FBI agent testifies against state auditor

By Tony Thornton

Published: May 23, 2008

MUSKOGEE — An FBI agent today testified about four specific acts State Auditor and Inspector Jeff McMahan took to repay millionaire businessman Steve Phipps, whose illegal campaign contributions helped put McMahan in office.

During his 80 minutes on the witness stand, agent Gary Graff provided a preview of the criminal trial McMahan and his wife will face beginning June 2.

Graff also discussed recorded conversations between Lori McMahan and co-conspirator Tim Arbaugh in February and March of 2007, shortly before McMahan fired Arbaugh.

In those conversations, Lori McMahan told Arbaugh that everyone needed "to stick to the same story" amid an increasing federal investigation, Graff said.

Phipps and Arbaugh told the FBI that Jeff McMahan and others tried to maintain "deniability" for the illegal campaign contributions. Steps to accomplish deniability included making sure Jeff McMahan left — with his complete understanding of why he was leaving — before Phipps gave cash to Lori McMahan, Graff testified.

The McMahans face trial on a nine-count indictment that alleges a tit-for-tat conspiracy: that the McMahans accepted more than $100,000 in illegal contributions for his 2002 campaign, plus several trips funded by Phipps. In return, the indictment alleges, Jeff McMahan took actions to benefit Phipps' lucrative abstract companies.

The state auditor's office regulated that industry until legislators ended that arrangement last year.

Phipps and Arbaugh are expected to be the government's two main witnesses. Phipps is testifying as part of his plea agreement to a separate conspiracy charge. Arbaugh has immunity from prosecution.

U.S. District Judge James Payne ruled Thursday against the McMahans' request to dismiss some of the counts.

How auditor's actions benefited Phipps

Graff was the only witness Friday during a hearing requested by the defense to establish whether a conspiracy existed.

He said Phipps and Arbaugh told him about specific acts McMahan oversaw to repay Phipps for his help in the 2002 campaign.

Those four acts:

— Delaying an application filed in December 2002 by McCurtain County banker John Callaham, who wanted to open an abstract company in direct competition to one owned by Phipps. Callaham eventually got tired of the lengthy delay and "gave up," Graff said.

— Not firing Arbaugh, his abstract registrar whose job was in constant jeopardy except during election years, who raised campaign money from Phipps and others in the abstract industry.

— Preventing action on a 2005 bill that would have made radical changes to the abstract industry. That bill, by Rep. Jerry Ellis, D-Valliant, resulted from numerous complaints about high prices and slow work performed by Phipps' abstract office in Idabel. Graff said McMahan convinced Ellis to remove his bill, in part by having Arbaugh act as a mediator.

— Filing an administrative complaint designed to remove Phipps' abstract company partner, former state Sen. Gene Stipe, from the business. McMahan filed the complaint in October 2005, a few months after Stipe sued Phipps. McMahan filed the complaint despite opinions from his own office attorney and an assistant attorney general that he had no authority to file it, Graff said.

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