Ex-employee testifies against State Auditor

By Tony Thornton

Published: June 5, 2008

MUSKOGEE — A key prosecution witness in the trial of state Auditor and Inspector Jeff McMahan choked up this morning as he recalled the moment he realized "we'd crossed the line" by taking $10,000 in cash from southeastern Oklahoma businessman Steve Phipps.

Tim Arbaugh, a former McMahan employee, and Phipps are the two main witnesses against McMahan. Both wore recording devices in early 2007 to capture conversations with the auditor and his wife, Lori McMahan.

Portions of Arbaugh's conversations, which prosecutors say show the McMahans' attempts to cover up their alleged crimes, are expected to be played for jurors this afternoon.

The McMahans face nine felony counts accusing them of taking illegal money, jewelry and trips from Phipps, then taking action to benefit his companies, which were regulated by the auditor's office.

The alleged crimes began in 2002, when Jeff McMahan was in his first campaign as the Democrats' anointed successor to longtime state Auditor Clifton Scott.

In May 2002, Phipps hosted a campaign fundraiser at a Guthrie restaurant, followed by a play across the street at the Pollard Theater.

Arbaugh, who was head of the abstract division for the Auditor's Office organized the event, said he asked McMahan while walking to the theater whether he was concerned about the large number of Phipps' abstract company employees who had paid up to $1,000 to sit next to either Scott or Jeff McMahan.

The candidate's response: "Clifton Scott told me that it might be a problem, and it might be best if I just didn't notice," Arbaugh testified.

After the play, Arbaugh said, he was talking to Lori McMahan about the chance that some of those people might be "straw donors," who gave under their own name but with Phipps' money so Phipps could avoid the $5,000 campaign contribution limit.

About that time, Jeff McMahan walked up and asked what they were talking about, Arbaugh said.

He said Lori McMahan's response was, "You don't want to know."

That phrase, and others like it, would be used often to provide Jeff McMahan with "deniability," Arbaugh testified.

One of those times was Oct. 22, 2002. It was two weeks before the election, and polls showed Jeff McMahan was in trouble to his Republican opponent, Gary Jones.

The campaign needed cash and some last-minute radio ads. A dinner meeting was arranged at the Garfield's restaurant in Shawnee to plan strategy.

Arbaugh said he and Phipps showed up early, where Phipps pulled out two stacks of cash.

He said Phipps told him one was $2,500 for Arbaugh to give the Pollard Theater for another fundraiser event. The other contained $10,000, Arbaugh said.

When Assistant U.S. Attorney Ryan Roberts asked Arbaugh about Phipps' intention for the money, Arbaugh choked up.

"He told me he was going to give it to Jeff and Lori," Arbaugh testified.

"We'd been stretching things" in the campaign, he said. "It was at that point," Arbaugh said, before choking up again.

"It was at that moment I realized we'd crossed the line," Arbaugh said.

After dinner, Arbaugh said, Phipps pulled out the envelope all four people at the table to see. Lori McMahan told her husband he needed to leave to go pick up their children.

"What was the reason for that?" Roberts asked.

"They wanted to make sure there was deniability" for the candidate, Arbaugh said. Two weeks later, Jeff McMahan narrowly beat Jones. He won re-election in 2006.

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