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The Cautionary Tale of Plaintiffs Attorney Stanley Chesley
Stanley Chesley settled just one case too many.
For decades the Cincinnati plaintiffs lawyer negotiated lucrative ends to big class actions: a $200 million settlement in 1985 for Vietnam War veterans injured by Agent Orange; a $3.4 billion settlement in 1994 for breast implant plaintiffs; the $246 billion tobacco settlement in 1998, where he was one of the lawyers who represented state governments. At the age of 75, he still maintained an active practice: Up until last June, he was plaintiffs counsel for the massive consumer fraud class action filed against Fannie Mae by two Ohio pension funds.
But the man whom Forbes dubbed the "Master of Disaster" is in a tailspin of his own.
For the past six years, Chesley has been under scrutiny for having a hand in allegedly helping other lawyers bilk $65 million in excess fees from fen-phen clients. At the heart of the case is the $200 million settlement of a Kentucky fen-phen class action that Chesley negotiated in 2001 against American Home Products Corporation (AHP). Only $74 million of that money found its way to clients, according to a criminal indictment targeting his three cocounsel on the case. Two of those lawyers have gone to prison for their involvement. Chesley, who testified against them under a grant of immunity, has faced no criminal charges, but a civil suit brought by former fen-phen clients accuses him of fraudulent misrepresentation and breach of fiduciary duty. Earlier this year, a report by a trial commissioner appointed by the Supreme Court of Kentucky, Judge William Graham, recommended that Chesley be disbarred, and in June the board of governors of the Kentucky Bar Association accepted Graham's recommendation. Because Kentucky and Chesley's home state of Ohio have reciprocal law licenses, disbarment in the Bluegrass State would likely mean disbarment in Ohio too, essentially bringing Chesley's 50-year legal career to an end.
Chesley has appealed the pending disbarment. His lawyer, Sheryl Snyder of Frost Brown Todd, says that Chesley was hired solely to settle the fen-phen case and was not involved in the distribution of the $200 million.
Chesley declined to comment for this article. However, the testimony from him and other witnesses in the criminal trials, the report that Graham prepared for the Kentucky Bar Association's inquiry commission, and the complaint and discovery findings in the civil suit against Chesley and his cocounsel provide a detailed account of the fen-phen settlement and its aftermath. How Chesley ended up in a downward spiral, Graham says in his report, is "a sordid tale worthy of the pen of Charles Dickens were he alive and well. Alas, this tale is not fiction."
Chesley has always been a controversial figure. Some in the plaintiffs bar have complained that he has elbowed his way into cases and then settled them too early ["Et Tu, Stan?," January/February 1994]. Yet others commend the work ethic that propelled the former shoe salesman into the upper echelon of the legal industry. "Every morning Chesley would make a list of people he wanted to talk to that day, there were sometimes 100 or 150 people on it. He was the epitome of a multitasker," says James Helmer, Jr., of Helmer, Martins, Rice & Popham, who has worked with and against Chesley on securities and personal injury cases. When his hard work paid off, Chesley basked in the rewards. "He was certainly proud to drive a Rolls Royce," says Stephen Schlegel, who worked with Chesley in the Agent Orange litigation, "but he's also one of the most charitable people I know. He still refers cases to me all these years later." Chesley's peers may have mixed opinions of his tactics, but as Helmer puts it, "There's no denying that Stan is a world-class lawyer."
Perhaps this time Chesley simply elbowed his way into the wrong case.
The Diet drug fenfluramine-phentermine — better known as fen-phen — supressed a person's appetite and melted away pounds. It also caused serious heart-valve damage in some users. The Food and Drug Administration yanked fen-phen from the market in 1997, as its manufacturer, AHP, was hit with a tidal wave of litigation.
Chesley was cochair of the plaintiffs management committee for the nationwide fen-phen litigation, which was consolidated in federal district court in Philadelphia in December 1997. While the $4 billion settlement was being hammered out, Chesley also filed a separate fen-phen class action on behalf of three individuals in state court in Boone County, Kentucky.
Three other lawyers — William Gallion, Shirley Cunningham, and Melbourne Mills — had just filed their own class action lawsuit against AHP in the same court, on behalf of Darla Guard and 430 other Kentucky fen-phen users who had also opted out of the national settlement. They also sued W. Rex Duff, an Ashland, Kentucky, doctor who had prescribed the drug to thousands.
Gallion, of Lexington, Kentucky's Gallion, Baker & Bray, a medical malpractice lawyer who frequently represented the University of Kentucky, was the team's lead lawyer. This was the largest case he'd ever worked on, he later testified at his criminal trial. All three lawyers knew each other: Gallion and Mills, a partner at a small Versailles, Kentucky, firm, had worked alongside each other on medical malpractice cases, according to Gallion's testimony, and Gallion and Cunningham, a partner at a small Lexington firm, had opposed each other on a few workers' compensation and personal injury cases.
Two weeks after filing his suit, Chesley moved to consolidate his case with the one filed by Gallion, Cunningham, and Mills, according to Graham's report. Gallion opposed the consolidation, he later testified at trial, because he feared that Chesley would "take over the case." Given Chesley's greater experience, it wasn't an irrational fear. Gallion happened to run into Chesley at a restaurant soon after Chesley filed his motion. Gallion introduced himself: "I essentially told him, 'I do not wish to have you involved in my case,' " Gallion testified. As Gallion recalled it, Chesley responded: "Well, you're going to have to live with it."
Gallion and his cocounsel eventually decided that they would have to live with it. Gallion and Chesley agreed that all four lawyers would serve as cocounsel. (Chesley's three clients were sent to the national fen-phen case.) Gallion was lead trial counsel, and Chesley would be "lead negotiator" in settlement talks. For reaching a settlement, Chesley would earn 27 percent of the total attorneys' fees, according to Gallion's testimony and Graham's report.
But Chesley's first attempts in 2000 to reach a settlement with AHP and its lead lawyer, John Vardaman of Williams & Connolly, went nowhere. When Chesley's fee arrangement neared expiration in December 2000, Gallion balked at renewing it, then agreed to a new deal that gave Chesley 21 percent of the attorneys' fees, if he settled the suit.
With a summer 2001 trial date approaching, Chesley had better luck pushing AHP toward making an attractive settlement offer. During two days of negotiations with AHP counsel Vardaman in April and May 2001, "Chesley turned an offer of $20 million into a $200 million offer," says Chesley counsel Snyder. With a $200 million aggregrate settlement reached, Snyder says, "Chesley's job was done."
But as Graham would later argue, the trouble was just starting.
Even with the settlement, AHP feared exposure through future claims against Duff, the doctor who had written so many fen-phen prescriptions, by patients who hadn't signed on to the Guard case. The Guard plaintiffs and their attorneys agreed to indemnify AHP for one year against claims it might incur through lawsuits against Duff. Gallion testified at his trial that, as he understood it, the Guard plaintiffs and the plaintiffs lawyers were responsible for all claims against Duff for a year — and therefore, the plaintiffs attorneys would have to set aside money to cover those potential claims.
But that interpretation wasn't quite right. As Vardaman testified at Gallion and Cunningham's criminal trial, a side letter to the settlement agreement limited AHP's potential indemification to $7.5 million. Gallion claimed in his trial testimony that he first saw this side letter a few years after the settlement and that his signature on it was forged. He believed, he said, that the $7.5 million was only for attorneys' fees related to the indemnification.
On May 9 Chesley, Gallion, Gallion's associate David Helmers, Cunningham, and AHP counsel David Schafer, then of Woodward, Hobson & Fulton, appeared before state judge Joseph Bamberger to present him with a jointly tendered order approving the settlement.
Bamberger would later testify in the criminal trial that the order he signed on May 9 made no mention of future claims that would be covered under the terms of the settlement agreement. He signed the order but never saw the actual settlement agreement, he said.
Next, Gallion, Mills, and Cunningham asked their clients to sign off on the settlement. But the terms were kept secret, according to the 417 fen-phen plaintiffs who would later sue the lawyers. In their complaint, the plaintiffs say they were never told the terms of the settlement or what percentage of the settlement money would go to their lawyers. According to the civil complaint, plaintiff Margie Berry was told that she could face jail time or receive a fine if she told even her family about her settlement figure.
From June through November 2001, AHP handed over the $200 million in incremental payments to the lawyers. Most of the fen-phen plaintiffs received checks of about $20,000 or $30,000, with some claims garnering as much as $2 million. The lawyers distributed only $45 million of the settlement to the plaintiffs, according to the criminal indictment. They stored the rest in bank accounts under their own names, the indictment says. As Gallion explained it, the lawyers were keeping the money in reserve to indemnify AHP; they set aside $7.5 million for attorneys' fees related to potential claims.
The plaintiffs lawyers got their fees, too. Oddly, Chesley was apparently paid too much. Under his agreement with Gallion, Chesley was in line to receive about $13 million. In June 2001, he got a check for $12.3 million. Later that summer he received two more checks totaling $4.1 million, for a total of $16.4 million.
At this point, Chesley should have realized that something was wrong, the Kentucky Bar Association trial commissioner found. "Even a rough calculation would reveal that the sixteen-and-a-half-million dollars received by Chesley is several million in excess of the 21 percent of the attorneys' fees to which he was contractually entitled," Graham wrote.
Chesley testified that he never checked to see whether he had gotten the correct fee. "I assumed that Mr. Gallion and Mr. Cunningham would send me a check based on what the court had indicated was the appropriate amount, and I had no reason not to trust them," he said at trial.
The first stream of payments raised concerns for one of Mills's partners and one of Gallion's. In January 2002, they contacted the Kentucky Bar Association about their misgivings.
Gallion's partner Michael Baker found internal e-mails that led him to believe the money was not being distributed properly, according to Kentucky Bar Association counsel Linda Gosnell, who oversaw the investigations of the three Kentucky lawyers and of Chesley. Likewise, Mills's partner David Stuart also was concerned about the settlement distribution. "Stuart was worried that Mills was not watching how the money was being handled," says Gosnell.
In February 2002 the state bar investigation's inquiry commission opened an investigation, subpoenaing bank records and other records relating to the receipt and disbursement of the Guard settlement funds.
Meanwhile, Baker and Stuart compared notes. According to Graham's report, Baker told Stuart that the settlement totaled $200 million. When Stuart passed this along to his partner Mills, Mills was shocked. The other plaintiffs attorneys had told Mills the settlement amount was $150 million, according to Graham's report. An angry Mills confronted Gallion during Mills's own office birthday party on February 6, 2002, demanding that an additional distribution be made to the clients.
That's when The Plainttiffs lawyers came back to Judge Bamberger, according to Graham's report. They made a verbal motion requesting permission to be heard on an unspecified issue, according to the judge's trial testimony.
At trial, Gallion said that the meeting with Bamberger was prompted by the approval of the national fen-phen settlement in late January 2002. According to his testimony, the MDL's settlement was "a great relief" to him since it reduced some of the exposure for his own settlement. If the national settlement had collapsed, MDL plaintiffs could have turned to state courts, and the plaintiffs lawyers might have been required to indemnify AHP.
At Chesley's suggestion, Gallion testified, he and Cunningham decided to seek advice from Judge Bamberger on what to do with the money they'd withheld.
But in his closing argument at trial, assistant U.S. attorney Edwin Walbourn had a different explanation for the meeting with the judge, linking it to the birthday party confrontation between Mills and Gallion. The plaintiffs lawyers were trying to hold on to more than their share of the settlement proceeds, Walbourn said: "They've gotten caught with their hand in the cookie jar, but they just couldn't quite give it all up."
At trial, Chesley said he had no recollection of the meeting with the judge, but Bamberger testified that Chesley was present. Bamberger met with Gallion, Cunningham, Chesley, and trial consultant Mark Modlin in a jury room near his office. No court reporter was present.
The question under discussion: What to do with the millions of dollars the plaintiffs lawyers had withheld?
"[Chesley] started the conversation speaking about excess money and cy-pres," Bamberger said on the stand. "He was telling me about other cases he had where money was left over or excess and given to a charity."
At the time, the judge later testified, he had never heard of the expression cy-pres, the legal doctrine that allows excess settlement money to go to a charitable cause. According to Bamberger's account, after the meeting, Chesley sent Bamberger a memo about cy-pres, although it did not mention any facts relating specifically to the Guard case.
Next on the agenda were attorneys' fees. According to Bamberger's testimony, Gallion told Bamberger that he and the other plaintiffs attorneys wanted fees worth 49 percent of the settlement — a total of $98 million. At trial, Gallion said that he made the request because Chesley told him they were entitled to the money.
What the judge didn't know, according to Bamberger's own testimony, was that the plaintiffs lawyers had already taken fees pursuant to their contingency arrangements. The award of more fees would justify the lawyers keeping what was left of the money they'd already withheld, prosecutors would later argue. "So they asked the judge to approve attorneys' fees of 49 percent," Walbourn asserted at trial.
Bamberger approved the fee request and a second payment distribution to clients that night. Asked on the stand whether he trusted the three attorneys at the time of the meeting, Bamberger replied, "Oh, yes" — although he also testified that he had never dealt with Mills, Cunningham, or Gallion prior to the Guard case. Bamberger's hefty caseload — nearly 2,000 annually — meant that he "hardly ever" wrote orders himself, he testified. The same was true in this case. "I just asked them to tender an order," he said at trial.
Five months later, in July 2002, Bamberger approved the creation of a trust. His understanding, he later testified, was that the trust would receive $20 million of settlement funds.
Soon after the meeting with Judge Bamberger, clients who had been told that the first checks they received would be their last began getting calls telling them to retrieve a second settlement check, according to the eighth amended civil complaint against the plaintiffs attorneys. The second round of checks totaled $29 million, which brought the overall sum paid to clients to $74 million — according to the indictment — approximately $65 million less than what they deserved.
When the plaintiffs went to collect their money, the lawyers' representatives told them that, after the second distribution, some settlement funds remained, an amount that would be donated to charity because it was too small to split among the plaintiffs.
The charity of choice was a nonprofit corporation set up by Gallion and Cunningham: the Kentucky Fund for Healthy Living, aimed at supporting health initiatives throughout the state. The plaintiffs lawyers planned to pay themselves between $5,000 and $5,300 per month to manage the fund, according to Gallion's testimony.
In April 2002, after the plaintiffs received their second checks, Chesley got another check too, this one for $4 million, according to Graham's report. The fourth and final payment pushed Chesley's fee sum over the $20 million mark — approximately $7 million more than he was supposed to receive under his fee agreement with Gallion. In his report, Graham calls this check a bonus for persuading Judge Bamberger to sign the order approving the unjustified fees after their unrecorded meeting in Boone County.
Of the $200 million settlement, the plaintiffs lawyers had taken about $125 million; the fen-phen plaintiffs had received payments totaling $74 million.
But the plaintiffs lawyers wouldn't have much time to enjoy the fruits of the settlement. Word was getting out that something was very strange about the Guard settlement.
Angela Ford, a Lexington-based litigator, recalls that a new client, a former Guard plaintiff, walked into her office in August 2004. The client had concerns about her settlement, and her attorneys had declined to produce any documents, including the settlement agreement, says Ford.
Puzzled, Ford examined the court record for the Guard case, but what she found there didn't make sense either. "There were quite a few orders entered postsettlement that were red flags, including one about establishing a charitable corporation," says Ford.
Ford tracked down other fen-phen clients. "They had a bad feeling about the way they'd been treated," Ford says. Most of the plaintiffs were confused by what the lawyers had said about extra money going to charity.
In December 2004, on behalf of 417 of the fen-phen plaintiffs, Ford sued Chesley, Gallion, Cunningham, Mills, and the Kentucky Fund for Healthy Living for breach of fiduciary duty and negligent and fraudulent misrepresentation. The suit sought the return of all funds that had been improperly withheld from the fen-phen plaintiffs.
Ford wasn't the only one going after those involved in the Guard case. In 2005 the Kentucky Judicial Conduct Commission brought multiple charges against Judge Bamberger for his alleged misconduct in the Guard case. Bamberger — who had once been chosen judge of the year by Kentucky's trial attorneys — resigned in early 2006 after being reprimanded by the commission; at press time his disbarment was pending before the Kentucky Supreme Court.
Also in 2006, the Kentucky Bar Association leveled official ethics charges against Gallion, Cunningham, and Mills. In June 2007 they were indicted in the Eastern District of Kentucky on charges of wire fraud. Prosecutors asserted that the lawyers kept about two-thirds of the settlement with AHP — about twice what they could lawfully collect. The three defendants pleaded not guilty.
Ford scored a victory in August 2007, when Boone County circuit court judge William Wehr granted the fen-phen plaintiffs a $42 million partial summary judgment against Mills, Cunningham, and Gallion on the basis of the money they had withheld from the plaintiffs and the $20 million that had gone to the Kentucky Fund for Healthy Living [for more on the civil suit, see sidebar, "A Change of Opinion."].
Judge Wehr said the facts presented against Chesley were not sufficient to warrant summary judgment. Ford appealed the denial of summary judgment.
The criminal case against Cunningham, Gallion, and Mills went to trial in 2008. Jurors deadlocked on whether Cunningham and Gallion were guilty. And they acquitted Mills of all charges. His attorney, James Shuffett, had offered an unusual defense, arguing that Mills's alcohol abuse kept him out of the alleged conspiracy. "If the other two lawyers were going to steal from their clients, they would not take an alcoholic in on the scheme," says Shuffett. He also contended that Cunningham and Gallion had lied to Mills about the settlement, and that Mills had encouraged the other two lawyers to give more money to their clients.
Cunningham and Gallion were tried again in February 2009 in federal district court in Eastern Kentucky. The defense tried to shift blame to Chesley. In his testimony, Gallion said Chesley advised the plaintiffs lawyers on allocating the settlement funds. It was Chesley's idea to see Bamberger about a second distribution, Gallion said, and Chesley was also behind the cy-pres idea and the increased attorneys' fees.
On the stand, Chesley — who testified in both trials under a grant of immunity — denied Gallion's claims. He said that he had no involvement with the case postsettlement. No, he said, he did not give the plaintiffs lawyers any formulas for allocating settlement funds. He didn't have any conversations with the plaintiffs lawyers about how to determine their fees, and he didn't know how much money Gallion was planning to put into the cy-pres trust. He thought a small amount of money would go into the trust — perhaps 1 or 2 percent of the settlement. Chesley testified: "No way did I have any idea that it would be . . . almost 10 percent."
Chesley said on the stand that a "holdback" in a settlement to cover future claims is not uncommon, but he repeatedly testified that, if no additional claims were filed, the clients were owed whatever money had been held back.
"My role was to have direct contact with AHP and negotiate a settlement," Chesley said. "But I was to have no contact, nor did I know any of the clients, nor did I ever meet any of the clients. [Reaching a settlement] was my sole responsibility."
In his closing argument Gallion's counsel, O. Hale Almand, pointed the finger at Chesley for allegedly misleading the other plaintiffs lawyers. "It was certainly reasonable for [Gallion and Cunningham] to rely on that person, Mr. Stanley Chesley, who is known nationally as being an expert in this area of law," Almand said. "Much of the advice that was given by Mr. Chesley was bad advice. And it led to the committing of acts that, in hindsight, you can always say you would never commit."
But the jurors evidently concluded that, no matter what advice Gallion and Cunningham might have received, they had broken the law on their own responsibility.
In April 2009 the jury found both lawyers guilty of one count of conspiracy to commit wire fraud and eight counts of wire fraud. Gallion was sentenced to 25 years in prison; Cunningham, to 20 years. (Both have appealed their convictions while they serve their sentences.) The two lawyers had already been disbarred; the Kentucky Supreme Cort disbarred Mills in May 2010.
As Gallion and Cunningham headed to prison, Chesley had so far avoided any civil or criminal penalties related to the ill-fated Guard settlement. But now he faced ethics charges filed by the Kentucky Bar Association in 2007. The bar association had accused him of violating attorney ethics rules pertaining to unreasonable fees, notification of fees, and making false statements to the court.
In September 2010 Graham — appointed trial commissioner by the state supreme court's chief justice — held a hearing in Frankfort, Kentucky, where the state bar is based. Chesley testified on his own behalf, cross-examined by Gosnell for more than a day. Gosnell says that Chesley was adept at side-stepping questions. "His testimony lacked credibility," she says, "and that's what the trial commissioner found."
Almost six months later, in February 2011, Graham filed his devastating report. "It is clear from the evidence," Graham wrote, that even before Chesley received his last $4 million payment, "he was fully aware that a major portion of the funds had not been properly distributed to the clients."
Chesley, represented by Frost Brown's Snyder, Scott Cox of Cox & Mazzoli, James Gary of Weber & Rose, Frank Benton IV of Benton, Benton & Luedeke, and solo practitioner Mark Miller, appealed Graham's recommendation to the state bar's board of governors. But at a June 2011 hearing, the board upheld Graham's recommendation to disbar Chesley.
At press time Chesley's last appeal was pending before the Kentucky Supreme Court. Meanwhile, his practice has already been affected: In June, Ohio attorney general Mike DeWine suspended Chesley as plaintiffs counsel in Ohio's securities fraud case against Fannie Mae. Snyder says Chesley is still active in several other plaintiffs matters.
Chesley's lawyers argue that he had no part in allocating the settlement funds. They also say that the trial commissioner's findings of fact lack adequate support. "Bar counsel's evidence of Mr. Chesley's alleged participation in key cover-up events consists exclusively of the testimony of a defrocked judge — Mr. Bamberger," their briefs argue.
And they contend that Chesley, who had negotiated billions in settlements over his career, had no incentive to join the conspiracy: "There is no rational reason why a lawyer with Mr. Chesley's level of professional success, community involvement, and financial security would risk it all — to cover up other lawyers' criminal misconduct."
Some of Chesley's professional acquaintances are asking the same question. In his report, trial commissioner Graham blamed it on simple avarice.
"The greed evidenced by the plaintiffs attorneys in this case is astounding," Graham wrote. "Chesley's greed may not be as eye-popping as that of his cocounsel, Gallion and Cunningham, but it is no less egregious."
But for Ralph Knowles of Atlanta's Doffermyre Shields Canfield & Knowles, who worked alongside Chesley on the breast implant litigation, that explanation doesn't cut it.
"Stan is very smart, and he's very talented," says Knowles. "I don't know how much money Stan has, but he's got a lot. . . . I don't know why, at this stage in his life, would he do what he's been accused of doing."
See also: "AChange of Opinion," Litigation 2011.