On June 23, 2025, U.S. District Judge Dale S. Fischer of the Central District of California sentenced a former Chairman and CEO of a behavioral healthcare company to 42 months in federal prison. This conviction represents the first-ever criminal securities fraud case based solely on the misuse of trading plans governed by the Securities Exchange Act’s Rule 10b5‑1. The CEO was also ordered to pay a $5.25 million fine and forfeit approximately $12.7 million in profits obtained through illicit trading.
The Department of Justice underscored that this case flows from a broader data-driven enforcement initiative aimed at identifying executive misuse of trading plans. The case represents a major turning point in the interpretation and enforcement of securities laws concerning insider trading and corporate governance. The sentencing followed a jury verdict from June 2024 in the Central District of California, which found Peizer guilty of securities fraud under Section 10(b) of the Securities Exchange Act and Rule 10b‑5, along with two counts of insider trading.
Case Specifics
The case centered on CEO Terren S. Peizer’s adoption of two Rule 10b5‑1 trading plans in May and August 2021. Despite internal and external warnings, Peizer initiated stock sales the day after establishing each plan—timed immediately after learning that his company Ontrak, Inc.’s largest customer intended to terminate its commercial relationship.
These trades allowed Peizer to avoid losses exceeding $12 million when Ontrak’s stock price dropped by over 44% following the public announcement of the contract termination.
Prosecutors relied heavily on the timing of the trades and the absence of any cooling-off period to argue that Peizer’s actions were not consistent with the good faith required under Rule 10b5‑1.
While Peizer’s defense emphasized that the plans were reviewed internally and disclosed, the jury concluded that he adopted them in bad faith while in possession of material nonpublic information (MNPI), thus invalidating any reliance on the Rule 10b5‑1 affirmative defense.
This conviction marks a warning for public companies and executives that the Rule 10b5‑1 safe harbor is not absolute. Compliance programs must evolve to reflect both the regulatory expectations and prosecutorial posture. Companies should now treat trading plan governance as a critical risk area, with clear protocols for plan adoption, documentation, and monitoring. The Peizer case makes it clear that mechanical compliance with plan documentation is insufficient if the underlying purpose and timing suggest an intent to trade on nonpublic information.
Key Takeaways
- First criminal conviction based solely on Rule 10b5‑1 misuse: The Peizer case is the first of its kind, establishing that improper use of Rule 10b5‑1 trading plans can lead to criminal insider trading convictions.
- Good faith is critical: The safe harbor under Rule 10b5‑1 only applies if the plan is adopted in good faith. Executives must not possess MNPI at the time of plan adoption and must adhere to appropriate waiting periods before trading.
- Cooling-off periods matter: Prosecutors highlighted Peizer’s failure to observe any cooling-off period—a major factor in undermining his defense. Companies should consider adopting longer cooling-off periods to mitigate legal risk.
- Data-driven enforcement is expanding: The DOJ has confirmed that the Peizer prosecution is part of a broader initiative using data analytics to identify suspicious trading behavior and enforce insider trading laws more aggressively.
- Plan formalities alone offer no protection: Executives cannot rely solely on legal or internal compliance approvals of a 10b5‑1 plan if their trading behavior indicates awareness of MNPI or a lack of genuine intent to follow the plan in good faith.
- Compliance programs must evolve: Companies should consider engaging counsel to reassess their insider trading policies, enhance oversight of 10b5‑1 plans, train insiders on legal obligations, and use monitoring tools to identify and prevent risky trading behavior.
Conclusion
To effectively utilize a Rule 10b5-1 trading plan, insiders should discus with counsel the need to establish the plan when they are not in possession of MNPI, implement a ‘cooling off’ period of at least 30 days before executing any trades, ensure the plan clearly defines the parameters of price and timing of transactions, and avoid making any changes or terminating the plan while in possession of material nonpublic information. Although Rule 10b5-1 plans do not guarantee immunity from prosecution, they can serve as a strong defense when used properly.
