Healthcare CEO is being charged with illegal stock sales in prearranged transactions

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

A spokesman 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 is innocent. “The government has clearly overreached in this case, especially because they ignored good faith discussions about the facts and circumstances of this investigation, which took place before these cases were filed without notice,” said attorney David Willingham.

The Wall Street Journal reported on possible 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, age 63, is a former trader with 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 nearly two years in prison. Former President Donald Trump pardoned him in 2020.

According to data from FactSet, Ontrak’s stock rose to $95 in January 2021, despite the company not reporting earnings since at least 2013.

Shares of the company fell 46% in March 2021 after it was announced that a first major customer, health insurer Aetna, had terminated its participation in Ontrak.

Mr Peizer was also aware of a deteriorating relationship with Cigna, the indictment said. 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 it intended to terminate their contract by the end of the year, the suit said. The company did not immediately disclose that information to shareholders.

Mr. Peizer approved his first trading plan that month, which was designed to sell approximately 596,300 shares of stock purchased through an exercise of warrants. The warrants were set to expire in August of that year, the SEC said in its court filing.

A brokerage firm Mr. Peizer contacted to draft the trading plan told him he would have to wait 30 days to begin selling, according to the SEC’s lawsuit. Mr. Peizer refused to work with that broker-dealer and instead approached another company who said he didn’t have to wait to start selling, the SEC’s lawsuit said. Mr. Peizer claimed at the time that he had no material non-public information, the court’s complaint said.

The second brokerage firm began selling Mr. Peizer’s shares the day after the plan was drawn up, the indictment said.

According to the indictment and the 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 data from research firm VerityData.

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

In total, Mr. Peizer sold approximately $24 million of Ontrak stock under 10b5-1 plans in 2021 as the stock fell from $32 in May to less than $10 in Fall 2021. The stock now trades below $ 1.

His trading according to the plans saved him from losing more than $12 million, according to the indictment, which was returned by Los Angeles federal court.

Glenn Leon, chief of the Justice Department’s fraud division, said Wednesday at the American Bar Association conference in Miami that prosecutors were investigating Mr. Peizer using analytic tools that allowed them to search data for suspicious transactions by executives using 10b5-1 plans.

The name for the trading plans stems from a rule that the SEC passed in 2000 known as Rule 10b5-1. It provided a safe haven for company insiders to trade legally as long as they drafted the plan while not in possession of material non-public information. The SEC says the more time elapses between when the plan is created and when an executive begins trading, the less likely the trader is to benefit from material non-public information.

However, the rule had its shortcomings. Some insiders sold shares less than a month after they approved their plans, or started new plans just before the earnings announcement. Another approach was to adopt multiple 10b5-1 plans and later selectively cancel those that would not work in the insider’s favor.

In December, the SEC updated Rule 10b5-1 to add stricter requirements, such as a cooling-off period of at least 90 days after a plan is adopted or amended. Executives cannot trade during that period. Companies had to start complying with the revised regulations on Monday.

During 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, which motivated the decision to update the rules. But the new rules won’t stop regulators from looking back at cases where executives may have abused trading plans, he said.

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

Write to Dave Michaels at dave.michaels@wsj.com

Corrections and reinforcements
Mr. Peizer created a second trading plan on August 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 erroneously said that he did so on August 11 and made his first trade under the plan five days later. (Corrected March 1)