Reported by Dave Michaels

It is a safe harbor executives have enjoyed for 25 years to protect against insider-trading charges: commit to sell slices of their portfolio in the future, regardless of market events.

The strategy helps company insiders show they aren’t trading on secrets unknown to investors. But jurors on Friday didn’t buy that in Terren Peizer’s case. After a nine-day trial, the Los Angeles jury convicted the former chairman of healthcare company Ontrak of insider trading despite his use of a prearranged, executive trading plan. 

Peizer, a protégé of Michael Milken, the Drexel junk-bond king who pleaded guilty to securities fraud, was accused of misusing the plan and trading based on confidential information about Ontrak’s likelihood to lose Cigna CI 0.62% as a major customer. Prosecutors hailed the outcome as a display of their ability to look behind the plans and detect illicit 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,” said Nicole Argentieri, head of the Justice Department’s criminal division. “We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith.” 

Sometimes known as 10b5-1 trading plans, these programs are a common way for insiders to sell stock. Prosecutors and regulators didn’t question the trades until recently, when the Justice Department and the Securities and Exchange Commission both accused Peizer of abusing the plans.  

Much of Peizer’s trial turned on what he knew about the possible loss of Cigna as an Ontrak customer. Aetna had already canceled a big contract with Ontrak in March 2021, sending the smaller company’s shares down 46%. Ontrak needed the Cigna business to keep investors’ hopes alive. 

Peizer was Ontrak’s chairman, founder and biggest shareholder, giving him firm control. He wasn’t in charge of dealing with Cigna, but executives kept him in the loop about their effort to save the $90 million deal with the health-insurance company.

Peizer set up his first trading plan on May 10, 2021, disclosing that he planned to sell 596,000 shares. He started trading the next day—about a week before a Cigna officer told Ontrak about its intention to end the contract by the end of the year, according to court records.  

Prosecutors said Peizer created the plan knowing that Ontrak was going to lose Cigna. 

Read full report: https://www.wsj.com/finance/regulation/jury-convicts-milken-protege-terren-peizer-of-insider-trading-7c78ba2a