Clinton Name Tied to Deal, Witness Says : Arkansas: Ex-judge charged with fraud is said to reassure potential borrower by citing governor’s involvement. President has denied link.

A former Little Rock judge now charged with fraud invoked the name of then-Gov. Bill Clinton during a 1989 business deal to reassure a potential borrower who expressed concern that federally guaranteed funds were being used improperly, according to testimony heard Monday in a Whitewater-related case in federal court here.

“Son, the governor of Arkansas wouldn’t be involved in this if we were doing anything illegal,” a witness said he was told.

The testimony came in the case of former Little Rock Municipal Judge David Hale, who is accused of defrauding the government of hundreds of thousands of dollars by misusing a federal program to aid small business. Hale claims that his legal troubles began when he had a meeting with Clinton in which he says Clinton pressured him to make a $300,000 loan to Susan McDougal, a partner with the governor in the Whitewater real estate development.

A portion of the loan ended up in the Whitewater venture.

Clinton has denied that he had any such dealings with Hale.

The testimony referring to Clinton came from Gayland Westbrook of Monroe, La., who appeared during a hearing on pretrial motions in the Hale case. Westbrook recalled that he visited Hale during the summer of 1989 because he wanted to borrow $75,000 for a computer business from a government-backed small business investment corporation that Hale operated.

Westbrook, who was called to the stand by an attorney for one of Hale’s co-defendants, said he had reason to suspect that Hale was violating the laws governing operation of a small business investment corporation.

Hale and two co-defendants are now charged with operating the firm, Capital Management Services, in a manner that cost taxpayers $900,000.

When Westbrook asked Hale about apparent improprieties, Westbrook said, Hale invoked Clinton’s name and said the governor would never be involved in illegalities. He said Hale did not elaborate on the remark.

Clinton, who served as governor of Arkansas until shortly before he became President in January, 1993, has denied meeting with Hale or asking him to loan money to McDougal. He also has denied knowing that any such funds were improperly used to finance the Ozark real estate investment known as Whitewater Development Corp. in which Clinton and his wife were partners.

In another development, U.S. District Judge Stephen Reasoner, who will hear the fraud case against Hale and two co-defendants, agreed to allow Whitewater independent counsel Robert B. Fiske Jr. to prosecute Hale--even though the case technically is unrelated to the Whitewater affair. The ruling was a victory for Hale, whose defense depends on connecting his actions to Clinton and Whitewater.

Fiske was appointed more than a month ago by Atty. Gen. Janet Reno to investigate allegations that Clinton and his wife, Hillary, may have benefited improperly from their joint real estate investment with McDougal and her husband, James, owner of a failed savings and loan.

A separate grand jury will soon be impaneled in Little Rock to hear evidence presented by Fiske and his staff relating directly to Whitewater. Before Fiske took charge of the case, Hale tried without success to trade his testimony about Clinton for leniency.

While not conceding guilt in the fraud case, Hale asserts that his actions were necessary to save his small business investment corporation from insolvency after he made $700,000 in bad loans to the McDougals--including the money that was diverted to Whitewater.

In Washington on Monday, Sen. Alphonse M. D’Amato (R-N.Y.), ranking Republican on the Senate Banking Committee, released documents showing that two federal regulators objected in 1989 when Mrs. Clinton’s law firm was chosen to represent the government in the case of McDougal’s failed thrift.