2 Seek to Bar Starr Probe of Clinton Funds : Whitewater: Legal battle to block scrutiny of gubernatorial campaign donations is seen as a test of the independent counsel’s authority.

In a secret court battle that could influence the outcome of the Whitewater probe for President Clinton, two Arkansas men are seeking to bar independent counsel Kenneth W. Starr from investigating allegedly improper donations to Clinton’s 1990 campaign for governor.

Arguments in the case were heard behind closed doors here last week by the U.S. 8th Circuit Court of Appeals, which must decide whether Starr has the authority to subpoena documents related to contributions made to Clinton’s campaign by two Democrats with influence in Arkansas politics.

If Starr defeats the challenge to his authority brought by bank owners Herb Branscum Jr. and Robert M. Hill, sources say, it will open the way for a wider investigation of alleged irregularities in the Clinton gubernatorial campaign and bring the probe closer to the president’s doorstep.

A ruling against Starr would be seen as a victory for Clinton. Already, sources say, the refusal of Branscum and Hill to cooperate has impeded Starr’s investigation of Clinton’s friend and White House aide, Bruce Lindsey.

In addition, the case reflects a growing effort on the part of defendants and witnesses in the Whitewater affair to challenge the scope of Starr’s authority. As the lawyers involved in these cases see it, the independent counsel’s probe has ranged too far beyond the central issue of whether Clinton benefited improperly from his mid-1970s investment in the Whitewater land development.

The suits coincide with an effort by the White House to challenge requests for evidence by the Senate Whitewater investigating committee. According to Committee Chairman Alfonse M. D’Amato (R-N.Y.), the Senate is ready to vote Wednesday to compel Clinton to supply documents the White House claims are protected by attorney-client privilege.

So far, the independent counsel’s investigation has led to the indictment of five people on criminal charges, including Arkansas Gov. Jim Guy Tucker, and nine guilty pleas. But no charges have been brought against the central figures: the president, the first lady and their aides.

Starr has declined to comment on the court case brought by Branscum and Hill. Lawyers handling the case against Starr said they were bound by a court order not to discuss the details.

But knowledgeable sources said the case centers on Starr’s effort to compel Branscum and Hill, owners of the Perry County Bank in Perryville, Ark., to provide records and testimony to a grand jury in response to allegations they misappropriated bank funds by funneling them into Clinton’s 1990 campaign.

Branscum, Hill and their families contributed $7,000 to Clinton’s gubernatorial campaign, and a bank employee alleges it came from bank funds. A month after making his contribution, Branscum, a former Arkansas Democratic Party chairman, was appointed by then-Gov. Clinton to head the Arkansas Highway Commission.

Neil T. Ainley, ex-president of the Perry County Bank who has pleaded guilty to a charge related to Clinton campaign funds, told Starr he was reimbursed by the bank for a $1,000 contribution he made to the Clinton campaign in 1990, sources said. Likewise, these sources added, Ainley has said the bank funded contributions from Branscum, Hill and their families.

Although lawyers for Hill and Branscum refused to discuss the case, attorney Jack Lassiter, who represents Hill, issued a statement saying the two men “have never made campaign contributions with money misappropriated from the Perry County Bank or any other institution.”

According to sources, Starr is trying to determine whether Lindsey or Clinton were aware of the allegedly improper contributions. If there is evidence that either Clinton or Lindsey knew of the transactions, they could be implicated in the alleged misappropriation of bank funds.

On Monday, the Senate Whitewater panel released notes written in February 1992 by Susan Thomases, a close friend of Hillary Rodham Clinton. The notes state that Hillary Clinton was involved in “numerous conferences” concerning her work for Madison Guaranty Savings & Loan while working as a private attorney in the late 1980s. Hillary Clinton has denied being deeply involved with Madison, which allegedly funneled improper payments into her Whitewater investment account.