Update 11 pm ET: Looking at the court document, McAuliffe’s denial looks … reasonable:

On or about April 20, 2010, the Postal Inspector met with T.M. and asked if a $2,000 check he received from CARAMADRE was a payment for referring a terminally ill individual to CARAMADRE. T.M. intentionally lied to the Postal Inspector, telling him that the check was not a payment for referring a terminally-ill individual to CARAMADRE, but rather was a payment for construction work that T.M. had performed in CARAMADRE’s house.

Was McAuliffe doing home construction in 2010? Doubtful.  This looks like a huge screw-up at the Associated Press.

Update, 11:10: AP story at the Washington Post has not yet been amended or retracted. Also, updated the headline.

Update: WTOP reports that the AP has retracted the story:

What a huge faceplant for the Associated Press.

Also, re-read the Cuccinelli statement again. I think they knew the AP had screwed up, and made sure they stuck to the facts of the McAuliffe investment alone. They may end up being the smartest players in this tonight, but they’re not going to get much traction on this now.  The story will be about the AP.

Update, 11:45: The only Twitter feed that hasn’t yet commented on the AP’s retraction of the story is … @AP. I think it’s time to break out Otter as the AP’s unofficial spokesman (NSFW):

Original post and updates follow …

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With less than four weeks to go in the Virginia gubernatorial race, Terry McAuliffe appeared to be coasting to victory. Until now, that is:

 Documents in a federal fraud case allege that Virginia Democratic gubernatorial candidate Terry McAuliffe lied to a federal official investigating a Rhode Island estate planner now imprisoned for receiving death benefits on annuities secured on terminally ill people without their knowledge.

A 2011 fraud, conspiracy and identity theft indictment against Joseph Caramadre and an aide, Raymour Radhakrishnan, also alleges that McAuliffe misled a federal postal inspector who was inquiring about a $2,000 check Caramadre had sent him.

Normally in an October surprise like this, one would suspect dirty tricks by the opposing campaign.  That doesn’t appear to be the case here, though.  This isn’t an old report uncovered in oppo research, but a new filing in a federal court.  McAuliffe’s name only got linked to the Caramadre case today.  Ken Cuccinelli is the current AG of Virginia, but there isn’t any apparent connection between the state AG’s office and a federal investigation in Rhode Island, at least not at the moment.

So at least for the moment, this looks like a very big and unspinnable problem for Team McAuliffe, and not just in the campaign.  Lying to federal investigators is obstruction of justice, which is a very significant felony — as Scooter Libby can attest.  McAuliffe is presumed innocent until proven guilty, but that’s only in the legal sense, not the political sense.

Unless McAuliffe has a really good explanation for this, Cuccinelli may be the luckiest man in politics this year — and Democrats may be looking through the Virginia election code to get all their options ready.  It’s difficult to imagine someone staying in a gubernatorial race with this on the public record.

Update: The Cuccinelli campaign has a statement out:

“There is no question that this is a deeply troubling story, and what it reveals most of all is yet another glaring example of Terry McAuliffe doing business with highly dubious individuals. We’ve seen this movie before. Any minute, Terry McAuliffe will release a statement claiming ignorance of details. He will say that he was just an innocent investor, just as he was when he made millions of dollars just before Global Crossing went belly up and employees lost their jobs and life savings. He will claim no knowledge or responsibility for what happened, just like he said about critical investor documents—now the subject of a Securities and Exchange Commission investigation—when he was the chairman of GreenTech Automotive. In this case, as with all of the others, McAuliffe will say, ‘it wasn’t me.’

“Is this the kind of leader Virginians want to be their chief executive? A person who always seems to be involved with individuals, businesses and investments that are almost always tied up in wrongdoing, whether legally or ethically? A person who seems to always make excuses and avoids responsibility? It’s becoming clearer by the day why Terry McAuliffe has steadfastly refused to release his tax returns to the public. This is not the kind of behavior or judgment worthy of Virginia’s highest office.”

McAuliffe acknowledges being one of the investors, but says he has no knowledge of the fraud:

McAuliffe’s campaign was quick to distance the candidate from the report. They claim that while he had invested in the annuities he knew nothing about Caramdre’s fraudulent activity.

“Terry was one of hundreds of passive investors several years ago and had no idea about the allegations against the defendant – who, at the time, was widely respected by business leaders and elected officials,” said spokesman Josh Schwerin. “The allegations are horrible and he never would have invested if he knew he was being deceived.”

Schwerin said that McAuliffe and his campaign would donate the equivalent of the campaign donations from Camardre to the American Cancer Society. $27 thousand from the campaign. $47 thousand from the candidate himself.  The $27 thousand was to return campaign contributions. The $47 thousand was for the investment into Caramadre’s business venture.

I don’t think that’s going to help.

Update: McAuliffe’s team also denies that he’s the one who lied to investigators:

 They contend that the “T.M” in the court document is not the candidate.

“The person referenced on page 68 is absolutely not Terry McAuliffe since he was a passive investor and did none of the things referenced: First, he was not interviewed by law enforcement on April 20, 2010; rather, he was in Richmond for a day of meetings,” said Schwerin. “Second, he was never involved in the referral of any annuitants to Mr. Caramadre, ever.

“When an investigator contacted Terry briefly by phone, as he said he was doing with other investors, Terry answered a few questions and never heard from him again.”

We’ll see — but Republicans also point out that McAuliffe certainly waited a long time to divest themselves of Caramadre’s contributions.