Nestled among the dunes at an exclusive beach along the Outer Banks in North Carolina is a palatial summer house called "Northern Star." She is bigger and fancier than most of the vacation houses that increasingly dot the eastern shores. But in the upscale community of Corolla Light, the house shines no brighter than those of wealthy neighbors except for one reason: It belongs to Richard Gephardt, a presidential hopeful in 1988, the speaker-in-waiting until last year and now leader of the minority House Democrats.
This Gephardt mansion, situated on lot 26, contains six bedrooms, six and a half baths, jacuzzis, a pool table, an outdoor spa facing the sea and room enough for six cars, just to mention a few of its many amenities.
Gephardt and wife, Jane, own Northern Star along with two business partners, Michelle and Jeffrey Conley. In an average year it generates about $100,000 in rental income. Split between the couples, that's $50,000 that Gephardt can add to his annual salary of $148,400, plus income his wife receives from her job at a medical association.
An Insight review of how Gephardt wound up with a luxury beach house worth more than $700,000 suggests that the Democratic leader may have violated various banking and tax laws, as well as financial-reporting requirements of the Ethics in Government Act. As a result, the 10-term congressman could end up under close scrutiny by the House ethics committee. "If Newt can be examined under a microscope, so can Dick," says one of several senior House Democrats and Republicans interviewed for this article. "Our leaders must meet a higher standard than the average 'Joe' congressman," says another member. It is not surprising, therefore, to see bipartisan interest when allegations surface involving an important federal lawmaker. What is surprising is the hint of scandal when it involves Gephardt, who is known for his "clean jeans" image.
First there is the matter of how Gephardt acquired his luxury beach home and how, for purposes of tax and federal financial disclosure, he explains a series of complicated financial transactions that included a tax-free "exchange" of one home for another. Known as a Starker Exchange, this tax scheme, permitted under Section 1031 of the Internal Revenue Code, allows individuals to swap investment properties and avoid taxes on capital gains. Second homes or vacation houses generally do not qualify under Section 1031, even if the property may have been used to generate rental income.
A year before Gephardt initiated his land swaps, a property of modest value he and his wife owned in Duck, N.C., was listed on his annual federal financial-disclosure report as a rental. In 1991, the next reporting year, when Gephardt "exchanged" the Duck property for a vacant lot in the upscale Corolla Light community, the Duck property was not listed (nor was the new Corolla Light lot) on the congressman's financial-disclosure report. In a letter to the House ethics committee dated June 3, 1992, Gephardt explained: "I did not disclose this sale on my 1991 report because it was my understanding that the sale of a personal residence, including a secondary residence or vacation home, did not need to be disclosed if the residence was not used for rental purposes. While in prior years I have rented my vacation home, and, therefore, disclosed it on my reports, in 1991, the home was not rented, and we received no income from it." The explanation was in response to an inquiry by the panel about the discrepancy.
It was this nonrental/business "home [that] was exchanged for a new vacation home in April 1991," Gephardt told the ethics panel, formally called the Committee on Standards of Official Conduct. When he filed his 1992 financial-disclosure report, Gephardt listed a second home-mortgage liability but he did not list all of the banking transactions associated with the new property, of which there were several. Under House rules, these were required. Curiously, if as Gephardt claimed in 1991, a second home didn't have to be listed, then why do so in 1992 but not fully?
In his 1993 and 1994 financial-disclosure reports Gephardt listed the Corolla Light property as a rental. By so doing and, again, by not listing all of the related banking transactions, several questions are raised: Was and is the house a second home or a business investment and, whichever its classification, how does that correspond to his claims on tax forms that it is an investment property for tax purposes but on loan papers that it is a nonrental second property?
Based on available bank and land records reviewed by Insight, Gephardt's various loans over the years for the Corolla Light beach property specifically state that it could not be used for rental purposes: "Borrower shall use as second home only." This limitation was agreed to several times in writing by Gephardt, his wife and the Conleys when they signed at least two mortgage instruments. This suggests that Gephardt may have broken several federal banking and tax laws, among others.
Second, at about the same time that Gephardt "exchanged" the Duck and Corolla Light properties, his congressional campaign committee began a spending spree for "fund-raising" events along the Outer Banks that continued well into 1994 (the latest time period for which public records were available). What makes these campaign-related activities interesting -- beyond the fact that virtually no discernable funds flowed in from contributors -- is that, prior to March 1991, Gephardt's campaign appears to have spent no money at the seashore or in all of North Carolina. It was not until the week that Gephardt was in the state signing purchase agreements to acquire the exclusive Corolla Light property that the "fund-raising" expenses began.
A close review of these "fund-raising" expenses spots the crux of the potential problems. Since 1991, his campaign committee has spent well over $100,000 in the Corolla Light area, with an estimated $70,000 for catering and lodging going to a group of companies owned, in part or in whole, by Richard A. Brindley or associates. Besides the catering-related firms, Brindley and/or his family also own Outer Banks Ventures, or OBV, the company that developed Corolla Light. OBV is also the firm that provided Gephardt an initial $304,205.52 loan to buy the premier lot worth $375,000 where he later would erect Northern Star at an estimated cost of about $300,000, according to local builders.
Brindley also appears to have provided Gephardt with a generous extension of nearly six months past the due date of the original note. Gephardt did not disclose this information on his annual financial-disclosure reports as either a debt or a gift. If, as Gephardt's aides suggest, such information did not have to be disclosed because the house was viewed as a "second home," then how did it qualify for the federal Starker Exchange? And why list some of the financial transactions, but not all, such as that possible loan extension from OBV?
Also troubling is a conflict between Gephardt's financial-disclosure reports and information in court records concerning the congressman's "business" partners, the Conleys. According to the records, the Conleys bought one-half interest in Gephardt's Corolla Light property on Feb. 23, 1992, for $195,500. If the loan to OBV was for $304,205.52, then what was the extra $16,000 or so for? (If a half interest was $195,500, the total value would be $391,000, $16,000 more than the purchase price.) And did it go to pay off any interest that may have been due OBV for extending the due date on the original loan?
Although Gephardt listed the one-half interest sale to the Conleys
on his financial disclosure report for 1992, he did not list any
outstanding interest on debt or a refinancing loan of $30,000 he and
the Conley's secured on the property Also, if the original loan did not
have to be listed, as Gephardt aides had claimed in interviews, because
the property in question was a second home exempt from disclosure
requirements, then why list the purchase by the Conleys? And in later
years, why list the property as a rental if various loan agreements
specifically state the property is not to be used as a rental?
Gephardt aides have sought to dismiss such matters by arguing that the congressman would "never knowingly" violate the laws or claiming that, at worst, "these are very technical matters" that nobody cares about. Perhaps. But didn't the Gephardt staff, along with staffs of other Democrats, work night and day to collect similar "technical" violations by other congressmen, including two Gephardt rivals, House Speaker Newt Gingrich and Rep. Charles Rose of North Carolina?