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Hillary, Whitewater, and Madison Guaranty

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Hillary, Whitewater, and Madison Guaranty

In 1994 the Hillary Clinton Quarterly and Matt Hallisey investigated Hillary’s role in the complex business deals of the McDougals, the Whitewater land development project, and Madison Guaranty Savings and Loan. 

“You can’t be a lawyer if you don’t represent banks.”
— Hillary Clinton, March, 1992

As a special counsel begins his investigation into a real estate venture part-owned by then-Governor and Mrs. Clinton in the mid-1980s, questions have been raised about Mrs. Clinton and her law firm’s representation of various entities involved in a savings and loan association that later collapsed. The special counsel, Robert B. Fiske, Jr., is examining documents to determine whether the owner of Madison Guaranty Savings and Loan Association improperly diverted money from his institution to Whitewater or to pay Mr. Clinton’s gubernatorial campaign debts, or in any other way that may have benefited the Clintons. The owner, James B. McDougal, was a part owner of Whitewater Development Company with his wife Susan and the Clintons; he also served as Mr. Clinton’s economic development aide in his first term as governor. The investigation is also expected to focus on allegations that the Rose Law Firm, and perhaps Mrs. Clinton herself, as a partner at the firm, engaged in representations of clients that may have constituted a conflict of interest under ethical guidelines for lawyers.

Among the many questions facing the special counsel are the following:

1. Did Hillary Rodham Clinton represent Madison Guaranty Savings and Loan Association before the Arkansas Securities Commissioner in 1984 and 1985?

The S & L sought authorization from the regulatory board to issue a class of preferred stock and to set up a service corporation to engage in the securities brokerage business. As found in an investigative report issued for the Resolution Trust Corporation (RTC, a government agency that disposes of assets of insolvent S & Ls), the Rose firm represented Madison before the Securities Commissioner, Beverly Bassett Schaffer, who was appointed by then-Governor Bill Clinton. Mrs. Clinton had joined the firm in 1977 and became partner in 1979, during her husband’s first term as governor. Although she was not an active trial attorney at the Rose firm, Mrs. Clinton lent prestige to the firm, and she made over $200,000 when she resigned in 1992.

The Rose firm has said that another partner at the firm, Richard Massey, conducted most of the work before the securities board. However, correspondence between the law firm and the securities department shows that either Mrs. Clinton or Massey could be contacted for information. Further, Mrs. Clinton was involved to the extent that she drafted an opinion for the firm, concluding that Madison, as an Arkansas chartered institution, could lawfully issue preferred stock. In May, 1985, Ms. Bassett responded to the law firm by letter addressed to Mrs. Clinton, in which she agreed with Mrs. Clinton’s conclusion and approved Madison’s application to issue preferred stock.

In September, 1985, the securities commissioner approved the service corporation conditioned on Madison raising the required capital by the end of 1985. Madison never raised the capital and the service corporation was not formed. In 1986, Madison was insolvent and the Federal Deposit Insurance Corporation (FDIC, an independent executive agency that insures deposits in qualified banks and savings institutions) took control, ousting Mr. McDougal as owner. Thus, although it is unclear whether Mrs. Clinton appeared before the regulatory board (lawyers at the firm have said they cannot recall her ever appearing before the commission), she was actively involved behind the scenes in Madison’s efforts to gain approval to issue preferred stock and engage in brokerage activities.

In representing Madison before the regulatory board, Rose presented an audit report of Madison’s financial statements issued by Frost & Co. for calendar year 1984. In 1988, Madison sued Frost & Co. for accounting malpractice, alleging that the accounting firm failed to fairly represent Madison’s financial condition. The following year, the FDIC retained Rose, after the late Vince Foster solicited the business for the firm, to pursue the lawsuit against Frost, joining Madison as a defendant. In the lawsuit, which was later settled in the FDIC’s favor for over $1 million and earned Rose more than $400,000 in legal fees (increasing taxpayer burden to bail out the thrift), Rose argued that Frost failed to detect Madison’s insolvency during its 1984-85 audit of the S & L. The extent, if any, of Mrs. Clinton’s involvement in the lawsuit is unclear.

2. Did the First Lady’s involvement as a lawyer for the Rose firm appearing before the Arkansas Securities Commissioner constitute a conflict of interest?

In a February 17, 1994 report of a review conducted by the FDIC’s Legal Division into questions related to the FDIC’s retention of Rose in the litigation resulting from the failure of Madison, the FDIC found that Rose’s prior representation of Madison before the securities commissioner and its later representation of the FDIC in its lawsuit against Frost and Madison did not represent a conflict of interest. The FDIC analyzed whether a conflict of interest existed that should have been disclosed before Rose agreed to represent the FDIC. In finding that Rose’s representation of Madison before the securities board in 1985 was not “directly adverse” to its representation of the conservatorship in 1989, the FDIC reasoned that Rose represented Madison’s interests in both actions. The latter representation was merely on behalf of the S & L’s conservator and the agency’s takeover of Madison has been likened to a trustee in bankruptcy; thus, Rose’s representation was not adverse.

Ethical guidelines for attorneys, embodied in a code of ethics in all states, including Arkansas at the time, require attorneys to examine their relationships with clients to ensure that the lawyer’s professional judgment is exercised solely for the client’s benefit, free of any compromising influences and loyalties. It is the lawyer’s, not the client’s, responsibility, to resolve conflicts of interest questions. This duty of loyalty to the client underlies the rule that a lawyer must not represent a client if to do so will be “directly adverse” to another client’s interests unless the lawyer “reasonably believes the representation will not adversely affect the relationship with the other client and each client consents after consultation.”

A client must not be asked to consent if a “disinterested lawyer would conclude that the client should not agree to the representation under the circumstances.” Consent is invalid unless it is given by the client after consultation, defined as information “reasonably sufficient to permit the client to appreciate the significance of the matter in question.” In other words, the attorney must disclose all relevant facts to the client.

In general, lawyers within a law firm are usually regarded as a single unit for conflicts of interest purposes. That is, if one lawyer within a firm has a conflict of interest and cannot take on a matter, no other lawyer in the firm can take on the matter either. Again, loyalty to the client is the purpose of the rule with the practical recognition that information acquired by one lawyer is frequently exchanged among attorneys within a law firm.

Rose’s senior administrative partner, Webster L. Hubbell (former Associate Attorney General in the Justice Department), has said that when Rose represented the FDIC in its suit against the auditor Frost & Co., he orally disclosed to the FDIC the firm’s prior representation of Madison before the regulatory board. Written disclosures of conflicts of interest are not required under ethical guidelines for lawyers. However, prudent lawyers often use written disclosures and client consent in conflicts of interest matters. The FDIC’s report, however, states that it is unclear whether the FDIC staff was informed of the prior representation.

With the passage of time and inadequate documentation, the FDIC’s investigation failed to uncover any evidence of disclosures. And, since at the time (the late 1980s) many savings and loans were going into conservatorship, the FDIC did not have formal guidelines in place to deal with conflicts. (It was not until 1990 that the agency adopted procedures requiring client waivers even where there is only the “appearance” of a conflict.) In its report, the FDIC stated that disclosure of prior representation as involved in this case may not have been required. Yet, in an apparent realization that the FDIC may have overlooked a violation in this instance, the report states that “where a firm is aware of such a prior relationship, we would expect it to convey that information to our staff to assist in determining whether to retain the firm.” In any event, it concluded that the prior representation did not represent a conflict of interest.

Since the report’s release, it has been heavily criticized by some Republican members of Congress as playing down the true extent of an ethical violation by the Rose firm. (The acting head of the FDIC, Ricki Tigert, is a personal friend of the Clintons and has since agreed to recuse herself from any issues involving the Clintons and Whitewater.) According to the FDIC spokesman, David Barr, the FDIC has reopened an investigation into the Rose firm’s retention in response to Senator Alphonse D’Amato’s request for a new investigation. This official investigation, Barr says, is expected to last 90 days and will be conducted by the FDIC’s Inspector General’s office. That office has greater powers and authority not possessed by the Legal Division, including the power to subpoena records and documents and obtain statements under oath.

The RTC report, on the other hand, suggests Mrs. Clinton’s firm failed to properly disclose its dealings with Madison. The report mentions Mr. Hubbell’s verbal disclosures but says no documents were found detailing other conflicts of interest. In fact, the RTC’s attorney cannot recall anyone at the Rose firm telling her that the firm previously represented Madison. The RTC report leaves it to the General Counsel to determine any appropriate action.

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Mrs. Clinton, if she did advocate on behalf of Madison before the securities commissioner, did not necessarily create an ethical violation of conflict of interest rules. Although Ms. Bassett (the securities commissioner) has said she was unaware of Mrs. Clinton’s Whitewater investment with Mr. McDougal, the commissioner’s office could have been informed of the relationship and the conflict may have been waived. In any case, a lawyer, under the ethical guidelines, has a duty of diligence, which includes acting with dedication and zeal on behalf of the client. The attorney may use any lawful and ethical measures required to vindicate a client’s cause. Indeed, her relationship with McDougal may have caused Mrs. Clinton to be zealous and work extra hard on behalf of her client—” what any good lawyer should do,” says George Washington University Law Center professor of legal ethics Thomas D. Morgan. However, Mrs. Clinton’s involvement lends an appearance of impropriety. Before an official appointed by her husband, Mrs. Clinton advocated on behalf of Madison, the owner of which was her investment partner.

3. Did the Rose Law Firm’s representation of Madison, with Hillary Clinton’s active involvement in advocating on the client’s behalf before the securities commission, constitute a Kaye, Scholer-type violation of ethical regulations?

On March 11, 1992, Kaye, Scholer, Fierman, Hays & Handler (Kaye, Scholer) a Manhattan law firm that represented Charles Keating’s Lincoln Savings & Loan, settled with the Office of Thrift Supervision (OTS, a Treasury Department office that examines and regulates savings associations) for $41 million arising out of an administrative action. OTS had frozen Kaye, Scholer’s assets in response to alleged legal and ethical violations, which the firm vigorously denied, in the firm’s representation of Lincoln. Since the case was never litigated and Kaye, Scholer was forced to settle because of the unprecedented asset freeze, the significance of the action is unknown.

In the 1980s, Kaye, Scholer represented Lincoln before the Federal Home Loan Bank Board (FHLBB, the OTS’s predecessor) on securities filings and bank examinations. OTS accused Kaye, Scholer of numerous violations, including misrepresenting Lincoln’s income and net worth and failing to disclose the reasons for the resignation of Lincoln’s auditor. OTS alleged that, by misleading the FHLBB, Kaye, Scholer prevented regulators from recognizing the riskiness of Lincoln’s loan practices and problems with its financial condition.

The practical implications of the Kaye, Scholer case have been interpreted by some legal experts as imposing an affirmative obligation on attorneys to conduct due diligence in regard to their banking clients. That is, they may not necessarily merely rely on their clients’ information when advocating before a government regulatory board; they must investigate further and provide full disclosure. The decision seems to expand the fiduciary duty lawyers owe their clients to government regulators.

The Rose firm’s representation of Madison has been compared to Kaye, Scholer’s representation of Lincoln. Madison was likely insolvent at the time Rose appeared before the regulatory board in 1985 and vouched for an audit report issued by Frost & Co., the accounting firm that the FDIC later sued. Since Mrs. Clinton and others stood to benefit from Madison’s continued existence (the thrift was a source of loans for many prominent Arkansans), it has been speculated that the Rose firm may have misled the state securities commissioner.

According to Pr. Morgan, “if Mrs. Clinton’s personal interests in Whitewater Development interfered, such that she favored McDougal, and thus was not in the best interests of the institution (Madison) itself, then there could be a Kaye, Scholer-type violation.” If the Rose firm’s attorneys knew of Madison’s insolvency and actively misled the regulatory board, there is clearly an ethical violation, perhaps as severe as Kaye, Scholer. However, only the special counsel, with sufficient resources at his disposal, will be able to determine the extent of any improprieties by the Rose firm before the regulatory board. And perhaps only Mrs. Clinton herself can resolve many of the unanswered questions about her role.

4. What effect, if any, will the special counsel’s investigation into Whitewater Development and Madison Guaranty have on the First Lady and her legal career outside government?

An appearance of impropriety has been raised in Mrs. Clinton’s involvement with Whitewater and Madison. By investing in real estate with an individual who later became an owner of a prominent Arkansas savings and loan and then representing the thrift before the Securities Commissioner raises a question as to her objectivity in the matter. How this bodes for the First Lady and her legal career beyond government service remains to be seen. The special counsel’s investigation is expected to be thorough and lengthy.

The American Bar Association (ABA) has formulated a set of standards to impose sanctions on attorneys who violate ethical guidelines. They serve as a model for courts to apply, taking into account the facts and circumstances of each case and any aggravating or mitigating circumstances, such as the attorney’s knowledge or the client’s waiver in the matter in question.

Generally, the court asks a series of questions to determine the proper sanction:
(1) what ethical duty did the lawyer violate?
(2) what did the lawyer know at the time of the injury?
(3) what was the extent of the injury caused by the lawyer’s misconduct?
(4) are there any aggravating or mitigating circumstances?

The ABA regards the duty of loyalty to the client, including avoiding any conflicts of interest, as among the most important of the ethical principles designed to protect the public. Although punishment can be as severe as disbarment, it is rarely imposed in conflict of interest situations because the lawyer must be found to have “knowingly used information relating to representing his former client with the intent to benefit the lawyer or another while causing serious injury to a client.” Either suspension, reprimand, admonition, or even a less severe sanction, if any at all, may be appropriate in this case.

Given the passage of time, lack of FDIC procedures and documentation, the initial findings of the FDIC exonerating the Rose firm, and the significant possibility that Mrs. Clinton did not even appear before the regulatory board, sanctions, even hypothetically, are difficult to impose. For practical purposes, should Mrs. Clinton return to private law practice following government service, the prestige she will lend to a firm will likely outweigh any damage to her credibility that her involvement in Madison’s regulatory board activity could possibly have done.

Notwithstanding the possible effects on Mrs. Clinton’s private legal career, however, since the statutory mandate for the special counsel does not apply to the First Lady, any findings of impropriety may not damage her public role. In general, it may lead to congressional oversight of the First Lady’s advisory role and definition of the functions of First Lady and perhaps compensating her. Indeed, it may subject the First Lady to greater scrutiny and accountability. Ironically, given her powerful role as First Lady and the warm response she has received on Capitol Hill, the investigation’s findings may cause Congress to treat Mrs. Clinton with skepticism and as an ordinary White House official.

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