Investigator Rejects Call for Probe of Iraqi Loans : Inquiry: Lacey terms charges of criminal violations by Administration ‘errant nonsense,’ assails Congress, press.

WASHINGTON —  The special investigator appointed to examine the government’s handling of a politically sensitive Iraqi loan case rejected demands for an independent counsel Wednesday and called allegations of criminal wrongdoing by the Bush Administration “errant nonsense.”

Former U.S. District Judge Frederick B. Lacey, appointed by the attorney general to conduct the internal Justice Department inquiry, accused Congress and the press of damaging the careers of honest prosecutors and investigators by perpetuating false allegations.

“Many decent people have had their careers tarnished, their reputations stained by being charged with being corrupt, being part of a cover-up,” said Lacey. “These are baseless charges.”

Democrats immediately denounced Lacey’s conclusions as a whitewash. But Atty. Gen. William P. Barr embraced the findings and said that he will not seek an independent counsel to investigate the case involving $5 billion in illegal loans to Iraq by the Atlanta branch of Italy’s Banca Nazionale del Lavoro.

Barr’s decision means that there will be no independent counsel appointed during the Bush Administration under the law that expires Tuesday. However, Lacey’s report may inflame rather than quell outside criticism and suspicions about the handling of the loan investigation.

Lacey said that he found “blundering” by the CIA in its transmission of classified cables to the Justice Department and he acknowledged that questions in other areas remain unanswered. But he said he found no grounds for investigation by an outside counsel.

Democratic skepticism and the lingering questions seem to ensure that the controversy will be addressed early in the Administration of President-elect Bill Clinton.

“I intend to consult with the leadership, my colleagues and--eventually--with the incoming attorney general to determine what course of action will best serve the public’s interest and will restore its confidence in our government,” said Sen. Joseph R. Biden Jr. (D-Del.), chairman of the Senate Judiciary Committee.

The Justice Department’s handling of the BNL investigation has been criticized by Democrats for months. There have been charges that the indictment was delayed to avoid straining ties with Iraq before the Persian Gulf War and that the bank should have been indicted. Its manager was singled out by prosecutors to shoulder the entire burden of blame.

In response to pressure from Democrats for a court-appointed independent counsel to investigate the loan scandal, Barr took a lesser step and named Lacey as a special investigator on Oct. 16.

Lacey’s instructions were to provide the attorney general with a recommendation on whether there was enough evidence of possible criminal acts to warrant an independent counsel.

Using teams of FBI agents, Lacey directed a seven-week investigation in which more than 100 people were interviewed. Two lengthy reports and several volumes of supporting documents were produced, although some material was not released because it is classified.

Lacey unveiled his findings at a contentious press conference at FBI headquarters. A former judge and prosecutor with a reputation for toughness, Lacey was bluntly critical of Congress and the press.

“It’s you people who cover this city and accept and repeat the protected words and unbridled attacks of a legislator,” he told reporters. “Why should anyone want to serve in a country and, perhaps more specifically, in a city like this where irresponsibility like that prevails?”

Asked whether his Republican background and appointment by a Republican attorney general should raise questions about his findings, Lacey dismissed the question as “silly” and said: “Read my report.”

The 190-page portion released Wednesday declares that prosecutors in Atlanta and supervisors at the Justice Department acted properly in investigating the massive loan scheme and determining that it was carried out by the Atlanta branch manager without knowledge of his superiors at BNL headquarters in Rome.

The report said that delays in bringing the charges were the result of the complexity of the case and honest disagreements within the Justice Department over whether the bank itself was a victim.

There was evidence that the case attracted unusual attention from outside the Justice Department. But Lacey said that incidents such as a White House lawyer’s decision to telephone the Atlanta prosecutor did not affect the outcome of the case and therefore did not merit further inquiry.

The BNL investigation started in August, 1989. Within weeks, the State Department and Agriculture Department were concerned that the inquiry would jeopardize plans to extend another $1 billion in loan guarantees to Iraq through the Commodity Credit Corp.

Lacey said that the investigation found there were efforts to slow down the Justice Department inquiry to protect the loan guarantees.

“This effort failed,” he said. “But this was the early signal to me that the prosecutors were going to go where the trail led.”

Lacey acknowledged that he had been unable to investigate many aspects of the case and other Iraq-related issues because of the deadline imposed by Barr, which stemmed from the imminent expiration of the independent counsel statute.

The only White House officials interviewed by investigators were Chief of Staff James A. Baker III, the former secretary of state, and C. Nicholas Rostow, legal adviser to the National Security Council. No Agriculture Department officials were questioned.

Lacey said that his investigators had not had time to determine the circumstances surrounding the alteration of Commerce Department export licenses for Iraq or to evaluate whether Administration officials misled Congress with testimony about U.S. aid to Iraq.

From the moment he was appointed, Democrats had questioned Lacey’s independence. His findings and his tough tone fueled criticism Wednesday.

“He was intended to be a shield to help Atty. Gen. Barr buy more time in his cover-up campaign,” said Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking, Finance and Urban Affairs Committee. “With all the good intent in the world, he could not do a real study of the evidence in the short time allotted to him.”

But the Justice Department found reprieve in the retired judge’s report. “From what I’ve heard, I’m very, very pleased,” said Gerrilyn G. Brill, the acting U.S. attorney in Atlanta.

Barr also was satisfied, saying: “The department had nothing to hide. Judge Lacey has conducted that investigation and confirmed that the professionals in the department handled this case in a proper manner.”

A classified portion of the report, which was not released, dealt with the dispute over the handling of classified CIA cables about the BNL case. Lacey said that he was much more critical in this phase of his inquiry of Justice and CIA officials.

The government said that the loan scheme was the sole work of Christopher P. Drogoul, the former manager of BNL’s Atlanta branch. However, CIA cables discovered during Drogoul’s sentencing hearing last September indicating that Rome officials may have known about the loans were not provided to the Justice Department or the judge in a timely fashion.

At the press conference, Lacey sketched a picture of communications between the Justice Department and the CIA about crucial aspects of the case that made the two agencies sound like Keystone cops.

The nation’s premier intelligence agency sent cables on the case to the Justice Department without specifying where they should go within the massive building or for whom they were intended, Lacey said.

Justice compounded the “sloppiness” by failing to maintain a record of who saw what and when they saw it, according to Lacey.

Lacey characterized the events last September as “a fiasco” that culminated in a dispute between Justice and the CIA. At issue was whether the CIA purposely withheld information from the prosecutors and whether the Justice Department mishandled the investigation and knowingly misled a federal judge.

“We would try to find where a cable came from within the CIA and we would have difficulty because of their inadequate--and that’s a benevolent word--inadequate retrieval system,” Lacey said.

Lacey said that he found no criminal intent in the miscommunication but that he did discover “signs of carelessness, casual treatment of sensitive information, lack of accountability and poor administration.”

Both CIA Director Robert M. Gates and Barr have said that they will study ways to remedy the problems but Lacey said the “societal clash” between the agencies and their different missions may make reform difficult.

“I guess there never will be clear channels of communication because of differences introduced in that relationship,” said Lacey.