Insider Trading’s New Frontier: What Companies and Individuals Need to Know about Enforcement Under the SEC’s Recently Amended Insider Trading Rule

March 21, 2023

Insider Trading’s New Frontier:  What Companies and Individuals Need to Know about Enforcement Under the SEC’s Recently Amended Insider Trading Rules

In late 2022, the United States Securities and Exchange Commission (“SEC” or the “Commission”) formally adopted amendments to its flagship insider trading rule 10b5-1 (17 CFR § 229 et seq.), to take effect in 2023.[1] The Commission’s stated goal for the amendments to Rule 10b5-1(c) - the provision of the federal securities laws that provide an affirmative defense to insider trading where insider transactions are executed in connection with a pre-approved trading plan, entered into by an insider in good faith when they do not possess material nonpublic information (“MNPI”) – was to fight perceived abuses of corporate trading plans.

To reach this aim, the Commission amended its rules by:

  • Broadening disclosure requirements related to corporate trading plans;
  • Increasing disclosure requirements for director and executive compensation awards “made close in time to the issuer’s disclosure of MNPI”;
  • Requiring a good faith certification; and requiring issuers to identify transactions made by insiders pursuant to a plan.  [2]

On March 1, 2023, just one week after the above referenced amendments came into full effect, the United States Department of Justice’s Fraud Section, in connection with the U.S. Attorney’s Office for the Central District of California, unsealed a three-count indictment against Terren S. Peizer (“Peizer”), the CEO & Chairman of Ontrak Inc., a publicly traded healthcare company, alleging that Peizer engaged in an insider trading scheme involving the fraudulent use of Ontrak’s 10b5-1 trading plan.[3]

Specifically, the Indictment alleges that Peizer participated in Ontrak’s 10b5-1 trading plans while possessing MNPI regarding Ontrak’s materially changing relationship with its then-largest customer. When this news became public, Ontrak’s shares lost more than 44% of their value. The Indictment alleges that because Peizer had entered into the 10b5-1 plan in bad faith (possessing the adverse MNPI regarding Ontrak and its customer), Peizer was able to avoid losses of more than $12M.[4]

As noted above, traditionally, a 10b5-1 trading plan allows insiders, like executives, board members and other high-ranking employees, like Peizer, who tend to possess MNPI, to trade stock in their company while providing an affirmative defense to what otherwise may be considered insider trading. The 10b5-1 amendments are drafted to address instances, like the scheme allegedly committed by Peizer, where an executive enters a company’s trading plan in bad faith, intending to use the existence of the trading plan as cover for insider trading. [5]

According to remarks delivered by Assistant Attorney General Kenneth A. Polite, Jr. at the 2023 ABA White Collar Conference in Miami, besides representing DOJ’s first ever criminal insider trading charge based on “activity conducted exclusively pursuant to a 10b5-1 plan,” Polite stated that Peizer’s conduct was first detected by government data analysts tracking “company insiders who greatly outperformed the market when trading pursuant to 10b5-1 plans.”   Polite warned that not only will DOJ pursue more prosecutions like Peizer in the near future, but data analytics is here to stay as a valuable tool for law enforcement.[6]

Takeaways: DOJ and the SEC under the Biden Administration will continue to scrutinize trading activity where they believe an insider is “beating” the market, whether or not that insider has traded pursuant to a 10b5-1 plan. Furthermore, DOJ and other regulators will continue the trend of aggressively deploying market analytics to identify insider trading and other market abuses. Given these developments, it is crucial that companies, executives, board members and other insiders carefully double-down on efforts to ensure compliance with all relevant securities laws.

The Herrick White Collar Defense & Investigations and Securities Litigation & Enforcement team is comprised of lawyers with decades of experience representing corporations and individuals in regulatory and criminal inquiries.

For more information on this issue or other securities matters, please contact:

Howard R. Elisofon at +1 212 592 1437 or [email protected]
Arthur G. Jakoby at +1 212 592 1438 or [email protected]
Maxim M.L. Nowak at +1 212 592 1464 or [email protected]

© 2023 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.