Some Cracks in Cabinet Ethics

New questions about Donovan, as Smith abandons a tax shelter

Nothing I've heard has changed my, reduced my confidence in Secretary Donovan." So said Ronald Reagan last week during a brief, unscheduled encounter with reporters in the White House press room. Some of the President's aides, however, were worried about fresh allegations concerning Secretary of Labor Raymond Donovan, who has been accused of consorting with organized-crime figures before he joined the Reagan Cabinet. "This is heavy political baggage," admitted one aide, who conceded that the President's reluctance to distance himself from Donovan threatened to make it "a shoestring Lance case." That was a reference to Jimmy Carter's refusal to abandon his Georgia buddy Bert Lance, whom he had appointed Budget Director, until disclosures about Lance's wheeler-dealer banking practices forced Lance to resign his Cabinet post.

Donovan is not the kind of crony to Reagan that Lance was to Carter. Indeed, the President was on solid ground in not criticizing the Secretary while Special Prosecutor Leon Silverman was still investigating Donovan's conduct as a vice president for labor relations of New Jersey's Schiavone Construction Co. Nonetheless, Reagan need not have publicly downgraded the increasing seriousness of the Donovan situation.

Reporters last week were able to examine a financial disclosure statement for 1981 that the Labor Secretary had been required to file with the Office of Government Ethics. That statement indicated Donovan had maintained close ties with the construction company after joining the Cabinet. In 1981 he received $146,300 in salary and bonuses from the company, $94,940 in consulting fees, and $100,000 in dividends from more than $250,000 worth of Schiavone stock. Donovan also received two short-term, interest-free loans from Schiavone totaling more than $65,000. One was repaid in four days, the other in six weeks.

While carrying more than $1 million worth of debt and paying $255,000 annually in interest, Donovan made some puzzling loans of his own. One was for $9,800 to Edward V. Hickey Jr., director of special support services for the White House and a security aide for Reagan when he was Governor of California. A presidential aide said that the loan, which did not require any repayment until Donovan demanded it, was to enable Hickey to pay his "living expenses." Another loan, apparently for about $15,000, was made to James Hooley, one of Donovan's aides at the Labor Department.

Allegations about Donovan continued to surface at a hearing of the Senate Labor and Human Resources Committee. James J. Donelan, who sold flashing highway warning signs to Schiavone during the 1960s, testified two weeks ago that Donovan had told him about getting inside information on contracts being let by officials of the New Jersey Turnpike Authority. Schiavone would make low bids to land the contracts, Donelan claimed, but would later renegotiate portions of the agreements at a higher price. Officials of the turnpike authority heatedly denied the accusations.

According to a summary of information previously suppressed by the FBI but disclosed by the Senate committee, an unnamed informant told federal agents that Donovan had "socialized on a regular basis with Salvatore ['Sally Bugs'] Briguglio," a Mafia hitman slain by other mobsters in 1978. Briguglio was able to learn about low bids received by various city and state agencies in New Jersey, and allegedly passed the information to Donovan. Contended the informant, as reported in the committee document: "Briguglio received payoffs from Donovan for his assistance in obtaining the contracts."

Both Donelan and the informant told their stories to the FBI before Donovan was confirmed by the Senate, on Feb. 3, 1981. But the Senators were not told by the FBI about these bid-rigging charges at that time. The information seems to have been buried in the Newark offices of the FBI. This apparent suppression of derogatory material about Donovan has angered FBI Director William Webster. TIME has learned that he has shifted two FBI officials in charge of the preconfirmation check of Donovan, Joseph P. Schulte and Anthony Adamski, to other posts in Washington.

White House aides have launched a quiet inquiry of their own into the possibility of an FBI coverup. TIME has learned that on the eve of the confirmation hearings, the FBI informed Presidential Assistant Fred Fielding, then in charge of checking out nominees to high Administration positions, about a key piece of evidence that was not given to the Senate committee until long after Donovan had been confirmed.

The evidence, contained in FBI wiretaps, indicated that Donovan had attended a social affair with William Masselli, an admitted Mafia family member. Fielding told TIME that the information was not identified as coming from a wiretap, and he thus regarded it as "just another allegation." FBI records, however, show that Fielding was told the evidence came from a "tape recording."

Fielding also said that he kept White House Counsellor Edwin Meese, his boss during the new Administration's transition period, fully informed about the FBI material. "Everyone was watching it carefully. It was of grave concern to us," Fielding explained. "The White House encouraged as thorough an investigation as possible on this." Nonetheless, neither the White House, the FBI, nor the Justice Department told the Senate committee about the wiretaps.

Although the FBI wiretaps on Masselli ended in 1979, voluminous files on them remain in the Justice Department, which supervises the FBI. Whether anyone in the department informed Attorney General William French Smith about the wiretap references to Donovan is not known. In retrospect, it is evident that someone should have done so.

Smith has some probity concerns of his own. He has engaged in financial activities that, while not illegal, seem less than appropriate for the nation's chief law enforcement officer. Shortly before assuming his Cabinet post, Smith accepted a $50,000 "severance" payment from Earle M. Jorgensen Co., a Los Angeles-based steel and aluminum distributor. This seems out of proportion to his duties as a director paid $500 for each board meeting he attended. The severance award was made after Reagan announced that Smith was his choice for Attorney General.

More damaging is Smith's use of two questionable oil and gas tax shelters to reduce his income tax obligations. One of them, involving a $16,500 his claiming a $66,000 deduction on his 1981 income tax--an amount only $3,000 short of his annual Government salary. The second $16,500 investment was made early this year and could allow Smith to claim a $33,000 deduction. Deductions so large relative to the investment, especially when made at year's end, have been disallowed by the Internal Revenue Service. Although no one has charged Smith with violating the law, his use of a dubious tax shelter of a type that the IRS has contested suggests insensitivity on the part of the top Government official responsible for the prosecution of criminal tax dodgers.

As criticism of these transactions grew, Smith issued a statement last week in which he contended his actions had been entirely "proper." Smith noted that federal law "prohibits outside compensation for Government services," but argued that the severance fee from Jorgensen was paid "for past, not future services." He admitted that the Office of Government Ethics had "inquired whether I was considering any action concerning the severance payment." Under that implied pressure, Smith concluded that "the fullest public confidence in the nation's chief law enforcement officer requires an Attorney General to do whatever is necessary to avoid even an inaccurate appearance of impropriety." Therefore, he said, he had returned the "severance" payment and would limit his tax deductions to the actual amount of his investments. This, he said, should "dispel all of the concerns raised in the press." At the same time, a new financial statement made by Smith showed that he had invested a previously undisclosed $25,800 in a third tax shelter that might have produced a deduction of $77,400.

Smith may have been worried about more than media criticism. The Administration's political opponents had begun to argue that the Attorney General's search for tax loopholes was proof that Reaganomics favors the rich and hurts the poor. Democratic Senator Edward Kennedy, with both hyperbole and some justification, told a labor convention last week that Smith's tax shelter is "welfare for the rich... If the President wants to find welfare fraud, let him open the door of his own Cabinet and take a look." Valid or not, it is a criticism the Administration could hardly have wanted as it pressed its case for budget cuts with Congress.

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