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Ontrak Inc.'s founder rushed to dump over $20 million of the healthcare company's stock using insider information about a souring relationship with its biggest client, Cigna, helping him avoid $12 million in losses, prosecutors told California federal jurors Tuesday in a first-of-its-kind securities fraud trial.

Opening statements kicked off in the case of Terren Peizer, the founder, chair and former CEO of Ontrak Inc. Peizer is facing three counts of securities fraud related to his using two Rule 10b5-1 plans between May and August 2021 to trade using material nonpublic information: that his company was about to lose its then-leading customer, Cigna, which makes up a large portion of its revenue.

Ontrak provided behavioral health services to members of large health insurance plans which aimed to cut down on insurers' costs. Cigna was one of Ontrak's biggest customers, and the two entered into a $90 million contract in 2020, which was to last three years, though Cigna could terminate it upon 30 days' notice.

The U.S. Department of Justice levied securities fraud charges against Peizer in March 2023, and later filed a superseding indictment in January against him for insider trading, in what's known as the first-ever criminal case based solely on an executive's use of so-called Rule 10b5-1 trading plans.

Under Rule 10b5-1 of the Exchange Act, a corporate insider can establish a trading plan for selling their own stocks but must do so without possessing material, nonpublic information about the company at the time they enter into the plan.

DOJ trial attorney Della Sentilles told jurors Tuesday that "the writing was on the wall" for Peizer, after discovering in spring 2021 that his company was in danger of losing Cigna. Ontrak had already lost another client, Aetna, earlier that year, which caused stock prices to plummet over 40%, resulting in millions of dollars in losses, jurors heard.

However, Peizer wasn't going to simply sit back, "let history repeat itself" and lose millions of dollars again, and decided to sell Ontrak stock using that insider information in May 2021, she said.

Eventually, history did repeat itself, as Cigna announced its intent to terminate its contract in August 2021, leading stock prices to again plunge more than 40%, Sentilles said. Armed with material, nonpublic information, Peizer essentially established his Rule 10b5-1 trading plans in August and May 2021, and quickly shed over 600,000 shares worth over $20 million, avoiding losses of approximately $12 million, jurors heard.

Peizer falsely certified in both 10b5-1 trading plans he had no material, nonpublic information, jurors were told, and also refused to utilize a "cooling-off period" — which is a specified time frame in which an executive waits a certain number of days to set up a plan to start trading — as he knew Cigna could end its deal with Ontrak at any time.

Sentilles promised that jurors would hear from former Ontrak employees who will testify that Cigna had problems with Ontrak, and that Cigna started cutting down the number of its members, from several thousands per month to approximately 50 per month, at the time things only got worse from there.

Peizer knew what was going on, grew desperate, and sent text messages to colleagues that showed he was "fixated on Cigna," and described the situation as "a nightmare" closely resembling the situation involving Aetna, Sentilles said.

Peizer's attorney, David K. Willingham of King & Spalding LLP, urged jurors to consider all sides of the story to understand that, contrary to the government's contentions, his client had already expressed his intent in January 2021 to sell stock warrants that were about to expire that year, long before Cigna aired any issues with Ontrak.

At that time, Peizer owned over nine million shares of Ontrak common stock and over a million in stock warrants set to expire, jurors heard. His motives for wanting to exercise those warrants had nothing to do with Cigna, as Peizer simply wanted to buy a home in Puerto Rico and pay off loans, Willingham said.

But executives cannot exercise warrants and quickly sell, as they must wait for the company to open the trading window, which is exactly what Peizer did, jurors heard.

"'Yes, we want to know the legal guardrails,'" jurors saw in a text message that Peizer sent to company colleagues on Jan. 26, 2021. That demonstrated Peizer "wanted to get it right" and follow all trading rules, Willingham explained.

Peizer acted in good faith when setting up his Rule 10b5-1 trading plans and did so believing Cigna was going to renegotiate its deal with Ontrak, not that it would terminate it, jurors heard. His trading plans also needed pre-approval from Ontrak's insider trading compliance officer, Brandon LaVerne, who ultimately concluded that the plan wasn't established using insider information. LaVerne had a crucial role in approving such trading plans, and took his compliance duties seriously, Willingham said.

Furthermore, Peizer waited to enter into his trading plans after Ontrak submitted quarterly earnings reports in May 2021 and August 2021 with the U.S. Securities and Exchange Commission, which disclosed potential material, nonpublic information about Ontrak's relationship with Cigna, jurors heard.

The May 2021 disclosures contained information Ontrak's compliance officers believed was necessary to include, that key clients might cut back on enrollment levels. They also mentioned it'd be appropriate to modify its guidance to revenue of $80-85 million, reflecting current expectations "with our existing health plan customers regarding outreach pool," "budget considerations" and "timing of expansions," jurors heard.

Cigna isn't mentioned in name in those earnings reports, as Ontrak had a policy not to name clients in such disclosures as some clients have complained about that in the past, Willingham added.

Then, Peizer implemented his Rule 10b5-1 trading plan on Aug. 13, 2021, but again, only after the company submitted its earnings reports, which reiterated the same information found in the May 2021 reports, and warned of the risk of Ontrak losing any one of its biggest clients, jurors heard.

Cigna met with Ontrak on Aug. 18, 2021, five days after Peizer's trading plan was already in place. Peizer believed the meeting would discuss Ontrak's proposals and Cigna's renegotiation of the contract and thought Ontrak was in good shape. However, it was at that meeting that Cigna announced its plan to terminate its deal by the end of 2021, jurors heard.

Peizer didn't dump stocks to avoid losses, and if anything, sought to gradually sell his stock warrants over time, Willingham said. He also set up his trading plans after seeking advice from two law firms and receiving approval from Ontrak's executives to do so, Willingham added.

Testimony will begin Thursday.

The government is represented by Matthew Reilly and Della Sentilles of the U.S. Department of Justice's Fraud Section and Ali Moghaddas of the U.S. Attorney's Office for the Central District of California.

Peizer is represented by David K. Willingham, Yelena Kotlarsky and Jamie A. Lang of King & Spalding LLP and Stephen A. Best, Angela M. Papalaskaris and Stephen Cook of Brown Rudnick LLP.

The case is U.S. v. Terren Peizer, case number 2:23-cr-00089, in the U.S. District Court for the Central District of California.