‘Protected Reagan’ : Shultz Blocked ‘Lie’ by Casey, Source Alleges

Secretary of State George P. Shultz “protected President Reagan from another Watergate” by engaging in a heated exchange with the President last November that ultimately prevented CIA Director William J. Casey from giving inaccurate testimony to the Senate Intelligence Committee about secret arms sales to Iran, a knowledgeable government source said Thursday.

Shultz’s White House meeting became tense, according to the source, because the President was reluctant to believe the secretary of state’s assertion that then-National Security Adviser John M. Poindexter and others had seriously misled Reagan by suggesting that only small amounts of arms had been shipped to Tehran, that the weapons were purely defensive in nature and that Iran had halted its involvement in international terrorism.

Shultz’s action “protected President Reagan from another Watergate,” the source said. “That’s what it would have been if we had let Casey go down that road and lie.”

“Reagan was upset with the arguments by Shultz at first. The President didn’t want to face the fact he had been misled,” the official said. “But the fact is that he learned Shultz was telling the truth and he hasn’t fired Shultz.”

The Casey testimony--drafted by others in the Administration--would have denied that any U.S. officials had knowledge of an Israeli shipment of Hawk anti-aircraft missiles to Iran in November, 1985, even though several top Administration officials did in fact know weapons were being sent, the source said. The proposed testimony included a cover story devised by National Security Council aide Oliver L. North that U.S. officials believed the Israeli shipment consisted of oil drilling equipment, not missiles.

Consequences of Intercession

Scheduled for delivery Nov. 21, the CIA director’s testimony was revised after Shultz’s tense meeting with Reagan at the White House the day before, the source said. And the State Department’s intercession led indirectly to the Justice Department’s discovery that profits from the sale of American arms to Iran had been diverted to Nicaragua’s contra rebels, which turned the arms sale controversy into a full-blown scandal and the most severe crisis of the Reagan presidency.

According to the source, two Shultz aides--Undersecretary of State Michael H. Armacost and legal counsel Abraham D. Sofaer--first became suspicious that there had been a diversion of funds from the Iran deal to the contras because the price the United States reportedly charged Tehran suggested that some money remained unaccounted for.

Sofaer, who declined to comment on other aspects of the matter, confirmed that he and Armacost had first raised the possibility of a diversion of funds, but he credited Atty. Gen. Edwin Meese III with turning up evidence of the diversion.

“We suspected it because the missiles were priced rather low and there was a surplus of money and I wondered what had been done with it,” Sofaer said. “But Meese followed it up, he pinned it down.”

Discovers Poindexter Memo

In an investigation he launched after Sofaer informed the Justice Department of the State Department’s suspicions, Meese discovered a Poindexter memo bearing on the subject in National Security Council files at the White House.

Later, at a press conference, Meese announced that he had uncovered evidence that funds had been used to support the contras, and that he was continuing an investigation. At the same time, Reagan announced that Poindexter was being reassigned and that his aide, North, who had directed field operations for the Iranian arms sale and headed up a contra supply operation, was being fired.

The White House declined to comment on the White House meeting after the Washington Post published a report describing its heated nature in its editions Thursday. “I won’t have any discussion of private talks between the President and Secretary Shultz, nor will I confirm, even, the meeting,” White House spokesman Marlin Fitzwater said.

“There’s no bad blood. He (the President) has full confidence in the secretary of state. They meet regularly, discuss the issues,” Fitzwater said. “And the relationship is excellent and I think that’s obvious by the way they’ve worked together in all of these recent issues, as well as in the Iran situation.”

Committees Investigating

Select committees in both the Senate and House are now investigating the Iran-contras scandal and Meese’s inquiry has been taken over by an independent counsel charged with determining whether criminal violations were involved.

Poindexter, North and several other figures involved in the operation have refused to testify at earlier congressional hearings, invoking their Fifth Amendment right not to incriminate themselves.

Shultz, who had opposed implementation of the secret Iranian arms policy and publicly stated his opposition to it, was appalled to hear Reagan make several erroneous statements about the matter during a Nov. 19 press conference, according to the government source.

Among other things, Reagan said that there was only one shipment of arms, that all of the weapons were defensive and that there was no connection between the arms shipment and any negotiations for the release of American hostages in Iran--all of which Shultz knew not to be true.

Seven Arms Shipments

Subsequent testimony before the Senate Intelligence Committee has shown that there were at least seven shipments of arms, including more than 2,000 offensive TOW anti-tank missiles and that the arms shipments were directly tied to negotiations for release of the hostages.

Learns of Cover Story

Shultz also was disturbed to learn from Sofaer and Armacost, who had reviewed a draft of Casey’s proposed testimony, that the draft included North’s “oil drilling equipment” cover story. Sofaer and Armacost had been permitted to examine the draft after being briefed by Poindexter.

The evening after Reagan’s press conference, Shultz went to the White House living quarters to warn the President that he had been seriously misled by Poindexter and other officials who had briefed him on the controversy, the government source said.

The Senate Intelligence Committee, in its recent report on its investigation into the controversy, reported that it had evidence former National Security Adviser Robert C. McFarlane had contacted both Shultz and White House Chief of Staff Donald T. Regan before the Israeli shipment and advised them that “hostages were to be released and some type of arms were to be transported to Iran by Israel.”

The committee also reported: “Regan testified that McFarlane informed the President in Geneva (during the November, 1985, summit with Soviet leader Mikhail S. Gorbachev) that some type of arms shipment was being considered and that, if the operation were successful, hostages might be freed. (During that time) Shultz expressed reservations to McFarlane, but according to Shultz, was told by McFarlane that he had cleared it with the President.”

The government source, who has been supportive of Shultz’s position in the Iran affair but who provided details of Shultz’s intervention with Reagan on condition that he not be identified, said: “It would be unfair to suggest that the President was unwilling to reveal the whole truth (about the arms sale). He’s never been ashamed of the operation, at least what he knew about it. It’s Poindexter who was stonewalling and trying to keep things from being revealed.”