State Police began investigating the case after receiving information from the Washington County attorney's office indicating that the settlement money may have been improperly used.
State Police Senior Investigator Thomas Aiken said the client had been hurt in a car crash, but had been on Medicaid. The county had placed a lien against the check, but never received the money despite the check being cashed in December.
"They were owed compensation (by the client) but they never got it," Aiken said. "The bulk of it (the check) was supposed to go to the county, with whatever was left over going to the client."
Washington County Attorney Roger Wickes was not available Wednesday morning.
The arrest is the latest legal problem for Oswald, who was Washington County public defender for 3.5 years until resigning in August 2005, days before he was arrested on a bad check charge. That charge was later dropped.
He was arrested last summer on a charge he burglarized a female acquaintance's home in Kingsbury, but said recently that the felony charge in that case was dropped. He also was ordered to spend 15 days in Washington County Jail last month for not paying $11,000 in child support.
Oswald was free on bail Wednesday but could not be reached for comment Wednesday. The phone number listed for his law office was disconnected as of Wednesday morning.