The Special Committee's Whitewater Report

Part II. GOVERNOR CLINTON'S QUESTIONABLE RELATIONSHIP WITH JAMES MCDOUGAL

While Mr. McDougal was carrying the Clintons share on the Whitewater loans, Governor Clinton, using the power of his political office, acted favorably on Mr. McDougal's other business ventures and accepted Mr. McDougal's recommendations regarding state action. These favors took the form of granting Mr. McDougal influence in appointments to state positions445, steering lucrative state leases to Madison Guaranty446, and making decisions for Mr. McDougal concerning state regulators.447 This pattern of favoritism was important to Mr. McDougal, whose thrift was experiencing serious financial trouble.

The motive for this favoritism is clear. From the standpoint of Governor Clinton, if Madison Guaranty failed or Mr. McDougal experienced financial troubles, the Clintons could be liable for the full Whitewater debt. Thus, Governor Clinton had a reason to act to ensure the viability of Mr. McDougal's savings & loan, even if such action was adverse to the interests of the state. I.

James McDougal's Madison Guaranty: A Corrupt Savings & Loan

In January 1982, James and Susan McDougal, along with several others, purchased 90% of the stock of the Woodruff County Savings & Loan Association for $246,500, which they renamed Madison Guaranty Savings & Loan Association ("Madison Guaranty").448 To finance the purchase of Madison Guaranty, the McDougals borrowed $70,000 from Worthen Bank. Mr. McDougal inaccurately indicated on the change of control applications that he had obtained the money through "funds received from closely held corporations." 449 In June 1983, the McDougals borrowed another $142,186 from Worthen Bank to acquire stock belonging to other investors in Madison Guaranty in order to acquire exclusive control over the S&L.450

Mr. McDougal's true interest was always real estate investments, and his control of Madison Guaranty allowed him to pursue such investments. On the other hand, Madison Bank & Trust, Mr. McDougal's other federal institution, was prohibited from such investments.451 In early 1982, Mr. McDougal incorporated Madison Financial Corporation as a subsidiary of Madison Guaranty for the sole purpose of real estate investment.452

From the beginning, Mr. McDougal viewed Madison Guaranty as a personal "candy store."453 Soon after its purchase Mr. McDougal began to borrow personally from Madison Guaranty to pay down other loans including financing Whitewater.454

In 1984, the Federal Home Loan Bank Board ("FHLBB") examined Madison Guaranty and concluded that "[t]he viability of the institution is jeopardized through the institution's current investment and lending practices in real estate development projects." The FHLBB attempted to force Madison, through a cease and desist order and a supervisory agreement, to stop lending money to the McDougals or any McDougal-controlled entity, and require Madison Guaranty to raise additional capital.

Shortly thereafter, Mr. McDougal hired Mrs. Clinton and the Rose Law Firm to represent Madison Guaranty and then-Governor Clinton appointed Beverly Bassett Schaffer to the position of Arkansas Securities Commissioner, based possibly on Mr. McDougal's recommendation. Mrs. Clinton and Ms. Schaffer discussed -- and Ms. Schaffer approved -- a novel proposal for Madison Guaranty to raise capital through the issuance of preferred stock. Ms. Clinton and the Rose Law Firm also represented Madison Guaranty in connection with land transactions and real estate investments, notably Castle Grande.

Beginning in March 1986, the FHLBB again examined Madison Guaranty.455 James Clark, the examiner-in-charge, testified that the examiner discovered "a group of insiders was obtaining cash in what amounted to a pyramid scheme" led by the principal insider, James McDougal.456

Mr. Clark testified that in his 20 years as a bank examiner, Madison Guaranty was on of the top five worst financial institutions that he examined in terms of self dealing by insiders.457 The 1986 examination report concluded that "management blatantly disregarded numerous regulations," "ignored" parts of the Supervisory Agreement.458 Moreover the report stated that Mr. McDougal's effective control of Madison Guaranty "enabled [him] to use corporate resources to develop large land developments [and] to divert substantial amounts of funds from the projects to himself and others."459 The examiners cited Campobello, Maple Creek, and Castle Grande as problematic projects.460 Although Madison Guaranty's financial statements indicated that the institution was in the black, the FHLBB report noted that improper accounting appeared to be the source of the profit, not successful investing. The report stated that, "[i]f profits [of the real estate projects] were booked properly, the Institution would be, in fact, insolvent."461

A.

Madison's Fraudulent Land Deals

Examiner Clark testified that Mr. McDougal "had total control of Madison Guaranty funds" and that Mr. McDougal could "dispense those funds at any time he wished, and he did so through the land development projects."462 The 1986 federal examination uncovered several instances where Madison Guaranty insiders engaged in "sham transactions" or acted as a "straw man," an arrangement whereby the "purchaser of the property would obtain legal title to a property without having any actual financial interest in the property simply as a means to hide true ownership of the property."463 The sham transactions were used as a means to place phony profit on the books in attempt to falsely inflate net worth.464

For example, the 1986 examination found that the Castle Grande project was "purchased and sold in a series of fictitious transactions" to straw buyers.465 At the recently concluded McDougal-Tucker trial, Don Denton, chief lending officer of Madison, testified that Seth Ward was a "nominee" buyer in the purchase of part of the land.466 These transactions were structured in this way to enable Madison Guaranty to violate the Arkansas state regulation prohibiting Madison Guaranty from investing more than 6% of its assets into Madison Financial Corporation.467

Bank examiners also found that Madison Guaranty insiders obtained financing for real estate projects that were fully funded by Madison Guaranty.468 In addition, insiders received real estate commissions that they did not earn.469

B.

Madison's Phony Books and Records

The 1984 examination of Madison Guaranty had concluded that the books and records were "inadequate."470 The books and records at Madison Guaranty were "poor, missing, and in some cases, intentionally misleading."471 The loan files did not sufficiently document the disbursements of the loan proceeds.472

Mr. Denton testified that prior to the arrival of the examiners in March 1986, the staff of Madison Guaranty went through the loan files to find out what was missing, back dated documents, and had phony appraisals prepared.473 Robert Palmer, a Madison appraiser, confirmed that he prepared several inflated appraisals for Madison Guaranty and backdated several appraisals.474 Moreover, Mr. Clark testified that the appraisals were "wholly inadequate" and "the reports seemed to us to be essentially shams, some documents to put into the loan file."475

The 1986 FHLBB examination of Madison Guaranty lasted from March through September of 1986, as opposed to the three to four weeks that it would normally take for an S&L that size, because "Madison Guaranty's problems were so severe and its records were so poor."476 Moreover, Madison Guaranty's management actively obstructed the examination by retaining needed loan files or withholding information.477

C.

Federal Regulators Oust Mr. McDougal from Madison

On June 19, 1986, Walter Faulk, the FHLBB's Supervisory Agent responsible for Madison Guaranty, issued the preliminary report of the examination.478 This report was so devastating that the Arkansas Securities Commissioner Beverly Bassett Schaffer believed it "effectively put Madison out of business."479

Curiously, on July 2, 1986, Ms. Schaffer forwarded a letter which Mr. Faulk had sent to Madison Guaranty, to Samuel Bratton, then Counsel to Governor Clinton, with a personal note attached. The note stated, "Madison Guaranty is in pretty serious trouble. Because of Bill's relationship with McDougal we probably ought to talk about it."480 Mr. Bratton, who had already spoken with Governor Clinton several times about Madison Guaranty's financial difficulties, was well aware of the Governor's personal ties to Mr. McDougal.481 After Mr. Bratton received the note, he spoke with Ms. Schaffer about the possible closure of Madison Guaranty by the FHLBB,482 and the upcoming FHLBB meeting in Dallas on July 24 where Madison's financial problems would be discussed.483 After Mr. Bratton received Ms. Schaffer's memorandum he contacted Governor Clinton, telling him of the FHLBB's plans.484 Mr. Bratton also went to see Betsey Wright, the Governor's Chief of Staff, and they "together carried this to the Governor rather than my sending it in his normal mail."485

Although the exact date of Governor Clinton's receipt of the copy of the FHLBB's letter is unknown, he certainly received it before July 14, 1986.486 It is clear that Governor Clinton knew that Mr. McDougal -- his business partner, friend, and client of his wife's law firm -- was in serious financial trouble before it was ever made public.

Results of an examination by the FHLBB are to be kept confidential, and "[t]he law requires that release of an exam report be restricted."487 Bank regulators should not share the results of exams with anyone outside of the regulatory agency. James Clark, the FHLBB examiner, could not think of one reason why it would be appropriate for a state bank regulator to tip off the governor's office with regard to an ongoing bank examination.488 Moreover, Mr. Clark testified that, given Governor Clinton's business relationship with Mr. McDougal, the "tip off" from Ms. Schaffer certainly "had the appearance of a conflict."489

On July 11, 1986 the Federal Home Loan Bank Board met to discuss Madison. Ms. Schaffer, her associate Charles Handley, nine persons from the FHLBB, and the Madison Board of Directors were all present.490 Mr. and Mrs. McDougal were not present.491 Mr. Clark expressed some concerns about Ms. Schaffer's presence at the FHLBB meeting because she had performed legal work for Madison Guaranty when she was in private practice, and he viewed that as a conflict with her oversight capacity as the Arkansas Securities Commissioner.492

During the meeting, Dawn Pulcer of the FHLBB mentioned that she thought Ms. Schaffer's conduct during the meeting was peculiar. Ms. Pulcer's contemporaneous notes of the meeting reflect that during the course of discussion at the FHLBB meeting Ms. Schaffer appeared to be frowning, and asked only one question: "[w]ho is representing the McDougals?"493 Ms. Pulcer stated that she "[t]hought it was a little odd. I, too, would have expected her to say something in support of the actions that the Federal Home Loan Bank Board supervisory authorities were taking."494

At this meeting, FHLBB determined that Mr. McDougal and Mr. Latham should be removed from Madison. On July 14, 1986, just three days after this meeting, Ms. Wright wrote a telling message to Governor Clinton that reads:

White Water stock
(McDougal's company)

Do you still have? (pursuant
to Jim's current problems

If so, I'm worried about
it.495

Governor Clinton responded by writing "No-Do not have any more---B."496 Ms. Wright claimed it was then well known that Mr. McDougal had been removed from the bank. But the local newspaper did not report the event until July 25, 1996, eleven days later.497

Curiously, on the very same day that Ms. Wright inquired about Governor Clinton's relationship with Mr. McDougal, Mrs. Clinton wrote a letter to Mr. McDougal and Mr. Latham terminating the Rose Law Firm's retainer agreement with Madison Guaranty.498 Along with the letter, Mrs. Clinton sent a check from the Rose Law Firm refunding Madison Guaranty's outstanding retainer balance.499

Mrs. Clinton has given at least two different accounts regarding why she terminated the Rose Law Firm's representation of Madison Guaranty.500 In a press conference on April 22, 1994, Mrs. Clinton said that the Rose Law Firm's relationship with Madison Guaranty was terminated because Madison Guaranty could not meet the requirements imposed by Ms. Schaffer for the issuance of preferred stock.501 However, in response to interrogatories on February 4, 1994, Mrs. Clinton said that the representation of Madison Guaranty was terminated due to "the increasing work the Rose Law Firm was doing for FSLIC ... the firm had decided in early July, 1986, generally to avoid taking on any new or expanded representations of S&L's."502 In Mrs. Clinton's February 14, 1996 interview with the FDIC, Mrs. Clinton stated that the letter to Madison Guaranty was written in direct response to a memorandum written by Herb Rule, then the managing partner of the Rose Law Firm, to all attorneys.503 II.

Governor Clinton Provides Benefits to James McDougal and Madison S&L

During the time when Mr. McDougal was running Madison Guaranty and carrying the Clintons on the Whitewater investment, Governor Clinton acted favorably on Mr. McDougal's various proposals before the state. Indeed, substantial evidence supports Mr. McDougal's claims that he had "clout" with the Governor.504

A.

Governor Clinton Steers Valuable State Leases to Madison

Governor Clinton exercised the power of his office to steer two lucrative lease contracts to Madison Guaranty.505 Helen Herr, the former Leasing Administrator for Arkansas State Building Services ("ASBS"), testified that she first learned in January or February 1984 that Madison Guaranty was interested in leasing space to Arkansas Housing Development Agency ("AHDA") during a meeting in the office of Paul Mallard.506 Mr. Mallard, the Director of ASBS called Ms. Herr into his office to meet Susan McDougal. Mr. Mallard told Ms. Herr that the McDougals were developing a building on South Main Street in Little Rock, in Quapaw Quarter, and that they had additional office space that they wanted to rent.507 This office space was difficult to lease because it was located in an unsafe part of Little Rock and the real estate market in Little Rock was soft. Many commercial landlords were eager to fill their office space with long term tenants.508

In fall 1983, AHDA developed a need for additional office space. ASBS was considering office space on Brookwood Drive that the Director of AHDA, Wooten Epes, felt would be suitable.509 After meeting with Mrs. McDougal, Mr. Mallard instructed Ms. Herr to examine the Madison office space.510

When Mr. Epes, AHSA's Director, complained to Ms. Herr about the Madison space, she recommended that he state his complaints in writing. On March 5, 1984, Mr. Epes wrote a letter to Ms. Herr rejecting the proposal that AHDA lease the office space from Madison.511 Mr. Epes was concerned that the Madison space was not sufficiently large and was not located in a safe part of Little Rock.512 When Ms. Herr brought Mr. Epes' letter to Mr. Mallard's attention, Mr. Mallard told her that the leasing contract was going to Madison Guaranty because the McDougals were "friends" of the Governor.513 Ms. Herr specifically testified: "When I presented the objections from Mr. Epes about the Madison space, [Mallard] said that the governor's office wants us to lease that space ... and that the McDougals were friends" of Governor and Mrs. Clinton.514 Mr. Mallard also told her that "they weren't going to consider other proposals" because the "governor's office wants us to lease this space and that's the way it's going to be."515 Mr. Epes took his concerns to the Governor.516 Mr. Epes testified that Governor Clinton refused to overrule Mr. Mallard's decision, and that was the Governor's final word.517

On April 1, 1984, the AHDA entered into a lease with Madison Guaranty.518 The lease was for a 60-month term at $4,800 per month.519 The contract realized nearly $300,000 in payments to Madison.520

In 1985 AHDA became the Arkansas Development Finance Authority ("ADFA").521 ADFA subsequently sought to lease additional office space for their new employees.522 As a result of this change, ADFA entered into another contract with Madison.523 In August 1987, however, ADFA canceled its lease with Madison because it needed still more space, which was the concern that Mr. Epes had from the beginning.524

Moreover, the State of Arkansas, through ASBS, leased space in an additional building from Mr. McDougal, in Quapaw Quarter, to house the Arkansas Revenue Department.525 Other than the three leases entered into with McDougal-owned entities, Ms. Herr could not recall any other leases the state entered for office space in the lease in Quapaw Quarter.526

Don Denton, a Madison loan officer, believed that the state leases were a political payback by Governor Clinton to the McDougals. Mr. Denton testified that the connection "[s]tood out like a beacon at night."527

B.

McDougal Holds a Questionable 1985 Fundraiser for Clinton

On April 4, 1985, James McDougal hosted a fundraiser for Governor Clinton at Madison Guaranty to raise money to pay off the Governor's outstanding personal debt from his 1984 gubernatorial campaign.528 In the closing days of that race, Governor Clinton had obtained an unsecured personal loan in the amount of $50,000 from the Bank of Cherry Valley. 529

The exact amount of money raised at the event is not known. The campaign finance report listing the contributions received at the fundraiser is missing from the Pulaski County Clerk's office and has never been located. By all accounts, however, the fundraiser netted more than $30,000 to pay off Governor Clinton's personal debt.16

Four $3,000 checks were collected at the fundraiser.530 The names on the checks were James B. and Susan McDougal, J.W. Fulbright, Ken Peacock, and Dean Landrum.531 J.W. Fulbright is the late former Senator. Ken Peacock is the son of former Madison director and borrower Charles Peacock.532 Dene Landrum, who is now deceased, was Mr Peacock's business associate.533 His first name was misspelled on the check as "Dean."534

All four checks were dated April 4, 1985.535 The James McDougal check was written on the McDougal's personal checking account at Madison Guaranty and was signed by Susan McDougal.536 The Fulbright, Peacock, and Landrum checks were Madison Guaranty cashier's checks bearing numbers 2496, 2497, and 2498, respectively.537

There is strong evidence suggesting that the $3,000 check in Senator Fulbright's name was purchased by Mr. McDougal out of funds from his Flowerwood Farms account. Senator Fulbright did not attend the fundraiser, although he was expected to.538 In 1994, Kent Goss, an RTC investigator, questioned Senator Fulbright's lawyer, a former aide to the Senator, about the $3,000 check.539 17 Mr. Goss wrote that although it was "evident" that Senator Fulbright was "a meticulous record-keeper," there was no record of any charitable donation in the amount of $3,000 between 1984 and 1991.540 Nor did Senator Fulbright's bank statements reflect a $3,000 debit during the relevant time.541 Senator Fulbright's lawyer added that he believed that the Senator had "no knowledge" of a $3,000 contribution to Governor Clinton.542

The Pillsbury Madison & Sutro Report on Madison Guaranty and Whitewater commissioned by the Resolution Trust Corporation attempted to trace the source of funds of the Fulbright check.543 According to this report, on April 4, 1985, the same day that the Fulbright check was issued, a $3,000 check payable to Madison Guaranty was written on Flowerwood Farms' account at Madison Guaranty.544 The Flowerwood Farms check was apparently deposited in the Madison cashier's check account, as it was encoded with "7001312" -- the number of that account.545 A $3,000 deposit was posted in the account 7001312 on April 4, 1985.546

Despite this evidence, the Pillsbury Report erroneously concluded that the link between the Flowerwood Farms check and the Fulbright check "has not been conclusively confirmed" because Madison Guaranty issued two other cashier's checks for $3,000 on April 4, 1985, i.e., those in the names of Ken Peacock and Dean Landrum.547 However, Charles Peacock, an attendee and donor at the fundraiser, has admitted to purchasing those two checks.548 The Pillsbury report recognized: "[I]f the Ken Peacock and Dene Landrum cashier's checks were funded by Charles Peacock III, the Flowerwood Farms check could have funded the remaining $3,000 cashier's check, the one from Fulbright."549

Mr. Peacock's testimony establishes, and the documentary evidence confirms, that he caused the checks to be issued. Mr. Peacock admitted that he purchased the $3,000 checks in the names of his son and Dene Landrum.550 Mr. Peacock said he bought the check in his son's name because he thought it might help his son secure a job with Governor Clinton.551 He testified that he bought the check in Mr. Landrum's name because Mr. Landrum wanted to help the child of a friend receive a scholarship awarded by Governor Clinton.552

The documentary evidence is consistent with Mr. Peacock's admission that he procured the checks. On April 4, 1985, Mr. Peacock wrote a $6,000 counter check payable to Madison Guaranty, apparently on his account #15253.553 The check was encoded with "7001312" -- the number of the Madison cashier's checking account. That same day, Mr. Peacock purchased a cashier's check for $4.554 Madison Guaranty charged a $2 fee for cashier's checks.555 When asked whether he bought this cashier's check to pay the $4 fee on the two $3,000 checks, Mr. Peacock said, "I'm sure that's what happened."556 It seems clear that since Mr. Peacock purchased two of the $3,000 cashiers checks, the third $3,000 check was purchased with proceeds from Flowerwood Farms.

There is evidence that Mr. Peacock purchased the Ken Peacock and Dean Landrum checks with proceeds diverted from loans made by Madison Guaranty.

On the day of the fundraiser, April 4, 1985, Dixie Continental Leasing, a company owned by Mr. Peacock, purchased 29.77 acres of land on Woodson Lateral Road for $335,000.557 Most of the sale was financed by Madison Guaranty with a $297,000 mortgage.558 Mr. Peacock borrowed an additional $50,000 from Madison Guaranty in his own name to fund the down payment on the property.559 The loan was executed on April 5, 1985, but was funded on April 4, 1985, with a $50,000 Madison Guaranty check payable to Mr. Peacock.560 The loan was secured by commercial air conditioning equipment appraised at $273,000 but ultimately sold as scrap by Madison Guaranty for $1,500.561

On April 5, 1985, Mr. Peacock wrote a check for $38,940 to Quapaw Title Co. to pay the down payment on the Woodson Lateral Road property.562 The check was deposited in Madison Guaranty.563 There is no documentary evidence indicating what happened to the remaining $11,060. Mr. Peacock does not remember how the remaining $11,060, a sum sufficient to fund the checks to Governor Clinton, was spent.564 Moreover, he does not recall what funds he used to pay for the cashier's checks: "I don't remember how I paid for them, whether I paid for them with a check or whether I paid for them out of funds or what I did."565

The Pillsbury Report concludes that the source of funds for Mr. Ken Peacock's and Mr. Landrum's checks "cannot be established from the available documentation,"566 because Mr. Peacock's April 1985 Madison Guaranty bank statement is missing.567 Thus, it is not possible to ascertain what Mr. Peacock's balance was when he wrote the $6,000 check to Madison Guaranty, or what it would have been absent the infusion of an extra $11,060.568 Nevertheless, the Pillsbury Report does indicate that "it is possible that a portion of this $11,060 could have been used to reimburse Charles Peacock III for the campaign contributions he funded that were made in the names of Ken Peacock and Dene Landrum."569

In spring 1987, after Mr. McDougal was ousted from Madison Guaranty, the S&L filed several suits against Mr. Peacock, other members of his family, and related entities to recover on unpaid loans.570 On March 12, 1987, Madison Guaranty filed suit against Dixie Continental Leasing to recover on the loan executed on the day of the fundraiser.571 On April 1, 1987, Madison Guaranty filed four additional suits against the Peacocks and their companies.572 In all, Madison Guaranty sought to recover approximately $500,000 from the Peacocks with these suits.573

Madison Guaranty was represented in these actions by Lance Miller of the law firm of Mitchell, Williams, Selig & Tucker ("Tucker Firm").574 Patricia Heritage, a Madison Guaranty collections officer, was the Madison Guaranty liaison to the Mitchell Williams attorneys with respect to these cases.575

On April 21, 1987, Greg Hopkins, Mr. Peacock's attorney, visited Ms. Heritage in her office.576 Ms. Heritage testified that Mr. Hopkins was obviously angry and made certain allegations to her involving, the Dixie Continental loan, Mr. McDougal, and the Clinton campaign.577 Immediately after Mr. Hopkins left, Ms. Heritage called Mr. Miller to relate Mr. Hopkins' allegations.578

Mr. Miller took contemporaneous notes of his conversation with Ms. Heritage,579 which he then memorialized in a three-page memorandum, addressed to John Selig, the partner on the matter.580 Ms. Heritage confirmed that Mr. Miller's memorandum accurately reflects what Mr. Hopkins said to her.581

Mr. Miller's memorandum reflects that Mr. Hopkins claimed that there had been "substantial wrongdoing" at Madison Guaranty as a result of which people were "going to go to prison."582 Mr. Hopkins also made the serious allegation that "a portion of the loan proceeds made to Dixie Continental Leasing went to Bill Clinton's campaign and that in return for the substantial campaign contribution, Bill Clinton assured Jim McDougal that a state agency would lease space from Madison Guaranty at its headquarters on Main Street in Little Rock."583

There is every reason to believe that Mr. Hopkins actually made the serious and troubling allegations attributed to him, and that Mr. Miller's memo accurately reflects what Mr. Hopkins. Ms. Heritage's memory of the conversation is vivid.584 Indeed, Ms. Heritage testified that Mr. Hopkins "was angry and shouting" at her, and that "that's the sort of thing that would stick out" in her mind.585

It appears that Mr. Hopkins did not make these allegations out of whole cloth. Ms. Heritage testified that, with respect to the allegations about campaign contributions to Governor Clinton, she "thought it was entirely possible that it was true."586 She thought Mr. Hopkins may have been "posturing," but not lying.587

Although Mr. Hopkins did not recall speaking with Ms. Heritage in April 1987 or making allegations, he did not dispute that he may have done so and has no reason to doubt Ms. Heritage's recollection.588

Mr. Hopkins testified that he could not think of a "conceivable reason for making up an allegation about the Governor and Jim McDougal exchanging money for favors."589 He also testified that "it was not [his] habit to lie or make up baseless allegations."590 He acknowledged that the allegations about Governor Clinton are serious and not the sort of thing that he would say without a basis for doing so.591 Mr. Hopkins admitted that he "probably had suspicions."592

Moreover, Mr. Hopkins was likely in a position to learn about the diversion of loan proceeds to Governor Clinton and Madison Guaranty's award of a lease contract through his representation of Mr. Peacock, who owned Dixie Continental and was a Madison director. However, Mr. Hopkins, invoked the attorney-client privilege and refused to answer questions about what Mr. Peacock has told him.593

If Mr. Hopkins did make the statements attributed to him, and they were false, he would be in violation of an Arkansas ethical rule.594 The Rule states: "In the course of representing a client a lawyer shall not knowingly . . . make a false statement of material fact or law to a third person."

The memorandum written by Mr. Miller reflects that Mr. Hopkins said that "in return for the substantial campaign contribution, Bill Clinton assured McDougal that a state agency would lease space from Madison Guaranty at its headquarters on Main Street in Little Rock."595 Indeed, on August 13, 1985, the State of Arkansas awarded a contract to expand the Madison lease office space in its Main Street office to the Arkansas Development Finance Authority (ADFA).596 Governor Clinton had previously used his influence to steer an ADFA lease contract to Madison Guaranty.597

C.

Governor Clinton Vetoes Legislation For McDougal Business Partners

The 1985 McDougal fundraiser appears to have been used as leverage to secure action by Governor Clinton on proposed state legislation. On February 14, 1986, Castle Sewer & Water Company -- an entity owned by Jim Guy Tucker and R.D. Randolph -- entered an agreement to purchase the sewer and water system at Castle Grande for $1.2 million.598 On July 15, 1986, following Mr. McDougal's removal from the Madison Guaranty, there was a special meeting of its Board of Directors.599 At the meeting, Mr. Tucker explained to the board that he had an old agreement with Mr. McDougal for 110 utility hook-ups per year and that, although the utility company was not a registered public utility under Arkansas Law, it was not a problem.

Mr. Tucker raised a number of issues in the July 15, 1986 meeting. Some of the concerns voiced by Mr. Tucker brought into question the validity of legal work performed by Hillary Clinton and the Rose Law Firm.

Mrs. Clinton supervised Rose Law Firm associate Rick Donovan's analysis on the need for Castle Sewer and Water to register as a public utility with the Arkansas Public Service Commission.600 The memorandum concluded that the cost of becoming a "public utility" -- and thus being regulated by the Public Service Commission -- would be greater than the risk of being reported by a resident to the Public Service Commission.601 Such a citizen report would simply require the payment of a civil fine.602 Mrs. Clinton, after reviewing various memoranda and billing records, recalled that she supervised Mr. Donovan on certain "questions relating to the provisions of water and sewer service by a utility which was located within IDC property."603

It is not clear exactly what work was performed by the Rose Law Firm on the utility issues related to Castle Grande because Mrs. Clinton ordered those client records destroyed in July 1988.604 But, the work performed by Mrs. Clinton clearly became an issue when Mr. Tucker threatened to sue Madison Guaranty, which was under then the "close scrutiny of FSLIC"605, for recision.606

The sale of the sewer and water system occurred on February 28, 1986.607 Yet, the Rose Law Firm continued to do work on utility related issues and continued to bill Madison Guaranty.608 Six days after the final transfer of the Industrial Service Corporation stock to Castle Sewer, Mr. Donovan wrote a memorandum on whether "Madison Guaranty/IDC" can provide services to customers inside Little Rock's city limits.609 Mr. Donovan could not explain why he was preparing a legal memorandum for a client who had sold the utility a week earlier.610

The Rose Law Firm charged Madison Guaranty thousands of dollars for work on utility issues.611 There may have been work performed on utility issues in January 1986, the bill which reflected 14.5 hours of unaccounted billing by Mrs. Clinton for Madison.612

Two years later, the utility work performed by the Rose Law Firm became an issue when Mr. Tucker threatened to sue Madison Guaranty for recision of contract, based on the fact that "a utility, subject to regulation by the Public Service Commission, is prohibited from mortgaging utility property without permission of the Public Service Commission."613 This threat would have directly called into question the legal work performed by the First Lady and the Rose Law Firm.

Mr. Tucker refused to rescind his purchase contract for Industrial Services Corporation unless legislation was enacted barring the Public Service Commission from regulating Castle Sewer and Water's rates.614 On February 24, 1987, Mr. Tucker wrote a memorandum to Representative Mike Wilson outlining a proposed bill, a copy of which was attached to the memorandum.615 This proposal, House Bill 1780, passed both houses of the State legislature without a single dissenting vote.616

Governor Clinton, however, vetoed the bill. According to the Governor's Chief Counsel, Samuel Bratton, Governor Clinton vetoed the bill because it was local and specific and this violated the Arkansas constitution.617 Prior to the veto, the Governor was not aware that the legislation was designed to help Madison Financial, Mr. Tucker, Mr. Randolph, and tangentially The Rose Law Firm and Mrs. Clinton.618

In early April 1987, Mr. Randolph spoke with Mr. Bratton about a way to reverse the Governor's the veto of House Bill 1780.619 Unable to resolve the matter, Mr. Randolph went to see the Governor.620

On April 14, 1987, because the Governor was unavailable, Mr. Randolph left a message with621 Nancy Hernreich, the Governor's scheduler.622 The message indicated that Mr. Randolph had spoken with the Governor the previous Sunday, and that he wanted to know if the water bill veto was going to stand.623 Mr. Randolph advised Ms. Hernreich that the Governor should call Mr. Tucker about the legislation. Ms. Hernreich's message indicates that Mr. Randolph "mentioned a meeting between you [Governor Clinton], Tucker, and Jim McDougal a couple of years ago which involved $33,000."624

The evidence indicates that Mr. Randolph was referring to the April 4, 1985 fundraiser at Madison Guaranty. This "meeting" involving $33,000 appears to be the 1985 fundraiser. Mr. Randolph, Mr. Tucker and Mr. McDougal contributed at the April 5, 1985 fundraiser,625 which was almost exactly "a couple of years" before Mr. Randolph's visit to the mansion. Also, $33,000 is approximately what was raised at the event.

Ms. Wright, Governor Clinton's Chief of Staff, read the memorandum, and wrote, "see if Sam Bratton will call him."626 The Governor wrote "ugh" in response.

Mr. Tucker wrote a letter to Governor Clinton requesting that he or the representatives who sponsored the legislation be given the opportunity to speak with the staff person who recommended the veto.627 Mr. Tucker met with or had conversations over the telephone with Mr. Bratton to discuss Castle Sewer's need for a legislative remedy.628 On May 13, 1987, Representative Walker called the Governor's office and left a message "Rep Walker want and appt with BC ASAP. He wants to bring Jim Guy Tucker and R.D. Randolph."629 Underneath the typed message Governor Clinton wrote "This is B.S. I thought Sam, called J. Guy, did he? I thought PSC not regulating this project, right?"630 There is no doubt that the Governor was aware of the problems his veto created for Castle Sewer.

On May 19, 1987, Mr. Bratton prepared a memorandum to Governor Clinton related to "Sewer District legislation/Jim Guy Tucker-R.D.Randolph, Mike Wilson, Bill Walker."631 The memorandum is revealing about the true nature of the discussions between Mr. Bratton and Mr. Tucker. The first paragraph contains a discussion of the fact that Madison Guaranty could not legally own and operate a utility, and this limitation was the reason the S&L sold it.632 In addition, the first paragraph mentions that the problem stems from the fact that a utility regulated by the Public Service Commission was barred from mortgaging utility property without permission of the Public Service Commission. Therefore, in Mr. Tucker's opinion, the mortgage was invalid because the utility had not obtained approval of the mortgage.633 The entire first paragraph mentions nothing about legislation remedying the cost of the Public Service Commission regulation or the burdens that such regulation places on small utilities.

It was Mr. Bratton's position that Representative Walker was interested in seeing the legislation passed because it could save money for the citizens of the City of Wrightsville.634 Mr. Tucker informed Mr. Bratton that if the legislation were not passed that litigation "would result because of the question of the validity of the mortgage and the fact that the S&L is now being operated under the close scrutiny of FSLIC and is no longer controlled by McDougal, et. al."635 Thus, there was a threat of a lawsuit involving Madison Guaranty calling into question the legal work performed by the Rose Law Firm because the mortgage was invalid.636 In none of these subsequent paragraphs is there any mention of the merit of the legislation.

In the last paragraph, Mr. Bratton indicated that he spoke with Robert Johnston, at the Public Service Commission and asked Mr. Johnston to review options available to solve the "Tucker/Randolph problem short of the deregulation proposed by H.B. 1780."637

On June 12, 1987, Act 37 of 1987 was enacted into law.638 Act 37 of 1987 divests the Public Service Commission of regulatory authority over small sewer and water companies.639 Interestingly, six days after the legislation was signed, Castle Sewer indicated to Madison Guaranty that they were prepared to enter into a new contract.640

D.

Clinton Promises to McDougal on Brewery Legislation

Mr. McDougal consistently turned to Governor Clinton and Mrs. Clinton when he faced state regulatory obstacles involving his land development projects.

McDougal had many creative ideas for developing real estate. At Castle Grande, he proposed to build a brewery with a tasting room641 that he hoped would become a profitable local tourist attraction.642 Mr. McDougal spoke with William Lyon, an Arkansas developer, who had borrowed $300,000 from Madison Guaranty.643 Mr. Lyon had already invested the money he borrowed from Madison Guaranty in a brewery in Little Rock.644 At that time, Mr. Lyon was interested in expanding his existing brewery so he could serve and sell alcohol on the same premises.645 However, existing Arkansas state law prohibited the sale of alcohol at a manufacturing facility.

Mr. Lyon and Mr. McDougal discussed the potential for success of a "brew pub" and the need to change the current state law in order to implement this plan. Mr. Lyon testified that he discussed the change in the law with Mr. McDougal because he knew Mr. McDougal had "clout" with then-Governor Clinton.646 Mr. Lyon believed that "Jim McDougal thought that he owned Bill Clinton."647

Indeed, Mr. McDougal assured Mr. Lyon that he would be able to take care of the regulatory problems that prevented Mr. Lyon from building a brew-pub. Mr. McDougal intended to rely on his contacts in the state government, and particularly his friendship with Bill Clinton.648

On December 12, 1984, Mr. McDougal wrote a letter to Betsey Wright, Governor Clinton's chief of staff, about a bill that had been pre-filed with the Arkansas State Senate. The letter states: "Governor Clinton has made a commitment concerning this bill which I need to discuss with you at your convenience."649 The bill provided exactly the type of legislative relief necessary for Mr. Lyon to successfully build his brew-pub.650

On February 18, 1985, the state senator sponsoring the bill withdrew it due to lack of support from the ABC Board.651 Mr. McDougal assured Mr. Lyon, however, that he could have the alcohol regulation changed instead through the ABC Board.652

Two days later, on February 20, 1985, the ABC Board enacted a regulation that permitted the tasting of alcohol on the premises of a manufacturing facility.653 As promised, Mr. McDougal was able to provide the necessary changes in the state regulations.

Later that year, Mr. Lyon and Mr. McDougal discussed the prospect of moving Mr. Lyon's brewery to Castle Grande and placing it in a building that was already on the Castle Grande property.654 Unfortunately, Castle Grande was located in a "dry" township and another change in the Arkansas state law or regulations was needed in order to open a brew-pub on the property. Mr. McDougal again told Mr. Lyon know that he would "take care" of the necessary regulatory changes.655 In a letter dated November 20, 1985, Mr. McDougal informed Seth Ward, who was involved in Mr. McDougal's Castle Grande development, that Governor Clinton would help obtain approval for the brewery. Mr. McDougal wrote: "I have spoken with the Governor [Clinton] on this matter and expect it will be approved."656

Shortly thereafter, Mr. McDougal enlisted Mrs. Clinton's assistance in performing some legal analysis on the "wet/dry" issue. In a January 3, 1986 memorandum from Rick Donovan, a Rose Law Firm associate, to Mrs. Clinton,657 Mr. Donovan confirmed that Castle Grande was in a "dry" township. The memorandum reported that the only way to change the "dry" status was to pass a referendum in the township, or to seek a regulatory change through the ABC Board. This memorandum was followed by an undated handwritten note from Hillary Clinton. The note states:

"Rick -
I visited with Seth Ward and gave him a copy of your memo and with Ken Shemin. Please see Ken about a strategy to approach the ABC to argue the "dissolved township" theory.

Thanks,
Hillary658

Mr. Ward passed the January 3 memorandum on to Mr. McDougal. The Rose Law Firm billing records mysteriously discovered in the White House Residence indicate that Hillary Clinton billed for a "conference with Mr. Ward and Mr. Shemin" on January 7, 1996, and charged it to the Madison/IDC matter number.659 Mr. Donovan continued to research the wet/dry issue, writing a second memorandum to Mrs. Clinton January 23, 1986. In his second memo, Mr. Donovan again concluded that without a regulatory change or a vote, the Castle Grande property would still be considered "dry."660 On February 7, 1986, Mr. McDougal wrote a memo to Jim Guy Tucker, "It looks like our township is dry. Attached is a legal opinion Seth got from his attorney." The legal opinion attached is Mr. Donovan's January 3rd memorandum.

At the end of February, the federal S&L examiners arrived at Madison Guaranty, and Mr. McDougal was removed from the S&L before his plans for the brewery could be successfully completed.

E.

McDougal Asks Governor Clinton to Fire Tough State Regulators

Mr. McDougal asked Governor Clinton for assistance related to Madison and his real estate projects. For example, after Mr. McDougal received unfavorable treatment from Health Department officials monitoring Maple Creek Farms Land Development, Governor Clinton's assistance directly resulted in the removal of the state employees regulating the project.

Maple Creek Farms was one of Mr. McDougal's real estate projects that he intended to subdivide into single-family lots. On June 23, 1983, however, shortly after McDougal had purchased Maple Creek Farms, Lex Dobbins, a Saline County Health Unit Sanitarian, wrote to Mr. McDougal warning about the instability of the soils and the inadequate absorption fields.661 Mr. Dobbins suggested that "individual sewage disposal permit[s] be obtained prior to any construction," in order to ensure the safety of the sewage system.662 As a result, Mr. McDougal signed a "Memorandum of Agreement" pledging that each lot would be individually evaluated and approved for a septic tank system and that the lots would not be less than 3 acres in size.663

Without obtaining the permits required by the Memorandum of Agreement, Mr. McDougal began construction on Maple Creek Farms in February of 1984. Mr. Dobbins reminded him of the need for the proper permits and maintaining lots of at least 3 acres in size664 and again urged Mr. McDougal to consider installing a community sewer system instead of septic tanks.665

Mr. McDougal wrote to Mr. Dobbins on March 6, 1984, assuring him that the customers would contact the Health Department before beginning construction and that the community sewer system would be available to any lot where a septic system failed.666 On April 26, 1984, Mr. McDougal signed another agreement with the Health Department, which stated, "The Department of Health agrees to issue temporary permits with a condition that property owner shall connect to the sewerage system when said system is available."667

After seeing no significant improvement in the situation at Maple Creek Farms, Mr. Dobbins wrote to his supervisor, William Teer, Director of Sanitarian Services, of the problems.668 In response to Mr. Dobbins' memorandum, Mr. Teer wrote to Mr. McDougal on July 3, 1984, instructing him to correct the problems.669 Two weeks later, Mr. McDougal wrote back stating: "We are in agreement on your recommendations as to site protection and site drainage and are in the process of the continued implementation of these recommendations."670

Despite Mr. McDougal's assurances that the problems at Maple Creek would be alleviated, the situation was not. On July 2, 1985, one year later, Mr. Teer informed Mr. McDougal that, absent corrective action, the Department of Health would not issue additional temporary individual sewage disposal permits in the poorly drained areas.671 Contrary to the agreements he had signed and letters he had written promising to correct the sewage problems on Maple Creek Farms, Mr. McDougal continued to ignore the warnings of the Health Department.

By January 1986, Mr. McDougal was so frustrated by the persistent reprimands from the Health Department that he met with Governor Clinton. Mr. McDougal provided Governor Clinton with a list of detailed grievances that he had with health regulators.672 Governor Clinton granted a meeting with Mr. McDougal and called Mr. Butler in order to summon the state workers as well.673 Mr. Butler recalled Governor Clinton telling him during the call: "the reason I think some of your staff is messing with this development is because this gentlemen [McDougal] has been a supporter of mine since I ran for Congress and has never asked me for anything."674

On March 4, 1986, Dr. Saltzman, Director of the Health Department, Jerry Hill, Environmental Chief of the Health Department, Janice Choate, an aide to Governor Clinton, Mr. Butler, Mr. McDougal and the Governor met in Governor Clinton's office.675 As a result of this meeting, Mr. Butler removed the three sanitation workers from their positions regulating Maple Creek. A memorandum from Ms. Choate informed the Governor of this action and noted: "I believe they took their cue from you when you told them that Jim was your friend of 20 years who had never asked for a favor."676

No witnesses denied that Governor Clinton "ordered" the firing of the sanitation workers,677 and the documentary evidence indicates that the termination decisions were made in response to the Governor's wishes.

F.

McDougal Helps Select S&L Regulators

In addition to obtaining the removal of state health regulators, Mr. McDougal was able to select some of the state regulators charged with overseeing Madison Guaranty. The evidence indicates that Governor Clinton looked to Mr. McDougal to provide him with the names of appointees for banking board positions. A handwritten memo about appointments on Governor's Office stationary reads, "Banking Board - ask McDougal."678

In fact, the Governor's staff contacted Mr. McDougal for his recommendations for the State Savings and Loan Board.679 On February 7, 1985, Mr. McDougal wrote a memorandum to Governor Clinton recommending that John Latham, Chairman of Madison Guaranty, and Jerry Kendall be appointed to the Savings and Loan Board.680 A memorandum announcing Governor Clinton's appointments on March 4, 1985 reflected that Mr. Latham and Dr. Kendall were named to the Savings and Loan Board.681 Mr. McDougal had an obvious interest in having his own employee, Mr. Latham, appointed to a board that would have direct regulatory control over Madison Guaranty.

Indeed, the evidence indicates that, with then-Governor Clinton's assistance, Mr. McDougal consistently pushed through the appointments of persons who would be favorable to him and Madison Guaranty. This pattern is demonstrated by the troubling case of William Lyon, an Arkansas developer and business associate of Mr. McDougal. Mr. Lyon testified that: "Mr. McDougal called me, literally out of the blue, and asked if I would be on the Arkansas State Bank Board."682 Mr. McDougal informed Mr. Lyon that he could get then-Governor Clinton to appoint Mr. Lyon, "and he did."683

During Mr. Lyon's term, however, Mr. McDougal informed him that it "would be more beneficial" if he sat on a different board - the Savings and Loan Board - which would be voting on whether Madison Guaranty could issue preferred stock in order to raise capital.684 Mr. McDougal made it clear to Mr. Lyon that the Governor would support Mr. McDougal in his effort to have the preferred stock issue passed.685

Mr. McDougal told Mr. Lyon that if he did not agree to serve on the Savings and Loan Board he would be asked to resign from the Bank Board.686 Mr. Lyon believed the preferred stock deal was "a rip-off of the stockholders" and told Mr. McDougal the he would not go over to the Savings and Loan Board.687 Ultimately, Mr. Lyon rejected Mr. McDougal's offer to move to the Savings and Loan Board because he did not want anyone controlling his vote.688

Mr. McDougal asked Mr. Lyon to resign but Mr. Lyon "told him that he no longer had anything to do with the State of Arkansas" and therefore only the Governor could ask him to resign.689 Mr. McDougal then informed Mr. Lyon that he would ask Governor Clinton to ask Mr. Lyon to resign. Perhaps not coincidentally, Governor Clinton called Mr. Lyon a month or so later and told Mr. Lyon that he had spoken with Mr. McDougal, and that the Governor wanted Mr. Lyon to resign.690 Mr. Lyon resigned from the State Bank Board in February 1984.691

Documents indicate that later that year, Mr. McDougal played a role in the appointment of the Arkansas Securities Commissioner, Beverly Bassett Schaffer, who ultimately did approve Mr. McDougal's proposal for preferred stock. Woody Bassett, Ms. Schaffer's brother, wrote to the Governor several times recommending her for the position of Securities Commissioner, however, on a letter dated November 26, 1984, Governor Clinton wrote: "she'd be good but may need to do something else - B."692 After a December 22, 1984, message for the Governor from Mr. McDougal, however, in which he recommended Ms. Schaffer for the position of Securities Commissioner,693 Governor Clinton appointed Ms. Schaffer to the position of directly overseeing Madison Guaranty.

G.

McDougal Hires Mrs. Clinton and Her Law Firm

1.

The Questionable Retention of the Rose Law Firm

Perhaps as a favor to then-Governor Clinton and Mrs. Clinton, and in an effort to obtain a favorable state regulatory ruling from Ms. Schaffer, in April 1985, Mr. McDougal retained Mrs. Clinton and the Rose Law Firm to represent Madison Guaranty in its proposal for the issuance of preferred stock.

Mrs. Clinton has provided several versions of how the Rose Law Firm came to be retained by Madison Guaranty contradicted both her own statements and those of others. Mr. McDougal made statements during the 1992 Clinton Presidential campaign and to the press in 1993 that he put Mrs. Clinton on retainer as a favor to Bill Clinton. In 1992, Mr. McDougal told James Blair, a longtime Clinton friend and legal advisor to the campaign, and Loretta Lynch, a campaign lawyer who worked on the Whitewater-Madison matters, that Governor Clinton, in jogging pants, visited Mr. McDougal's office and told him that he and Mrs. Clinton were pressed for money and asked Mr. McDougal to give some work to Mrs. Clinton.694 According to Mr. McDougal, two hours later, Mrs. Clinton came by to set up the retainer.695 According to notes taken by Mr. Blair, Mr. McDougal said that he remembered the encounter "explicitly" because Governor Clinton, in his exercise clothes, left a permanent stain on Mr. McDougal's "new leather contour chair."696 In 1993, Mr. McDougal gave a similar account of the incident to the Los Angeles Times. President Clinton does not recall asking Mr. McDougal to place Mrs. Clinton on retainer.697

Mrs. Clinton has given a markedly different account of the circumstances surrounding Madison Guaranty's retention of the Rose Law Firm. According to Mrs. Clinton, Richard Massey, then a first year associate at the Rose Law Firm, brought in Madison Guaranty as a client. Mrs. Clinton claims that although she was the Madison Guaranty billing partner on the matter, she was merely acting as a "backstop" because the firm did not permit associates to bill clients directly.698

During a press conference on April 22, 1994, Mrs. Clinton stated that Mr. Latham, Chief Executive Officer of Madison Guaranty, asked Mr. Massey whether he would be interested in representing Madison in connection with a proposed stock offering. Mrs. Clinton further explained that Mr. Massey was aware that she knew Mr. McDougal, so "he came to me and asked if I would talk with Jim to see whether or not Jim would let the lawyer and the officer go forward on this project. I did that, and I arranged that the firm would be paid $2,000 retainer."699 In a statement to the RTC in November 1994, Mrs. Clinton similarly told investigators that "she recalled Massey came to her and asked her to be the billing attorney which was a normal practice when an associate was handling the matter. . . Mrs. Clinton recalled that a Madison official (individual unknown) approached Rick Massey regarding a preferred stock offering in an effort to raise capital."

In a sworn response to an RTC interrogatory in May 1995, Mrs. Clinton elaborated on her story. Mrs. Clinton stated that Mr. Massey approached her because "certain lawyers" in the Rose Law Firm were "opposed" to representing Mr. McDougal until Mr. McDougal paid an outstanding bill, and he was aware that Mrs. Clinton knew Mr. McDougal. Mrs. Clinton wrote:

In the spring of 1985, Massey came to see me because he had learned that certain lawyers at the firm were opposed to doing any more work for Jim McDougal or any of his companies until he paid his bill and then only if Madison Guaranty agreed to prepay a certain sum. . . I believe Massey approached me about presenting this proposal to Jim McDougal because he was aware that I knew him.700

Mr. Massey, however, contradicts Mrs. Clinton's account in sworn testimony before the Special Committee. According to Mr. Massey, he was not responsible for bringing in Madison as a client.701 Mr. Massey stated specifically18 that Mr. Latham never offered him Madison's business,702 and that he did not recall approaching Mrs. Clinton with a proposal to represent Madison.703 Contrary to Mrs. Clinton's unsworn statement of November 1994 to the RTC, Mr. Massey also indicated that he did not ask Mrs. Clinton to be the billing attorney.704

David Knight, a former Rose partner specializing in securities law, testified that he attended the lunch meeting during which, according to Mrs. Clinton, Mr. Latham allegedly hired Mr. Massey.705 Mr. Knight confirmed Mr. Massey's testimony that Mr. Latham did not ask Mr. Massey to represent Madison on the preferred stock offering. Quite to the contrary, according to Mr. Knight, the subject of the stock offering never arose.706 Indeed, according to Mr. Knight, Mr. Latham informed him and Mr. Massey at the lunch that Mr. McDougal made all hiring decisions and that Madison Guaranty already had outside counsel.707

Mr. Latham confirmed that Mr. McDougal made the decision19 to retain the Rose Law Firm.708

The essence of Mrs. Clinton's account of the Madison retainer was that she became involved due to an alleged outstanding debt that Mr. McDougal's Madison Bank & Trust owed to the Rose Law Firm in 1985. Mrs. Clinton claimed that it was to relieve the concerns of her partners that she insisted on the $2000 per month retainer.

Documentary evidence and testimony provided to the Special Committee, however, indicate that the outstanding balance of Rose's bill to Madison Bank & Trust was paid in November 1984, months prior to Mrs. Clinton's retainer in April 1985.

Gary Bunch, President of Madison Bank & Trust, produced documents evidencing the bank's payment of the Rose legal fees in late October of 1984. Minutes of Madison Bank for October 1984 indicate that $5,000 in legal fees are owed to the Rose Law Firm for work on the "Huntsville move appeal,"709 litigation relating to the relocation of the bank. The minutes state: "Mr. McDougal seconded that Mr. Bunch will negotiate settlement with the firm."710 Mr. Bunch testified that Mr. McDougal directed him to pay the outstanding Rose Law Firm bill for the Madison Bank & Trust matter in full in October 1984.711

Following the discovery of the Rose billing records and the testimony of Mr. Massey before the Special Committee, Mrs. Clinton's story changed in a February 1996 interview with RTC investigators.20 Mrs. Clinton claimed the late Vincent Foster first informed her that Mr. Massey wanted to do work for Madison: "I believe it was Vince Foster who came to me, who said that Mr. Massey wanted to do this work, but the partners didn't want him to do it."712 When asked who suggested that she approach Mr. McDougal, Mrs. Clinton replied, "I don't have a specific recollection. I believe it was Vince Foster, but I'm not positive."713

2.

Mrs. Clinton Asks the Arkansas S&L Regulator to Approve a Novel Stock Issue

The Rose Law Firm billing records belatedly discovered in the White House Residence show that Mrs. Clinton called Ms. Schaffer the day before the Rose Law Firm submitted to the Arkansas Securities Department Madison's proposal to offer preferred stock in order to raise badly need capital.714 Ms. Schaffer notified Mrs. Clinton of the approval of the proposal two weeks later in a letter addressed to "Dear Hillary." Ms. Schaffer and Mrs. Clinton both denied that Madison was given any preferential treatment.715

Prior to the discovery of the billing records, Mrs. Clinton claimed in her sworn responses to RTC interrogatories in May 1995 that she called the Arkansas Securities Department to find out "to whom Mr. Massey should direct any inquiries" but she did not recall to whom she spoke.716

In testimony before the Special Committee, Ms. Schaffer directly contradicted Mrs. Clinton and stated that the proposal was discussed during the phone call. According to Ms. Schaffer, She called and said they had a proposal, and what it was about; and I said I'm familiar with that; I've already looked at that. You know, I agree with the-basically I have no problem with that position, and you'll be getting a letter soon to that effect.. . I think in substance I said, basically,I agree with the position-I mean, that preferred stock can be issued pursuant to the Business Corporation Code.717

Mr. Massey likewise contradicted Mrs. Clinton's account of the phone call. Mr. Massey testified that he drafted the proposal and knew exactly to whom the proposal should be sent.718 Mr. Massey also said that Mrs. Clinton never gave any instructions about addressing the transmittal letter.719 Mr. Massey did not recall asking Mrs. Clinton to make such an inquiry and was not aware that she had.720

Prior to the Rose Law Firm's engagement of Madison, the law firm, Mitchell, Williams, Selig, Jackson & Tucker started to perform research related to a preferred stock proposal.721 The firm even opened a file labelled "Madison Guaranty - Sale of Stock" on February 6, 1985.722 For some reason, then, Mr. McDougal decided to send the work to the Rose Law Firm.

On April 30, 1985, The Rose Law Firm wrote a letter to Charles Handley, Assistant to the Arkansas Securities Commissioner.21 to request an opinion as to whether Madison Guaranty was authorized to issue nonvoting preferred stock.723 Mr. Massey drafted the letter.724 This was the first time the Arkansas Securities Department was asked to make a determination on the ability of a savings and loan to issue preferred stock.725 After receiving the letter from the Rose Law Firm, Mr. Handley, an accountant, wrote, in a routing memorandum on May 6, 1985, that "perhaps one of our attorneys should review the matter and issue a legal opinion."726 Ms. Schaffer forwarded a copy to William Brady, who was the only staff attorney at the Arkansas Securities Department.727 Attached to the letter was a memorandum from Ms. Schaffer which said "Brady: Please review and draft reply to Hillary 6 May 1985."728 It was Mr. Brady's understanding that this was to be an approval letter.729 Therefore, any review was merely to get an understanding of the issues, because he believed it had already been determined that the proposal would be approved.

Mr. Brady did not draft a reply. Instead he drafted a memorandum to Ms. Schaffer explaining his objection to the plan.730 "The more I looked into the Rose Law Firm request concerning the issuance of preferred stock ... the less I supported the position presented in the Rose Law Firm."731 Because the plan had never been done in Arkansas before, Mr. Brady disagreed with the Rose Law Firm analysis: "I was not sure it was permissible."732 Mr. Brady believed the Arkansas Securities Commission should seek an opinion from the Arkansas Attorney General.733

Mr. Handley was also concerned about the right of Arkansas savings and loan associations to issue preferred stock. Mr. Handley testified that after receiving the Rose Law Firm's letter his "initial belief was that Madison guaranty could not issue preferred stock because under the Arkansas State Savings and Loan Act, state institutions could only issue common stock."734 Mr. Handley relented after his supervisor, Ms. Jones, disagreed.735

On May 14, 1985, just two weeks after receiving this unique proposal, and despite the objections of her staff attorney, Ms. Schaffer approved the Rose Law Firm's position that Madison Guaranty could issue preferred stock.736

Over the course of the next seven months, the Rose Law Firm continued to prepare the documents for a preferred stock offering.737 Madison Guaranty, however, had lost interest in issuing preferred stock. Instead, Madison tried to and raise capital through property syndication and a proposed offering22 of subordinated debt. III.

The Castle Grande Land Deal: A Series of Fraudulent Loans

The land development commonly known as "Castle Grande" consisted of about 1,050 acres of property near Little Rock. Madison Guaranty's wholly-owned subsidiary, Madison Financial Corporation, and Seth Ward, Webster Hubbell's father-in-law, jointly purchased the property for $1.7 million and then sold the land in parcels to various Madison insiders.738 Almost all of the sales were financed by loans from Madison Guaranty, and most of the loans were not repaid. As a consequence, the Castle Grande deal caused nearly $4 million in losses to Madison Guaranty.739 These losses were borne ultimately by U.S. taxpayers.

Numerous transactions related to Castle Grande were fraudulent, criminal, or both. Indeed, the recent convictions of Mr. McDougal, Mrs. McDougal, and Governor Jim Guy Tucker on criminal fraud and conspiracy charges stemmed in part from certain aspects of the Castle Grande deal.

Under this sham transaction, Mr. Ward purchased 60% of the available land -- with 100% nonrecourse financing by Madison Guaranty -- and Madison Financial had the right to buy the property from him once it had found other buyers. The inclusion of Mr. Ward in the deal was intended to, and had the effect of, circumventing an Arkansas regulation that limited investment in a service corporation such as MFC by a savings and loan. In essence, Mr. Ward was nothing more than as "straw man" who held the property in his name for Madison Financial because Madison could not own it all. As compensation for his role, Mr. Ward earned hundreds of thousands of dollars in commissions on the sale of the Castle Grande property.

New evidence indicates that Mrs. Clinton played a direct role in transactions involving Castle Grande and has never admitted the extent of her role. The billing records discovered in the White House Residence in January 1996 indicate that between late 1985 and early 1986 Mrs. Clinton had numerous conferences with Mr. Ward about the matter and billed Madison for approximately 30 hours of work related to Castle Grande.740 Of importance, the billing records indicate that Mrs. Clinton drafted an option agreement dated May 1, 1986, between Mr. Ward and Madison. Mrs. Clinton drafted this option at a time when Madison Guaranty was intense scrutiny from federal regulators. According to James Clark, the chief examiner of the 1986 Federal Home Loan Bank Board examination of Madison Guaranty, the May 1 option "was created in order to conceal" the true purpose of questionable notes executed between Seth Ward, Madison Guaranty, and Madison Financial.741

The use to which Mrs. Clinton's work product was put raises questions about the state of her knowledge concerning what was going on at Madison Guaranty. The Special Committee has identified one occasion where Mrs. Clinton was apparently put on notice of suspect loans related to Castle Grande. When Madison Guaranty's top lending official, Don Denton, expressed concerns to Mrs. Clinton about questionable notes involving Seth Ward, she "summarily dismissed" his concerns.742 Mr. Denton gathered from her response that she was saying he should "take care of savings and loan matters and she would take care of legal matters."743

Furthermore, the Rose Law Firm billing records indicate that Mrs. Clinton had spent time studying a letter prepared by the Rose Law Firm explaining why the Ward notes were questionable -- i.e., the rule limiting direct investment by a savings and loan in real estate ventures. Thus, it is reasonable to conclude that Mrs. Clinton was apprised of both the law and the facts that made Castle Grande an illegal transaction.

In the view of the Special Committee, Mrs. Clinton's role in the Castle Grande deal cannot be assessed in isolation from her reluctance to be forthcoming about the extent of that role. Mrs. Clinton's role in the Castle Grande transactions was all but unknown prior to the discovery of her billing records in the White House residence in January 1996. Indeed, in a sworn interrogatory given to the RTC in May 1995, Mrs. Clinton represented that she knew nothing about Castle Grande.744 In light of the billing records and other evidence, the Committee finds that Mrs. Clinton's representation is difficult to credit.

A.

Structuring of the Acquisition of the Castle Grande Property to Evade State Regulations

Mr. Ward and Madison Financial purchased the Castle Grande together in fall 1985 from Industrial Development Company of Little Rock ("IDC") for $1.75 million.745 Mr. Ward, who was working as a part-time consultant for Madison Financial, brought the possible purchase of this property to Mr. McDougal's attention.746 On September 13, 1985, Madison Financial and IDC entered into a purchase agreement, which Mr. Ward signed on behalf of Madison Guaranty.747 The closing was held on October 4, 1985.748

At an early stage, Rose Law Firm attorneys were involved in the deal. Rose partner Thomas Thrash was involved in the acquisition of the IDC property for Madison Financial and attended the closing, although he has no recollection of it.749 In addition, the Rose Law Firm billing records reflect that, on November 14, 1985, Mrs. Clinton had a "conference with Seth Ward regarding purchase from [IDC Chairman] Brick Lile."750

Although some aspects of the deal struck by Mr. Ward and Madison Financial are disputed, the following is not in doubt. Madison Financial purchased the property south of 145th Street -- about 40% of the total land area -- plus some other parcels for $600,000.751 Mr. Ward purchased most of the land north of 145th Street, plus the property's sewer and water utility, for $1.15 million.752 The entire purchase was financed by Madison Guaranty, which loaned Mr. Ward the $1.15 million on a nonrecourse basis.753

Madison Financial and Mr. Ward agreed that the property would be parceled, developed, and sold as quickly as possible; that proceeds from sales would be applied toward the mortgage on the property; and that Mr. Ward would receive a commission on any sale, whether the land belonged to him or Madison Financial.754 Finally, Madison Financial had the right to purchase all or some of Mr. Ward's property from him.755

B.

The Fraudulent Nature of the Castle Grande Purchase

The purchase of the Castle Grande property by Madison Financial and Seth Ward has been described by federal regulators as a fraudulent transaction. In essence, Mr. Ward warehoused the property to allow Madison Guaranty to evade regulatory limitations upon its investment in real estate.

Under Section V of the Rules and Regulations of the Arkansas Savings and Loan Association Board, Arkansas thrifts may establish service corporations to pursue real estate development ventures.756 Madison Financial Corporation, Madison Guaranty's wholly-owned subsidiary, was such a service corporation.

Section V(C), however, limits a savings and loan's investment in its service corporation to 6% of the thrift's assets. This rule is known as the 6% rule or the direct investment rule. Section V(C) provides:

An association may make any investment under this section if its aggregate outstanding investment in the capital stock, obligations, or other securities of service corporations and subsidiaries thereof . . . would not exceed thereupon six (6%) percent of the association's assets.757

According to James Clark, the Examiner-in-Charge of the 1986 Federal Home Loan Bank Board ("FHLBB") examination of Madison Guaranty,758 the purpose of the direct investment rule was "[t]o limit the amount of risk that Madison Guaranty or any Arkansas thrift could take. Direct investments in service corporations or in property are considered to be more risky than just lending on property."759

The FHLBB's May 8, 1986 examination report on Madison Guaranty sharply criticized the purchase of Castle Grande as having been structured to circumvent the direct investment rule:

Ward apparently warehoused this land to reduce Madison Financial's investment and the attendant borrowing from Madison Guaranty. In this way, limitations on Madison Guaranty's investment in its Service Corporation are avoided. . . . By using this circuitous route, additional Madison Guaranty investment in Madison Financial was disguised as a loan to Ward.760

In a recent interview with the FDIC's Office of Inspector General, Mr. Clark stressed that "had MGSL purchased Castle Grande directly, they would have exceeded their direct investment limit."761 In hearings before the Special Committee, Mr. Clark expressed the view that Mr. Ward was a "straw purchaser,"762 or someone "who obtains legal title to a property without having any actual financial interest in the property simply as a means to hide the true ownership of the property."763 Mr. Clark also explained that as a federal examiner he was concerned about the state direct investment rule because "internal FHLBB procedures called on an institution to be in compliance with state regulations" and "violating the state regulation would mean that the institution was not operating safely and soundly."764

Others have confirmed that the purchase of Castle Grande was structured to evade the direct investment rule. Don Denton, Madison Guaranty's Chief Lending Officer, testified in the McDougal trial that "[t]here was a limitation on the amount of investment that Madison Financial Corp. could make, so Madison took the amount it could legally take and the balance of the acquisition was taken by Seth Ward."765 And in a recent interview, Mr. Denton "said that it was his understanding that Ward was acting as a 'nominee' purchaser in the acquisition of the IDC property, acting on behalf of the institution and carrying the property at no risk."766 In a deposition taken in connection with the Ward v. Madison case, Madison Guaranty's CEO, John Latham testified that the purchase was divided between Madison Financial and Mr. Ward to escape the direct investment rule.767

In sum, the Special Committee finds that substantial evidence demonstrates that the purchase of the Castle Grande property was a fraudulent transaction that violated the direct investment rule and involved the use of Mr. Ward as straw man.23

Mr. Ward testified to the Special Committee that he had no knowledge of the limitation on direct investment at the time of the Castle Grande purchase or that limitation dictated the structure of the transaction.768 That testimony, however, is contrary to a statement that Mr. Ward made to investigators working for the Pillsbury law firm. An April 29, 1994 interview reflects that "Ward indicated with respect to Castle Grand [sic] that he understood when he purchased the property that the money was being loaned to him and the property purchased in his name because of a limitation on Madison Financial Corporation's investments."769

Moreover, Webster Hubbell, Mr. Ward's son-in-law -- with whom Mr. Ward talked about business constantly770 -- has stated that he was aware in September 1985 "based on what Mr. Ward told me" was that "Madison had limits on what it could own in its own name, and so Mr. Ward was going to own part of it until it could be sold."771 In another interview, Mr. Hubbell indicated that Mr. Ward may have told him that there was a regulatory limit on what Madison could purchase.772

Finally, in a December 1986 interview of James McDougal conducted by the Memphis, Tennessee law firm Borod & Huggins (which had been retained as special counsel by Madison Guaranty's Board of Directors), McDougal indicated that "Madison Financial took the property south of 145th Street and Ward took the property north of 145th Street. This split was done because the entire project would have been beyond the capacity of Madison Financial due to bank board regulations."773 It seems likely that if Mr. McDougal knew about the limiting regulation he communicated this to Mr. Ward.

The sham perpetrated in connection with Castle Grande did not end with the purchase of the property in the fall of 1985. In subsequent months, the property was sold in a series of transactions.774 In most cases, the property was sold to Madison insiders and friends of the McDougals with 100% Madison financing. Because many of these loans were not repaid, Madison Guaranty suffered large financial losses. These losses were passed on to the American taxpayer after the institution's failure. The RTC estimated that Castle Grande caused losses in excess of $3.8 million.775

Under his agreement with Madison Financial, Seth Ward reaped sizable commissions on all Castle Grande sales, which ultimately totalled over $300,000.776. The last of these sales took place in late February 1986, when 486 acres was sold to former Senator J.W. Fulbright for $77,600, and the Castle Grande sewer and water utility was sold to a company owned by Jim Guy Tucker and R.D. Randolph for $1.2 million.777 After these sales, there remained only two parcels, both owned by Mr. Ward. One of these was tracts 27 and 28 of Holman Acres.778

According to Don Denton, after February 28, 1986, Ward began to demand his commissions for Castle Grande sales but Madison Guaranty lacked ready funds to pay him.779 It seems likely that an even greater obstacle to the payment of the commissions was the presence of federal savings & loan regulators, who commenced their examination of Madison Guaranty and moved into its offices on or around March 4, 1986.780 Indeed, Mr. Latham testified in the Ward v. Madison trial that the presence of the examiners was a concern in this regard.781

As a result of these difficulties, Madison Guaranty, Madison Financial, and Seth Ward executed a series of notes and loan transactions. On March 31, 1986, Madison Guaranty loaned $400,000 to Mr. Ward.782 Notably, the loan was secured by the mortgage on the Holman Acres property. Mr. Ward returned $100,000 within a week or so, leaving him with $300,000.783 Then, on April 7, 1986, MFC gave -- but did not fund -- two promissory notes to Seth Ward, one for $300,000, the other for $70,943.784

According to Mr. Denton, the exchange of these offsetting notes was intended to pay Mr. Ward his commissions.785 That is, the $400,000 loan (less the $100,000 that was returned) satisfied the commissions and the notes from Madison Financial offset any obligation by Mr. Ward to repay that loan. Similarly, in the Ward trial, Mr. Ward testified that the $370,943 in notes was intended to document for the regulators his entitlement to commissions.786 24

In September 1987, after he had a falling out with Mr. McDougal, Mr. Ward filed suit against Madison Guaranty claiming that he was entitled to collect unpaid commissions on the sale of Castle Grande property.787 He was represented in that action by Alston Jennings, a prominent local attorney in the Little Rock law firm of Wright, Lindsey & Jennings.788

The Ward v. Madison case is significant because the meaning of several documents bearing upon the Castle Grande transaction, including the May 1 option drafted by Mrs. Clinton, was disputed at the trial. Specifically, Mr. Latham, testifying for the defense, took the position that the option was related to Mr. Ward's unpaid commissions.789 Mr. Ward maintained at the trial that the option had nothing to do with his commissions and claimed that Madison Financial had simply wanted the right to purchase Holman Acres from him.790

The jury returned a verdict in Mr. Ward's favor and awarded him over $391,000.791 In 1993, however, Mr. Ward and the RTC as the successor to Madison Guaranty reached a settlement under which Mr. Ward agreed to pay $325,000 to the RTC in exchange for a release from all liability.792

Prior to the trial, Madison Guaranty had suggested in a document filed with the court that the underlying transactions as to which Mr. Ward claimed an entitlement to commissions were questionable. Specifically, Madison Guaranty indicated that it might argue that it did not owe any commissions to Mr. Ward because of his own "unclean hands." By way of explanation, Madison Guaranty stated in its court filing: "With knowledge, the Plaintiff [Mr. Ward] agreed to purchase a section of the Undeveloped Property in his name so that Madison Financial Corporation would not exceed its investment limitation, imposed by the FHLBB, of 6% of the assets of the corporation. In effect, Plaintiff acted as a straw man for the real estate purchase for the mutual benefit of himself, Jim McDougal and other individuals." No witness at the trial, however, suggested that Mr. Ward's commissions were ill-gotten and Madison Guaranty's lawyers made no such argument.

C.

The September 24, 1985 Letters

The essential terms of the initial agreement between Mr. McDougal and Mr. Ward as described above were set forth in a letter dated September 24, 1985 from Seth Ward to Jim McDougal.793 Two versions of this document exist. According to Seth Ward, one of the letters was typed on September 24, 1985, by Susan Strayhorn, James McDougal's secretary, and the other version was prepared sometime thereafter and then backdated.794 Ms. Strayhorn agreed that she typed the first letter at Mr. Ward's direction.795 Mr. Ward has testified that he had the backdated letter prepared or prepared it himself.796

The major difference between the two versions of the September 24 letter concerns Madison Financial's right to purchase Seth Ward's property. While the original letter gave Madison Financial the right to purchase all of Mr. Ward's property, the backdated letter excluded from Madison's reach a 22 1/2 acre parcel known as Holman Acres. A detailed legal description of the 22 1/2 acre parcel -- identified as "Part of Tracts 27 & 28, Holman Acres, Pulaski County, Arkansas" -- was attached as an addendum to the letter.

Although Seth Ward testified that the backdated version of the September 24, 1985 letter was prepared within several weeks or a month of that date,797 there is substantial evidence that it was created much later than that. Former Madison President John Latham has testified that he had never seen the letter until Mr. Ward brought it to his attention in May or June of 1986.798 Ms. Strayhorn testified that the document was not in the S & L's files, and that she had never seen it before 1987.799 Don Denton, who initially refused to state whether he had any knowledge about the backdating of the letter for fear of "digging a hole for myself," later said that "I'll go so far as to say [it was] drawn after July, 1986."800 And James Clark, lead investigator for the 1986 examination of Madison Guaranty, has stated that he does not recall ever seeing the document during the time he was at the savings and loan.801

D.

The May 1 Option Disguises the Questionable Payments to Seth Ward

While Mr. Clark examining Madison Guaranty, Madison insiders did not disclose to him that commissions might be owed to Seth Ward, and Mr. Clark was not aware of this issue until he discovered by chance the original September 24, 1985 letter in a desk drawer.802 The letter was the first indication Mr. Clark had that Seth Ward might be owed commissions.803

Mr. Clark also saw the March 31 and April 7 notes during the examination and became concerned that there might be a connection between the notes.804 Specifically, his suspicion was that the crossing notes might represent a payment to Mr. Ward and thus constitute "independent financing of MFC by Madison Guaranty"805 Such "independent financing" would raise the concerns underlying the direct investment limitation.806

When Mr. Clark inquired about the March 31 and April 7 notes, however, he was told that they were unrelated, "completely separate deals."807 Instead, the April 7 notes -- evidencing the $373,000 debt from Madison Financial to Mr. Ward -- were said to be related to a plan by Madison Financial to purchase Holman Acres from Mr. Ward. The transaction was to be accomplished through an as yet undrafted option agreement which would replace the notes. The notes, Mr. Clark was told, existed simply to guarantee that Madison Financial would go through with the deal pending preparation of the option and would be canceled after the exercise of the option.808

According to Mr. Clark, if he had known that the exchange of notes was a device to pay Mr. Ward's commissions -- and thereby transfer money from the savings and loan to its the service corporation -- it would have effected his examination in several respects. Mr. Clark said "that if he and known about the commissions, at the very least he would have called it a direct investment by Madison Guaranty into MFC because MGSL would be funding MFC's obligations, and he would have been asking what Ward did to earn the commissions."809 He also expressed the view that "the commissions would [have] been a further indication that Ward was a 'straw' buyer in the IDC purchase" and that "if the loan had been made to pay commissions, he would have considered the loan 'deceptive on its face.'"810

An option was prepared on May 1, 1986, and entitled "Option To Purchase Real Estate."25 811 Under the May 1 option -- which was executed by Mr. Ward and Mr. Latham -- Madison Financial had the right to purchase tracts 27 and 28 of Holman Acres from Mr. Ward for $400,000 and Mr. Ward was to be paid $35,000 for extending this option to Madison Financial.812

That Mrs. Clinton was involved in the creation of this option is indisputable. The Rose Law Firm billing records reflect that on May 1, 1986, Mrs. Clinton billed Madison Guaranty for two hours of time for the following work: "Conference with Seth Ward; telephone conference with Seth Ward regarding option; telephone conference with Mike Shauffle; prepare option."813 Furthermore, there appears in the lower left hand corner of the option a word processing code ("0190g") that, according to the Rose Law Firm's counsel, indicates the document was created at the Rose Law Firm by or for Mrs. Clinton.814 Mrs. Clinton, however, has sworn that she has no recollection of the option agreement or the transaction it reflects.815

According to Mr. Clark, the May 1, 1986 option prepared by Mrs. Clinton was used to disguise the fact that the crossing notes between Seth Ward, Madison Guaranty, and Madison Financial were designed to funnel commissions to Mr. Ward. He stated that "based upon what he has now learned the option was created 'in order to conceal the connection -- whatever it was-- between'" the notes.816

When Mrs. Clinton prepared the May 1 option, she may have known about the relationship involving the May 1 option and its use to disguise the fact that Madison Guaranty had paid Mr. Ward's commissions. A message slip produced by Mr. Denton reflects that Mrs. Clinton called him from the Rose Law Firm on April 7, 1986.817 Mr. Denton returned the call and spoke to Mrs. Clinton.818 The subject of the conversation was the notes between Mr. Ward, Madison Financial, and Madison Guaranty.819 Mr. Denton had the sense that Mrs. Clinton was preparing a $400,000 note involving Madison Financial and Mr. Ward and he told her that such a note had already been prepared and executed.820 Mrs. Clinton asked him to send whatever notes there were to her and Mr. Denton did so, sending copies of the notes by courier.821

Mr. Denton recalled that during the conversation he indicated to Mrs. Clinton that a problem might exist with respect to the Ward notes because "they constituted in effect a parent entity fulfilling the obligation of a subsidiary."822 Mrs. Clinton, however, "summarily dismissed" that concern in a way that he took to mean that "he would take care of savings and loan matters, and she would take care of legal matters." 823

On June 13, 1996, the same day that the Special Committee received Mr. Denton's testimony, the Committee in a letter addressed to Mr. Kendall, Mrs. Clinton's counsel, requested that the First Lady attempt to refresh her recollection regarding the matters discussed by Mr. Denton and inform the Committee of what she recalls about them.824 The Special Committee's request was made in response to an earlier offer by Mrs. Clinton through a White House spokesman to answer in writing questions regarding the subject of the Special Committee's work.

On June 17, 1996 the Special Committee received an affidavit from Mrs. Clinton accompanied by a letter from Mr. Kendall. In the affidavit, Mrs. Clinton gave no indication as to her recollection regarding the subject matter of Mr. Denton's testimony. Instead, she simply requested that Special Committee refer to Mr. Kendall's letter "addressing certain allegations recently made by Mr. Don Denton."825 In his letter, Mr. Kendall maintained that Mr. Denton's recollection is "wholly unreliable" but gave no indication as to the recollection of the First Lady.826 In sum, the First Lady has neither confirmed nor denied Mr. Denton's testimony.

E.

Mrs. Clinton's Previously Unknown Legal Work for Questionable Castle Grande Transactions

Prior to the discovery of the Rose Law Firm billing records in the White House Residence, the nature and extent of Mrs. Clinton's work on Castle Grande matters was virtually unknown. Indeed, Patricia Black, former Counsel to the RTC Office of Inspector General, testified in 1995 that "[w]e have no evidence that she [Hillary Clinton] worked on Castle Grande."827 The evidence obtained in the course of the Special Committee's investigation now establishes that Mrs. Clinton had substantial direct involvement in Castle Grande.

From the billing records, the Special Committee learned that, over a seven month period from late 1984 to mid 1985, Mrs. Clinton billed almost 30 hours of time to Castle Grande related matters while representing Madison Guaranty -- more than any other Rose Law Firm attorney;828 that she he had 15 conferences with Seth Ward, the central figure in the transaction -- seven of them occurring within 18 days in December, 1985;829 that she had a telephone conference with Don Denton on April 7, 1986;830 and that she drafted an option agreement between Seth Ward and Madison Financial Corporation on May 1, 1986.831 Because Mrs. Clinton has no recollection of any of these events, however, the Special Committee's understanding was limited. But just days before the conclusion of its investigation, the Special Committee obtained new evidence illuminating Mrs. Clinton's Castle Grande-related work on April 7 and May 1, 1986.

From Jim Clark, the FHLBB examiner in charge of the 1986 examination of Madison Guaranty, the Special Committee now knows that the option drafted by Mrs. Clinton, in his view, "was created in order to conceal" a direct investment in Madison Financial through the payment of questionable commissions to Seth Ward.

From Don Denton, Madison's former chief lending officer, the Special Committee has learned that apparently on April 7 Mrs. Clinton "summarily dismissed" concerns he expressed to her by Mr. Denton about questionable notes involving Seth Ward -- notes she apparently was set to prepare had they not already been drafted. Mr. Denton understood from Mrs. Clinton's response that she was saying he should "take care of savings and loan matters and she would take care of legal matters."

The Rose billing records also suggest that Mrs. Clinton learned of the direct investment rule by June 1985. In a letter dated June 17, 1985, Richard Massey, then a Rose associate working with Mrs. Clinton, wrote a letter to officials of the Arkansas Securities Commission ("ASC") regarding Madison Guaranty's application to engage in brokerage activities.832 The letter was a response to a May 22, 1985 ASC memorandum about the same matter in which the ASC discusses the 6% "assets limitation which is set forth in Rule V(C),"833 i.e., the direct investment rule found in Rule V(C) of the Rules and Regulations of the Arkansas Savings and Loan Association Board ("ASLAB"). Mr. Massey's June 17 letter likewise refers to "the limitation set forth in Rule V(C)."834 It concludes by saying, "[w]ith this response, Madison hereby amends the Application."835 The billing records indicate that on June 17, 1985, Mr. Massey billed time to "draft/revise response to ASLAB application,"836 and Mrs. Clinton billed time to "review applications amendments."837 Mrs. Clinton would have become aware of the direct investment rule through this review of Mr. Massey's letter.

The use to which Mrs. Clinton's work product was put raises questions about her knowledge of the state of affairs at Madison Guaranty. The billing records suggest that Mrs. Clinton should have been aware of the rule against excessive direct investments. Furthermore, from her conversation with Don Denton, Mrs. Clinton apparently was put on notice -- prior to the drafting of the option -- that Mr. Ward was taking part at Madison in transactions that were at least questionable if not fraudulent. Unless she was engaged in conscious avoidance, Mrs. Clinton should have known these facts when she drafted the May 1 option, which concealed from the regulators the very transactions Mr. Denton warned her about.

In 1995, when asked about her knowledge of Castle Grande and several other land developments, Mrs. Clinton stated, under oath, "I do not believe I knew anything about any of these real estate parcels and projects."838

The billing records, however, revealed that Mrs. Clinton performed a substantial amount of legal work for Madison Guaranty related the Castle Grande property and billed this time to a matter called "I.D.C." The records indicated, for example, that Mrs. Clinton had more than a dozen conferences with Seth Ward. Mrs. Clinton's claim that she did not know anything about Castle Grande appears contrary to the billing records.

In response to a set of supplemental interrogatories propounded by the RTC in 1996, Mrs. Clinton sought to explain her prior blanket denial of knowledge of Castle Grande by saying that she thought of the larger property as "IDC" and a small portion of the property as Castle Grande Estates.

In the RTC's interrogatories which I answer on May 24, 1995, the term "Castle Grande" was not defined, and we construed this reference to be to Castle Grande Estates, a mobile home development which I now understand to be a portion of the 1050-acre tract. In these responses to the Supplemental Interrogatories, I will refer to the entire tract not as Castle Grande but as the "IDC property", because "IDC" was the billing name for work involving that property at the Rose Law Firm.839

Mrs. Clinton's attempt to claim she had misunderstood the name of the project appears contrary to a wealth of evidence to the effect that the entire 1000+ acre tract was known as "Castle Grande." That is the term by which Madison Guaranty officials and federal regulators commonly referred to the parcel.

The minutes of a MFC Board of Directors meeting dated September 12, 1985, reflect that the Board discussed the purchase of 400 acres of land on 145th Street for $600,000 and that "[a]fter a lengthy discussion, the Board unanimously approved the purchase of this development to be known as Castle Grande Estates."840 Consistent with these minutes, Don Denton testified at the McDougal trial that the property "was renamed Castle Grande shortly after the acquisition" from IDC.841 At the same trial, Mr. McDougal said that Castle Grande was the name of "about a thousand acres" of property.842 And Susan McDougal, denying any distinction between Castle Grande and IDC, has stated that "[i]t was always the same thing. As far as I know, IDC and Castle Grande were one and the same."843

Two former FHLBB examiners who participated in the 1986 examination of Madison and scrutinized the Castle Grande transaction, James Clark and Dawn Pulcer, testified that Madison insiders referred to the whole project as Castle Grande.844

Finally, Davis Fitzhugh, a former Madison Financial Vice President, testified that he understood all of property south of 145th Street to be Castle Grande.845 But Mr. Fitzhugh agreed that the $50,000 check he used to make the down payment on his purchase of the Levi Strauss building -- which is located north of 145th Street -- carried the notation, "For: sale of bldg C Castle Grande."846

In the summer of 1988, Mrs. Clinton ordered the destruction of her files related to Castle Grande. A July 21, 1988 memorandum from Mary Russell to Mrs. Clinton reflects that the Rose Law Firm was in the process of making retention decisions with respect to the files of closed cases.847 The memorandum gave Mrs. Clinton three options with regard to any file: keep it intact, microfilm and then destroy it, or destroy it without microfilming. The memorandum asked for a response by August 9, 1988.

Mrs. Clinton requested destruction, without microfilming, of four Madison Guaranty files, including two related specifically to the "I.D.C." matter and the "Ward Option." The Special Committee finds it troubling that in July or August of 1988 Mrs. Clinton would order the destruction of these files. Because the Ward v. Madison case was ongoing at the time, Mrs. Clinton might well have destroyed evidence relevant to the case. Indeed, the May 1 option drafted by Mrs. Clinton was an important piece of evidence in the trial. It seems reasonable to assume, moreover, that Mrs. Clinton was aware of the Ward v. Madison litigation, involving as it did her former clients. Moreover, Webster Hubbell, her law partner and close friend, attended at least some of the trial.848

F.

Webster Hubbell's Mysterious Role in Structuring Questionable Castle Grande Transactions

It is unclear the extent of the involvement Webster Hubbell, Seth Ward's son-in-law, with respect to providing legal advice to Mr. Ward relating to the Castle Grande transaction. Mr. Hubbell's statements on this matter are contradictory to each other, contradictory to the testimony of other witnesses and contradictory to documentary evidence. His statements also defy common sense. Even Mr. McDougal's secretary, Ms. Strayhorn, expressed surprise when told that Mr. Hubbell did not prepare the May 1 option for his father-in-law.849 In a hearing before the Special Committee she asked, "Why wouldn't he [Ward] have his son-in-law prepare the document?"850

Mr. Hubbell was in frequent contact with Mr. Ward. Mr. Hubbell said that Mr. Ward and he talked about business constantly.851 Mr. Hubbell testified that Mr. Ward "talked to [Hubbell] a lot about deals," and "you couldn't stop him basically" from talking about business.852

With respect to the Castle Grande transaction, Mr. Hubbell altered his story with respect to when he learned that Mr. Ward was a nominee purchaser for Madison Financial. First, Mr. Hubbell testified that he understood in September 1985 based on what Mr. Ward told him that "Madison had limits on what it could own in its own name, and so Mr. Ward was going to own part of it until it could be sold."853 Also, in an interview with the RTC Inspector General, Mr. Hubbell "said that Ward told him that he was negotiating on behalf of Madison to buy the IDC property, which would then be split up between Madison and Ward."854 In testimony before the Special Committee, however, Mr. Hubbell repeatedly testified that he was not aware of the deal between Madison and Ward until after the closing in early October 1985.855

Mr. Hubbell was reluctant to answer questions regarding his own view of the legality of Mr. Ward's role in the purchase of the IDC property. When asked if he viewed it as a way to evade a regulatory restriction, Mr. Hubbell answered, "I have never represented an S&L. I don't know whether it's illegal or not."856 When he was asked if he considered this transaction as a classic parking or warehousing transaction, Mr. Hubbell answered, "I think of parking and warehousing a little bit differently."857 When asked if he thought Mr. Ward could be considered a "straw man," Mr. Hubbell testified, "I didn't give it any consideration, you know. 'Straw man' means, to me, somebody who you clear title through."858

Mr. Hubbell has denied advising Mr. Ward with respect to the transaction.859 He specifically denied preparing the backdated September 24, 1985 letter or advising Mr. Ward with respect to its preparation.860 Mr. Hubbell claimed that although he was aware of his father-in-law's deal with Mr. McDougal and discussed it with Mr. Ward, he does not recall discussing the September 24th letter.861 Mr. Hubbell claimed, "I recall discussing the nature of his deal with Madison, but not the letter, no."862

There is evidence, however, that Mr. Hubbell may have prepared a backdated September 24, 1985 letter, which was found in his files at the Rose Law Firm.863 Martha Patton, Mr. Hubbell's secretary at the Rose Law Firm, has stated that although she does not recall typing the letter she believes she did because the type is similar to that of the IBM typewriter she used and the second page of the document is formatted in the style she used while a Rose secretary.864 She added that the letter appears to be "her style of typing."865 Mr. Hubbell testified that "it's certainly possible" that his secretary typed the agreement.866 26 And Alston Jennings testified that Mr. Ward told him that Mr. Hubbell's secretary had typed the letter.867

There is also some indication that Mr. Hubbell was supposed to prepare the May 1, 1986 option agreement. Handwritten notes taken by James Clark, the examiner in charge of the 1986 examination of Madison Guaranty, reflect the following:

MFC Commitment to buy land at corner of Route 145 . . .

Option will be prepared, atty out of town (Hubbell)

to replace note.868 The note strongly suggests a hitherto unknown involvement in Castle Grande by Mr. Hubbell.

Mr. Clark has stated that he believes that the information reflected in the above note came from former Madison chief loan officer Don Denton.869 Although Mr. Denton does not believe that he was the source of information recorded by Mr. Clark, Mr. Denton has implied at other times that Mr. Hubbell advised Mr. Ward on the Castle Grande matter.870 For example, Mr. Denton believed that the wording on the note dated October 15, 1985 stating that Mr. Ward was not personally responsible for the note was prepared by Mr. Hubbell.871 Also, Mr. Denton believed that he had some conversations with Mr. Hubbell about the February 28, 1996 transaction.872

Furthermore, Mr. Denton implied in his recent interview that Mr. Hubbell was involved in the March 31 and April 7 notes between Mr. Ward, Madison Guaranty, and Madison Financial. He stated that he was "reasonably confident" that when Mrs. Clinton called him regarding these notes she was acting on Mr. Hubbell's behalf.873 Mr. Denton would not testify as to whether he ever dealt with Mr. Hubbell on the matter of the notes.874 He also declined to answer whether he had visited Mr. Hubbell's office at Rose regarding Mr. Ward or Madison Guaranty.875

Mr. Hubbell has not provided complete and accurate statements about his legal representation on other occasions. He did so in 1989 when the Rose Law Firm was retained to represent the FDIC in the case against Madison Guaranty's former accountants.876 April Breslaw, the RTC attorney who hired the Rose Law Firm for the Frost litigation, testified that when she asked Mr. Hubbell about Mr. Ward, Mr. Hubbell informed her that he did not represent Mr. Ward. He also told her "that his relationship with his father-in-law was not close."877 Ms. Breslaw was asked whether she believed Mr. Hubbell lied to her when she hired him, and she replied, "Yes, sir. I do."878 Even Mr. Hubbell admitted that he did not disclose to Ms. Breslaw his knowledge of the IDC transactions.879

Mr. Hubbell did not provide complete and accurate statements about his legal representation again in 1993 when he failed to disclose information he had learned the previous year from reading the Rose Law Firm billing records to FDIC investigators looking into the 1989 retention of Rose.880 In 1993, FDIC investigators reported that in 1985, the Rose Law Firm represented Madison Guaranty before the Arkansas Securities Department on two matters.881 Mr. Hubbell admitted, however, that he was aware of additional matters on which the Rose firm had worked, including the IDC closing and the option agreement, on behalf of Madison, and that he did not disclose it to investigators.882

In view of the foregoing, the Special Committee has no confidence in Mr. Hubbell's claim that he did not advise Mr. Ward with respect to Castle Grande.


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