The Justice Department turned over information about Attorney General Edwin Meese III's involvement in telephone-industry issues to independent counsel James C. McKay after department lawyers uncovered evidence that Meese's actions may have violated federal conflict-of-interest laws, according to sources familiar with the inquiry.
The sources said that among the material that Deputy Attorney General Arnold I. Burns gave McKay last month, following an investigation by criminal division lawyers into Meese's actions while he held legal title to telephone company stock, was information that Meese associate E. Robert Wallach helped set up one meeting between Meese and telephone industry officials.
The Justice Department review was triggered by a request several months earlier by McKay, but McKay's office was not actively investigating the "Baby Bell" issue until Burns transmitted the information shortly before Christmas, sources said.
It could not be determined who Wallach arranged for Meese to meet or when. Meese's lawyer, James Rocap, said he had "absolutely no indication" Wallach was involved in arranging any meetings with industry officials.
Wallach, Meese's close friend and former lawyer, was indicted in New York last month on racketeering charges alleging that he and W. Franklyn Chinn, Meese's former investment adviser, took payoffs from the Wedtech Corp., a bankrupt defense contractor, to influence Meese and other federal officials.
Meese also met personally with top officials from at least two of the seven Baby Bells in 1985 and 1986, to discuss, among other things, restrictions imposed on them under the consent decree that split the telephone company, according to spokesmen for the two companies, Bell Atlantic and BellSouth.
At the time, Meese and his wife, Ursula, held legal title to 91 shares of stock in the seven regional telephone companies spun off in the breakup of AT&T. The stock was worth about $14,000 when they sold it last August.
The Justice Department was then reviewing the restrictions on the Baby Bells' ability to offer long-distance services, manufacture telephone equipment and provide computer services. The department was required under the terms of the 1984 breakup to file recommendations three years later on that issue with U.S. District Court Judge Harold H. Greene, who presides over the breakup.
On Feb. 2, 1987, the department reversed position and asked Greene to lift most of the restrictions, as the Baby Bells wanted. Two weeks earlier, on Jan. 20, Meese had received a waiver from then-White House counsel Peter J. Wallison to participate in future "discussions" involving the issues. Wallison granted the waiver on the ground that the Meeses' holdings in Baby Bell stock were too small to pose a conflict. The stock constituted about one-fourth of the Meeses' investment portfolio when Meese became attorney general in Feburary 1985.
Wallison said Friday that, at the time he granted the waiver, he was not aware that Meese had already held meetings with Baby Bell executives. He declined to say whether knowledge of the meetings would have influenced his decision.
Meese met Dec. 13, 1985, with Bell Atlantic chairman Thomas E. Bolger and general counsel Robert A. Levetown, and Jan. 28, 1986, with BellSouth chairman John Clendenin and general counsel Norman Frost, spokesmen for the companies said. Spokesmen for four other Baby Bells said they did not have evidence of similar meetings. One company, Ameritech, said it could not respond to such inquiries Friday.
BellSouth spokesman Kathleen Hughes said the company's meeting with Meese involved "one of the most important decision areas involved in our business. We put our top people with their top people."
Hughes said company officials were "very anxious" that department officials consider the company's information in making recommendations to Greene.
"Any time you can get an audience with a key player and one of the main regulators of you, that's a big deal," Bell Atlantic spokesman Larry Plumb said. He said company officials "were there to make the case" for lifting the restrictions and also wanted to discuss a controversial interpretation by department lawyers of a provision that could have required Bell Atlantic to sell a telephone paging company.
Federal conflict-of-interest law bars government officials from taking part "personally and substantially . . . through decision, approval, disapproval, recommendation, the rendering of advice, investigation or otherwise" in any matter in which "to his knowledge" he has a financial interest.
Meese attorney Rocap said Meese met with company officials "as a courtesy . . . . Mr. Meese listened, he was not required to take any action or make any decision of any kind." In addition, Rocap said, Meese "didn't have any financial interest to begin with" because he had "transferred all right, title and interest" in the Baby Bell stock to Chinn, his investment adviser.
Meese reported the stock as having been sold on May 23, 1985, and informed department officials that he was "accordingly no longer disqualified from participating in any matter involving those entities." However, he disclosed last July that he could not locate the stock certificates and so continued to hold legal title to it and to receive account statements and dividend checks, which he did not cash.
Rocap said Meese obtained the January 1987 waiver from Wallison "out of an abundance of caution."
Sources said McKay in July had asked the Office of Government Ethics, the agency responsible for reviewing officials' financial disclosure forms, to ask the Justice Department to perform a "conflicts analysis" of Meese's actions. The request came after Meese disclosed that month that he had not actually sold his Baby Bell stock.
The sources said Meese did not produce all requested records until December, and his disclosure then quickly resulted in the review by the department's criminal lawyers.
Sources said the criminal division's Public Integrity Section conducted an investigation of Meese's actions after the matter was referred to them by department lawyers reviewing Meese's financial disclosure forms in the Office of Professional Responsibility, which handles allegations of misconduct by department officials.
The Justice Department transmitted its findings to McKay just before Christmas and he began actively investigating Meese's Baby Bell actions early this year.
Sources familiar with the McKay investigation said he had ordered a concerted effort to review the Baby Bell issue under the direction of one of his top deputies, Carol Bruce. They said the process is expected to take more than a month and is not likely to be finished until completion of the conflict-of-interest trial of former White House aide Lyn Nofziger, which started last week.