U.S. Regulators Clear Hubbell in S&L; Probe : Investigation: FDIC ends conflict-of-interest inquiry, says it will not seek sanctions against associate attorney general or his former law firm.

Federal regulators concluded Thursday that Associate Atty. Gen. Webster Hubbell did not mislead them about the potential for conflicts of interest when, as a lawyer in private practice, he sought legal work for his firm in the government case against the failed Arkansas thrift that is central to the Whitewater land deal controversy.

The Federal Deposit Insurance Corp. said it will not seek sanctions against Hubbell or the Rose Law Firm, in which he and First Lady Hillary Rodham Clinton were partners. Questions about potential conflicts arose because the firm had previously represented the thrift, Madison Guaranty Savings & Loan.

FDIC spokesman Alan Whitney said the decision ends the agency’s investigation of the firm--although it remains one of the subjects of a separate probe by special counsel Robert B. Fiske Jr.

Fiske was appointed by Atty. Gen. Janet Reno to determine whether the President and Hillary Clinton were guilty of any wrongdoing in connection with the Whitewater Development Corp. The Clintons were partners in the firm with James B. McDougal, owner of the failed thrift, and his then-wife, Susan.

The release of the FDIC finding Thursday was one of several new developments in the tangled case.

The Rose Law Firm was notified by Fiske’s office that he intended to subpoena documents related to Madison Guaranty and Whitewater. The notice was accompanied by a standard admonition against destroying potentially relevant material, including legal files, work papers and computer records.

The notice followed a report in the Washington Times last week that Rose employees had shredded Whitewater documents--an allegation firm officials have denied.

“There has been no destruction of any documents relating to the Whitewater inquiry,” said Ronald M. Clark, the firm’s managing partner and chief operating officer.

Lawyers at the firm said Thursday they were gathering documents in anticipation of a formal subpoena from Fiske, adding that they intended to “cooperate fully” with the investigation.

Fiske also announced that a new charge was filed against David Hale, another key player in the Whitewater affair. Hale is a former Arkansas municipal judge and owner of a failed investment company.

The new charge accuses Hale--who has already been indicted on charges of loan fraud and conspiracy--of making false statements to the Small Business Administration.

Hale is charged with diverting hundreds of thousands of dollars from SBA-backed loans to Susan McDougal. Much of the money from the SBA loans reportedly ended up in Whitewater’s bank accounts. Hale and two others were originally indicted last September. Their trial is scheduled to begin March 28.

The FDIC began its probe of possible conflicts of interest at the Rose Law Firm late last year. Federal regulators had hired the firm in 1989 to sue Madison Guaranty’s former accountants, Frost & Co., for negligence in auditing the S&L;’s books while McDougal was running the thrift. Ultimately, Rose received $400,000 in legal fees from the FDIC and settled the case against Frost & Co. for $1 million. The FDIC had originally sought $6 million in damages.

But while Madison Guaranty was still in business under McDougal in 1985, Rose attorneys, including Hillary Clinton, represented the thrift when it sought state regulatory approval for a plan to sell stock and raise money to keep the S&L; afloat.

The plan to raise capital received tentative approval from a state regulator appointed by then-Gov. Bill Clinton, but was never acted on because of the thrift’s worsening condition.

Meanwhile, in a radio interview, Clinton said the Whitewater investigation would likely cost taxpayers millions of dollars and that “most of it has nothing to do with me.”

The President contended that the Whitewater affair would turn out to be a “simple, straightforward” business deal that went sour and cost him and his wife thousands of dollars.