Road To A Subpoena

It was more than a typical washington "drop by." For four hours last Friday, Whitewater prosecutors questioned Hillary Rodham Clinton before a federal grand jury about how her long-missing law-firm billing records suddenly turned up in the White House family quarters-two years after investigators first sought them. When she emerged from the grilling, graciously smiling but obviously weary, the First Lady told reporters she had no idea. Not everyone believes her. A new NEWSWEEK Poll finds that 50 percent of the American people think Mrs. Clinton is not telling the truth about Whitewater.

Is Mrs. Clinton hiding something?. In some ways, her role in Whitewater still looks like a cover-up without an underlying crime. So far, little more has been proven other than the appearance of a possible conflict of interest. As a lawyer in Little Rock in the 1980s, Mrs. Clinton represented Madison Guaranty before a state regulator appointed by her husband. Madison was a troubled savings and loan whose ultimate failure cost taxpayers $60 million. Last week former Arkansas Securities Commission chairman Beverly Bassett Schaffer testified that Mrs. Clinton had called her about Madison matters. But Schaffer did not allege any wrongdoing, and swore that Mrs. Clinton had not tried to improperly influence her.

And yet. Independent counsel Kenneth Starr is now investigating White Houseaides for possible obstruction of justice. Another grand jury in Little Rock is looking into suspicious land deals involving Madison. Mrs. Clinton herself does not appear to be a target of either probe, but her closest staffers could be severely punished for loyally trying to protect the First Lady. So how has Whitewater turned into a scandal that could threaten President Clinton's re-election? To understand the affair, NEWSWEEK has pieced together evidence in Washington and Arkansas and found that although Whitewater began way back in the Clintons' gubernatorial days, the more intriguing-and troubling--elements came out of the tumultuous Clinton campaign camp during the winter of 1992.

That February, the Clintons were reeling. At first a media favorite for the Democratic nomination, Bill Clinton was being smeared as an adulterer and a draft dodger on the eve of the critical New Hampshire primary. The Clintons believed that any hint of financial scandal would ruin the campaign and send them back to Little Rock in humiliation. That's why the winter calls from Jeff Gerth, a New York Times investigative reporter, were so worrisome. Gerth had been talking to the Clintons' political enemies in Arkansas about stories that the Clintons had been involved with a shady S&L baron named Jim McDougal.

On Feb. 11--seven days before the primary in New Hampshire--Gerth filed a Freedom of Information Act request on MeDougal and the Clintons with the Arkansas agency that regulates securities. The very next day, the recently recovered documents show, someone at the Rose Law Firm began printing out billing records of all the work Hillary Clinton had done for McDougal and Madison. A young Rose lawyer, Rick Massey, recalls being approached by Vince Foster, a partner in the firm and Mrs. Clinton's close friend and personal lawyer. Foster was agitated and impatient. He wanted to see Mrs. Clinton's billing records right away. When Massey said he needed some time to get them in order, Foster "just stomped off," Massey later recalled.

Foster had reason to worry about the billing records, especially after he consulted with Webster Hubbell, a senior lawyer in the firm and another close Clinton friend. Once Foster got hold of the documents, he used a red-ink pen to methodically circle and underline entries mentioning Mrs. Clinton. During a 15-month period in the mid-'80s, Mrs. Clinton billed some 60 hours on the Madison account. The work ranged from helping McDougal try to build a microbrewery in a "dry" Arkansas county to more serious savings and loan business. The records showed that she had indeed worked on a Madison stock plan pending before state regulators, and at one point had even called the Arkansas Securities Commissioner about it. (The plan was intended to shore up the failing thrift.) Another large batch of calls and meetings--14 in all--was to a Madison "consultant" named Seth Ward. Some of these were about a sprawling development called Castle Grande.

Webb Hubbell was familiar with Seth Ward and his tangled businesses: Ward was his father-in-law and client. Federal regulators now say that Castle Grande in-eluded a sham land deal set up to fool bank examiners. It hastened Madison's collapse. No evidence has emerged that Mrs. Clinton played any active role in this scheme. Indeed, at least one report cited by a federal investigative agency found that while she had worked on the deal, there is no proof she knew it was "wrong." But Hubbell, who is now serving a 21-month sentence for overbilling clients while a Rose partner, understood that Mrs. Clinton could not afford to be connected to a sleazy savings and loan.

For Mrs. Clinton, Madison and its flamboyant and erratic owner, McDougul, must have looked like Banquo's ghost. She had already tried to make the stain go away. After one incident of small-state political coziness in July 1986-Schaffer tipped off the governor that McDougal was about to be ousted from his thrift--Mrs. Clinton had moved to sever all ties with Madison, returning the remainder of her retainer. In 1988, when her firm was routinely cleaning out files, she ordered the destruction of her work files for McDougal.

Now in the winter of 1992, she needed a trusted friend to keep The New York Times at bay. The Clintons did not trust the campaign staff with their secrets. "I've known blind dates better than I know Clinton," complained strategist James Carville. Hillary turned to Susan Thomases, an old friend and tough New York litigator. On Feb. 24, Thomases and Hubbell worked out what now looks like a cover story. According to Thomases's handwritten notes, Hubbell informed her that Mrs. Clinton had had "numerous conferences" with Madison executives. But they agreed to say that a junior associate-- Massey--had brought Madison in as a client. "Rick will say he had . . . a lot to do with getting the client in," wrote Thomases.

A few days later, Thomases tried to star Gerth. She was sorry, she said, but records about the Clintons' investments and Mrs. Clinton's legal work were missing or incomplete. She was hoping that the story would just go away if Gerth had too little to work with.

That was naive; the words "missing records" are catnip to reporters. Gerth's story ran on Sunday, March 8--just two days before Super Tuesday primaries. The story said little about Madison, focusing instead on a failed real-estate investment in the Ozarks called Whitewater. Gerth reported that the Clintons had a sweetheart deal with McDougal that offered them a great return at little risk.

The article created panic at Clinton headquarters when it arrived by fax that Saturday night. "It's strike three," moaned David Wilhelm, a top campaign official, adding Whitewater to the draft and Gennifer Flowers. Wilhelm dispatched two young aides to the red-brick Rose Law Firm in downtown Little Rock to obtain whatever records the firm would give them.

At the darkened law firm, Hubbell emerged from the shadows and handed them two or three boxes of documents. Significantly, in retrospect, Hillary's billing records weren't among them. At the time, however, campaign staffers did not really know what they were looking for. Inside the box was a jumble of letters and receipts. The aides began pawing through them. NEWSWEEK has learned that when one staffer pulled out American Express receipts for room charges at Little Rock's Excelsior Hotel, signed by Bill Clinton, the others laughed nervously and prayed that the bill didn't signify what they were all thinking. Then the staffer found receipts, also signed by the governor, for purchases from Victoria's Secret.

On the campaign trail, Clinton's top advisers prepared him for a pre-Super Tuesday press conference. "Remember," said Bruce Lindsey, Clinton's traveling aide, "less is more." George Stephanopoulos agreed. "Less, less, less," he intoned. Meanwhile, James Blair, general counsel to Tyson Foods, the giant Arkansas chicken company, was sent to muzzle McDougal. (Blair was trusted; he had steered Hillary to her quick $100,000 profit on a $1,000 investment in cattle futures.) Three days after the Gerth story broke, Blair met with McDougal. The fallen financier, battered by litigation and bankruptcy, told Blair a tale that could have proved politically lethal if made public. McDougal recounted that a "sweaty" Governor Clinton had jogged over to see him in '84, flopped down in a chair and asked McDougal to steer his legal business to Hillary's firm. Two hours later, McDougal claimed, Hillary herself had arrived on his doorstep to "set up a retainer." (The Clintons deny this.) Blair eyed McDougal, whom he thought unbalanced and unreliable, and urged him to keep his mouth shut. According to a private Blair memo obtained by NEWSWEEK, there was also some desultory discussion of getting McDougal a job in state government. (Blair denies making the job offer.) If not properly treated, McDougal warned, he could be "vicious."

In the days that followed Gerth's piece, there was press interest, but many reporters had trouble sorting out the details in the story. Clinton's primary opponent, Jerry Brown, did pick up on a Washington Post story questioning whether Mrs. Clinton's representation of Madison before a state agency was a conflict of interest. Clinton passionately rose to Hillary's defense. (In a debate in Illinois, Clinton told Brown he should be ashamed "for jumping on my wife.") Then Mrs. Clinton weighed in. "I suppose I could have stayed home, baked cookies and had teas," she huffed, "but what I decided was to fulfill my profession." Her comments set off a new storm--and deflected attention from Whitewater.

The Clintons had squelched a story that could have proved politically fatal. At the same time, however, they may have unwittingly helped initiate a possible cover-up that haunts them still. The billing records, with their uncomfortable leads to Castle Grande and Madison, were apparently never returned to the Rose Law Firm after Foster and Hubbell reviewed them. It is unclear where the documents--or copies of them--went after the campaign. They may have disappeared, along with several boxes of Mrs. Clinton's other Rose records, into the basement of the Washington home bought by Hubbell, who had been appointed associate attorney general. Or they may have stayed with Foster, who became deputy White House counsel. And there they might have sat until Foster killed himself in the summer of 1993.

As Mrs. Clinton's shattered aides gathered in Foster's office after his death, they did not know what to believe. They knew that Foster, who was still the Clintons' personal lawyer, had been worried about Travelgate, the scandal over the firing of the White House Travel Office. (In a private notebook, later released to congressional investigators, Foster bad written, "Defend/HRC Role--whatever it was in fact, or might have been.") They knew that Foster's files would contain the Clintons' personal records. And according to one knowledgeable source, some Clintonites had long suspected that Foster had a crush on Mrs. Clinton -- a worry that may have made staffers particularly anxious about what might be in a possible suicide note.

When Justice Department investigators showed up at the White House after Foster's suicide, counsel Bernard Nussbaum barred them from inspecting files in the dead man's office. Later that afternoon, a Clinton aide took the family's papers up to the White House residence. The appearance of stonewalling prompted inevitable questions: did some dark Clinton secret drive Foster to suicide? In December there was a sensational disclosure: among the files removed was a folder marked WHITEWATER. For the White House, the timing was unfortunate. Reporters were gossiping about "Trooper-gate," the tales of Clinton's alleged philandering that were being spread by Arkansas state troopers who had guarded him when he was governor. The stories were too lurid to be printed in most of the mainstream press, so Whitewater, however complex, served as a surrogate.

All through the winter of '94 the headlines screamed about scandal and cover-up without delivering much proof of either. The Wall Street Journal's editorial page and Rush Limbaugh were particularly strident about the case. Nussbaum was shoved out and replaced by a "wise man," Lloyd Cutler. Defensively, the White House called for a special prosecutor, though the Clintons bitterly understood that it would mean millions in legal fees. The noise died down somewhat after Mrs. Clinton called a press conference in April '94. Dressed in pink, she disarmed reporters with confident, if somewhat vague, answers. Privately, however, she was furious. Not without some justification, she blamed her problems on a well-organized right-wing conspiracy machine out to get the Clintons and a press that was too easily manipulated.

Whitewater receded, but it wouldn't go away. Behind the scenes, federal investigators looking into Madison's collapse were interviewing Mrs. Clinton. Sometimes under oath, she was dodgy and lawyerly. She insisted her work for Madison before state regulators had been "minimal," and she couldn't recall whom she had talked to. She said she had never heard of Castle Grande. The investigators seemed satisfied.

Senate Republicans, however, were more persistent. When they won control in the '94 elections, they used their majority power to step up the Whitewater investigation. Last summer Sen. Al D'Amato put Thomases and Maggie Williams, the First Lady's chief of staff, on the griddle. D'Amato had records documenting a flurry of telephone calls between Mrs. Clinton and her two friends in the hours after Foster killed himself. Had Mrs. Clinton ordered them to stonewall? Both witnesses appeared evasive, often claiming memory failure.

The most serious cracks in the original story began showing last December. The Whitewater committee got Thomases's '92 notes, with her jotting that Hubbell had told her of "numerous" conferences between Mrs. Clinton and Madison. But it was hard to know what those conferences had been about, since no one had been able to find Mrs. Clinton's billing records.

They had been missing for at least two years. Lawyers from Williams & Connolly, the firm representing Mrs. Clinton, had not found them when they searched the files stored in Hubbell's basement in the fall of '93. Nor had they been in the papers ultimately turned over from Foster's office.

Then a copy of the records was discovered in the White House in early January, in a box beneath the desk of Carolyn Huber, an aide to Mrs. Clinton. The First Lady declared that there had been no cover-up. But Huber's testimony that she had originally found the records last August in a room in the family quarters--near Mrs. Clinton's private office--made the scandal a tantalizing whodunit and got the First Lady subpoenaed.

Clinton's political advisers--including Dick Morris, the guru who predicted last year that Whitewater would be a hot issue in '96--are troubled. Voters who can't make much out of the Madison muddle can certainly understand a possible cover-up. The president's men blame Mrs. Clinton's lawyer, David Kendall, for reinforcing the First Lady's lawyerly instinct to volunteer as little as possible. But Kendall's chief concern is to keep his client out of legal trouble. If Whitewater produces a batch of indictments aimed at the White House, spin control won't be much help come November.

On the of the '92 campaign, the press was painting Clinton as a womanizer and draft dodger. So when The New York Times started asking about Whitewater, damage control was crucial. At Rose, Foster hastily pulled Hillary's Madison billing records. Within weeks, the Times was told they couldn't be found.

Foster's July '93 death brought Whitewater back. Were important papers removed form his office? What were Susan Thomase's frantic calls to the First Lady that night about? Did Hubbell, who kept Clinton files in his basement, know anything? But Hillary's "pink press conference" defused the story--for a while.

Two years after they vanished, aide Carolyn Huber stumbled across the Madison billing records last August, put them away, then found them again in January. The First Lady's lawyers gave no ground, saying the Clintons had no idea how they got there. Meanwhile, Mrs. Clinton gamely continued her book tour--with an unplanned stop before the grand jury.