Former Maryland Gov. Martin Mandel's attorney yesterday denied an allegation that Mandel had forged the endorsement on a $12,000 check -- an accusation that first publicly surfaced in news reports yesterday.

The state special prosecutor's office investigated the charges and recently decided not to prosecute, according to assistant prosecutor Gerald Ruter.

Mandel attorney Arnold Weiner said yesterday that the allegation led to no prosecution because he was able to furnish the prosecutors with evidence that "the complaint was totally without foundation."

A prosecution source said, however, that the key witness involved in the check forging allegation had some credibility problems and might not have made a good witness in court.

Mandel is currently serving a three-year prison term on unrelated political corruption charges.

During the state special prosecutor's probe, investigators established that Mandel last November deposited the $12,000 check -- made out to him and business associate Michael Keane -- in his own account after signing both their names as endorsements, the source said.

Keane, who made the allegation of forgery and was the key witness against Mandel, swore in an affidavit that he had not authorized the endorsement of the check by Mandel, according to the source.

But prosecutors decided to drop the case after "some things cracked his [Keane's] credibility" as a witness, according to the source, who refused to elaborate.

The $12,000 check was intended to be a "flash check" -- that is, one that Mandel could show to business associates as a demonstration that he could come up with the money needed for a certain deal, according to the source.

Weiner said yesterday that Keane actually gave Mandel "full authority" to endorse the check and deposit it. It is "routine," Weiner said, to grant such authority verbally.

Weiner said he also provided prosecutors with a statement from a witness who asserted that Keane had acknowledged he sent Mandel the check for deposit.

Keane could not be reached for comment yesterday.

The check had been written to Keane and Mandel by Ozzie Clay, a Washington developer, who said yesterday it was his understanding the check would not be deposited.

Clay said Keane had come to him last November asking for a $12,000 loan for Mandel, whom Clay did not know personally. "I said I might consider such a request provided certain conditions were met," Clay said yesterday. Clay cited proper collateral, interest and a repayment plan as such conditions.

"Keane said he'd tell Governor Mandel what my conditions would be and get back to me," Clay recalled of his meeting with Keane.

Clay said he agreed to write a check on Nov. 26 made out to both Mandel and Keane because Mandel wanted a check "to demonstrate to his business associates that he did know someone with $12,000 that could extend a loan to him." Clay said he got a signed statement from Keane that Keane would not endorse the check for deposit "until he got permission from me."

Clay said he was "upset" when he discovered about a week later that the check had been deposited. Clay said he called Keane and later Mandel, who he said told him, "Ozzie, I was under the impression you had made a loan to me, and I could use the $12,000.'"

"I said, 'How could you think you could use my $12,000 without providing me with collateral or a legal document that you had responsibility to repay it,'" Clay recalled of the telephone conversation.

Clay said Mandel was "congenial and apologetic."

Clay said that within approximately a day after that conversation, his account at the National Bank of Washington was reimbursed for the $12,000 by Mandel's bank in Maryland. Mandel later reimbursed his bank for the funds, according to legal sources.

Keane is an employe of Thermonetics, Inc., a company that specializes in developing new forms of energy.