Hillary's in trouble:
April 20, 1998
Arkansas Deadline for Starr: Was It a Coverup or
Politics?
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The New York Times: The President Under Fire
By JEFF GERTH and STEPHEN LABATON
LITTLE ROCK, Ark. -- After 30 months a federal grand jury here has nearly
completed its examination of evidence compiled by Kenneth Starr that President and
Hillary Rodham Clinton and their aides have long sought to suppress embarrassing details of their old financial dealings with the owners of a corrupt savings and loan association in Arkansas.
Lately the most visible part of the investigation by Starr, the
Whitewater independent counsel, has been the work of a
Washington grand jury examining whether Clinton or his aides
tried to hide a relationship between the president and Monica
Lewinsky. But it is Starr's prosecutors here in Arkansas who
have worked longest, looking into the possibility of a larger pattern of evasion, an effort to obscure the Clintons' involvement in the failed Whitewater land venture and its link to the savings and loan, Madison Guaranty.
Now Starr must decide whether that effort -- including a memorandum drafted by Mrs. Clinton and labeled by government regulators as meant to "deceive federal bank examiners" -- amounts to a criminal cover-up, or simply reflects an acceptable exercise in political damage control.
Starr has not announced what he will do about the work of the Arkansas grand jury, which will finish its term on May 7 and has sent no signals that new criminal charges will be brought. But he is required under the independent counsel law to submit a final report to the special court that supervises him. And if he determines that Clinton may have committed an impeachable offense, Starr must outline the evidence to Congress.
For years, prosecutors have examined whether the Clintons played a role in trying to cover up a criminal conspiracy in Arkansas in the mid-1980s. Interviews with witnesses and lawyers involved in the $30 million inquiry, as well as a review of previously overlooked public records, reveal that the Clintons and aides have deflected inquiries and given less than
forthright accounts about ties to James McDougal and his former wife, Susan, the Clintons' partners in the Whitewater Development Co. and the operators of Madison Guaranty.
The pattern investigators found, which included disappearing documents, began when Clinton was governor of Arkansas, ran through his 1992 campaign for president and continued in Washington after he took office and faced federal investigations, including those involving his dismissal of the White House travel staff and the 1993 suicide of Vincent Foster Jr., one of the first family's closest aides.
The destruction or disappearance of documents has made it difficult for investigators to reconstruct the events that are the focus of Starr's inquiry: a decade-old scheme by McDougal to bail out both the teetering Whitewater investment and his savings and loan, which ultimately failed, costing taxpayers more than $60 million.
The Arkansas phase of the investigation has resulted in several criminal convictions, including those of the McDougals; Jim Guy Tucker, the governor who succeeded Clinton; and David Hale, a former local judge, on fraud and other charges.
The convictions have been a mixed blessing for Starr. They forced recalcitrant defendants to cooperate and provide new information about the Clintons. But Starr faces the problem of deciding whether he can build a case against the president or first lady that is based largely on the testimony of criminals he convicted.
Starr's inquiry faces other hurdles that make it difficult, if not impossible, to file new criminal charges. McDougal died last month. Mrs. McDougal has refused to respond to questions before the grand jury. Hale's current finances are under attack. And Tucker's cooperation has been described by other witnesses as only moderately helpful.
Among the new details about the bad deals and the resulting investigation, from both witnesses and the records, are these:
-- McDougal's efforts to regain his financial footing were rooted in two large land deals on the outskirts of Little Rock that were more closely connected than previously known. One, known as Castle Grande, was seen as a way to recapitalize the ailing savings and loan. But the deal, examiners later concluded, was a sham. The other, Lorance Heights, was intended to be the last-ditch effort to rescue Whitewater, bought with part of a fraudulent $300,000 loan to Susan McDougal.
-- McDougal told prosecutors that he kept Clinton apprised of efforts to rescue Whitewater and discussed those with him on the day the Lorance Heights deal was signed. The president has denied under oath that he knew of the efforts.
-- Mrs. Clinton did legal work for the utility that was to provide Castle Grande and Lorance Heights with water and sewer service and was critical to the developments' success. The utility, bought as part of the sham deal, was partly owned by Tucker. He recently appeared before the grand jury here following a plea deal in which he agreed to cooperate with investigators.
-- Officials of the Federal Deposit Insurance Corp. have told the Arkansas grand jury in recent months that a document drafted by Mrs. Clinton in 1986 was used "to deceive regulators" about the financing of the Castle Grande deal. The officials initially concluded that Mrs. Clinton had done little work for Madison and Castle Grande. But they changed their view after examining her billing records, which disappeared for several years before turning up in the White House study. Mrs. Clinton has said she does not remember drafting the document or performing other work on Castle Grande.
-- In a previously undisclosed court record, a Whitewater prosecutor told the judge in 1996 that an effort by Clinton to silence McDougal during the 1992 campaign -- after McDougal first talked to reporters about the Whitewater project -- implied "an attempt to cover the conspiracy" of crimes committed by McDougal and others.
-- Last summer, a briefcase belonging to Foster, the former deputy White House counsel who killed himself in 1993, as found in the attic of his old house here. It contained documents that raise questions about Mrs. Clinton's accounts of her legal work for Madison, according to witnesses.
Clinton's allies see Starr's inquiry differently. The only pattern they describe is of endless subpoenas issued by a partisan prosecutor trying to turn political activities and personal
friendships into felonies.
"Mr. Starr," said Lanny Davis, the former White House special counsel, "lacking evidence of crimes that would withstand scrutiny, stretches, almost desperately, to take political
behavior that is routine in our system, and attempts to create a criminal offense. Where he suspects cover-up, without any real evidence of it, is in fact politicians and lawyers
attempting to make the best of a given set of facts."
Near the southern border of Little Rock along U.S. Highway 65-167 lies nearly 2,000 acres of wilderness that in the 1980s McDougal saw as salvation. This was the land that came to be known as Castle Grande and Lorance Heights. If McDougal could buy that tract and develop it, while providing water and sewer lines to the new houses, he could use the sales of lots to help bail out his other ventures. His failing savings and loan was under scrutiny from examiners, and the Whitewater company he and the Clintons co-owned until 1992 -- begun so hopefully in 1978 with a 230-acre tract they had bought in the Ozarks -- was by then overwhelmed by debt.
But Arkansas regulations prevented Madison from buying the land. So McDougal hired Seth Ward, a wealthy local businessman, to act as a straw man. Ward's son-in-law, Webster Hubbell, was a partner at the Rose Law Firm along with Mrs. Clinton and Foster.
In October 1985, Ward spent $1.15 million to buy roughly half of Castle Grande and its sewer and water system. A Madison subsidiary spent $600,000 to buy the rest of the land and took an option to buy most of Ward's stake.
Examiners concluded that the deal was a sham. Ward had borrowed the money risk-free from Madison, putting up no money of his own. Within a few weeks of the initial transaction, McDougal's friends and political allies began to snap up parcels of the property, usually at inflated prices and, as Ward had, with Madison loans.
The biggest loan, for $1.05 million, went to a company formed by Tucker and R.D. Randolph, a close Clinton associate, to buy the water and sewer system. The two also used a $150,000 loan from Capital Management Services, the investment company run by Hale, to finance the $1.2 million sale.
Tucker's company, Castle Water and Sewer, became crucial to a second deal McDougal had devised, the purchase of 800 acres just south of Castle Grande that he called Lorance Heights. The Whitewater company bought the tract in March 1986 for an initial $25,000 payment. The money came from the fraudulent $300,000 loan that Hale had made to Mrs. McDougal.
In a recent appearance before the federal grand jury in Little Rock, the former top loan officer for Madison recounted how McDougal believed he could use his ties to Clinton to make the project a success.
The loan officer, H. Don Denton, recalled in a recent interview that early in 1986, he and a friend had driven a Jeep Cherokee through the mud to the site near Lorance Creek. He said
he told the grand jury how he wondered aloud where McDougal would be able to get the money he would need to develop Lorance Heights.
"Don't worry about that," Denton recalled being told by the friend -- Randolph, who was cutting down trees and building gravel roads in the area. "With the governor owning half of this, we won't have any problems getting a bank in the state to finance it."
Starr has obtained fraud convictions against the McDougals, Tucker and Hale in connection with Castle Grande.
Clinton provided videotaped testimony for the McDougals' trial in which he said he was unaware of the Lorance Heights deal. He also said he was unaware of Hale's unlawful loan. McDougal initially supported Clinton's account but after his conviction said that Clinton knew about both the deal and the loan. Hale has also said that Clinton knew about the loan.
The business relationship between the Clintons and McDougals escaped public notice until the 1992 presidential campaign, when McDougal, upset because he felt he had been used and abandoned by the Clintons, divulged some details about the Whitewater project to The New York Times.
The Clintons and their closest associates wanted to keep McDougal quiet, according to campaign records. Hubbell, whom Clinton later brought to Washington to work at the Justice Department, was concerned that the Castle Grande deal might be scrutinized, according to one witness.
Soon after the first article about Whitewater was published, in March 1992, McDougal was approached by Randolph and another close Clinton associate and urged to stop providing information to reporters. Clinton, in testimony prepared for McDougal's criminal conspiracy trial, recounted how he had sent Randolph to see McDougal.
"I asked R.D. if he knew what was going on, if he knew how Jim was doing and if he knew what motivated the article," Clinton said in testimony that the judge ruled inadmissible in the trial itself. He went on, "And I might have asked him to, you know, talk to him and see if we could have no further damaging articles, but I don't remember exactly what I said."
A prosecutor said in a court record that the testimony implied that Clinton's request of Randolph was part of a "post-conspiracy act to conceal or frustrate the government's efforts." At the time, however, there was no government investigation of McDougal or of Madison.
There were other efforts during the campaign to keep the relationship between the Clintons and Madison quiet. Foster and Hubbell removed files from the Rose Law Firm in 1992 that
shed light on Mrs. Clinton's legal work for Madison. Some, such as her billing records, remained hidden until 1996. Others did not surface until last summer, when Foster's wife, Lisa, turned over the briefcase she had found in her attic in Little Rock.
One document in the briefcase, according to a witness who recently appeared before the grand jury, raised questions about Mrs. Clinton's account of how Madison came to hire her firm. She said during the campaign, and again in 1994 when federal investigators were examining the firm's work for Madison, that a junior associate had brought in the business, that she had acted only as the billing partner.
In 1992 McDougal told reporters that Clinton had asked him to have Madison hire Mrs. Clinton because she needed the work, and his savings and loan had put the firm on a monthly retainer. During his trial in 1996, McDougal slightly altered his account, saying that he had made the suggestion that Mrs. Clinton be retained. Mrs. Clinton has said that the retainer agreement was set up because an earlier bill from McDougal's bank was unpaid.
That assertion came into question with the discovery of the paid bill in Foster's briefcase.
As part of the effort to explain how Mrs. Clinton came to represent Madison, the Clinton campaign staff interviewed her law partner, Hubbell, who had reviewed the firm's records. One campaign memorandum to the Clintons that was given to the grand jury by a witness spelled out five versions of the retainer arrangement, given over three weeks by Hubbell.
Although Castle Grande and Lorance Heights never surfaced in 1992, the news accounts about Whitewater and Madison prompted a federal investigation of the savings and loan. The inquiry led to the appointment of an independent counsel. It was virtually inevitable that Castle Grande and Lorance Heights would be scrutinized: the latter was Whitewater's biggest investment and the former was Madison's biggest loss.
The investigation unfolded slowly. Under pressure from Congress, regulators looked into the Rose firm's work for Madison. Mrs. Clinton was interviewed by investigators and responded to written questions about her work for Madison. Her answers were supplied before her firm's billing records surfaced.
After investigators had completed their reports, they told Congress in the summer of 1995 that they had uncovered "no evidence that she worked on Castle Grande." But after the billing records were turned over to investigators in January 1996, that federal investigation was reopened.
Later that year, officials of the inspector general's office of the FDIC came to a different conclusion. "Madison Guaranty used a document drafted by Mrs. Clinton to deceive federal bank examiners" about payments to Ward that were part of the Castle Grande scheme, they wrote in a report to Congress.
The federal investigators who changed their conclusions about Mrs. Clinton appeared earlier this year before the grand jury in Little Rock to discuss their work, according to witnesses. Now her legal work on Castle Grande, and Clinton's possible knowledge of the fraudulent loan used to finance the Lorance Heights deal, have become central issues for Starr.
At first, in interviews with investigators starting in 1994, Mrs. Clinton denied working on the Castle Grande project. Then she said she knew it by another name and handled only a few obscure aspects of it. Her account came into question for the first time when the billing records surfaced.
A forensic analysis of the records found that Mrs. Clinton's fingerprints appeared on 2 of 108 pages. One page was a summary of her work for Madison; the other described her billings on Castle Grande, according to congressional investigators.
The billing records also show that Mrs. Clinton had numerous conversations with Ward during pivotal points in the deal.
The task of reconstructing Castle Grande has been difficult for investigators because Mrs. Clinton decided in July 1988, three years after the deal, to destroy her files on Madison and Castle Grande. Mrs. Clinton has said she dumped the records as part of an effort by the Rose Law Firm to reduce its file load.
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