The Cost Of Insider Trading Non-Compliance
A Rule 10b5-1 Cautionary Tale
When used properly, the U.S. Securities and Exchange Commission’s (SEC) Rule 10b5-1 trading plans are a valuable compliance tool that allow corporate insiders to sell company stock without violating insider trading laws. These plans operate under the principle that trades are pre-scheduled and executed according to a predetermined structure, regardless of whether the insider later comes into possession of material, nonpublic information (MNPI).
A Refresher on Rule 10b5-1
Rule 10b5-1 is an SEC rule that lets company insiders (like executives and board members) set up a prearranged plan to sell company stock. It helps them avoid insider trading violations by ensuring trades are made according to a preset schedule and not insider knowledge. How it works:
- Preplanned trades: Insiders set the amount, price, and timing of trades in advance.
- Protection from insider trading claims: Plans must be created in good faith and when the insider doesn’t have MNPI.
- Common among executives: Used to sell shares without raising red flags.
- Promotes fairness: Helps show that trades aren’t based on confidential company news.
But the protection these plans offer depends entirely on how and when they are established. A recent high-profile conviction shows what can happen when those rules are ignored.
First-Ever Prosecution
On June 23, 2025, Terren Scott Peizer, former CEO and Chairman of Ontrak Inc., was sentenced to 42 months in federal prison for insider trading. The Department of Justice found he entered Rule 10b5-1 trading plans while in possession of MNPI. This marked the first conviction based solely on the misuse of a Rule 10b5-1 plan.
Evidence proved that Peizer learned that a key client relationship was deteriorating and that the client was likely to terminate its contract. Here is a timeline of the activity:
- Peizer learns of MNPI: Becomes aware that a key client relationship is deteriorating and that the client is likely to terminate its contract.
- First trading plan adopted: Establishes a Rule 10b5-1 trading plan shortly after receiving this nonpublic information.
- Second trading plan adopted: Just one hour after learning the termination is likely, he adopts a second trading plan.
- Sales begin: Begins selling shares the very next day after each plan is adopted.
- Warnings ignored: Proceeds with sales despite receiving warnings from brokers, legal counsel, and a company executive urging him to wait.
- Public announcement: The client’s contract termination is publicly disclosed.
- Stock impact: Ontrak’s stock price falls by more than 44 percent following the announcement.
How StarCompliance Can Help
While Rule 10b5-1 plans can be an effective defense when implemented in good faith, they are not a guarantee against regulatory scrutiny. Firms must have strong compliance oversight in place to monitor activity, enforce policies, and provide employees with guidance on proper trading behavior.
And that’s where StarCompliance (Star) fits in. Star’s SaaS-based Insider Trading Compliance Solutions software helps firms manage personal trading, monitor for conflicts, and enforce cooling off periods and trading windows. Our platform supports automated surveillance, audit trails, and real-time alerts which provides compliance teams with the visibility they need to detect and prevent high-risk behavior before it becomes a costly violation.
To learn more about Star’s future-ready employee conflicts of interest platform, including insider trading and firm trade surveillance, schedule a personalized demo here.
Riding the Regulatory Wave
