Corruption trial nears for auditor
Witnesses expected to detail campaign bribery scheme
Corruption trial nears for auditor

By Tony Thornton

Published: June 1, 2008

MUSKOGEE — As a treasurer for Jeff McMahan's 2006 re-election bid looked over the contributor list to his first campaign, she noticed a disturbing trend.

Numerous donors tied to abstract company owner Steve Phipps had given large amounts of money to the state auditor's race in 2002, even though many lacked financial means to do so, Erin Bradshaw determined.

"It became very obvious to her that many of these people were straw donors,” FBI agent Gary Graff testified at a recent court hearing.

Bradshaw and McMahan's staff had a common phrase for those contributors: "Phipps people.”

That phrase is among several code terms jurors will hear during McMahan's criminal corruption trial, which begins Monday in Muskogee.

Prosecution witnesses also will describe a code designed to provide McMahan with "deniability” about the money Phipps secretly provided.

McMahan and his wife, Lori, face nine felony counts involving an alleged conspiracy to take more than $100,000 from Phipps and later to repay Phipps through actions benefiting his abstract companies.

The trial is expected to last at least a week.

The McMahans' freedom, predominantly. If convicted of the conspiracy count, the sentencing guideline range is roughly eight to 10 years in prison, assistant U.S. Attorney Ryan Roberts said. Because the guidelines treat elected officials much more harshly, the sentencing range for Lori McMahan is roughly half of what her husband could face, Roberts said.

A felony conviction also would result in Jeff McMahan's automatic removal from office and an end to his $109,250 annual salary. He is still collecting his pay although he hasn't worked at the office since his January indictment.

Finally, a corruption conviction would violate the auditor's oath of office, thereby triggering a likely effort to forfeit his pension. That pension is worth $2,249 a month if he begins collecting it at age 55.

Court filings suggest the government will rely heavily on recorded conversations involving the McMahans and Tim Arbaugh, who worked as the auditor's abstract registrar until his firing in March 2007.

Shortly before being fired, Arbaugh accepted the government's offer of criminal immunity and agreed to wear a recording device.

Phipps also is testifying as part of a plea agreement. He is expected to discuss, among other things, a longstanding practice of influencing state and federal elections with illegal infusions of cash. Phipps previously testified he learned this practice from his longtime business partner, former state Sen. Gene Stipe.

Their beneficiaries were, like McMahan, Democrats.

Jeff McMahan, 48, grew up in Holdenville and played baseball at East Central University in Ada, where he met his wife.

He opened an auto detail shop in Tecumseh after college. A customer, then-state Auditor Clifton Scott, helped Jeff McMahan get a job at Scott's office in 1988. Despite his lack of an accounting background, McMahan eventually headed the investigative audit division and earned Scott's endorsement to replace him when Scott retired in 2002.

Lori McMahan, 43, is a fifth-grade teacher at South Rock Creek School near Shawnee. She was the treasurer for her husband's first campaign.

Prosecutors have said they could call as many as 60. Expect half that number to testify.

• Steve Phipps: The Pittsburg County businessman has provided dates and locations where he gave cash illegally for the McMahans' benefit, court filings indicate. Most of those occasions involved McMahan's first political campaign in 2002. However, prosecutors say Phipps also paid the McMahans' way for two trips to New Orleans and another to the 2004 Democratic National Convention in Boston. The indictment also alleges Phipps bought jewelry for Lori McMahan, with her husband's knowledge, on each New Orleans trip: a $1,640 ring in 2003 and a $500 set of earrings in 2004.

• Tim Arbaugh: Court filings indicate he will testify that among other things, Jeff McMahan asked him in 2003 to shelve an application for a new abstract company in McCurtain County. That business, if approved, would have been direct competition to a Phipps-owned company. Arbaugh also is expected to describe acting as liaison when his boss needed money from Phipps. He also will describe a constant insecurity about his job except during election years, when he could collect $100,000 or more from the abstract industry for Jeff McMahan's campaign.

• Clifton Scott: He will testify about going on guided bass-fishing trips with Jeff McMahan and Phipps. Scott, now head of the state Commissioners of the Land Office, also will discuss a meeting he shepherded in 2005 with Phipps, McMahan and an attorney for the state Insurance Department. The meeting, which Scott says was requested by McMahan and Phipps, was designed to use an official state action to aid Phipps after Stipe sued him.

• Chester Dennis: As executive director of the Kiamichi Economic Development District of Oklahoma, Dennis oversaw millions of dollars annually in "special project” money earmarked by legislators. He is expected to testify that Jeff McMahan told him no receipts were required to justify how that money was spent. The conversation specifically involved state money that ended up going to Phipps' businesses. McMahan said in a 2006 interview that he gave no such permission to Dennis. "That's stupid,” the auditor said then.

Judging from motions filed in the case, the auditor's defense could differ from his wife's.

Jeff McMahan likely will argue, among other things, that there was no connection between the trips funded by Phipps and any subsequent actions by the auditor that benefited Phipps.

The auditor has maintained in interviews that he had no knowledge of any illegal contributions to his campaign. Even if he did know, the contribution limits to his campaign are governed by state law, not by federal law, his attorney has noted.

Court filings indicate Lori McMahan will argue that she wasn't an elected official and therefore couldn't be bribed. Also, her attorney is likely to claim she took no specific action to benefit Phipps.

Prosecutors have a head start of sorts, thanks to a ruling issued May 23 by U.S. District Judge James H. Payne.

Ruling on a defense motion, Payne determined that a conspiracy existed, and that it included the McMahans, Phipps and Arbaugh.

That ruling makes it easier for prosecutors to introduce testimony that otherwise might be considered hearsay.

An attorney representing a state House committee will attend the trial in the event Jeff McMahan is acquitted.

His job: To determine whether legislators should proceed with a plan to impeach the auditor.

In the event of a full acquittal, a special session likely would be called to present articles of impeachment, said Rep. Rex Duncan, R-Sand Springs, co-chairman of a special committee to investigate the auditor.

A possible impeachment trial would take place before November, Duncan said.

The FBI investigation of Jeff McMahan stems at least in part from information provided by Gary Jones, his Republican campaign opponent in 2002 and 2006. Jones now is the state Republican Party chairman. U.S. Attorney Sheldon Sperling, a Bush appointee, has tried to maintain distance from Jones to prevent the appearance of a politically motivated prosecution. It's unclear whether defense attorneys will try to make politics an issue for jurors to ponder.