For a time in the mid-1980s, Terren Peizer, then in his 20s, may have had the best seat in finance. After stints at First Boston and Goldman Sachs, Peizer would sit as a trader next to Michael Milken at the junk bond king’s famed x-shaped desk in the Beverly Hills office of Drexel Burnham Lambert. The two would reportedly exchange high-fives after a winning trade, according to that era’s seminal book, Den of Thieves.

But it would soon become perhaps the worst vantage point. Peizer witnessed the shock experienced by Milken when news came across the wire in 1986 of the arbitrageur, Ivan Boesky, co-operating with the government in what would be a sprawling investigation of a securities fraud ring that eventually would reach both Milken and Drexel.

Peizer would ultimately turn state’s evidence and testified against Milken about alleged illegality at the investment bank at a pre-sentencing hearing in 1990 for his mentor (“Everyone was running faucets,” Peizer told the federal court, noting the paranoia that gripped the Drexel offices of being caught on government surveillance).

Milken eventually pleaded guilty to financial crimes and served 22 months in prison. Peizer went on to a successful career as a California-based financier and entrepreneur, if relatively obscure measured against several other Drexel alumni who became Masters of the Universe.

But earlier this year, the Department of Justice once again knocked on Peizer’s door. The Feds have accused him of insider trading related to share sales in 2021 of a listed healthcare services company, Ontrak, which Peizer founded in 2003 and where he had been board chair and chief executive. According to the DoJ complaint, the sale allowed Peizer to avoid more than $12mn in losses.

Peizer is charged with abusing a so-called “10b5-1” plan which allows executives to safely sell stock without risking accusations of benefiting from inside information. The case is important to the Department of Justice and the civil authorities at the Securities & Exchange Commission as it is the first case that solely challenges an executive’s trading based on a 10b5-1 plan.

By sheer coincidence, the SEC has just enacted tougher limits on the usage of 10b5-1 plans, a tool first implemented in 2000 to give executives the “safe harbour” protection.

A plan would delineate a pre-determined schedule of share transactions. But ultimately the worry became that there was excessive flexibility in the plans, and academic studies showed that executives using 10b1-5 plans seemed to be skilled at systematically avoiding losses.

The SEC tightened the rules on 10b5-1 plans from March. Most notably, to get the benefit of the legal protection, there has to be a 90-day “cooling off” period before any share sales.

According to the DoJ complaint against Peizer, after learning that Ontrak was going to lose key contracts with insurers that would send its revenue plummeting, he used two different 10b5-1 plans to sell exercise stock warrants and sell shares. The Feds said that it had used new data science techniques to uncover questionable trades like Peizer’s. Naturally, either under the old rules or the new ones, executives could never legally trade on such inside information whatever the terms of a 10b5-1.

Peizer’s lawyer has proclaimed his innocence. “The government has clearly over-reached in this case, especially since they have disregarded the good faith discussions regarding the facts and circumstances of this inquiry which took place before these cases were filed without any prior notice,” said attorney, David Willingham.

Even now in his mid 60s, Peizer’s LinkedIn profile lists him as the current CEO or chair of nine different companies, and his biography in SEC filings said that his personal firm had led $1.5bn worth of investments in various companies over the years. He was also a fixture courtside at Los Angeles Laker basketball games, according to a fellow executive.

Ontrak shares have now collapsed to under $1 each. But at their peak in early 2021, prior to his share sales, Peizer’s stake was valued at more than $800mn, according to securities filings (the DoJ complaint noted that he had only twice previously sold shares in the company).

For his part, Milken declined to comment on Peizer’s plight. A representative told the Financial Times that Milken was “not focused on the distant past” but rather the release of his new book on medical research and his longstanding work in the area.

sujeet.indap@ft.com