Before its charter expired at the end of 1995, the RTC was charged with investigating the cause of the failure of savings and loans under its control and to determine what civil claims, if any, should be pursued. The RTC, however, lacked the authority to initiate criminal prosecution of the failed S&Ls. Thus, it was the RTC's practice to notify the Justice Department -- typically, the U.S. Attorney's office and the FBI Bureau for the jurisdiction in which the failed thrift was located -- of any suspected crimes discovered by the agency. A "criminal referral" is the formal document that the RTC and other federal agencies use to report suspected criminal activity to the Justice Department.(219)
In 1992 and 1993, RTC investigators in Kansas City submitted to the U.S. Attorney for the Eastern District of Arkansas ten criminal referrals concerning the activities of Madison Guaranty. Several of the referrals identified Mr. and Mrs. McDougal, the Clintons' Whitewater partners, and Mr. Tucker, who succeeded Mr. Clinton as Governor of Arkansas, as targets. Two of the referrals specifically involved Whitewater Development Corporation, which maintained a checking account at Madison Guaranty. One of the referrals alleged that Madison Guaranty funds were used to make illegal contributions to then-Governor Clinton's gubernatorial campaigns in the mid-1980s. Finally, the Clintons were named in three of the referrals as possible witnesses to suspected criminal activities.
The RTC begins its criminal investigation of Madison Guaranty.
The RTC began its investigation of criminal activities related to Madison Guaranty after the publication of an article on the front page of the New York Times on March 8, 1992.(220) The article, written by investigative reporter Jeff Gerth, reported that Governor Clinton, then a leading Democratic candidate for president, and his wife were partners with Mr. McDougal in the Whitewater real estate venture.
Mr. Gerth's article caused several RTC officials to question whether Whitewater had caused any of the financial losses suffered by the failed Madison Guaranty S&L. Mr. Gerth had written that "at times money from Mr. McDougal's savings and loan was used to subsidize" Whitewater. Mr. Gerth also wrote:
"It was during the period that Whitewater was making the Clintons' loan payments that Madison Guaranty was putting money into Whitewater.
For example, Whitewater's check ledger shows that Whitewater's account at Madison was overdrawn in 1984, when the corporation was making payments on the Clintons' loan. Money was deposited to make up the shortage from Madison Marketing, an affiliate of the savings and loan that derived its revenue from the institution, records also show."(221)
After publication of the article, the criminal investigations unit in the RTC's office in Tulsa, Oklahoma -- the office responsible for investigating possible crimes involving failed savings and loans in Arkansas -- received requests to investigate Madison Guaranty and Whitewater from both the Office of Investigations in the RTC Washington, D.C. office and from the director of the Tulsa office.(222) In any event, a criminal examination of Madison Guaranty had already been slated to commence in December, 1992.(223)
In March 1992, Mike Van Valkenberg, the head of investigations in the Tulsa office, assigned Laura Jean Lewis to be the lead RTC criminal investigator on the case.(224) At the time, Ms. Lewis was the RTC's only criminal investigator with responsibility for savings and loans in Arkansas.(225)
From March through August 1992, Ms. Lewis examined Madison Guaranty records stored in a warehouse in Little Rock.(226) She retraced and analyzed the flow of funds between several checking accounts at Madison Guaranty, including the Whitewater account, the McDougals' personal account, and the accounts of several other McDougal-related companies.(227)
Ms. Lewis testified that the investigation uncovered "substantial evidence of bank fraud."(228) Specifically, Ms. Lewis found numerous instances in which the McDougals would write a check on the Madison Guaranty account of one their various enterprises with insufficient funds to satisfy the draft and then deposit another check in that account, also written on insufficient funds, from another Madison Guaranty account.(229) Ms. Lewis observed that although many of checks had the word "loan" written on them, they were written on accounts lacking sufficient funds.(230) Ms. Lewis testified that through this "elaborate check kiting scheme" the McDougals "float[ed] worthless checks among specific accounts [so as] to create the appearance of legitimate balances."(231)
The first RTC criminal referral: C0004.
In July 1992, the investigation was interrupted briefly when the RTC office in Tulsa was closed and its investigations unit merged with the Kansas City office.(232) Ms. Lewis accepted an offer to transfer to the Kansas City office.(233)
By early August 1992, Ms. Lewis had begun to draft a criminal referral based upon her investigation of Madison Guaranty.(234) On August 31, 1992, the referral was completed and assigned the number C0004.(235) The referral was signed by Ms. Lewis, and her two immediate supervisors in the Kansas City office: Lee O. Ausen, the head of the Criminal Investigations Department, and L. Richard Iorio, the Director of Investigations.(236)
On September 1, 1992, Mr. Iorio sent Criminal Referral C0004 to Charles Banks, the U.S. Attorney for the Eastern District of Arkansas,(237) and to Steven Irons, Supervisory Special Agent ("SSA") of the FBI Little Rock Field Office.(238). In the accompanying transmittal letter to Mr. Banks, Mr. Iorio wrote that "[c]ertain matters have come to our attention which may constitute criminal offenses under Federal law. Enclosed is a report of Apparent Criminal Irregularity."(239) The referral was accompanied by several hundred pages of documentary exhibits consisting of copies of checks, account statements, and other bank records.
Prior to its submission to the Justice Department, Criminal Referral C0004 was reviewed not only by Mr. Iorio and Mr. Ausen, but also by James Thompson, the Deputy Regional Director of the RTC's Kansas City office.(240) James Dudine, the Director of the Office of Investigations in the RTC's Washington, D.C. office, also reviewed the referral after it was submitted to the Justice Department.(241) Both Thompson and Dudine testified that they thought C0004 met the standard for issuance of a criminal referral -- i.e., that there was a reasonable basis for believing that a crime has been committed or attempted.(242) Mr. Iorio, who signed the referral, testified that he thought the referral met and exceeded the prescribed standard.(243)
Criminal Referral C0004 was a 20-page, single-spaced description of "numerous questionable cash flow and 'loan' transactions" occurring in 1984 and 1985 among a dozen companies controlled by the McDougals, including Whitewater Development Corporation.(244) The referral alleged that crimes may have been committed in the course of these transactions; that some of the McDougal's business associates may have been aware of the criminal activity; and that the suspected criminal activity may have cumulatively contributed to the failure of Madison Guaranty:
The transactions reviewed and discussed herein will allege excessive overdrafts resulting in unauthorized loans, check kiting, possible forgery (or at the very least, extensive use of unauthorized signatures), potential misappropriation of funds, possible illicit campaign contributions, diversion of loan proceeds, and potential bank fraud; each of these actions, compounded by the extended time frame during which they occurred, lends [credence] to the probability that some or all of the McDougal's business associates and partners, the collective principals of these combined companies, had knowledge of these activities. The extensive nature of these activities could allegedly constitute ongoing criminal and regulatory violations which lasted for a period of three or more years, and could have ultimately contributed to the failure of the Association.(245)
The referral alleged that the McDougals and Lisa Aunspaugh (an employee of Susan McDougal's), had committed, among other crimes, bank fraud, in violation of 18 U.S.C. 1344, and conspiracy, in violation of 18 U.S.C. 371.(246) The referral named the President and Mrs. Clinton, Governor Jim Guy Tucker, former U.S. Senator J.W. Fulbright, Stephen Smith, and Greg Young, as potential witnesses to suspected criminal activity.(247) The referral also identified the Clintons, Mr. Tucker, and Mr. Smith as persons who had stood to benefit from the suspected criminal activity.(248)
Ms. Lewis identified the Clintons as possible witnesses because they "were business associates and involved in the Whitewater Corporation with Mr. McDougal, and as such, I think I would have been imprudent in my job had I not listed them as witnesses because they were part of Whitewater and could have easily had knowledge of what Mr. McDougal was doing with those funds."(249) Mr. Iorio agreed with Ms. Lewis' decision to list the Clintons as possible witnesses.(250)
The referral indicated that, during the mid-1980s, at least 10 checks were written on the Whitewater's account at Madison Guarantyand that five of the checks totalling over $60,000 were written on insufficient funds.(251) The referral also noted that these overdrafts were cured by funds supplied by other McDougal entities, and that Madison Guaranty did not impose any service charges or fees in connection with the overdrafts.(252)
Betsey Wright informs Mrs. Clinton of the RTC criminal referral.
At about the time when Ms. Lewis was preparing Criminal Referral C0004, Mrs. Clinton learned of its existence. Betsey Wright, the former Chief of Staff to Governor Clinton, testified that in the fall of 1992, while she was working on the Clinton presidential campaign, she was informed, from a person she could not remember, of an RTC Criminal "Referral about an S&L officer which would implicate the Clintons in Arkansas."(253) Ms. Wright testified that "she went scrambling trying to find out what on earth they were talking about."(254) Ms. Wright called Bob Wilson, a criminal defense attorney in Little Rock, to determine whether she could obtain information about the referral but was told that such information would be confidential.(255)
Ms. Wright testified that she spoke with Mrs. Clinton and asked "if she was aware of any friend of theirs in the savings and loan business who might be under criminal investigation, and we couldn't think of anybody."(256) Although national media attention was focused on the McDougals, Madison Guaranty, and Whitewater during the 1992 campaign, Ms. Wright claimed that Mr. McDougal's name was not discussed during her conversation with Mrs. Clinton.(257)
II. Criminal Referral C0004 Languishes at the Justice Department
After a criminal referral is submitted to the U.S. Attorney, he or she must determine whether it warrants further investigation or the initiation of criminal proceedings.(258) When the U.S. Attorney declines to proceed with a criminal referral, a "declination letter" is sent to the RTC.(259)
Although RTC Criminal Referral C0004 was submitted to the U.S. Attorney's Office in Little Rock on September 1, 1992,(260) no action was taken on the referral for more than one year. Finally, in October 1993, the new U.S Attorney in Little Rock, Paula Casey, a former student and campaign worker for President Clinton, declined this referral.(261) The referral was also reviewed by Justice Department officials in Washington, D.C., where the President's close friend, Webster Hubbell, was the Associate Attorney General, the third-highest position in the Justice Department.
The U.S. Attorney sends Criminal Referral C0004 to the main Justice Department.
On September 2, 1992, the U.S. Attorney's Office in Little Rock received Criminal Referral C0004.(262) The U.S. Attorney's Manual directs that a U.S. Attorney send an "Urgent Memorandum" to the attention of the Attorney General whenever a sensitive matter arises.(263) Although Criminal Referral C0004 identified Governor Clinton, then the Democratic nominee for President, his wife, and Jim Guy Tucker, then the Lieutenant Governor, as potential witnesses, Mr. Banks did not send an "Urgent Memorandum" or even report the receipt of the referral to the Justice Department in Washington, D.C. ("Main Justice").(264) Mr. Banks claimed that he did not notify Main Justice of the referral immediately because he lacked "confidence" in the referral and wanted more evidence before notifying persons outside of Little Rock.(265)
At about the same time, on September 17, 1992, White House Cabinet Secretary Edie Holliday asked Attorney General William Barr whether he was aware of any matter involving one of the presidential candidates.(266) Ms. Holiday later told Mr. Barr that the matter she had heard about involved a failed savings and loan and the Clintons. Mr. Barr asked Ira Raphaelson, then-Special Counsel for Financial Institutions Crimes(267), to ascertain whether the Justice Department was handling such an investigation.(268) Mr. Raphaelson initially informed the Attorney General that no such case existed within the Department.(269)
After Mr. Barr made a second request, however, Mr. Raphaelson discovered that "there had been a referral down in Arkansas, but it had not been reported. In fact, it appeared that the office had withheld it from [Justice Department] headquarters."(270) Mr. Barr testified that he was angry that the U.S. Attorney's Office in Little Rock had deliberately failed to inform him of the matter:
I basically said I was very angry that a matter which I viewed as a sensitive matter, that should have been reported to the Attorney General, was deliberately withheld from the Attorney General. So I was angry, and expressed my displeasure, and said that I'd be interested in knowing why an urgent report was not prepared for me and why I was not advised of this case, and why it had been deliberately withheld.(271)
Mr. Barr testified that Criminal Referral C0004 definitely met the criteria for the issuance of an Urgent Report:
The criteria is really anything which involves -- well, includes anything that involves a public personage, a celebrity or any kind of sensitive case that can involve, for example, public officials in the state, those kinds of things. It's inconceivable to me that any U.S. Attorney would not immediately understand that this case would require an Urgent Report.(272)
Mr. Barr instructed Mr. Raphaelson to ensure that the matter was kept in the strictest confidence to prevent any leaks and was handled solely based on its merits.(273)
On October 7, 1992, Floyd Mac Dodson, First Assistant to Mr. Banks, informed Lawrence McWhorter, Director of the Executive Office of United States Attorneys, that the U.S. Attorney's Office had been "sitting on the referral for six weeks," and that he "thought some further investigation was needed."(274) The next day, Mr. McWhorter transmitted an Urgent Memorandum, along with a copy of Criminal Referral C0004, to Attorney General Barr, stating that "[i]t is the belief of the U.S. Attorney's Office that further investigation into this matter is warranted."(275)
On the same day, SSA Irons also sent a teletype to SSA Kevin Kendrick at FBI headquarters in Washington informing him about Crminal Referral C0004.(276) The FBI teletype listed then-Governor and Mrs. Clinton and then-Lieutenant Governor Jim Guy Tucker among the possible witnesses.(277) The teletype explained the reason for identifying the Clintons as potential witnesses:
The activities of McDougal as they may have involved Bill or Hillary Clinton are related to Whitewater Development Corporation, Inc. (WWD) James and Susan McDougal and Bill and Hillary Clinton were partners in WWD. . . [Pages of the referral] discuss the check kiting activity involving the WWD account at MGSL.(278) According to the teletype, Mr. Banks had informed the FBI that he intended to research the referral and analyze the 300 documentary exhibits submitted by the RTC.(279)
On October 8, 1992, officials from FBI Headquarters and Main Justice met to discuss Crminal Referral C0004.(280) Present at the meeting were Mr. Raphaelson; Robert Mueller, Assistant Attorney General, Criminal Division; (281) Fred Verinder, Deputy Assistant Director, Criminal Division, at FBI Headquarters;(282) Mr. Kendrick; and Thomas Kubic, Section Chief, Banking Crimes Unit. Mr. Mueller indicated that even though the referral on its face did not contain enough information for the Justice Department to render an opinion, the FBI should investigate the matter to determine whether the case had merit.(283) As a result of the meeting, FBI Headquarters instructed its Little Rock Field Office to conduct a limited investigation into the matters described in the Criminal Referral C0004 and specifically directed the office to review the exhibits.(284)
Although Mr. Bank assured the FBI that he would review the 300 exhibits, neither he nor Mr. Dodson ever reviewed them.(285) On October 16, 1992, Mr. Banks wrote to Donald Pettus, Special Agent in Charge of the FBI Little Rock Field Office, to inform him that the U.S. Attorney's Office would not participate in any investigation regarding Criminal Referral C0004 until after the 1992 presidential election.(286) Mr. Banks indicated that he believed no prosecutable case existed against any of the witnesses, and that "the only allegations having any credibility are against the McDougals and Anspaugh." (287)
On the same day, the FBI Little Rock Field Office also notified Mr. Kendrick at FBI Headquarters by teletype that the limited data "may indicate criminal activity on the part of the captioned subjects, James and Susan McDougal, and Lisa Anspaugh. However, USA is holding opinion of prosecutive opinion regarding these subjects in abeyance."(288)
Based on the decision of the U.S. Attorney's Office to defer any prosecutorial consideration, the Field Office also adopted a non-investigative posture on Crminal Referral C0004.(289)
Criminal Referral C0004 gets lost at the Justice Department.
Criminal referral C0004 remained in the U.S. Attorney's Office until January 27, 1993, when Mr. Banks requested, in a letter to Donna Henneman, Ethics Program Manager at the Executive Office for U.S. Attorneys, that Main Justice assume responsibility for any further action.(290) Mr. Banks believed that his office had a conflict of interest because of its unsuccessful criminal prosecution of Mr. McDougal in 1990.(291) Mr. Banks concluded that "[a] limited preliminary investigation of allegations pertinent to Mr. and Mrs. McDougal and Ms. Anspaugh should be considered," and that interviews of these individuals should determine whether there is merit to further investigation.(292)
On February 9, 1993, Anthony Moscato, Director of the Executive Office of United States Attorneys, forwarded Mr. Banks' request to Stuart Gerson, then Acting Attorney General, through Douglas Frazier, Principal Associate Deputy Attorney General.(293) Mr. Frazier prepared a recusal package and sent it to the Criminal Division for its recommendation.(294)
On February 22, 1993, Gerald McDowell, Chief of the Frauds Section at Main Justice, directed a young trial attorney, Mark MacDougall, to analyze the criminal referral.(295) Just one day later, on February 23, 1993, without even reviewing the 300 exhibits, Mr. MacDougal prepared a memorandum in which he concluded that Crminal Referral C0004 did not appear to warrant any criminal investigation.(296)
Main Justice officials decided against rendering an opinion on the merits of the referral. Instead, Main Justice rejected Mr. Banks' request for recusal and returned the referral to Mr. Banks to let his office decide whether to investigate further or to decline prosecution.(297)
On March 19, 1993, Acting Assistant Attorney General John Keeney prepared a memorandum for Mr. Frazier rejecting recusal:
We have reviewed the material in the package and have concluded that there is no identifiable basis for recusal by the United States Attorney. Further, we would not question a decision by the United States Attorney to decline further substantive action on the referral.(298) Main Justice wanted Mr. Banks to make the ultimate decision on the referral. Allen Carver, Deputy Chief of the Fraud Section, Criminal Division, testified that the memorandum prepared by Mr. MacDougall did not constitute a conclusion by Main Justice not to prosecute the case,(299) and that the matter was sent to the U.S. Attorney's Office for a determinative opinion.(300)
Although Mr. Frazier believed that he should have received Mr. Keeney's memorandum in March, he did not receive it until the end of May or June, when it suddenly "appeared out of nowhere."(301) Thus, for more than two months, Mr. Banks was not advised of Main Justice's decision to reject his request for recusal.(302)
By May 1993, the U.S. Attorney's Office still had not sent a response to Ms. Lewis on whether a decision had been made to decline or prosecute Criminal Referral C0004. After Mr. Banks' resignation in March 1993,(303) Ms. Lewis wrote to Acting U.S. Attorney Richard Pence in Little Rock to inquire about the status of the referral. Mr. Pence notified Ms. Lewis that the matter had been referred to Main Justice.(304)
Ms. Lewis then contacted Ms. Henneman of the Executive Office for U.S. Attorneys to ask about the status of Crminal Referral C0004. After a number of inquiries, Ms. Henneman located, within the Fraud Section at Main Justice, the March 19 memorandum declining Mr. Banks' request for recusal. Ms. Henneman then forwarded a copy of the memorandum to Mr. Frazier.(305) Finally, in July 1993, Main Justice sent a package of materials, including the March 19 memorandum, to the U.S. Attorney's Office in Little Rock.(306)
Mr. Pence discussed Criminal Referral C0004 with Assistant United States Attorney Fletcher Jackson.(307) He took no other action. Mr. Jackson advised Mr. Pence that he wanted to review the referral exhibits to determine whether any of the Madison Guaranty transactions were related to his ongoing investigation of David Hale and Capital Management Services, Inc.(308)
Although a decision on a criminal referral is usually issued within 60-90 days after submission, the U.S. Attorney's Office did not render a prosecutorial opinion on Criminal Referral C0004 until October 27, 1993 -- over one year after its submission -- when Ms. Casey formally declined the referral.(309) The length of time that it took for the referral to be acted upon was unusually long in the experience of Mr. Iorio and Ms. Lewis. Mr. Iorio testified that the normal time period for a United States Attorney to act on an RTC criminal referral was around 60 days;(310) Ms. Lewis testified that she generally received responses within 30 to 45 days.(311)
The final decision to decline prosecution was made without anyone having reviewed the exhibits. Indeed, no one at the U.S. Attorney's office in charge of handling Crminal Referral C0004 ever reviewed or analyzed the 300 exhibits.(312)
III.Interference with the RTC's Ongoing Investigation of Madison.
From May through August 1993, while Crminal Referral C0004 was in the hands of the Justice Department, Ms. Lewis, at the express direction of her supervisors -- Mr. Ausen and Mr. Iorio -- continued to investigate Madison Guaranty.(313) RTC Kansas City investigators Mike Caron, Ed Noyes, and Randy Knight joined Ms. Lewis in this effort.(314)
According to Ms. Lewis, this phase of the RTC's investigation uncovered:
several transactions involving insider abuse, self-dealing, money laundering, embezzlement, diversion of loan proceeds, payments of excessive commissions, misappropriation of funds, land flips, inflated appraisals, falsification of loan records and board minutes, chronic overdraft status of various subsidiaries, joint ventures and real estate investments, regulatory violations of investments in subsidiaries, wire fraud, and illegal campaign contributions.(315)
As a result, the RTC prepared nine new criminal referrals concerning Madison Guaranty.(316) These referrals were completed on September 24, 1993.(317)
The 1993 referrals alleged the commission of crimes involving, among other things, bank fraud, conspiracy, false statements, false documents, wire fraud, aiding and abetting, and misuse of position.(318) The nine referrals identified multiple suspects of criminal wrongdoing -- including Mr. and Mrs. McDougal, several former Madison Guaranty officers and borrowers, Mr. Tucker, and the Bill Clinton Political Committee Fund.(319) President and Mrs. Clinton were listed as witnesses in three referrals,(320); Beverly Bassett Schaffer, the former Commissioner of the Arkansas Securities Department, was listed in one referral.(321)
Criminal Referral #730CR0192 alleged that Mr. McDougal embezzled money from Madison Guaranty, by channelling it through the Whitewater account.(322) In April 1985, Mr. McDougal transferred $30,000 from the Whitewater account at Madison Guaranty to former Senator J.W. Fulbright.(323) As the balance of the Whitewater account was $270, this transfer caused the account to be overdrawn.(324) Later that month, the overdraft was cured when Madison Financial deposited $30,000 into the Whitewater account.(325) According to minutes of a Madison Financial Board of Directors' meeting, the $30,000 was supposedly a prepayment of Mr. McDougal's annual bonus.(326)
The referral stated that "the unauthorized prepayment of McDougal's annual bonus was simply a method to allow McDougal to embezzle funds through manipulation of the accounts which he controlled. He clearly used the White Water account to pay his unknown obligation to J.W. Fulbright and schemed to deprive Madison Financial Corporation of funds to reimburse the White Water account."(327)
President and Mrs. Clinton were listed as potential witness to suspected criminal activity.(328) Ms. Lewis testified that the Clintons were included as potential witnesses because, as owners of the closely-held Whitewater corporation, they might "have had knowledge of what was going on with the finances of their corporation."(329)
A second referral, number 730CR0196, alleged that "James B. McDougal, and MGS&L shareholder and former Director, Charles Peacock III, . . . conspired to misappropriate thrift funds for the purpose of making illegal campaign contributions to the benefit of Arkansas Governor Bill Clinton."(330) The referral named Mr. McDougal, Mr. Peacock, and the Bill Clinton Political Committee Fund as criminal suspects.(331)
The referral identified four $3,000 checks, all of which were dated April 4, 1985, drawn on Madison Guaranty accounts, and deposited in the Bill Clinton Political Committee account at the Bank of Cherry Valley.(332) The first check was written by Mrs. McDougal on the McDougals' personal checking account at Madison Guaranty and made payable to the "Bill Clinton Political Committee."(333) The second check, a Madison Guaranty cashier's check purchased in the name of J.W. Fulbright, was also made payable to the "Bill Clinton Political Committee."(334) The referral alleged that this check was funded by a check issued by Flowerwood Farms, one of the McDougals' companies.(335)
The third and fourth checks were each $3,000 cashier's checks drawn on Madison Guaranty. The checks were purchased in the names of Ken Peacock and Dean Landrum, respectively, and made payable to Bill Clinton.(336) The referral alleged that former Madison Guaranty director Charles Peacock III, the father of Ken Peacock and the business partner of Mr. Landrum, purchased these checks by diverting part of the proceeds of a $50,000 Madison Guaranty loan.(337) The three cashier's checks were numbered sequentially -- Q2496, Q2497 and Q2498 --(338), and Mr. Landrum's first name, Dene, was misspelled on the check.(339)
The referral further suggested that Mr. McDougal may have received benefits from then-Governor Clinton in exchange for $6,000 in campaign contributions. The referral observed that during the month the $3,000 checks were written, Mrs. Clinton, then a partner in the Rose Law Firm, had sent a letter to the Arkansas Securities Department seeking approval of Madison Guaranty's plan to issue a class of preferred stock.(340) The referral noted that the plan was approved the next month by the Arkansas Securities Commissioner, Beverly Bassett Schaffer, who had been appointed to her post by then-Governor Clinton.(341) The referral also remarked that Madison Guaranty's request for approval to issue preferred stock came at a time when Madison Guaranty was badly in need of additional capital.(342)
The referral named both Mrs. Clinton and Ms. Schaffer as possible witnesses.(343)
Ms. Lewis believed that "there was a very strong possibility of a quid pro quo in the selection of Ms. Bassett into [her] position"(344) and that "there was a possibility of a quid pro quo situation" with respect to "Mrs. Clinton and the Rose firm representing Madison."(345)
The nine referrals were submitted to the Justice Department on October 8, 1993.(346)
The verdicts in the McDougal and Tucker trial prove that actual criminal activity was identified in the RTC referrals. On August 17, 1995, a federal grand jury convened in the Eastern District of Arkansas returned a twenty-one count indictment against Mr. and Mrs. McDougal, and Governor Tucker alleging conspiracy, bank fraud, mail fraud, wire fraud, misapplication of funds, and the making of false statements and false entries.(347) The Office of the Independent Counsel ("OIC") prosecuted the three defendants and, on May 28, 1996, after a lengthy trial, a jury in Little Rock convicted Mr. McDougal on 18 of 19 counts in the indictment, Mrs. McDougal on four counts, and Governor Tucker on two counts.(348)
Many of the felony counts on which the defendants were convicted were based on suspected criminal activity identified in the RTC referrals. Count one of the indictment, a criminal conspiracy charge on which both Mr. McDougal and Governor Tucker were convicted, involved a $260,000 loan obtained by Mr. Tucker from Madison Guaranty and the "flip" of property at 1308 Main Street in Little Rock. This count closely tracked allegations made in RTC Criminal Referrals #730CR0190 and #730CR0198.(349) The jury also convicted Mr. McDougal on charges of misapplication of funds (counts 17 and 18) and making false record entries (count 19) related to the land flip at 1308 Main Street -- the suspected crime described in Criminal Referral #730CR0198.(350)
Three additional charges on which Mr. McDougal was convicted -- count 5 (mail fraud), count 6 (fraud), and count 7 (false statement), tracked the suspected criminal activity identified in Criminal Referral #730CR0199. That referral outlined suspected crimes committed by Mr. McDougal in connection with his development of resort property on Campobello Island, off the coast of New Brunswick, Canada.36
Finally, five of the counts on which the jury returned guilty verdicts -- counts 1, 13, 14, 15, and 16 -- related to a fraudulent $300,000 loan made to Mrs. McDougal's company, Master Marketing, from Capital Management Services.(351) The proceeds of that loan were tracked in the first Madison Guaranty referral, Criminal Referral C0004.
Despite the proven success of the Kansas City investigators' efforts, they encountered a concerted effort to hamper their investigative efforts. Both Ms. Lewis and Mr. Iorio testified that obstacles were placed in the way of the RTC's investigation into Madison Guaranty and Whitewater. Ms. Lewis "believe[d] there was a concerted effort to obstruct, hamper and manipulate the results of our investigation of Madison."(352)
Mr. Iorio shared that view.(353) He also described as "unprecedented" the "scrutiny that had been focused on the efforts of preparing the referrals and the subsequent review of the referrals."(354) He explained:
Through this arduous process, the Kansas City office of investigations has been subjected to an alteration of the work environment that included instigation of special procedures, a new review critique mechanism, a slow down of information flow, information leaks, and for us, Jean Lewis, Lee Ausen, and myself, the uncertainty of being placed on administrative leave, without prior notification to RTC investigations management in Washington, D.C. At that point, the review of our work appeared to be more than an effort to confirm or deny our findings. Instead, it appeared that three of us had become the messengers of unwanted news, and if history serves as a guide, are often the targets of attack meant to deflect attention from the information the messengers bring.(355)
Part of the pattern of intimidation, interference, and outright obstruction was the subjecting of the second set of criminal referrals to an unprecedented written "legal review" by the Professional Liability Section ("PLS") of the RTC. The second set of nine criminal referrals related to Madison Guaranty were completed and signed by September 24, 1993, and the Kansas City RTC investigators had planned to send the referrals to the Justice Department on October 1, 1993.(356)
On September 30, 1993, however, Julie Yanda, the Chief of the Professional Liability Section37 in the RTC Kansas City office, demanded that her staff be given the opportunity to conduct a "legal review" of the referrals.(357) Ms. Lewis was concerned that the review was "a delay tactic,"(358) and, on October 4, 1993, she shared her concerns with RTC Regional Inspector General Dan Sherry.(359)
Two senior RTC PLS attorneys, Karen Carmichael and Philip Adams, prepared this so-called "legal review" -- a 13-page memorandum, dated October 7, 1993, and addressed to Ms. Yanda.(360) For each referral, the memorandum posed between six and 12 brief questions stemming from the authors' "concerns" about the referrals.(361) The memorandum did not answer or analyze the questions it raised. And, it offered no suggestions for revising the referrals, gave no conclusions about the referrals, and contained no recommendations with respect to what action the RTC should take.(362)
On October 8, 1993, PLS provided its legal review to the criminal investigators,(363) and the nine referrals were submitted to the United States Attorney's Office.(364) Thus, the only effect of this legal review was to delay the submission of the referrals by one week. The referrals were submitted exactly as they had been written prior to the PLS review.(365)
Ms. Lewis and Mr. Iorio both described PLS's request to delay the submission of criminal referrals for a legal review as "unprecedented."(366) According to Ms. Lewis, PLS had never before reviewed any other criminal referrals prepared by the Kansas City criminal investigations unit.(367) Mr. Iorio similarly testified that "[t]he request to do a critique of the referrals, that was the first time this had happened and it was with regard to the nine Madison criminal referrals."(368) He also stated that subsequent referrals were not reviewed prior to their submission in all cases.(369)
Ms. Yanda claimed that her request for a legal review of the Madison Guaranty referrals was based on a June 17, 1993 RTC memorandum on the handling of criminal referrals.(370) That memorandum stated: "[e]xcept in rare circumstances, criminal referrals shall be reviewed by RTC Investigations and Legal Division Criminal Coordinators before they are delivered to the U.S. Attorney and the FBI or any other investigative agency."(371)
Other RTC officials had a different view of the June 17, 1993 memorandum than Ms. Yanda. Mr. Iorio did not read the memorandum to require that the submission of criminal referrals be delayed pending PLS's review. According to Mr. Iorio, under the June 17 memorandum, PLS was "to be provided with a copy of any outgoing criminal referrals for their review as a means to exchange information, but you are not dependent upon them critiquing your referrals and telling you it's all right to send them."(372) Mr. Iorio's understanding was based on conversations with Mr. Dudine and Carl Gamble, the criminal coordinator in the RTC Washington, D.C. office, who he understood to have authored the memorandum.(373) Also, Kenneth Donahue of the RTC Office of Investigations in Washington, D.C., told Ms. Yanda that he helped draft the June 17, 1993 memorandum, and that it had not been intended that PLS would prepare legal reviews of all referrals prior to their submission to the Justice Department.(374)
Soon after the nine new criminal referrals were sent to the U.S. Attorney's Office, Ms. Lewis began to encounter more difficulties in conducting the Madison Guaranty investigation. In October 1993, Ms. Lewis was removed from the Madison Guaranty "communications loop" by the PLS criminal coordinator.(375) That same month, Mr. Iorio advised Ms. Lewis that PLS personnel had complained that she communicated directly with the U.S. Attorney's Office and the FBI in Little Rock, concerning Madison Guaranty.(376)
On November 9, 1993, at the direction of Ms. Yanda, Ms. Lewis was removed from the position as lead investigator on the Madison Guaranty criminal case.(377) According to Mr. Iorio, "[t]here was some friction between Jean and Julie's criminal coordinator, Karen Carmichael, and Julie came to me and asked me to remove Jean."(378) When asked about this meeting, Ms. Yanda claimed that she "laid out for Mr. Iorio a series of events that had troubled me greatly concerning Ms. Lewis and her failure to act as a team member and work with the legal division in concert to try to move matters along successfully to the benefit of the RTC."(379)
Mr. Iorio and Mr. Ausen told Ms. Lewis that she was being removed from the Madison Guaranty investigation "to avoid me taking a bullet I didn't deserve."(380) On November 10, 1993, Ms. Lewis wrote in an e-mail, "[j]ust a heads up to let you know that Mike Caron, Senior Criminal Investigator, is now the lead investigator on Madison . . . The Powers that Be have decided that I'm better off out of the line of fire (and I ain't arguing)."(381)
The removal of Ms. Lewis from the Madison Guaranty investigation was only part of a larger pattern of interference by senior officials in the RTC's investigation. April Breslaw, a PLS attorney, was at the center of this effort. Throughout 1994, Ms. Breslaw sought to discourage RTC employees from investigating Madison Guaranty and informed RTC investigators that senior RTC officials preferred that any such investigation reach a certain outcome.
Ms. Breslaw's first contact with Madison Guaranty was in 1989. In March 1989, Ms. Breslaw -- then an attorney in the FDIC Directors and Officers Liability Section -- retained the Rose Law Firm to handle a malpractice suit against Madison Guaranty's former independent accountants, Frost & Company.(382) In January 1990, Ms. Breslaw was detailed to the RTC's Professional Liability Section.(383) In April 1991, the Frost case was settled.(384) In January 1994, Ms. Breslaw was put on a team of RTC attorneys reviewing Madison civil claims.(385) In March 1994, Ms. Breslaw recused herself from the Madison case.(386)
In late 1993 and early 1994, after public allegations arose that the Rose Law Firm had a conflict of interest, Ms. Breslaw's decision to hire the Rose Law Firm to represent the FDIC (and later the RTC) came under considerable scrutiny.(387) In September 1993, Sue Schmidt, a Washington Post reporter, contacted Ms. Breslaw about Rose's representation of the RTC.(388) Later that fall, the FDIC Legal Division commenced a review of the hiring of the Rose Law Firm for the Frost case.(389) The Office of Investigations in the Kansas City RTC office also began that fall to examine Madison civil issues, including Rose Law Firm conflicts issues.(390) In January 1994, the RTC Office of Contractor Oversight and Surveillance also started to investigate Rose conflicts issues.(391)
On January 12, 1994, Ms. Breslaw sent an e-mail message to Mr. Iorio and James Thompson, the Vice President of the Kansas City RTC office responsible for investigations.(392) In the e-mail, Ms. Breslaw stated that "[i]t's my understanding that Kansas Investigations has attempted to evaluate the decision to hire the Rose Law Firm to represent the government against Frost & Co."(393) She then attempted to persuade Mr. Thompson and Mr. Iorio to call off the investigation:
[Y]ou should be aware that the FDIC is conducting its own investigation of this matter. Trial attorneys from their Special Litigation unit are in the process of both evaluating relevant documents and interviewing witnesses. By all indications, this project is being handled in a professional manner. . . . In light of all of this, I suggest that Investigations discontinue its inquiry into this matter.(394)
Within days of sending this e-mail, Ms. Breslaw warned RTC investigator Gary Davidson against pursuing an investigation of Madison, saying that certain RTC managers would take a "dim view" of such an investigation.(395) In a February 18, 1994 memorandum addressed to Mr. Iorio, Mr. Davidson recounted his conversation with Ms. Breslaw:
On January 11, 1994, you requested that I conduct a preliminary investigation into Madison Guaranty, for possible Civil Fraud claims. . . . On January 13th or 14th, I called the assigned PLS attorney, April Breslaw, for the purpose of asking whether she knew of any fraudulent activity that was not addressed in the Criminal Referrals.
Before I could ask my intended question, April asked if I was conducting an investigation into Madison Guaranty. After acknowledging that I was, she indicated that what she was about to tell me was being stated as politely as she could. April felt that I should know there are some RTC people in management positions that would take a "dim view" of me investigating Madison Guaranty. She also advised that I should be very careful of who I talk to and what I say, because of the people associated with Madison Guaranty.(396)
Mr. Davidson came to Mr. Iorio within a few days after he had received Ms. Breslaw's warning that RTC management "would take a `dim view' of [him] investigating Madison Guaranty."(397) Mr. Iorio told Mr. Davidson to memorialize what Ms. Breslaw had said because he "thought it was very unusual."(398) Mr. Davidson interpreted Ms. Breslaw's comments as "definitely a threat."(399)
Ms. Breslaw recalled a conversation with Mr. Davidson but denied telling him that some RTC managers would take a "dim view" of him investigating Madison.(400) She remembered only cautioning Mr. Davidson about speaking to the press.(401) But Ms. Breslaw's testimony is contradicted by a July 12, 1994 memorandum she wrote to RTC Deputy General Counsel Andrew Tomback. In that memorandum, Ms. Breslaw admitted that she had told Mr. Davidson that some people "would take a dim view" of an investigation in Rose Law Firm conflicts issues:
Gary called me in 1994 to quiz me about the Rose Law Firm. In response, I reminded Gary that the FDIC had taken responsibility for evaluating Rose Firm conflicts and that it was not appropriate for RTC Kansas investigations to go further into that matter. I believe I told Gary that the senior people would take a dim view of further Kansas inquiry into Rose Law Firm conflicts issues.(402)
On February 2, 1994, at the direction of Mark Gabrellian, Counsel for the Legal Division of the RTC, Ms. Breslaw traveled to the Kansas City RTC Office of Investigations to review Madison documents in connection with the RTC's recently reopened Madison civil investigation.(403) That afternoon, Ms. Breslaw and Ms. Lewis spoke for approximately 40 minutes.(404) Ms. Lewis recorded their conversation.38 On the tape, a speaker who Ms. Lewis identified as Ms. Breslaw stated:
I think if they can say it honestly, the head people -- Jack Ryan and Ellen Kulka, would like to be able to say "Whitewater did not cause a loss to Madison." We don't know, you know, what Fiske is going to find and we don't offer any opinion on it. But the problem is nobody has been able to say to Ryan and Kulka, "Sure say that, that's fine."(405) At the time, Mr. Ryan was the RTC's CEO and Ms. Kulka was its General Counsel.
Ms. Breslaw also was recorded saying:
Well, you know, as I say -- I feel self-conscious asking that, because in some ways it is kind of a silly question. But it's the kind of thing, they're looking for what they can say, and I do believe they want to say something honest, but I don't believe at all, and I don't want to suggest at all, that they want us to move to certain conclusions. I really don't get that feeling.
But there are answers they would be happier about, you know, because it would
get them, you know, off the hook, you know, and that would be it about
Whitewater. So that is why we keep getting asked the same things.(406) In Ms. Lewis's view, "it is clear that Ms. Breslaw was there to deliver a message that 'the people at the top would like to be able to say Whitewater did not cause a loss to Madison.'"(407)
Ms. Breslaw initially denied having made this statement to Ms. Lewis. On March 24, 1994, Representative James A Leach stated on the floor of the House of Representatives that "[o]n February 2, 1994, the day Roger Altman briefed the White House on Madison Guaranty, April Breslaw, RTC Senior Attorney, visited the Kansas City office and said that Washington would like to say that Whitewater caused no losses to Madison."(408)39 That same day, Ms. Breslaw sent an e-mail to several persons within the RTC, saying "[a]s you may know, Congressman Leach made a statement regarding the so-called 'Whitewater' affair on the floor of the Congress today. At one point he made specific reference to me. I want you to know that I categorically deny making the statement which he attributed to me. . . . I did not say that anyone from Washington 'would like to say' anything."(409)
On March 25, 1994, the day after Representative Leach made his statement, Ms. Breslaw met with Ms. Kulka and Assistant General Counsel Thomas Hindes to discuss Representative Leach's statement. The notes of Ms. Kulka's secretary, Wilma Lekan,(410) reflect that at the meeting Ms. Breslaw stated that she had discussed Whitewater with Ms. Lewis and mentioned both Ms. Kulka and Mr. Ryan but denied saying that the two wanted a particular outcome:
April said that she told Jean that we had been getting inquiri[es] in Washington about Whitewater. She said she told her that Ellen and Jack Ryan had been getting inquiries (she said that she was thinking of the tolling agreements and the D'Amato letter.) April said that this was the only point where she mentioned Ellen Kulka and Jack Ryan.
April says that she denies saying that Ellen Kulka or Jack Ryan wanted a particular outcome or wanted the loss numbers to be anything.(411)
Before the Special Committee, Ms. Breslaw recalled speaking to Ms. Lewis on February 2, 1994,(412) but she claimed that she did not recall making the statement that "if they can say it honestly, the head people, Jack Ryan and Ellen Kulka, would like to be able to say Whitewater did not cause a loss to Madison."(413)40
Ms. Breslaw claimed that she was "not sure" whether it was her the voice on the tape recording.(414) She implausibly testified that "I don't know what my voice sounds like on the tape, or on a tape,"(415) and that "I guess all I can say is that I don't know what I sound like on tape."(416) She finally admitted "I have no reason to think that this is not my voice."(417)
In an e-mail dated June 28, 1994, Ms. Breslaw expressed concern about any production of documents to the Senate related to her conversation with Ms. Lewis:
I have the impression that we're in the midst of producing doc's to the Senate banking committee in anticipation of the hearing scheduled for the end of July. If anybody is considering producing anything that has anything to do with my conversation with Jean Lewis, I'd like to talk about whether its responsive to the committee's request. It's my understanding that the senate rejected amendments which might have brought this incident into the scope of the hearings.(418)
On August 15, 1994, the three Madison investigators were placed on administrative leave for two weeks.(419) The RTC took this action without any warning or explanation. On that fateful day, after Mr. Ausen and Mr. Iorio arrived at work, they were summoned to an office and told that they had been placed on administrative leave.(420) The three investigators then were escorted to their offices and finally out of the building.(421) They were told to stay off RTC property.(422) Their offices were locked and sealed.
On the night of August 15, Ms. Lewis, then in the hospital, received a call from Edward Noyes, a member of the Madison investigative team, who advised her Mr. Iorio and Mr. Ausen had been placed on administrative leave.(423) Mr. Noyes told her that "the purge has begun."(424) He telephoned later to let Ms. Lewis know that she had also been placed on leave.(425)
The three Madison investigators each received an identical one-page memorandum, dated August 12, 1994, from Mr. Hindes.(426) The memorandum stated "[y]ou are hereby placed on Administrative Leave to be effective immediately upon receipt on August 15, 1994" but offered no explanation for the adverse employment action.(427) Although the August 12th memorandum indicated that "[i]f you have any questions you may contact Randi L. Mendelsohn, Chief, Employee Relations, OHRM [Office of Human Resource Management]," Ms. Mendelsohn refused to advise Mr. Iorio's counsel why he had been placed on administrative leave.(428) Ms. Mendelsohn refused offers to have Mr. Iorio answer questions, provide documents, answer charges, or otherwise provide assistance.(429) According to Ms. Lewis, the three were not contacted for interviews or information.(430)
On August 29, 1994, Mr. Iorio, Mr. Ausen, and Ms. Lewis were told to return to work.(431) The three still did not receive any explanation for why they were put on administrative leave.(432)
The RTC never provided an explanation to Ms. Lewis, Mr. Ausen and Mr. Iorio, although Mr. Iorio believed the action was related to the Madison investigation.(433)
In August 1994, Mr. Iorio and Ms. Lewis through counsel requested that the RTC OIG investigate the matter.(434) John J. Adair, the Inspector General of the RTC, testified that in August 1994 his office received requests from attorneys for two or three of the Madison investigators and from Mr. Ryan to investigate the matter.(435)
On the Friday before the administrative leave of the three Madison investigators was to end, Mr. Adair, received a telephone call from Andrew Tomback, Assistant General Counsel, and RTC attorney Erica Cooper,(436) who "indicated to me that perhaps my office would want to, my agents would want to search the offices of the three individuals."(437) Mr. Adair told Mr. Tomback and Ms. Cooper that such a search "didn't seem to be an appropriate thing for us to do absent any really good reason to do that."41 (438)
Before the RTC OIG could proceed with the investigation, the OIC advised that inquiry by the RTC IG into the administrative leave matter would interfere with the his work.(439) Accordingly, the RTC OIG suspended its investigation.
IV.Paula Casey Delays her Recusal from Madison, Handles the Hale Pleas Negotiations, and Declines to Prosecute Criminal Referral C0004.
Investigations of Capital Management and David Hale.
During the summer of 1993, even before the RTC submitted its second set of criminal referrals relating to Madison Guaranty, the U.S. Attorney's Office for the Eastern District of Arkansas began investigating David Hale, a Little Rock municipal judge who owned a Small Business Investment Corporation ("SBIC") called Capital Management Services, Inc. ("CMS"). Mr. Hale was accused of fraudulently obtaining SBA loans.
On July 20, 1993, the date of Vincent Foster's death, the FBI obtained a search warrant and seized loan documents from Mr. Hale's CMS offices. Some of the documents contained references to Mr. Tucker, as well as a $300,000 loan to Mrs. McDougal d/b/a Master Marketing.(440) As a result of information obtained in its investigation of Mr. Hale, by August 20, 1993, the Little Rock FBI had opened a separate fraud investigation of Mr. Hale and Mr. McDougal.(441)
The SBA certified CMS as a Specialized SBIC on March 14, 1979.(442) Over the next 14 years, the SBA examined CMS eleven times.(443) Although five examinations found no improprieties, six identified various areas of regulatory concern. Specifically, the SBA raised concerns about CMS's financing of businesses that did not qualify as socially or economically disadvantaged.(444) The SBA also faulted CMS for lending to businesses that were controlled by Mr. Hale's associates.(445)
In late 1992, despite its spotty compliance record, CMS and Mr. Hale applied for $6 million in additional leverage from the SBA.(446) Mr. Hale represented to the SBA that he had a $13.8 million increase in CMS assets(447) in the form of non-cash assets that investors had provided to CMS.(448) On October 28, 1992, the SBA rejected Mr. Hale's application for financing, and requested additional information relating to donated assets. Mr. Hale then informed the SBA that the donated assets consisted of $11.5 million in medical receivables of an investment pool and $2.3 million in stock of a company named National Building Supply.(449) On December 8, 1992, the SBA gave Mr. Hale conditional approval for the capital increase -- that is, to accept the donated assets.(450) The SBA, however, informed Mr. Hale that the assets could only be used for regulatory purposes -- i.e, to support the $6 million in additional financing -- until the assets were converted to cash and their value had been validated.(451)
On February 19, 1993, at Mr. Hale's request, Wayne Foren, then the SBA's Associate Administrator for Investment, met with Mr. Hale in Washington, D.C. to withdraw his application for additional SBA financing for CMS.(452) According to Mr. Foren: "In other words, he wanted the problem to go away. He didn't want to answer the questions of where did the assets come from."(453) But Mr. Foren persisted in questioning Mr. Hale about the donated assets: "And I said David, why would anybody give you tens of millions of dollars worth of assets? Doesn't make sense. . . . Either these assets are not worth the represented value, in which case you are perpetrating a fraud on SBA, or you are being bribed."(454)
Mr. Hale told Mr. Foren that he was close to the current governor of Arkansas, Jim Guy Tucker, and to President Clinton,(455) and "[t]hat he had access to both."(456) "His answer was people gave him the money, would give him the money because he could do things for them in Arkansas."(457) Mr. Hale elaborated that an individual, who was interested in starting an insurance company in Arkansas, had put money into CMS by routing the funds through the Central Arkansas Community Development Corporation, a non-profit corporation.(458) The money was given to Mr. Hale for "[g]etting things done in Arkansas" and to "solve problems."(459) When Mr. Foren expressed concern over the arrangement, Mr. Hale replied, "well, Wayne, you have to understand this is the way we do business in Arkansas."(460)
Mr. Foren found Mr. Hale's statements regarding his relationship with Governor Tucker and President Clinton to be credible.(461) Indeed, in May 1993, after Mr. Foren had referred the case to the SBA Inspector General ("SBA IG") for further investigation, Mr. Hale called Mr. Foren and requested that he attend a meeting with Governor Tucker and a representative of the Arkansas Development Finance Authority.(462) Mr. Foren declined to attend the meeting because "[i]t is inappropriate for me to attend a meeting on this kind of a subject called by David Hale while we're -- we have made a referral for investigation of his company."(463)
On March 11, 1993, the SBA issued a regulatory compliance report on CMS that "raised questions relative to the donated assets and the values" on those assets.(464) Specifically, the report identified the source of the $11.5 million investment pool certificate as an offshore company incorporated in the Grand Cayman Islands.(465) According to Mr. Foren, the mysterious source of the assets raised "another red flag" for regulators.(466) In addition, the SBA determined from documents that National Building Supply filed with the Securities and Exchange Commission that the stock donated to CMS was worthless; National Building Supply was bankrupt.(467) On March 26, 1993, as a result of the examination report, the SBA sent Mr. Hale an examination letter(468) disclosing the results of the examination and requiring Mr. Hale to provide additional information and/or take corrective action.(469) On April 20, 1993, Mr. Hale responded that he disagreed with the conclusions and findings of the examination.
On May 5, 1993, Mr. Foren referred the matter to the SBA IG for investigation.(470) Arnold Hawkins, the SBA's Regional Inspector General,(471) determined that the case would require considerable investigative resources.(472) Because the SBA IG did not have an office in Little Rock, Mr. Hawkins and other SBA officials decided to refer the matter directly to the FBI on May 20, 1993.(473)
The FBI then proceeded to investigate CMS and Mr. Hale. On June 14, 1993, the FBI requested that the SBA provide documents concerning CMS and Mr. Hale.(474) On July 20, 1993, the FBI obtained a search warrant for CMS records.(475) The next day, the subpoena was served and loan documents were seized from the CMS offices.(476) Some of the documents contained references to Mr. Tucker, while others referred to the $300,000 CMS loan to Susan McDougal d/b/a Master Marketing.(477)
On September 23, 1993, a grand jury indicted Mr. Hale on various federal charges relating to the operation of CMS. Mr. Hale has since pleaded guilty to two federal charges and he cooperated with the investigation by the OIC into alleged criminal conduct arising from the operation of CMS, Whitewater, and Madison.(478)
Plea Negotiations with David Hale.
In May 1993, while the SBA and FBI were investigating Mr. Hale, President Clinton nominated Ms. Casey to be the new U.S. Attorney for the Eastern District of Arkansas. Ms. Casey had no prior prosecutorial experience,(479) but she had close ties to the President and Mrs. Clinton. She worked on Clinton gubernatorial campaigns(480), attended a law school class taught by President Clinton, and participated in a law clinic with Mrs. Clinton.(481) Governor Clinton also had appointed Ms. Casey to a special commission along with Mrs. Clinton, for the development of a new court system and a new juvenile law code, and to a separate juvenile advisory group.(482)
In addition, Ms. Casey was a longtime personal friend of Mr. and Mrs. Tucker. She had lobbied Governor Tucker's office in 1993 on behalf of the Arkansas Bar Association.(483) Ms. Casey's husband also had worked on Governor Tucker's political campaigns and had donated money to him.(484)
A short time before Ms. Casey took office on August 16, 1993,(485) Randy Coleman, a Little Rock attorney representing Mr. Hale, met with Assistant U.S. Attorney Fletcher Jackson.(486) Mr. Coleman testified that he met with Mr. Jackson "to try to determine what was happening since I didn't know at that point in time. I'd had very little opportunity to visit with my client to educate myself at that point."(487)
Several days later, Mr. Coleman met with Mr. Jackson again.(488) Mr. Coleman expressed concern about the timing of the indictment of Mr. Hale and whether there would be any time for negotiations.(489) At this second meeting, Mr. Coleman told Mr. Jackson that Mr. Hale could offer the government information that might lead the U.S. Attorney's Office to Mr. McDougal and possibly to Governor Tucker and President Clinton.(490) Mr. Coleman recalled that he specifically identified potential areas for cooperation: Madison Guaranty Savings & Loan, James McDougal, Susan McDougal, Master Marketing, President Clinton, Governor Tucker, Castle Water & Sewer, Southloop Construction Company and Campobello Realty.(491) Mr. Coleman was also certain that he mentioned Whitewater to Mr. Jackson.(492)
Mr. Jackson recalled that Mr. Coleman told him that Mr. Hale could help him "get Tucker," and that President Clinton might have some involvement in the Hale transactions.(493) Based on his investigation of the CMS loan files, Mr. Jackson was aware that the Hale investigation might lead to Governor Tucker and President Clinton:
[I]f I recall the correct words were -- that I used were that, from Hale, the path would lead to Mr. McDougal, and then the road would divide, one branch would possibly go over to Mr. Tucker, and the other branch would go over possibly to Whitewater and the Clintons.(494) Mr. Jackson refused, however, to enter into any plea negotiations until Ms. Casey took office.(495)
After Ms. Casey was confirmed, Mr. Jackson briefed her on the Hale investigation.(496) He advised her that he planned to continue his investigation of other matters involving Mr. Hale that might ultimately lead to Madison Guaranty, the subject of the first RTC criminal referral. Mr. Jackson also informed Ms. Casey that Mr. Tucker might be a target or a witness in that investigation,(497) and that the RTC expected to make additional criminal referrals relating to Madison Guaranty.(498)
Ms. Casey admitted that "Fletcher told me that his continued investigation of the David Hale matter could possibly involve Governor Tucker. I don't know that he told me specifically what that involvement might be."(499) But, Ms. Casey denied that Mr. Jackson advised her of the specific list of persons about whom Mr. Hale might offer evidence.(500)
On September 7, 1993, Mr. Coleman met with Ms. Casey to discuss a possible plea negotiation for Mr. Hale.(501) In exchange for his cooperation, Mr. Coleman initially requested that Mr. Hale be granted immunity or charged with a misdemeanor.(502) Ms. Casey insisted that Mr. Hale enter a plea to an unspecified felony in exchange for a possible sentence reduction depending on the nature of the information offered.(503)
Mr. Coleman testified that he informed Ms. Casey that Mr. Hale had information regarding important Arkansas political figures.(504) According to Mr. Coleman, he specifically provided Ms. Casey with the names of President Clinton, Governor Tucker, Madison Guaranty, James McDougal, Susan McDougal, Castle Sewer & Water, Southloop Construction Company, Campobello Realty and Whitewater.(505) Mr. Coleman understood that Ms. Casey and Mr. Johnson "had already talked with Fletcher and they were aware of some of these things [names of areas of possible cooperation] before I got there. . . ."(506)
Mr. Coleman further testified that he also offered to make an informal or an "attorney" proffer.(507) In an "attorney proffer," Mr. Coleman would essentially provide a more detailed summary of evidence Mr. Hale might offer.(508) Mr. Coleman testified that the government could have accepted his informal proffer without granting immunity to Mr. Hale: "If I make an informal proffer to you through counsel and give you an idea of what is available, the negotiation can carry forward in some form from this point. I'm trying to get a dialogue started with these people, and I'm not getting anywhere."(509) Ms. Casey nonetheless gave no response to Mr. Coleman's offer for an informal proffer at the meeting or during the following week.(510)
Ms. Casey had a markedly different recollection of the September 7 conversation. She claimed that Mr. Coleman provided no names or concrete information,42 but merely "insinuated that Mr. Hale could give information about people who were too big for me to prosecute."(511) She did not inquire further about the "big people" because "[i]t may have piqued my interest but my understanding of the way the process works is that his client should proffer his testimony to an agent for evaluation." (512) Ms. Casey claimed that even though she met with Mr. Jackson several times after her meeting with Mr. Coleman, she still never inquired about the "big people."(513)
On September 15, 1993, after not hearing from Ms. Casey for a week, Mr. Coleman wrote to her to confirm that he had received no response to his offer of an informal proffer.(514) The letter stated:
I have offered an informal proffer of Mr. Hale's information for evaluation of its quality and content, but have reached absolutely no interest in the process.(515) Ms. Casey sent back a letter stating that plea negotiations were at "an impasse" -- reiterating the government's insistence that Mr. Hale plead guilty to a felony.(516)
On September 20, 1993, Mr. Coleman sent another letter to Ms. Casey, in which he reiterated that he had provided a list of names to Mr. Jackson.(517) When asked about this letter, Ms. Casey denied again that she ever received any specific names from Mr. Coleman, and claimed that the letter did not prompt her to discuss the matter with Mr. Jackson.(518) Mr. Johnson similarly claimed that Mr. Coleman never offered any specific information during plea negotiations.(519)
Thus, according to Mr. Coleman, he (1) provided specific names to Mr. Jackson and Ms. Casey --including the President and Governor Tucker -- as areas of cooperation; (2) offered Ms. Casey an informal or attorney proffer; and (3) reiterated in writing that he had offered an informal proffer and given specific areas of cooperation. Yet, Ms. Casey did not notify Main Justice of, or express any interest in Mr. Coleman's overtures.
Because of Ms. Casey's unwillingness to enter into plea negotiations, Mr. Coleman suggested in his September 15th letter that Ms. Casey recuse herself from the case:(520)
I cannot help but sense the reluctance in the U.S. Attorney's office to enter into plea negotiations in this case. . . . I cannot help but believe that this reluctance is borne out of the potential political sensitivity and fallout regarding the information which Mr. Hale would provide to your office, but at the same time it is information which would be of substantial assistance in investigating the banking and borrowing practices of some individuals in the elite political circles of the State of Arkansas, past and present. . .
Would it not be appropriate at this point for your office to consider terminating participation in this investigation and to bring in an independent prosecutorial staff, who are not so involved with the histories and personalities and circumstances of this case?(521) Mr. Coleman believed that Ms. Casey's recusal was appropriate because of her extensive involvement in Arkansas politics:
I knew Paula had been active in the political arena over the years. I knew her husband had. I think, at least it was my impression, that all of us were fairly aware at that point in time that there were some substantially prominent folks involved here.
You could look at the receipt on the search warrant and the nature of the records that the FBI seized from Mr. Hale's office and certainly gather at least that Mr. Tucker's name was prominently displayed.(522) However, according to Ms. Casey, she did not need to recuse herself because Mr. Coleman did not proffer any specific information.(523) Mr. Johnson seconded Ms. Casey's position.(524)
By this time, Ms. Casey knew that Governor Tucker was referenced in both the Hale investigation and the ongoing Madison investigation.(525) In addition, as early as August, Ms. Casey told Mr. Jackson that if the U.S. Attorney's Office prosecuted Governor Tucker or if the anticipated set of RTC referrals named Governor Tucker, she would have to recuse herself.(526)
Ms. Casey never discussed Mr. Coleman's request for plea negotiations or immunity with Main Justice or notified Main Justice of information that Mr. Coleman said Mr. Hale could proffer.(527) Even though Mr. Jackson told her that "there was the potential that [Hale] could lead to some people," Ms. Casey claimed that "for that matter I suppose every loan file at SBIC was a potential defendant."(528)
On September 17, 1993, New York Times reporter Jeff Gerth contacted a high ranking Justice Department official, Irv Nathan, Associate Deputy Attorney General,(529) and an FBI Little Rock Field Agent, Robert M. Satowski, to inform them of his interview with Mr. Hale.(530) Mr. Gerth told them that Mr. Hale was prepared to furnish specific information about sensitive matters, possibly involving the Clintons, including information about a $300,000 loan to Mrs. McDougal that was funneled to Whitewater Development Corporation.(531)
On the same day, FBI Little Rock sent a teletype to FBI Director Louis Freeh about Mr. Hale's allegations. The teletype indicated that "Gerth alluded that this was why the United States Attorney Casey would not deal with Coleman when he was attempting to work out a suitable deal for his client."(532) In a separate memorandum, dated September 21, 1993, to FBI Director Freeh, Mr. Keeney outlined the substance of Mr. Hale's allegations that Mr. McDougal and then-Governor Clinton "encouraged Hale to provide funds to Madison Guaranty, prior to the audit, to bring the Whitewater loans acceptably up to date. Thereafter Hale, through his Small Business Investment Corporation, lent $300,000 to Susan McDougal, dba Madison Marketing."(533)
Meanwhile, on September 20, 1993, after learning of Mr. Hale's allegations about President Clinton, Mr. Keeney met with other high ranking officials at Main Justice to discuss the need for Ms. Casey to recuse herself from both the SBA fraud case against Mr. Hale and the investigation into Mr. Hale's allegations about Governor Tucker, the McDougals and President Clinton, as well as Criminal Referral C0004 relating to Madison Guaranty.(534) Mr. Keeney, Principal Deputy Attorney General, Gerald McDowell, Chief of Frauds Section, and Joseph Gangloff, Chief of the Public Integrity Section, all agreed that Ms. Casey should recuse herself from the matter.(535)
According to Mr. Gangloff, the criteria for recusal include past personal, political or financial relationships between the United States Attorney and the subject of an investigation. In fact, the mere appearance of a conflict justifies recusal.(536) According to Mr. Gangloff, Main Justice officials knew Ms. Casey was close to President Clinton and, thus, she "obviously" should recuse herself under the circumstances.(537) Mr. Gangloff was "surprised" that Ms. Casey had not advised Main Justice of Mr. Hale's allegations about the President, and believed that Main Justice should have been involved in the case sooner.(538)
Mr. Keeney also believed Ms. Casey "certainly should not be involved in the matter" because "she was the U.S. Attorney in Little Rock, Arkansas. She was appointed by the Clinton Administration. And we had a situation where somebody who was under investigation was suggesting . . . that he had information which would implicate the President who appointed her."(539) Mr. Keeney testified that it was important to him that "she would in fact recuse herself, and that she would not be involved in taking any sort of proffer from David Hale" or make any more substantive decisions on the case.(540) Mr. Carver and Mr. McDowell also agreed.(541)
At the time, Mr. Keeney based his opinion solely on the fact that Ms. Casey was appointed by President Clinton.(542) Mr. Keeney testified that although Ms. Casey may have "said something" about her relationship with Governor Tucker, she did not disclose the nature of her relationship with President Clinton.(543) Ms. Casey did not disclose her August conversation with Mr. Jackson about the expected set of new referrals that might involve Governor Tucker or the fact that the Hale investigation would likely involve Madison Guaranty.(544)
Mr. Keeney called Ms. Casey and told her that she should recuse herself from the Hale and Madison matters.(545) Mr. Keeney expressed his opinion in "strong terms."(546) Even though Mr. Keeney was Acting Assistant Attorney General and Ms. Casey was a newly appointed U.S. Attorney with no prior prosecutorial experience, she refused his advice to recuse herself.(547) Mr. Keeney recalled that Ms. Casey told him: "Well, she said, in essence, I'm a fair person, I'm a person of integrity, I can handle this, this matter as my oath of office requires me to do so."(548)
According to Mr. Keeney, Ms. Casey told him that she "would have to think about" recusal.(549) Ms. Casey did not recall that she was considering recusing herself at the end of the conversation.(550) Mr. Johnson opposed recusal by the office.(551) Ms. Casey never contacted Mr. Keeney again to discuss the recusal matter.(552)
During the same September 20th conversation with Mr. Keeney, Ms. Casey "indicated that Coleman refused to make a proffer to the office in Little Rock because he didn't trust them."(553) Accordingly, Mr. Keeney thus advised Ms. Casey to convey to Mr. Coleman that he could make the proffer to Main Justice.(554) Mr. Gangloff similarly testified that he understood that Ms. Casey would send a letter to Mr. Coleman to inform him that he had "recourse to Washington" and could make a proffer to Main Justice; he recalled "detailed discussions" about ensuring that Mr. Coleman knew about this option.(555)
Ms. Casey did not recall any such request by Mr. Keeney. Although Ms. Casey did not dispute Mr. Keeney's recollection, she claimed that Mr. Keeney may have directed Mr. Johnson, not her, to relay this information to Mr. Coleman.(556) Mr. Johnson also believed that Mr. Keeney may have suggested that he advise Mr. Coleman of Mr. Hale's recourse to Main Justice.
Neither Ms. Casey nor Mr. Johnson followed Mr. Keeney's direction to inform Mr. Coleman that he had the option of dealing with Main Justice. None of the letters that Ms. Casey or Mr. Johnson sent to Mr. Coleman on September 20 or 21, 1993 advised Mr. Coleman that he could contact directly Main Justice if he did not trust the U.S. Attorney's Office.(557)
Ms. Casey and Mr. Johnson both admitted that they did not convey Mr. Keeney's message to Mr. Coleman.(558) Mr. Coleman similarly testified that no one from the U.S. Attorney's Office ever informed him that he could speak to someone at Main Justice.(559)
On September 23, 1993, the Arkansas Democrat-Gazette published Hale's allegations involving President Clinton, Mr. McDougal and Governor Tucker.(560) That same day, the grand jury indicted Mr. Hale on two counts of conspiracy and two counts relating to the submission of false statements to the SBA.(561)
Ms. Casey's declination of Criminal Referral C0004.
Even after her September 20, 1993 discussion with Mr. Keeney, Ms. Casey continued to participate actively in the Hale and Madison Guaranty investigations. By August 20, 1993, the FBI Little Rock Field Office had opened an investigation of Mr. McDougal and Mr. Hale as a result of information developed during the investigation of Mr. Hale.(562) In July or August of 1993, an investigation was launched involving Dean Paul, Ltd. and Castle Grande and touching on Madison Guaranty and Mr. McDougal.(563)
On September 24, 1993, only four days after Mr. Keeney advised Ms. Casey to recuse herself, FBI agents met with Ms. Casey to discuss the investigation of Madison Guaranty and Mr. Hale, as well as whether Ms. Casey should recuse herself from these matters because of her close ties to Governor Tucker, Seth Ward and Stephen Smith.(564) According to SSA Irons, he and Mr. Jackson told Ms. Casey that her "good friends" were either subjects or material witnesses of the ongoing investigations.(565) Ms. Casey admitted that they discussed allegations involving President Clinton and the McDougals.(566) SSA Irons indicated in a memorandum, memorializing the meeting, that Ms. Casey stated that she would need to recuse herself from the matter because of her close friendship with Governor Tucker, Mr. Ward and Mr. Smith.(567)
Ms. Casey agreed with SSA Irons' account except with respect to Mr. Ward. She testified, "I told them that if the investigations led to Governor Tucker, that I would recuse. I don't know Seth Ward. I am an acquaintance of Steve Smith's."(568)
Yet, once again, Ms. Casey did not provide the Special Committee with any real reason for her sudden change of mind regarding her recusal. Ms. Casey claimed that at the time of this meeting, she "realized" that the investigation had progressed to a point that "there was a real" possibility that Governor Tucker would become a subject of the investigation.(569) Ms. Casey claimed that even though she knew that she had to recuse herself, she still had to decide the "best time" to do so.(570) Mr. Johnson continued to urge Ms. Casey against recusal.(571)
For some unknown reason, despite her conversation with Mr. Keeney only four days before, Ms. Casey did not advise officials at Main Justice that she had changed her position on recusal.(572)
In addition, on October 5, 1993, after a briefing on the Hale investigation, the Director of the FBI indicated to senior FBI officials that he wanted Ms. Casey to recuse herself.(573)
For the balance of September and October, Ms. Casey took no steps to recuse herself from the Hale or Madison investigations or her office.(574) Rather, Ms. Casey continued to participate in the investigation and, amazingly, even attended a plea negotiation meeting with Mr. Coleman on October 21, 1993.(575) Mr. Keeney testified that once Ms. Casey had decided to recuse herself, "she should not be making any decisions with respect to the matter." (576) Thus, as of September 24, 1993, Ms. Casey should not have participated in any way in the Hale and Madison investigations.
When pressed about her continued involvement in such matters, Ms. Casey claimed that even though she "knew I was going to recuse myself," she still wanted to wait for the receipt of the new referrals. She explained: "If there was a case against -- if there was a case against Tucker or Steve Smith, that's what I was going to do. And I expected those referrals to give me that."(577)
On October 8, 1993, the RTC forwarded nine new criminal referrals concerning Madison Guaranty to the U.S. Attorney's Office in Little Rock.(578) Ms. Casey reviewed the second set of referrals.(579) According to Ms. Casey, "when the referrals came in, I probably talked with Michael again about the fact that they were there, that the names were there and I needed to recuse."(580) Mr. Johnson still advised Ms. Casey not to recuse herself from the case.(581)
Again, Ms. Casey did not contact any official at Main Justice either to notify them that Governor Tucker was a target of an investigation or to inform them of her "recusal."(582) Ms. Casey offered no coherent reason for not advising Main Justice immediately, claiming only, "I was waiting to talk--I was going to the orientation in November. I wanted to talk to someone at the Department of Justice whose opinion I could also trust."(583)
In September and October 1993, while Main Justice and FBI were urging Ms. Casey to recuse herself, the Little Rock U.S. Attorney's Office took no action on the first RTC Referral, number C0004. Ms. Casey testified that when she first read Criminal Referral C0004 in late August or September of 1993, she probably noticed Governor Tucker, Mr. McDougal and President Clinton were mentioned. But, the only action she took was to place the referral back into "the vault."(584)
On October 27, 1993 -- over a year after the RTC had sent the referral to the U.S. Attorney's Office and at least two months after she first read it -- Ms. Casey formally declined prosecution on Criminal Referral C0004.(585) It is unclear why Ms. Casey believed that it was appropriate for her to make a substantive decision on the referral when she knew that she was going to recuse herself. Mr. Keeney testified that issuing the declination letter was a "substantive decision" that someone who supposedly had recused herself from the case should not have made.(586)
Ms. Casey could not explain why she did not defer action on the first referral until after she had recused herself from the new set of referrals -- which either had already arrived at the U.S. Attorney's Office or would arrive shortly thereafter: "It was just a question of closing the books on the particular referral. Because, in my opinion, the books had already been closed on it. It was just a matter of relating that decision to the RTC."(587)
Even more peculiar, Ms. Casey's declination letter gave the impression that Main Justice had decided to decline the referral: "I concur with the opinion of the Department attorneys (emphasis added) that there is insufficient information in the referral to sustain many of the allegations made by the investigators or to warrant the initiation of a criminal investigation." (588) In fact, Main Justice had not made any decision on the referral, but had returned it to the Little Rock office.
When confronted with the fact that she reviewed the March 19, 1993 memorandum from Mr. Keeney to Mr. Frazier prior to sending the declination letter, Ms. Casey admitted that she made the "decision" to decline prosecution on the referral.(589)43 Mr. Carver, Principal Deputy Chief of Fraud Section, Criminal Division, was "amazed" when he read a press article stating "Paula Casey didn't participate in the decision making with regard to C0004" because he knew she had been involved in the decision to decline the referral.(590) Moreover, Justice Department officials testified that the referral was returned to the U.S. Attorney's Office earlier in 1993 for a decision, (591) and that Main Justice never reviewed the declination letter before Ms. Casey sent it.(592)
Neither Ms. Casey nor Mr. Johnson, her First Assistant, ever reviewed the exhibits to the referral prior to declining prosecution.(593) Mr. Carver believed that Ms. Casey should have conducted an independent review of the evidence prior to declining Criminal Referral C0004.
As of early November 1993, as Main Justice was "vigorously" pursuing allegations about Mr. Hale, the McDougals and Mr. Ward(594), Ms. Casey still had not contacted Main Justice about her recusal.
On November 3, 1993, Philip Heymann, Deputy Attorney General, called Ms. Casey to a meeting with other high ranking DOJ officials for the purpose of persuading Ms. Casey that she should recuse herself.(595) Mr. Heymann told Ms. Casey that she should recuse herself. This view was expressed by all Justice Department officials in attendance.(596)
Even though Ms. Casey earlier explained that her reason for not recusing herself immediately after reviewing the second set of referrals was that she needed to receive advice from a Justice Department official whom she could trust, Ms. Casey told Mr. Heymann that she would "think it over" and get back to them.(597) As of the end of the meeting, Ms. Casey still had not committed to recusal.(598)
Thus, notwithstanding the advice of the Deputy Attorney General and other high-ranking Justice Department officials, Ms. Casey still waited another two days before she finally recused herself on November 5, 1993.(599)
On November 9, 1993, the day after Ms. Casey's formal recusal, Mr. Keeney announced that Donald Mackay, a career prosecutor for the Justice Department, would lead the investigation of Mr. Hale and Madison Guaranty.(600) Mr. Mackay subsequently entered into plea negotiations with David Hale.(601) On January 3, 1993, Mr. Mackay sent a letter to Mr. Coleman outlining what the Justice Department would require as the terms of a proffer agreement.(602) After Special Counsel Fiske was appointed in January 1994, he entered into negotiations with Mr. Hale, and Mr. Hale entered a plea agreement on March 19, 1994.(603)