Healthcare CEO faces charges of conducting illicit stock sales in pre-arranged transactions

The founder of telehealth provider Ontrak Inc.

OTRK -0.16%

was charged in an insider trading case, the first of its kind, with prosecutors alleging he sold millions of dollars worth of stock while abusing a trading scheme that executives normally deploy to protect themselves from such suspicions.

Ontrak chief executive Terren Peizer rolled out the pre-arranged business plans in May and August 2021, just before his company disclosed the loss of health insurer Cigna Corp.

as an adult client, according to an unsealed federal grand jury indictment Wednesday. Mr Peizer sold about 641,000 shares of Ontrak when he knew about the undisclosed bad news, according to the Securities and Exchange Commission, which also sued him. When Ontrak revealed on August 19, 2021, three days after it began trading, that Cigna had severed its ties with Ontrak, the stock fell 45%.

The case, which will be prosecuted by the Justice Department’s Fraud Section and the U.S. Attorney’s Office in Los Angeles, is novel as it centers on Mr. Peizer’s use of a so-called 10b5 trading plan -1. Company executives and directors used the scripted trading plans to sell while immunizing themselves against insider trading allegations. Regulators recently revised the rule governing 10b5-1 plans to address concerns that some executives abused it.

A spokesperson for Ontrak did not 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 was innocent. “The government has clearly gone too far in this case, especially since it ignored good faith discussions regarding the facts and circumstances of this investigation, which took place before these cases were filed without notice.” , said lawyer David Willingham.

The Wall Street Journal reported possible abuses of the 10b5-1 plans in articles published in June 2022 and December 2012, both cited in the new version of the regulations.

Mr. Peizer, 63, 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 the responsible for Drexel’s junk bonds. Mr. Milken pleaded guilty to securities fraud and other charges in 1990 and served nearly two years in prison. Former President Donald Trump granted him a pardon in 2020.

Ontrak shares hit $95 in January 2021, though the company hasn’t reported earnings since at least 2013, FactSet data shows..

The company’s shares fell 46% in March 2021 after it revealed that a first major client, health insurer Aetna, had ended its involvement with Ontrak.

Mr. Peizer was also aware of a deterioration in relations with Cigna, according to the indictment. In early May 2021, he described Ontrak’s relationship with Cigna in a text message as “a nightmare”. On May 18, Cigna informed Ontrak that she intended to terminate their contract by the end of the year, the indictment states. The company did not immediately disclose this information to shareholders.

Mr Peizer adopted his first trading plan that month, which was created to sell approximately 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.

A brokerage firm Mr. Peizer contacted to create the trading plan told him he would have to wait 30 days to start selling, according to the SEC lawsuit. Mr. Peizer refused to work with that broker and instead approached another firm that said he would not have to wait to start selling, according to the SEC lawsuit. Mr Peizer said at the time that he did not have any material non-public information, according to the complaint filed in court.

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

According to the indictment and securities filings, Mr. Peizer created a second trading plan on August 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 the data. from research firm VerityData.

A few days after it began trading, on August 19, Ontrak revealed that it had lost a second major client whose contract was worth $90 million over three years. Ontrak later confirmed that the client was Cigna. The news sent shares of Ontrak 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 total, Mr. Peizer sold about $24 million worth of Ontrak stock in 2021 under the 10b5-1 plans, with the stock falling from $32 in May to less than $10 in the fall of 2021. stock is now trading at less than $1.

His trade in the plans saved him losses of more than $12 million, according to the indictment, which was remanded in federal court in Los Angeles.

Glenn Leon, head of the Justice Department’s fraud section, told the American Bar Association conference in Miami on Wednesday that prosecutors uncovered Mr. Peizer’s dealings using analytical tools their allowing suspicious transaction data to be screened by executives who have used 10b5-1 plans. .

The name of the trading plans comes from a rule adopted by the SEC in 2000, known as rule 10b5-1. It provided a safe haven for company insiders to trade legally as long as they created the plan when they did not have material nonpublic information. The SEC says that the more time that elapses between when the plan is created and when an executive begins trading, the less likely the trader is to benefit from material nonpublic information.

The rule had its flaws, however. Some insiders sold shares less than a month after adopting their plans or launched new plans just before the earnings announcement. Another approach has been to adopt multiple 10b5-1 plans and later selectively cancel those that do not work to the insider’s advantage.

In December, the SEC updated Rule 10b5-1, adding stricter requirements such as a cooling-off period of at least 90 days after adopting or modifying a plan. Leaders cannot trade during this window. Businesses were due to start complying with the revised regulations on Monday.

Speaking in an interview at the Miami conference on Wednesday, SEC Chief Enforcement Officer Gurbir Grewal said regulators have “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 back for instances in which executives may have abused trading plans, he said.

“If there is historical behavior that violated the rules as they were, we will bring those cases,” Mr Grewal said.

Write to Dave Michaels at

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 stated that he did so on August 11 and made his first trade under the plan five days later. (Corrected March 1)

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