Part 1. In too deep? Tucker and Whitewater

   By Mary Hargrove, Don Johnson
   & Michael Whiteley
   Arkansas Democrat-Gazette Staff Writers

   First in a series of four articles.
   Copyright  1994, Little Rock Newspapers, Inc.
   The message scrawled on White House notepaper ended with the ominous words: "Current Governor may well be indicted."                 Jim Guy Tucker's involv
   Tucker has not been indicted as Lindsey's note forecast. But a decade of loans and land deals have dragged him deep into the "Other Whitewater."
   Tucker's political career has been derailed twice by Bill Clinton. And Clinton, indirectly, may have done it again. In January, dozens of federal agents swa
   They focused on Whitewater Development Corp., Jim McDougal's Madison Guaranty Savings and Loan Association and David Hale's Capital Management Services Inc.
   At key junctures a new name cropped up: Jim Guy Tucker.
   Federal agents are now sifting through records from 10 Tucker businesses, plus files from Madison Guaranty and Capital Management, even records from his for
   Tucker has been forced to turn over thousands of pages of documents, including, he says, every check he has written since 1978.
   Additionally, Tucker and McDougal are being investigated by the Resolution Trust Corp., the federal agency that manages and sells assets of failed savings a
   The agency is pursuing possible claims involving Tucker and McDougal for "fraud and intentional misconduct relating to Madison ... for the benefit of variou
   Tucker previously was named in a recommendation for further investigation, called a criminal referral. It was sent to the Justice Department on Oct. 8, 1993
   The problem? The RTC alleged Tucker diverted funds from a $260,000 loan obtained from Madison Guaranty. Tucker has denied any wrongdoing.
   John Haley, Tucker's attorney, described RTC investigators who forwarded the referral as either "malevolent or fairly uninformed bumpkins."
   David Hale's shocking story in September 1993 that Tucker and McDougal, and later Clinton and McDougal, coerced him into making loans to help out the "polit
   "I think Hale has lied and cheated and stolen," Haley said. "He has committed mammoth fraud against the Small Business Administration, not once, but repeate
   The Arkansas Democrat-Gazette has examined Tucker's business dealings. The story has been pieced together through 80 interviews and reviews of thousands of
   Tucker has repeatedly refused to be interviewed about these matters.
   The Tucker connection is a complex tale of financial intrigue set against the backdrop of 20 years of Arkansas politics.
   It is the strange saga of a millionaire governor now trying to distance himself from two close business associates and supporters -- a convicted ex-judge an
   In the land of Whitewater, the art of the deal was perfected.
   It's not a world of three-bedroom home mortgages and used-car loans. It's a place 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.
   - A Malvern man swears he was an unwitting victim of a scheme that channeled funds to a troubled Madison Guaranty.
   - The owner of an investment business secretly controlled companies to siphon off taxpayer funds and cover bad loans.
   And on one frenzied day -- Feb. 28, 1986 -- Tucker, McDougal and Hale entangled themselves in a torrent of deals that cast a shadow over their lives and ove
   - The beginning: A game of gin rummy
   It all began, as retired Little Rock businessman Seth Ward recalls, during a game of gin rummy in the spring of 1985. Ward was playing cards at the Little R
   Denton, Madison Guaranty's chief loan officer, took Ward to meet owner Jim McDougal. Maybe Ward could help the S&L's investment subsidiary, Madison Financia
   Ward, then 65, hesitated.
   "I don't know," he told them. "I'm not really interested in working too hard or punching a clock."
   Ward eventually agreed. McDougal liked Ward's Little Rock business-society connections.
   "Seth was valuable as an ear in the business market," Denton said.
   What Ward was hearing in the fall of 1985 was that three Little Rock banks wanted to unload 1,000 acres in southern Pulaski County.
   What he couldn't know at the time was the Pandora's Box he was about to open.
   . . .
   By the fall of 1985, Jim McDougal was realizing that dreams could be bought -- they just couldn't be sold easily.
   Six years earlier, in 1979, he had formed Whitewater Development Corp. with Bill and Hillary Clinton to develop 230 acres where the White River intersects w
   "I wanted to make them some money," McDougal said of his relationship with the Clintons.
   Whitewater Development languished over the years as McDougal cast around for bigger and better deals.
   After his purchase of Madison Guaranty in 1982, McDougal's compulsion to buy and develop land intensified until it finally ran unchecked.
   His acquisitions ranged from a 3,460-acre mobile home park called Goldmine Springs, near McDougal's hometown of Bradford, to a 3,900-acre development on Cam
   Another pet project, Maple Creek Farms, featured 1,300 acres set aside for residential property in southern Pulaski County.
   By early 1984, federal regulators were concerned. Sales were sluggish and projected costs had doubled for those developments. Investments in Madison Financi
   However, he gobbled up even more land, enthusiastically launching a string of low- to middle-income housing projects: Green Tree Farms, Fair Oaks and Timber
   McDougal heard the question more than once from his friends: "Jim, why did you always go to that next thing?"
   "That's what my father would always do," McDougal explained. "He would say, 'Just quit worrying about it. ... You can just buy something else, start another
   McDougal also was attracted by diamonds in the rough.
   "I became known as the junk dealer. If it didn't have a road to it, if it had a problem that would depress the price, they'd come to me."
   But McDougal's background was really in politics, not the world of finance.
   A self-styled "populist Democrat," McDougal had joined the staff of U.S. Sen. J. William Fulbright in 1967. He worked for him in Washington and later in Lit
   The McDougal-Tucker business ties go back to those Clinton years when Tucker, a freshman congressman, was defeated in 1978 in a U.S. Senate bid.
   In 1979, McDougal and Tucker invested in Park Place, a Little Rock condominium project near MacArthur Park.
   Tucker bought five shares of stock, out of 400 shares, when McDougal purchased the Bank of Kingston in Madison County in 1980.
   They formed a partnership with Steve Smith, an aide to Clinton, to develop real estate ventures in the Ozarks.
   Tucker failed in a political comeback attempt in May 1982 when he was defeated by another comeback kid, Clinton, in the Democratic primary for governor.
   McDougal remembers those bitter days.
   "That election of '82 -- it was a real sore spot," McDougal said. "I never heard the word politics mentioned. I mean the word was NEVER  said at the (Tucker
   McDougal lost his own campaign that year. He was crushed in a vitriolic battle to unseat then-U.S. Rep. John Paul Hammerschmidt, a Republican, in the 3rd Di
   Tucker's and McDougal's earliest ties had been political. Now, they focused their full attention on making money.
   Saddled with $250,000 in campaign debts, Tucker had no time to look back.
   He joined the Mitchell Williams & Selig law firm as a partner in 1982. A year later, he was earning $170,000, records show.
   "On what a lawyer makes, he would not have been able to pay his campaign debt back," Haley said. "So he was looking for other areas."
   Tucker was also looking for a little help from his friends. He turned to Jim McDougal and David Hale.
   - The deal of a lifetime --
   hooking up with Tucker
   A simple handshake with Tucker in 1983 led to one of the best deals of Billy Cost's life.
   Cost, a Louisianian, was working in the Little Rock area in the cable TV business, when his lawyer, W. Chris Barrier, arranged a meeting with Tucker. Barrie
   "In a half-hour, we shook hands," Cost said. "It was a 50-50 split. I would go out and acquire the cable franchises; he (Tucker) would take care of the fina
   By the end of 1984, Cost left their cable partnership with several hundred thousand dollars after Tucker bought him out.
   "I used to make the statement," Cost said, "anybody can do anything as long as they have the good Lord, themselves and Jim Guy Tucker."
   Lured by the potential of the cable TV business, Tucker and Cost had formed County Cable Inc. Tucker needed to keep his end of the bargain and find money fo
   "Nobody really wanted to loan Jim Guy money," McDougal said. "He had to struggle. He had two or three things (business projects) that didn't work."
   One of County Cable's first loans -- $50,000 -- came through David Hale's Capital Management Services, an investment company subsidized by the Small Busines
   Capital Management was licensed to provide funds for "socially or economically disadvantaged" individuals. The government could match each dollar invested b
   Hale, a member of a Little Rock political family, also served as a judge for the Pulaski County Municipal Court.
   As a young lawyer in Little Rock, Hale was president of the Arkansas Jaycees before being elected national president in 1974.
   Dean Paul, a Malvern businessman, met him in those early years.
   Paul had gone to school in Malvern with Hale's wife, Sue. He had invested $67,500 in Hale's Capital Management when it was first licensed in 1979.
   "David and I did more than one business deal together, but I considered it more of a friendship than a business relationship," Paul said. "I was talking to
   During the mid-1980s, when Yell Forestry Products took over Plainview Lumber Co. after a bitter bankruptcy fight, Paul and Hale became business associates.
   At the same time, Tucker also developed a casual relationship as a borrower with both Hale and McDougal. Loans were often lined up with a phone call.
   Tucker routinely took out hundreds of thousands of dollars with no down payments, no written applications, no feasibility studies and sometimes no collatera
   Tucker was not relying on either Madison Guaranty or Capital Management as the principal source of financial backing for his cable business.
   He borrowed from area banks as well as from major out-of-state lenders. But he drew regularly from Madison Guaranty and Capital Management for smaller start
   Between 1983 and 1984, Tucker's County Cable borrowed $150,000 from Hale's investment company.
   Ultimately, companies that Tucker owned would borrow $725,000 from Hale's Capital Management for his cable TV business through 1987.
   McDougal was also there for Tucker. In 1985 alone, Tucker and his companies took out more than $500,000 in loans from Madison Guaranty and paid off another
   Tucker never had to traipse through the loan approval process at Madison.
   "I called Jim McDougal if I wanted to borrow money," he said.
   - Loan officer: Madison
   was full of surprises
   Don Denton had never seen anything like it. Madison Guaranty was a candy store for McDougal, said Denton, who had been hired as chief loan officer in April
   "Everything that happened (at Madison Guaranty) surprised me. The way the place was run -- it was totally unorthodox. Running the savings and loan was incid
   Denton, a former U.S. Treasury Department national bank examiner, had been a senior lending officer for Union National Bank for 10 years before joining Madi
   McDougal's penchant for real estate ventures, combined with his access to funds through Madison Guaranty, were a recipe for disaster.
   Madison Guaranty created a subsidiary, Madison Financial Corp., to hold its investments, including the real estate it was developing.
   State Securities Department regulations limited investment in subsidiaries to 6 percent of the parent company's assets. Madison Financial had climbed to 14
   The Federal Home Loan Bank Board's examiners who came to Madison Guaranty in 1984 berated Madison for its unbridled real estate spending. Madison Guaranty w
   The future of Madison Guaranty "is jeopardized" through its investment and lending practices in real estate development projects, examiners warned.
   The criticism was inevitable, Denton said.
   "McDougal didn't have a hint (on how to run an S&L)," Denton said. "He was taking full advantage of the system."
   Madison files lacked appraisals and reflected unsafe and unsound lending practices, the examiners' report stated.
   Correcting the books, examiners warned, "will adversely affect net worth and result in an insolvent position."
   Despite the stern criticism by regulators, money flowed freely to Madison owners.
   - As president of Madison Financial, McDougal's salary and bonuses in 1985 reached $179,000. From 1983 to October 1986, his salary and bonuses totaled $373,
   - McDougal's wife, Susan, garnered $189,500 in commissions from Madison real estate sales between October 1985 and June 1986.
   - Susan McDougal's firm, Madison Marketing, was paid more than $1.5 million between 1983 and 1986 for promoting the S&L's real estate.
   She starred in television commercials, sometimes sitting astride a white horse in a Lady-Godiva-wears-hot-pants pose.
   - Madison Financial purchased a fleet of luxury cars -- several Mercedes-Benzes and Jaguars, a blue Bentley -- and a twin-engine Piper Seminole plane.
   - By May 1985, the McDougals had financed $443,000 on their west Little Rock home through Madison Guaranty.
   McDougal largesse was not limited to family. Loans, at times, were for the asking.
   "If your story sounded good or if you were an insider, it was a done deal," Denton said.
   After Denton recruited a retired Seth Ward to drum up more real estate deals for Madison Financial, Ward didn't disappoint him.
   Ward's best deal for his new employer was discovering 1,000 acres for sale in southern Pulaski County at the Little Rock Industrial Park.
   The original asking price was $3.5 million, but the three banks holding the notes quickly lowered their demands when they found a potential buyer.
   Final price: $1.75 million.
   McDougal, the self-described "junk dealer," gloated inwardly. He was convinced the land was an unrecognized gem because it lay near a proposed freeway exten
   It was, he declared, "the greatest bargain I've ever seen."
   The land was purchased in October 1985. McDougal named the project Castle Grande.
   Now McDougal faced an interesting dilemma. He had the land but he had to sell it quickly to stay within investment guidelines.
   One of the first buyers McDougal found was Tucker.
   . . .
   If the land deal sounded "great" to McDougal, it sounded even better to Ward.
   McDougal couldn't keep that much debt on the books of his subsidiary. He came up with a plan.
   Ward would purchase the property north of 145th Street and the sewer and water system for $1.15 million.
   Madison Financial would buy the land south of 145th Street for $600,000 to develop as residential lots.
   Ward's $1.15 million share of the land would be financed by Madison Guaranty with a non-recourse note. That meant that if the payments were not made, the la
   As parcels from Ward's land were sold, the loan money was used to reduce the $1.15 million debt. Ward didn't need to make any payments.
   In addition, Madison Financial would pay Ward a 10 percent commission on the commercial land whether he sold it or not. In the first six months, Ward, who n
   "I didn't try to sell anything, really," Ward said. "Madison sold it all."
   About the same time that McDougal was acquiring the 1,000 acres, Tucker called him for another loan.
   Sure, said McDougal, but this time, he attached some strings. He agreed to lend Tucker the money if Tucker would buy some land in Castle Grande.
   Tucker was busy laying cable lines south of the area, in McDougal's Maple Creek Farms subdivision. Castle Grande would be a natural extension for his cable
   So, Tucker accepted McDougal's terms and became the owner of 34 acres of Castle Grande.
   McDougal was not unaware of how top-heavy Madison Financial's real estate portfolio had become.
   Federal auditors, already critical of Madison's real estate loans, had not come back for a follow-up exam in nearly two years. They were certain to return s
   The Castle Grande project, would surely raise questions.
   That, David Hale says, was when Tucker and McDougal came to him.
   - Hale: "Different people
   were in a bind"
   It was a late afternoon call from Tucker, in David Hale's version of events, that introduced Hale to the deal -- a deal that later would result in a crimina
   Hale was interviewed by the Democrat-Gazette shortly before he was indicted in September 1993.
   Tucker, Hale said, asked him to go to McDougal's office at 1501 S. Main St. in Little Rock.
   But they didn't stay there. Hale said that Tucker and McDougal drove Hale out to the Castle Grande property.
   Tucker and McDougal discussed various development ideas and seemed excited about building a shopping center.
   But Hale soon learned this was more than a casual visit.
   Madison's problems were twofold: a burgeoning real estate portfolio and specific "hot loans" that had to be moved off the books, Hale said he was told.
   "Different people were in a bind with Madison," Hale said. "They had to get out of there before the audit. I knew they had loans to some political folks tha
   McDougal was depending on Hale to bail him out with a series of loans from Capital Management.
   "I had enough money in my (company) to fund nearly all of it," Hale said, "but if I did, I would be completely out of money."
   The talks continued over the next few weeks and the pressure from McDougal and Tucker escalated, Hale said.
   "They wanted $150,000 here and $150,000 there," Hale later told a close  associate. "He didn't have the money."
   For Hale to help out, he needed $500,000. With that nest egg in hand, he could draw matching funds from SBA and replenish his drained accounts.
   But where to get the money?
   Enter Dean Paul.
   . . .
   The high-pitched whine of a band saw screeched through the air as Dean Paul answered the phone at his lumber mill in Plainview. He left for Little Rock so q
   Two hours later, he and Hale emerged from a downstairs office at Madison Guaranty.
   Paul had just signed loan papers for $825,000 -- money he swears today that he never saw, was not supposed to see.
   "Don't put me in a bind," Paul remarked nervously to Hale as they walked outside to Hale's Oldsmobile.
   "David told me not to worry," Paul recalls. "He said it would be taken care of. He told me the loan was going to be paid out of deals he and Jim Guy were do
   It was Feb. 28, 1986.
   . . .
   The first time Dean Paul had heard of "the deal," he was sitting in a Little Rock coffee shop.
   The details had been spelled out in January 1986, when Hale told Paul that federal regulators were "on" McDougal and "we need to get him cleaned up."
   But Capital Management was tiny compared to Madison Guaranty, where deposits had reached $100 million. Since opening its doors, Capital Management loans tot
   "David said he didn't have the type of capital McDougal needed," Paul said.
   This was the plan as described by Paul, Hale and others:
   As luck would have it, Paul and Hale each had an interest in Etta's Place, a defunct restaurant in Sherwood at the corner of U.S. 67-167 and Wildwood Avenue
   Using the restaurant and two small parcels of land, they would sell the property to each other and their companies, inflating the price.
   Then Madison Guaranty would lend Paul $825,000 to buy the property from Hale.
   Part of the Paul loan funds would be transferred to Capital Management so Hale could get matching government funds. For example, on a 1-to-1 match, $500,000
   Hale could then free existing funds at Capital Management and produce the loans Madison Guaranty needed before the examiners arrived.
   One of the first loans McDougal wanted from Capital Management was $150,000 for Tucker's company to use as a down payment to purchase a sewer and water comp
   Later, Hale would use funds from the Paul loan to dole out more loans to Madison "friends."
   Paul said Hale told him the $825,000 loan would be repaid out of projects Hale and Tucker had in mind at Castle Grande, such as the proposed shopping center
   "I trusted him completely," Paul said. "If he had told me a rooster could pull a freight train, I'd have hooked it up."
   How did they come up with using Etta's Place?
   Hale said Tucker and McDougal pored over Hale's books and concluded that the value of Etta's Place could be inflated enough to generate a large loan from Ma
   But, Hale said, Tucker was not the only politician involved in the plan.
   During October 1985, Hale claims, he was being alternately badgered by McDougal and Tucker and then McDougal and Bill Clinton to "close out the land deal" a
   "They were in a bad hurt. There was pressure," Hale said. "They didn't come out and threaten me. We'd been friends. Political friends. I did think it would
   Hale said that Clinton and McDougal decided Susan McDougal would apply for a loan because, as a woman, she would easily qualify at Capital Management under
   She couldn't borrow from Madison Guaranty because, as an owner, she would exceed the insider loan limit.
   Hale felt Clinton was putting the heat on. His impression was there was a personal interest by Clinton in making a loan to Susan McDougal. Hale said he did
   Clinton, Hale said, did tell him one thing: "My name can't appear on this."
   "I never negotiated with Susan McDougal. That was done through Clinton and Jim McDougal," Hale said. Hale said they were never specific about the purpose of
   Two weeks into February 1986, the dreaded notice arrived. The Federal Home Loan Bank Board examiners were coming to Madison Guaranty on Feb. 28.
   It was time to line up the loans.
   - The crucial date:
   Feb. 28, 1986
   For years, Little Rock lawyer Bill Watt, who became a traffic judge in 1986, had done occasional legal work for David Hale.
   And it was Watt, as trustee for Hale on the Etta's Place land, who called in appraiser Robert W. Palmer to place a value on the empty restaurant. Palmer app
   After adding two small parcels of land, they had a package. Hale and Paul had purchased the three pieces of property between 1982 and 1985 from "outsiders"
   On the day of the sales from Hale to Paul, the total price soared from $260,000 to $800,000.
   "That restaurant was just sitting there. That property was not worth anywhere near that amount of money," Paul admitted.
   After being appointed in January this year, special counsel Robert Fiske Jr. subpoenaed Palmer's appraisal of Etta's Place, along with all of the appraisals
   "I very simply and quite honestly analyzed the lease potential. It was income-producing property," he said. "That's the alpha and omega of the whole deal."
   With the examiners on the way, Madison Guaranty began frantically trying to update loan files.
   Madison Guaranty Chairman and Chief Executive Officer John Latham called a meeting before the exam and told the staff to generate new documents for the loan
   "It was quite unusual for an appraisal to be in hand when the loan was funded," Denton would later testify at McDougal's bank fraud trial in 1990, at which
   On its books, Madison Guaranty listed the appraisals as "consulting fees." That would not tip examiners off that the appraisals had been added after the fac
   A Castle Grande loan to Davis Fitzhugh made Madison Guaranty particularly edgy. The loan was "non-recourse," meaning the borrower would not have to pay anyt
   In what would result in the only guilty plea out of the Madison Guaranty failure, Latham tampered with a $525,000 non-recourse loan to Fitzhugh, a Madison F
   "Latham felt that the examiners would be very critical" because Madison carried all the risk, Denton said.
   But Madison had a much larger, much more visible $1.15 million non-recourse loan with Seth Ward, who was holding the industrial property for them. Madison n
   The pace picked up. This is what happened:
   In January 1986, Madison sold land in Castle Grande to former U.S. Sen. J. William Fulbright, McDougal's former boss, for $700,000. Fulbright borrowed the m
   Madison sold the sewer and water system for $1.2 million to a company owned by Tucker and R.D. Randolph. Madison applied $450,000 to further reduce the Ward
   That left about $70,000 of Ward's $1.15 million non-recourse loan on the books. Ward took out a personal $70,000 note and the non-recourse loan had vanished
   On Feb. 28 -- the day the federal examiners were to arrive at both Madison and, ironically, at Capital Management -- all the plans fell into place. Loans we
   - Paul finally bought Etta's Place restaurant from Hale.
   - Paul signed for the $825,000 loan from Madison Guaranty using the restaurant and land as collateral.
   - Tucker's company, Castle Sewer and Water, borrowed $150,000 from Capital Management for the down payment for the utility system.
   - Castle Sewer and Water borrowed $1.05 million from Madison Guaranty to purchase the utility from Madison Financial.
   - The Ward $1.15 million non-recourse loan was "cleared" off the books.
   - Latham switched out the $525,000 non-recourse note on the Levi Strauss warehouse building in Castle Grande.
   - Hale mailed an application for matching funds to the SBA, showing he had $502,000 from the $825,000 Paul loan. Hale's action would later be the basis for
   Hale used $300,000 of the $825,000 to pay off the original Etta's Place loan at Malvern National Bank on March 3, 1986. The remaining $23,000 went to closin
   But what about the Susan McDougal loan that Hale said Clinton pushed for so aggressively?
   Hale had deposited $502,000 from the Paul loan into People's Bank and Trust Co. of Russellville. He moved $400,000 from that account into Capital Management
   On April 3, 1986, Capital Management made a $300,000 loan to Susan McDougal's company, Master Marketing, a newly created advertising firm. The Democrat-Gaze
   How was the money used? The McDougals paid $111,500 on a loan at Stephens Security Bank in Ouachita County for their real estate development called Flowerwo
   Earlier this year, it was widely -- and apparently mistakenly -- reported that $110,000 from the Susan McDougal loan was used as a down payment for the purc
   White House aides say the Clintons, co-owners of Whitewater Development at the time, didn't know about the Lorance Heights purchase.
   Congressional sources said only $25,000 from the Susan McDougal loan was used for earnest money.
   A review of checks larger than $10,000 indicates there was no direct payment from the Susan McDougal loan to the Whitewater Development account at Madison G
   Jim McDougal, who contended several months ago that the $110,000 down payment came from that $300,000 loan, now says he obtained the money elsewhere. He say
   Tucker, through a faxed statement from his press secretary, denied any knowledge of the $825,000 loan to Paul's company. "He (Tucker) has never agreed, dire
   The only Tucker link to Paul, according to the statement, is that, "In general, Mr. Tucker and his law firm, on occasion, have represented David Hale and co
   Haley said Tucker knows nothing about the elaborate circle of money detailed by Hale that indirectly supplied the Castle Sewer and Water down payment.
   "If David Hale got a ski mask and went to the 7-Eleven store and stole the money, I do not think that is the responsibility of the borrower to track that th
   McDougal denied knowing about the loan for Etta's Place.
   When "I heard about that (loan) ... it was probably the angriest I've been about anything," he said.
   Clinton has termed Hale's story "a bunch of bull" and the White House has suggested Hale was lying.
   McDougal's attorney, Sam Heuer, said his client was not part of any plot to conceal bad loans from regulators or to divert funds.
   "All of this stuff can be made so mysterious and crooked-looking," Heuer said, "and the only guy getting money was David Hale."
   Hale had been cooperating with Fiske's investigation under a plea-bargain agreement and new independent counsel Kenneth W. Starr has said he will pick up wh
   According to several sources close to the investigation, the independent counsel is studying the events of Feb. 28,

   Depending on what evidence Starr unearths, he could potentially bring a number of charges under federal law before a grand jury, including bank fraud, misap
   . . .
   Despite the elaborate shifting of funds, Madison Guaranty did not escape the wrath of the regulators.
   Examiners, described by Latham and other Madison officers as "hostile," issued a scathing report on the condition of the books and apparent attempts to fals
   The savings and loan financial statements reflected phenomenal growth. Liabilities -- including its deposits -- had mushroomed from $6 million to $123 milli
   The Castle Grande land was "purchased and sold in a series of fictitious transactions" involving Madison insiders and Madison Financial, the examiners concl
   In addition, Madison loan files were "incomplete, inaccurate ... grossly inadequate," examiners wrote.
   "There were even some apparent attempts to hide records, to assemble files that did not previously exist by using back-dated documents and to alter records,
   McDougal, who had been staying at a trailer on the Castle Grande sales office to avoid examiners, was ousted by Madison's board July 15, 1986, at the demand
   Two days later, the Madison board of directors halted all advertising promoting Castle Grande.
   Tucker's law firm, Mitchell Williams Selig Jackson & Tucker, had done work in the past on state regulatory matters for Madison Guaranty.
   Tucker told the Democrat-Gazette that he sat in on one Madison board meeting after McDougal was forced out "to evaluate a problem there. ... It was to revie
   "It was a short meeting and I was in it for a relatively short time," he said.
   Other than that, Tucker said, "I can only recall one real estate transaction and one corporate request that I ever made for Madison."
   However, last week, in a petition to a Washington, D.C. court, the RTC alleged that Tucker was Madison's legal counsel.
   The RTC, terming Tucker "a substantial borrower," had issued a subpoena to him June 1 of this year asking for documents related to Madison as well as his pe
   Tucker did not comply. Instead, according to the RTC, he argued in a June 27, 1994, court document that "the RTC was precluded by statute of limitations and
   Despite what Tucker told the Democrat-Gazette, Tucker responded to the RTC that he had not "provided any legal services to Madison Guaranty or its affiliate
   Following the removal of McDougal, the Federal Home Loan Bank Board demanded a complete overhaul of the loan files and issued a 29-page cease and desist ord
   Under the order, Madison Guaranty was prohibited from making loans or extending credit without prior approval to 12 companies -- including Tucker's Castle S
   The news only grew worse.
   KPMG Peat Marwick auditors, hired at the insistence of federal regulators, concluded that Madison Guaranty was insolvent by $10 million as of December 1986.
   The audit trail uncovered $11.1 million in delinquent loans and another $16.9 million in outstanding loans to Madison insiders. Madison's net worth had fall
   Madison Guaranty was officially taken over by the Federal Home Loan Bank Board on an oddly coincidental date, Feb. 28, 1989, three years after the frantic e
   . . .
   Meanwhile, Dean Paul began to have problems.
   Hale had not delivered on his promises. In exchange for signing on the $825,000 loan, Hale had offered to make Paul equal partners in Capital Management and
   Madison Guaranty and two other banks also were supposed to refinance Yell Forestry, the lumber business in Plainview, Paul said. None of those things happen
   But the real letdown came in the form of a computer notice. The new Madison Guaranty regime, after McDougal, began to collect on past-due loans. A payment o
   A second notice arrived. "I told David the computer's writing letters now."
   Hale reassured Paul again. But Paul was getting nervous.
   "Hale's the type of person that, when you pin him down, he's got amnesia," Paul said. "David was all of a sudden getting hard to find."
   In December 1986, Hale had a heart attack. McDougal already had been hospitalized for a stroke. Paul was left holding the note.
   Madison Guaranty sued Paul for the money April 30, 1987.
   Confused and dismayed by the lawsuit, Paul realized, "I was in a fight for my life."
   Paul signed an affidavit in that lawsuit swearing he had been "a disclosed agent for David Hale."
   He had not, he said, received the proceeds from the loan, a fact "well known to Madison Guaranty."
   Nevertheless, a judgment was entered against Dean Paul Ltd. and Dean Paul. The restaurant and the small tracts of land were sold at auction back to Madison
   After his heart attack, Hale returned to Capital Management to grapple with his own problems. During the first four months of 1986, Hale had made $664,000 i
   Among them: Tucker's company did not pay back the $150,000 Castle down payment to Capital Management. Tucker's company also defaulted on the $1.05 million t
   And Susan McDougal did not repay her $300,000 loan, although Hale told the SBA she had paid it in full.
   Ever resourceful, Hale tried to hide some of the bad loans from auditors. He created new companies, lent them money, then used those funds to pay off delinq
   In the case of the Susan McDougal loan, Hale actually channeled the payoff money through a newly created construction company in an attempt, SBA auditors we
   By 1993, Hale "secretly controlled 13 of 57 small concerns that Capital Management had financed," according to the General Accounting Office, the financial
   When the SBA seized Capital Management, auditors discovered 86 percent of Capital Management loans were delinquent.

   - The end: Tucker suggests
   that he is the real victim
   Jim Guy Tucker was angry. Sitting around a table at the Governor's Mansion on a Sunday evening in May 1994, he shuffled papers -- canceled checks, loan file
   He had succeeded Clinton as governor in December 1992, he was running for election, he had garnered one of the largest campaign war chests in state history,
   The 1993 criminal referral by the RTC on his 34-acre purchase at Castle Grande was beyond his comprehension. He had copies of a cashier's check to show how
   "It seems to me that ... someone at the RTC, a BUREAUCRAT at the RTC, has alleged that I received a loan," he said, his voice shaking, "and in getting that
   Perhaps, he suggested, HE was the real victim. "In February of '86, for a week to 10 days, the guys down there (at Madison) were going through loan files an
   Tucker's past dealings with McDougal and Hale have clung to him like a tenacious tar baby. Not just the one $260,000 loan in question. Everything. Everythin
   . . .
   Since the mid-1980s, the fortunes of those entwined in Madison and Whitewater have either risen to great heights -- the president of the United States and a
   The public Jim McDougal and the private Jim McDougal now lead vastly different lives.
   At congressional Whitewater hearings in July, McDougal was an instant celebrity, cheerfully signing autographs with a shapely blond coed in tow.
   Back home in Arkadelphia, ensconced in a sparsely furnished trailer featuring a portrait of General Robert E. Lee, he reflects on the past.
   No more Jaguars, no more million-dollar wheeling and dealing in real estate, no more go-for-the-throat political races.
   With one exoneration from a bank fraud trial behind him, he's very well aware that federal investigators have been ordered to take apart all of his transact
   To add to the dark cloud chronically looming over his bald pate, a California bankruptcy attorney has sent a criminal referral to the Whitewater investigato
   It seems that when he filed for bankruptcy in Los Angeles in 1991, McDougal swore he owned nothing. He did not mention a 230-acre development in Arkansas' M
   McDougal's attorney, Heuer, says when the bankruptcy was filed, McDougal had transferred all his assets to his mother.
   McDougal claims to take it all -- the highs and the lows -- in stride.
   "Because, you see," he says, pointing to his surroundings, "if they grab me up and give me 40 years, they have better house trailers" in minimum-security pr
   His ex-wife, however, is not as stoic.
   In March, a tearful Susan McDougal, who divorced Jim in 1991, faced reporters at Little Rock's Excelsior Hotel. She was, she said, innocent of any wrongdoin
   "We have suffered enough," she declared, two attorneys standing as sentinels on either side. "The investigation should have died in 1990 when a jury acquitt
   She is facing charges in California for allegedly embezzling $200,000 from symphony conductor Zubin Mehta and his wife when she worked for them from 1989 un
   Seth Ward spent years trying to collect the more than $350,000 in commissions from his deal with Madison to hold the land.
   He was awarded the money by a jury in state court in 1988. However, the RTC appealed the decision in federal court, insisting that he was not owed the commi
   Tired of paying legal fees -- "they were bleeding me, riding me to death," Ward said -- he settled with the RTC, paying back $325,000 in April 1993.
   Dean Paul, whose Yell Forestry lumber company finally went bankrupt, now makes a living in sales. In June, the RTC sent him a notice, demanding he pay the $
   "I don't have it, but if I did, I don't think I'd pay it," he said. "I never got the money in the first place.
   "People keep asking me why I'd sign that loan," he said. "It was for David Hale. I trusted him. If you knew him like I did, you just would."
   Hale resigned his judgeship in September 1993. He faces a truth test with newly appointed independent counsel Starr, who will review his story of loans to p
   The losses go far beyond the personal stakes of any of the players.
   Madison Guaranty's failure has cost taxpayers $65 million.
   Capital Management, seized by the SBA in September 1993, has generated a $3.4 million loss.
   The independent counsel's investigation will probably stretch into next year. Fiske's share of the investigation had run up $1.8 million in expenses through
   Standing outside the federal courthouse following Hale's guilty plea in March, his attorney, Randy Coleman, talked briefly about the sweeping Whitewater inv
   "This is a painful, embarrassing day for David Hale," he said. "But, I think it's that way for the state of Arkansas, also."
   NEXT Castle Sewer and Water: The deal that wouldn't die.

















   Part 2: The Deal That Wouldn't Die

   By Mary Hargrove, Don Johnson
   & Michael Whiteley
   Arkansas Democrat-Gazette Staff Writers

   Second in a series of four articles.
   Copyright © 1994, Little Rock Newspapers, Inc.
   Dragonflies hover and a lizard skitters under a chain-link fence topped with razor wire.             A narrow hole cut in the fence allows just enough room
   An abandoned pickup truck on blocks, its windows shattered, sits in front of a rusty water tank.
   Welcome to the Castle Sewer and Water Corp.
   In 1986, a company owned by Jim Guy Tucker and R.D. Randolph paid $1.2 million for this obscure utility set off in the oak and pine woods west of Wrightsvil
   Today, the company is so mired in debt and plagued by environmental problems, you couldn't give it away. Just ask the Resolution Trust Corp., the federal ag
   The RTC offered the utility to Wrights-ville last year, but Wrightsville said "No."
   "RTC had this white elephant it wanted to get rid of. No one knows what it will cost to foreclose or bring it up to standards," Wrightsville attorney Ron Ho
   The system works but chronically fails to meet sewage discharge standards. The plant is valued at $640,000. If the tab for proposed repairs reaches $673,000
   And residents pay about three times the rates they would if they lived in Little Rock, thanks to legislation sought by Tucker.
   Castle Sewer and Water is no longer in Tucker's portfolio. Tucker sold his stock to Randolph in 1989 for $10, shedding the company and the bulk of its unpai
   But Castle Sewer and Water Corp. is the deal that will not die.
   Former Whitewater special counsel Robert Fiske Jr. issued a swath of subpoenas covering all of Tucker's dealings with Castle and its subsidiary, Southloop C
   Tucker's attorney, John Haley, responding to questions about Tucker's financial history said, "Tucker has a record of credit worthiness and paying loans bac
   A review of Castle and Southloop records obtained by the Arkansas Democrat-Gazette, however, reflects an eight-year pattern of late or missed payments on lo
   - Castle Sewer and Water defaulted on its first loan -- a $1.05 million note for the purchase of the utility system in February 1986 from Madison Financial
   Tucker convinced federal regulators to cut the sales price and loan in half. But the new loan went into default, too.
   - When the Small Business Administration seized David Hale's Capital Management Services Inc. in September 1993, several Tucker-related loans were on the de
   Castle Sewer and Water borrowed $150,000 in 1986 from Capital Management. as the down payment for the utility purchase. Castle made only "sporadic payments
   - And no payments had been made on the $100,000 that Tucker's Southloop Construction borrowed from Capital Management in 1987, according to investigators. M
   Questions about another Tucker loan led to a request in 1993 from the RTC to the Justice Department for further investigation, called a criminal referral.
   An RTC investigator alleged Tucker diverted part of a $260,000 loan he received from Madison Guaranty to pay off a note Tucker guaranteed at Savers Federal
   Tucker termed the RTC allegations "a total fabrication." He produced a copy of a cashier's check drawn on Madison Guaranty and payable to Savers on the day
   "They knew exactly where the money was going. I'm at a loss to understand," he said.
   But if Tucker feels beleaguered, some Castle Sewer and Water customers don't want to hear it.
   They are saddled with substantial bills and substandard service -- the legacy of owners who have failed to upgrade and maintain the system.
   For an average cost of $50-$70 a month, they get treated water and sewage. Those bills are about three times higher than bills for similar service in neighb
   Residents say they also cope with the occasional overpowering stench of sewage that permeates the air on warm, muggy nights.
   The system serves about 130 homes in the communities of Castle Grande and Quail Creek off U.S. 65-167 at 145th Street in southern Pulaski County. Ten busine
   Suzanne and Donald Taylor are one of the nine original families that bought mobile homes in Castle Grande when it opened in 1986.
   "My bill has tripled since we moved here. But the water stinks. Where is my money going?" Suzanne Taylor demanded.
   Residents and industry representatives are working to form an improvement district to take over the Castle plant. Their plan? The RTC would give them the no
   So far, Suzanne Taylor has refused to sign the improvement district petition. She didn't like the way the improvement district committee members were select
   "I may be stubborn, but it doesn't feel right," she said. "I'm paying twice as a taxpayer for what Tucker did: I'm paying for his bad loans and now they're
   "The real question is, how did this happen?"
   - McDougal sees opportunity
   in 1,000 acres of land
   The sewer and water system was built on the promise of things to come.
   The plant was completed in the late 1960s as part of the Little Rock Industrial Park in southern Pulaski County. Businesses never flocked to the area as hop
   Enter Jim McDougal, owner of Madison and an investor with a penchant for buying and building. In September 1985, he had nine housing developments under way,
   McDougal created a subsidiary, Madison Financial Corp.
   But the state only allows the subsidiary to hold investments equal to 6 percent of the S&L's assets. State Securities Department regulators had warned McDou
   McDougal arranged for the 1,000 acres at the industrial park to be purchased by Madison Financial and Little Rock businessman Seth Ward.
   Hopes for the proposed Southloop Bypass Freeway, expected to link U.S. 65-167 with Interstates 30 and 430 in Southwest Little Rock, propelled McDougal into
   McDougal dreamed of a development that would cater to blue-collar families who wanted an "upscale" mobile home community outside of Little Rock. Phase One w
   At the same time, Tucker needed a loan and McDougal agreed to give him one. But there was a catch. To get the money, Tucker would have to buy one of the fir
   Tucker agreed. On Oct. 25, 1985, Tucker borrowed $260,000 from Madison Guaranty and at the same time purchased 34 acres at the corner of U.S. 65-167 and Pra
   Tucker used $125,000 of that loan to pay for the land. Most of the remaining $135,000 went, he said, to pay off a loan at Savers Federal Savings & Loan that
   Garner had met Tucker years earlier through the Boy Scouts. The two friends eventually were part of a group that applied unsuccessfully for an FM radio stat
   Later, Garner, unemployed and broke in early 1984, needed money to pay off a 6-year-old debt for a failed solar energy business. His only collateral was his
   Tucker told Garner he needed help.
   In March 1984, Tucker and Garner's mother co-signed a $115,600 promissory note at Savers. Tucker held three promissory notes from Garner and was paid $17,00
   Tucker says he warned Garner then, "Make the damned mortgage payments."
   Garner didn't. Savers called the note. Tucker turned to McDougal for the approximately $135,000 needed to pay it off. That was when McDougal insisted Tucker
   As for Garner's mother, Tucker said foreclosing on a widow was "distasteful," and he asked David Hale to foreclose through Hale's real estate firm.
   "That was just not something I wanted to have in the newspaper without all the explanations," Tucker said.
   Even though 18 of the 34 acres of the Tucker Castle Grande land were in a flood plain, Tucker was considering building a strip shopping center on the proper
   Madison's skimpy records conflict with Tucker's recollection of what the loan was to be used for. The $135,000 that Tucker says was paid to Savers on the Ga
   Tucker said he spent about $8,000 on that study, but that was never the purpose behind the extra money from that loan.
   "I can't imagine how you'd spend $135,000 on a feasibility study," he said.
   Four months later, on Feb. 28, 1986, Tucker and Randolph, operating as Castle Sewer and Water, purchased the utility.
   Tucker was two-thirds owner and secretary of Castle Sewer and Water. He arranged the financing. Randolph owned the rest of the stock and was president. He o
   The sewer and water company dovetailed with Tucker's plans to lay cable from his County Cable Inc. through the area at the same time as Madison was selling
   Later, Tucker explained to the Associated Press that he had a concurrent side agreement with McDougal. Madison Guaranty would pay Castle Sewer and Water for
   Madison, Tucker said, pledged to provide all billing and mailing services for free during the first two years.
   But on the same day as the Castle loans to Tucker's company, examiners from the Federal Home Loan Bank Board arrived at Madison Guaranty.
   - Tucker company:
   Loan past due
   It was the beginning of the end for McDougal. Loan files were sketchy or missing, and auditors suspected the records had been altered. They feared Madison G
   On July 15, 1986, McDougal, who had moved his office to a mobile home at Castle Grande to avoid examiners, was officially removed from Madison Guaranty by o
   The regulators, now monitoring Madison Guaranty, demanded an accounting of past-due loans.
   The Castle loan was one of the largest single delinquent loans on Madison Guaranty's books.
   Haley, Tucker's attorney, provided the Democrat-Gazette with a typed list of Castle's payments to Madison. It showed five full payments of $8,698.32 each an
   However, a letter from the Federal Home Loan Bank Board to Castle Sewer and Water in September 1987 stated, "No payments have been made."
   A contract negotiated a month later with the regulators and signed by Tucker also contains the following language: "No payments have been made by borrower .
   Citing the side agreement with Madison to provide the sewer lines and hookups and billings -- promises that Tucker said Madison never fulfilled -- Tucker as
   He worked out a tentative deal. The $1.2 million sales price from Madison would be cut down to $675,000 and the $150,000 down payment from Capital Managemen
   The new loan amount: $525,000.
   The deal depended on the Legislature's passing a bill that, among other things, would allow small water and sewer systems to set rates without restrictions
   Specifically, the new loan was "contingent on the successful passage and signing by the governor of the utilities legislation with which Jim Guy Tucker is i
   A bill was introduced by Rep. Mike Wilson of Jacksonville, who was under contract at the time to operate a Jacksonville branch office for Tucker's law firm,
   Several small utilities wanted the bill, and Wilson said that Randolph talked to him about it. Wilson said he never discussed the bill with Tucker.
   The legislation was passed, then vetoed by then-Gov. Bill Clinton. After a cursory review by a House committee, it passed again and was signed by Clinton du
   The new loan agreement for $525,000 was signed Oct. 5, 1987.
   The original loan amount carried a 10.5 percent interest rate. The new loan required repayment at 6 percent for the first two years, then 9 percent until th
   The agreement also stated that Castle was liable for the original loan amount at the original interest rate if its property sold for an amount large enough
   Within the same week that the new loan was negotiated, Castle's subsidiary, Southloop Construction, borrowed $100,000 from Capital Management. In exchange,
   No payments were made on the Southloop Construction loan, according to the General Accounting Office, the congressional agency that audits federal programs.
   A year later, Castle had again missed its payments on the renegotiated loan. By February 1989, that loan was 90 days overdue.
   Tucker points out that all these loans were made to his companies, not to him personally.
   "The whole purpose of having corporations is to not have personal debt," Tucker told The Associated Press recently. "It is a customary and routine way of do
   However,  Tucker also told the Democrat-Gazette that the loans were doled out -- often without written applications or collateral -- on the strength of his
   He had been in business deals for years with McDougal, and purchased five of 400 shares of stock when McDougal bought the Bank of Kingston in 1980 in Madiso
   Tucker had a string of loans with Madison Guaranty over the years. In 1985, he paid off five loans totaling $211,000 at Madison Guaranty and took out anothe
   "I called Jim McDougal if I wanted to borrow money," Tucker said.
   On Oct. 9, 1985, for example, Madison provided Tucker with a $150,000 unsecured loan for his cable company.
   On the $260,000 Madison loan two weeks later, Tucker said: "I asked them to loan me the money, and they loaned the money. There was no loan application."
   By 1989, Castle Sewer and Water began courting a buyer.
   "As you know from our financial statements, the company has been losing money steadily," Randolph wrote Madison Guaranty.
   "It is highly unlikely the company can survive for more than another year. It is possible that it cannot survive that long," he warned.
   He mentioned selling Castle to nearby Wrightsville, but the city was not interested.
   Randolph then talked to the homeowners about forming an improvement district and taking over the plant.
   Willie Lorings, Quail Creek resident and volunteer fire chief, recalled that meeting.
   "They wouldn't turn over financial records so we could see how much money was coming in and what the company owed," he said. "They just wanted us to sign a
   That's when residents learned of the bill passed in 1987 allowing small systems to set their own rates.
   Lorings, who moved his family to the area 17 years ago, said the service declined after Tucker and Randolph bought the system in 1986.
   "Before they arrived, it was in good shape and we weren't charged astronomical fees," he said. "I'm paying $60 a month for water. At times it smells bad. Th
   - Trying to unload
   debt-ridden Castle
   In June 1989, Tucker sold his Castle stock to Randolph for $10.
   The company was not just debt-ridden. If Randolph had opened Castle's files, residents would have realized the business had been under fire from the state f
   The Arkansas Department of Pollution Control & Ecology had been citing Castle for not monitoring the system and for exceeding discharge limits since 1989. T
   In April 1991, Castle agreed to a consent order by PC&E and was given a deadline to bring the system into compliance. Its sewage treatment violated federal
   Although some work was done to upgrade the plant, Castle has never made major improvements or fully met the compliance schedules.
   By 1991, Randolph had a state government job. The Arkansas Development Finance Authority had hired the former contractor as its agriculture development spec
   His son, Randall, now operates the system.
   "Our company cannot absorb the debt service required for the improvements," Randall Randolph wrote PC&E on May 6, 1991. The company was exploring the possib
   When Castle was purchased in 1986, McDougal supplied Tucker and Randolph with a cash flow projection showing customer payments of $6,000 a month. Residents
   Randall Randolph did not return phone calls from the Democrat-Gazette to discuss the current revenue generated by Castle.
   Jeff Bowman, safety and environmental administrator for Siemens, said his company, with 300 employees is the largest industrial customer, accounting for 60
   "We're hoping once the improvement district takes over, that we can fund the improvements with existing revenues," he said.
   Gary Williamson, PC&E's enforcement administrator, said his agency has not hit Castle with heavy sanctions because, although it is not in compliance, there
   "The situation has been monitored, but it is not considered a high priority," he said.
   Mike Pyron, a Little Rock appraiser, was hired by the RTC to evaluate Castle in 1992.
   "It was obvious that here was a system that had been Band-Aided for a long time," he concluded.
   He determined it would be worth $640,000 if it were in good condition. But he warned that the plant was in disrepair and needed extensive upgrading.
   At the same time, Jim Summerlin, a consulting engineer working for the RTC, was asked to calculate the cost to bring Castle into compliance.
   The price tag: $475,000 for the sewer and $198,000 for the water system upgrades. A total of $673,000. Annual maintenance costs, he estimated, would be $113
   The Greater Little Rock Chamber of Commerce, concerned about the more than 1,000 jobs in the industrial park, also hired Summerlin to figure out how to impl
   "In any scenario, the customers will probably have to form an improvement district," Summerlin determined.
   In March 1993, Tucker, by this time the governor, bought back the $260,000 note owed to Madison. He paid the RTC $220,000. That was the loan used to cover t
   The RTC, Haley said, had lost the loan file, and the price was reached by calculating what Tucker had already paid.
   Tucker purchased the note through Ikansa Realty Inc., a company owned by Haley.
   "Because I am in government, we paid the loan in full," Tucker recently told The Associated Press. "A private citizen would have gone in and negotiated a re
   However, Haley told the Democrat-Gazette that he did try to get the loan trimmed back by $45,000.
   "I wasn't that good of a negotiator. It seemed fair to me, (to cut the price) but it didn't seem fair to them, and we ended up paying the full $220,000," he
   On a recent summer's night, Fire Chief Willie Lorings talked to a handful of industrial and residential users perched on metal lawn chairs outside the Quail
   They talked about starting an improvement district.
   "The revenue that's coming in needs to go toward fixing the system up," Lorings said, "not just going in those people's pockets.
   "We can do this ourselves," he encouraged his neighbors. "I'm going to send up some prayers this will work."
   As friends and acquaintances lingered afterward, Lorings shook his head over all the utility problems from inadequate service to high bills -- problems that
   "It's been tough," he said. "Real tough.'
   NEXT Madison appraisals: Questioning their worth.


















   Part 3: Optimistic Appraisals

   By Mary Hargrove, Don Johnson
   & Michael Whiteley
   Arkansas Democrat-Gazette Staff Writers

   Third in a series of four articles.
   Copyright © 1994, Little Rock Newspapers, Inc.
   Jim McDougal was in a hurry. The message was clear: Get it done "at once."                                           It was March 1986 and the owner of Madi
   Betts' appraisal was helpful. The land, he said, was worth $1.85 million. Just six months earlier, it had been part of a 1,000-acre tract that was sold for
   A year later, after federal regulators had seen the Madison loan files, they told Madison to do another appraisal. Madison hired Mike Pyron of Little Rock,
   Pyron wrote nine other appraisals on Madison land deals. He set substantially lower values than previous Madison appraisers had set on four key tracts in th
   "The (Madison) appraisals were unrealistic. The properties were never worth -- never worth -- those kinds of values and are not today," Pyron said.
   Pyron testified at McDougal's 1990 bank fraud trial and challenged Betts' work at Castle Grande. Betts, who was never called as a witness, said he was unawa
   But Betts said Pyron's allegations angered him. He said the two appraisers had used different measures to arrive at property value. Had they applied the sam
   "Don't you think it's really odd that they get up and trash my name and trash my work with absolutely no corroboration from me?" Betts asked. "I believe my
   Betts, however, declined to provide copies of his work to the Arkansas Democrat-Gazette, saying it belonged to Madison Guaranty. He also declined to check d
   But Betts said he was never aware of the loans and land transactions arranged by Madison as a result of his work.
   - Castle Grande's value
   overstated in appraisals
   McDougal dreamed of Castle Grande as an upscale working-class neighborhood featuring mobile homes, a shopping center, a convenience store and a truck stop.
   Madison Financial Corp., the savings and loan's real estate arm, and Little Rock businessman Seth Ward bought the land for $1.75 million in October 1985. Mc
   Loan records, land transactions and memos obtained by the Arkansas Democrat-Gazette show that during the next five months, the value of Castle Grande was ap
   McDougal characterized the original Madison appraisals as "optimistic" during a 1990 trial in which he was acquitted of bank fraud. Assistant U.S. Attorney
   Pyron was the chairman of the first Arkansas Appraiser Licensing and Certification Board and is often called as an expert witness in land cases.
   After testifying for the government in the McDougal trial and expressing his alarm over nationwide fraud among savings and loan appraisers, Pyron wrote Stol
   "I believe there was a systematic selection by savings and loan management of appraisers who were known to be liberal in their value estimates and who were
   Most of the Madison loans based on the early appraisals at Castle Grande went into default, including a $1.05 million loan that allowed Jim Guy Tucker and a
   What role did the appraisals play in the $65 million loss to taxpayers from Madison's collapse?
   Madison Guaranty used those appraisals to support the value of collateral to finance commercial property, enabling Madison to clear loans and property off t
   Betts appraised a large portion of land at the center of Castle Grande.
   Davis Fitzhugh, who briefly owned a Levi Strauss & Co. warehouse as part of the Castle Grande land rush, borrowed $525,000 for land Betts valued at $1.4 mil
   "It may have been appraised at more than $1 million," Fitzhugh testified at McDougal's trial, "but that appraisal is not worth anything."
   Betts responded that Fitzhugh was an accountant without the real estate savvy to know he was getting a bargain. And he said the construction materials alone
   "I wish I had been Fitzhugh (and) able to buy that warehouse for $500,000," Betts said. "As matter of fact, I'd take it right now."
   In the case of another Madison loan, this one to Master Developers Inc., what Betts omitted as a factor in determining value became as important as the fact
   The usage of Madison Developers' 59 acres was limited by a natural gas pipeline that ran through the property.
   Betts included the pipeline on an appraisal map. But he did not discuss the gas line in his report, although Pyron said it is "very prevalent on the site."
   Pyron subtracted value due to the pipeline. But Betts said the pipeline could just as easily have been a bonus for industries looking to buy from Master Dev
   "If you were putting in an industry that extruded plastic or vulcanized rubber, you would be happy to see that in x number of feet you have natural gas," Be
   Pyron appraised the land for $465,000, which was $1.4 million less than what Betts said it was worth.
   Pyron said his lower appraisals are not the result of land values decreasing with a fluctuating market. Values have remained stable.
   Local real estate agents agree. They say Little Rock never experienced the boom-and-bust cycle that devastated Texas and Oklahoma in the 1980s.
   Betts and appraiser Robert W. Palmer of Little Rock were frequently called upon by Madison in the mid-1980s. Both had private dealings with the savings and
   During the time that Betts was appraising land at Castle Grande, he took out three loans totaling $205,000 from Madison. Federal regulators foreclosed on th
   Betts said there was no connection between his personal loans and his work at Madison.
   "There was never any pressure. It was strictly business," he said. 'I had (other Madison) loans that were paid off."
   Palmer received more than $61,000 of the proceeds of a Madison loan on which he did the appraisal. The loan proceeds went to buy an option Palmer held on th
   Palmer's financial interest in the land was not at issue, but his assurance in the appraisal that he had no interest prompted a Madison Guaranty senior vice
   The vice president of Madison was Sarah J. Worsham Hawkins, who had worked as a Federal Home Loan Bank Board examiner before going to Madison Guaranty. In w
   Her March 3, 1988, referral revealed two sets of closing records on the sale of 7.7 acres in North Little Rock.
   The first set -- delivered to Madison -- makes no mention of money going to Palmer.
   However, an internal file at Quapaw Title Co., which closed that loan, showed that Palmer was paid $61,353.
   Palmer stated in the appraisal that he had "no present, contemplated or future interest in the property."
   He gave the Democrat-Gazette a copy of a disclaimer he said he included as an attachment to the appraisal report. He declined to provide a copy of the appra
   The two-paragraph disclaimer is undated and unsigned. It does not detail Palmer's stake in the real estate deal. But it does say that several Madison offici
   "As noted before in numerous conversations with loan officers from Madison Guaranty, this attachment is to recognize that the appraiser has a financial inte
   "It is my opinion that the Fair Market Value was objectively developed despite this interest," he concluded.
   Federal investigators first questioned the transaction five years ago. They looked at it again in June of this year, when Palmer explained the appraisal to
   The criminal referral surfaced as part of the investigation by special counsel Robert Fiske Jr., who had been looking into the business deals between Madiso
   Palmer said he and an employee, Bennie Beard, received the money because they were being paid for an option they held on the land. He denied any wrongdoing
   "Everybody knew that we had an interest in it," Palmer said. "Everything that was found -- everything about this transaction -- was completely disclosed. An
   Beard said he was unaware of Hawkins' criminal referral to the bank examiners. He said he was shut out of Palmer's activities in late 1987, when Palmer abru
   James Patterson of Cabot, one of the land buyers involved in Palmer's criminal referral, said he recently was questioned by federal investigators. He refuse
   Pyron and a national appraisal standards expert, Ken Thurston, said Palmer was not prohibited from having an interest in the land he valued. But Thurston, d
   "The idea is that the appraiser should be in a totally hands-off situation -- a disinterested third party so that his or her compensation is the appraisal f
   - A critical report warns
   of impending collapse
   Madison had been warned in 1984 that faulty sales comparisons and inflated projections by appraisers could trigger Madison's collapse.
   The warnings came from Hawkins while she still worked for the Federal Home Loan Bank Board.
   In a very critical report issued Jan. 20, 1984, on Madison's loans and appraisals, Hawkins, working as an examiner, said she uncovered three instances in wh
   Hawkins had gone to work for Madison Guaranty by the time Castle Grande was purchased by Madison Financial in October, 1985.
   Although McDougal was buying, Madison Guaranty needed to get the land off the books of Madison Financial because a purchase of that size would push the comp
   Within 22 days of the $1.75 million Castle Grande purchase, Tucker, at McDougal's urging, bought the first piece --a 34-acre tract of scrub brush and pine t
   Tucker paid $125,000 for that land. He borrowed a total of $260,000, using the land as collateral. He said he used most of the $135,000 difference to pay of
   Reflected in the light of Betts' appraisal, however, Madison appeared on solid ground. Eleven days before the Tucker purchase, Betts had valued those same 3
   However, 18 of the 34 acres were in the flood plain. Betts said he saw the potential for flooding, and mentioned it in his appraisal. But Betts did not fact
   He said he was hired to value the 34 acres on the basis that it was "ready to be built on."
   "I was merely asked to value the property at that point. I wasn't asking who, why, when or anything," he said. "I just did what I was told."
   Land and loan records filed in Ouachita County show Betts was personally borrowing from Madison at the height of the buying spree at Castle Grande.
   On Oct. 13, 1985, two days before he issued the Tucker appraisal, Betts bought a lot in Fair Oaks Phase 1, a Camden subdivision owned and developed by Madis
   Before the sun had set that day, Betts had borrowed five times that amount -- $68,000 --from Madison Guaranty, using that land as collateral. Betts built a
   Then he borrowed $125,000 from Madison Guaranty on Jan. 16, 1986. That loan was secured by other Ouachita County land. Again, the documents don't show how t
   In July 1986, Madison Guaranty's board ousted McDougal.
   By 1988, Betts had paid $42,000 on the large note and owed the full balance of the other two. The new management of Madison foreclosed on him. Betts owed $1
   Pyron and Thurston said appraisers also are not prohibited from borrowing money from banks or savings and loans for which they do appraisals. In fact, Pyron
   "We all live in a world where we have to finance our homes, our businesses, and various things we get involved with. I don't think it's uncommon," Pyron sai
   Betts, who operates a real estate business in Camden, said his loans at Madison were not a major portion of his business debt.
   His work for Madison had been questioned in 1986 by federal bank examiners. In 1990 it would be reviewed again by prosecutors in the McDougal trial. In 1994
   In one case, Betts compared sales prices at Sherwood and Otter Creek to justify values at Castle Grande, although the areas are many miles apart in opposite
   In 1987, Pyron appraised Tucker's 34 acres at Castle Grande at $120,000 -- about a third of Betts' estimate and $5,000 less than what Tucker had paid for it
   Other appraisals by Palmer took on significance in retrospect. One of them allowed Madison to lend $1.05 million to a company owned by Tucker and R.D. Rando
   When he was hired by Madison, Palmer said, he was given an engineering study showing water and sewer facilities worth $1.5 million.
   Instead of water and sewer plants, Palmer compared Castle to the sale of two residential tracts and an industrial plant with self-contained utilities.
   "They basically said they had an engineering report. I based my appraisal on that and they were satisfied," Palmer said.
   When Pyron reappraised Castle Sewer in 1992 for the RTC, he said the value was just $640,000, not $1.3 million.
   Palmer responds that the only justification for setting a value that low would be if the owners had let the plant deteriorate. State inspectors have cited t
   Palmer's appraisal on Etta's Place, the Sherwood restaurant, became part of the special counsel's investigation into the use of an $825,000 Madison loan.
   Early in 1986, Palmer placed a $755,000 value on Etta's Place, a closed restaurant at the corner of U.S. 67-167 and Wildwood Avenue in Sherwood owned by the
   Palmer failed to mention in his appraisal that the restaurant was closed. Paul, the final buyer, said the restaurant wasn't operating when he agreed to buy
   Hale sold the properties to himself through Paul and transferred $502,000 to Hale's own investment company, Capital Management Services Inc. The rest of the
   During an interview in April this year, McDougal said the restaurant was cheaply built and Palmer's estimate was highly inflated.
   Paul agreed. "That restaurant was never worth that," he said.
   Palmer contended that his main obligation as an appraiser is to satisfy the customer.
   For example, when Madison wanted quick, brief reports to sell new lots in Maple Creek Farms in southern Pulaski County, Palmer wrote letters instead of the
   "We were able to do those in a timely manner and give good service, and that's how we were able to get and keep doing their account," Palmer said.
   Both Betts and Palmer say they were never aware of the insider land sales and trades that sometimes surrounded their work.
   "I was a part of whatever went on there -- unwillingly," Betts said. "As far as I knew, as far as I know, I was a businessman doing business."
   Pyron believes Madison was hiring appraisers for their speed and not their accuracy.
   The tip-off?
   Betts relied on a land sale as far away as Sherwood to support a value in south Pulaski County -- 16 miles apart.
   "It's like the moon and Mars," Pyron said.
   Betts said he does not remember using a Sherwood comparable. He declined to review his appraisals to check Pyron's comment.
   NEXT Federal regulaors were watching our money -- or were they?

















    Part 4: 'Red flags' ignored in financial debacle

   By Mary Hargrove, Don Johnson
   & Michael Whiteley
   Arkansas Democrat-Gazette Staff Writers

   Last in a series of four articles.
   Copyright © 1994, Little Rock Newspapers, Inc.
   Jim McDougal couldn't refrain from buying real estate -- his Madison Guaranty Savings and Loan Association was on the brink of insolvency.
   The brakes could have been applied to these now-defunct companies in 1984. Or in 1986. Or certainly by 1987.
   Red flags were clearly evident by the mid-1980s for federal regulators to try to rectify problems at Madison Guaranty and Capital Management.
   Instead, Attorney General Janet Reno in January was forced to appoint a special counsel to investigate business dealings between Bill and Hillary Rodham Cli
   The territory to be covered was not new. Madison Guaranty and Capital Management -- their funds either partially supplied or insured by taxpayers -- had bee
   A review of the records reveals a shocking lack of supervision that to date has cost the taxpayers at least $70 million, including $1.8 million for the curr
   The counsel's staff has been combing through decade-old business deals that should have alerted regulatory agencies at the time.
   In 1984, the Federal Home Loan Bank Board issued a critical report after examining Madison Guaranty's operation.
   It would be five more years before Madison was taken over by regulators.
   In 1991, the Small Business Administration questioned why Capital Management books did not reflect that 86 percent of its loans were past due, according to
   It would be two more years before Capital Management was placed in receivership.
   Someone should have been watching the watchdogs.
   Here are a few of the red flags:
   - 1984 and 1986: Federal Home Loan Bank Board reports
   Madison Guaranty was in trouble. Deep trouble.
   So much so that the Federal Home Loan Bank Board ordered Madison Guaranty's directors to come to Dallas in July 1986. Federal Home Loan Bank Board superviso
   - They had allowed the institution to run wildly out of control since a critical 1984 exam.
   - Records were inaccurate or missing.
   - Appraisals did not meet the most basic standards.
   - Savings and loan employees had tried to hide records or create files with back-dated documents.
   In one case, Madison board members would later discover, the S&L had not performed a title search to check on property used for collateral. Madison Guaranty
   Although the regulators had issued strict orders to Madison Guaranty two years earlier, they had not returned to enforce them until Feb. 28, 1986.
   Madison Guaranty, with McDougal at the helm, recently had purchased 1,000 acres in southern Pulaski County that he called Castle Grande. Loans for most of t
   Nearly every "commercial" transaction in Castle Grande was being looked at by Faulk's examiners. That included the $1.2 million sale of a sewer and water ut
   If Faulk decided to write off the questionable loans to Castle Grande borrowers and the overdue loans on two other McDougal real estate developments, Madiso
   Faulk issued strict guidelines that day in July, directives that grew even stronger Aug. 15, 1986, under a cease-and-desist order. New funds were not to be
   Madison's reaction was the equivalent of a yawn.
   When examiners returned for a follow-up visit three months later, they discovered:
   - Madison had given new chairman Steve Cuffman a $96,000 salary, part of a package of raises examiners called "excessive" and said violated the cease-and-de
   - Senior Vice President Sarah J. Worsham Hawkins' salary had jumped from $33,000 to $65,000. She was given an 8-year-old blue Bentley to drive, plus $500 fo
   - Comptroller Greg Young had received a 100 percent salary increase from $25,000 to $50,000 and was given a year-old Mercedes to drive. Young said that, wit
   - Madison Guaranty had not hired a real estate consultant to review its land and investment portfolio or obtained an independent audit as it was told to do.
   - It had extended an overdue $40,000 unsecured loan to ousted owner McDougal, in violation of the Federal Home Loan Bank Board's order. The loan was renewed
   Madison Guaranty board minutes reflect similar problems in the running of the S&L without McDougal. Excerpts from a Jan. 27, 1987, meeting state:
   "The extension request by (name blocked out) had been consummated through error. The board had previously denied extension since the borrower had refused to
   In May 1987, KPMG Peat Marwick, hired at the request of the Federal Home Loan Bank Board, released an audit. Madison Guaranty was insolvent by $10 million.
   It took nearly two more years before Madison Guaranty was officially taken over by the regulators. Today, the Resolution Trust Corp. totals the loss at $65
   - 1987: Madison Guaranty
   vs. Dean Paul
   Dean Paul signed loan papers for $825,000 from Madison Guaranty in 1986.
   But, when Paul was sued for failure to pay a year later, he had an interesting answer: He never got the money.
   Paul said in an affidavit signed in August 1987 that he was acting as a "disclosed agent" for David Hale when he obtained the Feb. 28, 1986, loan.
   And Madison, he added, was well aware of that fact.
   The first time Madison Guaranty and Capital Management were linked was in a 1987 lawsuit against Dean Paul. But no one followed up beyond asking a few quest
   The money, Paul said he told everyone, was being diverted through Hale to help Madison Guaranty "clean up its books." And, he said, the loan would be repaid
   Paul, a Malvern businessman, said his attorney, Mark Roberts, withdrew from the case because of a conflict, so he hired John Haley.
   Haley was Tucker's friend, business associate and attorney.
   Haley said Paul didn't tell him that a Tucker/Hale business venture was supposed to repay the Madison loan. But Paul said he told Haley the plans for repayi
   If Paul had mentioned Tucker's alleged involvement in what appeared to be a sham transaction, Haley said he would have considered it a conflict of interest
   "I don't recall anything like that," Haley said. "We are very cautious of any conflict of interest. If there had been any appearance of conflict, we would n
   Haley said he doesn't know whether Paul was aware at the time that he and Tucker were good friends.
   "I don't know if there were any occasion for that to come up. I can't imagine any occasion for that to have been discussed," Haley said.
   Paul said he didn't feel Haley had done enough for him in the case.
   "I got the feeling that my interests were not first and foremost," Paul said of Haley's representation.
   Haley said he was "sorry (Paul) feels that way."
   Paul "could never establish from any third party that he was acting for Hale," Haley said. "According to all the documentation, Hale was simply a seller."
   Asked if he pursued Paul's story, Haley said he obtained a statement from Hale. He said he couldn't disclose what Hale had told him.
   "I can say this much, if there had been any intimation from Hale that he had a continued interest in the transaction and that Tucker was even remotely invol
   Madison Guaranty was aware of Paul's claims that something was wrong with the loan.
   Its board of directors took note in an Oct. 15, 1987, meeting that "former management could be involved in the distribution of the proceeds from the loan."
   McDougal has denied knowing anything about the Dean Paul loan.
   Hale pleaded guilty in March of this year to a mail fraud charge covering various acts allegedly committed by the former judge "and others known and unknown
   Randy Coleman, Hale's attorney, said part of the mail fraud charge related to the Paul loan.
   Tucker's press secretary faxed a statement to the Arkansas Democrat-Gazette that said, "Mr. Tucker had no knowledge of or participation in the $825,000 loan
   But a 1989 memo from former Madison Guaranty President and CEO John Latham to his private attorney, obtained by The Associated Press, suggests Tucker and Mc
   The memo describes how the FBI questioned Latham about the loan in 1989. Other former Madison employees have said they were questioned by the FBI about the
   Latham's memo reads: "Because of the fact that Jim Guy Tucker was involved and that McDougal's opinion on the real estate was that its value was more than s
   Madison Guaranty won a judgment against Paul's company for $993,960 in November 1987. After foreclosing on the land, Madison was left with more than a quart
   Paul was questioned by federal investigators in 1990 before the McDougal trial, but never asked to testify. He was questioned again in 1993 and again severa
   - 1979-93: Small
   Business Administration
   The conclusion of the General Accounting Office auditors was simple and to the point.
   David Hale's Capital Management Services -- which was subsidized by the Small Business Administration -- had been mismanaged for years. The SBA, because of
   They were more like red rockets.
   When a special team of GAO auditors seized Hale's books after his indictment in September 1993, they discovered that 11 previous audits over 14 years had be
   v Hale "secretly controlled" 13 of 57 companies that borrowed money. The flag? Nine businesses listed Capital Management's 1910 N. Grant St. address as thei
   v A 1991 audit disclosed that Capital Management didn't accurately reflect the number of delinquent loans on the books. Examiners checked the payments and f
   v Hale's company was supposed to provide loans to "socially or economically disadvantaged" individuals. The flag? A $300,000 loan to Susan McDougal whose lo
   When Hale was told by federal auditors that his firm's eligibility profiles were insufficient, he responded, "Arkansas is the poorest state in the United St
   "This area has been determined by the Congress ... to be economically depressed in comparison with that of the Third World Countries."
   That meant, Hale told auditors, that any Arkansas resident was qualified as "socially and economically disadvantaged."
   That included cable TV companies connected to Jim Guy Tucker. From 1983-87, Tucker entities borrowed $725,000 from Capital Management.
   Tucker, who acted as Hale's attorney in the mid-1980s, said he did not know of the "socially or economically disadvantaged" qualification.
   Billy Cost, a former Tucker business partner whose name appeared on three loans for cable companies in 1983 and 1984, said Tucker told him how to qualify fo
   Cost said Tucker told him that his Vietnam-era military service made him eligible for the loan.
   "I specifically remember he and I having a big discussion on that," he said.
   Cost added he wasn't told Hale's company made loans to "socially or economically" disadvantaged individuals.
   Whether Tucker was aware or not, as a Vietnam-era veteran, he would have qualified for the loans on his own.
   Tucker's wife, Betty, as joint owner of the cable companies, applied for the Cablevision Management loans. She would have qualified under the SBA guidelines
   But, as the General Accounting Office said with the Susan McDougal loan, the Tuckers' net worth would have made the loans questionable. Betty Tucker applied
   While his companies were borrowing funds underwritten by the federal government to help disadvantaged businesses in 1984, Tucker earned $180,000, held $1.4
   A source familiar with Hale's company described the SBA audit of Capital Management procedures as "just pitiful."
   "It was nothing in the way of an audit. This guy would come in and sit around and shoot the bull all day long and never question that there were loans on th
   The failure to watch Hale closely cost taxpayers $3.4 million.
   - 1994: The latest
   federal investigation
   Kenneth W. Starr, the new independent counsel, has promised to pick up where his predecessor, Robert Fiske Jr., left off.
   "The nation has a compelling interest in the fair, just, thorough and prompt disposition of these matters," he said.
   The tab for Fiske's share of the investigation through July: $1.8 million.

   About this series
   For six months, a team of reporters for the Arkansas Democrat-Gazette has investigated Whitewater-related topics.
   Associate Editor Mary Hargrove led the research, reporting and writing effort. Hargrove has been at the Democrat-Gazette since leaving the Miami Herald in F
   Don Johnson has been a reporter and editor at the Democrat-Gazette for 14 of the last 15 years. He served as Washington bureau chief, assistant city editor,
   Reporter Michael Whiteley joined the newspaper last fall after working in special projects and computer-assisted reporting for the Fort Worth Star-Telegram.
   Design Director Ray White, Assistant Managing Editor for Graphics Kirk Montgomery, Photo Editor Barry Arthur, and Assistant Managing Editors Frank Fellone a

   
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