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Clinton Friend Pleads Guilty to Misapplying Loan Funds

By Susan Schmidt
The Washington Post

Whitewater independent counsel Kenneth W. Starr Thursday stepped up his prosecution of Arkansas Democratic Party figures who dipped into a local kitty of federally backed loans intended for disadvantaged people. Just a day after Gov. Jim Guy Tucker was indicted in connection with the loan program, Stephen Smith, a longtime associate of Tucker and President Clinton, pleaded guilty to misapplying loan funds.

Smith, who was one of Clinton's closest aides during the early years of his political career, agreed to cooperate with prosecutors looking into allegations that leading members of the state's "political family" used a capital venture firm backed by the Small Business Administration for personal and political ventures. Smith pleaded guilty to a single misdemeanor conspiracy count.

Smith becomes the 11th person who has faced charges in an investigation that arose out of a land deal by Bill and Hillary Rodham Clinton and broadened into an examination of possible wrongdoing by various Arkansas political figures at financial institutions and federal agencies. The investigation's offshoots have led to legal trouble for the president's closest friends and political associates.

Smith's plea agreement said in early 1986 he and former S&L owner James B. McDougal submitted a phony loan proposal to Capital Management Services Inc., the SBA-backed firm owned by David Hale, a former Little Rock municipal judge and Democratic Party operative who has been cooperating in the Whitewater investigation since last year. CMS lent Smith's political consulting firm $65,000, ostensibly to hire a new marketing employee. The money actually was used to pay off a real estate loan incurred by the King's River Land Co., a corporation that included Smith, McDougal and Tucker, according to court papers.

Tucker will be arraigned next week on charges that he falsely obtained a separate $300,000 loan from Hale's company and conspired to defraud the IRS of nearly $2 million in taxes. Neither he nor McDougal were charged Thursday in connection with Smith's loan. McDougal has been notified he is a target of Starr's investigation.

"This misdemeanor disposition does not involve the Clintons in any way, nor does it relate to the Whitewater Development Co. The charge arises out of Mr. Smith's private business affairs," said Clinton lawyer David Kendall.