Rule 10b5‑1 allows a corporate insider of a publicly traded company to establish a prearranged trading plan for buying or selling company stock that can provide an affirmative defense to insider trading charges. The defense is available only if the executive is not in possession of material, non-public information at the time the executive sets up the Rule 10b5‑1 plan and enters into the plan in good faith and not as part of a scheme to evade insider trading rules.
On June 21, 2024, the U.S. Department of Justice secured a guilty verdict in the first criminal insider trading case based on trading pursuant to a Rule 10b5‑1 plan. The DOJ secured a conviction against the former chief executive officer and chairman of the board of Ontrak, Inc., a publicly traded healthcare company. U.S. v. Peizer, No. 2:23-cr-00089-DSF (C.D. Cal.). The DOJ charged Terren Peizer with avoiding more than $12.5 million in losses by entering into two Rule 10b5‑1 trading plans while in possession of material nonpublic information indicating that Ontrack’s largest customer was likely to terminate its contract with Ontrack. Rather than providing for a “cooling-off” period between the establishment of the plans and the beginning of trading, Peizer’s plans provided for trading to be initiated immediately after adoption. Shortly after the second plan was adopted, Ontrak announced that the customer had terminated its contract, and Ontrak’s stock price declined by more than 44 percent.
This case presents a cautionary tale for practitioners, particularly in-house counsel charged with implementing Rule 10b5-1 plan policies and procedures. Peizer argued that he implemented his Rule 10b5-1 plans during the trading windows established for insiders. Peizer also argued that he received preclearances for his plans from Ontrak’s insider trading compliance officer (who was also Ontrak’s Chief Financial Officer) and two lawyers. The jury rejected these defenses, and in denying Peizer’s motion for a new trial, the court held that Peizer’s “apparent rush to enter into the trading plans—especially as shown by his rejections of cooling-off periods when those periods were repeatedly recommended by people he spoke to” was enough to demonstrate fraudulent intent, and that the jury was not required to accept Peizer’s innocent explanations. See U.S. v. Peizer, No. 2:23-cr-00089-DSF, ECF Doc. No. 371 at 3. The court also held that Peizer was not entitled to a “reliance on advice of counsel” or “advice of professional” jury instruction. The court found that there was insufficient evidence that Peizer made full disclosure to the lawyers of all material facts when he sought their advice, as required for an advice of counsel instruction. With respect to the compliance officer’s advice, the court concluded that, in the Ninth Circuit, an advice of professionals instruction is generally available only to those relying on the advice of lawyers or accounting professionals, that the compliance officer had received minimal training in insider trading compliance, and that insider trading compliance is not a formal profession. In addition, the court again found there was insufficient evidence that Peizer presented all material facts to the compliance officer when conferring with him about the trading plains.
