By Jonathan Stempel

June 23 (Reuters) - A protege of former junk bond king Michael Milken was sentenced on Monday to 3-1/2 years in prison for insider trading at a healthcare company he once led, over his use of a trading plan designed to protect executives against that crime.

Terren Peizer, 65, the founder and former chief executive of Ontrak OTRK.O, was sentenced by U.S. District Judge Dale Fischer in Los Angeles. She also imposed a $5.25 million fine and forfeiture of more than $12.7 million of ill-gotten gains.

Peizer plans to appeal, his lawyer David Willingham said.

Federal prosecutors called the prosecution the first based solely on the use of so-called 10b5-1 trading plans.

Named for a U.S. Securities and Exchange Commission rule, such plans let insiders at public companies sell shares at predetermined times to shield against accusations their sales might be timed to negative corporate news.

Prosecutors charged Peizer with illegally avoiding losses by selling about $20 million of Ontrak shares under plans he set up in May and August 2021.

They said Peizer set up the first plan soon after being told Ontrak's relationship with its largest customer Cigna CI.N was deteriorating, and set up the second plan five minutes after learning the insurer would likely sever ties.

Ontrak's share price fell more than 44% on August 19, 2021, after the company disclosed the end of its relationship with Cigna, whose identity was revealed later.

Jurors found Peizer guilty last June of two counts of insider trading and one count of securities fraud.

Prosecutors sought an approximately eight-year prison term, while defense lawyers sought a "significant" period of home detention.

Willingham, a partner at King & Spalding, called the outcome a "true miscarriage of justice," saying Peizer disclosed his trading plans to Ontrak management and obtained necessary approvals.

"This case was a massive overreach, a waste of taxpayer dollars, and sets a dangerous precedent that grossly distorts the meaning of material, nonpublic information," Willingham said. "We will not rest until we clear Mr. Peizer's name and reputation."

Peizer worked under Milken at Drexel Burnham Lambert in the 1980s. In exchange for immunity from prosecution, he cooperated in the government's criminal case against his former boss.

Milken pleaded guilty to securities fraud and served about two years in prison. U.S. President Donald Trump pardoned him in February 2020.

(Reporting by Jonathan Stempel in New York; Editing by Richard Chang)

((jon.stempel@thomsonreuters.com; +1 646 223 6317; Reuters Messaging: jon.stempel.thomsonreuters.com@reuters.net))