At the heart of the controversial transactions commonly known as Whitewater, lies a real estate deal called Castle Grande. It is this particular deal, and subsequent events related to it, that have drawn the most intense scrutiny of financial regulators, congressional investigators and the independent counsel, Kenneth W. Starr.

In 1996, the independent counsel obtained the first Whitewater
convictions of its four-year investigation. Jim McDougal and Arkansas Governor Jim Guy Tucker were convicted on multiple counts of financial fraud directly related to the Castle Grande deal. Susan McDougal was convicted of fraudulently obtaining a $300,000 loan that was tied to Castle Grande.

In November 1998,independent counsel Starr indicted President Clinton's longtime friend, Webster L. Hubbell, on charges that he allegedly "schemed to falsify, conceal and cover up the true nature" of the role he and Mrs. Clinton played in the Castle Grande deal. Two federal agencies concluded that Castle Grande involved "insider dealing, fictitious sales and land flips." It's estimated that the deal ended up costing taxpayers nearly four million dollars. Starr's November 1998 indictment of Hubbell does not mention Mrs Clinton by name but does refer to Hubbell's "1985-86 billing partner."

In recent years, prosecutors have been narrowing in on questions about the veracity of sworn statements by the President and First Lady relating to their involvement in the Castle Grande controversy. In particular, prosecutors want to know whether the President was truthful when he testified that he had no knowledge of or involvement with the fraudulent loan to Susan McDougal. And prosecutors are also investigating Mrs. Clinton's statements, as well as her actions subsequent to questions being raised about her ties to McDougal and Castle Grande -- actions the prosecutors believe may have entailed the obstruction of justice.

The Castle Grande project consisted of 1,000 acres of scrub pine that had failed previously as an industrial development. The sales price was $1.75 million and the plan was simple: carve out half-acre lots and drop in double wide trailers. For a small investment, and only 5% down, working-class families could buy into a "quiet and roomy" community with "plenty of trees and lots of room to stretch."

McDougal had big plans for his new development -- a shopping center and even a microbrewery. But first he needed money. As he did with many of his deals, he borrowed from his own S&L. But State regulations prohibited McDougal from investing more than 6% of his institution's assets. So, he put up $600,000 of Madison money and then, to cover the difference, he turned to a friend and part-time employee, Seth Ward.

Ward kicked in the remaining $1.15 million, money he borrowed from McDougal's S&L. Significantly, the Madison loan to Ward was non-recourse -- that is, he had no personal obligation to repay it. If federal regulators were to uncover the true nature of the Ward loan (i.e., that Ward was being used as a filter for Madison money), McDougal's entire operation could be in trouble since the institution, had, since its previous examination, been operating under orders to correct its lending practices.

So, as regulators prepared to revisit Madison Guaranty in early 1986, McDougal set in motion a complicated series of transactions intended, in part, to conceal the non-recourse Ward loan. The transactions would become known as the Dean Paul loan and were orchestrated primarily by McDougal and local municipal judge, David Hale.

Since 1979, David Hale had operated a Small Business Investment Corporation, Capital Management Services, Inc., that was licensed to provide lending to minorities and the economically disadvantaged. The loans were matched and backed by the Small Business Administration. According to the testimony of David Hale, he and McDougal, along with future-Governor Jim Guy Tucker, concocted a scheme that would use Hale's SBIC as a pass-through to generate additional loans from Madison.

It worked this way. Dean Paul, a friend and business associate of Hale's, borrowed $825,000 from Madison to buy three properties from David Hale. But, Paul never saw the money, it went straight to Hale, who used much of it to recapitalize his SBIC with matching funds from the SBA. Hale then loaned a $150,000 downpayment to Jim Guy Tucker and business partner, R.D. Randolph, who together bought out a portion of Ward's Castle Grande holdings for $1.2 million. Tucker and Randolph borrowed the additional $1.05 million from Madison.

McDougal then loaned his old friend and political mentor, Senator William Fulbright, $700,000 to buy out the bulk of Ward's remaining holdings. The net effect was to remove Ward's non-recourse loan from the Madison books and generate substantial sales profits and commissions for Madison.

Confused? You should be. The transactions were designed to be confusing; complicated enough to keep the regulators from discovering the Ward loan and the true extent of Madison's full investment in Castle Grande. All of this, however, had to be done quickly. The federal thrift examiners would arrive the first week of March, 1986. The Dean Paul loan and attendant transactions were rushed through Madison on February 28.

But the last-minute flurry of loans did not fool the examiners. After several months of close examination, Jim Clark, the Federal Home Loan Bank Board Examiner-in-Charge at Madison, discovered that Seth Ward was a "straw man" in the Castle Grande deal; the property had been purchased exclusively, and illegally, with Madison money. The Castle Grande deal, like other transactions at the S&L, was essentially a sham deal -- a "pyramid scheme" intended to enrich institution insiders and bolster the institution's stated net worth. According to Clark, Madison was one of the three worst cases of insider dealing that heíd seen in his 20 years as an examiner.

Clark also uncovered some additional transactions between Ward and McDougal, including an option agreement, suggesting that Ward would receive payments for his role in the Castle Grande deal. At the time, Clark was told by Madison officials that these transactions were not related to Castle Grande. But later, investigators with the Inspector General of the Federal Deposit Insurance Corporation, determined that the option agreement was indeed part of a concerted effort to further conceal Ward's role as a "straw man" in the sham Castle Grande deal.

The investigators also determined that the Ward option agreement was drafted by Madison's lawyer at the Rose Law Firm, Hillary Rodham Clinton. Mrs. Clinton, it turns out, had been retained by McDougal to handle various legal needs for the S&L. The extent of her work for Madison was not fully understood until a long-missing copy of Rose Law Firm billing records surfaced mysteriously in the White House in January, 1996 -- nearly two years after they were subpoenaed by Federal investigators.

According to the billing records, Mrs. Clinton billed Madison for some 60 hours of work over a 15 month period. Nearly half, or 29.5 hours, of the work was done on matters relating to Castle Grande, including preparation of the Ward option. An April 7, 1986 entry on the records reflects a telephone conference with Madison's senior loan officer Don Denton. During the call, according to Denton, he and Mrs. Clinton discussed the ways by which McDougal would compensate Ward.

Mrs. Clinton, whose historic testimony was taken before a grand jury shortly after the billing records appeared, has said the records confirm that she, in fact, performed very little work for Madison -- so little, that she does not recall specific details. Mrs. Clinton has also said that she has no idea how the billing records got to the White House. The Independent Counsel is continuing to investigate these statements and any role that Mrs. Clinton may, or may not, have had in keeping the records from investigators for two years.

The Independent Counsel is also investigating the sworn testimony of President Clinton, who, in 1996, provided videotaped testimony at the Whitewater trial of Jim and Susan McDougal and Governor Jim Guy Tucker. At the trial, David Hale testified that then-Governor Bill Clinton had, on several occasions, inquired about a $300,000 loan Hale provided to Susan McDougal from the funds generated by the Dean Paul loan. According to Hale, Governor Clinton showed up at McDougal's Castle Grande office during which time Clinton, McDougal and Hale discussed the SBIC loan to Susan McDougal.

For his part, Jim McDougal first said that the President was not at such a meeting. Following his Whitewater conviction, however, McDougal began cooperating with the Independent Counsel and changed his story. Now, McDougal says that the President did come to his Castle Grande office to ask about the loan to Susan.

In his videotaped testimony, the President says that he never met with McDougal and Hale about the loan to Susan and never even knew about any such loan. Meanwhile, Susan McDougal will not answer any questions about the President's alleged involvement. She has been serving an 18-month sentence in Federal prison for refusing to testify before the Grand Jury -- refusing, she says, to answer any questions that might help the Independent Counsel's ongoing investigation. In May 1998, the Federal Whitewater Grand Jury indicted her on new charges of criminal contempt and obstruction of justice for which she now will have to stand trial.

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