Letter Shows Official Doubts on Whitewater Prosecution : Probe: Then-U.S. attorney warned FBI in 1992 that charges might not be provable and would not be fair in light of political situation.

As the 1992 presidential election approached, the U.S. attorney in Little Rock argued vehemently against bringing charges in the Whitewater controversy, contending that initiating prosecution at that time would constitute “prosecutorial misconduct,” it was learned Friday.

Then-U.S. Atty. Charles A. Banks, a Republican appointee, warned in a letter to the FBI that taking federal action then would be unfair because it could give a sense of legitimacy to allegations affecting a candidate that might not be provable.

The unusual October, 1992, letter from Banks to Don Pettus, then the special agent in charge of the FBI’s Little Rock office, sheds light on a little-known struggle within the federal bureaucracy on what to do about the Whitewater case as Election Day approached.

The episode provides the basis for a central dispute that rages today on the matter: Was it a case of financial and political abuse that was long stifled and stalled for political reasons? Or was it a tangled financial mess that, while requiring delicate handling and attention to fairness, was of marginal importance compared with other savings and loan prosecutions.

Republican critics of the Clinton Administration have moved toward the former interpretation. They released documents Thursday from investigator R. Jean Lewis, who worked for the Resolution Trust Corp., conveying her frustration and suspicions about delays in the case. The RTC is the federal agency set up to oversee failed S&Ls;

Banks’ letter, which he acknowledged writing but refused to discuss Friday, reflects the position held by some Justice Department officials who saw Lewis as overzealous and unfairly single-minded about a matter that could have had major electoral repercussions.

A spokesman for Rep. Jim Leach of Iowa, the leading House Republican critic of the Administration on the Whitewater case, said Leach did not have a copy of Banks’ letter.

Leach, releasing documents Thursday that shed new light on the controversy, charged that the Arkansas real estate venture was ultimately used “to skim, directly or indirectly, federally insured deposits” from a Little Rock savings and loan.

In the letter, Banks noted that he had met with the FBI on a “referral” for possible criminal prosecution in the case involving Madison Guaranty Savings & Loan, which was owned by James B. McDougal, a partner with then-Gov. Bill Clinton and Hillary Rodham Clinton in the Whitewater Development Corp.

Banks said that even after a second review of the case, he still had doubts that it could be successfully prosecuted against any of the witnesses in the case. The Clintons, as investors in the Whitewater project, one of the McDougal enterprises that investigators believe was used to skim money from Madison Guaranty, were among the witnesses.

The letter noted that Pettus had been ordered to conduct an immediate review of the case to determine if prosecution was warranted and to provide an answer later that week. He did not make clear who in the FBI was ordering Pettus to move quickly.

FBI spokesman John Collingwood said Friday that he would have no comment. Banks, in declining to comment, said: “As (then-) U.S. attorney, I could not properly discuss reports and correspondence about cases, and I don’t feel I have been relieved of that restriction today. And now that there is a (special counsel) assigned to the case, it is even more inappropriate for me to comment.”

But in his letter to Pettus, Banks made it clear that he resented the pressure for action, without revealing its source. He said neither he nor anyone in the U.S. attorney’s office would take part in the inquiry before the Nov. 3 election.

The letter said that moving further on the case at that point--presumably to a federal grand jury--would lead to press inquiries and give legitimacy to charges that might not be provable. This would be inappropriate and would amount to prosecutorial misconduct, it said.

Three months later, Banks tried to remove himself from the case, but the Justice Department found no grounds for “recusal” and supported his view that no criminal action should be taken.

A second criminal referral eventually was made and the entire case is now being investigated by Whitewater special counsel Robert B. Fiske Jr.

Ostrow reported from Washington and Rempel from Little Rock.