Witnesses detail fen-phen settlement

Say money was for current plaintiffs

By Jim Warren - JWARREN@HERALD-LEADER.COM

COVINGTON -- Two Washington lawyers who represented American Home Products in a 2001 fen-phen settlement testified in federal court Thursday that the $200 million agreement was intended to cover the roughly 440 plaintiffs in the class-action lawsuit, and not future claims by others in Kentucky who had used the diet-drug combination.

The testimony by lawyers Jack Vardaman and Elaine Madonick appears to contradict a key claim by defendant attorneys Melbourne Mills Jr., Shirley Allen Cunningham Jr. and William Gallion, who have long maintained that they had to hold back large amounts of settlement money to pay off any other fen-phen claimants who might surface after the suit ended.

Cunningham, Gallion and Mills are accused of conspiring to commit wire fraud while pocketing millions of dollars in settlement money that should have gone to the plaintiffs they represented in the lawsuit.

The three filed the suit in Boone Circuit Court in 1998, and it later was merged with a similar suit filed by Cincinnati tort lawyer Stanley Chesley.

Chesley, a nationally known expert in class-action law, then joined Gallion, Mills and Cunningham in pushing the merged suit toward the settlement in which AHP agreed to pay $200 million. Chesley is not a defendant in the criminal case.

Under questioning by Assistant U.S. Attorney E.J. Walbourn, Vardaman said that Chesley sent him a letter in September 2006.

Vardaman testified that Chesley wanted him to write a letter basically stating facts of the case as outlined by Chesley, and then send it back to Chesley. But Vardaman, who said he's known Chesley for about 15 years, testified he never wrote the requested letter because the outline offered by Chesley was "totally incorrect."

Chesley's letter, parts of which were read in court, stated among other things that American Home Products had intended for the 2001 settlement to cover the claims of all fen-phen users in Kentucky -- not just the roughly 440 plaintiffs in the lawsuit -- and that AHP expected that settlement funds would be available if future claims were filed.

Defense attorney Hale Almand later asked Vardaman what the requested letter was for. Vardaman answered, "I think he (Chesley) was a defendant in a lawsuit."

That was an apparent reference to a related state civil suit, in which plaintiffs from the original fen-phen case are trying to recover money from Mills, Gallion, Cunningham and Chesley. A special judge in the case awarded a $42 million judgment against Gallion, Cunningham and Mills last August, but that judgment does not apply to Chesley.

Vardaman and Madonick, who work for separate Washington law firms, testified that they were among the attorneys who represented American Home Products in the mediation that led to settlement of the original fen-phen case May 1, 2001. Both said they also represented AHP in other fen-phen cases around the country.

Vardaman and Madonick said that some $7.5 million of the $200 million settlement was earmarked to indemnify American Home Products against any claims that might arise from individuals who had received fen-phen from Dr. Rex Duff, a Kentucky physician who distributed fen-phen to up to 60,000 people through several clinics he operated. But Vardaman said that was to be limited only to claims that were filed within a year after the settlement. In reality, Vardaman said, no such claims were ever filed.

Madonick and Vardaman repeatedly stated the settlement was intended to cover the 440-odd plaintiffs in the original lawsuit, and not to resolve all claims of Kentucky fen-phen users who might come forward.

Madonick testified that she settled some individual cases of Kentucky fen-phen users on behalf of AHP after the 2001 settlement.

She and Vardaman also testified that AHP took no position in settlement negotiations as to how the $200 million was to be split up among the plaintiffs, leaving that decision to Mills, Gallion, Cunningham and Chesley. They also stated that nothing in the settlement's confidentiality provisions prohibited the lawyers from notifying plaintiffs as to the total amount of the settlement in order to comply with Kentucky court rules.

Attorneys for Mills, Gallion and Cunningham vigorously attacked the testimony, particularly Vardaman's statement that the fen-phen case was not actually settled as a class-action lawsuit.

Almand, who represents Gallion, suggested at one point that AHP did not want the case settled as a class action because it would have had to report the case in its filings with the Securities and Exchange Commission, which might have hurt AHP's stock price.

Testimony from former Boone Circuit Judge Joseph "Jay" Bamberger was expected to continue Thursday, but was delayed to make way for Vardaman and Madonick. Bamberger could return to the stand Friday.