Whitewater started as 'sweetheart' deal

May 6, 1996
Web posted at: 11:35 a.m. EDT

It all began in 1978, when land broker James McDougal and his wife, Susan, formed a 50-50 real estate venture with a young Democratic politician, Bill Clinton, and his wife, Hillary Rodham.

James McDougal and Clinton, then attorney general of Arkansas, had become acquainted in 1968 when they worked for the re-election campaign of U.S. Sen. F. William Fulbright.

The real estate venture was called Whitewater Development Corp., and was initially described as a sweetheart deal for Bill and Hillary Clinton. The partners would borrow money to buy land in northern Arkansas along the White River, divide the property into lots, and sell them for a profit.

But it was anything but profitable. Loan documents show the Clintons owed $250,000 throughout the 14-year partnership. Whitewater was a financial flop. The Clintons lost more than $46,000 by the time they sold their half to McDougal in 1992 -- just before Clinton was elected president.

Hillary Clinton, believing Whitewater eventually would be profitable, reportedly turned down -- three times during their partnership -- the McDougals' offers to buy out the Clintons' share.

The Clintons' lawyer in the sale was Vincent Foster, a boyhood friend of Clinton and a Rose law firm colleague of Mrs. Clinton. He later became the deputy White House counsel who, on July 20, 1993, committed suicide in Washington.

White House aides removed a Whitewater file from his office on the night of his death, prompting some Republicans to accuse the Clintons of orchestrating a cover-up of wrongdoing.

In the end, the McDougals lost more than $150,000 in the Whitewater venture, three times what the Clintons lost. Although the Clintons and McDougals legally were equal partners, the McDougals made many more loan payments than their partners did.

The Clintons took tax deductions in 1984 and 1985 for loan payments that the McDougals actually had paid. The Clintons made up for the deductions in 1993, paying back taxes to the IRS. Foster was their attorney in that case, too.

In 1982, James McDougal bought Madison Guaranty Savings and Loan, which later financed other unsuccessful real estate deals involving other Arkansas political figures.

The Clintons' relationship with McDougal eventually involved them with Madison. McDougal hired the Rose law firm, he claims, at the urging of then-Gov. Clinton, who wanted to help Mrs. Clinton drum up business. The president denies the claim.

Hillary Clinton represented the S&L before the State Securities Department, headed by Clinton appointee Beverly Bassett Schaffer, who also once represented Madison as an attorney.

Schaffer approved an unusual stock sale to help save the troubled Madison, despite federal complaints about McDougal's business practices. Federal investigators are looking into those actions, which are central to the allegation that the Clintons helped keep Madison open long after it was broke, as a favor to McDougal.

Exactly what Mrs. Clinton did for Madison and how much work she did is in dispute. The first lady claims she did minimal work on behalf of the trust company, leaving the lion's share to a junior associate. A file containing the billing records disappeared from Foster's office after his death, but it mysteriously reappeared in August 1995, after a two-year absence.

The records show Mrs. Clinton did 60 hours of legal work for Madison over a 15-month period. In January 1996, she testified before a grand jury about "the discovery and the content" of those records. Her testimony marked the first time that a first lady was subpoenaed to appear before a grand jury.

Madison collapsed in the mid-1980s, leaving American taxpayers with a $68 million bailout bill. The Rose law firm, having once represented Madison, then represented the government in the case. In 1989, McDougal was indicted on charges of bank fraud and other violations related to Madison's failure. He was acquitted in 1990.

Madison and McDougal's travails led to other questions about Bill Clinton's role -- questions of whether Madison funds were diverted by McDougal to pay Whitewater debts or funneled into Clinton's gubernatorial campaign.

The suspicion of funneling arises from a 1985 fund-raiser McDougal organized to cover Clinton's campaign debt. It raised $30,000, $12,000 of which came in the form of Madison cashier's checks. Investigators believe the money came directly from the S&L's deposits.

Special Counsel Kenneth Starr, appointed by the Justice Department (succeeding Robert Fiske, a Clinton appointee), and a small army of lawyers and investigators are looking into charges surrounding Whitewater and Madison.

The wide-ranging investigation has yielded indictments against Jim and Susan McDougal and Arkansas Gov. Jim Guy Tucker. All three went on trial in early 1996.

They were accused of conspiring to defraud the saving and loan and defrauding the federal government by obtaining $3 million in loans from a lending company run by David Hale, a former Arkansas banker and municipal judge. His company issued loans on behalf of the federal Small Business Association. The conspiracy charge against Mrs McDougal was dismissed.

Hale has pleaded guilty to two felony charges for fraudulently running his business and has testified against the defendants. He was sentenced to two years and four months in prison.

In one allegedly fraudulent deal, Hale claims Clinton pressured him in 1986 to make an illegal $300,000 SBA loan to Susan McDougal, to be repaid by Clinton and James McDougal. Hale approved the loan for one of her companies, which he qualified as a disadvantaged small business, or a minority-owned firm. The money has not been repaid.

President Clinton has called Hale's allegations "bull" and will testify in the trial by videotape.

The Whitewater investigation reached deeply into the workings of the Rose law firm in Little Rock. It led to a guilty plea from former Rose partner Webster Hubbell to fraud charges arising from his billing practices at the firm. Hubbell had followed the Clintons to Washington to serve in the No. 3 position at the Justice Department. He is now serving time in federal prison.


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