The founder and chief executive of telehealth provider Ontrak faces charges of insider trading as federal prosecutors allege he made illicit stock sales in prearranged trades.
Terren Peizer was indicted for allegedly engaging in an insider trading scheme in which he fraudulently used Rule 10b5-1 trading plans to trade Ontrak stock, according to the Department of Justice (DOJ). The indictment was unsealed on Wednesday.
It marks the first time the DOJ has brought criminal insider trading charges based exclusively on an executive’s use of co-called 10b5-1 trading plans, which are designed to help shield executives from such charges.
Peizer was charged with one count of securities fraud and two counts of insider trading.
David Willingham, an attorney for Peizer, 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.”
The company's stock dropped 11% Thursday to 55 cents a share.
In a parallel action, the Securities and Exchange Commission on Wednesday announced civil insider trading charges against Peizer.
Ontrak is an AI and telehealth-enabled healthcare company that provides behavioral health services and primarily works with insurance companies. The company says it engages individuals with anxiety, depression, substance use disorder and chronic disease through personalized care coaching and customized care pathways. Ontrak uses AI, predictive analytics and digital health tools combined with coaching to address members' behavioral health conditions.
Peizer sold more than $20 million of Ontrak stock between May and August 2021 while in possession of material non-public negative information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract, the DOJ alleges in the indictment.
The DOJ alleges that Peizer misused so-called 10b5-1 trading plans and these trading arrangements helped him avoid more than $12.5 million in losses.
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In a statement, U.S. Assistant Attorney General Kenneth Polite called the charges a "groundbreaking" effort to prevent the misuse 10b5-1 plans as a shield for insider trading.
"Few things undermine trust in the markets more than insiders abusing their positions for personal advantage; the SEC remains committed to investigating such abuse and holding bad actors accountable," Gurbir Grewal, the SEC’s director of enforcement, said in a statement.
Rule 10b5-1 trading plans can offer an executive a defense to insider trading charges, according to a DOJ press release. However, the defense is unavailable if the executive is in possession of material, nonpublic information when entering the 10b5-1 trading plan. 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, DOJ officials said.
The SEC in December voted to make changes to the insider trading programs to address concerns over abuse, Reuters reported.
According to the indictment, filed in U.S. District Court in the Central District of California, Peizer allegedly entered into his first 10b5-1 trading plan in May 2021 shortly after learning that the relationship between Ontrak and insurer Cigna was deteriorating and that the customer had expressed serious reservations about continuing its contract with the tech company.
Around February 2021, Cigna began significantly reducing the number of its members that it referred per month to Ontrak for services. Around the same time, the tech company lost its then-largest customer Aetna.
By May, Cigna cut the number of patients that it referred from several thousand members per month to approximately 50 members per month — thereby substantially reducing Ontrak’s potential billings to Cigna, the DOJ indictment alleges.
Several months later, in August, the executive allegedly entered into his second 10b5-1 trading plan approximately one hour after Ontrak’s chief negotiator for the Cigna contract confirmed to him that the contract likely would be terminated, U.S. authorities allege.
According to the DOJ's accusations, Peizer allegedly refused to engage in any “cooling-off” period – the time between when he entered into the plan and when he sold stock – despite warnings from two brokers.
"Peizer allegedly began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 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%," according to a DOJ press release.
If convicted of the criminal charges, Peizer faces a maximum penalty of 25 years in prison on the securities fraud scheme charge and 20 years in prison on each of the insider trading charges, the DOJ said.
The SEC’s complaint, also filed in U.S. District Court in the Central District of California, charges Peizer with violating anti-fraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and an officer and director bar for Peizer.