On March 1, 2023, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) demonstrated continued interest in investigating insider trading by company executives who possess material non-public information when they unsealed an indictment and filed a civil complaint, respectively, in the Central District of California. Though a Rule 10b5-1 plan—an investment device that allows a corporate insider to set up an investment plan for buying or selling company stock without violating insider trading laws—is intended as a safe harbor, the existence of any such plan cannot be an affirmative defense if the executive possesses material non-public information at the time the plan is implemented.
The indictment and complaint against Terren Peizer allege that Mr. Peizer set up a Rule 10b5-1 plan to sell shares of Ontrak, Inc., the company he founded and where he served as Executive Chairman. At the time the plan was established, there was no requirement for a formal “cooling-off” period before transacting, but industry best practices suggested a 30-day period was sufficient to avoid the appearance of any impropriety. The government alleges that Mr. Peizer knew that one of Ontrak’s major customers was contemplating terminating its contract, and directed the sale of more than $20 million of Ontrak shares between May and August 2021 while in possession of this material non-public information. This concerted action by the DOJ and SEC is significant as it is the first time an executive has been charged for insider trading based on misuse of a Rule 10b5-1 plan.
Rule 10b5-1 plans cannot provide corporate executives and employees with an affirmative defense against insider trading liability if they possess material non-public information at the time the plan is created. Any such plan must establish a pre-set trading schedule for the sale or purchase of a specific number of shares at specific times, dates, and prices. Corporate executives and employees must create the plan before they are aware of any material non-public information, and the plan is then executed by a third-party administrator without any further input from the insider.
In December 2022, the SEC announced changes to Rule 10b5-1 to enhance investor protections against insider trading. Some of the amendments include:
- adopting cooling-off periods for persons other than issuers before trading can commence under a Rule 10b5-1 plan
- adding a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to the plan
- requiring directors and officers to include representations in their plans certifying at the time of the adoption of a new or modified Rule 10b5-1 plan that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.
Notably, the amendments limit the ability to rely on the affirmative defense for a single-trade plan to one single-trade plan per 12-month period. Given the new disclosure requirements and the restrictions on the availability of the affirmative defense, companies should be aware of the government’s increased interest in protecting the interest of investors.
 17 CFR 240.10b-5
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