The Special Committee's Whitewater Report



While running Senator Fulbright's election campaign in 1968, Jim McDougal was introduced to William Jefferson Clinton who, at the time, was a young student at Georgetown University and was working for Senator Fulbright on the staff of the Foreign Relations Committee.106 Several years later, in 1973, after Clinton had graduated from Yale Law School, he returned to Arkansas and took a university teaching position.107 In 1974, Mr. Clinton ran unsuccessfully for a congressional seat in Arkansas and, in 1976 he ran for, and won, the office of Attorney General for Arkansas.108 During the campaign for Attorney General, Mr. Clinton re-established his relationship with Mr. McDougal, who was then a professor at Ouachita Baptist University.

During 1977, Mr. Clinton entered into his first real estate investment with Mr. McDougal. This was a profitable investment. Specifically, on January 25, 1977, Mr. Clinton purchased 20 acres of land from Rolling Manor, Inc., a company owned and controlled by Mr. McDougal for a price of $11,400. In 1978, Mr. Clinton sold that land for $19,985, netting a profit of $ 8,585 in just over one year--a 75% return on his initial investment.109 This transaction convinced Mr. Clinton that investing with Mr. McDougal could bring quick profits. At the time, Mr. Clinton, in the midst of his campaign for Attorney General, was still paying off educational loans and debt he had acquired in his congressional election loss. Shortly afterward, Mr. Clinton was elected Attorney General.110

Near the end of Mr. Clinton's term as Attorney General, in 1978, the Clintons, impressed by their profit from Mr. Clinton's first investment with Mr. McDougal, joined Mr. McDougal in the Whitewater investment. Mr. Clinton and Mr. McDougal borrowed $20,000 and used the money as a down payment on the purchase of 230 acres of land along the White River.111 The rest of the $203,000 purchase price was financed by another loan taken out by the Clintons and the McDougals.112 At the time of the origination of the loans, the McDougals' financial statements showed a net worth of $551,000, with total assets of $975,000.113 The Clintons, on the other hand, did not submit a financial statement, but their tax return for 1978 indicates earned income of $54,593.114

The following year, on June 18, 1979, the McDougals and Clintons incorporated Whitewater Development Corporation and transferred the land that they had purchased along the White River to this company, subject to the mortgages.115 Stock in Whitewater was to be evenly distributed between the Clintons and the McDougals, but because of conflicting documentation it is difficult to determine the exact distribution of ownership.116 One thing that is certain, however, is that the Clintons and the McDougals believed they would share equally in any profits.117

Sales at the Whitewater real estate project did not meet the Clintons' and the McDougals' expectations. Not only was there no profit, but from the early days onward, the investment did not take in enough money to service the debt. As a result, the Clintons were forced to attend several meetings with bank officials in order to extend the loans.

Between June 1979 and October 1985, the Clintons signed at least 10 renewals on various Whitewater loans at Union National Bank, Citizens Bank of Flippin, and Security Bank. On December 16, 1980, Mrs. Clinton took out a $30,000 loan from Mr. McDougal's Madison Bank and Trust to finance the purchase of a model home for Whitewater lot 13. It was hoped that the model home would spur lot sales.

The Clintons did not put any funds into Whitewater Corporation during the period that Mr. McDougal was running Madison Guaranty. Instead, the Clintons allowed Mr. McDougal to make the payments. Mr. McDougal made substantial payments. He often used funds from Madison Guaranty to service the Whitewater debt. Whitewater did not generate sufficient cash flow because of lagging lot sales. Thus, if Mr. McDougal was unable to cover the debt personally, the Clintons' would have been liable for the total amount of the mortgage if the bank refused to renew the notes. Thus, the Clintons had an interest in the economic well-being of the McDougals.

Since questions surrounding the Clintons' investment in Whitewater first arose, the Clintons have stated they were "passive investors" in this investment.118 In May 1995, in a sworn response to interrogatories propounded by the RTC, Mrs. Clinton testified that the Clintons "the McDougals exercised control over the management and operation of WDC for the period of its existence. . . .As was contemplated from the inception of the venture, we were passive investors and relied upon the McDougals to manage and operate it."119 (emphasis added).

Since the 1992 campaign, the Clintons have continued to attempt to distance themselves from Mr. McDougal. The Clintons have repeatedly maintained that they were passive investors in Whitewater. Similarly, Mrs. Clinton sought to minimize the extent of her involvement in the representation of Madison Guaranty while a partner of the Rose Law Firm. I.

Whitewater: The Early Years


The Clinton's Previously Undisclosed Land Deal with James McDougal

In 1977, President Clinton made his first real estate investment with Mr. McDougal. The Clintons' 1978 federal income tax return reported two real estate sales: a cash sale of a five-acre parcel of land purchased by the Clintons on January 25, 1977, and an installment sale of 15 acres of land also purchased that same day.120

President Clinton testified, however, that while he had no recollection of the particular investment, he recalled that he was involved in a five-acre land deal with Mr. McDougal that was sold for $5000 and resulted in a capital gain of $2150. In his May 24, 1995 sworn interrogatory responses to the RTC, President Clinton stated:

I believe I made a real estate investment or investments in 1977, which are reported in our 1978 income tax return. I can recall nothing specific about this investment or investments, except that at least one involved the purchase of land near Jacksonville. . . . As reported in our 1978 tax return, a five acre parcel of land was sold on May 17, 1978, for $5000, resulting in a capital gain of $2150. To the best of my recollection, this was a real estate investment I had with Jim McDougal, and, while small, it was a profitable one. This confirmed my impression that he was capable of putting together successful real estate transactions.121

This 1977 transaction was President Clinton's first real estate investment venture, and his success was a factor in his decision to purchase the real estate in Marion County, Arkansas that came to be known as Whitewater.

Documentary evidence, including the Clinton's 1978 federal income tax return, indicates that the 1977 transaction between then-Attorney General Clinton and Mr. McDougal was significantly larger, longer and more profitable than previously described by the Clintons. According to President Clinton, a five-acre parcel purchased on January 25, 1977 was sold for $5,000 on May 17, 1978, netting the Clintons a gain of $2,150 in just under 16 months.122 The schedules to the Clintons' 1978 tax returns also report, however, an installment sale of 15 acres of unimproved land. This 15-acre parcel was purchased on the same date as the five-acre parcel, January 25, 1977, and was sold for $14,985 on July 23, 1978, netting the Clintons a gain of $6,435 in just under 18 months.123 Thus, according to their 1978 federal income tax return, the Clintons purchased 20 acres of land on January 25, 1977, with a reported cost of $11,400 and sold all 20 acres of the land by July 23, 1978 for $19,985, netting them a profit of $8,585 -- a 75 percent return on their total investment -- in just under a year and a half.

The land was purchased from Rolling Manor Inc., a company owned by Mr. McDougal and Senator Fulbright.124 A January 25, 1977 Purchaser's Agreement between Rolling Manor Inc., the seller, and Mr. Clinton, the buyer, states that Rolling Manor Inc. agreed to sell Tract Number 74 to Mr. Clinton for $11,400.125 This $11,400 equals the adjusted cost for the 5-acre parcel ($2,850) and the 15-acre parcel ($8,550) reported on the Clintons' 1978 personal income tax return.126 The terms of the purchase agreement called for Mr. Clinton to pay $400 in cash and execute an $11,000 note to finance the balance of the purchase price. A January 25, 1977 installment note between Rolling Manor, Inc. and Mr. Clinton in the face amount of $11,000 was prepared by Rolling Manor, Inc.127 Mr. Clinton was obligated to pay 96 monthly installments of $155.51 beginning on April 1, 1977 at an annual percentage rate of eight percent and continuing until May 1985.1

Mr. McDougal wrote to then-Attorney General Clinton on February 4, 1977 requesting the down payment of $400 "if you have it to spare"2 and giving notice that the first monthly payment on the note was coming due on April 1, 1977.128

A First Jacksonville Bank deposit slip that was marked "paid by" Bill Clinton indicates that the $11,000 note was fully paid off by November 9, 1977 -- less than ten months after Mr. Clinton purchased the 20-acre parcel from Rolling Manor Inc. and more than eight months prior to the sale of the 15-acre parcel on July 23, 1978.129 Because the property was not sold until 1978, the source of the $9000 payment to Rolling Manor Inc. in 1977 to completely pay off the $11,0003 Rolling Manor note is not known.4

In sworn testimony, Gaines Norton, the Clintons' personal accountant who prepared their 1978 tax return, admitted that "the tax return which the President makes mention of in his interrogatories . . . makes it quite clear that there was a second investment or a second part of this investment with Mr. McDougal that involved a larger piece of property and a larger profit."130 Mr. Norton also admitted that the President's answer in the interrogatory is "incomplete."131


Whitewater: A "No Cash" Deal

In 1978, the Clintons and the McDougals purchased the Whitewater land development in an entirely leveraged transaction. The Clintons and McDougals invested no money in the original mortgage. As a result of Mr. Clinton's political position, it appears that bank officers routinely gave preferential treatment to Whitewater loans, often violating sound banking practices concerning timely payments and proper loan documentation.

Early on, then-Attorney General Clinton was made aware of the problems with the Mr. McDougal's Whitewater tax scheme by his personal accountant, Gaines Norton.132 Mr. Clinton asked Mr. Norton to sit in on a meeting with Mr. McDougal133 to "look at an investment he was making."134 During the meeting, Mr. McDougal explained how the transaction would be arranged so that even though no money was invested in the deal -- they would use "a hundred percent borrowed money"135 -- the McDougals and the Clintons "would immediately be able to take personal tax deductions."136

Mr. Norton, a certified public accountant, immediately advised both men that the proposed tax deduction would be illegal.137 Mr. McDougal would not listen,138 however. Curiously, after the meeting, Mr. Clinton told Mr. Norton that he "had to rely on his partner to structure [the deal] tax-wise properly" and "to back off and leave the issue alone."139

Thus, against the advice of his personal accountant, the Clintons joined with the McDougals in investing in the Whitewater land venture. The deal was financed by two banks: Citizen's Bank of Flippin ("Citizen's Bank"), a small bank located near by the Whitewater property, and Union National Bank, a larger bank in Little Rock.140 Because the Whitewater mortgage exceeded the legal lending limit of Citizen's Bank, the transaction was structured as a loan participation with the larger Little Rock Union National Bank. Thus, Citizen's Bank and Union National Bank each financed half of the $182,611 loan that was closed on August 2, 1978.141

Frank Burge, a Vice President and loan officer at Citizen's Bank, who handled the Whitewater loan, testified that the Whitewater loan was not a typical loan for the small bank, whose portfolio was composed of residential and consumer loans.142

In addition, the Clintons and McDougals never notified Citizen's Bank that Union National Bank also extended a $20,000 unsecured loan for the down payment on the Whitewater mortgage. Citizen's Bank was not aware that the Clintons and McDougals invested no money into the original mortgage.143 This loan violated Citizen's Bank's practice of not making real estate loans without an equity contribution by the borrower.144 Mr. Burge explained that "(s)ound banking tenets said you should have equity on all real estate lending."145 Similarly, Don Denton, the loan officer at Union National Bank responsible for the Whitewater loans, thought that this transaction was a potential regulatory problem.146

In fact, the Union National loan was made only as an "accommodation" to Mr. Clinton, who had actively sought to obtain it.147 According to Mr. Denton, he was instructed by a Union Bank lobbyist to make this loan -- against Mr. Denton's judgment -- to Mr. Clinton, because Mr. Clinton was an "up and coming political ... rising star in the State of Arkansas."148 Paul Berry, a Union Bank lobbyist and Mr. Clinton's former college roommate admitted that Mr. Clinton had approached him about obtaining the money for the down payment on the Whitewater deal, but claimed that he made the loan because it was "good business."149 Mr. Denton testified, however, that he would not have made the loan, given the Clintons' and the McDougals' financial condition, "had it been an arms' length loan by a client walking off the street."150 According to Mr. Burge, Mr. Clinton's political position also influenced his decision to make the loan at Citizen's Bank.151

Despite the fact that Mr. McDougal and Governor Clinton ignored repeated requests for payments of principal, Union National Bank renewed the Clintons' Whitewater loan a number of times.152 Rather quickly, Citizen's Bank became concerned over the Whitewater loan. Robert Ritter, who became the President of Citizen's Bank in September 1979, was concerned early on that the Whitewater loan would become "an item either on an examination or it became a reportable item to the Board at a particular time."153 His apprehension was compounded by problems that Citizen's Bank faced obtaining personal financial statements for the Clintons and the McDougals.154

During the early 1980s, Mr. Ritter recalled meeting twice with Mrs. Clinton and twice with Mr. Clinton.155 Mr. Ritter met once with Mrs. Clinton and Mrs. McDougal to obtain signatures on loan renewal documents.156 Mr. Ritter testified that he believes they discussed loan repayment plans.157 Mr. Ritter also recalled a second meeting5 at the bank with Mrs. Clinton and Mrs. McDougal -- probably occasioned by a loan renewal.158 He testified that Mrs. Clinton appeared knowledgeable about the Whitewater real estate development and the Whitewater loan, and, in fact, she remarked on the sharp rise in the interest rate on the loan.159 Mr. Ritter also recalled contacting Mr. Clinton twice concerning loan documentation.160

The Clintons have stated that they have no recollection of meeting with officers of Citizen's Bank to discuss their troubled Whitewater loan.161

In June 1980, the Clintons were released from their personal obligation on the Union National Bank loan when Mr. McDougal retired the loan with proceeds borrowed from the Bank of Cherry Valley.162


Lot 13: Irregularities in Madison Bank's loan to Mrs. Clinton

In December 1980, the Clintons and the McDougals sought to boost lagging Whitewater lot sales by building a model home on lot 13. Mrs. Clinton borrowed $30,000 from Madison Bank and Trust in Kingston, Arkansas ("Madison Bank"), which was controlled by Mr. McDougal, to finance the construction of the model home.163 As with the earlier loans, this loan also was obtained under unusual circumstances.

Madison Bank approved the loan even though Mrs. Clinton was not a pre-existing customer, and she lived outside the bank's lending area.164 According to Mr. Bunch, the loan was underwritten in a manner that was contrary to sound banking practices: "we probably didn't have anything in the file but a signed note. I'm sure there wasn't a financial statement. No documentation at all."165

Although Mrs. Clinton's Madison Bank loan was scheduled to mature on December 16, 1981, the loan apparently was extended for six-months to June 1, 1982. From the origination of the loan to its maturity, Madison Bank received only $285 in monthly interest payments. This amount was far less than the $373 in interest owed per month.166

On August 5, 1982, two months after the June extension had expired, Theresa Pockrus, executive vice-president of Madison Bank, who was responsible for monitoring delinquent loans, wrote to Mrs. Clinton notifying her of the loan's past due status, and that a "satisfactory agreement needs to be worked out."167 Ms. Pockrus was concerned about the upcoming Federal Deposit Insurance Corporation ("FDIC") audit.168 On August 11, Mrs. Clinton told Ms. Pockrus to speak with Mr. McDougal because he would personally take care of the situation. According to Mrs. Clinton, Mr. McDougal had been handling the payments the entire time.169 Coincidentally, after Ms. Pockrus spoke to Mr. McDougal, Madison Bank shortly thereafter received a $699 payment from an unknown payor.170

No principal payments were made, however, on the loan.171 Ms. Pockrus believed that "the loan should have been taken out of the bank all together" because it was too risky, and would have recommended that the Board "not extend it...because a $5 million bank has no business loaning money to people in Little Rock."172

On April 7, 1983, Madison Bank consented to a cease and desist order with the FDIC that, among other things, restricted Madison Bank's out-of-territory lending.173 The order effectively prohibited Madison Bank from extending Mrs. Clinton's Lot 13 loan.174 In January 1983, Mr. Clinton was sworn in as the Governor of Arkansas, and, in February, he appointed Marlin Jackson, former president of Security Bank of Paragould, to be the Commissioner of the Arkansas State Bank Department ("ASBD").175

On June 27, 1983, the ASBD released the results of its examination of Madison Bank, identifying Mrs. Clinton's loan as a problem.176 The ASBD later joined the FDIC in ordering Madison Bank to close out its out-of-territory loans.177 Thus, Madison Bank was forced to remove Mrs. Clinton's out-of-territory loan from its portfolio.178 Afterward, Mr. Jackson saw Governor Clinton in the State Capitol and told him about Madison Bank's deteriorating condition.179 Mr. Jackson did not normally advise the Governor of the results of bank examinations.180

Meanwhile, the Whitewater debt remained outstanding and sales were slow. Mr. Jackson admitted that he directed Governor Clinton to seek a loan with Security Bank of Paragould ("Security Bank").181 Indeed, on September 30, 1983, Governor Clinton obtained an unsecured $20,800 loan from Security Bank and used the proceeds to pay off Mrs. Clinton's Madison Bank loan.6

When Mrs. Clinton asked for a loan extension, Security Bank offered a one-year extension to September 30, 1985.182 On October 11, 1985, after Mrs. Clinton failed to meet her payments, Security Bank extended the note again to September 30, 1986.183

On November 1, 1985, Mr. Jackson wrote to Charles Campbell, vice-president of Security Bank, on the official letterhead of the State Banking Commissioner, enclosing the extension agreement.184 When asked about the propriety of Mr. Jackson's communicating to a bank on official stationary about the Governor's loan, William Lyon, a friend of Mr. Jackson's, a bank owner, and former member of the ASBD testified: "[i]t was not right for him to do that. He should never have done this."185

On November 20, 1986, Security Bank again sent Mrs. Clinton a notice that payment was past due on the loan, now in the amount of $15,435.51.186 On March 2, 1987, Mr. Jackson telephoned Mrs. Clinton to give her William Fisher's telephone number.187 Three days later, Mr. Fisher, the president of Security Bank, sent a new note to Mrs. Clinton for $14,117.59, due on March 5, 1988, and requested financial statements.188 On March 31, Mr. Jackson sent another letter to Mrs. Clinton, enclosing the extension agreement and telling her not to hesitate to contact Mr. Fisher.189

The Special Committee finds that it was clearly inappropriate for someone in Mr. Jackson's position to act as a go-between for the Clintons in their dealings with Security Bank, and, Mr. Jackson's involvement, at the very least, raises questions of whether improper influence was used to benefit the Clintons. The letters sent and received by Mr. Jackson reveal a continuing pattern of activity by him on behalf of the Clintons while he was a Clinton-appointed state employee (who happened to own controlling interest in a bank that he was charged with regulating which, coincidentally, took over a loan that had been a problem for the Clintons).

Governor Clinton's loan at Security Bank of Paragould was frequently delinquent, and the bank constantly sought to either collect or extend the loan. The loan officers experienced some difficulty in obtaining documents needed from the Clintons to complete the extension agreements. II.

The Clintons' Continued Involvement in Whitewater: 1987 - 1992


The Clintons' Active Involvement in the Management of Whitewater After 1986

By early 1982, both the Governor and Mrs. Clinton had attended meetings with bankers on the Whitewater loan renewals. Therefore, the Clintons should have been aware that the cash flow from Whitewater was not covering the debt, and that lot sales were not going well (hence, the need for the December 1980 lot 13 prefab home in Mrs. Clinton's name to try to attract purchasers).190

Indeed, by May 1985, only 20 of the Whitewater 44 lots were under contract for deed.191 Whitewater realtor Christopher Wade and Dr. E. Russell Webb, through Ozark Air Services, Inc. ("Ozark Air"), acquired the remaining twenty-four lots in Whitewater.192 In exchange for the twenty-four lots, Ozark Air agreed to repay $35,000 of the remaining Whitewater loan to 1st Ozark (the Clintons and McDougals remained personally obligated on the note),193 and transferred title to a 1979 Piper Seminole airplane to James McDougal.194 Mrs. Clinton admitted in RTC interrogatories that McDougal informed her in 1986 that the remaining Whitewater lots had been sold to Chris Wade in 1985.195

Between 1982 and 1986, while Mr. McDougal was running Madison Guaranty, the Clintons made no cash payments toward the Whitewater loans.196 After Mr. McDougal was removed from Madison Guaranty in July 1986, Mrs. Clinton took a more active role in Whitewater.

Wesley Strange, who became President of 1st Ozark National Bank in 1986, testified that Mrs. Clinton, rather than Susan or James McDougal, was his primary contact person on the Whitewater loan,197 beginning sometime in the fall of 1986.198 Thereafter, Mr. Strange and Mrs. Clinton had numerous contacts relating to taxable income from Whitewater, loan documentation and the corporate records of Whitewater.199

Yet, the Clintons continued their pattern of failing to provide requested financial statements. Obtaining relevant information for the credit file, particularly financial statements, regarding the Clintons and McDougals was a recurring problem for Citizen's Bank and its successor, 1st Ozark National Bank.200 1st Ozark loan officers hesitated, however, to press the Clintons for missing or delinquent information and "walked softly" with regard to this loan so as not to irritate Governor Clinton or the board of directors at the bank.201

By 1987, 1st Ozark loan officers Ronald Proctor and Vernon Dewey both realized that the bank should not renew the Clintons' original Whitewater mortgage without first receiving current financial statements for the Clintons and establishing an escrow account to reduce the principal balance of the loan.202 Nevertheless, the bank continued to exercise forbearance, granting waivers on the provision of financial information to both the Clintons and the McDougals. The bank also failed to undertake minimal efforts to ensure that the Clintons and the McDougals had sufficient collateral for the loan; for instance, there was no evidence of an appraisal or inspection of the Whitewater property (the primary source of collateral for the bank) between the summer of 1978 and December 1986.203

On November 28, 1988, Mrs. Clinton wrote to Mr. McDougal seeking power of attorney for matters concerning the Whitewater investment. The letter said: "I am enclosing a Power of Attorney for you to sign, authorizing me to act on your behalf with respect to matters concerning Whitewater Development Corp." Mrs. Clinton's letter also indicated that the Clintons at the time were actively involved in attempts to dispose of the remaining Whitewater property: "We are trying to sell off the property that is left and get out from under the obligations at both Flippin and Paragould."204

On June 21, 1990, Mrs. Clinton signed the legal forms indicating that, as of December 31, 1987, and December 31, 1988, she was the President of Whitewater Development Corp.205


Governor Clinton's Approval of Special Legislation Benefitting his Whitewater Banker

On February 15, 1984, Citizen's Bank, which continued to hold the original Whitewater mortgage, was sold to TC Bancshares.206 This acquisition was significant for several reasons. First, on January 1, 1986, Citizen's Bank's charter was converted into a national bank chartered and subject to examination by the Office of the Comptroller of the Currency (the "OCC") and became known as 1st Ozark National Bank.207 This conversion significantly changed the regulatory environment for the bank holding the Whitewater mortgage. OCC examinations were precise and demanding; loan management and credit file maintenance were subject to greater scrutiny.208

Second, TC Bancshares' flagship bank was Twin City Bank ("TCB") of North Little Rock, one of the largest state-chartered banks in Arkansas.209 TCB's President, Edward Penick, and its Chairman, Terry Renaud, became members of 1st Ozark's board of directors,210 and Susan Sisk, a senior lending officer at TCB, was assigned to review the decisions of the 1st Ozark officer's loan committee and, because of the loan committee's requirement for unanimous action, could exercise virtual veto power.211

In the mid-1980's, TCB sought to amend Arkansas' restrictive bank branching laws.212 TCB's growth was limited because of the restrictions that Arkansas law placed on branching; TCB, which was headquartered in North Little Rock, could not branch into Little Rock. As early as May 26, 1986, Mr. Penick began to look for solutions to this problem. After meeting with State Banking Commissioner Marlin Jackson, it became apparent to Mr. Penick that TCB's desire for expanded branching powers could not be realized without legislation.213 During the 1987 Arkansas Legislative session, legislation was introduced that would permit TCB to enter the lucrative Little Rock market.

On April 1, 1987, this legislation, Act 539, was approved.214 Act 539 amended Arkansas bank branching law to allow banks located in counties with populations of greater than 200,000 people to branch anywhere in that county. Because Pulaski County (which includes Little Rock and North Little Rock) was the only county in Arkansas with a population over 200,000, this law implicated the Arkansas Constitution's prohibition against local legislation.215

Act 539 was passed without widespread support from the Arkansas banking industry. Mr. Penick recalled that a majority of the state's banks opposed this bill, and that both Arkansas Bankers Association and Independent Bankers Association opposed this legislation.216 Nevertheless, Act 539 did enjoy support from two major banks with connections to the financing of Whitewater -- TCB and Union National Bank (the bank that loaned the Clintons and McDougals the down payment for Whitewater, and financed half of the mortgage loan for the Whitewater property). Mr. Penick testified that he was "proactive" in his lobbying on behalf of Act 539.217 Mr. Penick worked closely with Paul Berry -- Governor Clinton's former roommate who had helped secure the Whitewater down payment loan -- on passage of this bill. Mr. Berry admitted that he contacted Governor Clinton to encourage him not to veto this legislation.218

This same time period -- from the middle of 1986 through the spring of 1987 -- was an important time for Whitewater Development Corp. The Dallas Federal Home Loan Bank had forced James McDougal out of Madison in July 1986219, and Whitewater Development Corp. had accrued $90,000 in unrecoverable losses. In a November 14, 1986 letter, Mr. McDougal apprised the Clintons of these losses and cash flow problems. In this letter, Mr. McDougal suggested that the Clintons transfer their Whitewater shares to him, and that he would assume the losses.220 The Clintons refused the offer, and the Whitewater loan at 1st Ozark matured on December 3, 1986.221

Thus, in December 1986, in light of past criticism from federal regulators about the quality of loan documentation, Ronald Proctor, the 1st Ozark lending officer primarily responsible for the Whitewater loan, drove to the Whitewater property to conduct an inspection. Mr. Proctor testified that collateral inspections were "very common" when a real estate development loan came up for renewal.222 Mr. Proctor's supervisor, Mr. Strange, agreed, testifying that such inspections would have been "prudent."223 Nevertheless, this was the first time that Mr. Proctor inspected the property.224 In fact, there is no evidence in the Whitewater credit file of any other independent appraisal of the property between 1978 and December 1986, and Mr. Proctor's 1984 work sheet employs the $1,100 per acre value from the 1978 appraisal.225

Mr. Proctor's inspection showed that the value of Whitewater had declined precipitously, from $1,100 per acre to no more than $750 per acre.226 Thus, since the Whitewater loan had two primary sources of security -- the property that collateralized the loan, and the guarantees of the Clintons and McDougals -- the value of the guarantees of the Clintons and McDougals was now of greater importance to 1st Ozark in considering whether to renew the loan. In order to make a decision on loan renewal, financial statements are necessary; indeed, sound banking policy dictates annual submission of updated financial statements to ensure a borrower's financial condition is not deteriorating.227 Nevertheless, 1st Ozark did not possess current financial statements for the Clintons. Because there was real concern about renewing the Whitewater loan without receiving current financial statements, 1st Ozark conditioned the loan extension on, among other things, the provision of financial statements by the Clintons and McDougals.228 Vernon Dewey believed that 1st Ozark should have required repayment of the loan and shared his concern with Ron Proctor. Nevertheless, Mr. Dewey voted to approve the renewal because it was for the Governor.229

Despite the fact that the Whitewater loan's renewal was conditioned on the provision of financial statements, 1st Ozark once again experienced difficulty obtaining them. Mr. Strange, 1st Ozark's president, mentioned this problem to Governor Clinton but still no financial statements were forthcoming.230 At some point in early 1987, the absence of financial statements for the Clintons was brought to the attention of 1st Ozark's chairman, and TCB's president, Mr. Penick. Mr. Penick agreed to help in securing the necessary financial information from the Clintons.231 Mr. Penick decided to take steps to obtain the financial information from the Clintons. He testified that he mailed the to Mrs. Clinton Twin City Bank financial statement form, although no such correspondence was produced to the Special Committee.232

Ronald Proctor and Vernon Dewey, who were both members of the loan committee that required the financial statement as a condition for renewal, recalled that Mr. Penick offered to have Margaret Davenport, who was a friend of Mrs. Clinton's, contact Ms. Clinton to obtain the financial statement.233 Mr. Penick claimed he did not recall soliciting Ms. Davenport's assistance to obtain the financial statement.234

Mrs. Clinton' handwritten notes indicate, however, that she discussed the Whitewater loan with Ms. Davenport in 1987. The information regarding the status of the loan makes it clear that the notes relate to the 1987 extension. 235 Ms. (Davenport) Eldridge claimed that she did not recall this conversation, even after reviewing these notes.236 1st Ozark finally obtained the Clinton's financial statement237, on a TCB form, and the Clinton's guaranty agreement, both dated March 26, 1987.238

Curiously, four days after the loan was renewed, Governor Clinton signed Act 539 into law.

The next year, banking legislation affecting TCB came before the Arkansas legislature. Although the Legislature was not scheduled to meet in 1988, the Banking industry was pressing for a special session to consider an "omnibus banking bill." The catalyst for this push was the United States Court of Appeals for the 5th Circuit's decision in Department of Banking v. Clarke. In effect, the Clarke decision authorized Mississippi national banks to branch based on the more liberal branching laws that applied to Mississippi savings associations (rather than the branching laws that applied to Mississippi-chartered commercial banks).239 The Arkansas banking industry was concerned that the OCC would employ the Clarke decision to grant national banks expansive branching powers, and thereby give national banks in Arkansas a competitive advantage over state banks.240

Governor Clinton was not eager to call a special session; both his Chief of Staff, Betsey Wright and a close associate, Bruce Lindsey advised against it.241 Governor Clinton and his staff were apprised that TCB was among a small group of banks that opposed the special session and the omnibus banking bill.242 TCB's concern was that the 1988 bill might be used to close the loophole that Act 539 had created in the so-called "300 feet rule." Act 539 had removed restrictions on branching in Pulaski County, including a restriction on opening a branch within 300 feet of another bank. This provision allowed TCB to open a branch in downtown Little Rock, within 300 feet of the offices of First Commercial Bank.243 First Commercial had sought an Attorney General's opinion regarding Act 539's constitutionality and had initiated a lawsuit, claiming that Act 539 was unconstitutional local legislation.244 The Governor's office was apprised of both these actions.245

In early 1988, draft legislation was circulated and Hartsfield and the Arkansas Bankers Association began working on building support for the special session.246 TCB's concern that the 1988 bill might be used to reimpose the 300 foot rule on TCB was well-founded. While the initial draft of this legislation probably did not contain language closing this loophole, Bill Bowen of First Commercial continued his efforts to close the loophole.247 At some point in the process, he was able to obtain language in draft legislation to close the loophole. TCB maintained its opposition to the special session throughout spring 1988. Mr. Bowen told the Governor's assistant, Samuel Bratton, that TCB was "attempting `to be a spoiler'."248 Clearly, there was a conflict between TCB and First Commercial with respect to the 300 feet rule, or, more aptly, the presence of TCB's downtown Little Rock branch.

While the disputes regarding the Special Session ensued, the Whitewater loan was coming up for renewal. Under the March 1987 extension, the loan matured on April 3, 1988.249 In February 1988, Mr. Proctor began to seek financial statements needed for the renewal from the Clintons and McDougals. During telephone conversation with Mrs. McDougal, Mr. Proctor "implied" that the loan would not be renewed without updated financials.250 A loan extension agreement was prepared for signature on April 3, 1988, but was not signed. Apparently, the McDougals, who were the officers of Whitewater Development Corp. and the only persons authorized to sign the renewal documents, could not be located to sign them. 1st Ozark enlisted Mrs. Clinton in an attempt to locate the McDougals and to obtain the necessary signatures for renewing the loan.251

On July 3, 1988 Governor Clinton called a special session of the Arkansas Legislature to consider the banking bill.252 The TCB/First Commercial conflict over the 300 feet issue remained unresolved; however, documentary evidence in the Committee's possession indicates that this issue was shortly resolved when Governor Clinton intervened on TCB's behalf. There are notes of a July 5, 1988 meeting (that appear to be in Mr. Bratton's handwriting) regarding revisions to the Banking Bill. These notes includes the following notation: "p 16 - `300 feet' provision -- BC will call Bowen."253 That same day, Betsey Wright sent a memorandum to Governor Clinton and Mr. Bratton regarding the "300 foot" issue. Suggesting that the Governor had intervened, Wright wrote that:

"(n)either Sam nor I understands what your next step/followup with Bill Bowen is on the 300' issue. The bill which is being delivered to this office in the morning by the Bankers Association/Bill Ford does not contain the 300' provision based on their conversation with you this morning."254 A July 5th draft delivered to the Governor's office contains the same "grandfather clause" that Ed Penick had suggested to Marlin Jackson in a May 23, 1988 letter.255 Also on July 5, 1988, Mr. Penick sent a note to "Bill" thanking him for his assistance on the 300 feet provision.256 When questioned regarding this note, Mr. Penick suggested that it was not a note to Governor Clinton, but rather Banking Commissioner Bill Ford. The available documentary evidence undermines Mr. Penick's recollection. First, this handwritten note was discovered among the Governor's papers. The Banking Department's records were subpoenaed and this note was not produced (despite the fact that Bill Ford is still Commissioner). Second, this note contains the notation "GOV," as well as the check mark that Governor Clinton frequently used to indicate that he had reviewed an item. Mr. Penick testified that he was more likely to address Governor Clinton as "Governor" than "Bill."257 Mr. Penick's recollection on this count also is called into question by the documentary evidence; notably, the Committee obtained a June 6, 1988 note from Mr. Penick to Governor Clinton in which the salutation is also to "Bill."258

On July 7, 1988, Bill Bowen responded to Governor Clinton's proposal to remove "300 feet language" from the proposed bill. While Mr. Bowen committed himself to support the total package, he indicated in his letter that the package as proposed (including the 300 feet provision) enjoyed the support of 80% of bank CEO's in attendance at a March 1988 industry meeting, and that the "300-feet" specific provision enjoyed overwhelming support among the leadership of the Arkansas Bankers Association.259

Nevertheless, TCB carried the day. On July 15, 1988, the banking bill became law. As enacted, the bill did not contain Mr. Penick's suggested grandfather provision, but it did contain language that protected TCB's presence in Little Rock's downtown business area.260

Again curiously, that same day, the Clintons received a loan extension from 1st Ozark for their Whitewater loan for three years, through November 3, 1991. This renewal occurred three months after the loan term had matured.261 Mrs. Clinton, who had been unable to contact either of the McDougals, signed for Whitewater Development Corp. 1st Ozark waived the financial statement requirement for both the McDougals and the Clintons. The waiver for the Clintons would appear to be unusual -- with the McDougals out of the picture, the Clintons were the sole guarantors of the loan's repayment.

Granting this waiver to the McDougals and Clintons represented a change in policy for 1st Ozark. Mr. Proctor, who wrote to Mrs. McDougal for financial statements in February 1988 (nearly two months before the loan came due), was unable to explain why this same information was not necessary in July 1988.262 III.

The Clintons' Handling of Whitewater During the 1992 Presidential Campaign


The Focus on Whitewater During the 1992 Campaign

During the 1992 presidential campaign, questions arose about Whitewater, Madison, and the Clintons' relationship with the McDougals. On March 8, 1992, the front page of the New York Times carried the headline: "Clintons Joined S&L Operator In An Ozark Real-Estate Venture." The article, written by Jeff Gerth, reported the ties between the Clintons and the McDougals, focusing attention on their investment in Whitewater and the questionable tax deductions taken by the Clintons in 1984 and 1985. The Times report suggested that Whitewater may have been used as a conduit to funnel money to the Clintons or to Bill Clinton's political campaigns.263

In anticipation of the Gerth article and in response to the subsequent media interest in the story, the Clinton campaign organized a team of senior advisors to gather facts about from other candidates. Susan Thomases, the New York lawyer and confidant of Mrs. Clinton, involved in matters surrounding the handling of documents in Vincent Foster's office following his death, and Loretta Lynch, a campaign official, reconstructed Whitewater-related records and coordinated the response effort.264 Webster Hubbell and Vincent Foster, both then partners at the Rose Law Firm, were responsible for collecting materials from Rose relating to Mrs. Clinton's work for Mr. McDougal and his S&L.265

The campaign's effort to contact the McDougal and other principals associated with Whitewater-related transaction was headed by James Blair, General Counsel of Tyson Foods, and a close friend of the Clintons. Mr. Blair had also known Mr. McDougal for over 30 years.266 After Whitewater surfaced in the campaign, Mr. Blair contacted Mr. McDougal's lawyer, Sam Heuer, and arranged a meeting for Mr. Blair, Ms. Lynch, Mr. McDougal, and Mr. Heuer.267

Several days after the first New York Times article was published, on March 11, Mr. Blair and Ms. Lynch went to Mr. Heuer's office.268 When they arrived, Mr. Heuer met the pair outside and escorted them upstairs into his office.269 After some pleasantries, Mr. Blair asked Mr. McDougal why he talked to Mr. Gerth from the New York Times."270 Mr. McDougal replied that, based on his experience an assistant to former Senator Fulbright, "when the press had something it was better to talk and simply give it all to them."271

When Mr. Blair asked whether Mr. McDougal would stop talking to the press, Mr. McDougal stated that he would "but indicated he didn't want to be bashed in the press."272

Mr. Blair then travelled to Flippin to interview Christopher Wade, the Whitewater real estate agent, and to obtain some records. It is not clear exactly what documents Mr. Blair collected from the Wades or whether Mr. Blair took notes of his conversations with Mr. Wade. The campaign file containing the notation -- "WWDC Jim Blair Flippin Trip"273 -- was empty.274 When asked about his interview of Mr. Wade, Blair testified that he discussed the fact that Mr. Wade had not discharged his obligation on the $35,000.275

Mr. Blair also accused Mr. Wade of taking advantage of Mr. McDougal's situation in the 1985 transfer of the 24 Whitewater lots,276 and Mr. Blair questioned Mr. Wade about why he had not paid off the Whitewater mortgage. On May 11, 1992, shortly after the visit from Mr. Blair, Ozark Air obtained a loan from River Valley Bank & Trust ("River Valley"), formerly Citizens Bank of Lavaca, for $10,500.277 As collateral for this loan, Ozark Air relied on the escrow contracts on lots 2, 9, 23, 30, 37, 43, and 44 of Whitewater Estates.278 On May 12, 1992, Ozark Air wrote a check to 1st Ozark for $9,628.67 to close out the remaining Whitewater mortgage.279

By paying off the Whitewater loan with another bank loan, Mr. Wade merely exchanged one liability (his contractual obligation to assume $35,000 of the outstanding debt on the mortgage) for another (his obligation to River Valley Bank to repay a loan that was secured by the same collateral securing the Whitewater mortgage loan). However, this transaction accomplished one significant goal -- it released the Clintons, who were guarantors of the Whitewater loan, from personal liability.280 Mr. Wade asserted his Fifth Amendment right against self-incrimination, so the Committee was unable to examine him regarding this loan.281

Mr. Wade obtained the loan that he used to pay-off the Whitewater loan through former Citizen's Bank President James Patterson who was then the President of River Valley.282 After Mr. Wade called Mr. Patterson, he was granted this loan over the phone.283 Mr. Patterson, who admitted he did not even like Mr. Wade284, claimed that he did not recall the purpose of the loan or whether the bank received collateral.285 Mr. Patterson admitted that the loan to Mr. Wade was outside of River Valley's lending territory.286

It is unclear why Mr. Patterson would make this loan to Mr. Wade when Mr. Wade was in bankruptcy.7 Mr. Patterson initially testified that Wade had emerged from bankruptcy by the time this loan was made.287 When asked whether he understood that a person in bankruptcy is not supposed to engage in financial transactions without court supervision, Patterson claimed that he "didn't understand that if somebody had filed bankruptcy that they couldn't go make a new deal."288 In fact, Mr. Patterson continued to assert that he made this loan to Mr. Wade, a man who was in involuntary bankruptcy, because "(h)e was worth the loan."289


The Lyons Report

In February or early March 1992, James Lyons, a senior partner at the Denver, Colorado law firm of Rothgerber, Appel, Powers & Johnson, was asked by the Clinton campaign to investigate the Clintons' investment in Whitewater.290 Mr. Lyons specialized in complex civil litigation.291 He was also a friend and political supporter of the Clintons since the late 1970s292 and was the ad hoc chair of a group of lawyers from around the country who provided support and volunteer legal advice and services to the Clinton campaign.293

Mr. Lyons reviewed the available Whitewater "documents and information...that had been assembled by campaign staff after the issue had been raised by Mr. Jeff Gerth of the New York Times."294 Based on his preliminary analysis of the documents, Mr. Lyons determined that the campaign "needed accounting help to assist in a financial reconstruction." He "made a recommendation to campaign staff and to Governor and Mrs. Clinton . . . to engage Patten, McCarthy & Associates,"295 a Denver financial consulting firm.

In early March 1992, Mr. Lyons contacted Leslie Patten, a certified public accountant and president of Patten, McCarthy & Associates,296 and engaged his firm, on behalf of the Clintons, to conduct "a financial reconstruction of Whitewater Development Corporation from the then available books and records."297 Mr. Lyons and Mr. Patten were "friends" and "had a professional relationship for a number of years."298 Mr. Patten's firm provided "consultation on banking, financial, accounting and tax matters arising from business litigation and expert witness testimony on such issues."299 On March 10, 1992 the Patten firm began working on its analysis of Whitewater.300 Mr. Patten and Norris Weese, another certified public accountant and the firm's vice president, were the only professionals who performed work on the document that became the final report.301 Mr. Weese went to Arkansas to gather documents and began the financial analyses, and Mr. Patten reviewed the financial analyses and drafted the document that became the final report.302

Work on the so-called Lyons report proceeded rapidly, with the involvement of Mrs. Clinton. On March 18, 1992, just eight days after the Mr. Patten and Mr. Weese began work on the project, a draft of the final report was completed,303 and was faxed the next day to Mr. Lyons, Mrs. Clinton, Loretta Lynch and James Hamilton, a lawyer working with Mr. Lyons on the Clinton campaign.304 The fax to Mrs. Clinton and Ms. Lynch was 55 pages long and contained over 30 pages of work papers prepared by the Patten firm. On March 20, a revised draft was faxed to Mrs. Clinton, Mr. Hamilton, and John Klusaritz, another Clinton campaign lawyer.305 Later that day, Mr. Patten faxed to Mrs Clinton a revised report, dated March 20, 1992 and addressed to Governor Bill Clinton and Hillary Rodham Clinton, that contained six type-written pages. The report was signed by Mr. Patten and Mr. Weese.306 According to Mr. Patten, "the substance of the report was pretty much final at that point," but "I think we were premature in signing it because we had not obtained everybody's comments."307 During this period, Mr. Patten testified that he "was in fairly regular communication with Mr. Lyons," who "was anxious to get this project completed and was seeking periodic updates as to where we were in the process."308

Then, on March 20 or March 21, 1992, Mr. Lyons contacted Mr. Patten and told him that he wanted two versions of the report prepared, a summary version that only addressed specific questions raised by the press and a full report addressed to him. According to Mr. Patten's testimony:

It's at this approximate point [in] time when Mr. Lyons advised me that he wanted a summary report prepared. . . . The essence of it was that Mr. Lyons indicated that he [would] like to have a summary report in addition to the full report which would be addressed to him. . . . My understanding was that the purpose of the summary report was to address two or three specific questions that had been raised by the press.309

Mr. Lyons testified that the Patten firm "prepared a single report and a summary of it"310 and that "[o]ne is simply shorter and in my opinion was more responsive to the issues that were then being put forward by the press."311 On March 21, 1992, Mr. Patten faxed a shorter version of the report to Mrs Clinton.312 As with the version of the report faxed to Mrs. Clinton the day before, this version of the report, dated March 21, 1992, was addressed to the Clintons and was signed by Mr. Patten and Mr. Weese, but it was almost three pages shorter than the previous day's version.313 On March 22, 1992, Mr. Patten faxed even shorter versions of the report, dated March 23, 1992 and signed by Mr. Weese and Mr. Patten, to Mrs. Clinton and Ms. Lynch.314

On March 23, 1992, Mr. Patten faxed Mrs. Clinton the final summary version of the Patten firm's report, which contained three type-written pages and two pages of charts.315 A one page cover letter from Mr. Patten to the Clintons states: "Pursuant to the request of James Lyons, Esq., enclosed please find Patten McCarthy & Associates, Inc's report pursuant to our recent engagement."

In a March 23, 1992 letter to the Clintons, Mr. Lyons notified the Clintons that his review of Whitewater had been completed. He noted the findings of the summary report, including that the Clintons' had "invested approximately $70,000 in the corporation."316 The Clinton campaign only released the final summary version of the Patten firm's report to the press,317 and Mr. Patten testified that Mr. Lyons "is the only individual that received both versions of the report."318

On April 10, 1992, Mr. Lyons sent the Clintons the final complete version319 of the Patten firm's report, which contained seven type-written pages and three pages of charts.320 In his cover letter, Mr. Lyons states:

Enclosed please find the complete report prepared by Patten, McCarthy & Associates concerning Whitewater Development. A summary of this report was previously sent to you and released to the press along with a cover letter from me on March 23, 1992. I have deferred sending this complete report until now to avoid any confusion or possible inadvertent production. The only copies of this report which exist (other than the enclosed original) are in my file and the confidential files of Les Patten.321

He then explained that the summary report omitted several items:

Please note the enclosed report discusses such things as the $9,000 interest deduction taken by you in 1980, lot 13 and borrowings associated with it, and the sale of 24 lots in 1985 to Ozark Air for assumption of the mortgage and an airplane. None of these items is set out in the summary report which was released to the press. Similarly, the summary report released to the press did not contain Schedule 1, which details loans and advances by the McDougals and the Clintons from 1980- 1991.322

Mr. Lyons concluded his letter by noting: "Accordingly, it is my recommendation to you that you maintain the complete report in strictest confidence and do not waive either the attorney/client or accountant/client privilege which attaches to the enclosed report."(emphasis added)323

Mr. Lindsey testified that the complete report was not released to the press as of late 1993.324 According to his testimony, "it turned out later [after late 1993] at least one reporter, through other sources, probably Independent Counsel, who knows, reported on the longer version of the Lyons report, but at that time I don't think anyone had reported on it."325

In March 1994, almost two years to the date after the Patten firm issued its report, it was discovered that the report had overstated the Clintons investment in Whitewater by $22,244.65.326 The $68,900 investment in Whitewater by the Clintons reported by the Patten firm included a check paid by Mr. Clinton to Madison Bank and Trust in 1982 on a loan used to purchase a house for his mother in Hot Springs, Arkansas.327 Thus, the Patten firm overstated the Clinton's Whitewater investment by more than 30 percent.

Less than two weeks after this error was first acknowledged, Mr. Patten, in a November 4, 1993 memorandum to Mr. Lyons, explained the problems that his firm had encountered in its analysis. Mr. Patten noted that his firm's work "did not and could not constitute an audit, review, compilation or the application of agreed upon procedures as those terms are understood within the accounting profession." He further wrote that "source documentation was not available in many instances and we had to utilize the next best available documentation," and that "[t]he financial statements that we reconstructed took into consideration monies paid by the Clintons, the McDougals and others that had not been reflected in the accountant's workpapers or tax returns."328


The Clintons Finally Get Out of Whitewater

Among the documents in Mr. Foster's office at the time of his death was his handwritten note: "Get out of White Water."329 To that end, Mr. Foster, Mr. Hubbell and others in the Clinton organization met with Mr. Lyons on November 24, 1992, two weeks after Mr. Clinton was elected President.330

Mr. Blair called Mr. McDougal's attorney, Sam Heuer, and told him that "the Clintons and the McDougals needed to be totally separated over the Whitewater thing."331 According to Mr. Blair, he suggested that Mr. McDougal pay a nominal amount to buy the Clintons' interest in Whitewater:332 "I think we settled on a thousand dollars as an appropriate nominal amount."333 There was one problem: "McDougal doesn't have a thousand dollars."334 Mr. Blair then told Mr. Heuer, "[W]ell, what the heck, I will loan him the thousand dollars. I'll just Fed Ex you a check to your trust account. And I believe that's what I did."335 The loan was made without interest,336 and Mr. McDougal has never repaid Mr. Blair.337

On December 22, 1993, Mr. McDougal and the Clintons executed the transaction to get the Clintons out of Whitewater.338 Mr. Foster obtained the Clintons' signature for the documents executing the sale.339 It is unclear whether Mr. Foster, Mr. McDougal, or the Clintons knew that Mr. Blair gave Mr. McDougal the $1000 to buy the Whitewater shares from the Clintons.340

Mr. Blair then assigned Mr. Foster the task of contacting the accountants and preparing the Clintons' tax returns.341 The issue facing Mr. Foster in the months preceding his death was how to treat the $1000 sale on the Clintons' 1992 tax returns. The basic dilemma stemmed from the Clintons' claim, bolstered by the publicly released Lyons report, that they had incurred significant losses on their investment in Whitewater. The problem with declaring the loss on the Clintons's tax return was the lack of a proper basis with which to calculate the cost of the venture to the Clintons. Despite their claim that they were 50% partners in the venture, the Clintons had contributed less than 25% of the funds used to cover Whitewater's losses.

Also among the documents in Mr. Foster's office at the time of death were his notes of conversations with the Clintons' accountant, Yoly Redden.342 The notes, in Mr. Foster's hand, identified the tax problem as a "can of worms you shouldn't open."343 His notes in the file outlined the basic tax issues the Clintons faced in connection with Whitewater:


What was nature of deductions

A. How deduct interest/principal payments for corp.?


Can you use contribution which predated incorporation?


Contribution/advancements of $68,900 to the McD


Inability to utilize $8000 capital loss"344

Mr. Foster's objective was to avoid calling attention to Whitewater during the annual audit of the President and Mrs. Clinton's tax returns by the Internal Revenue Service audit.345 One approach was simply to report a wash, that is, to show no loss and no gain from the venture, thereby obviating the need for any tax treatment. The problem with such treatment, however, was that it would have bolstered the allegation that the Clintons were insulated from Whitewater losses and thus the company was a vehicle for Mr. McDougal to channel funds to the Clintons.

In notes titled "Discussion Points," Mr. Foster wrote:


An argument that they were protected against loss:

A) wash is consistent with this theory346 But Mr. Foster did not a have a proper cost basis with which to calculate the Clintons' true losses or gains. His discussion points continued:


Improper to reduce basis by improper tax benefit


Computation of economic loss was based, in part, on assumptions

Whereas computation of tax gain or loss must be defensible in audit.347

Therein lay the problem. To claim a loss based on economic assumptions, as the Lyons report did, was one thing.8 But to claim a loss on the Clintons' 1992 tax returns without proper support and documentation increased the likelihood of calling attention to Whitewater during the IRS audit--of opening the can of worms that Mr. Foster and the Clintons' accountant wished to keep sealed.348

Mr. Foster's notes summarized the options as follows:



$1000 basis

so no tax effect

but is arbitrary & still risks audit


0 basis w/ $1000 gain

avoids any audit of issue"349

In a letter to Mr. Foster days before the tax returns were due, Ms. Redden, the accountant the Clintons hired to handle Whitewater tax issues, wrote: "Because of the numerous problems with Whitewater records and the commingling of funds with other companies and individuals, I believe many explanations may have to be made if we claim a loss."350 This letter, addressed to Mr. Foster, was not among the documents in Mr. Foster's office that the White House produced to the Special Committee. It was obtained by the Special Committee through another source.351 Ms. Redden testified that after the Clintons were in the White House she had a number of discussions with Mr. Foster concerning tax issues related to Whitewater.352 The main focus of these numerous communications was the tax basis for the Clintons' contributions to Whitewater and how to treat the $1000 payment.353

The Clintons' final tax returns for 1992 reported a capital gain of $1000 from the sale of stock to Mr. McDougal.354 According to Ms. Redden, "I think we need to claim no gain or a loss."355 Mr. Foster did not follow her advice, however, because he was also consulting with another accountant, and "[a]t the end we compromised what we were going to put in the return in connection with Whitewater."356 IV.

The Clintons' Questionable Tax Treatment of Whitewater: A History of Unreportable Income and Improper Deductions

During the years that the Clintons owned an interest in Whitewater, the Clintons adopted an aggressive approach to the tax treatment of their investment. This approach sometimes resulted in errors on their federal income tax returns. From 1978 to the early 1990s, the Clintons invested a total of $42,192 in Whitewater.357 During this same period, the Clintons deducted $42,656 of their Whitewater related expenses on their federal income tax returns -- almost $500 more than their total investment in the corporation.

The Special Committee's analysis of the Clintons' treatment of individual Whitewater-related items on their federal income tax returns reveals that the Clintons took a number of questionable tax positions relating to Whitewater. From 1992 to the present, the Clintons have admitted taking improper deductions of $7,928 and omitting income of $8,171 on their federal income tax returns during the period of their Whitewater investment. Therefore, the Clintons have admitted understating their income by $16,099 during this period. Based on its analysis of the available evidence, the Special Committee concluded that the Clintons could have understated their income on Whitewater related items by an additional $33,771, for a total increase in taxable income of $49,870.

The Clintons have explained that errors on their tax returns relating to Whitewater were due to mistakes made by their accountants. The Clintons did not fully disclose, however, all of their financial information to their accountants,358 did not discuss the details of important financial transactions with them,359 and sometimes simply ignored their accountant's advice.360

Gaines Norton, the Clintons' personal accountant from 1978 to 1984, stated that the Clintons provided him with the information used to prepare their tax returns.361 According to Mr. Norton, a former IRS revenue agent and a certified public accountant, the Clintons did not provide him with underlying documents, but instead provided him with summaries,362 such as handwritten lists on notepads.363 In one case, Mr. Norton raised specific tax concerns about the structure of Whitewater and Mr. Clinton told him "to back off and leave the issue alone."364 The errors and questions discussed in this section, therefore, cannot be dismissed as merely mistakes by the Clintons' personal accountants.


1978: The Clintons' Unreported Income of $5,405 from 15-Acre Installment Sale

The Clintons may have unreported income of $5,405 from their 1978 installment sale of 15 acres of land originally purchased from Rolling Manor Inc., a company owned and controlled by Mr. McDougal. On January 25, 1977, then-Attorney General Clinton purchased 20 acres of land from Rolling Manor Inc. for $11,400.365 The Clintons' 1978 federal income tax return reports that they sold 20 acres of land in 1978 in two separate transactions, a cash sale of five acres and an installment sale of 15 acres. On May 17, 1978, the Clintons sold five acres on a cash basis for $5,000, resulting in a gain of $2,150, which was properly reported on Schedule D (Capital Gains or Losses) of their 1978 return.366 On July 23, 1978, the Clintons sold 15 acres of unimproved land on the installment method for $14,985, resulting in a gain of $6,435.367 Since the Clintons elected to report this $6,435 gain on the installment method, only $886 of the gain was taxable in 1978 and was reported by the Clintons on their return.368 The $5,549 balance of the gain ($6,435 - $886) from this 15-acre land sale was to be reported in future years as the Clintons received the payments from the buyer.

$5,405 of the $5,549 deferred gain reported on the Clintons' 1978 return does not appear, however, in their subsequent federal income tax returns. The Clintons did not report any income from the 15-acre installment sale on their 1979 tax return.369 The Clintons did report $144 in capital gains from an installment sale on Schedule D (Capital Gains and Losses) of their 1980 tax return.370 The Clintons did not report any income from the 15-acre installment sale on any of their tax returns after 1980.9 How the Clintons collected a total of $2,066 in 1978 on the sale of this 15 acre tract of land, collected no funds in 1979, collected a total of $335 in 1980, of which $144 was reported as a gain on their 1980 tax return, and then collected no other funds from the buyer remains unexplained.

If the Clintons collected the funds due from the buyer of the 15-acre parcel, they were required to report a portion of each payment as a gain on their tax returns, just as they reported a $144 gain on their 1980 return.10 As described above, the Clintons reported no other gains on any of their subsequent returns. Of course, if the Clintons did not receive payments from the buyer, they would not have been required to report gains on their income tax returns. If the buyer of the property defaulted, however, the Clintons could have foreclosed on the property and then resold the property to another buyer, but there is no evidence on any of their subsequent tax returns that such action was taken by the Clintons. In addition, if the buyer defaulted, the Clintons could have taken a $7,194 deduction for their remaining basis in the 15 acres, but there is no evidence of such a deduction on any of the Clintons subsequent tax returns.11 Moreover, if the property was foreclosed upon and not sold, then the Clintons would still own it, but this property is not shown on the Clintons 1991 Federal Election Disclosure form.371


1979: The Clintons' Improper Interest Deduction of $2,400

The $2,400 interest deduction claimed by the Clintons on their 1979 tax return may have been improper under federal income tax law. On December 7, 1979, Whitewater deposited in its account a check from the Clintons in the amount of $2,900.372 On the books of Whitewater, this check was recorded as $500 for capital and $2,400 as "Loan - Bill Clinton".373 According to its books, Whitewater's first interest payment in the amount of $4,352.63 was made to Citizen's Bank of Flippin on May 5.374 On their 1979 federal income tax return, the Clintons claimed an interest deduction of $11,749 for payments to "Bank and Loan Companies."375 This amount included the Clintons' $2,400 payment to Whitewater.376

Federal income tax law allows a deduction for "all interest paid or accrued within the taxable year on indebtedness,"377 but the burden of proof for establishing the propriety of an interest deduction is on the taxpayer.12 In this case, there is no evidence that the Clintons' $2,400 payment to Whitewater was for interest on indebtedness. Indeed, the only available evidence, the $2,900 deposit slip and the entries on Whitewater's books, indicates that the $2,400 payment was a loan to the corporation, which the corporation had an obligation to repay, and not an interest payment. Moreover, Whitewater did not make its first interest payment to a bank until May 5, 1980, almost five months after the Clintons' payment of $2,400 was deposited, and there is no evidence that Whitewater's first interest payment of $4,352.63 included the Clintons $2,400.378

An IRS audit of the Clintons' 1979 income tax return resulted in no changes. However, there is no evidence that the revenue agent reviewed all of the relevant documents regarding this interest deduction.379 Absent proof that Whitewater's books and records were made available to the revenue agent by the Clintons, the result of the 1979 audit is inconclusive on this issue. Indeed, it is possible that the revenue agent would have reviewed only a canceled check or bank records, determined that less than the full payment was deducted, and accepted this as sufficient evidence to verify the deduction.


1980: The Clintons' Improper Interest Deduction of $9,000

The $9,000 interest deduction claimed by the Clintons on their 1980 tax return may have been improper under federal income tax law. On August, 23, 1980, Mrs. Clinton wrote a personal check in the amount of $9,000.380 The Clintons' deducted this $9,000 payment on their 1980 federal income tax return as interest paid to "James McDougal."381 A third-party endorsement by Citizens Bank of Flippin, dated September 5, 1980, is on the reverse side of the Clintons' check.382

Federal income tax law allows a deduction for "all interest paid or accrued within the taxable year on indebtedness,"383 but the burden of proof for establishing the propriety of an interest deduction is on the taxpayer. In this case, there is no evidence that the Clintons' $9,000 payment was used to pay interest on indebtedness. Nor is there evidence on the face of this check that it was intended to be used to pay interest. The payee on the check was left blank, and there is no designation or notation on the check that it was intended to be used to pay interest.384

In addition, the absence of a notation on the check that it was for interest is particularly probative, since Mrs. Clinton made such a notation on the other checks that she wrote to pay interest on the Whitewater debt. Mrs. Clinton wrote at least four other personal checks to pay interest on Whitewater related debt -- three before and one after the $9,000 check, and, on each of these checks, Mrs. Clinton wrote a notation that the checks were for interest.13 Moreover, the Clintons' checkbook entry designates this check as a "land payment," not an interest payment.385 "Land payment" could refer either to a principal or interest payment. Since Mrs. Clinton generally noted when a payment was for interest, however, her notation that this check was for a "land payment" would tend to confirm that this payment was for principal, not interest.

Analyses of the available bank records also indicate that the $9,000 check was used to pay principal, not interest. A report prepared by Patten, McCarthy & Associates, a Denver accounting firm hired by the 1992 Clinton Presidential Campaign, states:

In our telephone conversation with her [Mrs. Clinton] and you [James Lyons] on March 18, 1992, she reaffirmed that she believed that it was an interest payment. Based on our reconstruction of the probable amortization of the mortgage loan at Citizens Bank & Trust, we believe the $9,000 went to reduce principal.386 The report of Pillsbury, Madison & Sutro is even more conclusive on this point. It states:

On August 23, 1980, the Clintons paid $9,000 to an unknown payee. Through a reconstruction of the Citizens Bank mortgage, it has been determined that this payment was applied as principal to the outstanding balance of the Citizens Bank loan.387 Thus, the available evidence indicates that the bank applied the $9,000 to reduce principal, not interest.

According to the report prepared by the President and Mrs. Clinton's counsel, David Kendall, since the Clintons "owed interest to Citizens Bank of Flippin, WDC [Whitewater] or the McDougals, if they intended that their $9,000 check represents the interest, then Mr. and Mrs. Clinton accurately deducted the $9,000 payment as interest."388 However, there is no evidence of any unconditional and legally enforceable indebtedness between the Clintons and Whitewater or Mr. McDougal at the time of this payment. While an indebtedness did exist between the Clintons and Citizens Bank, Mrs. Clinton's intent that a payment on the note was for interest is not sufficient to support an interest deduction under federal income tax law.

Courts generally will give effect to an arrangement between a creditor and a debtor allocating payments on an indebtedness to principal and/or interest where that arrangement is bona fide and done at arm's length.389 There is no evidence of that such an arrangement existed between Mrs. Clinton and Citizen's Bank. Nor is there evidence that Mrs. Clinton communicated to the bank or any other party that the payment was for interest. Absent such an arrangement, payments by a debtor are first allocated to accrued but unpaid interest and then to principal.390

The available evidence indicates that no accrued but unpaid interest was due on the Citizens Bank loan when the Clintons' $9,000 check was endorsed by Citizens Bank on September 5, 1980. One month earlier, on August 5, 1980, the Citizens Bank note was extended and modified and, at the same time, the Clintons paid Citizens Bank the quarterly interest owing and due of $4,350, which they properly deducted on their 1978 return.391 No principal payment had been made on the loan as of the date of its renewal.392 Just 18 days later, Mrs. Clinton wrote the $9,000 check for "land payment." The next quarterly interest payment on the note would not have been due until November 5, 1980, two months after Citizens Bank endorsed the Clintons' $9,000 check.


1980: The Clintons' Unreported Income of $10,000 from Whitewater payment of the $20,000 Union Bank Note

Whitewater's 1980 payment of a 1978 $20,000 unsecured, personal note of Mr. McDougal and Mr. Clinton may have resulted in $10,000 of income to the Clintons that was not reported on their 1980 federal income tax return. On June 19, 1978, Mr. McDougal and Mr. Clinton obtained a $20,000 unsecured, personal loan (Loan # 0004197) from Union National Bank of Little Rock.393 The proceeds of this loan were used to make the down payment on the 230 acres of land in Marion County, Arkansas that became Whitewater.394 On December 17, 1979, the Union National Bank note was renewed for 6 months, with a new maturity date of June 16, 1980.395 As of the date of that renewal, the principal of the note remained $20,000.396 On June 10, 1980, Mr. McDougal borrowed $20,000 from the Bank of Cherry Valley in Cherry Valley, Arkansas,397 and deposited those funds in Whitewater's account at the Union National Bank.398 On June 23, 1980, Whitewater disbursed $21,346.29 to Union National Bank, using a corporate check with the notation "For Note # 0004197 Plus interest thru 6/23/80," to pay off the accrued interest and principal owed personally by Mr. McDougal and Mr. Clinton to Union National Bank.399

Section 61 of the Internal Revenue Code states that "gross income means all income from whatever source derived, including . . . income from discharge of indebtedness."400 Courts have ruled that amounts expended by a corporation for an individual taxpayer's benefit would constitute income to the taxpayer.401 Section 108(e)(4)(A) of the Code states that income is realized if debt is discharged or acquired by a related entity.402

The central issue is whether Whitewater's payment to Union National Bank discharged any debt owed by Mr. Clinton. Mr. McDougal and Mr. Clinton were jointly and severally liable on the Union National Bank note.403 Whitewater's incorporation did not change this, since the Union National Bank note was not transferred to Whitewater.404 Therefore, Whitewater's payment to Union National Bank eliminated Mr. Clinton's obligation to that bank.

However, if Mr. Clinton was an obligor on the Bank of Cherry Valley note, from which Whitewater received the funds to pay Union National Bank, then Whitewater's debt would not have discharged any debt owed by Mr. Clinton. In this case, the debt simply would have shifted from Union National Bank to the Bank of Cherry Valley.405 14 On the other hand, if Mr. Clinton was not an obligor on the Bank of Cherry Valley note, then Whitewater's payment would have discharged debt owed by Mr. Clinton. In this case, the Union National Bank debt, on which Mr. Clinton was jointly and severally liable, would have been replaced by the Bank of Cherry Valley debt, on which Mr. Clinton was not liable. In the latter case, Mr. Clinton would owe the IRS additional taxes on the $10,000 of discharged debt, his share of the Union Bank debt.

Was Mr. Clinton an obligor on the Bank of Cherry Valley note? Mr. Clinton has stated that "any shift of this $20,000 loan from Union Bank did not affect its character as an acquisition loan, for which my wife and I considered ourselves equally responsible with the McDougals for repayment."406 However, testimony by the Bank of Cherry Valley's former President, Maurice Smith, indicates that the loan was made to Mr. McDougal individually, and most of the bank documents support his testimony. Indeed, Mr. Smith testified that the bank "just loaned it to Jim McDougal" and that Mr. Clinton did not make payments on the loan.407

Most of the available loan documents indicate that Mr. McDougal was the sole obligor on the Bank of Cherry Valley note.408 Mr. McDougal's name, and not Mr. Clinton's, is typed on each of the documents, and Mr. McDougal signed each of the documents.409 Only one loan document appears to have Mr. Clinton's signature on it, and Mr. Clinton's name is not typed on that document.410 Moreover, that document is dated more than two years after the note was originated.411


1982: The Clintons' Unreported Income of $5,691 for Whitewater Payment of Citizens Bank of Jonesboro Note

A 1982 payment by Whitewater of the principal and interest on a $5,000 note between the Citizens Bank of Jonesboro and Mr. Clinton may have resulted in $5,691.20 of income to the Clintons that was not reported on their 1982 federal income tax return. A May 21, 1981 personal financial statement of the Clintons lists a $5,000 note payable to Citizens Bank of Jonesboro as a liability under the heading "general debt."412 On February 17, 1981, Mr. Clinton wrote a personal check in the amount of $243.82 to Citizens Bank, which had a notation "Interest on Note #585-270."413 On February 22, 1982, Whitewater disbursed a check in the amount of $5,691.20 to Citizens Bank.414 The notation on the check states "Note 585-270,"415 and the Whitewater checkbook entry designates this check as payment of "Note #585-270 - Bill Clinton."416

Section 61 of the Internal Revenue Code states that "gross income means all income from whatever source derived, including . . . [i]ncome from discharge of indebtedness."417 Courts have ruled that amounts expended by a corporation for an individual taxpayer's benefit would constitute income to the taxpayer.418 Whitewater paid Mr. Clinton's note at Citizens Bank of Jonesboro, but Mr. Clinton has stated that "[i]t is possible that it was a WDC-related loan."419 If Mr. Clinton invested the proceeds of this loan in Whitewater and Whitewater then repaid the loan, Mr. Clinton would have received no personal benefit from Whitewater's payment of the note, and, therefore, would not have been required to recognize income from discharge of indebtedness.

The evidence is inconclusive on whether this Citizens Bank of Jonesboro loan was related to Whitewater. A March 1, 1982 letter from Jim McDougal to Bill Clinton states:

I have paid from the Whitewater Development Corporation the note you owed Citizens Bank of Jonesboro. You are correct in your belief that the sum of money borrowed was part of your investment in Whitewater. 420

Yet, there is no evidence on Whitewater's books that it received $5,000 from either the Clintons or Citizens Bank of Jonesboro.421 15 Indeed, when Whitewater disbursed $5,691 to Citizens Bank of Jonesboro, it recorded the full amount as "interest" paid, which indicates that the corporation had never recorded a liability that could be reduced upon payment of the note.422

Although the evidence is inconclusive on whether these funds were invested in Whitewater, under federal income tax law the Clintons would bear the burden of proof that this payment did not result in any benefit to them personally. It is unclear whether the March 1, 1982 McDougal letter would be considered sufficient proof that the Clintons invested the funds received from the Citizens Bank of Jonesboro in Whitewater. If found insufficient, the Clintons would have unreported income of $5,691.20, excluding any interest and penalties.


1984: The Clintons' Improper Deduction of $144 for Real Estate Taxes

On their 1984 federal income tax return, the Clintons improperly deducted $144 for real estate tax payments for which they were reimbursed by Whitewater. On October 10, 1984, the Clintons paid $144 to Marion County for the payment of real estate taxes on Whitewater lot 13. On November 4, 1984, Whitewater reimbursed the Clintons for this amount.423 Since the Clintons were reimbursement for the taxes paid, this deduction was improper. On May 24, 1996, the Clintons acknowledged this error and repaid the federal taxes owed to the Bureau of Public Debt and the state taxes owed to an Arkansas charity.424


1984 and 1985: The Clintons' Improper Interest Deductions of $2,811 and $2,322

On their 1984 and 1985 federal income tax returns, the Clintons improperly deducted $5,133 for interest payments made paid by Whitewater, not the Clintons.425 In 1984 and 1985, Whitewater made interest payments to the Security Bank of Paragould in the amounts of $2,811 and $2,322, respectively, that the corporation deducted on its corporate tax returns.426 The Clintons also claimed these same interest deductions on their 1984 and 1985 federal income tax returns.427 Since Whitewater made the interest payments to the bank, it, and not the Clintons, was entitled to those deductions. On December 28, 1993, almost two years after the errors were first reported, the Clintons repaid the taxes owed due to these errors.428 The Clintons did not explain the delay.429


1987: The Clintons' Improper Interest Deduction of $2,561

On their 1987 federal income tax return, the Clintons improperly deducted $1,636 for interest which they also deducted on their 1986 federal income tax return. On December 30, 1986, Mrs. Clinton wrote a check in the amount of $1,635.51 to Security Bank of Paragould.430 On their 1986 federal income tax return, the Clintons deducted $1,636 for interest paid to "Security Bank."431 In 1987, Security Bank of Paragould sent the Clintons a statement of interest paid on their loan during 1987, which listed interest paid of $2,561.33.432 On their 1987 federal income tax return, the Clintons deducted $2,561 in interest paid to "Security Bank.433

The $2,561 of interest deducted on the Clintons' 1987 tax return improperly included the $1,635.51 payment made by the Clintons in 1986 and deducted on their 1986 tax return. The $925 balance of this amount ($2,561 - $1,636) was also improperly deducted by the Clintons on their 1987 tax return. This interest was paid by Hillman Logan, the owner of Whitewater lot 13. On May 24, 1996, the Clintons acknowledged these errors and repaid the federal taxes owed to the Bureau of Public Debt and state taxes owed to an Arkansas charity.434

Documents show that the Mrs Clinton may have discussed this error with her personal accountant, Yoly Redden, and Loretta Lynch on March 23, 1992 -- almost four years before the Clintons acknowledged the error. Notes taken by Ms. Redden of a March 23, 1992 telephone conversation between herself, Mrs. Clinton and Ms. Lynch state:

Clinton Campaign - Issue discussed with HC & Loretta Lynch


$2,651 deducted per return to Security Bank of Paragould. [found canceled check from Clintons dated 12/30/86 check # 1623 for 1635.51.]


1,636 paid [an arrow in Ms. Redden's notes points from this entry to the 1987 entry]435 Ms. Redden testified that in this conversation she had discussed with Mrs. Clinton and Ms. Lynch whether or not certain deductions had been "double-counted" on the Clintons' 1986 and 1987 federal income tax returns and that this issue had been discussed even prior to this conversation.436


1988: The Clintons' Improper Deduction of $1,275 for Real Estate Taxes

The $1,275 real estate tax deduction claimed by the Clintons on their 1988 tax return may have been improper under federal income tax law. On October 28, 1988, Mrs. Clinton reimbursed Ozark Realty $1,275.15 for real estate taxes due on several Whitewater lots.437 On their 1988 federal income tax return the Clintons deducted $1,275 as real estate taxes.438 Generally, only the owner of real property is entitled to deduct real property taxes on the property, since those taxes are the liability of the owner under federal income tax law.439 Since the Clintons did not own the property on which the taxes were assessed, they were not entitled to a deduction for the payment of those real estate taxes. A taxpayer who owns a beneficial interest in property and who pays taxes thereon to protect that interest may deduct the taxes, even though legal title is in another.440 Beneficial interest is narrowly defined, however, and does not appear to the Clintons interest, if any, in the lots on which these real estate property taxes were assessed. Therefore, the Clintons' $1,275 payment to Ozark Realty for real estate taxes may not be an allowable deduction.


1988: The Clintons' Unreported Income of $1,673 from the Sale of Lot 13

On May 24, 1996, the Clintons acknowledged that they under-reported the capital gain from the sale of a Whitewater lot owned by Mrs. Clinton by $1,673 on their 1988 federal income tax return.441 On that return, the Clintons reported a $1,640 long-term capital gain from the sale of lot 13.442 In computing the capital gain from this sale, the Clintons included in their basis calculation payments made by the previous owner of the lot.443 As a result, the cost of the property was artificially inflated by $1,673, reducing the gain reported by the Clintons by this same amount on their 1988 tax return. The have repaid the federal taxes owed to the Bureau of Public Debt and the state taxes owed to an Arkansas charity.444

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