stanley chesley v. kentucky bar association, kba reponse brief to board of governors, 5/10/11

8/6/2019 Stanley Chesley v. Kentucky Bar Association, KBA reponse brief to Board of Governors, 5/10/11

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SUPREME COURT OF KENTUCKY ~^Y CLERKKBA FILE 13785 MAY1 0 ^

STANLEY M. CHESLEY

v.

RESPO LLANT

KENTUCKY BAR ASSOCIATION COMPLAINANT/APPELLEE

KBA'S RESPONSE BRIEF TO THE BOARD OF GOVERNORS

Linda'A. GosnellChief Bar Counsel

Cary B. HowardDeputy Bar CounselOffice of Bar CounselKentucky Bar Association514 West Main StreetFrankfort, Kentucky 40601502-564-3795

CERTIFICATE OF SERVICE

This is to certify that, pursuant to SCR 3.290, this Brief to the Board of Governors has beenfiled with Susan Greenwell, Disciplinary Clerk, 514 West Main Street, Frankfort, Kentucky 40601-1883, with a copy for distribution by mail or email to the following this 7 / ^ c i a y of May, 2011.

Frank Benton IVFrank Benton mBenton Benton & Luedeke528 Overton StNewport KY 41071-0218

Scott C. CoxMichael Mazzoli600 West Main St Ste 300

Louisville KY 40202

James M. GaryWeber & Rose PSC471 W. Main St. Ste. 400Louisville KY 40202

Mark Miller600 West Main St Ste 300Louisville KY 40202

Sheryl G. SnyderFrost Brown ToddLLC400 W Market St 32nd FlLouisville KY 40202

R. KentWestberryLandrum & Shouse220 W Main St Ste 1900Louisville KY 40202

_r^v^Q

Counsel for the KBA


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INTRODUCTION

Trial Commissioner, William Graham, after hearing and evaluating testimony of 43

witnesses and reviewing 349 exhibits, found the Respondent guilty of 8 of 9 counts of the

Amended Charge and recommended permanent disbarment and restitution of $7,555,000.00 in

fees to the clients. The KBA urges adoption of this Report by the Board in this appeal

proceeding filed by the Respondent.

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COUNTER STATEMENT OF POINTS AND AUTHORITIES

PAGE

I. COUNTER STATEMENT OF RELEVANT FACTS AND PROCEEDINGS 1

A. FACTS OF THE MISCONDUCT 1

1. The Respondent was co-counsel for the Plaintiffs in Guard. 1

a. The Respondent manipulated the proceedings of the Guard, Courtney, andFeltnerlitigation to insert himself into Guard 1

b. Following the deadline for opting out of the national diet drug settlement theRespondent signed a written agreement to be co-counsel for the GuardPlaintiffs 7

2. The Respondent actively participated in multiple efforts to settle the Guardcase withAHP 8

a. He settled several GuardPlaintiffs' cases individually and made numerousefforts to reach settlement with AHP for the entire "inventory" of the GuardPlaintiffs'claims 8

b. He attended a mediation of the Guardcase on April 30 and May 1, 2001, atwhich he negotiated settlement of the remaining "inventory' ofGuardPlaintiffs'claims against AHP 9

c. He appeared on May 9, 2001 before Judge Bamberger and convinced him todecertify the class and dismiss the lawsuit 13

3. The Respondent's co-counsel then defrauded the 440 clients, convincing them toaccept amounts far below the appropriate amounts calculated under the allocationscontained in the agreement 18

4. The Respondent orchestrated and participated in a complicated attempt to cover up thetheft 20

a. He was paid an additional $4,000,000.00 in 2002 for successfully assisting his

co-counsel in procuring orders from Judge Bamberger that were used to concealthe fraud from the KBA and from their clients 20

b. He gave directions and a document to Helmers to use to further deceive theclients regarding the true nature of the settlement 24

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c. Even after the KB A, JCC, two of his cohorts' partners and numerous clients began

asking questions about details of the handling of the settlement funds and even filed civil

claims against him, he continued his efforts to cover-up the fraud 31

B. PROCEDURAL HISTORY 34

II. COUNTERARGUMENT 36

A. THE BOARD SHOULD ADOPT THE TRIAL COMMISSIONER'S FINDINGS OF

FACT AND CONCLUSIONS OF LAW 36

1. The Trial Commissioner correctly found that the Respondent violated SCR 3.150-

1.5(a) 39

2. The Trial Commissioner correctly found that the Respondent violated SCR 3.150-1.5(c) 44


1.5(e) 46

4. The Trial Commissioner correctly found that the Respondent violated SCR 3.150-1.8(g) 47

Shirley A. Cunningham, Jr. v. Kentucky Bar Association, 266 S.W.3d 808

(Ky. 2UU5) 47

rrltllulTl J. VJilllWYl V, r^dnlUCKy DOT A.SSOClQllOn, ZOO S . W . J Q oUZ ^JN-y. ZUU oJ HrI

&ntucky Beit Association v. Melbourne iviiiis, 318 S.W.3d 89 (ivy. 201uj 47

5. The Trial Commissioner correctly found that the Respondent violated SCR 3.150-3.3(a) 49


8.1(a) 52


8.3(c) 54

8. The Trial Commissioner correctly found that the Respondent violated SCR 3.150-5.1(c)(1) 55

B. THE TRIAL COMMISSIONER'S RECOMMENDATION OF PERMANENTDISBARMENT AND RESTITUTION IS APPROPRIATE 57

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1. The appropriate sanction for the Respondent's misconduct in this case is nothing shortof permanent disbarment 57

Kentucky Bar Association v. Collis, 535 S.W.2d95 (Ky. 1976)..'. 57

7wreZj/c/i ,238S.W.2dll8(Ky. 1951) .58

Kentucky Bar Association v. Matthews, 131 S.W.3d 744 (Ky. 2004) 59

Pooh v. Kentucky Bar Association, 128 S.W.3d 833 (Ky. 2004) ..59

Kentucky Bar Association v. Johnson, 660 S.W.2d 671 (Ky. 1983) 60

Kentucky Bar Association v. Tucker, Ky., 535 S.W.2d 97, cert, den., 423 U.S. 1054,96 S.Ct. 785(1975) 60

Kentucky Bar Association v. Collis, Ky.s 535 S.W.2d 95, cert, den., 423 U.S. 1049(1975) 60

Kentucky Bar Association v. Zimmerman, 69 S.W.3d465 (Ky. 2001)..'. 60

Kentucky Bar Association v. Steiner, 157 S.W.3d 209 (Ky. 2005) 60

Kentucky Bar Association v. Catron, 229 S.W.3d 910 (Ky. 2007) 60

2. The Trial Commissioner correctly held that there are numerous aggravating factorsfurther supporting permanent disbarment 61

Anderson v. Kentucky Bar Association, 262 S.W. 3d 636 (Ky. 2008) ..61

3. The Trial Commissioner correctly discounted the impact of any mitigating evidencepresented by the Respondent 62

4. The recommendation by the Trial Commissioner of an order by the Court of restitutionis appropriate in this case under Kentucky law

Kentucky Bar Association v. Kersey, 320 S.W.3d 682 (Ky. 2010)..... 64

Kentucky Bar Association v. Marcum, 308 S.W.3d 200 (Ky. 2010) 65

Kentucky Bar Association v Mathews, 308 S.W.3d 194 (Ky. 2010) 65

Kentucky Bar Association v Justice, 302 S.W.3d 70 (Ky. 2010) 65

Kentucky Bar Association v Menefee, 296 S.W.3d423 (Ky. 2009) 66

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In matter ofAckerman, 330 N.E.2d 322 (Ind. 1975) 66

In matter ofHailey, 792 N.E.2d 851 (Ind. 2003) 67

In matter of Cotton, 939N.E.2d 619 (Ind. 2010) 67

Lovellv. Winchester,941 S.W.2d466 (Ky. 1997) 68

C. THE BOARD SHOULD REJECT THE RESPONDENT'S CONTINUEDMISSTATEMENTS OF FACT AND OMISSIONS OF FACT, AS DID THE TRIALCOMMISSIONER IN REVIEWING THIS VOLUMINOUS RECORD 67

1. Several examples of these misstatements are sufficient to demonstrate thedisingenuousness of the Respondent regarding even obvious facts 67

2. The Trial Commissioner properly analyzed and weighed the credibility of the

witnesses, including the Respondent, and found many aspects of the Respondent'stestimony and his responses to the Inquiry Commission to be "misleading, if not outrightlies." 69

3. Many of the Respondent's criticisms of the Trial Commissioner's Report areinvalid 72

CarlCoe, etal. v. Roman Catholic Diocese ofCovington 73

III. CONCLUSION 74

IV. INDEX TO APPENDIX 76

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"It may be profitable to you to reflect, in future, that there never were greed and cunning in theworld yet, that did not do too much, and overreach themselves. It is as certain as death."- David Copperfield

I. COUNTER STATEMENT OF RELEVANT FACTS AND PROCEEDINGS

A. FACTS OF THE MISCONDUCT

This case is about the misconduct of Stanley Chesley, a participant in a scheme to cover

up the unethical and criminal misconduct of his co-counsel in defrauding their mutual clients.

The fraud was commenced through the improper administration of funds paid in the aggregate

settlement of the clients' claims against the pharmaceutical company American Home Products

(AHP). The fraud initially resulted in the distribution of only $45,000,000.00 of the

$20.0,000,000.00 paid by AHP to the attorneys to settle the claims of these 440 clients. The Trial

Commissioner, retired Judge William Graham, with 23 years of experience on the Franklin

Circuit Court bench, has made extensive findings of fact. They are correct and supported by the

evidence. A copy ofhis Report is attached as Appendix 1. A summary ofthe facts contained in

the record is set forth below. The KBA urges adoption of the Report.

1. The Respondent was co-counsel for the Plaintiffs in Guard.

a. The Respondent manipulated the proceedings of the Guard, Courtney, and Feltnerlitigation to insert himself into Guard.

On August 24, 1998, three former Kentucky lawyers, William Gallion (with the

assistance of his associate David Helmers), Shirley Cunningham, Jr. and Melbourne Mills, Jr.

jointly filed a Class Action Complaint in the Boone County Circuit Court. (Tr.II, p. 243; KBA

Exh. 68) The lawsuit, Darla Guard, etal. or Jonetta Moore, etal. v. A. H. Robins Company, et

al, Boone County Circuit Court, Case No. 98-CI-795, ( Guard) was filed on behalf of several

named individual plaintiffs and on behalf of all others similarly situated who claimed injury

resulting from the ingestion of certain pharmaceutical products, referred to in this Brief as diet

1
http://tr.ii/http://tr.ii/http://tr.ii/


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drugs. (Tr. II, p. 243)l This case, referred to as Guard, was filed against numerous Defendants

including AHP, which later became Wyeth, and Dr. Rex Duff.2 (Tr.I, p. 862)

Cunningham and Mills had signed up thousands of clients between them for

representation in potential tort claims against the manufacturers and distributors of. (Tr.II, pp.

121-124) Gallion, the more seasoned litigator of the three, provided courtroom expertise to the

joint venture and the other two provided their substantial book of clients. (Tr.II, pp. 122)

Throughout the litigation of the case, Gallion, with substantial assistance from his associate,

David Helmers, almost exclusively handled the discovery, motion practice and courtroom work

forthe

plaintiffs. (Tr.I, pp. 866-867; Tr.II, pp. 123,241)

At the time Guardwas filed many other diet drug lawsuits from around the country were

being either filed in or removed to federal court thereafter and consolidated for discovery

purposes pursuant to federal procedural rules on multidistrict consolidated litigation, or MDL.

(Tr.I, p. 858; Tr.II, p. 243) The Respondent was involved in representing plaintiffs in that

litigation which was based in the United States District Court for the Eastern District of

Pennsylvania at Philadelphia. (Tr.II, p. 248) As the federal litigation progressed he became a

member of the nationwide Plaintiffs' Management Committee (PMC). The PMC orchestrated

negotiations with AHP ultimately resulting in the certification ofa nationwide settlement class to

administer a settlement agreement ofdiet drug claims from across the country. (Tr.II, p. 248) At

1 Throughout this Brief, citations to testimony from the pre-deconsolidation portion of the hearing aredenoted in the format (Tr.I, p. X). Citations to testimony from the post-consolidation portion are denoted as (Tr.II,

p. X). Citations to testimony from the depositions of witnesses Vardaman, Levine, Madonick, Stilz, Dominguez andBaker are denoted respectively as (Vard., p. X; Lev., p. X; Mad., p. X; Stilz, p. X; Dom., p. X; and Baker, p.X).

2Dr. Duff (whose license to practice medicine in this Commonwealth has since been revoked) operated multiple

clinics in Kentucky incorporated under the name ofBariatrics, Inc. (also named as a defendant in Guard) andreportedly prescribed and distributed to thousands ofindividuals from across the Commonwealth of Kentucky andelsewhere. (Tr.IT, p. 252)

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least one ofthe Respondent's experts who testified in this case also testified for the Respondent

in support of the settlement agreement in that action.

Unlike many other diet drug lawsuits filed in state courts around the country, the Guard

case was not removed to federal court. It remained in the Boone Circuit Court, which, by Order

entered May 4, 1999, certified a plaintiff class initially defined as consisting of all Kentuckians

who had consumed diet-drugs obtained from Dr. Duff (Tr.I, p. 863; Tr.II, p. 243; KBA Exh. 69)

Shortly thereafter, another class action lawsuit was filed in a different Kentucky state court

involving diet drug claims of Kentuckians, Feltner et al v. AHP et al, Case No. 99-CI-127,

Leslie County Circuit Court ( Feltner). (Tr.I, pp. 1032-1033; KBA Exh. 95) That case was filed

on May 26, 1999 on behalf of Feltner and four other named individuals by a team of four

attorneys, Kenneth Buckle (a Hyden, Kentucky attorney who testified), Alva Hollon (a Kentucky

licensed attorney located in Florida), Michael Gallagher (from Houston, Texas), and Robert

Arledge (from Vicksburg, Mississippi). (Tr.I, p. 1033)

On the very same day that the lawsuit was filed, then-presiding Leslie Circuit Judge

Cletus Maricle certified a plaintiff class defined to include "all current and/or former residents of

the Commonwealth of Kentucky who have ingested the Pondimin, Fenfluramine,

Dexfenfluramine and/or Redux manufactured, marketed, sold, distributed, designed, created

and/or prescribed by the defendants." (Tr.I, p. 875; KBA Exh. 96) Kentucky counsel for AHP in

both this case and Guardwas David Schaeffer, who testified in the disciplinary case.

Among the several problems created by what AHP's counsel referred to as this "drive-by

certification," an issue arose for the Guardattorneys and the Boone Circuit Court in that this

newly certified class, by definition, overlapped the Guardclass. (Tr.I, pp. 875, 881) Since the

Feltnerclass was defined to include all Kentuckians that had taken the (necessarily including at

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least some of those that obtained the drugs from Dr. Duff), something would presumably need to

be done to deal with this duplication. (Tr.I, pp. 871-876) This problem was seemingly resolved

rather quickly, though, by Feltner's nearly immediate removal to the United States District Court

for the Eastern District of Kentucky at London on June 16, 1999. (KBA Exh. 97) At that point

Feltnerappeared highly likely to be transferred to the MDL in Philadelphia and subsumed within

that litigation. (Tr.I, p. 878)

But then, on July 30, 1999, (after the Guard class had already been certified) the

Respondent filed his own Class Action Complaint and Jury Demand in Boone County, Courtney

et al, v. AHP et at, Case No. 99-CI-842, Boone County Circuit Court (hereafter Courtney), on

behalf of three individuals. (Tr.I, pp. 873-874; KBA Exh. 100) One of these, Debra Courtney,

had previously been advised by the Chesley firm to go to the national class action, but then was

contacted and ended up becoming a plaintiff in this new suit. (Tr.II, p. 743; KBA Exhs. 274 &

275) The Respondent had previously tried to enter the Guardcase as co-counsel but Gallion had

refused. (Tr.II, p. 746) The putative Courtney class was to be comprised of "all persons who

were residents and citizens of the Commonwealth of Kentucky at the time they consumed

Pondimin and Redux". (KBA Exh. 100) Just two weeks later, on August 13, 1999, the

Respondent filed a Motion to Consolidate in the Courtney case supported by a Memorandum of

Law explaining why the Courtney and Guardcases should be consolidated. (KBA Exh. 101)

Gallion then filed, in direct response to the Respondent, an Objection to Motion to

Consolidate Actions on September 24, 1999. (KBA Exh. 71) Documents exchanged

contemporaneously between Helmers and Gallion inter-office demonstrates their negative

reaction to this attempt by the Respondent to enter their case. (Tr.II, p. 244; KBA Exhs. 150 &

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151) This is contrary to Respondent's oft-stated claim that he was hired by the lawyers to help

them in this suit because ofhis reputation.

Meanwhile, in Feltner, while the case was under stay in federal court pending transfer to

the MDL, the Respondent entered his appearance as counsel for that plaintiff class on September

29, 1999. (Tr.I, pp. 876, 1037-1038; KBA Exh. 98) Oddly, at the hearing in this discipline case,

he denied representing these Feltnerplaintiffs. Furthermore, in his civil deposition he denied

knowing Hollon or Buckle, his co-counsel in Feltnerl (Tr.II, pp. 752-753; KBA Exh. 322) Mr.

Buckle's signature on the Order of Remand contains the initials "SMC." Schaefer testified that

the remand had been worked out with AHP by the Respondent. (Tr. I, pp. 879-880) In fact, the

Order to Remand was mailed by the Respondent to the federal court with his entry of appearance

on September 29, 1999. (KBA Exh. 282) Once the Feltner action had been remanded, the

Respondent's co-counsel in Feltnerquickly filed a Motion to Intervene in the Guardcase on

October 5, 1999. (KBA Exh. 72)

Simultaneously, on October 5, the Respondent filed a "Status Report" in Courtney

regarding the current status of his negotiations with Gallion to work together in Guard. (KBA

Exh. 102) The Status Report contended that the Court should consolidate the Courtney and

Guardcases despite the inability of the attorneys themselves to come to an agreement to do so.

(KBA Exh. 102) The Status Report also informed Judge Bamberger of the Agreed Order to

Remand the Feltner case having been filed. (KBA Exh. 102) The Respondent reported to the

Judge that the existence of Feltner, back at the state court level in Leslie County, was an

additional reason that his case, Courtney, should be consolidated with Guard. (KBA Exh. 102)

However, he made no mention to the Boone Court ofthe fact that it was the Respondent himself

who had arranged for the remand, or that he had entered his appearance to represent the Feltner

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plaintiffs as co-counsel. (KBA Exh. 102) These maneuvers were not fully disclosed until the

hearing in this case. On October 12, 1999, a notice of the Agreed Order to Remand the case to

Leslie County Circuit Court was filed in that Circuit. (KBA Exh. 99)

It was at around this time that Gallion and his team gave up their efforts to resist the

involvement of the Respondent in their case. They acquiesced by way of entering into a written

Stipulation to Consolidate and the Respondent's case was thereby consolidated by the Court with

Guard for "all purposes". (KBA Exh. 105; Appendix 2) The Respondent later, under oath,

falsely claimed the cases were not consolidated for all purposes. (Tr. II, pp. 746-748; KBA Exh.

322 pp. 72-73, 113-115, 746-748)

Following the consolidation of Courtney with the ongoing Guard class action, the

Respondent did nothing further in the Feltner matter although he also never withdrew from

representation of those plaintiffs. (Tr.II, p. 757) A series of letters was sent by Gallion to the

Respondent finally consenting to the intrusion of the Respondent into the Guard case as co-

counsel. (KBA Exhs. 283, 284 & 285) The many clients of Buckle and Hollon, including Ms.

Feltner, ultimately had their claims settled as part of an inventory settlement administered in

another state. (Tr.I, p. 1057) Likewise the Courtney plaintiffs would not receive any of the

Guard settlement, but were sent back to the national case. (Tr.II, p. 753) The Respondent

admitted on cross-examination that he used these Courtney plaintiffs as a "power play" to get

into Guard. (Tr.II, pp. 753-756)

The entry of this Stipulation occurred at roughly the same time that the Federal District

Court for the Eastern District of Pennsylvania in Philadelphia overseeing the multi-district

litigation approved a national settlement agreement which covered the claims of most diet-drug

plaintiffs including most of the Guardattorneys' clients. (Tr.I, pp. 858-860) Under the terms of

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the national settlement agreement, the deadline to opt-out was March 30, 2000. (Tr.II, p. 249)

The attorneys, aided largely by Rebecca Phipps and other paralegals, submitted forms opting-out

of the national settlement class on behalf of approximately 491 of their clients. (Tr.I, pp. 1280-

1281) These included several very serious injury and death cases and some claims not covered

by the national class definition. (Tr.II, pp. 249-250)

b. Following the deadline for opting out of the national diet drug settlement theRespondent signed a written agreement to be co-counsel for the GuardPlaintiffs.

Immediately following the expiration of the March 31, 2000, opt-out deadline for the

national settlement, Gallion, Cunningham and Mills entered into a fee-splitting contract with the

Respondent and another Cincinnati attorney, Richard Lawrence in April of 2000.3 (Tr. II, pp.

767; KBA Exh. 147; Exh. 1 to Appendix 3a) This agreement was reached following several

hours of negotiation between all of the attorneys who had gathered in Cincinnati. (Tr.II, pp. 124-

125,767) The key aspect of the attorneys' agreement was that they agreed to split any fees from

settlement of the claims of any of the lawyers' clients who had opted out of the national

settlement.4 (KBA Exh. 147; Exh. 1 to Appendix 3a).

Under the terms of the written agreement all of the attorneys agreed to be co-counsel in

the Guardclass action, but the agreement designated certain roles for various counsel. (KBA

Exh. 147; Exh. 1 to Appendix 3a) Specifically, the Respondent was to act as "lead negotiator" in

attempts at settlement for which he was to receive 27% of any fees generated by the settlement

of any individual opted out cases or by settlement of the class action as a whole. (KBA Exh. 147;

Exh. 1 to Appendix 3a) Gallion was to be lead trial counsel in the event that Guardhad to be

tried. (KBA Exh. 147; Exh. 1 to 3a) If the Respondent was unable to effectuate a settlement but

3 The Respondent and Lawrence both independently maintain offices in Ohio where they are licensed attorneys but

they are also licensed to practice law in Kentucky.

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the plaintiffs prevailed at trial, the Respondent's portion of any gross attorney fee would be just

15%. (KBA Exh. 147; Exh. 1 to Appendix 3a)

The agreement had an expiration date of December 31, 2000. (KBA Exh. 147; Exh. 1 to

Appendix 3a) All counsel had the express right to review each other's client fee contracts, which

were referred to in the agreement, but the Respondent never did so. The clients were to be

notified under the terms of the agreement but never were. The Respondent never inquired

whether they had been notified. (Tr.IL p. 766) His role as co-counsel for the class is

demonstrated and confirmed in documents of record in the Guard case, including orders and

motions and in the video at the final legitimate hearing on May 9, 2001. (KBA Exh. 74;

Appendix 4, and KBA Exhs. 75, & 120)

2. The Respondent actively participated in multiple efforts to settle the Guardcase withAHP.

a. He successfully settled several GuardPlaintiffs' cases individually and made numerousefforts to reach settlement with AHP for the entire "inventory" of the Guard Plaintiffs'claims.

The Respondent, sometimes with Gallion and Helmers, during the remainder of the year

2000, made several attempts to negotiate a settlement with AHP of the claims contained within

the Guard case. The Respondent had several conversations with John "Jack" Vardaman, a

partner in the Washington law firm of Williams & Connelly, who represented AHP, but was

unable to reach an agreement by the end of the year to settle all of the claims of the attorneys'

"inventory" of opt-out clients. He was able, however, to reach agreement to settle the individual

claims of some of the clients. These agreements were reached between the Respondent and

Helene Madonick (from the law firm of Arnold and Porter, LLP). At least one of these was a

4 Individually contracting clients of the Respondent who had opted-out of the national settlement were specificallyexcluded from the agreement. He settled those separately.

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named class representative. (Tr.I, p. 993; KBA Exh. 75) Contractual fees were paid to the

lawyers by the client. No "judicial" approval was, nor should have been, sought.

The Respondent wrote a letter to Gallion late in the year requesting that the fee

agreement be renewed and referred to the "groundwork we have laid" being helpful for a desired

settlement of the remaining cases. (KBA Exh. 286, 287, 288) This resulted in renewal ofthe fee-

splitting agreement, but with the Respondent's portion should he successfully negotiate any

settlement was reduced to 21%. (KBA Exh. 148; Exh. 2 to Appendix 1) It was this agreement

that governed what the Respondent would receive. According to AOC Accountant, Vicki

Hamm's undisputed testimony that amount would have been $12,941,638.46. (KBA Exh. 223)

In 2001 he therefore received $3,555,438.41 over any possible amount of a legitimate fee. (KBA

Exh. 122) In his brief he never discusses the testimony of the accountant, preferring to

hypothesize some 27% of40% figure that is simply invented.

b. He attended a mediation of the Guardcase on April 30 and May 1, 2001, at which henegotiated settlement of the remaining "inventory' ofGuardPlaintiffs' claims against AHP.

The Boone Circuit Court set the matter for trial in the summer of 2001 but directed the

parties to first once again attempt settlement of the case, this time in mediation. (Tr.I, pp. 887-

888) Counsel for the parties agreed to attempt mediation and met for two days, April 30 and May

1, 2001 in Lexington, Kentucky. (Tr.I, pp. 894-896) Two mediators were present, Daniel

Weinstein (from California) and Pierce Hamblin (a Lexington, Kentucky attorney). (Tr.I, pp.

894-896) Counsel present for the defendant AHP included Jack Vardaman, Helene Madonick

and local counsel David Schaeffer. (Tr.I, pp. 894-896) Counsel present for the plaintiffs

included Gallion, Cunningham (present only on the second day), Helmers and the Respondent.

(Vard., pp. 33-34) Also present with plaintiffs' counsel was their non-attorney "trial consultant",

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Mark Modlin, a longtime close, personal friend of presiding Boone County Circuit Judge

Bamberger. (Tr.II, p. 270) Mills and Lawrence did not attend.

In advance of the mediation Helmers sent both mediators and defendant's counsel binders

of material relating to the individual medical conditions of the "inventory" of clients. He sent

voluminous letters and medical records of the "inventory" of cases to AHP. He also sent

materials to the Respondent which included a detailed chart breaking down proposed settlement

ranges for their many clients in various injury classes. This chart clearly reflected that numerous

clients in the inventory were claiming to have the serious condition of PPH, which was never

covered in the national case, and also noted that the fee contract rate to be applied to the

settlement amounts was 30%. (KBA Exh. 261) This conforms to the prior knowledge he had of

the existence of these fee contracts. The contract rates ranged from 30% for Mills cases, which

were the bulk, to 33% for Cunningham and 33 1/3% for Gallion and Helmers.

Following two full days of negotiation between and among the attorneys, an agreement

was reached to aggregately settle the diet drug claims of 440 individuals who were represented

by Gallion, Cunningham, Lawrence and Mills for a total payment of $200,000,000.00. (Mad., p.

45) None of these clients had signed an individual contract with the Respondent. Which

particular individuals properly comprised this "inventory" of clients had been the subject of

numerous items of correspondence between Helmers and Levine prior to the mediation. (KBA

Exhs.11-26) The Respondent's brief is very silent on his role as so-called lead negotiator. Of

course, if that is what he was, and he was admittedly there, then he was folly aware of all the

terms.

After an agreement in principle was reached on the second day of mediation, the parties

worked to craft a written agreement tailored to the specifics ofthis particular settlement. (Vard.,

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p. 38; KBA Exh. 6; Exh. 3 to Appendix 3c) This agreement was initially drafted by counsel for

AHP utilizing a form agreement used by the company in other similar "inventory" settlements

with lawyers around the country. (Vard., p. 37) The letter agreement incorporated and contained

reference to three Exhibits, two of which were, at the time the letter was signed, not yet in

existence. (Tr.II, pp. 273-274; KBA Exh. 6; Exh. 3 to Appendix 3c) Exhibits 2 and 3 to the

settlement letter were to be part of the agreement, but were to be created and provided to AHP by

the plaintiffs' settling attorneys later. (Tr.II, pp. 273-274) Exhibit 2 was to contain the names of

each individual client whose claims were settled by the aggregate agreement, which defined

these individuals collectively as the "settling claimants." (KBA Exh. 6; Exh. 3 to Appendix 3c) It

ultimately paralleled the lists sent pre-mediation to AHP. Exhibit 3 was to be a list of amounts

designated to be the allocations of the total settlement fund to each of the settling individual

clients. (KBA Exh. 6; Exh. 3 to Appendix 3c) The plaintiffs' counsel was to arrive at the

allocations.

Among the numerous provisions of the settlement letter were two clearly delineated

conditions precedent to the agreement's effectiveness that could only be satisfied by Order of the

Boone Circuit Court. (KBA Exh. 6; Exh. 3 to Appendix 3c) One of those conditions was

decertification of the previously certified class and another was dismissal of the Guardlawsuit.

(KBA Exh. 6, p. KBA 6540, H 13; Exh. 3 to Appendix 3c) AHP's counsel made absolutely

clear both prior to and at the mediation that the company would not want to settle Guardas a

class action and instead required that the class be decertified and the Guardlitigation dismissed

by the Court prior to binding itself to any proposed settlement. (Vard., pp. 16, 40) Among other

things, AHP and its counsel quite rationally did not want to settle a class action which had been

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defined as containing all of the opt-outs from another class action and create that precedent.

(Vard.,p.41)

In accordance with that objective, the agreement itself provided that the agreement would

not be effective unless the Guardclass was decertified and the case dismissed. (KBA Exh. 6, p.

KBA 6540, % 13; Exh. 3 to Appendix 3c) The agreement was signed by Helmers, Gallion,

Cunningham and Mills but contained a notation that it was being copied to the Respondent. His

brief omits that fact. He later produced a copy of the agreement in Mildred Abbott, et al. v.

Stanley M. Chesley, et al Boone Circuit Court, Case Number 05-CI-4365 with that notation

deleted. (KBA Exh. 116; last page is Appendix 5) His brief omits that fact, which is a very

illuminating act and an equally illuminating omission. Those misrepresentations to the court in

the civil case are material, and are several. He also redacted the above referenced fee splitting

agreements to remove the portion in which he agreed he was co-counsel (KBA Exh. 301;

Appendix 6) The fee splitting agreements, of course, eliminate many of his claims, so the severe

redaction is, once again illuminating.

The agreement also made reference to and incorporated a "side letter" which was to

outline an agreement by the settling attorneys and their clients to indemnify AHP. It was limited

to $7,500,000.00 for any claims brought within a year against Dr. Duff or his clinic, Bariatrics

Inc. (KBA Exh. 9, p. KBA 6540, | 18; Exh. 4 to Appendix 3d) Despite bizarre and seemingly

self-contradictory testimony from the Respondent in this hearing and in his deposition in Abbott

v. Chesley, (Tr.II pp. 974-978; KBA Exh. 322) it is plain that a maximum exposure existed for

this indemnity. He has misrepresented this repeatedly. In fact at the hearing, while reading

directly from the text of this letter during cross-examination, the Respondent deliberately omitted

5Abbott is the lawsuit brought against the Respondent by his former clients alleging breach of fiduciary duty and

fraud among other claims.

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the word "not" in order to support his argument that the indemnity was unlimited. (Tr.II p. 976)

He misrepresented that in Abbott, as well as tried to misrepresent it herein, but Judge Graham

detected this. He continues in his briefto argue this could have the "holdback" involved in early

2002. He goes so far as to argue that part of the client's money, had it really been held in

escrow, would then have been eligible for the cy pres doctrine, a theory which he came up with

in February 2002! Aside from the fallacy that the client's money somehow transformed into

"extra" money, the one year was not up. In his federal court testimony he agreed that it was the

clients.

The "side letter" was not drafted at the time the settlement agreement was signed but its

essential terms had been discussed and agreed to at the mediation. (Vard., pp. 43-44) The

function of the "side letter" was allegedly to address certain potential claims of members of the

Guardclass that the plaintiffs' attorneys, especially the Respondent, claimed exposed AHP to

enormous liability. (Vard., pp. 43-44) During the course of litigating the Guard case the

plaintiffs' attorneys had discovered that AHP had entered into a written contractual agreement

with doctors around the country, including Dr. Duff, for any and all claims that might be brought

against them related to their prescription and distribution of the . As it turned out there were

never any such claims made. (Vard., pp. 43-44) This letter, like the main agreement, was not

signed by the Respondent but contained a notation that he was provided a copy. (KBA Exh. 9)

The clients were never told of the indemnity they were giving. (Tr.II, p. 60)

c. The Respondent appeared on May 9, 2001 before Judge Bamberger and convinced him

to decertify the class and dismiss the lawsuit.

On May 9, 2001, the Respondent, Helmers, Cunningham and David Schaeffer, a lawyer

for AHP, appeared at a hearing before the Boone Court. (Tr.I, p. 907) The hearing was for the

parties to jointly request the Court to decertify the existing class and to dismiss the Guardcase

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so that the agreement that had been reached by the parties at mediation could be effectuated.

(Tr.I, p. 907) This was not a class settlement "fairness hearing" as the Respondent has claimed;

in fact, no notice of the hearing was ever sent to the class. (KBA Exh. 120) Prior to the

commencement of the hearing, counsel presented the Judge with a jointly drafted and proposed

Order Decertifying Class and Dismissing Action. (Tr.I, p. 907) Helmers said that draft was

circulated to Chesley. That lengthy and detailed Order explained the history of the case and its

relation to the federal litigation and national class settlement. (KBA Exh. 78; Exh. 5 to

Appendix 3e)

...8. During a two-day mediation on April 30 and May 1, 2001, theparties negotiated a settlement of claims of the 431 opt-outs represented byPlaintiffs' Counsel (the "Settling Claimants"). The parties did not have sufficientinformation concerning, and were not able to reach a settlement of, the claims ofother class members....

...10. In light of the settlement, the Court finds that there is no longer aneed or adequate basis for maintaining this action as a class action against AHP,Dr. Duff or Bariatrics. The potential class members have been greatly reducedfrom the number thought to exist when the Court previously certified a class.Many of the remaining claimants against AHP have indicated that they haveretained their own attorneys to represent them and, as noted, some of them havefiled their own lawsuits, which are pending in various courts in Kentucky.Moreover, whether or not they have sued, all of the remaining claimants arepersons who did not retain Plaintiffs' Counsel herein to represent them and whoelected to of a prior class action, thereby suggesting a decision on their part topursue their claims, if any, outside of a class action. These facts, in conjunctionwith the fact that individual lawsuits would no longer impose an unmanageableburden on the judicial system, warrant the entry of an order decertifying the classin this action....

The video and transcript of the May 9, 2001, hearing reveal that the lawyers present were

aware of the practical complications presented by their decertification and dismissal proposal.

(KBA Exh. 120; Appendix 7) However, at no point before, during or after the hearing did the

lawyers show Bamberger the letter agreement itself. The integral Exhibits 2 and 3 to the

agreement and its incorporated "side letter" had seemingly not even been created at that time.

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(Tr.II, p. 274) At the hearing, Bamberger addressed an issue brought to his attention by the

wording of the tendered Order:

Judge Bamberger (JB): I have one question about it. I didn't do the math, but

you, when you go through the numbers, you go through how many people arerepresented and how many people of the national settlement. How many, ah,have, ah, individual lawyers and it looks like, let me see, you have five hundredseventy-four perspective participants in this case; four hundred thirty, fourhundred thirty-one are represented by plaintiffs' counsel; the remaining onehundred forty-three, seventy-three indicate they ofthe national class and retained .their own attorney to represent them, and some twenty have filed their ownlawsuits. It looks like that leaves about, the other approximately seventy did notindicate whether or not they had planned to or retained counsel to represent themindividually. Have those seventy been notified about this class action?

David Helmers (DH): No, your Honor.

JB: Okay.

Stanley Chesley (SC): Judge, let me speak to that, I think there's a simpleapproach to this. We, we just feel that these seventy people will have tworemedies. The good news for you is there is no other case pending in front ofYour Honor, but the good news for these folks is they have several remedies, oneof which is they would be able to request to go back into the class. I talked tosome friends of mine in West Virginia who because they didn't want to make aclaim. Period. For religious beliefs. There are people who said they don't want tomake a claim, and if we're able to find out who they are, we will see to it that theyare, gotten to an attorney. We won't represent them anymore. Get them to anattorney or in the alternative, do what they did in West Virginia and elect to havemost of those people go back into the national class and we'll explain it to themwith no charge to tell them what it is. But the idea was that that mass group ofpeople was four hundred and what fifty-four that we had?

DH: Almost, we had four hundred and forty or four hundred forty-one, ah...

SC: Four hundred forty-one was...

JB: Four hundred thirty-one was.. .

SC: ... really, really was representative of the bulk of what this class was, and inview of the kind of money that was received, it more than compensates them, ah.for their claims and therefore, the class is no longer necessary. Also, there was anational class of which the, a multitude, a large multitude of people went into thenational class. There were about three thousand of their clients that went into the

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national class, and AHP, American Home Products, has made it an opportunity sothat any late person wants to opt into that class can get into that class.

(KBA Exh.120; Appendix 7) (Underlining added)

The Respondent stepped in to make argument and use his influence as the "expert" in the

room, to explain to the Judge that the agreement reached was only for the particular opt-out

clients that the group represented and that they could not and did not resolve the claims of any

other people. (KBA Exh.120; Appendix 7) The Judge was rightly concerned about whether

notice of this agreement should be sent to the absent class members.

JB: My concern is whether or not this court has an obligation to have thoseseventy people contacted, and I know that we acted under, ah, and, probably oversome objection. We're a little bit pressing, you know, with the trial date and, ah,you know, but af... after our last couple of meetings, we were trying to ascertainwho of the federal settlement and who was left in Kentucky in order that wemight give them proper notice. And the question I have is whether or not wehave an obligation to mail notice to those people.

SC: If we have a motion to decertify.the class, there is one request and, ah,because the class was never noticed, in other words, the class was never noticed.There was never a notice.

It was the Respondent who explained to the Judge the various reasons that he believed

the agreement that had been reached, even though it benefitted only a discrete subset ofthe class,

did not prejudice the absent class members. (KBA Exh. 120; Appendix 7) He explained that

those people would not be able to recover under this settlement but would be able to pursue their

own claims or opt back into the national class. (KBA Exh. 120; Appendix 7)

SC: We talked about it, ah, and we did have extensive conversation and thequestion is, who could best take the responsibility of these people who are still out

there. And it was determined, ah, and I think the mediators were very helpful, inthis, that we could not take that, responsibility, ah, to pay them, ah but at the sametime, we don't know whether they're represen ... we do not believe they'rerepresented. And so American Home Products was, decided that they would takethat responsibility, but we indicated that we would help and we plan to help. Wehave to notify those people, talk to those people, and (UI).

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JB: And we, you know, we certainly don't know if those seventy have injury,don't have injury, are...

DH: We don't know anything about them, no. If., if...

SC: In other words, we could not take, take it upon ourselves, nor, nor, I will saythis, You Honor I found, ah, American Home Products has very good faith in thenegotiations in the entire period, and I've dealt with them now going on fiveyears, and this one, ah, they understood our problem, nor did they, were theywilling to put up a fund of money to bid against themselves when we don't knowthat maybe, maybe half of them have religious pursuits. That they don't want topursue a case or religious preferences of some, and not to pursue a case, and someof them may not even be injured. But if they are injured, I think that AHPunderstands that and, ah, probably work those, are probably the best people to doit and, ah, I have talked with the American Home Products' people and theyindicated that they'd be willing to help them in that resolution. Er. not as part ofthis but so as to protect them, The rest of the people are represented by counseland they, counsel (UI), and we're not sure if they really are sick. But I think weshare your concern, Judge, and we will follow that up.

(KBA Exh. 120; Appendix 7) (Underlining added)

This of course is contrary to the theory later developed by the Respondent and Mr. Mills,

that this was not really an aggregate settlement, but some sort of complex proceeding with

judicial oversight and "extra" money. The Order's only reference is to enforcement. Mr. Miller

and others can talk about judicial supervision in the abstract, but we are here on this set of facts.

In any event, following the hearing the Judge signed the Order Decertifying Class and

Dismissing Action that same day but it was not filed in the record of the Boone Circuit Clerk

until May 16, 2001. (Tr.II, p. 452; KBA Exh. 78; Exh. 5 of Appendix 3e) The entry of the Order

satisfied the two primary contingencies prerequisite to the. effectiveness of the aggregate

settlement agreement. Specifically the order decertified the class and dismissed with prejudice

all claims of the individual clients of the attorneys who were included in the settlement

agreement. (KBA Exh. 78; Exh. 5 of Appendix 3e) It further dismissed without prejudice the

claims of any other individuals (approximately 70) who would have fallen within the definition

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of the previously certified Guardclass but were not a part of the settlement agreement because

they were not known to or represented by these lawyers. (KBA Exh. 78; Exh. 5 of Appendix 3e)

They were not "settling" parties under the defined terms of the agreement.

3. The Respondent's co-counsel then defrauded the 440 clients, convincing them to acceptamounts far below the appropriate amounts calculated under the allocations contained inthe agreement.

Seventeen clients testified at the hearing of this matter regarding the settlement of their

diet drug claims. Every single client that testified revealed that their attorneys failed to disclose

to them several critical facts they clearly would needed to have known to make informed

decisions as to whether to accept a settlement. (Tr.I, pp. 19-665) Had the KBA produced every

one of the clients that were still living, they all would presumably have testified consistently. In

any event, the Respondent produced no witnesses to give any contrary testimony.

As a matter of fact, he did not even attend the first two days of his own disciplinary

hearing which were set aside by the Trial Commissioner, Roderick Messer, for his own clients'

testimony.

His brief claims he was denied discovery, but he did not even show up to see them or

hear them. No one has argued he ever met with them, nor is he charged with such.

Nevertheless, it is the clients who were cheated, a fact that the Respondent's brief overlooks. In

fact, he complains that the clients testified and were discussed in the KBA's brief. Rebecca

Phipps, who met with the largest number of clients, followed the same script as the others who

met with the clients which script included material failures to disclose and outright

misrepresentations. (Tr.II, pp. 53-62)

None of the clients were told anything about the fact that their settlement offer was part

of an aggregate settlement of 440 individuals for a total of $200,000,000.00. None of them were

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told the amount that was allocated to them in Exhibit 3 to the settlement agreement or that the

allocation was made by their counsel. None of them were told that by the time they met to

discuss settlement their claims had been dismissed by the Boone Circuit Court. None of them

were told anything about the "side letter" indemnity agreement that their counsel had signed and

entered into on their behalf. None of them were told that the release forms they signed were

being forwarded to AHP with a false and fraudulent certification that either Gallion,

Cunningham or Mills had read over the release with them and fully explained the release to

them. (Tr.I,pp. 19-665)

The chart below shows that the testifying sample of witnesses were allocated a total of

approximately $29,000,000.00, but were paid only just over $9,000,000.00 in exchange for their

full and final release of the Defendant.

Client's Name 1stdistribution

E x h . 3

Allocations1 Tracy Curtis 16,675.00 181,159.422 Bonnie Henderson 833,750.00 1,500,000.00

3 Connie McGirr 1,334,000.00 5,000,000.00

4 Debbie M. Carman-Staton 1,000,500.00 5,000,000.005 Elizabeth Fannin 210,000.00 181,159.42

6 Connie Centers 1,000,500.00 3,750,000.00

7 Berenda Ford 122,500.00 181,159.42

8 Phyllis J. Combs 16,675.00 95,057.03

9 Deborah K. Turner 1,334,000.00 3,750,000.00

10 Angela Peace 46,900.00 95,057.03

11 Orene Miller 667,000.00 1,500,000.00

12 Kathy Daniels Stephenson 667,000.00 1,500,000.00

13 Angie Lynn Bowman 16,675.00 95,057.03

14 Lora Hoover 16,675.00 95,057.03

15 Georgia/Jordan Coots 333,500.00 750,000.00

16 Carla Baldwin 1,334,000.00 5,000,000.00

17 JacquelynMcMurtry 50,025.00 181,159.42

TOTALS 9,000,375.00 28,854,865.80

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During the course of that same summer, the Respondent received $16,497,121.87 in fees

from the Guardsettlement. The chart prepared by Vicki Hamm (KBA Exh. 223) shows he was

entitled to receive at most a total of $12,941,638.46. He received exactly 75%, or

$12,372,534.37, of the total amount he was paid in 2001 on June 19, 2001. (In reality, he was

paid the contractual fee on that first day.) His money was wired from Cunningham's client trust

account just hours following the transfer by AHP to Cunningham of75%, or $150,000,000.00, of

the total $200,000,000.00 settlement amount. He received this amount before any client had been

paid a dime. This was the first distribution, made after he insisted Helmers fly to New York to

hand deliver the releases for the clients who had been grouped with the bulk of the money

allocated to 39 of the clients in order to collect $150,000,000.00 of the total. (Tr. II, pp. 276-277)

He received two more payments, one on July 5, and another on August 14, 2001, each

constituting exactly 12.5% of his total fee, or $2,062,143.75 each. (KBA Exh. 122) His brief

ignores the fact that he was very much still involved. The brief glosses over this important fact,

in order to make it appear he was not seen again after the court hearing.

On the Friday following the Respondent's final 2001 payment of his fee, August 17,

2001, he treated some of his Guardco-counsel and their wives to a lavish celebratory dinner.

(Tr.II, pp. 282-283, 836-837; KBA Exh. 206)

4. The Respondent orchestrated and participated in a complicated attempt to cover up thetheft.

a. He was paid an additional $4,000,000.00 in 2002 for successfully assisting his co-counselin procuring orders from Judge Bamberger that were used to conceal the theft from theKBA and their from clients.

In the late summer and fall of 2001, Gallion's law partner, Mike Baker, became

suspicious of the activities of Gallion and Helmers regarding the handling of the proceeds of the

Guard settlement money. (Mike Baker deposition taken August 16, 2010, hereafter Baker, pp.

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11-12) In October of2001, when Baker confronted Helmers about various documents and emails

he had uncovered in the office and on the firm's computers he demanded that Helmers explain

what was going on, specifically how the fees from the Guard settlement were being handled.

(Baker, pp. 22-24) When Helmers refused to answer his questions, Baker fired him. (Baker, p.

22) Shortly thereafter Helmers opened his own law office right next to Mills' new Lexington

office. Baker then sued Gallion to dissolve their law firm and Gallion quickly and quietly settled

that lawsuit. (Baker, p. 21)

Controversy was also brewing between Mills and his law partner, David Stuart. At first

those issues revolved primarily around Mills' excessive drinking. (Tr.II, p. 441) But over a

period ofa few months, as Mills' behavior became more secretive and bizarre, Stuart, too, began

to make inquiries into the handling ofthe funds from the settlement. When he did not receive an

adequate accounting from Mills of the firm's fees and expenses in Guard, he contacted Baker

who informed him of some of the information that he had uncovered on his end. (Tr.II, pp. 439,

442)

In June 2001, at the time Guardwas settled, Gallion had called Mills (who had not

attended the mediation) and lied to him, stating that the Guard case had settled for

$150,000,000.00. (Tr.II, pp. 128-129) In early 2002, Mills began asking questions of Gallion

regarding the handling of the Guardsettlement funds because he had just discovered at around

that time that the actual amount of the settlement was $200,000,000.00. (Tr.II, p. 133) Mills

discovered that fact from Stuart who had gotten that information from Baker. (Tr.II, p. 441)

During that time, Baker and Stuart, having not at all been assured by their law partners

that the money was being properly handled, contacted the KBA. (Tr.II, p. 445; Baker, p. 26)

Partly as a result of information provided by them, an Application requesting authorization by

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the Inquiry Commission for issuance ofa series of subpoenas to Gallion, Cunningham, Mills and

Bank One was filed and served upon Mills' office on January 30, 2001. (Tr.II, p. 132) The

Application was set to be heard by the Inquiry Commission on February 11, 2002 at 9:30 a.m.

(Tr.II, pp. 132; KBAExh.l l2)

On February 6, 2002 (at a party for Mills' birthday held in his office), Mills angrily

confronted Gallion and demanded another distribution to the clients out of the $50 million of

"extra" money. (Tr.II, pp. 133-134) Gallion assured Mills that he would see to it that more

money would be distributed to the clients. (Tr.II, p. 134) That evening Gallion, Cunningham,

Modlin and the Respondent met in Boone County and visited with Judge Bamberger. (Tr.II, p.

134) Chesley picked up Modlin in his car. (Tr.II, p. 609) Remember that Modlin was also later

used by Chesley in the Diocese case, resulting in an allegation of improper influence by Modlin.

The meeting with Bamberger that evening occurred without any motion having been

filed. No notice was given to any of the clients. No notice was given to AHP's counsel. The

meeting was held off-the-record and behind the closed doors apparently in the jury room in the

old Boone Circuit courthouse. (Tr.II, p. 445) Bamberger had not heard anything from the

attorneys regarding the Guardcase since the decertification hearing held nine months earlier just

before the case was dismissed and testified that he was surprised to see them again. (Tr.II, p.

461) In his brief Respondent makes an argument that if the meeting was in the courtroom it

would have been recorded. The record shows that the Judge could turn off the recording, and, in

fact, was asked to do so by the Respondent in 2001, so he could state off-the-record the amount

ofthe settlement.

The Respondent provided the Judge a memorandum of law and gave oral argument

regarding the appropriateness of the cy pres doctrine to address the "extra" funds remaining in

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the possession ofthe attorneys. (Tr.II, pp. 457-458) Of course, as "lead negotiator" and primary

person who argued for decertification in 2001, he knew that there was no "extra" money. The

Respondent also provided the Judge a copy of a case called Grinnell v. City of Detroit, claiming

that it governed the issue of how attorney fees could be appropriately awarded by the Court in

the Guardcase. (Tr.II, p. 459) The fee discussion resulted in the Judge's oral approval of an

attorney fee totaling 49% of the total $200,000,000.00. (Tr.II, p. 505) The attorneys, knowing

that the Judge had not ever been provided a copy of the settlement agreement, did not provide a

copy to him at this meeting either. (Tr.II, p. 455) The Judge was likewise not provided with any

financial or accounting documents showing what had been done with any of the money. (Tr.II, p.

456)

On February 11, 2002, at the subpoena Application hearing, the Inquiry Commission,

over the in-person objection of Mills' counsel, authorized the issuance of the requested

subpoenas demanding bank records and other records related to the receipt and distribution of

settlement funds from the Guard case. (KBA Exh. 112) That afternoon, five wire transfers

totaling approximately $59,000,000.00 were made by Gallion and Cunningham from several of

their personal accounts where they had cached their ill-gotten gains in 2001, into an already

existing bank account at First Union Bank in the joint names of Gallion, Cunningham and Mills,

where a relatively small amount of funds had previously been stashed.6 (Dom., pp. 70-71; KBA

Exh. 46) As mentioned above, the testimony and charts of Vicki Hamm confirm that all of the

money that had not been paid out to clients had been almost immediately distributed to the

attorneys (including the Respondent) and others working for or with them as soon as it was

received from AHP the previous year. (Tr.I, pp. 989-990; KBA Exh. 123)

' This was the conclusion of the wire transfers that were the subject of the federal criminal action.

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On February 15, 2002, the Judge signed an Order which, among other things, approved

all attorneys fees paid but made no mention of the amount, either in nominal terms or as a

percentage. (KBA Exh. 81) That Order also authorized a further distribution of funds to clients

of half of the remaining funds, the amount of which was similarly unspecified. (KBA Exh. 81)

The Order was not filed until June, 6, 2002 and even then was filed under seal with copies going

only to Gallion, Mills, Cunningham, Helmers and the Respondent. However, a copy was

provided to the KBA by Mills (who wasn't even at the February meeting) in April,

approximately two months prior to somehow finding its way into the Boone County Circuit

Clerk's office. (KBA Exh. 149; Appendix 8) The Respondent never mentions in his long

discussion of his purported lack of knowledge that he received this and many other very

enlightening orders. Even had he not attended the early 2002 "hearing," he received multiple

orders furthering the scheme.

b. He gave directions and a document to Helmers to use to further deceive the clientsregarding the true nature of the settlement.

Shortly after the February meeting with Bamberger, the Respondent and Gallion

contacted Helmers, now established in his new firm and asked him to participate in a "second

distribution" of money to the clients. (Tr.II, pp. 306-308) Helmers was asked by the Respondent

to meet personally with each of the approximately forty clients with whom he had originally met

to hand them an additional check and have them sign a second receipt and release. (Tr.II, pp.

306-308) They were the more seriously injured, and were largely the group whose releases had

been hand delivered. He received a letter from the Respondent's office which he was instructed

to show to each client and have them sign. (Tr.II, p. 312; KBA Exh. 53E; Exh. 7 of Appendix

3g) Helmers followed these instructions, and employees from the other firms did likewise with

the other approximately 400 clients. (Tr.II, pp. 312-313)

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On April 1, 2002, the Respondent was issued a check for $4,000,000.00, drawn not on

Cunningham's client trust account from which his previous fee payments had been wired, but on

a different account in a bank not located in Kentucky. (KBA Exh. 49) The check listed the

drawee as being AHPC Settlement Fund and was deposited by the Respondent before any client

received any money from this "second distribution." (KBA Exh. 49)

After the second distribution referenced above was made, and $11,162,116.40 more was

paid to the attorneys in 2002 and early 2003, more than $20,000,000.00 remained undistributed.

At that point the 440 clients had been given a total of $74,194,577.13, and the lawyers and their

agents had divided up $126,255,422.87. (KBA Exh. 122) The clients received no additional

money after that until after they filed their civil suit, Abbott.

As stated before, two months after the second distribution checks were cut and four

months after Bamberger signed the Order approving additional fees and payments to the clients,

that Order was filed with the Boone Circuit Clerk on June 6, 2002. (KBA Exh. 81) At the same

time an Order was filed sealing the record and restricting the Clerk's Certificate of Service

henceforth in the Guard case to Mills, Gallion, Cunningham, Helmers and the Respondent.

(KBA Exh. 80) There would be several more orders entered over the following eighteen months

which the Respondent stated he would have received but testified that he paid no attention to

them! (Tr.II, pp. 809-810) Those orders all had him listed on the distribution list. He testified

that he did review the Order approving additional fees because he claimed to have relied on that

to authorize the additional money he was paid, although no amount is listed, there was no

hearing, he participated in no "fee application" petition such as would occur in a class action, and

there was no notice. (Tr.II, p. 676) He never even inquired about the client fee contracts, he

says, although he was aware of them. (KBA Exh. 322, pp. KBA 80-87)

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The Respondent received an Order dated June 19, 2002, stating, in part,

...the Boone Circuit Court, having retained jurisdiction over the above actionfollowing mediation, dismissal of the class action, and resolution of the individualclaims, and makes the following findings and rulings:

1. Having specifically reviewed an accounting of the settlementallocations in the individual cases, including the assessment and allocation ofattorney's fees, the court finds that the allocations are reasonable, fair andsatisfactory.

2. This review includes the disbursement of excess settlement proceedsheld for indemnification purpose and the Court finds that the distribution of saidexcess funds was done correctly, and in compliance with, previous Orders of theCourt.

Wherefore, the Court ORDERS and reiterates that the individual cases areDISMISSED WITH PREJUDICE AS SETTLED. The Court will retain jurisdiction and enter specific Orders as necessary for clarification of the settledstatus of individual claims or cases.

(KBAExh. 84)

The Order was not preceded by a written Motion of any kind from either party, nor was there any

hearing held. (KBA Exh. 84) The case had already been dismissed in 2001. The only

indemnification was $7,500,000.00 and that was not even discussed.

The Respondent also received two other substantially similar Orders signed on the same

date concerning individual clients, one being the Estate of Linda Toler, and the other being Lisa

Swiger. These Orders stated, in part,

It is hereby ordered and reiterated that the above claim is ORDEREDDISMISSED WITH PREJUDICE AS SETTLED. Moreover, the Settlement isspecifically approved as adequate, reasonable and fair.

(KBA Exh. 82 & 83) Both Orders also stated that the individual client "did receive the full

settlement value as agreed less the contracted attorney's fees." (Underlining added) These cases

had been dismissed in 2001, with all the others. This is yet another reference to contractual

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attorneys' fees, contrary to.his odd analysis claiming a class action fee that was to receive

approval by the court.

The Respondent then received a series of orders purporting to create a non-profit

corporation funded by the undistributed millions at the request of the attorneys. He makes no

mention of any of this evidence in his brief. These Orders commenced following June 24, 2002,

when Gallion filed a pleading with the Boone Circuit Clerk styled Motion For Directives

Regarding Distribution of Remaining Settlement Proceeds which contained no certificate of

service whatsoever. The one sentence Motion requested the Court to "issue directives >

concerning how the remaining proceeds from the settlement of this action are to be distributed."

(KBA Exh. 85) The Motion also contained a Notice that the Motion would be heard three days

later on June 27, 2002. (KBA Exh. 85)

An ex parte hearing was held on June 27, 2002, before the Court at which Gallion,

Cunningham, and Modlin (as well as an investment adviser named Robinson) appeared. (KBA

Exh. 245) Bamberger ordered from the bench that the $7,500,000.00 that had been set aside for

the contingent Dr. Duff claims was to be simply split up and kept by Mills, Gallion, and

Cunningham because of the "enormous risks that they undertook." (KBA Exh. 245) Actually,

nothing had been set aside in any event. In addition, they took no risks. Chesley got this order

giving the clients' money to the lawyers. He did nothing, although one would expect an honest

lawyer to make inquiry if he truly had no knowledge at that point.

Following the hearing, the Respondent received an Order dated July 31, 2002, stating in

part that the Court in entering its Order had:

...consulted with counsel for the plaintiffs, outside counsel regarding appropriateuse of funds for charitable purposes, having reviewed the accounting of the funds,having been advised of the consent of the individual plaintiffs who receivedsettlements for use of the remaining funds for charitable purposes, having

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reviewed the file, and being generally familiar with the status of the case statusand being fully advised...

(KBA Exhibit 87) The court further directed in the same Order that all remaining settlement

funds be placed in a "trust" and ordered that 5% (or $1,000,000.00) of the assets could be used

for the expense of establishing the trust and up to "30% (or $6,000,000.00) of the assets available

for distribution on an annual basis shall be used to pay fees and expenses incurred by the

trustees." (KBA Exhibit 87) (Parentheticals added) The video reveals that Gallion and the

Judge discussed the consent of the clients. That "consent," albeit based on false facts, related to

the very letter Chesley's office prepared and the clients all signed. (KBA Exh. 53E; Exh. 7 of

Appendix 3g)

Meanwhile, in 2002, Bill Johnson was representing Mills in responding to the Inquiry

Commission's subpoena and investigation. Whitney Wallingford was representing Gallion and

Cunningham in responding to the subpoenas they had been issued and the Inquiry Commission

investigation as to them. (Tr.I, p. 1070) By August, 2002, Wallingford's clients had only

partially complied with the production required. (Tr.I, p. 1077)

A meeting was called at Bill Johnson's office which was attended by Wallingford, Mills,

Phipps, Johnson, Gallion, Cunningham and the Respondent. (Tr.I, p. 1081) At that meeting the

Respondent insisted that Wallingford be fired and that Mills, Gallion and Cunningham all be

represented by Mr. Johnson in the Bar investigation. (Tr.I, p. 1082) It appears that was the

purpose of the meeting. No explanation was given as to why Respondent would have been

involved. However the Trial Commissioner concluded that he was guiding and assisting the

cover-up. There is no other logical conclusion.

Wallingford agreed to withdraw but before doing so he completed a supplemental

submission to the KBA on which he had already been working. (Tr.I, p. 1082) Before filing it, he

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sent a copy of that submission to the Respondent for his approval. (Tr.I, pp. 1085-1087) The

submission contained a chart which inaccurately and grossly inflated the amounts that had

actually been paid to the clients. (KBA Exh. 134) Shortly thereafter the Respondent called

Wallingford and told him to go ahead and file the submission with the KBA, and he did. (Tr.I, p.

1087) Why was he involved at all other than to hide the facts?

Later, the Respondent received an Amended Order dated January 6, 2003 amending the

prior July 31, 2002 Order which had authorized the creation of the cy pres trust for which the

Respondent had argued. (KBA Exh. 89) Once again, this Order was not preceded by any Motion

nor is there any record ofa hearing. No notice of any kind went anywhere but to the lawyers who

took the clients' money. The Respondent received another Amended Order dated January 15,

2003, stating in part, that,

2. Section 4 of the Order is further amended to provide that the followingpersons be and hereby are appointed as the initial directors of such nonprofitcorporation: Mark Modlin, Shirley A. Cunningham, Jr. (sic) William J. Gallion,and Melbourne Mills, Jr.

3. Section 4 of the Order is further amended to provide that the Court shallretain ongoing jurisdiction and authority over such nonprofit corporation and shallapprove any change in the mission or purpose of such nonprofit corporation andshall approve any change in the persons serving as directors of such nonprofitcoiporation.

(KBA Exh. 90) Again the Respondent claimed to have received but paid no attention to these

Orders. (Tr.IL, pp. 809-811, 819-825) Perhaps that is true because the plan seemed to be

working.

Then, in February of2003, Stuart filed a lawsuit against Mills relating to dissolving their

partnership. He was demanding, among other things, that Mills provide him an accounting of the

firm's total income, including the amount received by the firm from the diet-drug litigation.

(Tr.II, p. 428) Stuart was represented in that lawsuit by Mindi Barfield, Esq. Mills was

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represented in that matter by Bill Johnson. (Tr.II, p. 145) Whitney Wallingford represented Mills

with respect to tax issues and was therefore in contact with Mills and Johnson in relation to the

tax effect ofany settlement that might occur. (Tr.II, p. 145) As part of Stuart's discovery

regarding the actual fees paid in Guardto Mills and Phipps he obtained a Commission from the

Fayette Circuit Court authorizing the out-of-state deposition of the Respondent and authorization

of the issuance of appropriate subpoena. (Tr.II, p. 145; KBA Exh. 109) With disclosure

imminent, the Respondent attempted to persuade Bill Johnson to file a motion to disqualify Ms.

Barfield. He refused. The Respondent then tried to get Mr. Wallingford to do that, and he

refused. (Tr.I p. 1104) Why was he inserting himself into another lawyer's firm dissolution?

With that lawsuit pending, the Respondent was also receiving correspondence from Rebecca

Phipps, Mills' assistant, relating to her desire to be appointed as a director to the Kentucky Fund

for Healthy Living. (Tr.II, pp. 74-76; KBA Exh. 144)

On April 2, 2003, the Respondent came to Lexington to meet with Mills, Gallion, Phipps,

Bill Johnson and Wallingford. (Tr.I, pp. 142-144; 1095-1099) The Respondent used this

meeting to insist that Mills settle his lawsuit with his partner. According to Mills, the

Respondent thought "it would be better if the case could be quietly- if it could be done quietly,

settle it, instead of going to court and drawing media attention." (Tr.II, p. 144)

So, in an effort to settle the litigation with his law partner, Mills attended mediation with,

Stuart, Bill Johnson, Phipps and others. (Tr.I, p. 430; Tr.II, pp. 144-145) Prior to this mediation

on July 24, 2003, the Respondent made arrangements with Rebecca Phipps to secretly contact

him if it looked like the parties were not going to be able to settle. (Tr.II, pp. 74-76; KBA Exh.

145) The mediation did not know and Mills did not know. Stuart did not know. When Mills'

8 Public Relations

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offer was apparently the most he was willing to pay and Stuart demanded more, Phipps excused

herself and called the Respondent on his cell phone, at which time he informed her that he would

contribute the difference, a halfa million dollars to get the matter settled. (Tr.ll, pp. 77-78)

The Respondent then wired $500,000.00 to Wallingford's client trust account to be

combined with Mills' money and then used to pay the Stuart settlement. (KBA Exh. 281) In

exchange he was released from any liability to Stuart for anything he may have done related to

the Guardsettlement and likewise relieved from having to give a deposition or respond to any

subpoena in that civil case. He had apparently (unbeknownst to Stuart, Mills or Wallingford)

received half of that amount from his co-counsel, Gallion and Cunningham, and tunneled it

through his trust account comingled with his own money. (KBA Exh. 292, Tr.II, pp. 842-844)

On December 19, 2003, Gallion filed a Motion with the Boone Circuit Clerk that asked

the Court to relinquish its jurisdiction over the Fund. (KBA Exh. 93) This was made necessary

by Bamberger's imminent departure from the bench. Then, on December 30, 2003, The Court

entered an Order that was sent to the Respondent and, in pertinent part, stated,

That the Court hereby relinquishes and releases the Corporation from itscontinuing jurisdiction and authority, and hereby orders that the Corporation shallnot be required (sic) obtain the consent or approval of the Court for any change inthe Corporation's mission, or any change in the individual's (sic) serving as theCorporation's Directors.

(KBA Exh. 94) The Judge retired from the bench on the following day, and was appointed to the

charity's board a few months later.

c. Even after the KBA, JCC, two of his cohorts' partners and numerous clients beganasking questions about details of the handling of the settlement funds and even filed civilclaims against him, he continued his efforts to cover-up the theft

After being made aware of the bar investigation and receipt of order setting up the cypres

fund, he still did not ask to see what the clients had been paid or make any report of potential

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criminal or unethical behavior on the part ofhis co-counsel. (Tr.II, p. 822) In fact, he continued

his assistance in covering up the fraud. He corresponded with PHpps in gathering documents

and was informed by her via fax that Ms. Ford was attempting to contact some of the clients.

(KBA Exh. 256) He sent that fax on to Bill Johnson suggesting that the information he had

received from Phipps regarding Ms. Ford's activity could be used as "reverse PR"8 against her.

(KBA Exh.294)

In 2004, while the Inquiry Commission investigation continued, attorney Angela Ford of

Lexington began to make inquiries on behalf of numerous individuals who had been paid as part

of the Guardsettlement but who were concerned that their case had not been properly handled.

(Tr.II, p. 94) In January, 2005, Ms. Ford filed a lawsuit in Boone Circuit Court on behalf of

several of the clients against the Respondent, Cunningham, Gallion, Mills and the Kentucky

Fund for Healthy Living. (KBA Exh. 276) At first Bill Johnson represented all of the lawyers in

that matter and filed an Answer jointly on their behalf, on July 11, 2005. (KBA Exh. 277) In that

Answer the Respondent specifically admitted having acted as class counsel in Guard. He would

P ylater hire new attorneys who filed pleadings in which he then denied that he had been class

y P g

counsel in Gtictvcl fKRA Fxh 2991 The Respondent docs not mention these fjicts in his brief

He also filed a Motion to Dismiss on September 2, 2005 attaching severely redacted copies of his

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comi&Cl. ^JVJ_>.r\2, All. 3 0 1 ; r^JJJJe-llUlA \J)

Later m 2005, when he iscovered that the Judicial Conduct Commission (JCC) was

investigating Bamberger for potential misconduct in the Guardcase, he met m his office with

rjdmuerger anci oiners ro worK on preparations ror a mcciiiig mai iiau ucen scneuuieu wuii uic- f e - p

F

Commission. (Tr. n, p. H/6) riis Piief does not mention mat fact. He later anended mat meeting

32
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before the JCC and presented his argument in support of Bamberger that the application of the cy

pres doctrine and the establishment of the Kentucky Fund for Healthy Living was appropriate.

(Tr.II, pp. 922-928) He states that the KBA has argued the Respondent represented Bamberger.

That is false. The fact is he assisted Bamberger in the meeting in the Respondent's office to

prepare for the JCC hearing. (Tr.II, p. 476) He also assisted by going to lend his name to

Bamberger's argument on why he entered all those false orders. At the hearing the Respondent

was asked ifhe made certain statements to JCC. He did not deny it. (Tr.II, p. 922)

The Judge later resigned before the hearing under Public Reprimand rather than face removal.

(Exh. 250)

During this time the Respondent assisted Gallion in obtaining a fraudulent affidavit from

his friend, Kenneth Feinberg. (Tr.II, pp. 1090-1091) He called Feinberg to testify in the hearing

of this case as an expert apparently for the purpose of stating that very little in his previous sworn

affidavit was true. Nonetheless, it had been filed in the court record. (KBA Exh. 319) Feinberg

testified that he thought the affidavit had never been used because he was never paid the

$50,000.00 Gallion had promised him to provide it. (Tr. II, pp.1095-1096) Apparently the

Respondent never told his friend that the affidavit in fact had been filed by a co-defendant in the

Abbottcase. The Respondent testified that he was embarrassed to discover that Gallion had not

paid Feinberg so he gave him $10,000.00 and apologized. (Tr.II, p. 1096) The Respondent,

however was apparently not shocked to see it in the record of his civil suit.

At some point in 2006 he dropped off a document in the Washington DC office of Jack

Vardaman. This document contained statements about the Guard settlement that he knew to be

false. The Respondent left a message with Vardaman that he wanted him to draft a letter

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confirming his agreement with the false statements. Vardaman refused because he recognized

the statements to be lies. (Vard., pp. 66-73, KB A Exh. 10; Appendix 9)

Additionally in 2006 the Respondent began responding to requests for information in the

investigation ofhis conduct by the Inquiry Commission of the Supreme Court. His responses to

these requests contained further statements of fact later proven to be falsehoods. This

misinformation served to obfuscate and delay the Commission's investigation. (KBA Exhs. 226

and 270)

B. PROCEDURAL HISTORY

The Inquiry Commission authorized the Office of Bar Counsel (OBC) to initiate an

investigation of the Respondent on January 9, 2006. An Inquiry Commission Complaint was

filed on December 4, 2006. (KBA Exh. 115) A Response to the Complaint was received by

OBC on March 1, 2007. (KBA Exh. 116)

The Inquiry Commission filed the Charge on October 22, 2007. (Appendix 3) The

Respondent filed his Answer on January 4, 2008. (Appendix 10) Later, the Inquiry Commission

entered an Order consolidating this case with KBA 9341 (KBA v. David Helmers) and for

limited purposes with KBA 13985 (KBA v. Joseph Bamberger) on November 3, 2008.

Frank Doheny was the initial Trial Commissioner appointed in this matter. At the

Respondent's request he stepped down and then the Chief Justice of the Kentucky Supreme

Court appointed Senior Judge Roderick Messer as the Trial Commissioner on March 4, 2009.

On April 6, 2009, OBC filed a Motion to Amend Charge (Appendix 11) with the Inquiry

Commission to add one additional count of misconduct. His brief implies that was some type of

admission or charge. In reality, the IC added a count to include another rule that the evidence

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indicated he had violated. The Inquiry Commission granted the Motion to Amend Charge on

May 26, 2009. (Appendix 11)

The live hearing was begun at the Kentucky Bar Center on November 5-6, 1243, 2009,

through which time Judge Messer continued to serve as the Trial Commissioner. Judge Messer

and a court reporter were present on all of those dates. Present on behalf of the KBA were Linda

Gosnell, Esq., Cary Howard, Esq., and at various times, Angela Parker, Shawn Daniel, and Dale

Perry, Bar Counsel Paralegals. The Respondent, Stanley M. Chesley, was present on some of

those dates9 with his counsel (appearing at various times), Kent Westberry, Esq., James Gary,

Esq., Frank Benton, IV, Esq., Scott Cox, Esq., Mark Miller, Esq. and Hon. Susan Dlott, a federal

judge and his wife.

Prior to the commencement of the live hearing, testimony was taken by video deposition

of five (5) witnesses located out of state. The video recordings, as well as written transcripts of

that testimony, were entered into the record at the hearing. Forty-four (44) exhibits were

introduced by the Complainant through the out-of-state deposition testimony of John Vardaman,

Esq., Heidi Levine, Esq., Helene Madonick, Esq., three of the lawyers for American Home

Products who were involved in the settlement of the underlying lawsuit, Faye Stilz, Esq., the

Respondent's employee and Frank Dominguez, a representative of one of the banks which, for a

period oftime, held the stolen