GOVERNOR'S TRAVELS IN WHITEWATER

Reprinted with permission of The Wall Street Journal Copyright 1994 Dow Jones & Company Inc. All rights reserved.

LITTLE ROCK, Ark. -- As Election Day nears, the tentacles of the Whitewater affair are tightening around Arkansas's leading gubernatorial candidate, Democratic Gov. Jim Guy Tucker.

Widely circulated news reports in Arkansas have linked Gov. Tucker, who stepped into the top post when Bill Clinton became president, to the alleged corrupt practices of James McDougal's Madison Guaranty Savings & Loan and David Hale's Capital Management Services, two companies at the center of the Whitewater investigation. Press accounts name him as a likely target for indictment by the Whitewater grand jury. The Resolution Trust Corp. is pursuing possible fraud claims against him, and he is fighting a broad RTC subpoena for documents.

In May and June, newspapers around the state ran a five-part Associated Press series on Gov. Tucker's links to Whitewater; in August, the Arkansas Democrat-Gazette published a lengthy four-part investigative report. "Luckily for the governor," wrote Jeff Hankins, editor of the weekly Arkansas Business, "the saga went right over the heads of the average reader" and "won't be strong enough to deliver a victory" to Gov. Tucker's GOP opponent, Sheffield Nelson. Gov. Tucker has dismissed the reports as "nothing new," said a campaign spokeswoman, Dina Tyler.

A familiar look

But when the Byzantine pathways are cleared of debris, Gov. Tucker's Whitewater problems have a familiar look to students of the affair. From 1983 to 1987, Mr. Tucker and firms he controlled reportedly received more than $2 million in loans from Messrs. Hale and McDougal through channels not available to ordinary folks. Some loans were not repaid; questions have been raised as to whether others were fraudulently obtained.

In 1983, following a loss to Bill Clinton in the 1982 Democratic gubernatorial primary, Mr. Tucker went into the cable business to try to make some extra money. A lawyer earning $170,000 a year, Mr. Tucker was burdened with a $250,000 campaign debt; he turned to his old friend David Hale, who had been Mr. Tucker's campaign co-chairman in an unsuccessful 1978 Senate bid.

Mr. Hale, a municipal judge, had formed Capital Management in 1978. Subsidized by the Small Business Administration, the company was licensed to provide funds to "socially or economically disadvantaged" individuals. When Mr. Tucker approached Mr. Hale with his venture, County Cable Inc., he was promptly lent $50.000. "Ultimately," the Democrat-Gazette reported, "companies that Tucker owned would borrow $725,000 from Hale's Capital Management for his cable television business through 1987." The cable business made Mr. Tucker a millionaire. Mr. Tucker has said he did not learn that Mr. Hale's company was supposed to lend only to the disadvantaged until reading Whitewater news reports in 1993.

Mr. Hale is now cooperating with the independent counsel and seeking a lenient sentence after having pleaded guilty to fraud. He claims that Mr. Tucker, Mr. McDougal, and then-Gov. Clinton pressured him into making illegal loans. including one for 300,000 to Mr. McDougal's wife, Susan. Some published reports say $100,000 of that loan ended up in an account controlled by Whitewater Development, the McDougal-Clinton land partnership.

The Democrat-Gazette series described Mr. Tucker's odyssey through "the land of Whitewater," where "political cronies doled out loans worth hundreds of thousands of dollars with a phone call; six-figure loans changed hands without applications or down payments and debts were shed by walking away." In this land, Jim McDougal was king.

But Mr. McDougal's kingdom was one of financial chaos in which loans and land parcels were switched around with the speed of a hare, while the tortoise of regulatory scrutiny plodded along behind. Castle Grande. Mr. McDougal's plan for a neighborhood and shopping center south of Little Rock, is a good example.

In October 1985, a Madison Guaranty subsidiary, Madison Financial, paid $1.75 million for 1,000 acres of land, in partnership with Seth Ward, a prominent Arkansas businessman and father-in-law of Webster Hubbell, a Rose Law Firm partner and former Clinton administration associate attorney general. Mr. Tucker, meanwhile, was looking for a loan. Mr. McDougal agreed to lend Mr. Tucker $260,000 if Mr. Tucker purchased 34 acres of the Castle Grande land.

Mr. Tucker got his loan -- without a down payment, the Democrat-Gazette reported, and without a written loan application. Mr. Tucker seldom bothered with loan applications. "I called Jim McDougal if I wanted to borrow money," he told the Democrat-Gazette .

The $260,000 loan is one of the transactions that has attracted federal investigators. The AP reported that Mr. Tucker may "have committed bank fraud" by misrepresenting to what uses he would put the money. Mr. Tucker has said he used $125,000 of the loan to pay for the Castle Grande land, with most of the rest going to pay off a loan he had guaranteed for a friend. Mr. McDougal claims Mr. Tucker was supposed to use the rest of the money for improvements to the land, but instead spent it on his cable business. Mr. Tucker told AP that he had not pledged to use the remaining funds for land improvement.

In the end, Mr. Tucker seems to have done all right with his 34 acres. The same month he bought the land for $125,000, it was appraised at $350,000. The appraiser, the Democrat-Gazette reported, turned out to have three loans outstanding at Madison Guaranty totaling more than $200,000. In 1987, a company partly owned by Mr. Tucker, Southloop Construction, bought the land from him for $353,000. That purchase was partly funded by a $100,000 loan from Mr. Hale's Capital Management to Southloop. Eventually, the RTC took over the property, reappraised at $120,000. Most of the original $260,000 note has been paid off. The $100,000 loan from Capital Management was never paid back.

Mr. Tucker ran into trouble with another Madison Guaranty transaction, the purchase of a sewer and water utility on the Castle Grande property. In February ]986, an appraiser working for Madison valued the utility at $1.3 million, a figure later reduced to $640,000 by a 1992 RTC appraisal. (The original appraiser also was engaged in a profitable Madison transaction.) Two weeks after the first appraisal, a new Tucker partnership. Castle Sewer & Water Corp., bought the utility for $l.2 million. The $150,000 down payment came from Mr. Hale's Capital Management; the rest of the financing was provided by Madison. Among other issues, the independent counsel is investigating an elaborate scheme linking the Castle Sewer deals to an alleged $825,000 loan from Madison to Arkansas businessman Dean Paul.

By 1986, the regulatory tortoise was closing in on the Madison hare. In July, the Federal Home Loan Bank Board removed Mr. McDougal from Madison. According to the Democrat-Gazette, Mr. Tucker's Castle Sewer note "was one of the largest single delinquent loans on Madison Guaranty's books."

Castle Sewer, along with the entire development, was going down the drain. An anticipated new highway did not materialize. Many of the plots remained unsold. The sewer system was falling apart. Some of Mr. Tucker's land turned out to be on a flood plain.

Loan is restructured

With Madison now in the hands of federal regulators, the Tucker partnership renegotiated the Castle Sewer deal, arguing that Mr. McDougal had not fulfilled side agreements to bring in new sewer and water hookups. The loan was cut to $525,000. According to the Democrat-Gazette, the deal was contingent on new legislation allowing utilities to raise their rates. In June 1987, Gov. Clinton signed the, bill. Four months later, Mr. Tucker's restructured loan was approved.

A year later, Castle Sewer was still missing payments on the renegotiated loan. The $150,000 down payment is still owed to Capital Management, according to the Democrat-Gazette. In June 1989, Mr. Tucker bailed out, selling his Castle stock to a partner for $10.

All this alleged fiscal chicanery so far seems to have had little impact on Arkansas voters. Private polls by both parties show Gov. Tucker with a comfortable 15-point lead over Mr. Nelson, the GOP candidate. Mr. Nelson has his own somewhat milder Whitewater problems. Not only was he once involved in a land deal with Mr. McDougal, but he has been criticized in Arkansas for bringing the Whitewater affair to national attention. The Nelson camp, fearing a backlash if it raises Whitewater again, has been reduced to praying for an indictment before the election. "We need a miracle," says a Nelson strategist. Over at Castle Grande, they'd settle for a decent sewer.

Mr. Morrison is a Wall Street Journal editorial page writer.