Judge Decries Barr for Not Appointing Special Counsel : Arms funding: Jurist doesn’t believe ex-bank manager was behind Iraqi loan scheme, fears whole story will never be known.

The federal judge presiding over a case involving $5 billion in hidden bank loans that helped finance Iraq’s military buildup criticized Atty. Gen. William P. Barr on Wednesday for refusing to seek an independent prosecutor to investigate the Bush Administration’s prewar Iraq policy.

U.S. District Judge Marvin H. Shoob said he does not believe the former bank manager accused of masterminding the loan scheme acted alone and fears the whole story will not be known without a special prosecutor.

“I certainly am concerned as to whether I will get the entire story of what happened down here in Atlanta,” Shoob said in a telephone interview. “I don’t think there was any way that a branch manager of an Italian bank could make loans over a period of time involving billions of dollars without somebody being aware of it.”

Christopher P. Drogul, former manager of the Atlanta branch of Italy’s Banca Nazionale del Lavoro, was charged with 347 counts of conspiracy and fraud for allegedly running a secret scheme to loan Iraq $5 billion without informing his superiors in Rome or U.S. bank regulators. Federal and congressional investigators have determined that some of the loans were used by Iraq to buy military goods.

In late May, Drogul’s lawyer told Shoob that his client planned to plead guilty to all the counts and to implicate others.

But the weekend before the plea was to be entered, Drogul accepted a government offer to plead guilty to 60 charges and cooperate with prosecutors. Shoob responded by questioning whether the deal was an attempt to silence Drogul and called for a special prosecutor.

The House Judiciary Committee cited Shoob’s comments on July 9 in asking Barr to seek an independent counsel. But when he rejected the request this week, Barr said Congress and Shoob had the facts wrong. He defended the handling of the BNL case and the plea bargain.

“I am especially troubled by the fact that certain members (of Congress) would repeat scurrilous charges against career prosecutors which are blatantly false,” Barr said in his letter rejecting the request.

Criticism of the BNL case centered not only on the plea but also on delays that kept the charges from being filed until after the Persian Gulf War and on allegations of White House interference.

The Justice Department defended the time required for the indictment by saying that a draft prepared by the Atlanta prosecutor in January, 1990, did not include four Iraqi government officials and an Iraqi-owned bank ultimately charged on Feb. 28, 1991. The others were charged after additional investigation and supervision from senior prosecutors in Washington.

“The final indictment was far more detailed and contained five times as many charges as the January draft,” according to a 97-page report prepared by the department to explain Barr’s denial of the special prosecutor request. A copy of the report was provided to The Times.

The report also dismissed allegations that consultations on the indictment with other agencies and White House calls to the prosecutor constituted interference in the BNL case. It said that consultation with government agencies on some charges was routine and that telephone calls to the BNL prosecutor by a White House lawyer were harmless, although they violated guidelines.

White House lawyer Jay Bybee twice telephoned prosecutor Gale McKenzie to ask about the case in November, 1989, as the Administration was considering another $1 billion in loan guarantees for Iraq. Because the BNL investigation involved allegations that Iraq had misused previous loan guarantees, the report said Bybee wanted to know whether evidence had been found that affected the program.

Judge Shoob’s criticism centered on the plea bargain reached with Drogul by another prosecutor while McKenzie was out of town. McKenzie appeared to indicate in court that she had not learned of the deal until it was done.

However, the Justice Department said McKenzie only missed part of the talks and that she prepared the written agreement. The report also said McKenzie first offered to allow Drogul to plead guilty to 60 counts two weeks earlier and it defended the plea because prosecutors secured Drogul’s cooperation and his potential sentence just as if he had admitted all charges.

On another matter, Barr exonerated former Agriculture Secretary Clayton K. Yeutter of allegations that he misled Sen. Patrick J. Leahy (D-Vt.) about decisions involving loan guarantees for Iraq.

In February, 1990, Leahy had asked Yeutter about rumors that foreign policy considerations had caused the Agriculture Department to extend the $1 billion in new guarantees to Iraq in the fall of 1989.

Yeutter responded in a letter that said: “You mentioned that there were ‘rumors’ that foreign policy pressures have encouraged the department to give Iraq special treatment in this case. I can assure you that there is no basis to this rumor.”

After The Times reported that Secretary of State James A. Baker III had lobbied Yeutter to approve the aid, Leahy said he felt misled by Yeutter, who is now President Bush’s chief domestic policy adviser.

But Barr’s report said the letter did not focus on foreign policy concerns, but on denying that Iraq received special treatment. As a result, the report concluded that the letter provides “no basis for a false statement prosecution.”