July 15, 2025
Rule 10b5-1 Plans: First-Ever Criminal Defendant Sentenced
The first-ever criminal conviction based on the abuse of Rule 10b5-1 plans ended in late June with the sentencing of defendant Peizer, CEO & Chair of a healthcare company, to 42 months in prison and $17.9 million in fines and forfeitures. (The DOJ had sought a 97-month sentence, $10.25 million in fines and $12.7 million in forfeiture judgment.)
As Liz blogged when the charges were announced, the facts were in the DOJ’s favor. Peizer entered into two 10b5-1 trading plans shortly after learning bad news about a relationship with the company’s largest customer and refused to use any cooling-off period despite warnings from two brokers. In fact, he “shopped” for a broker who wouldn’t require one. Plus, the facts of this case are unlikely to recur now that Rule 10b5-1 requires a 90-day minimum “cooling-off” period for directors and officers.
That said, there are still some important takeaways from the sentencing. This Winston blog notes that the government made clear in its sentencing memorandum that it plans to continue to investigate and pursue insiders who effectuate suspicious trades through Rule 10b5-1 plans — one unfortunate potential consequence of this (coupled with stiff penalties and prison time) is that it may chill the use of such plans by insiders who are operating in good faith and without MNPI. When 10b5-1 plans are used, the blog highlights the need to carefully consider the “good faith” requirement and the importance of having counsel review plans and policies:
The “good faith” requirement is subjective and must be thoroughly evaluated when taking any actions with respect to a trading plan: As discussed above, the 2022 amendments expanded existing requirements that trading plans be entered into in good faith, leading to heightened scrutiny of compliance with, and additional avenues for enforcement of, insider trading rules. It’s important that those considering entering into a plan – or taking any action with respect to a plan – remember that good faith is evaluated on a facts-and-circumstances and insider-by-insider basis. At the center of the Peizer case was an evaluation of his motivations and reasons for not just entering into the trading plan, but pursuing the stock sales at the time and in the magnitude in which he did. Additionally, it is essential that individuals are not in possession of MNPI when entering into a plan.
Counsel should review 10b5-1 plans and policies: Before entering into a Rule 10b5-1 plan, individuals should engage legal counsel to review the plan in light of all the conditions of Rule 10b5-1 and discuss whether there are any risks involved in entering into the plan. Issuers should also engage legal counsel prior to making changes to their insider trading policies.
– Meredith Ervine
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