A federal appeals court panel named Washington attorney James C. McKay as an independent counsel yesterday to examine allegations that former assistant attorney general Theodore B. Olson gave false testimony to Congress in 1983 about the administration's withholding of Environmental Protection Agency documents.
But the three-judge panel, following limits set by Attorney General Edwin Meese III, did not ask the independent counsel to investigate two former deputy attorney generals and others who were accused of wrongdoing in a 1,300-page report last December by the House Judiciary Committee.
"Those charges are not justified," said Olson, who was the Justice Department's chief legal adviser as head of the Office of Legal Counsel until 1984. "There is no credible evidence to support the proposition that I misled Congress.
"I regret that I have to go through this process," said Olson, now an attorney here with Gibson, Dunn & Crutcher, the Los Angeles law firm of former attorney general William French Smith. He said the independent counsel statute "can work in unpleasant and unfair ways."
Meese sought the probe of Olson after a preliminary FBI investigation. But he told the court there is insufficient evidence to pursue allegations against former deputy attorney general Carol E. Dinkins and former deputy attorney general Edward Schmults, both of whom were accused in the committee's report of acting improperly in the EPA controversy.
Justice Department spokesman Terry Eastland said another official criticized in the report, White House deputy counsel Richard A. Hauser, was not high-ranking enough to be covered by the independent counsel law but that he has been investigated and cleared by the department's Criminal Division. Schmults, Dinkins and Hauser have denied any wrongdoing.
The 1978 independent counsel law was designed to eliminate questions about an administration investigating its own high officials by shifting responsibility to an outside prober after an initial screening by the Justice Department. Judiciary Committee Chairman Peter W. Rodino Jr. (D-N.J.) said yesterday that Meese has gone well beyond the law in his decision.
"The attorney general has disregarded overwhelming evidence of other possible wrongdoing. . . and appears to have made judgments that are beyond his authority under the statute," Rodino said. He said Meese's request "does not even address" key issues and that Meese's conclusion that Dinkins and Schmults lacked criminal intent was "not supported by the evidence."
But Eastland said the statute requires the department to follow its standard policy, which is "not to recommend criminal prosecution if there is no reasonable prospect that an unbiased jury would return a criminal conviction."
Independent counsel McKay, 69, a trial lawyer with the firm of Covington & Burling here for the last 29 years, has represented Eli Lilly and Co. in litigation stemming from deaths linked to Oraflex, an arthritis medicine. A Georgetown Law School graduate and veteran of antitrust and product liability cases, McKay has also represented the Washington Redskins and the National Football League.
McKay said he has had no prosecution experience since he was an assistant U.S. attorney here in 1947 and 1948 but that he has no doubt he can handle the investigation. He said his selection came as "a total surprise" and that one of his first tasks will be to digest the three-volume committee report.
Olson played a major role in the Reagan administration's decision to withhold EPA documents subpoenaed by two House committees in 1982 and 1983. Congress was then investigating mismanagement and political favoritism in the EPA's "Superfund" toxic-waste cleanup program, and Olson's advice that the documents should be withheld under executive privilege helped spark a confrontation that forced Anne M. Burford to resign as EPA administrator.
The committee report charges that on March 10, 1983, the day after Burford's resignation, Olson "gave false and misleading testimony" to a House Judiciary subcommittee. Olson later made revisions in the transcript, a process he described yesterday as "routine."
The report said Olson's testimony "caused immediate concern" within the Justice Department, that Olson's deputy urged him to "correct the record" and that Olson "made a number of substantive alterations that changed the meaning of his prior testimony."
For example, Olson testified he was "not sure" whether he had provided written advice in the documents dispute, although he had written four memos on the subject. Olson changed his testimony to say he believed some of his advice was in writing.
Olson testified that he did not know whether President Reagan had reviewed the subpoenaed documents. The committee said it had evidence that "Olson did not believe the president had reviewed them."
Olson also testified that he did not recall having been told that EPA officials were willing to give the documents to Congress. But the report said that Burford told Olson at least once that she would turn over the documents if he did not sign a statement that they were enforcement-related.
The appeals court judges -- George MacKinnon, Edward Morgan and Walter Mansfield -- gave McKay broad jurisdiction to examine any allegation involving Olson.
Meese's 48-page report to the court said no independent counsel is needed to investigate Schmults because he had a "lack of criminal intent." It said that Schmults did not inform the Judiciary Committee about handwritten officials' notes relevant to the probe for more than a year because Schmults "did not want another documents dispute" with Congress.
"Mr. Schmults insists that he never intended to mislead the committee and that it was always his intention to raise the 'notes' issue before the committee's investigation was over," Meese's report said.
Schmults, now a GTE Corp. vice president, said his conduct was "perfectly proper." He called the independent probe of Olson "a tragedy. . . . We regarded him as the conscience of the Justice Department. I've never worked with a better lawyer."
The committee probe found that Dinkins had falsely certified to Congress that she had reviewed all the disputed documents by a certain date. But Meese's report said the evidence was ambiguous and that Dinkins believes she did review the documents.