06/15/2007 12:00AM

Part-owners of Curlin indicted in fen-phen case

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LEXINGTON, Ky. - A federal grand jury has indicted three Lexington lawyers - two of whom own a part-interest in Preakness winner Curlin - on charges that they conspired to commit fraud as part of their representation of 440 people in a lawsuit against the makers of the fen-phen diet drug combination.

William Gallion, 56; Shirley Cunningham Jr., 52; and Melbourne Mills Jr., 76, were served with the indictment on Thursday, about one year after they were temporarily suspended by the state bar because of questions concerning their handling of the $200 million settlement in the 2001 diet-drug case. Gallion and Cunningham purchased Curlin for $57,000 at the 2005 Keeneland September sale, and later sold an 80 percent interest in the colt for a reported $3.5 million.

The three lawyers were each charged with one count of conspiracy to commit fraud and one count of forfeiture and could face a maximum sentence of 20 years and a fine of up to $250,000 under federal sentencing guidelines. The forfeiture count would require the lawyers to repay $65 million to the fen-phen clients.

In the indictment, the federal grand jury claims that the three lawyers did not notify any of the plaintiffs in the case of the amount of the settlement or what the individual plaintiffs were entitled to, "falsely asserting a claim of confidentiality."

"Thereafter, Gallion, Cunningham, and Mills ignored both mandatory court rules and their contractual fee agreements with each plaintiff, fraudulently convinced each plaintiff to acccept a settlement amount without full disclosure of the facts, and defrauded the plaintiffs of approximately $65,000,000," the indictment states.

According to the indictment, the plaintiffs in the suit should have received two-thirds of the $200 million, but instead received a total of $74.2 million, with $28.6 million of that total being distributed only after the lawyers had received a subpoena from the Kentucky Bar Association seeking an explanation of the distribution of the funds.

The three lawyers are also the target of a civil case brought by the plaintiffs, some of whom have asserted that Gallion and Cunningham used proceeds from the case to purchase Curlin, who finished third in the Kentucky Derby and second in the Belmont Stakes. The lawsuit, filed in 2004, is scheduled to go to trial in September.

The criminal case will be prosecuted by U.S. Attorney Amul Thapar of the Eastern District of Kentucky. The lawyers who have been charged will have their initial hearings on June 22 in Covington.