The Ontrak Case: A Watershed Moment for Insider Trading and Executive Accountability

The prosecution of former Ontrak Inc. CEO Terren Scott Peizer, culminating in his 42-month prison sentence and record-setting fines, has become a landmark in the fight against insider trading. This case, the first criminal conviction centered solely on the misuse of Rule 10b5-1 trading plans, signals a new era of accountability for corporate leaders. For investors, it underscores the growing importance of scrutinizing companies' governance frameworks and the integrity of their executives.

The Case That Changed the Rules

Peizer's downfall began in May 2021 when he learned that Ontrak's largest client, Cigna, planned to terminate its contract—a decision that would later devastate the company's stock. Instead of disclosing the news, Peizer exploited Rule 10b5-1 plans, which allow executives to pre-schedule stock sales to avoid insider trading liability. However, he bypassed critical safeguards: he ignored cooling-off periods (a 2022 SEC requirement) and falsely certified that his trades were based on public information. By selling $19 million in shares between May and August 2021, he avoided $12.5 million in losses when the news finally broke.

The prosecution's case hinged on Peizer's texts and communications, which revealed his awareness of the impending crisis and his frantic efforts to conceal it. “We just need to save Cigna,” he wrote to colleagues, while simultaneously offloading his shares. The jury saw through his claims of innocence, finding him guilty of securities fraud and insider trading.

A New Era of Enforcement

The Ontrak case marks a pivotal shift in regulatory strategy. For the first time, the DOJ has used a criminal prosecution to target Rule 10b5-1 plan abuses, a tool once seen as a loophole for unethical executives. The 2022 amendments to the rule—requiring 90-day cooling-off periods and certifications of good faith—were designed to close such loopholes, but Peizer's defiance highlighted their fragility.

The case also reflects the DOJ's embrace of data-driven analysis to detect suspicious trading patterns. Prosecutors used algorithms to identify rapid, pre-disclosure sales that deviated from typical trading behavior. This approach signals that regulators are now better equipped to expose violations, even among sophisticated executives.

Corporate Governance: A Non-Negotiable Priority

For investors, the Ontrak case is a stark reminder that weak governance and unethical leadership carry steep costs. Companies with robust compliance programs—such as mandatory cooling-off periods, rigorous certifications, and transparent disclosures—are far less likely to face such crises. The fallout for Ontrak has been severe: its stock remains volatile, and its reputation as a trustworthy healthcare provider has been tarnished.

Investors should scrutinize companies for three key governance pillars:
1. Internal Controls: Do executives follow Rule 10b5-1 protocols strictly, including cooling-off periods?
2. Ethical Leadership: Are executives incentivized to prioritize long-term value over short-term gains?
3. Transparency: Does the company disclose material risks promptly, even if it hurts the stock?

What This Means for Portfolios

The Ontrak case raises the stakes for investors to favor firms with strong governance. Companies that cut corners—such as those with executives using Rule 10b5-1 plans to exploit MNPI—face not only legal penalties but also lasting reputational damage. Consider the contrast between Ontrak and firms like Microsoft or Johnson & Johnson, which have long histories of transparent governance.

Investors should also monitor regulatory trends. The SEC's 2022 amendments are only the start; further reforms could follow the Peizer conviction. Meanwhile, companies in industries prone to insider trading—such as healthcare or tech—should be evaluated rigorously.

Conclusion

The Peizer case is more than a cautionary tale—it's a call to action. Investors must demand higher standards of accountability, rewarding companies that embed integrity into their DNA. Those that fail to do so will face not just legal repercussions but also the wrath of markets that increasingly prioritize ethics over expediency. In this new landscape, governance is no longer a footnote: it's a cornerstone of long-term value.

John Gapper is a pseudonym. The views expressed are the author's own.