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U.S. Is Asked to Probe Failed Arkansas S&L

By Susan Schmidt
Washington Post Staff Writer
Sunday, October 31, 1993; Page A01

The Resolution Trust Corp. has asked federal prosecutors in Little Rock to open a criminal investigation into whether a failed Arkansas savings and loan used depositors' funds during the mid-'80s to benefit local politicians, including a reelection campaign of then-governor Bill Clinton.

About three weeks ago, the RTC forwarded to U.S. Attorney Paula Casey in Little Rock information about 10 matters arising from transactions at the now-defunct Madison Guaranty Savings & Loan that warrant criminal investigation, according to government sources familiar with the probe. A written summary of the referral has been sent to the Justice Department, according to sources.

The package includes questions about whether a series of checks written on Madison accounts ended up in Clinton's campaign fund. The sources said there is no indication Clinton had personal knowledge of or involvement in the transactions, and the White House said yesterday there would be no way Clinton would have known if money from Madison accounts had been improperly used to make campaign contributions.

The RTC request, based on a broad probe of the S&L's financial affairs, also asks for further federal investigation of Madison's dealings with current Arkansas Gov. Jim Guy Tucker (D), the sources said.

Tucker's companies borrowed more than $1 million from the S&L for real estate and other ventures during the mid-1980s, when he was at a law firm that represented Madison. Some of the loans were made on what appear to be favorable terms and caused large losses to the S&L. Tucker's office did not respond to requests for an interview.

The RTC, which disposes of S&Ls, took over Madison after its 1989 failure, expected to cost taxpayers an estimated $47 million.

In examining the Madison transactions, the RTC has asked Casey to determine whether checks to the Clinton campaign were paid from overdrawn accounts with the authorization of Madison's owner, James B. McDougal, or whether Madison loans intended for other purposes were used for campaign contributions. McDougal is a longtime friend and business partner of Bill and Hillary Rodham Clinton and was an economic development aide during Clinton's first term as governor.

In an interview, McDougal said he had no knowledge of any Madison funds being used improperly. "I never approved an overdraft in the entire time I was down there," he said.

Clinton aide Bruce Lindsey said yesterday that McDougal helped organize an April 1985 fund-raiser to pay off Clinton's 1984 campaign debts. Lindsey said he does not know how much was raised during the fund-raiser and does not have the state campaign records, which are routinely discarded after five years. But he said he had seen a deposit slip noting that McDougal contributed $3,000, which was not in excess of campaign limits at the time.

Lindsey said he understands that the RTC is questioning the "source of funds" for that check and perhaps others.

"How in the world would we have any knowledge of that?" Lindsey said. "Where the funds came from for that check – there's absolutely no way we would know or have questioned that."

RTC investigators have examined irregular Madison transactions that took place in April 1985 and have attempted to find out who endorsed and deposited a series of checks made out to Clinton or the gubernatorial campaign, one source familiar with the probe said. Lindsey said it would not be unusual for campaign contributors to make out checks in Clinton's name – and that was done by some at the 1985 fund-raiser – but that those checks would be placed in the campaign fund, which was maintained at Arkansas' Bank of Cherry Valley.

RTC investigators have been unable to secure bank records that would show where money from the checks went, the sources said.

The RTC takes the step of referring cases to law enforcement agencies when its own investigation of a failed S&L's books and loan files raises "aggravated suspicion" of possible criminal activity. Referrals are often made to the FBI or the Justice Department on limited evidence. The RTC has limited subpoena powers and no authority to bring criminal cases itself.

Sources familiar with the Madison referrals said Casey's office will have to evaluate whether transactions dating back to the mid-'80s warrant criminal investigation. Casey declined to comment.

RTC spokesman Steve Katsanos would neither confirm nor deny whether the agency asked Casey to further investigate Madison. "We have found Madison to be a very interesting institution and we conduct investigations in cases of all failed S&Ls," he said.

Sources said that the RTC also asked Casey to investigate whether McDougal had violated S&L regulations. He was acquitted of bank fraud in 1990 in a case that focused on bonuses and profits he earned for real estate deals involving the development subsidiary, Madison Financial Corp.

The RTC action comes after a long-running probe of Madison that began soon after the S&L was taken over by federal regulators. Before it was taken over, regulators were critical of Madison's management, contending it permitted conflicts of interest, inflated real estate appraisals, and unsupported loan documentation and that it failed to collect debts, state records show.

The RTC probe intensified about a year ago as investigators examined loans and financial transactions involving a small group of borrowers, including some S&L officers and directors and local politicians who were Madison customers.

As part of the investigation, the RTC went to extraordinary lengths to trace real estate transactions involving Whitewater Development Corp., a land company Bill and Hillary Clinton jointly owned with McDougal and his former wife, Susan McDougal, according to government sources. The corporation maintained an account at Madison, and sources said Whitewater's activities are among the matters referred to Casey for further investigation.

Whitewater, which the Clintons have described as a money-losing venture that developed land in the Ozark Mountains, was formed in 1978.

There was protracted debate within the RTC about whether Madison transactions involving the Clintons should be included in documents sent to Casey, because the investigation focuses primarily on the handling of S&L funds by Madison officials, sources said.

The RTC's investigators who are based in Kansas City were prepared to forward the information earlier this fall, but the decision to send the referrals on was not made until early October, the sources said.

Madison, which grew from a tiny Arkansas thrift into a bustling institution during McDougal's years there, has surfaced before as an issue for Clinton. During his presidential campaign last year, he was faced with questions about whether his administration in Arkansas gave favorable treatment to the troubled S&L in the mid-1980s when it was seeking state permission for new ways to raise money.

Hillary Clinton, then a lawyer with the influential Rose law firm of Little Rock, acted as an attorney for Madison when it went before the State Securities Commission in 1985. An issue was raised during Clinton's 1992 presidential campaign about whether her work for the S&L was a conflict of interest. She said her legal work had been minimal.

Controversy also arose during the 1992 campaign over Whitewater's finances. Press investigations of Madison showed that Susan McDougal's advertising firm, which was associated with Madison, deposited money in Whitewater's account at the S&L to cover an overdraft.

Under intense media scrutiny, Denver lawyer James Lyons was retained by the campaign to do a report on Whitewater's business dealings and he found the Clinton's lost money on the investment and had done nothing improper. Officials said they could not locate many of the records that might answer questions about the transactions.

Tucker, a former congressman and state attorney general, was involved in a number of Madison loans, which went to fund small real estate deals, Tucker's cable television company and major industrial projects.

Madison loaned one of Tucker's companies, Castle Water and Sewer, more than $1 million. His company was to provide service to the Castle Grande mobile home park, a Madison Financial Corp. development near Little Rock, but the S&L ended up losing $861,000 on the loan, the RTC said in an 1990 court document.

Staff writers Michael Isikoff in Washington and Howard Schneider in Little Rock contributed to this report.

Copyright 1997 The Washington Post Company

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