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Caught in the Whitewater Quagmire

By Marilyn W. Thompson
Washington Post Staff Writer
Monday, August 28, 1995; Page A01

In better days, they were the movers and shakers surrounding Bill Clinton, the vibrant young Democratic governor of Arkansas. They ran small banks and free-spending savings and loan associations, set up interconnected corporations and embarked on grand business and real estate ventures, often backed by shaky financing.

Now many of Clinton's close associates from the 1980s have fallen victim to the labyrinthine Whitewater scandal, the investigation named for the first couple's Ozarks real estate flop. The probe has rocked Arkansas' political circles and snared businessmen and lawyers who have not even a vague connection to the Whitewater Development Corp., in which Bill and Hillary Rodham Clinton were partners.

Recent congressional hearings into the failure of a savings and loan run by the Clintons' business partner in Whitewater offered a clearer picture than the public has had before of the kind of documentary evidence available to Whitewater independent counsel Kenneth W. Starr – and the directions in which it might be taking him.

What happens next is largely a matter of prosecutorial discretion.

Starr's office always had the mission of looking beyond the Ozarks to get to the bottom of a series of disparate charges swirling around the Clintons, who, except for millions of dollars in legal fees, have not been touched by the investigation.

Starr recently won a six-month extension of the Little Rock grand jury hearing the Whitewater case, a sign that the Clintons are not yet clear of the investigation that has delved into their personal finances, Clinton's campaign accounts throughout the 1980s and Hillary Clinton's law practice.

But where the extra time will take Starr – and whether he has developed any credible evidence implicating the Clintons in wrongdoing -- remains to be seen. The Clintons' lawyer, David Kendall, is convinced the worst is over. "Whitewater," he said, "is steadily evaporating."

Starr and his predecessor, special counsel Robert B. Fiske Jr., were given an open charter to spend as much time and money as it took to look into possible violations of law related to the Clintons and their dealings with Whitewater and Madison Guaranty Savings & Loan. It was always possible that Starr could end the probe by issuing a report exonerating the Clintons while bringing charges against many of those around them.

The investigation has reined in notables like Gov. Jim Guy Tucker and former associate attorney general Webster L. Hubbell and obscure characters from rural corners of the state, like a banker who left high finance to run convenience stores and a bankrupt Whitewater resort real estate agent whose fortunes reached rock bottom when he was caught shoplifting cigars.

To date, Starr's investigation has taken so many twists and turns that only the most dedicated Whitewater fanatic can track it – much less know the implications the various indictments and guilty pleas thus far could have for the Clintons.

Starr clearly has moved to resolve the central questions that dragged the Clintons into this mess. The original allegations made in press accounts and by some of the Clintons' Arkansas foes suggested that the couple had given a false accounting of their Whitewater involvement and misrepresented their contributions to the investment on their federal income tax returns. More broadly, their dealings with Whitewater business partner James B. McDougal were questioned as possible conflicts of interest, especially their ties to a state-regulated S&L owned by McDougal that failed.

There were allegations of quid pro quos – that in return for favorable treatment from the state for his enterprises McDougal had carried the Clintons in the Whitewater investment and hired Hillary Clinton's law firm. Bill Clinton was targeted most directly when a former municipal judge accused him of participating along with McDougal and others in a scheme to misuse a small business loan company backed by the federal government.

The grand jury's most recent indictment against McDougal and his former wife Susan shows Starr has found credible some of the charges made in 1993 by key prosecution witness David Hale, the former judge who has accused Clinton of wrongdoing.

Hale, who has pleaded guilty to fraud, described an alleged plot in 1985 and 1986 involving influential members of Arkansas' Democratic "political family" to loot a loan company he ran for disadvantaged borrowers that was backed by the Small Business Administration.

One missing component of Hale's story in the 47-page indictment obtained by Starr was the name of Bill Clinton, whom Hale has accused of participating in the scheme by twice asking him to help out McDougal. Hale has said Clinton once stopped him near the State House and asked if he would help James McDougal, and also participated in a meeting at one of McDougal's developments in which the details of a $300,000 loan were discussed. At the time, McDougal was allegedly scrambling to come up with money to cover some of Madison's irregular transactions to keep federal regulators from questioning them in a scheduled audit.

Hale made the $300,000 loan – the largest amount his company was authorized to lend – in the name of Susan McDougal, purportedly to finance a marketing company she owned. But the money quickly filtered out to other dubious McDougal ventures. Part of it was used by the Whitewater Development Corp. to purchase a tract of land from the International Paper Co. Clinton has denied any such conversations with Hale, and the Clintons say they had no knowledge of their failing corporation's last property purchase. James and Susan McDougal each face fraud charges in connection with the alleged scheme.

Where Starr is going with Hale's allegations is unknown. The indictment refers repeatedly to "unnamed others" known to the grand jury who participated in discussions about sham loans, yet Starr's office took pains to point out in a press release that the president and Hillary Clinton were accused of no wrongdoing.

The White House and Kendall have dismissed the case – as they have all other Whitewater-related matters – as unconnected to the first family or their money-losing Whitewater venture. Starr could be employing a typical prosecutorial strategy, coming down hard on other alleged participants – namely the McDougals and Jim Guy Tucker, who is also charged with fraud in the latest indictment – in hopes of eventually securing corroboration for Hale's charge that Clinton was involved.

So far, none of the three defendants has shown any willingness to cooperate. Or Starr could have thoroughly investigated the alleged Clinton involvement and found it to be either untrue, inconsequential or unprovable before a jury.

In their entirety, the charges Starr has brought over the past 18 months have drawn a picture of opportunism and greed in Arkansas, a small-scale version of the financial frauds and real estate scams taking place across the country before the S&L industry collapsed.

Arkansas had no Charles H. Keating Jr., with millions in S&L proceeds to spend illegally on political wheel-greasing; but it did have McDougal, Clinton's former economic development aide, who bragged that he had handled investments for state Democratic Party bigwigs since he worked with Clinton in Sen. J. William Fulbright's office.

Many in Arkansas knew of McDougal's closeness to Clinton before Madison Guaranty became a magnet for entrepreneurs with Democratic Party connections. The Whitewater project, launched while Clinton was the state's attorney general and its guardian against consumer fraud, caused a mild ripple when Clinton first disclosed it on his state financial forms. McDougal was buying up land all over Arkansas and soon became known for his fast-and-loose development style

Whitewater was a typical McDougal venture: Few lots were sold; some that were sold were repossessed; and in a short time, with no real property improvements by the developers, the project's estimated value could not secure the amount of the mortgage loan. By 1987, a recently released document shows, trash and rundown mobile homes on the properties would have made lots hard to sell.

In various charges brought by Starr and made more pointedly by Republican congressional investigators in these recent hearings, it has also become clear that government-backed institutions in Arkansas were drained by developers like McDougal. And more directly for Clinton, Republicans have charged that state regulators under his tenure as governor were turning a blind eye to the abuse of institutions like McDougal's that were particularly vulnerable to corruption.

Though the Clintons have tried for years to distance themselves from their fallen friend, the hearings established that during the 1980s, McDougal not only enjoyed access to Clinton but also traded on it to push his causes. Sewage was a big issue for McDougal as he tried to turn hardscrabble land into subdivisions, and resurrected files from Arkansas agencies show him "ranting and raving" with health regulators about the septic tank systems for one of his developments. After Clinton called a meeting on the issue, the troublesome regulators were removed from the case.

The Rose Law Firm, once the preeminent Little Rock firm where Hillary Clinton built her practice, has been branded by Republicans as a case study in ethical conflicts, and government agencies have forwarded new findings about ethical misconduct by Rose lawyers to Starr for further scrutiny. Former Rose partner Hubbell, one of Clinton's best friends and an appointee to a high-ranking Justice Department post, has taken most of the heat thus far, earning a prison term for his admission that he defrauded Rose clients, including the federal government.

But in recent weeks, public attention has turned again to Hillary Clinton, who has acknowledged working with McDougal's S&L on a 1985 matter under consideration by state regulators. She has repeatedly insisted that her work for McDougal was minor.

But the House Banking and Financial Services Committee released hundreds of pages of documents that called into question Hillary Clinton's credibility on the issue. They show her working with McDougal on other matters, like whether he could get a permit to open a beer-tasting parlor at a mobile home and industrial park located in a dry county.

For Clinton, the only obvious benefit of his association with the group now tarnished by the Whitewater scandal was loyal political support and hefty donations. That, too, has been a focus of scrutiny by Starr. Earlier this year, Starr had targeted Clinton's 1990 campaign treasurer Bruce Lindsey, now a senior White House aide, but backed off from seeking his indictment in connection with a large cash withdrawal that he made on the campaign's behalf.

An officer of the tiny Arkansas bank that kept Clinton's 1990 campaign accounts and raised large amounts of money for him has pleaded guilty to a technical banking violation, a way for Starr to gain firsthand information about activities in Clinton's account. FBI agents at one point were tracking the cash withdrawals and interviewing some black ministers who received cash payments to help "get out the vote." But it is not clear where this tangent of the probe has led.

McDougal raised tens of thousands of dollars for Clinton and, according to federal investigators, held a fund-raiser in which some of the money donated was drawn from federally insured deposits at Madison Guaranty.

Starr also has won cooperation from Stephen Smith, a University of Arkansas professor who was once Clinton's top gubernatorial aide. Smith admitted obtaining another phony loan from Hale's company, this one under the pretense of financing a "disadvantaged" political consulting firm Smith ran in the 1980s. The $65,000 loan actually went to pay off an overdue bank loan Smith had with Tucker.

Smith was a Clinton intimate, part of a trio of young, hip aides who ran the governor's office when Clinton was freshly elected and who helped him come back from a devastating defeat early in his political career and rise to national prominence.

He, like many others now drawn into the investigation, remained loyal to the Clintons as the Whitewater controversy escalated and said he knew of no wrongdoing by Clinton.

David Hale
Former Arkansas municipal judge. Pleaded guilty March 22, 1994, to two felony counts of defrauding the Small Business Administration. To be sentenced.

Eugene Fitzhugh
Little Rock attorney. Pleaded guilty June 23, 1994, to one misdemeanor count of trying to bribe Hale after being charged with defrauding the SBA with co-defendant Charles Matthews. Sentenced to one year in prison, but is free while pursuing a lawsuit to withdraw his plea.

Charles Matthews
Broker. Pleaded guilty June 23, 1994, to two misdemeanor counts of bribery after being charged with defrauding the SBA with Fitzhugh. Serving a 16-month prison sentence.

Robert W. Palmer
Real estate appraiser, Madison Guaranty Savings and Loan, the failed thrift owned by James B. McDougal. Pleaded guilty Dec. 5, 1994, to a felony count of conspiracy for filing false appraisals to clean up the books of Madison Guaranty. Sentenced to one year of home detention, three years probation, $5,000 fine.

Webster L. Hubbell
Former associate attorney general and friend of Bill and Hillary Rodham Clinton. Pleaded guilty Dec. 6, 1994, to two felony counts of mail fraud and tax evasion after being charged with defrauding clients of nearly $400,000. Sentenced to 21 months in prison.

Chris Wade
Whitewater real estate agent. Pleaded guilty March 21, 1995, to two felony counts including bankruptcy fraud. To be sentenced.

Neal Ainley
Former president of an Arkansas bank. Pleaded guilty May 2, 1995, to two misdemeanor counts after failing to report large cash withdrawals from Clinton's 1990 reelection campaign for governor. To be sentenced.

Jim Guy Tucker
Arkansas governor who succeeded Clinton and was reelected last year. Charged with three felony counts of lying to Hale's company about the purpose of a loan, using that money as collateral on another loan to buy a cable TV company, and devaluing assets to reduce tax liability. Pleaded not guilty June 22, 1995. Accused Aug. 17, 1995, of 11 new charges, including conspiracy, wire fraud, bank fraud, mail fraud and misapplying funds.

William J. Marks Sr.
Cable TV developer. Co-defendant in Tucker case, charged with the same three felonies as Tucker. Pleaded not guilty June 22, 1995.

John Haley
Tucker's personal lawyer. Accused of one felony count of helping Tucker and Marks hide assets to reduce tax liability. Pleaded not guilty June 22, 1995.

Stephen Smith
Pleaded guilty June 8, 1995, to one misdemeanor count of conspiracy to misapply the funds of a loan from Hale's company. To be sentenced.

Larry Kuca
Pleaded guilty July 13, 1995, to one misdemeanor count of conspiracy to misapply the funds of a loan from Hale's company. To be sentenced.

James B. McDougal
Accused Aug. 17, 1995, of 19 charges, including conspiracy, wire fraud, bank fraud, mail fraud, misapplying funds, and others involving loans by Madison Guaranty Savings & Loan, which he owned, and Capital Management Services Inc., which Hale owned, in the mid-1980s.

Susan McDougal
Accused Aug. 17, 1995, of eight charges, including conspiracy, wire fraud, bank fraud, mail fraud and misapplying funds.

SOURCE: Staff and Wire Reports

Copyright 1997 The Washington Post Company

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