EXCLUSIVE:

FBI agents working alongside Utah state prosecutors in a wide-ranging corruption investigation have uncovered accusations of wrongdoing by two of the U.S. Senate’s most prominent figures — Majority Leader Harry Reid and rising Republican Sen. Mike Lee — but the Justice Department has thwarted their bid to launch a full federal investigation.

The probe, conducted by one Republican and one Democratic state prosecutor in Utah, has received accusations from an indicted businessman and political donor, interviewed other witnesses and gathered preliminary evidence such as financial records, Congressional Record statements and photographs that corroborate some aspects of the accusations, officials have told The Washington Times and ABC News.

But the Justice Department’s public integrity section — which normally handles corruption cases involving elected figures — rejected FBI agents’ bid to use a federal grand jury and subpoenas to determine whether the accusations are true and whether any federal crimes were committed by state and federal officials.

The information involving Mr. Reid and Mr. Lee is not fully developed but centers on two primary issues:

• Whether both or either politician sought or received money or other benefits from donors and/or fundraisers in connection with doing political favors or taking official actions.

• Whether Mr. Lee provided accurate information when he bought, then sold a Utah home for a big loss to a campaign contributor and federal contractor, leaving his mortgage bank to absorb large losses.

“There are allegations, but they are very serious allegations and they need to be looked at by somebody,” Sim Gill, a Democrat who is the elected chief prosecutor in Salt Lake County, told The Times. “If true, or even if asserted, they truly should be investigated and put to rest, or be confirmed.”

Spokesmen for both senators denied their bosses engaged in any wrongdoing and said the lawmakers were unaware of the investigations.

Mass recusal

The investigative efforts have been further complicated by the fact that Mr. Reid worked to get Mr. Lee’s chief counsel, David Barlow, confirmed in 2011 as the U.S. attorney in Salt Lake City. That action — a Democratic Senate leader letting a Republican be named to a key prosecutor’s position in the Obama administration — raised many eyebrows and angered some Democrats.

Subsequently, the entire office of federal prosecutors in Utah was forced to recuse itself from the corruption case after questions surfaced about a conflict of interest involving one prosecutor and a subject of the probe. After the recusal, state prosecutors secured a court order transferring the federal evidence gathered up to that point to their possession.

The process has left FBI agents in the unusual position of trying to help two local prosecutors make a case in state court without the ability to use the federal court system to determine whether accusations against two powerful members of Congress are true.

“We’re just two local prosecutors but everybody who was supposed to look at this evidence above us has made a decision not to, and by default left it to us to investigate and prosecute at the state level,” Mr. Gill said.

He and his counterpart in the wide-ranging probe, chief Davis County prosecutor Troy Rawlings, praised the FBI agents assisting their case for their dedication to finding the truth.

State charges sought

The prosecutors said their current focus is pursuing state charges against Utah officials and figures, like former Utah Attorney General John Swallow. To the dismay of the investigators, the Justice Department declined to prosecute Mr. Swallow, a Republican.

On Wednesday, a special committee of the Utah Legislature concluded that Mr. Swallow may have violated as many as eight state laws on abuse of public office.

Mr. Swallow “compromised the principles and integrity of the office to benefit himself and his political supporters,” and he “hung a veritable ‘for sale’ sign on the office door that invited moneyed interests to seek special treatment and favors,” the legislative report concluded.

Mr. Swallow has denied wrongdoing.

A senior law enforcement official familiar with the discussions among FBI, Justice Department and state authorities said that after federal prosecutors declined to take the Swallow case or pursue the accusations about the senators, a decision was made to pursue justice wherever it could be achieved, even at the state level with FBI agents assisting.

“The sentiment was that it doesn’t matter in the end where it occurs as long as justice is served,” the official said, speaking only on the condition of anonymity.

Both state prosecutors said they eventually plan to pursue the accusations involving the senators and other federal officials — at least to determine whether any crimes were committed inside Utah borders that would warrant state charges.

“We’re sweeping up that information and those items of evidence,” said Mr. Rawlings, a Republican. “I think it would be unfair to say we are currently investigating Sens. Reid and Lee at this time. But we are not going to ignore the scraps of evidence coming in about them.

“Do we plan on formally turning attention to all of the scraps picked up about them? We do plan on that,” Mr. Rawlings said.

Justice ‘ran away’

People familiar with the probe said both FBI agents and local investigators have been frustrated for months by the Justice Department’s inaction on the initial accusations and evidence against the two senators, and those concerns were recently elevated to FBI headquarters.

The special agent in charge of the Utah office was summoned earlier this month to Washington to meet with senior FBI officials, and the bureau’s Utah office has been instructed that the FBI agents working the case may only assist in the state probe and cannot pursue federal criminal investigative leads — unless Justice finally approves a corruption probe.

The frustrations have prompted discussions of seeking a special prosecutor who would bypass the Justice Department and U.S. attorney’s office and evaluate the evidence independently.

FBI officials said it was rare but not unprecedented for their agents to assist a state-only investigation.

“We’ve let agents provide expertise and assist on the ground investigations for states in the past, especially in complex cases where federal crimes weren’t clear,” a senior FBI official in Washington told The Times, speaking only on the condition of anonymity because the official wasn’t authorized to talk to reporters.

“But in this case, DOJ risks creating the perception of a cover-up rather than let agents use the normal tools and follow the evidence wherever it leads — Republican, Democrat, Senate or not,” the senior FBI official said.

Mr. Rawlings criticized the Justice Department for failing to let FBI agents examine the evidence for federal crimes and leaving the matter to state prosecutors with limited jurisdiction.

“Based upon what we know today, we were surprised that the DOJ ran away,” he said.

FBI agents have conducted some interviews in Utah and provided analysis of bank records. But until the Justice Department engages or a special prosecutor is named, the agents are handcuffed from using a federal grand jury to gather evidence. FBI officials requested Justice Department permission last year but were turned down in August, officials said.

Influence-peddling claim

One focus of the investigation is on allegations by federally indicted businessman Jeremy Johnson, who says he was asked by Mr. Swallow and other intermediaries to route hundreds of thousands of dollars in campaign contributions and consulting payments to an associate of Mr. Reid and other companies in hopes that the senator would intervene on two matters.

The first was a dispute that Mr. Johnson was having with the Federal Trade Commission, which led to a fraud lawsuit against him.

Mr. Johnson says he was instructed by intermediaries to write a $200,000 check to one company and a $50,000 check to a personal friend of Mr. Reid in return for getting the senator to intervene with the FTC, an intervention that did not happen.

The second accusation involves the timing of Mr. Reid’s changing his opposition to legislation allowing Internet poker. Mr. Reid’s aides contend his change of heart was consistent with a broader shift underway in his state — and of the leading industry group, the American Gaming Association.

Mr. Johnson says Mr. Reid announced his new position in 2010 at a fundraiser with online gambling executives in a Las Vegas.

In a recorded conversation published last year by a Utah newspaper, Mr. Johnson is heard telling Mr. Swallow about the Las Vegas event.

Mr. Johnson says Mr. Reid told the gathering: “Look, I’ve polled my constituents and they don’t like online poker, bottom line. … It’s bad for jobs here in Las Vegas. But I’m going to back what you guys are doing here. I’m going to introduce a bill for you.”

On the recording, Mr. Johnson tells Mr. Swallow that, after Mr. Reid departed, Mr. Johnson himself pulled aside an online gambling official to ask about his announcement.

“I [Mr. Johnson] said, ‘How in the hell did you guys get him to do that?’ And he [the online gaming official] says, ‘Let’s just say he got a little something in his retirement fund.’ And I was like, ‘OK, that’s how it is.’”

Reid changes position

Mr. Johnson said in the recording that he was instructed by intermediaries to route a seven-figure check to a company on the West Coast.

Mr. Reid did introduce online poker legislation one month after his re-election in a closely contested race in 2010. The proposed legislation never went anywhere.

Jeffrey Ifrah, an online gambling industry attorney, attended the 2010 event with what he guessed were 60 to 70 others. He confirmed to ABC News that Mr. Reid announced his change of position on Internet poker in front of the donors.

But he said he did not think the contributions influenced the decision and laughed off Mr. Johnson’s suggestion that Mr. Reid was paid to make that change.

“If someone said that, they must have been joking,” Mr. Ifrah said. “Let me tell you something about gamblers: They don’t give their money to anybody and I highly doubt they would have given it to Reid. When they have cash to spend, they gamble with it — period.”

Adam Jentleson, a spokesman for Mr. Reid, confirmed that Mr. Johnson attended the fundraiser.

“Senator Reid met with a large group of supporters, just as he met with thousands of people over the course of his re-election campaign, and took pictures and shook hands with countless people. The record indicates that Mr. Johnson was present at this large group meeting, but Senator Reid does not recall him as anything other than a face in the crowd,” Mr. Jentleson said.

“The event was a fundraiser, but Sen. Reid himself did not make a personal appeal for money. Fundraising is a necessary reality of politics and Sen. Reid has always conducted his fundraising activities with full transparency and in full compliance with the law,” he added.

When Mr. Johnson’s accusations were first made public last year, Mr. Reid called him a man of “low record and character” and termed his accounts as “absurd and utterly false.”

Mr. Jentleson echoed those sentiments Thursday.

“Mr. Johnson is a desperate individual who’s been indicted on over 80 counts. His allegations are false and the flailings of a desperate man,” the Reid spokesman said.

Mr. Reid had long opposed online poker, making clear his position in a 2006 news conference.

“I, at one time in my career, was chairman of the Nevada Gaming Commission, which is the regulator for gaming in Nevada. I was there when gaming went to New Jersey. I do not believe in Internet gambling,” Mr. Reid told reporters. “I know how hard gambling is to control. I had my life threatened on more than one occasion as a result of untoward people who were involved in Nevada gambling. I was involved in shutting down major hotels because of the involvement of organized crime. The commodity of gambling is cash. And someone asked me if I oppose a study. I don’t oppose a study. If anyone wants to study it, they can study it. But unless I’m convinced differently, I do not favor Internet gambling.”

Shortly after Mr. Reid won re-election, the Senate majority leader surprised many by publicly supporting legislation to legalize online poker.

“Under the status quo, Internet poker is played by millions of Americans every day in an essentially unregulated environment,” Mr. Reid said in December 2010. “The legislation I am working on would get our collective heads out of the sand and create a strict regulatory environment to protect U.S. consumers, prevent underage gambling and respect the decisions of states that don’t allow gambling.”

Mr. Reid’s spokesman said his boss actually began reconsidering that position in late 2009, well before the fundraiser.

“Sen. Reid has always opposed broad-based online gaming, in part because of concerns that it could not be regulated. Since the issue first arose nearly a decade ago, new regulations and new technologies have been developed, including technologies that would enable sites to block minors. Due to these and other developments, Sen. Reid became convinced over time that states should be allowed to decide for themselves whether to allow online poker,” Mr. Jentleson said.

Tainted accuser

Mr. Johnson’s credibility is certain to come under attack from anyone he levels accusations against.

Federal prosecutors secured a federal indictment accusing the St. George, Utah, businessman of 86 criminal charges accusing him and other executives of his former financial firm of bilking tens of thousands of consumers out of millions of dollars.

A plea deal between him and the government fell through before the charges were filed, and the U.S. attorney’s office subsequently secured a gag order from a federal judge prohibiting Mr. Johnson from talking to the media.

Despite the accusations portraying Mr. Johnson as a swindler, FBI and state investigators have unearthed some early information that would substantiate some aspects of his claims against state and federal officials.

They include canceled checks of some of the payments Mr. Johnson purportedly made to third parties other than Mr. Reid, other bank records and even a photo of the fundraiser with Mr. Reid, officials said.

Lee questions

The questions in the broad-ranging state probe that surround Mr. Lee involve real estate transactions in which the Republican bought a home for $1.1 million in Utah in 2008 when he was still a private lawyer and then sold it for $720,000 after becoming a senator, leaving his mortgage bank, J.P. Morgan, to absorb a significant loss.

Investigators want to know whether Mr. Lee accurately described his personal finances in conjunction with the mortgage transactions.

Investigators have gathered information that Mr. Lee sold the home in a short sale in 2011 to a campaign contributor and federal contractor. As part of the short sale, Mr. Lee forfeited his down payment and left the rest of the loss to his bank, then immediately turned around and rented another property from the same donor for just more than $2,000 a month.

A spokesman for Mr. Lee confirmed the house transactions but said the senator accurately reported all of his finances and all the transactions were legal and proper.

“The purchase of the house was completely aboveboard so there was little to consider about appearances,” spokesman Brian Phillips said, adding that Mr. Lee at the time of the house transaction didn’t even know the buyer was a federal contractor.

Around the same time, Mr. Lee made a speech on the Senate floor praising the same donor who bought his home. Mr. Lee called the donor a “friend” and suggested the donor’s books and writings might offer a blueprint for compromise in congressional budget talks.

Mr. Phillips said his boss did no other favors for the donor and that the brief mention on the Senate floor was “an off-the-cuff, unplanned remark referencing a single line from a widely sold book” by the donor.

Mr. Lee told a local newspaper in Utah that his sale of the home and the rental of the new property were not connected, but rather separate transactions involving the same friend. He said he gained empathy with average Americans after experiencing the loss of his first home in the short sale.

“It certainly is something that is painful to go through, and I know a lot of people are going through it, and I feel for those who have had to go through it,” Mr. Lee told the Salt Lake City Tribune.

• ABC News contributed to this report.

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