David Hale, the source of criminal allegations against President Bill Clinton in the Whitewater affair, claimed in November 1993 that Bill Clinton, while governor of Arkansas, pressured him to provide an illegal $300,000 loan to Susan McDougal, the partner of the Clintons in the Whitewater land deal. This allegation by Hale was questionable, as Hale had not mentioned Clinton in reference to this loan during testimony in the original FBI investigation of the failure of Madison Guaranty in 1989. Hale also had a history of creating dummy companies, then looting federal funds, such as SBA loans, from them, and allowing them to fail. Only after coming under indictment in 1993 for charges in just such a scheme did Hale make allegations against Clinton.
A New York Times article published during the 1992 U.S. presidential campaign reported that Clinton and his wife had invested in and lost money in the Whitewater development project.
A U.S. Securities and Exchange Commission investigation did result in convictions against the McDougals for their role in the Whitewater project, but the Clintons themselves were never charged. Bill Clinton's successor as Arkansas Governor, Jim Guy Tucker, was also convicted and served time in prison for his role in the fraud. Susan McDougal later served time in prison for contempt of court for refusing to answer questions relating to then-Gov. Clinton's role in Whitewater. Three separate inquiries found that insufficient evidence remained to charge the Clintons with criminal conduct in the land deal.
The term Whitewater is also sometimes used to include other controversies from the Bill Clinton administration, especially those such as Travelgate, Filegate, and the circumstances surrounding Vince Foster's death, that were investigated by the Whitewater Independent Counsel.
Bill Clinton had known Arkansas businessman and political figure Jim McDougal since 1968, and had made a previous small real estate investment with him in 1977. Clinton and Hillary Rodham were seeking ways of supplementing their salaries of $35,000 (in 1970s dollars) as Governor of Arkansas and $25,000 as Rose Law Firm associate, respectively. It was around this time that Rodham also began her cattle futures trading. In Spring 1978, McDougal approached Clinton and Rodham with new proposal: to join with him and his wife Susan to buy of undeveloped land along the south bank of the White River near Flippin, Arkansas in the Ozark Mountains. The goal was to subdivide the site into lots for vacation homes, intended for the many people coming south from Chicago and Detroit who were interested in low property taxes, fishing, rafting, and mountain scenery. The plan was to hold the property for a few years and then sell the lots at a profit.
The four borrowed $203,000 to buy land, and subsequently transferred ownership of the land to the newly created Whitewater Development Corporation, in which all four participants had equal shares; Susan McDougal chose the name "Whitewater Estates"; their sales pitch was, "One weekend here and you'll never want to live anywhere else." The business was incorporated on June 18, 1979.
During the next several years, Jim McDougal asked the Clintons for checks for various interest payments on the loan or other expenses; the Clintons, believing themselves passive partners in the venture, did not question these. Concurrently, Jim McDougal had lost his job as the governor's economic aide when Bill Clinton failed to win re-election in 1980. McDougal decided to go into banking instead, and then acquired the Bank of Kingston in 1980 and the Woodruff Savings & Loan in 1982 renaming them the Madison Bank & Trust and the Madison Guaranty Savings & Loan, respectively.
In spring 1985, McDougal held a fundraiser at Madison's office in Little Rock that paid off Clinton's remaining 1984 gubernatorial campaign debt of $50,000. McDougal raised $35,000, and of that Madison cashier's checks accounted for $12,000.
In 1985, Jim McDougal set his sights on investment into local residential construction, labeling the project Castle Grande. The 1,000 acres (4 km²), located south of Little Rock, Arkansas, were priced at about $1.75 million, more than McDougal could afford on his own: due to financial laws, McDougal could borrow at most $600,000 from his own Savings and loan, Madison Guaranty. McDougal subsequently involved several others to produce the additional funds. Among these was Seth Ward, an employee of the bank, who helped funnel the additional $1.15 million required. To avoid potential investigations, the money was moved back and forth among several other investors and intermediaries.
In 1986, their scheme was unveiled by federal regulators who realized that all of the necessary funds for this real estate venture had come entirely from Madison Guaranty; regulators called Castle Grande a sham. In July of that year, McDougals resigned from Madison Guaranty. Seth Ward fell under investigation, along with the lawyer who helped him draft the agreement. Castle Grande earned $2 million in commissions and fees for McDougal's business associates, but in 1989 it collapsed, at a cost to the government of $4 million. This in turn helped trigger the 1989 collapse of Madison Guaranty, which federal regulators then had to take over. Taking place in the midst of the nationwide Savings and Loan crisis, the failure of Madison Guaranty cost the United States $73 million.
The Clintons lost between $37,000 and $69,000 on their Whitewater investment, a lesser amount than the McDougals lost, for reasons unclear in the media reports. The president's supporters made reference to the Pillsbury Report, a $3 million study done for the Resolution Trust Corporation by the Pillsbury, Madison & Sutro law firm at the time that Madison Guaranty Savings & Loan was dissolved. In this report it was shown that James McDougal, who had set up the deal, was the managing partner, and Clinton was a passive investor in the venture. The Presidents' critics cited the unequal capital contributions by the Clintons and McDougals as evidence that then-Governor Clinton was to contribute in other ways.
At Clinton's request, Attorney General Janet Reno appointed a special prosecutor Robert B. Fiske in 1994 to investigate the legality of the Whitewater transactions. Two allegations surfaced: 1) that Clinton had exerted pressure on an Arkansas businessman, David Hale, to make a loan that would benefit him and the owners of Madison Guaranty; and 2) that an Arkansas bank had concealed transactions involving Clinton's gubernatorial campaign in 1990. In May 1994, Independent Counsel Robert Fiske issued a grand jury subpoena to the President and his wife for all documents relating to Madison Guaranty, with a deadline of 30 days. They were reported as missing by the Clintons. However, the subpoenaed billing records of the Rose Law Firm, which Hillary Clinton worked for, were discovered by a staffer in the Clintons' private residence in the White House in January 1996. The Clintons were eventually cleared of all wrongdoing in two reports prepared by the San Francisco law firm of Pillsbury Madison and Sutro for the Resolution Trust Corporation, which was overseeing the liquidation of Madison Guaranty.
David Hale, the key witness against President Clinton in Starr's Whitewater investigation, alleged in November 1993 that Clinton, while governor of Arkansas, pressured him to provide an illegal $300,000 loan to Susan McDougal, the partner of the Clintons in the Whitewater land deal.
Hale's defense strategy, as proposed by attorney Randy Coleman, was to launch the story to the media that Hale was the victim of high-powered politicians who forced him to give away all of the money. This strategy was undermined by testimony from November 1989, wherein FBI agents investigating the failure of Madison Guaranty had questioned Hale about his dealings with Jim and Susan McDougal, including the $300,000 loan. According to the agents' official memorandum of that interview, Hale described in some detail his dealings with Jim Guy Tucker (then an attorney in private practice), both McDougals, and several others, but never mentioned Governor Bill Clinton. Nor did Clinton's name come up when Hale testified at McDougal's 1990 trial, which ended in an acquittal.
Clinton denied that he pressured Hale to approve the loan to Susan McDougal. By this time, Hale had already pleaded guilty to two felonies and secured a reduction in his sentence in exchange for his testimony against Clinton from prosecutors. Charges were made by Clinton supporters that Hale received numerous cash payments from representatives of the so-called Arkansas Project, a $2.4 million campaign established to assist in Hale's defense strategy, and to investigate Clinton and his associates between 1993 and 1997. These charges were subsequently the topic of a separate investigation by former Department of Justice investigator Michael E. Shaheen Jr. Shaheen filed his report in July 1999 to Starr, who summarized the findings in that there was insufficient evidence of Hale having been paid in hopes of influencing his testimony, with such allegations being "unsubstantiated or, in some cases, untrue," and that no charges would be brought against Hale or Arkansas Project outlet The American Spectator. Writers from Salon.com complained that the full, 168-page, unleaked report had not been made public, a complaint still being reiterated by Salon.com as of 2001.
The state prosecutors went ahead and signed an arrest warrant against Hale in early July 1996. Criminal charges filed by the state prosecutors charged that Hale had made misrepresentations to the state insurance commission regarding the solvency of an insurance company that he had owned, National Savings Life. The prosecutors also alleged in court papers that Hale had made the misrepresentations to conceal the fact that he had looted the insurance company. Hale said that any infraction was a technicality and that no one lost any money. In March 1999 Hale was convicted of the first charge, with the jury recommending a 21-day jail sentence.
In spite of questions regarding Hale's credibility or motives, Starr drafted an impeachment referral to the House of Representatives in the fall of 1997, alleging that there was "substantial and credible evidence" that Clinton might have committed perjury regarding Hale's allegations.
Theodore B. Olson,who with several associates launched the plan that later became known as the "Arkansas Project", wrote several essays for the The American Spectator accusing Clinton and many of his associates of wrongdoing. The first of those pieces appeared in February 1994, alleging a wide variety of criminal offenses by the Clintons and others, including Webster Hubbell. These allegations led to the discovery that Hubbell, a Hillary Clinton friend and former Rose Law Firm partner, had committed multiple frauds, mostly against his own firm. Hillary Clinton, instead of being complicit in Hubbell's crimes, had been among his victims. In December 1994, one week after Hubbell pleaded guilty to mail fraud and tax evasion, Associate White House Counsel Jane Sherburne created a "Task List" which includes a reference to monitoring Hubbell's cooperation with Starr. Hubbell was later recorded in prison saying "I need to roll over one more time" regarding the Rose Law firm lawsuit. In his next court appearance, he pleaded the Fifth Amendment against self-incrimination (see United States v. Hubbell).
In February 1997, Starr announced he would leave the investigation to pursue a position at Pepperdine University's law school. However, he "flip flopped" in the face of "intense criticism", and new evidence of sexual misconduct.
By April 1998, diverted to some degree by the burgeoning Lewinsky scandal, Starr's investigations in Arkansas were winding down, with his Little Rock grand jury about to expire in the following month. Webster Hubbell, Jim Guy Tucker, and Susan McDougal had all refused to cooperate with Starr, and each was later pardoned by President Clinton. When the Arkansas grand jury did conclude its work in May 1998, after 30 months in panel, it came up with only a contempt indictment against Susan McDougal. Susan McDougal testified that the Clintons had been truthful in their account of the loan, and had cast doubt on her former husband's motives for cooperating with Starr. She testified that James McDougal felt abandoned by Clinton, and told her "he was going to pay back the Clintons. Republican activist and Little Rock lawyer Sheffield Nelson, James McDougal told her, was willing to "pay him some money for talking to the New York Times about Clinton, and in 1992 he told her that, in fact, one of Clinton's political enemies was paying him to tell the New York Times about Whitewater.
From the beginning, Susan McDougal charged that Starr offered her "global immunity" from other charges if she would cooperate with the Whitewater investigators. McDougal told the jury that defying the independent counsel wasn't easy for her, or her family. "It's been a long road, a very long road ... and it was not an easy decision to make," McDougal told the court. McDougal refused to answer any questions while under oath, leading to her being imprisoned by the judge for civil contempt of court for the maximum 18 months including eight months in isolation. Starr's subsequent indictment of McDougal for criminal contempt of court charges resulted in a jury hung 7-5 in favor of acquittal. President Clinton later pardoned her, shortly before leaving office.
In September 1998 Independent Counsel Starr released the famous Starr Report, concerning offenses that may have been committed by President Clinton as part of the Lewinsky scandal. As it dealt exclusively with the Lewinsky scandal, it barely mentioned Whitewater at all, save for a glancing reference that longtime Clinton friend and advisor Vernon Jordan had both tried to find Monica Lewinsky a job after her removal from White House internship and tried to help Webster Hubbell financially with consulting contracts while he was under pressure to cooperate with the Whitewater investigations. Indeed it was on this one basis that Starr had taken on the Lewinsky investigation under the umbrella of the Whitewater Independent Counsel mandate in the first place.
There was much acrimony from the most fervent critics of the Clintons after release of the Starr report on the Foster matter and after Starr's departure and return to the case. The death of Foster had been the source of many conspiracy theories. Christopher Ruddy, a reporter for Clinton critic Richard Scaife's Pittsburgh Tribune-Review helped fuel much of this speculation with claims that Starr had not pursued this line of inquiry far enough.
The Senate Banking Committee also began hearings on Whitewater in July 1994; these intensified in May 1995, following the Republican gain of control, when the Senate Special Whitewater Committee was formed, with Republican Banking Committee chairman Al D'Amato also being chairman of the special committee and Michael Chertoff being chief counsel. The committee's hearings ran for 300 hours over 60 sessions across 13 months, taking over 10,000 pages of testimony and 35,000 pages of depositions from almost 250 people; many of these marks were records. The hearings' testimony and senatorial lines of investigation mostly followed partisan lines. The Senate Special Whitewater Committee issued an 800-page majority report on June 18, 1996, which only hinted at one possible improper action by President Clinton, but broadly accused "an American presidency [of having] misused its power, circumvented the limits on its authority and attempted to manipulate the truth." The First Lady came in for much stronger criticism, as she was billed as "the central figure" in all aspects of their investigations. The Democratic minority on the Committee derided these findings as "a legislative travesty," "a witch hunt," and "a political game."
Deputy White House counsel Vince Foster looked into this matter, but did not take any action before his death. Almost two years from the original announcement then passed before, on December 28, 1993, the Clintons did make this reimbursement payment, for $4,900, to the Internal Revenue Service. This was done just before Justice Department investigators started seeking the Clintons' Whitewater files. The payment was made without filing an amended return (possibly because the three-year period for amended return filing had passed), but did include full interest on the amount in error, including the additional two-year delay. The Whitewater files in question, publicly released in August 1995, cast some doubt on the Clintons' assertions in the matter, as they showed that the couple were aware that the interest payments in question were by the Whitewater corporation and not them personally.
The length, expense, and results of the greater Whitewater investigations turned much of the public against the Independent Counsel mechanism. In particular, Democrats portrayed Whitewater as a political witch-hunt, much as Republicans had at the end of the 1980s Iran-Contra investigations. As such, the Independent Counsel law expired in 1999, with critics saying it cost too much with too few results; even Kenneth Starr favored the law's demise. Indeed no one ended up happy with the Whitewater investigation: Democrats felt as just vindicated, Republicans were frustrated that both Clintons had escaped formal charges, and people without partisan involvement found press coverage of Whitewater's facts and narratives, which spanned four decades, difficult to understand to the point of bafflement.