The Special Committee's Whitewater Report



Whitewater Development Corporation and Madison Guaranty S&L

In August 1978, the Clintons and the McDougals purchased 230 acres of land in Marion County, Arkansas for $202,000 with the intention of dividing the land into lots and selling them for a profit.(169) At the time, Mr. Clinton was the Attorney General of Arkansas, and Mrs. Clinton was a young associate with the Rose Law Firm of Little Rock.(170) In June 1979, the Clintons and the McDougals formed Whitewater Development Corporation and subsequently transferred the land to the company.(171)

In October 1980, the year after Whitewater was formed, Mr. McDougal and others purchased a controlling interest in the Bank of Kingston, a small commercial bank located in Kingston, Arkansas,(172) and changed its name to Madison Bank and Trust.(173) In January 1982, the McDougals purchased an interest in Woodruff County Savings and Loan, which they renamed Madison Guaranty Savings and Loan Association.(174) Madison Guaranty thereafter formed a service corporation, Madison Financial Corporation, to facilitate Madison Guaranty's investment in real estate development projects.(175) In November 1983, the McDougals obtained a controlling interest in Madison Guaranty.(176)

Madison Guaranty's financial condition was poor when the McDougals purchased it and only became worse in later years. In January 1984, the Federal Home Loan Bank Board ("FHLBB") commenced a special examination of Madison Guaranty that culminated in a supervisory agreement to which Madison's Board of Directors consented in July 1984.(177) In October 1984, Mr. and Mrs. McDougal resigned as directors and officers of Madison Guaranty, but Mr. McDougal remained as Chairman and President of Madison Financial.(178) Mr. McDougal, however, retained control of Madison Guaranty and maintained his office there.(179)

In March 1986, the FHLBB began another examination of Madison Guaranty which revealed that the thrift's problems had grown worse.(180) At a meeting in Dallas, Texas on July 11, 1986, the FHLBB instructed Madison Guaranty's Board of Directors to remove John Latham, the Chairman of Madison Guaranty, and Mr. McDougal from their positions at Madison Financial.(181) The next month, the FHLBB entered a cease and desist order against the S&L.(182) The FHLBB took over Madison Guaranty in February 1989 and, in November of that year, the RTC was appointed receiver.(183)

The failure of Madison Guaranty cost American taxpayers in excess of $60 million. While Mr. McDougal was running Madison Guaranty between 1982-86, the Clintons made no payments toward the Whitewater debt.(184)

In 1992, the RTC began to investigate improper activities at Madison Guaranty and, on September 1, 1992, sent a criminal referral to the U.S. Attorney's office highlighting possible criminal violations. The referral described "numerous questionable cash flow and 'loan' transactions" between Madison and a dozen companies owned or controlled by the McDougals, including Whitewater.(185) The referral named, among others, the Clintons and future Arkansas Governor Jim Guy Tucker as persons who stood to benefit from, and as potential witnesses to, the suspected criminal activity.(186)

The Clintons, in a pattern that would recur, received advance notice of the confidential RTC referral. In late fall 1992, Betsey Wright, former chief of staff to Governor Clinton, learned of a "criminal referral regarding a savings and loan official in Arkansas and . . . involv[ing] the Clintons"(187) which had been sent "to the prosecutor in Little Rock."(188) Upon learning the news, Ms. Wright told Mrs. Clinton about the referral.(189) It is with this knowledge of the confidential referral that the Clintons and their advisors came to Washington.

By March 1993, senior Clinton Administration officials confirmed that the RTC had sent a criminal referral mentioning the Clintons to the Justice Department.(190) Specifically, RTC Senior Vice President William H. Roelle, on or about March 23, 1993, told Roger Altman, then Deputy Treasury Secretary, of the RTC referral involving the Clintons.(191) Mr. Altman immediately passed this important information on to White House Counsel Bernard Nussbaum. On March 23, Mr. Altman sent Mr. Nussbaum a facsimile with a handwritten cover sheet, forwarding an "RTC Clip Sheet" of a March 9, 1992 New York Times article with the headline, "Clinton Defends Real-Estate Deal."(192) The next day, Mr. Altman faxed to Mr. Nussbaum the same article and another Times report on Whitewater, dated March 8, 1992, entitled "Clintons Joined S&L Operator in an Ozark Real-Estate Venture."(193) The link thus had been made been between the RTC criminal referral and the Clintons' investment in Whitewater and their relationship with Mr. McDougal. This knowledge of the link between Whitewater and possible criminal investigations provides the subtext for a pattern of misconduct in the White House and elsewhere in the Clinton administration in an effort to contain potential damage from Whitewater and Madison. II.

Capital Management Services and David Hale

Whitewater was not the Clintons' only link to criminal investigations. In September 1978, David Hale, a former prosecutor and municipal court judge, formed Capital Management Services Inc., ("CMS").(194) In March 1979, the SBA licensed CMS as a Specialized Small Business Investment Company ("SSBIC").(195) On September 15, 1993, the SBA placed CMS into receivership after "the company's accumulated losses exceeded its private capital by 171 percent."(196)

A SSBIC is a company that the SBA licenses to lend money to disadvantaged small businesses.(197) SSBICs may not provide assistance to businesses that are not at least 50 percent owned, controlled, and managed by "disadvantaged individuals."(198) To ensure that SSBICs comply with these requirements, the SBA requires firms to document that they qualify for SBA assistance.(199)

Mr. Hale and his associates perpetrated a fraud on the SBA by using CMS to make loans to political insiders rather than "disadvantaged" individuals.(200) After the SBA would advance federal funds to CMS, Mr. Hale and his business associates would falsify loan applications in order to receive funds for their personal needs.(201) Mr. McDougal and Jim Guy Tucker were among associates of Mr. Hale who participated in and benefitted from this fraud.(202)

On April 3, 1986, Mr. Hale loaned $300,000 to Susan McDougal for the stated purpose of capitalizing Mrs. McDougal's new advertising firm, Master Marketing.(203)

Wayne Foren, then Associate Administrator for Investment at the SBA and the program director for the SSBIC program, learned of the $300,000 loan.(204) Mr. Foren also learned that some of the proceeds of the loan to Mrs. McDougal's Master Marketing benefitted Whitewater.(205) Mr. Foren stated that records suggest that of the original $300,000 loan, $111,500 was diverted to make payments on the Flowerwood Farms account and another $25,000 was used to replace money, either directly or indirectly, that went into Whitewater.(206)

At the McDougal and Tucker trial, Mr. Hale testified that he made these loans to Mr. McDougal as a favor to then-Governor Clinton and Mr. McDougal.(207) After Mr. Hale's allegations implicating the President became public in September 1993, this $300,000 loan quickly became the center of the controversy surrounding CMS and its connections to Mr. McDougal and Whitewater. Although the accounts of Mr. McDougal and Mr. Hale differ regarding why the loan was made and the use of the proceeds, records clearly indicate that the money was used for purposes other than those stated on the loan application filed with the SBA.(208) Mr. Hale's allegations concerning President Clinton have been refuted by Mr. McDougal's version of the events and President Clinton's own testimony at Mr. McDougal's trial, but neither has been verified by any outside source.(209)

Mr. Foren testified that he became concerned about CMS when Mr. Hale attempted to obtain matching government funds for what Mr. Hale claimed was an increase in his capital resulting from a gift.(210) Mr. Hale told Mr. Foren that people would give him money for his SSBIC because they knew he had ties to Jim Guy Tucker and then-Governor Clinton.(211) These statements aroused Mr. Foren's suspicion and, after a discussion with Mr. Hale, he sent a referral to investigate Mr. Hale's SSBIC to the Inspector General's office.(212)

In early 1993, the SBA began an internal inquiry into Mr. Hale and questionable activities at CMS, an inquiry which touched upon Mr. Hale's relationship with the Clintons.(213) Again, by the time the inquiry ripened into a referral for further investigative action, the White House received word. SBA Associate Administrator Wayne Foren testified that, in early May 1993, he briefed Erskine Bowles, the new SBA Administrator, about the agency's investigation of Mr. Hale and CMS because the case involved President Clinton.(214) Shortly thereafter, Mr. Bowles told Mr. Foren that he had briefed White House Chief of Staff Thomas ("Mack") McLarty about the case.(215)

On March 22, 1994, Mr. Hale pleaded guilty to two felony counts in connection to the granting of illegal loans.(216) In 1996, James McDougal, Susan McDougal, and Governor Jim Guy Tucker were indicted on charges stemming from dealings associated with Madison Guaranty and Capital Management Services.(217) On May 28, 1996 all three were convicted; Mr. and Mrs. McDougal were both convicted of eight charges directly related to the illegal $300,000 loan from Mr. Hale.(218)

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