A former D.C. government official was indicted yesterday on charges he accepted more than $25,000 in illegal gratuities from a contractor hired to provide services to mentally retarded adults under the city's care.

Arnett C. Smith was supposed to be overseeing day treatment programs for the mentally retarded and ensuring that they received social, recreational and educational services. Prosecutors said he deliberately engaged in a conflict of interest by helping a friend set up a day treatment program and steering more than 30 clients her way. In return, he allegedly profited by engaging in a series of loans and other financial dealings with her.

Smith's indictment marked the third case filed so far in an investigation by the FBI and the D.C. inspector general's office into allegations of corruption and fraud within an industry that developed to serve the needs of more than 1,000 mentally retarded people under the District's care. The District spends an average of $100,000 a patient each year on taxpayer-funded programs for the mentally retarded, including housing, treatment and other services.

Smith, the first government official to be indicted in the probe, faces six federal charges including conspiracy, receipt of illegal gratuities and having a conflict of interest. From 1985 to 1996, he was chief of the day programs branch of the Mentally Retarded and Developmentally Disabled Administration, an agency within the D.C. Department of Human Services.

Smith's activities were described in a Washington Post series last winter that examined the District's treatment of the mentally retarded. The series found that the District exercised little oversight on spending and failed to adequately monitor programs to ensure that services were provided.

He had no comment on the charges yesterday, dismissing questions with a quick, "Have a pleasant day." His attorney did not return a telephone message seeking comment. After leaving D.C. government, Smith set up a group home for the mentally ill that collects city tax dollars.

The indictment stemmed from Smith's ties to Denise Braxtonbrown-Smith, a psychologist and one of the District's largest providers of therapeutic services to the mentally retarded. The two are not related. Her businesses included Psychological Development Associates Inc., which ran day treatment programs for mentally retarded adults from 1994 until 1998.

Braxtonbrown-Smith was indicted in May on charges she cheated the city out of $1.6 million by submitting Medicaid claims for services that never were rendered, such as psychiatric and medical treatment. Prosecutors said she used the money to buy a grand piano, a deluxe home entertainment center and other luxuries. She has pleaded not guilty and faces trial in January in U.S. District Court. Kenneth L. Strachan, the company's former chief financial officer, has pleaded guilty to a federal conspiracy charge in the case and is assisting authorities. He is awaiting sentencing.

Prosecutors said Smith helped Braxtonbrown-Smith set up her company in 1993 after meeting with her at his office, his home and her office during and outside of work hours. Because he oversaw assignments into day treatment programs, he was in a position to send numerous clients to her company, they said. The company, which charged $175 per adult per day, received roughly $2 million by the end of 1995, prosecutors said. Some of the money was for legitimate services but a large part of it was not, they said.

Meanwhile, prosecutors said, Braxtonbrown-Smith lived in a house in Northwest Washington that was partly owned by Smith and made payments that exceeded monthly mortgage obligations. She allegedly paid for more than $20,000 worth of improvements to the place. Her company also borrowed $30,000 from a private firm owned by Smith and paid back $57,500, they said.

Prosecutors said Smith could face up to 21 years in prison if convicted. His case was assigned to U.S. District Judge Royce C. Lamberth, who is presiding over the matters involving Braxtonbrown-Smith and Strachan.