclose that information to shareholders. 

Mr. Peizer adopted his first trading plan that month, which was created to sell about 596,300 shares he had purchased through a warrant exercise. The warrants were due to expire in August of that year, the SEC said in its court complaint.

One brokerage firm that Mr. Peizer contacted to create the trading plan told him he would need to wait 30 days to begin selling, according to the SEC’s lawsuit. Mr. Peizer declined to work with that broker-dealer and instead approached a different firm that said he wouldn’t have to wait to begin selling, the SEC’s lawsuit says. Mr. Peizer represented at the time that he didn’t have any material nonpublic information, the court complaint says. 

The second brokerage firm began selling Mr. Peizer’s shares the day after the plan was created, the indictment states. 

According to the indictment and securities filings, Mr. Peizer created a second trading plan on Aug. 13, 2021. He made his first trade under that plan three days later, when he sold 15,000 shares at an average price of $21.98, according to data from research firm VerityData.  

A few days after he began trading—on Aug. 19—Ontrak disclosed that it had lost a second major customer whose contract was worth $90 million over three years. Ontrak later confirmed the customer was Cigna. The news sent Ontrak’s shares down 45% to $11.68, according to FactSet. Mr. Peizer sold 45,000 shares over three days in August before the disclosure, according to VerityData. 

In all, Mr. Peizer sold about $24 million of Ontrak stock in 2021 under 10b5-1 plans as the stock declined from $32 in May to under $10 in the fall of 2021. The stock now trades under $1.

His trading under the plans avoided him losses of over $12 million, according to the indictment, which was returned in Los Angeles federal court.

Glenn Leon, chief of the Justice Department’s fraud section, said at the American Bar Association conference in Miami on Wednesday that prosecutors discovered Mr. Peizer’s trades using analytical tools that allow them to sift through data for suspicious trades by executives who used 10b5-1 plans.

The name for the trading plans stems from a rule the SEC passed in 2000, known as Rule 10b5-1. It provided a safe harbor for company insiders to trade legally as long as they created the plan when they didn’t have material nonpublic information. The SEC says the more time passes between when the plan is created and when an executive starts trading, the less likely that the trader can benefit from material nonpublic information.

The rule had its shortcomings, however. Some insiders sold shares less than a month after adopting their plans, or initiated new plans right before earnings announcements. Another approach has been to adopt multiple 10b5-1 plans and later selectively cancel the ones that wouldn’t work to the insider’s benefit. 

In December, the SEC updated Rule 10b5-1, adding stricter requirements such as a cooling-off period of at least 90 days after a plan is adopted or modified. Executives can’t trade during that window. Companies were required to begin complying with the revised regulation on Monday.

Speaking in an interview at the Miami conference on Wednesday, SEC Enforcement Director

Gurbir Grewal

said regulators had “seen a lot of abuse” of 10b5-1 plans, motivating the decision to update the rules. But the new rules won’t stop regulators from looking backward for instances in which executives may have misused trading plans, he said.

“If there is historical conduct that was violative of the rules as they were, we’ll bring those cases,” Mr. Grewal said.

Write to Dave Michaels at [email protected]

Corrections & Amplifications
Mr. Peizer created a second trading plan on Aug. 13, 2021, according to the indictment and securities filings, and made his first trade under that plan three days later, according to VerityData. An earlier version of this article incorrectly said he did so on Aug. 11 and made his first trade under the plan five days later. (Corrected on March 1)