Rose Firm Tied to Deals That Led to S&L; Failure : Whitewater: Federal bank inspectors tell House panel of undisclosed conflicts of interest and overbilling. Congressional testimony ends, for now.

WASHINGTON —  Federal bank inspectors told a House committee Thursday that Hillary Rodham Clinton’s former law firm helped arrange several questionable real estate deals that led to the collapse of a Little Rock, Ark., thrift--and then profited from the government’s legal efforts to clean up the mess.

Moreover, attorneys at the Rose Law Firm failed to disclose clear conflicts of interest and overbilled the government by as much as $446,000, the inspectors said.

Former Associate Atty. Gen. Webster L. Hubbell, a Rose partner and a close friend of the Clintons, told the panel that he had asked his partners--including Mrs. Clinton--to inform him of potential conflicts. But, he said, he did not recall whether Mrs. Clinton had responded.

Hubbell is serving a 21-month prison sentence for defrauding the government by falsifying expenses at the Rose firm, although the charges were not directly related to Whitewater.

Thursday’s testimony brought to a close, at least for the summer, the House and Senate hearings on Whitewater, the Clintons’ failed Arkansas real estate development.

House Republicans said that Thursday’s testimony showed how a cozy circle of Little Rock politicians and lawyers enriched themselves at the expense of the taxpayers.

“This could be described as an insider firm reaping profits from the public after insiders had defrauded the public and caused a loss to the taxpayers,” House Banking Committee Chairman Jim Leach (R-Iowa) said of the Rose Law Firm.

“The American taxpayer has been forced to pay for the corruption of a few greedy individuals in Arkansas,” added Rep. Frank A. LoBiondo (R-N.J.).

But neither the government inspectors nor the committee Republicans alleged that Mrs. Clinton had violated any law or rule of ethics, although they said some of her dealings might create “an appearance of impropriety.”

Leach conceded that Republicans bear a large share of the blame for the savings-and-loan debacle of the 1980s, which is estimated to have cost the taxpayers $130 billion.

The Ronald Reagan Administration followed “an imprudently ideological deregulation agenda,” he said. Thrift executives were given more freedom to invest in real estate, and many of those executives--including Madison Guaranty Savings & Loan owner James B. McDougal in Little Rock--used that freedom to pour money into a series of disastrous ventures.

But Leach added that private lawyers also had a professional duty to follow the law and not enrich themselves and their clients by manipulating the rules in their favor.

Inspector General John J. Adair of the Resolution Trust Corp. cited several examples of how Rose lawyers skirted the edge of propriety.

For instance, state regulations in Arkansas do not allow a state-chartered thrift to buy into a real estate venture entirely on its own and without partners. But when McDougal sought to develop a project known as Castle Grande in 1985, Rose lawyers helped to arrange it so that a father-in-law of a Rose partner bought a share of the property. Madison financed his purchase entirely.

This “fictitious transaction” avoided the state regulation, Adair said, adding that it also helped to bring down Madison.

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After Madison became insolvent, government regulators filed a malpractice suit against the S&L; accounting firm for failing to detect its many slipshod transactions. The lawyers who brought the suit were none other than the Rose Law Firm, the same group that helped to arrange the transactions in the first place.

“Our investigation found that the Rose Law Firm did not disclose actual or potential conflicts relating to Madison Guaranty and another six of the 17 institutions for which the firm represented the Federal Deposit Insurance Corp. and the RTC,” Adair testified.

In 1989, the Rose firm won an RTC contract worth $300,000 to do legal work related to the collapse of Madison, even though Hillary Clinton had done legal work for Madison and McDougal, her business partner in Whitewater.

“It seems to me that a law firm which represented the insolvent S&L; would not be an ideal candidate to represent the RTC in cleaning up the situation,” said Rep. Frank D. Lucas (R-Okla.).

Also, the RTC lawyer who was accused earlier this week of seeking to block a criminal probe of Whitewater rebutted that charge Thursday.

A civil servant who worked for the government since 1986, April Breslaw described herself and her fellow lawyers at the RTC as “non-political professionals” who sought only “an honest investigation” of Madison’s collapse.

On Tuesday, L. Jean Lewis, a Kansas City-based criminal investigator for the RTC, said Breslaw visited her office in February, 1994, and suggested that the probe of Madison end. But Breslaw noted that a private law firm and an independent counsel were both looking into Madison by then.

“Ms. Lewis has greatly exaggerated the importance of her role,” Breslaw said.

In its hearings, the Senate panel investigating the Whitewater affair did not resolve contradictions among senior Clinton aides over who said what to whom in the days after the 1993 suicide of Deputy White House Counsel Vincent Foster. The hearings have centered on why law enforcement officials were denied free access to Foster’s files immediately after his death.

Senate Republicans did not produce any evidence to show that any of the top aides acted at the behest of either the President or Mrs. Clinton to prevent access to Foster’s office. Some GOP senators theorized that aides were seeking to conceal potentially embarrassing documents relating to Whitewater.

Times staff writer Edwin Chen contributed to this story.