Nabbing David Hale

Kenneth Starr's key Whitewater witness turned his government-funded loan company into an ATM machine for his politically connected friends. When the feds caught on, he tried to blame President Clinton.

Published March 3, 2000 5:00PM (EST)

To Little Rock judge and con man David Hale, suddenly facing a federal indictment, the right-wing obsession with ruining the Clinton presidency offered an excellent opportunity to evade the consequences of his own crimes. His embezzlement of $2 million from the U.S. government didn't trouble the Clinton-hating arch-segregationist "Justice Jim" Johnson or the gonzo conservative activists at Citizens United, who eagerly promoted Hale's uncorroborated charge: that the president had pressured Hale to OK a fraudulent loan to Susan McDougal, the Clintons' Whitewater partner.

But however zealous, those fringe advocates on the right couldn't do much for Hale by themselves. The crooked judge's gambit couldn't succeed without attention from the national media -- including a few timely phone calls from a certain well-connected reporter for the New York Times.

When a squad of FBI agents burst into the offices of Capital Management Services (CMS) in downtown Little Rock on July 21, 1993, and started carrying out boxes of files, their arrival ended several weeks of suspense for the company's proprietor, David Hale. While sitting as a judge in the city's municipal court, Hale had continued to operate several enterprises, the most lucrative being Capital Management Services, a private small business investment company (SBIC) that made loans backed by the U.S. Small Business Administration. With SBA funding and a license obtained in 1979, Capital Management Services was originally chartered to lend to businesses owned by minorities and other "disadvantaged" entrepreneurs. Under the Reagan administration, however, those federal requirements had been loosened to the point where virtually anybody qualified for an SBA loan-a loophole Hale exploited to the fullest advantage.

Hale's angle was a federally subsidized variation on the classic "bust-out" scheme. In collaboration with prominent political figures and others, he had loaned millions of federal dollars to more than a dozen dummy companies he secretly owned. Having no cash flow and no assets, his companies had then defaulted on the loans after Hale siphoned off all the money. The ultimate accounting would show that he had walked away with as much as $3.4 million.

This kind of crude fraud could hardly continue undetected forever. (A rather obvious clue was that the dummy companies all listed the same address as Hale's office.) By the end of 1992, Capital Management had drawn the scrutiny of SBA officials. Attempting to qualify for increased federal matching funds, Hale had confided to an administrator at the agency's Washington headquarters that millions in noncash assets had been "donated" to the firm thanks to his political influence. When the SBA proposed an audit, Hale attempted to withdraw his application, which aroused immediate suspicions. As soon as SBA investigators started poring over Hale's records, they found fraudulent entries everywhere they looked. Of fifty-seven outstanding loans on Capital Management Services' books, thirteen had gone to dummy corporations controlled by Hale. Altogether, he'd advanced the phony companies about $2.04 million.

Perhaps the most cynical aspect of Hale's scam was his exploitation of SBA matching funds. For every dollar of operating capital CMS came up with, the taxpayers kicked in three. Hale would finance a loan to one of his dummy companies, default on it, and then use the embezzled funds to generate more operating capital on a three-to-one basis. He repeated this pyramid scheme many times. Hale also ran various real estate and insurance frauds to raise more operating capital. One of the SBA investigators later told Senate staffers that Hale's embezzlement scheme was the most brazen he'd encountered in his twenty-five years with the agency. The SBA's inspector general swiftly referred the case to the FBI. No later than May 1993, Hale knew that federal officials were taking a hard look at his operation.

The FBI's seizure of his records concluded a long and remarkable dual career for David Hale. Publicly, he was a pillar of the community; privately, he was an inveterate con artist. Though his record as a judge was undistinguished, Hale came from an old hill-country clan with a long history in state politics, and he had established himself in Little Rock at an early age. Friendly and personable, a backslapper and glad-hander, he had pledged the right fraternity at the University of Arkansas; as a young businessman he had joined the Junior Chamber of Commerce, and he was elected national president of the Jaycees in 1974.

Regardless of his family's strong Democratic background, Hale never allowed partisan loyalties to obstruct his personal interests. He carefully cultivated the powerful, Republicans and Democrats alike. Hale was a longtime associate of Sheffield Nelson, the president's bitterest GOP rival. Many news reports would identify him as a Clinton appointee, but in fact Hale's judicial robes were bestowed upon him in 1981 by Governor Frank White, the Republican who had defeated Clinton's first bid for reelection the previous year. White signed a bill creating the judgeship for Hale, including an unusual provision that permitted him to run for election to the bench after his appointed term expired, a circumstance normally prohibited by the state constitution.

The entire scope of Hale's crimes, extending well beyond Capital Management, would not be revealed for years after the FBI raid. A few Arkansans had gotten a glimpse of Hale's true character prior to his well-publicized disgrace. Though he professed to be a devout and happily married Baptist, Hale conducted a long-running illicit affair with his secretary. While romancing her, he managed to swindle her grandparents into signing over their family farm to him. They later sued the judge and won a $486,000 judgment. Years before Hale was caught, at least one business associate later accused of complicity in his crimes had made a trip to Washington at his own expense to warn SBA officials that Hale was corrupt. Unfortunately, those warnings were ignored. Also known as something of an eccentric, Hale was the only judge in Little Rock-his court handled misdemeanors and traffic cases-to have a bulletproof shield installed in front of the bench. Visitors were required to pass through not one but two metal detectors to enter his courtroom.

Hale would eventually proclaim on national television that he had once been a "close political friend" of Bill Clinton, at the same moment he accused the president of joining a felony conspiracy to defraud the United States government. Oddly, however, he had never donated significantly to any of Clinton's political campaigns. And the clearest indication of Hale's true loyalties was that in the raid's aftermath, he immediately turned for help to Clinton's bitterest adversaries.

To "guide him through the jungle" of federal law enforcement, Hale hired defense attorney Randy Coleman, the partner of Sheffield Nelson's former campaign finance chairman. His new lawyer quickly ascertained from prosecutors that Hale would soon face several felony counts for a multimillion-dollar fraud against the Small Business Administration. With a federal indictment only weeks away, Coleman placed a call to William Kennedy, an attorney in the White House counsel's office whom he had known in Little Rock.

During a brief conversation, Coleman outlined Hale's sudden legal difficulties and added that this "might pose some problems for our mutual clients." When Kennedy asked him to be more specific, Coleman mentioned that the Hale investigation was likely to include the president's Whitewater partners, James and Susan McDougal, who had received loans from Capital Management Services; also likely to be caught up in the case for the same reason was Arkansas governor Jim Guy Tucker. And because of the McDougal connection to Whitewater, Coleman hinted, the Clintons themselves might fall under suspicion.

When Kennedy asked what Coleman wanted him to do, the defense lawyer replied, "Well, I don't want you to do anything. I'm just trying to figure out where everybody is on this matter." Two days later, Kennedy called back to learn more details. Coleman read off a list of certain Capital Management transactions that were under investigation, mentioning the $300,000 loan to Susan McDougal. Would Hale allege any "face-to-face meetings"? Kennedy wanted to know. Taking this as a reference to Bill Clinton, Coleman said he would. Kennedy didn't press any further, and Coleman remarked that if Heidi Fleiss was the "madam to the stars," then David Hale was the "lender to the political elite in Arkansas." (There was some truth to this quip, except that Hale loaned much more to elite Republicans, including two former party chairmen, than to Democrats.) Thanking him for the "heads up," Kennedy said he might get back to Coleman, but never did.

As Coleman eventually admitted in Senate testimony, he hadn't phoned Bill Kennedy simply to chat about the Hale case. He had hoped to provoke the White House into a foolish overreaction, such as interfering with the investigation in an attempt to keep Hale quiet. "I thought if I just made a provocative phone call, who knows what might transpire? These folks over here'd shown a propensity to make an ill-advised phone call or two in times past in their travel office situation, and I could just hope maybe it might happen again."

No "ill-advised" action was taken by anyone in the White House, however, and Coleman entered into several weeks of fitful negotiations with the newly appointed U.S. attorney in Little Rock. Paula Casey, an active Democrat and former law student of Bill Clinton's, had just taken over the office from her Republican predecessor, Charles Banks. Coleman's bargaining position never changed from their first meeting, and Casey found it unacceptable, not to mention audacious. In exchange for unspecified information about possible crimes by unnamed members of the "political elite of Arkansas," Coleman said, his client should be allowed to plead guilty to a misdemeanor. That way he could retain his judicial position and law license, and stay out of jail, too.

Casey and her deputy, veteran federal prosecutor Fletcher Jackson, told Coleman that based on the evidence against Hale, they wouldn't even consider a deal unless he agreed to plead guilty to a felony-and made a written "proffer," in advance, of any incriminating information he possessed about others. The proffer would then be tested for its veracity before any deal was made. These conditions were simply standard law enforcement procedure in dealing with any criminal defendant, let alone a con man of Hale's magnitude. As career Justice Department officials later testified, approving a lenient plea bargain without a proffer from Hale would have been the legal equivalent of "buying a pig in a poke."

As Coleman's jousting with Casey dragged on, the defense lawyer tried to create a written record that would support Hale's demand for a special prosecutor. On September 15, he sent a blunt letter to Casey accusing her of withholding a plea agreement because of "the potential political sensitivity and fallout regarding the information which Mr. Hale could provide to the [U.S. attorney's] office." He added vaguely that Hale's information "would be of substantial assistance in investigating the banking and borrowing practices of...the elite political circles of the State of Arkansas, past and present." He then asked Casey to step aside in favor of a special prosecutor.

Casey answered him by mail the following day. Hale's veiled assertions posed no problem for her, she wrote, but his crimes were too serious to permit the free ride Coleman was demanding. Her insistence that Hale plead guilty to at least one felony count had been repeatedly rejected by his lawyer. "Therefore, our plea negotiations are at an impasse," she concluded.

In the absence of a reasonable plea bargain and a proffer of useful testimony, Casey and her associates moved forward. On September 23, the federal grand jury in Little Rock handed up a four-count felony indictment against Hale charging him with fraud against the U.S. government.

The friend whose counsel Hale relied upon most as he faced criminal indictment wasn't his attorney, but "Justice Jim" Johnson, the diehard segregationist and perennial Clinton nemesis. Although there was no indication that Hale shared Johnson's extreme political outlook, their relationship went back decades. "I have known his family for three generations," Johnson was quoted as saying in this story. "His deceased brother John was one of my strongest supporters." He went on to say that they were so close, in fact, that during the tense summer of 1993, Hale went to live with the retired justice and his wife for a while at their farm, White Haven. From Johnson's point of view, "David was a young man who was in some trouble, and it was because of things that he did with Bill Clinton. We wanted to see to it that they were not able to cover that up." Telephone records show that during the months immediately following the FBI raid, Hale called Johnson's office more than forty times.

It was under Johnson's tutelage that Hale finally made his "proffer" about Clinton-not to the U.S. attorney, but to right-wing activists in Washington, and then to the news media. "I told him that with the influence the Clinton Administration and their friends had in the Federal court system here in Arkansas, that the only chance he had to help himself and his country was to see that all the facts were made available to the major news outlets throughout the world. I helped him get that project in motion."

Johnson later tried to suggest that he hadn't contacted Hale until after he read about Hale's problems in the Arkansas newspapers, but in fact they had been in touch months earlier. He also spread misinformation about Hale's supposed relationship with Clinton. "The Hale family," he told the ultraconservative Washington Weekly, "was a meaningful part of the Clinton Administration when [Clinton] was Governor of Arkansas. Clinton appointed David to a municipal judgeship." Both assertions were false. In fact, as a close observer of state politics and a Republican himself, Johnson surely knew that Hale was no friend of the Clintons. Not only were most of Hale's business associates prominent Republicans, but he had helped manage the campaign of Clinton's opponent, Jim Guy Tucker, in the bitter 1982 Democratic gubernatorial primary. Hard feelings persisted on both sides following that contest, to the point that Clinton and Tucker could scarcely speak of each other without snarling.

Sometime in August, Justice Jim Johnson called David Bossie, his associate from the 1992 presidential campaign, at the Citizens United office in Washington, saying he had "a friend who was in trouble." He assured Bossie that Hale could implicate Clinton in his own financial misdeeds. Bossie promised Johnson he would call Hale, but he didn't have to. At Johnson's urging, Hale called Bossie instead within minutes.

For two hours, Bossie listened with mounting excitement as Hale recounted his tale of woe. He was being set up as "the fall guy" by the Clinton-appointed federal prosecutor, Paula Casey, because she didn't want to act on his accusations against the McDougals, Tucker, and Clinton. As governor, Hale claimed, Clinton had "pressured" him in early 1986 to make an illicit $300,000 loan from Capital Management to a firm controlled by the McDougals called Master Marketing. The purpose of that loan, said Hale, was to "clean up" the Democratic "political family" in Little Rock, a reference to Clinton, the McDougals, and Tucker. On the deal's other end, he continued, there was an inflated $825,000 Madison Guaranty real estate loan provided by McDougal, which allowed Hale to pocket hundreds of thousands of dollars.

Later, Hale would embroider his story to include various colorful details of his alleged meetings with Clinton, including one on the steps of the Arkansas capitol and another in a trailer where McDougal kept an office, when they discussed the loan. He never would offer any specific dates, and the files seized from his office provided no support for his charges against Clinton. Lack of documentation, however, didn't prevent Hale from telling people that damning evidence had once existed. In several interviews given during the fall of 1993, the former judge claimed that he had formerly possessed documentary evidence proving Bill Clinton's participation in the bogus Master Marketing loan, but that federal investigators had stolen it.

"The file on the $300,000 loan was three to four inches thick when the FBI took it," Hale eventually told an Associated Press reporter. "But when my attorney and I asked to see it a month or so later, the U.S. Attorney's office gave us maybe an inch of stuff." One of the supposedly purloined documents was a handwritten letter from Jim McDougal to Hale, promising that Bill Clinton would make good on the Master Marketing loan. Not that a letter from McDougal to Hale, both of whom would later be proven to have forged and altered scores of documents for their own benefit, would have established the truth of Hale's accusations. Interestingly, however, almost none of the reporters or political operatives to whom Hale told this improbable tale chose to share it with the public.

When Assistant U.S. Attorney Fletcher Jackson was deposed on the subject of Hale's purloined papers, he categorically denied ever seeing what he mocked as "the smoking gun letter," and expressed doubt that it ever existed. Hale had dispatched his attorney to Little Rock FBI headquarters to fetch a copy of the letter from the file in September 1993. Asked if the lawyer had said why he wanted it, Jackson responded sardonically: "No, but hell, we both knew why he wanted the letter ... It was something that might support the position that [Hale] had been taking. 'The devil made me do all this. I was a victim of all these high-powered political types who forced me to give away all of the money which left S.B.A. and me holding the bag.'"

Hale's account was further undermined by at least one more stark contradiction. Back in November 1989, FBI agents investigating the failure of Madison Guaranty had questioned Hale about his dealings with Jim and Susan McDougal, including the $300,000 loan. According to the agents' official memorandum of that interview, Hale described in some detail his dealings with Jim Guy Tucker (then an attorney in private practice), both McDougals, and several others, but never mentioned Governor Bill Clinton. Nor did Clinton's name come up when Hale testified at McDougal's 1990 trial, which ended in an acquittal. Such exculpatory facts were routinely omitted from the news accounts of Hale's sensational allegations against the president.
Randy Coleman's defense strategy was to launch his client's story into print and onto the airwaves, even as he stubbornly rejected any compromise with Paula Casey. It appeared to many as if Coleman and his client-with the help of Brown, Bossie, and Johnson-wanted to create a public uproar concerning Whitewater, so they might bludgeon Casey into reconsidering a lenient plea bargain or force her off the case entirely.

Drawing national attention to Hale was difficult at first. When his indictment was announced, he dramatically related his story about Clinton and the McDougals to the Arkansas Democrat-Gazette, but the report that appeared in the Little Rock daily wasn't sufficiently pointed in its accusations to be picked up by any larger media outlets. At Sheffield Nelson's urging, however, Coleman already had taken his client to the most influential newspaper in the country, hoping that the New York Times would welcome a fresh angle on the Whitewater story it had broken the year before.

About two weeks before Hale's indictment was handed down, Coleman had contacted Jeff Gerth, the Times investigative reporter whose front-page article had caused a brief stir in March 1992. The lawyer had invited Gerth down to Little Rock to hear Hale's account in person at his law office. Gerth accepted, and over the course of two days questioning Hale, became sufficiently convinced to ask him to go on the record. After hesitating for a few days, Hale agreed.

Yet when Gerth found and interviewed his old source Jim McDougal, the ailing recluse said he had no memory of talking about the $300,000 loan with Hale and Clinton. Gerth got nothing useful from Casey or the Clinton White House, either. Stymied for the moment, he remained in touch regularly with Hale and Coleman, whose telephone records show almost two dozen calls to the Times reporter between September 19 and December 10. (Those records, of course, do not show the calls placed by Gerth to Hale and Coleman.) During roughly that same period, from September 27 to December 21, Hale also made at least twenty-eight calls to Jim Johnson.

The Times's national editors at first declined to publish unverified charges against the president by a man under indictment for embezzling federal money. But in a display of solidarity with his new source, Gerth took some unusual steps to assist Hale and Coleman. He contacted an agent at the FBI's office in Little Rock to report Hale's story concerning Clinton and the $300,000 loan. He also informed the FBI agent about the impasse Coleman and Casey had reached during their plea bargaining. In that conversation, it would appear that Gerth suggested to the FBI that Casey was unwilling to take testimony from Hale that might implicate Tucker and Clinton. The Times reporter later said, "I don't remember speaking to the FBI guy, but maybe I did."

After hanging up with Gerth, the FBI agent immediately posted a teletype from Little Rock to the FBI director's office in Washington, which said in part: "Gerth alluded that this was why the United States Attorney Casey would not deal with Coleman when he was attempting to work out a suitable deal for his client."

Later that day, Gerth also called Irv Nathan, associate deputy attorney general, at the Justice Department's Washington headquarters. He told Nathan about Hale and Casey, prompting the Justice official to inform his superiors about Gerth's tip. According to the reporter, who considered Nathan a friend, "I told him what Hale was alleging and asked what he knew, what his reaction was." Nathan's concern quickly led to a meeting of top Justice officials to consider whether Casey should recuse herself from the Hale case because of her relationships with Clinton, Tucker, and other Arkansas Democrats.

Among those participating in the Justice Department deliberations over Casey's potential conflicts were John Keeney, the second-ranking official in the Criminal Division, and Gerald McDowell, the chief of the Frauds Section. Casey and her staff took the position that absent strong and persuasive evidence from Hale, she should not recuse, lest every white-collar criminal in Arkansas force special consideration by claiming that Bill Clinton had made them commit a felony. Under the circumstances, however, Justice Department officials decided that Paula Casey should step aside, as she soon agreed to do. But they also resented what they viewed as underhanded methods used by Hale's lawyer in attempting to coerce a favorable plea bargain. To McDowell, "it looked like Coleman was using Gerth to send messages to the FBI and the Department of Justice in Washington and telling them, giving them, in effect, proffers, but not in any useable form." Both he and Keeney regarded this maneuver as "totally inappropriate."

Even after Hale's indictment, Coleman continued to insist that his client wouldn't plead to a single felony count. He remained steadfast after Casey recused herself in early November and was replaced by Donald McKay, a career Washington prosecutor in the Frauds Section. Clearly, Coleman was no longer interested in dealing with the Justice Department, if he ever had been. Hale's advisers were openly pushing for an independent counsel, and the surest way to achieve that was through the media, not the Justice Department or the courts. During the fall of 1993, Hale's telephone records show that in addition to his contacts with the Times, he called reporters at the Washington Post, Time, and Newsweek, as well as conservative publications such as the Washington Times, owned by Unification Church leader Sun Myung Moon, and right-wing media magnate Rupert Murdoch's new magazine, the Weekly Standard.

Although Gerth had a head start, the Post's Michael Isikoff began chasing down Hale's allegations not long afterward. Someone aware of Isikoff's interest in Clinton and Whitewater had faxed the Democrat-Gazette's September 24 story about Hale's charges to him. Like Gerth, Isikoff interviewed Hale himself. Then he and his colleague Howard Schneider, assisted by Susan Schmidt, a reporter on the savings and loan beat, spent weeks trying to confirm Clinton's role in the $300,000 loan. But all they got was a firm denial from Jim McDougal, which for the moment meant no story.

Editor's note: This article has been changed since it was first published.

By Joe Conason

Joe Conason is the editor in chief of To find out more about Joe Conason, visit the Creators Syndicate website at

MORE FROM Joe Conason

By Gene Lyons

Arkansas Times columnist Gene Lyons is a National Magazine Award winner and co-author of "The Hunting of the President" (St. Martin's Press, 2000). You can e-mail Lyons at

MORE FROM Gene Lyons

Related Topics ------------------------------------------

Hillary Rodham Clinton Joe Conason