Ex-Judge to Investigate Iraq Loans : Probe: Frederick Lacey of New Jersey will explore role of Justice Department and CIA in scandal. Democrats criticize attorney general’s plan.

Under mounting pressure from Democrats, Atty. Gen. William P. Barr on Friday named a highly regarded former federal judge to conduct a special investigation of Justice Department and CIA actions related to the Iraqi loan scandal.

The move drew immediate criticism from Democrats who contended Barr should have distanced his department from the investigation by seeking appointment of an independent counsel who, under federal law, would be selected by and report to a panel of three judges.

But Barr and the investigator he chose, former Judge Frederick B. Lacey, contended that the retired jurist will enjoy the same independence as a court-appointed prosecutor. And Lacey, who has fought public corruption and Teamster wrongdoing as a prosecutor and a judge, said he had “the ultimate weapon” of quitting if denied the information or latitude he needs to do the job.

Barr, like most other attorneys general, has opposed the concept of court-appointed independent counsels, contending that the Justice Department is capable of conducting any investigation.

Barr also said he is setting up a special task force to handle the prosecution and investigation related to the case that is at the core of the controversy--$5.5 billion in illegal loans to Iraq made by the Atlanta office of Banca Nazionale del Lavoro, which is owned by the Italian government.

The moves show that Barr realizes that in the heated political atmosphere of an election year, direct involvement by the Justice Department would not be accepted by those who contend that the Administration is trying to meddle in the case to hide the nature of prewar relations with Iraq.

“I have no reason to believe that any officials at the Department of Justice have acted improperly or unprofessionally,” Barr said at a press conference Friday.

“Nevertheless, in the current politically charged environment, nothing could be worse than to have this matter tried in the press based on allegation, rumor and leaks,” Barr said. “No one’s interests are served by conducting business in that way--particularly those of the American people, whose confidence in the department and its investigative process is essential.”

Justice Department attorneys are prosecuting a BNL official in Atlanta under the theory that he acted on the illegal loans without the knowledge of his superiors in Italy.

Questions about the actions of the department and the CIA arose after the CIA sent a letter to the judge presiding over the BNL trial disclosing the contents of cables pertinent to the case. Soon after the letter went out, however, the agency said that it discovered additional cables.

In testimony before the Senate Intelligence Committee last week, according to sources, CIA lawyers said the agency had been pressured by the Justice Department not to disclose the additional cables.

According to two officials familiar with the episode, the Justice Department feared the contents of the additional cables would lead the judge to believe that BNL officials in Rome unquestionably knew about the illegal loans to Iraq.

The CIA, which has since admitted that it withheld some cables but later turned over the documents, has publicly denied there was any pressure from the Justice Department “to mislead anyone and no intent on the part of the CIA to mislead or provide incorrect information.”

On Friday, Barr noted that Lacey will supervise any preliminary inquiries under the independent counsel statute, meaning that Lacey could decide and advise Barr that a court-appointed prosecutor should be sought.

He also said Lacey ultimately would report his findings to Congress and the public.

Democrats, however, said Barr should have taken the full step of seeking a court-appointed independent counsel as demanded by Democrats on the House Judiciary Committee and several influential congressional committee chairmen this week.

Under the statute, the independent counsel would report only to the three federal judges who appointed him, but he could operate with the full powers of a prosecutor.

“Atty. Gen. Barr has taken a sidestep--better than nothing but not nearly enough to restore the integrity of the Justice Department,” charged House Banking, Finance and Urban Affairs Committee Chairman Henry B. Gonzalez (D-Tex.), who repeated his call for the attorney general to resign over the issue.

Sen. David L. Boren (D-Okla.), chairman of the Senate Intelligence Committee, said the panel’s investigators would continue to take sworn statements from CIA and Justice Department officials involved in the document dispute until an independent counsel is named.

“My hope is that Judge Lacey will determine very quickly that an independent counsel is necessary,” said Boren, who earlier this week asked Barr to seek an independent counsel. “The authority must rest somewhere objectively and outside the Justice Department.”

Sen. Patrick J. Leahy (D-Vt.), a member of the Senate Judiciary Committee, said Barr did not go far enough toward unraveling what he called “the Administration’s cover-up of its Iraq policy.” He said he will support the request by Senate Judiciary Committee Chairman Joseph R. Biden Jr. (D-Del.) for an independent counsel.

Biden, while acknowledging the wide respect for Lacey, said his appointment is an insufficient substitute for appointing an independent counsel under the statute.

“The allegations put high-level officials of the CIA and the Department of Justice in direct conflict over the facts at issue,” Biden said. “Appointment of Judge Lacey by one of the parties to the inter-agency dispute raises the appearance of a conflict of interest.”

Sen. Al Gore of Tennessee, the Democratic vice-presidential candidate, said on the campaign trail that “Barr is taking a half-step when a full step is needed. That half-step points you in the right direction but falls far short of getting you across the road.”

Gore made his remarks in a written statement distributed shortly before he and running mate Bill Clinton were to speak at Southern University in Baton Rouge, La.

Lacey, 72, known for his stern manner, spent nearly 20 years as a prosecutor before he was named to the federal bench in 1971 by President Richard M. Nixon. A registered Republican, he retired from the bench in 1986.

In the last 2 1/2 years, he has won praise as the court-appointed administrator overseeing efforts to clean up the Teamsters. In that post, he has acted as judge and jury in cases that have led to the expulsion of nearly 100 union members on grounds of financial misconduct or associations with organized crime.

In considering whether to accept Barr’s appointment, Lacey said he first checked with FBI Director William S. Sessions to make certain that Sessions wanted him to take on the job.

Lacey said he had been “struck” by suggestions that the Justice Department had retaliated against Sessions for the FBI’s inquiry into the BNL case by leaking word about a preliminary investigation of some of Sessions’ alleged conduct.

Saying he had known Sessions for many years, Lacey described the FBI director as “straight as an arrow” and with “impeccable credentials.” He said Sessions “welcomed me with open arms” and that the appointment “made his day.”

Lacey said his investigation would include how word of the Sessions’ investigation leaked out.

Times staff writers James Gerstenzang and Robert L. Jackson contributed to this article.

BACKGROUND

Billions of dollars in fraudulent loans, some backed by U.S. government guarantees, were made by the Atlanta branch of an Italian government bank and helped Iraq buy weapons and food before the Gulf War. Democrats accuse the Bush Administration of botching prosecution of the $5.5-billion loan scheme in order to shield its flawed policy of support for Iraq. The current controversy began a week ago when the Justice Department asked the FBI to probe why the CIA failed to give it information suggesting that the Italian government knew about the loans.

The Special Investigator

Biographical sketch of Frederick B. Lacey of New Jersey, a retired U.S. district judge named special investigator of the Administration’s handling of the BNL case:

Age: 72

Education: Rutgers University, Cornell University School of Law, 1948

Service: U.S. attorney in Newark, 1969-1971

Appointed to federal bench: 1971

Retired: 1986

Currently: Senior litigation partner with the law firm of LeBoeuf, Lamb, Leiby & MacRae in New York City and Newark

Previous appointments:

1992, special master to draw new congressional districts in New York

1989, part of three-member panel to oversee the International Brotherhood of Teamsters as part of the settlement of a federal racketeering suit

Source: Times wire services