Tag: 10b5-1 plans

Jury convicts former executive for insider trading and fraudulent use of Rule 10b5-1 plan

Back in March 2023, the DOJ unsealed an indictment against Terren Peizer, formerly the executive chair of Ontrak, Inc., representing the first time, according to the press release, that the DOJ brought “criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.”  The DOJ charged that Peizer entered into a fraudulent scheme using 10b5-1 plans and engaged in insider trading, both of which charges carry stiff criminal penalties.  Peizer, the DOJ alleged, “avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.”  According to the WSJ, the trial continued for nine days.  On Friday, Bloomberg reports, a jury in the U.S. District Court for the Central District of California found Peizer “guilty of one count of securities fraud and two counts of insider trading.”  In a statement, Peizer’s counsel, as reported by Law360, said that the “testimony from all the witnesses at trial showed that Mr. Peizer did not operate the company, and relied on his management team for updates….That same management team told Mr. Peizer that there was no material nonpublic public information at the time he entered in his trading plans, and those plans were supposed to protect him. Mr. Peizer was entitled to rely on that advice. In our view, this result is a travesty of justice, as Terren Peizer is innocent of these charges. We will not rest until it is overturned.” The head of the DOJ’s criminal division observed, in the DOJ press release, that when Peizer “learned significant negative news about Ontrak, he set up Rule 10b5-1 trading plans to sell shares before the news became public and to conceal that he was trading on inside information….With today’s verdict, the jury convicted Peizer of insider trading. This is the Justice Department’s first insider trading prosecution based exclusively on the use of a trading plan, but it will not be our last. We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith.” Notably, Peizer wasn’t just convicted despite his use of 10b5-1 plans, he was convicted because of his use—a use that the jury found to be fraudulent.

DOJ and SEC bring charges for insider trading and fraudulent scheme using purported 10b5-1 plans

Government officials, especially those in SEC Enforcement, have been making noise about the potential for insider trading abuse of Rule 10b5-1 plans since at least 2007, when then-SEC Enforcement Chief Linda Thomsen expressed concern that “executives are taking advantage of a legal safe harbor to sell their stock and profit before their companies report bad news….[A]cademic studies suggest that the rule may be a cover for improper activity, Thomsen said. ‘We’re looking at this hard….If executives are in fact trading on inside information and using a plan for cover, they should expect the ‘safe harbor’ to provide no defense.’” (See this Cooley News Brief.) Now, in 2023, DOJ has unsealed an indictment against Terren Peizer, the executive chair of Ontrak, Inc., representing the first time, according to the press release, that DOJ has brought “criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.” (Note, however, that the SEC did bring a case last year against executives of Cheetah Mobile related to sales under a purported 10b5-1 trading plan entered into while in possession of material nonpublic information. See this PubCo post.)  DOJ charged that Peizer entered into a fraudulent scheme using 10b5-1 plans and engaged in insider trading, both of which charges carry stiff criminal penalties.  DOJ said that the FBI is continuing to investigate this case. Not to be completely outdone—although it’s hard not to be outdone by the threat of serious jail time—the SEC has also filed a civil complaint against Peizer, charging that he engaged in insider trading in Ontrak shares using 10b5-1 plans as part of a scheme to evade insider trading prohibitions: when Peizer entered into the plans, the SEC alleged, he was aware of material nonpublic information about the company. As you probably know, to be effective in insulating an insider from potential insider trading liability, the 10b5-1 plan must be established when the insider is acting in good faith and not aware of MNPI. Creating the plan once the insider has learned of MNPI, as alleged in this case, would seem to defeat the whole purpose of the rule—to ensure an even playing field for all investors. The SEC alleged that Peizer sold more than $20 million of Ontrak stock, avoiding more than $12.7 million in losses.  At the end of last year, Bloomberg reported that the SEC and DOJ were using data analytics “in a sweeping examination of preplanned equity sales by C-suite officials.” (See this PubCo post.) That effort appears to have paid off in this case; DOJ advises that this investigation was “part of a data-driven initiative led by the Fraud Section to identify executive abuses of 10b5-1 trading plans,” suggesting perhaps that this may not be the last prosecution we will see for abuse of 10b5-1 plans.

Lots to see on the SEC’s Spring 2021 Reg Flex Agenda

Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock.  What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8.  The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework).  Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.

Clayton advocates “good corporate hygiene” when it comes to material inside information

In this letter from SEC Chair Jay Clayton to Representative Brad Sherman following up on a previous conversation, Clayton offers his views and provides some insights and signals on a number of policy issues related to “good corporate hygiene.” The topics include controls and policies designed to prevent insider trading, Rule 10b5-1 plans and the grant of stock options while in possession of material inside information. Apparently, the issues addressed were significant enough that Clayton has asked Corp Fin director Bill Hinman and others on the staff to raise these issues “in upcoming speaking engagements and to remind market participants of these views.”

JOBS Act 3.0?

Will there be a JOBS Act 3.0?  The JOBS and Investor Confidence Act of 2018 just passed the House by a vote of 406 to 4, so, even though Senators may often be chary of jumping on the House bandwagon—remember the doomed Financial Choice Act of 2016 and then 2017— the overwhelming and bipartisan approval in the House still makes the odds look better than usual.

Academic study shows insiders beat the market in the “8-K trading gap”

by Cydney Posner A new study, reported in the WSJ, showed that corporate insiders consistently beat the market in their companies’ shares in the four days preceding 8-K filings, the period that the researchers called the “8-K trading gap.” The study also showed that, when insiders engage in open market purchases […]