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82D CONGRESS! 1st Session / CITXTATI? SENATE /REPORT \ N o . 76 STUDY OF RECONSTRUCTION FINANCE CORPORATION INTERIM REPORT OP THE COMMITTEE ON BANKING AND CURRENCY PURSUANT TO S. Res. 219 (81st Cong.) FAVORITISM AND INFLUENCE F E B R U A R Y 5 (legislative day, J A N U A R Y 29), 1 9 5 1 . — O r d e r e d t o be p r i n t e d w i t h an illustration UNITED STATES GOVERNMENT PRINTING OFFICE 79161 WASHINGTON : 1951 COMMITTEE ON BANKING AND CURRENCY B U R N E T R. M A Y B A N K , South Carolina, Chairman J. W. F U L B R I G H T , Arkansas H O M E R E . O A P E H A R T , Indiana A. W I L L I S R O B E R T S O N , Virginia J O H N W. B R I C K E R , Ohio J O H N S P A R K M A N , Alabama I R V I N G M . IVES, New York J. A L L E N F R E A R , JR., Delaware A N D R E W F» S C H O E P P E L , Iowa P A U L H . D O U G L A S , Illinois E V E R E T T M . D I R K S E N , Illinois R U S S E L L B. L O N G , Louisiana W A L L A C E F . B E N N E T T , Utah A. LEE PARSONS, Clerk Jos. P. MCMUBRAY, Staff Director SUBCOMMITTEE ON R E C O N S T R U C T I O N F I N A N C E CORPORATION (81st Congress) J. W. F U L B R I G H T , Arkansas, Chairman B U R N E T R. M A Y B A N K , South Carolina C H A R L E S W. T O B E Y , New Hampshire J. A L L E N F R E A R , JR., Delaware H O M E R E . C A P E H A R T , Indiana P A U L H . DOUGLAS, Illinois JOHN T . M . REDDAN, Special Legislative Counsel PRICE, WATERHOUSE & Co., Accounting Consultants a CONTENTS Preface Conclusions of the subcommittee Minority report Summary on favoritism and influence Chart showing relationships between certain persons, including three Directors of R F C —R F C loan to Harrington & Richardson Arms Co R F C loan to National Union Radio Corp Sale of facilities of Aireon Manufacturing Corp m Page 1 3 4 4 14 14 19 23 82D CONGRESS 1st Session STUDY SENATE REPORT No. 76 OF RECONSTRUCTION FINANCE CORPORATION FEBRUARY 5 (legislative day, JANUARY 29), 1951.—Ordered to be printed w i t h an illustration M r . FULBRIGHT, from the Committee on Banking and Currency, submitted the following INTERIM REPORT [Pursuant to S. Res. 219] T h e Committee on Banking and Currency accepted the third interim report of the Subcommittee on Reconstruction Finance Corporation and authorized its submission to the Senate. The committee reserved a decision on S. 514, as reported by the subcommittee, pending further consideration and further reports of the subcommittee. PREFACE T h e Subcommittee on the Reconstruction Finance Corporation, having been designated b y the Banking and Currency Committee of the Senate to conduct a study of the operations of the R F C pursuant to the terms of Senate Resolution 219, adopted February 8, 1950, herewith submits its third interim report. The subcommittee has had under consideration and now reports favorably, S. 514, a bill which proposes a fundamental reorganization of the R F C . This bill proposes that the management of the Corporation shall be vested in a single Governor who shall take the place of the present five-man Board of Directors. I t also proposes that the Board of Directors shall cease to exist 60 days after the date of its enactment. The purpose of this change is to strengthen the management of Reconstruction Finance Corporation, and in this way to enhance its true usefulness during the difficult periods which lie ahead of the Nation. During much of its existence, R F C operated successfully under the supervision of a Federal L o a n Administrator, whose authority transcended that of the R F C Directors and who functioned, in practical effect, as the General Manager of R F C . I n 1947, for the first time since 1939, the Board of Directors became the governing body in RFC. T h e position of Governor of the R F C would be a position of considerable responsibility. I t should attract the interest of a man of 1 2 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION adequate stature and background. Such a man would not be attracted by the prospect of serving as one of five directors with the possibility that his four colleagues would be of mediocre stature and background. The organization structure proposed i n this bill will make it possible for the Government to take into its employ for this position, a leader who would not otherwise be willing to devote his efforts to the public service. A single Administrator has proven successful in such lending agencies as the F a r m Credit Administration and the R u r a l Electrification Administration, and the history of the surplus property agencies affords an interesting analogy. I n the words of the Senate Committee on Expenditures i n the Executive Departments, Eightieth Congress: In actual operation, the three-man Surplus Property Board failed to accomplish its primary objective. * * * The unwieldy three-man Surplus Property Board was therefore abolished and replaced by a single Surplus Property Administrator. The study recently made by the subcommittee has shown that i n a five-man Board, it is possible for the individual members to avoid, obscure, or dilute their responsibilities by passing the buck from one to the other, or to subordinate employees of the Corporation. There have been instances i n which individual members of the Board have brought about the approval of loans by interference i n the work of subordinate employees and i n disregard of established operating policies of the Corporation. I n these cases the applications would otherwise have been rejected. There have been instances i n which important loans were made upon the affirmative vote of a minority of the Board members. There has been a large number of instances i n which the Board of Directors has approved the making of loans, over the adverse advice of the Corporation's most experienced examiners and reviewing officials, notwithstanding the absence of compelling reasons for doing so and the presence of convincing reasons for not doing so. Under the organization form proposed i n this bill the side-stepping and diffusion 01 responsibility would no longer be possible. If the management of R F C were vested in one man there would be no way in which he could escape the responsibility for the Corporation's acts. This change should greatly strengthen the control which the Congress will exercise on behalf of the people of the Nation over the lending of public money to private individuals and business concerns. W i t h the enormous growth which has taken place in the Federal establishment since the beginning of the Second W o r l d War, there has been a great increase in the number of people who must be appointed by the President to important positions in the Government. T h e number of appointments which must be reviewed for confirmation by the Senate has also increased. Necessarily, the relative importance of each appointment and the relative degree of high-level attention which can be given to the selection of officials has decreased, accordingly. I n recent years the appointment and confirmation of the Directors of R F C have not received the full and careful study they deserved. The change proposed by the bill will enhance the prestige of the R F C management sufficiently so that the President, i n all probability, will give his personal attention to the selection of the Corporation's Governor. I t is probable also that the qualifications of a nominee for 3 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION this position will be examined with considerably more care in the Senate than would the nominations of five men appointed to a board. This alone would justify the change proposed in this bill under the circumstances in which the Federal Government finds itself today. CONCLUSIONS OP T H E SUBCOMMITTEE From its study, the subcommittee has concluded that the independence and integrity of Reconstruction Finance Corporation have become impaired in recent years, and it has concluded that the impairment is the result of deterioration which has occurred in the Corporation's top management structure. The subcommittee has concluded also that the deterioration of the top management structure is attributable to the equal division of the management responsibility among the members of the five-man Board of Directors, This condition invites deterioration. It was this type of responsibility assignment which the Hoover Commission had in mind when it said, quoting from page 5 of the Report on Regulatory Commissions: Administration by a plural executive is generally regarded as inefficient. Only a drastic action can restore the integrity of R F C . Its top management must be rendered independent as it was in the earlier years. The material presented in this interim report has been summarized from case studies conducted by the subcommittee. It illustrates the weaknesses which have existed in the top management in R F C in the recent past and which continue to exist at present. It illustrates also the consequences which attend the existence of such weaknesses. This report shows that there has been improper use of the Corporation's vast authority in response to the influence which persons outside of the R F C have over individual members of the Board of Directors. In presenting this report the subcommittee wishes to distinguish between improper influence as such and the improper use of the Corporation's authority in response to influences which in themselves may be perfectly proper. This report deals primarily with the latter. The subcommittee believes that the Corporation's authority has been seriously abused by the Directors and that this constitutes an important impropriety. The subcommittee expresses no opinion as to the propriety of the activities of the other individuals named in the report and it makes no charges against those individuals. It is recognized that some of them may be subjected to public criticism because of inferences which may be drawn from the circumstances reported, or from the mere mention of their names. The subcommittee finds this unavoidable. It holds the view that there is a legitimate public interest i n the relationships which arise when public funds are placed at the disposal of private persons. The requirements of a full and proper accounting impose the hazard of public criticism, not only on those who administer a public lending activity, but also on those who borrow from the public and those who act as intermediaries seeking to influence the lender on behalf of the borrower. The subcommittee believes that no one will be injured unfairly by its report. However, it will accord the opportunity for a public hearing to those who feel that unfair injury has been given. 4 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION MINORITY REPORT Since the report of the subcommittee is an "interim report" Senator Capehart reserves the right to express his opinion on S. 514, the proposed legislation to change the administrative structure of the R F C at such time as intended further consideration of the matter has been completed and anticipated additional reports have been made by the subcommittee. SUMMARY ON FAVORITISM AND INFLUENCE The public hearings dealt primarily with lending policy Since the beginning of its study in February 1950, the subcommittee on R F C has taken considerable testimony, both in public and in executive session. T h e public hearings have been printed for distribution. They cover 1,601 printed pages. The testimony taken in executive session covers 1,240 pages of typewritten transcript and numerous exhibits. The subcommittee has discussed 35 individual loans in its public hearings, some of them in much detail. It has studied some 200 or so more on which hearings have not been held. T w o previous interim reports have been published. The public hearings on R F C loans have been conducted primarily as an inquiry into the policies governing the Corporation's activities. Particular attention has been given to top-level policy. One series of hearings, however, dealt with a contract between Lustron Corp., an R F C borrower, and Commercial Home Equipment Corp., a concern which undertook to transport the Lustron houses. This contract was reviewed from the standpoint of the possibility that there had been improprieties on the part of Commercial Home Equipment Co. and a lack of reasonable and businesslike supervision of the contract by the R F C . The Department of Justice has this matter under investigation at the present time. The Hoover Commission warned of favoritism Having completed a series of case studies on lending policies, the subcommittee considered the subject of favoritism and influence in the R F C . The Hoover Commission had warned of these things. I n its Report on Federal Business Enterprises, transmitted to the Congress on M a r c h 31, 1949, the Commission had said: Direct lending by the Government to persons or enterprises opens up dangerous possibilities of waste and favoritism to individuals or enterprises. It invites political and private pressure, or even corruption. Three of the Hoover Commissioners took exception to this assertion because they had seen no evidence which would justify it. The Senate Committee on Banking and Currency also has been concerned over the possible undesirable effect of outside influence on the R F C . I n reporting on the study which was concluded by its R F C subcommittee i n M a r c h 1948, the committee said: It is the opinion of this committee that, in those fields in which R F C has the responsibility for its actions, it should be allowed to exercise its discretion free from interference by other governmental agencies and departments and, for that matter, free from all influence whether from officials in the Government or from Members of Congress. Only under those circumstances can R F C be expected to 5 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION do its job properly and with full accountability. Attempts to influence the business judgments of R F C by the use of political influence, even though well intended, are a constant menace to sound administration. While the general policies of the R F C , like those of other Government agencies, should be reviewed and coordinated by the President, this general review should not extend to particular loans. The business decisions of R F C should be the independent judgments of its Board of Directors (S. Rept. 974, 80th Cong., 2d sess., p. 13). Recent RFC business decisions are not easy to understand I n its study, the present subcommittee has observed that many R F C loan applications in the past 2 years have been approved by the Board of Directors without any apparent affirmative reason. I n fact, many applications have been approved by the Board notwithstanding the existence of persuasive reasons why loans should not be made. Justification for a number of such loans, in general terms, has been offered i n the hearings held, but in certain cases the subcommittee has gained the impression that its hearings have not been successful i n establishing the real reasons why the loans were made. This was true of the Texmass loan which involved $10,100,000 of R F C money. I t was true of a $4,000,000 loan to Waltham Watch Co., a $1,300,000 loan to the Mapes Hotel in Reno, Nev., and a $400,000 loan to Ribbonwriter Corp. of America of Dania, Fla. The subcommittee has not held public hearings on certain loans to Central Iron & Steel Co. which totaled about $4,000,000, but it appears from the study made by the staff that the real reasons why these loans were made are equally obscure. There are other cases similar to Central Iron & Steel Co. i n this respect, i n which the staff has been able to make only a cursory review. Two directors accused of playing favorites The subcommittee has been told repeatedly that certain Washington attorneys and certain other people were unduly influential with officials of the R F C . I n some instances the reports have been received in sworn testimony which asserts that for a sufficient fee these people would give assurance, where no one else could, that matters pending before the R F C would have a successful outcome. Certain R F C officials were named i n the specific allegations of favoritism received by the subcommittee. They are Walter L . Dunham and William E . Willett, Directors. These are the hold-over Directors included by the President of the United States in the panel of nominees for the new Board which was submitted to the Senate on August 9, 1950, and resubmitted on November 27, 1950. Willett came up through the ranks in R F C . Dunham came to his position on the Board early in 1949 from outside the Corporation. H e attributes his appointment to C y Bevan, a Detroit lawyer, who was formerly the Democratic national committeeman for the State of Michigan. Goodwin, Rosenbaum, Meacham & Bailen T h e Washington law firm of Goodwin, Rosenbaum, Meacham & Bailen, and, particularly, its leading member, Joseph H . Rosenbaum, are the attorneys mentioned most frequently i n reports of special influence which have reached the subcommittee. There are other attorneys who seem to have unusual success at the R F C . Joseph H . Rosenbaum is quoted i n sworn testimony as having claimed on one occasion that Willett and Dunham were " i n his hip 79161—51 2 6 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION pocket." O n another occasion, reported b y R F C Director Harvey J. Gunderson, he told L . M . Giannini, the California banker, that he had considerable influence over the decisions made b y these two men. I n February 1950, according to Carl Strandlund, the president of the Lustron Corp., Rosenbaum met the representatives of a committee of Lustron stockholders. Strandlund said: In the course of the conversation, Mr. Rosenbaum mentioned that he was well informed with reference to the Lustron picture, that he was closely connected with Mr. Willett, and had been called upon by Mr. Willett for advice and assistance in connection with Lustron matters on several occasions. These incidents indicate that Rosenbaum stressed the importance of his personal relationships with the directors named. Lesser officials i n the R F C have sometimes found the Rosenbaum fees to be excessively high for the work done b y the firm. I n the case of a $1,400,000 loan to National Union Radio Corp., for example, a fee of $15,000 was agreed upon between attorney and client, and a fee of $5,000 was the maximum which R F C ' s N e w Y o r k office would approve for that portion of the work with which it was familiar. T h e difference was referred to Washington for approval. The matter was i n abeyance i n Washington for about 2 months and then the loan was repaid, before maturity. Approval of the fee never came to a final decision. The subcommittee has not made a complete study of the loan to National Union Radio Corp. A separate section of this report presents a brief description of certain aspects of the negotiations i n this case, as well as a complete copy of the analysis which the N e w Y o r k R F C L o a n Agency made with respect to the Rosenbaum fee billing. E. Merl Young The individual named most frequently i n the reports of alleged influence which have reached the subcommittee is E . M e r l Young. Director Gunderson described him to the subcommittee as an expediter. M e r l Y o u n g worked for a dairy company i n Washington during 1937 and half of 1938. H e was self-employed i n Jerico Springs, Mo., after that and until the end of 1939. I n 1940, his wife having accepted employment with Senator Truman, Y o u n g returned to Washington and became an assistant messenger i n the Government's General Accounting Office. The salary was $1,080 a year. H e served i n the Marine Corps from 1942 to 1945, and then he became an R F C examiner at $4,500 a year. B y J u l y of 1948 his salary at R F C had risen to $7,193 a year. M o r e recently, M e r l Y o u n g has been an $18,000-a-year vice president of the Lustron Corp. and, simultaneously, a $10,000-a-year official of F . L . Jacobs Co. B o t h were R F C borrowers at the time. Strandlund, the president of Lustron, testified that he was unaware of Young's employment with the F . L . Jacobs Co. I t seems that Y o u n g acquired and held both of these positions because of the influential atmosphere which surrounds him. A t the present time, M e r l Y o u n g and his friends say that he is an entrepreneur in the insurance business. According to his tax reports, which the subcommittee examined i n August, he expected his 1950 income to approximate $60,000. During the first 8 months of its existence, however, the insurance business had been financed exclu- 7 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION sively by the law firm of Goodwin, Rosenbaum, Meacham & Bailen and the officials of F . L . Jacobs Co., and it had not earned a sufficient gross revenue to pay expenses. Other close relationships between Young and the Rosenbaum firm have been uncovered in connection with matters which concerned the R F C . It was also found that Young has been closely associated with Willett and Dunham, with whom it has been alleged that Rosenbaum claims to have special influence. According to sworn testimony Young has offered to be influential for a fee on behalf of persons seeking to do business with the R F C . Bex Jacobsj James Windham, and the F. L. Jacobs Co.: Rex C. Jacobs has been named in sworn testimony as one of the persons whose interests have influenced Dunham's decisions. H e is closely associated with Joseph Rosenbaum, and has recommended employment of Rosenbaum's firm to persons seeking to do business with the R F C . H e has been intimately associated also with Walter Dunham, who brought about Jacobs' selection by R F C as the expert who would survey the Lustron Corp. and advise on its reorganization. Jacobs also has cultivated the friendship of Donald Dawson, the President's aide. Jacobs is president of the F . L . Jacobs Co. of Detroit. This company has been M e r l Young's employer. Though it no longer employs him, and though its stock is held by the public, the company has also undertaken to finance Young's entire stake in a wildcat oil well and a substantial portion of his venture into the insurance business. Jacobs has entertained M e r l Young and Rosenbaum at his estate in Homestead, Fla. Dawson too has been his guest. James C. Windham, treasurer and a director of the F . L . Jacobs Co., also has been close to Young and Dunham, and he frequently has substituted for Rex Jacobs in telephone conversations and other discussions with these men. Windham was an aide to Director George Allen, of R F C , at the time that a $3,000,000 loan was made to the F . L . Jacobs Co. H e joined the company shortly afterward. A t present he is a member of the advisory committee which consults with the R F C Loan Agency in Detroit. Each of the several loan agencies has such a committee composed of bankers and businessmen who serve as independent advisers without pay. Though Jacobs says he has known Dunham for 25 years, Dunham says he hadn't met either Jacobs or Windham before he was first appointed to the R F C Board. H e says that Windham sought him out i n Detroit after the appointment, and that shortly afterward Windham introduced him to M e r l Young and Rex Jacobs. H e considers Windham a brilliant man and professes admiration for him. Windham has taken a more extensive interest in the loans and other business of R F C than his duties on the Detroit Advisory Committee would require or justify. This is clear from the entries in Dunham's office records which reveal also that Windham was willing and able to influence Dunham in a way which constituted interference in the internal affairs of R F C . Donald Dawson Donald Dawson, personnel adviser to the President of the United States, and formerly personnel officer of the R F C , apparently exercised considerable influence over certain of the Directors of the R F C . 8 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION H e has had other points of contact i n the Corporation as well. Dawson's wife, M r s . A l v a Dawson, is the chief custodian of the files of the R F C . Donald Smith, who succeeded Dawson as R F C personnel director, is his close personal friend. Investigation b y the subcommittee indicates that close personal relationships exist between Dawson, M e r l Young, Rex Jacobs, James Windham, and R F C Directors Dunham and Willett. These friends, with others, constitute a group who appear to have exercised influence over the R F C . Former Chairman Hise and Director Dunham of the R F C have stated that Dawson tried to dominate the R F C . Hise said that he resisted domination by Dawson, but Dunham acknowledged that he did not. Hise, Dunham, and former Director Gunderson, all three, have asserted that Willett does what Dawson requires of him as an R F C Director. Dawson and Willett occupied adjoining space as examiners i n the Closed Bank Division of R F C some years ago. C. Edward Rowe C. Edward Rowe, of Athol, Mass., is one of the three new Directors of R F C . H e was given a 2-year term, and now holds office by interim appointment. Recently he was named Vice Chairman of the Board. Rowe's appointment to Board membership has been expected i n the R F C since the beginning of 1949 when Director Henry Mulligan's retirement first began to be anticipated. T h e subcommittee has been advised by both Dunham and Gunderson that they regarded Rowe as Willett's candidate for the position, and that they understood he was acceptable to Dawson for that reason. It has been reported to the subcommittee that former Congressman Joseph E . Casey was instrumental in bringing about Rowe's appointment. Casey does not take credit for Rowe's appointment, but he is not surprised by the reports, because he has been Rowe's close friend for a number of years and his associate in the practice of law i n Athol and Gardner, Mass. H e now practices in Washington. Casey was associated in Washington with the firm of Goodwin, Rosenbaum, Meacham & Bailen. Though he was neither a member nor an employee of the firm, he was its key representative on R F C matters, and he shared to the extent of 20 percent in the fees which the firm collected for the presentation of loan applications or the conduct of other business with the R F C . Willett has been acquainted with Rowe for a considerable period, they having been national bank receivers together i n 1933. When Rowe sought to borrow $300,000 from R F C for his business enterprise, the Harrington & Richardson Arms Co. of Worcester, Mass., he made his principal contacts in the Washington office of R F C directly with Willett. The two men were i n contact with one another at critical points in the loan negotiations, and it appears that Willett took a greater interest in the loan than would normally have been the case. Willett even accorded Rowe the opportunity to confer with the Washington examiner assigned to the case before the field examiner's report had been submitted, an unusual privilege for a loan applicant. Rowe's loan was a controversial one. Important concessions were made i n granting it, even though the value of the collateral had been questioned. One concession was the waiver of the pledge of the 9 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION borrower's plant properties. Another was the waiver of Rowe's personal guaranty of repayment. T h e guaranty of another official was also waived. Rowe's appointment to the R F C Board came less than 4 months after the loan was made. H e immediately arranged a refinancing w i t h two Massachusetts banks and the R F C was repaid. The two banks were the same ones which had been approached, but had declined to make the loan when the application was made to R F C . The subcommittee has not examined the financial position of Harrington & Richardson Arms Co. to ascertain what changes took place in the 4-month interval. Further comments on the loan are presented i n a separate section of this report. The RFC loans to Central Iron & Steel Co. T h e subcommittee has made a study of the circumstances surrounding the loans which R F C made to Central Iron & Steel Co. This is a subsidiary of Barium Steel Corp. As such, it is a member of a group of companies which are clients of the Rosenbaum firm. Another subsidiary of Barium Steel Corp. had sought financial assistance from R F C some years before. I t was turned down because of severe defects in its financial policies and in the financial policies of the parent's principal officials, who made a practice of "milking" the subsidiaries. T h e same people and the same policies were found to be dominant i n Central Iron & Steel Co. Primarily for this reason, its initial application was scheduled for "automatic decline," a process which would have ended in rejection of the application unless the R F C Board interfered by a freak action. Notwithstanding his knowledge of the earlier unsuccessful applications, Willett brought about a substitution of examiners on this case in time to avoid "automatic decline." The first Central Iron & Steel loan was granted on June 3, 1949, and the second was granted on September 16, 1949, the total at that point being $6,300,000. T h e loans were granted over the objection of all examiners and reviewers with the single exception of the substitute examiner, Hubert B . Steele. One month after the second loan was authorized, Steele left the R F C and obtained employment at $15,000 a year with Goodwin, Rosenbaum, Meacham & Bailen and Joseph E . Casey, jointly. H e received a payment of $5,000 on the day he reported for duty. Rosenbaum explains that the $5,000 payment was for 4 month's salary i n advance. Casey was the principal advocate for the Central Iron & Steel Co. loan. H e worked w i t h his brother-in-law, Robert W . Dudley, a member of the firm. B o t h made their principal contacts i n the R F C with Willett. T h e attorney-and-client arrangement between the Barium Steel g'oup and the Rosenbaum firm was first brought about by Paul O. uckley who was or had been an official of one or more companies i n the group. Buckley shared i n the fees which the firm collected from this client, including the fees arising from negotiation of the R F C loans to Central Iron & Steel. Buckley is known to the subcommittee. H e appeared in the hearings on the Lustron transportation contract. H e was a director of the Lustron Corp. and he was one of the officials of the company which 10 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION had contracted to haul the Lustron houses. H e also was a financial beneficiary of the hauler's operations under the contract. H e borrowed about $200,000 from this enterprise to finance another business i n which he and Frank Rosenbaum (the brother of Joseph) had an interest. Texmass Petroleum Co. Ross Bohannon, of Dallas, Tex., testified before the subcommittee. H e was attorney for Texmass Petroleum Co. when it borrowed $10,100,000 from R F C i n M a y 1950. Bohannon testified that M e r l Y o u n g had offered to be influential i n securing the success of the Texmass application. H e testified further that for this service Y o u n g set a fee of $85,000—to be paid $10,000 down and $7,500 a year for 10 years. N o arrangement was made between Texmass and Young. The matter was reported to R F C Chairman Harley Hise, who assured Bohannon that Washington influence would be neither helpful nor necessary. It is interesting to observe that one of the intermediaries between Young and Bohannon was John B . Skiles of the Dallas R F C L o a n Agency. Skiles is mentioned later i n this presentation as the man whose activities have seriously disrupted the organization of the Dallas office. According to affidavits from the files of the manager of the L o a n Agency, he claims influence with Donald Dawson, M e r l Young, and William E . Willett. Strandlund and the Lustron Corp. Carl Strandlund testified before the subcommittee. H e was president and principal owner of the Lustron Corp. which borrowed $37,500,000 from R F C . Strandlund testified that Dunham had repeatedly tried to wrest control of Lustron from him in order that he might bring about its transfer to other persons. Specifically, the charge was that Dunham attempted to transfer control of Lustron to R e x Jacobs and his associates, including M e r l Young. Testimony taken b y the subcommittee shows that Rex Jacobs was employed b y R F C to conduct a survey of the Lustron Corp. I t shows also that the survey was made i n only 2 days. I n the preliminary draft of his report, which the subcommittee has i n its files, Jacobs proposed that ownership of Lustron's capital stock should be vested in substantial part i n E . M e r l Young, Robert Haggerty, and E d Hunt. The proposal does not appear i n the report which was delivered to R F C . Haggerty was a business associate of the brothers, M e r l and Herschel Young. H u n t was Jacobs' associate i n making the survey. As drafted, the suggestion contemplated that the stock to be sold to these men at 1 cent per share would be enough to offset the 86,000 shares owned b y Strandlund. Strandlund made allegations of other improprieties. H i s testimony describes instances in which Dunham or his friends attempted to influence the business decisions of Lustron Corp. for their own purposes. One such instance had to do with the resale of steel which was in short supply. Another instance had to do with the proposed substitution of a Jacobs product for other equipment used in the Lustron house. I n the latter case there was to be $15 per unit for M e r l Young. 11 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION Strandlund testified to his belief that, following the failure of attempts to place control of Lustron i n the hands of his nominees, Dunham was instrumental i n directing the efforts of the R F C Board toward deliberate destruction of the Lustron Corp. Fruehauf Trailer Co. R o y Fruehauf testified before the subcommittee. H e is president of the Fruehauf Trailer Co., which had an important financial interest i n the success of Lustron Corp. Fruehauf's interest arose from a $3,000,000 unpaid balance owed to his company for trailers furnished' to the Commercial Home Equipment Co. which had contracted to transport the Lustron houses from factory to building sites. Fruehauf testified that Rosenbaum had offered to secure R F C ' s approval of a plan of reorganization for Lustron which would safeguard the Fruehauf interests. According to Fruehauf, Rosenbaum said his fee for this service was to be $100,000. Fruehauf testified that Rosenbaum claimed to have Dunham and Willett " i n his hip pocket," and he testified also that Rex Jacobs and P a u l O. Buckley strongly urged acceptance of the Rosenbaum proposal. Buckley is mentioned elsewhere i n this presentation. H e was connected with Barium Steel Corp., the parent of Central Iron & Steel Co. Also he was a Lustron director, and an official and stockholder of Commercial Home Equipment Co. which purchased the trailers to haul the houses. Finally he was a business associate of Joseph Rosenbaum. Fruehauf's regular counsel said the Rosenbaum proposal sounded like a typical "Washington fix." H e advised against it, and no arrangement was made between Fruehauf and Rosenbaum. The Fruehauf plans for Lustron reorganization met with failure. Kaiser-Frazer Corp. Former R F C Chairman Hise furnished the subcommittee with a copy of a confidential office memorandum which was written to him by Director Harvey J. Gunderson on October 11,1949. According to this memorandum, Rosenbaum had approached Edgar Kaiser through L . M . Giannini, the California banker. Edgar Kaiser is the president of Kaiser-Frazer Corp., which borrowed $44,000,000 from R F C in 1949 and received an additional loan authorization of $25,000,000 i n December 1950. T h e memorandum reports that Rosenbaum claimed to have influence over the decisions of Dunham and Willett, and that for this reason he would be able to negotiate more advantageous terms for the KaiserFrazer loan than the borrower could otherwise obtain. Success of the application itself was not promised because that had already been assured. T h e Gunderson memorandum states also that M e r l Young approached the Kaiser-Frazer officials. I n doing so, he attempted to create the impression that he had influence with the R F C and that he had brought about improvement of the conditions governing the Kaiser-Frazer loan. H e said this was done not on behalf of the Kaiser-Frazer interests, but for the benefit of certain other interests i n Detroit. T h e memorandum does not assert that Y o u n g sought to be rewarded b y the Kaiser-Frazer Corp. for what he claimed to have done. The allegations contained in Gunderson's memorandum were confirmed by Messrs. Edgar Kaiser and Chad Calhoun of the Kaiser 12 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION enterprises, who also confirmed Gunderson's report that they had declined the assistance offered. On the occasion of this discussion, Calhoun supplied the subcommittee with certain confidential memoranda from his files bearing on the subject. Also, he reported that Dunham had recently embarrassed him by soliciting his support for the confirmation of his reappointment to the R F C Board. Political sponsorship The entries in Dunham's office records indicate that it was his practice to discuss the affairs of R F C freely with representatives of the Democratic National Committee, and to give special attention to matters i n which the committee was interested. Though he was a Republican Board member, Dunham's most frequent visitors, judging from his office records, were attorneys and others who had been introduced by Chairman William M . Boyle or his assistants. Dunham cooperated freely with these people. H e even undertook to help place some of them in important jobs. Twice the committee sent over men who were candidates for membership on the Board of Directors of Preferred Accident Insurance Co., an R F C borrower. One of these was Leo B . Parker, an attorney of Kansas City, M o . Boyle's office made an appointment for him to visit Dunham on J u l y 12, 1950. Parker later undertook to negotiate with R F C and particularly with Dunham on behalf of a client corporation which wished to acquire the facilities of Aireon Manufacturing Corp. These facilities, located i n Kansas City, Kans., had come into R F C ' s possession by foreclosure on a defaulted loan. Parker's client was the Starrett Television Corp. owned principally by Jacob Freidus and his wife. After negotiatmg the offer of Starrett Television Corp. and certain other offers, R F C awarded the sale to Starrett for $700,000 and certain other considerations. I t then prepared to bring the transaction to a conclusion. For some unexplained reason, R F C omitted to obtain a D u n & Bradstreet report regarding Starrett Television Corp. and its principals. If it had done so, it would have learned that Freidus and his father-in-law, Sam Aaron, were under indictment for evasion of income taxes amounting to $218,000. This information came to the subcommittee on September 25, 1950, the day before the deal was to be closed in Kansas City. I t was communicated to the R F C immediately, and R F C undertook to postpone the closing of the deal. The R F C Investigations Division looked into the matter and found not only that there was income-tax evasion but also that Freidus and Aaron were then on trial in New York, and that certain other principals in Starrett Television Corp. had criminal records. T h e R F C investigators found further that there was good reason to believe the corporation and its principals had made misrepresentations to induce R F C to award the sale to them. Nothwithstanding the probability of misrepresentations, R F C did not take action against the purchaser under those sections of the R F C A c t which make it possible to do so. Instead, the Corporation defensively explored the possibility that it might be exposed to litigation if it sought to withdraw from the deal. It was November 3, 1950, before the Board finally rescinded the sale. Freidus and Aaron were sentenced to prison a few days later. 13 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION T h e incident is included i n this presentation i n order to show the difficulties which attend the assignment of too great a weight to political sponsorship of a party to a business transaction. O n December 19, 1950, acting on the suggestion of Director C. E d ward Rowe, R F C employed A a r o n K r o c k & Co., auctioneers of Worcester, Mass., to dispose of the Aireon properties. I f successful, the firm will receive 5 percent of the selling price as commission and it will be reimbursed for expenses incurred. T h e attempts to dispose of the facilities of Aireon Manufacturing Corp. are discussed i n greater detail i n a separate section of this report. Disruption in the Dallas Agency One series of entries i n Director Dunham's office records indicates that James Windham sought to bring about an increase i n the salary of an examiner attached to the R F C loan agency i n Detroit. H e was successful i n enlisting Dunham's interest i n this undertaking, and through Dunham the salary increase was brought about. Dunham promptly reported his success to Windham. This was one instance i n which a personnel action i n the R F C was taken because of an interest arising from the association of people discussed i n this presentation. T h e following paragraphs describe another. The Dallas loan agency of R F C has been i n a state of considerable disruption for 2 years because of the activities of one of its minor officials who seems to be on intimate terms w i t h Dawson and Y o u n g and who openly claims to have Washington influence at his disposal. This man is John B . Skiles, who heads the Division of Personnel and Administration in the Dallas loan agency. Shortly after the 1948 election, L . B . Glidden, manager of the agency, fell into disfavor with one of the local leaders of the Democratic Party i n Dallas, and his removal from the position of manager was suggested. M e r l Y o u n g was advised by letter that Glidden was " N . G . " Affidavits which the subcommittee obtained from Glidden's files indicate that Skiles became the principal purveyor of rumors which were circulated to undermine Glidden's position. T h e y indicate also that he deliberately divided the agency employees into factions, and used abusive language and pressure tactics w i t h those who opposed him. T h e official R F C organization, including the Board of Directors, was unable to cope with the situation, and Glidden, who resigned as manager i n December 1950, never was able to bring about Skiles' removal from the agency. I n desperation, Glidden once went so far as to appeal directly to Donald Dawson, who is the President's aide on personnel matters. I t was Dawson who had first sponsored Skiles' employment with R F C i n Dallas, a fact to which Glidden referred i n his letter. Dawson did not respond to Glidden's appeal. I t appears from other correspondence that he denied any knowledge of the situation i n Dallas. Some of the confidential memoranda which Glidden supplied to the subcommittee give reason to believe that Dawson may have encouraged Skiles' defiant attitude. The Skiles matter was put into the regular civil-service channels, and i n December 1950 an appeal board i n Dallas sustained Glidden's decision that Skiles should be rated an "unsatisfactory" employee. 14 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION Just at this time Glidden's transfer from Dallas to Houston was proposed by the Board of Directors, and Glidden resigned because he did not wish to make the move. H i s resignation was accompanied by the official recommendation that Skiles be discharged. The resignation was accepted promptly i n Washington, but the recommendation had not been acted on when this interim report was prepared. Succeeding sections of this interim report describe in greater detail certain aspects of the loans to Harrington & Richardson Arms Co. and National U n i o n Radio Corp. and certain aspects of the attempts to dispose of facilities acquired by foreclosure of the loan to Aireon Manufacturing Corp. Additional interim reports will be issued by the subcommittee as they are completed. These will deal with the other case studies mentioned in the section entitled "Summary on Favoritism and Influence." R F C L O A N T O H A R R I N G T O N & R I C H A R D S O N A R M S CO. When appointed to the RFC Board, Rowe was a borrower C . E d w a r d Rowe, one of the three newly appointed Directors of R F C , acquired the principal ownership and assumed control of the Harrington & Richardson Arms Co. of Worcester, Mass., i n 1944. O n A p r i l 20, 1945, this company applied to R F C for a loan of $500,000. Approval of the application was recommended by the Boston loan agency, but for various reasons, Board action was deferred and on February 7, 1947, the agency manager requested that the application be withdrawn. O n A p r i l 10, 1950, the Board of Directors of R F C approved a $300,000 2-year loan to Harrington & Richardson Arms Co. on a new application dated February 6,1950. A total of $225,000 was disbursed on this loan. T h e $75,000 remainder was canceled. O n September 1, 1950, after Rowe had been appointed a Director of the R F C , the then remaining balance of $165,139.17 was repaid b y a check drawn on Worcester County Trust Co. of Worcester, Mass. Financial assistance from other sources Repayment of the R F C loan was made from the proceeds of a $300,000 loan granted b y the Worcester County Trust Co. and the Merchants National B a n k of Boston which had taken a 50-percent •participation. This bank loan was secured to the extent of $200,000 b y pledge of the borrower's inventories, and the remaining $100,000 was unsecured. T h e R F C loan agency i n Boston understands that the secured portion had been repaid on October 19, 1950, repayments having been made possible by inventory liquidation. There was then an $85,000 unpaid balance on the unsecured portion. O n M a r c h 22, 1950, commenting on the application filed with R F C , Examiner Robert B . Bergen of the Boston loan agency had reported on the availability of assistance from other sources. H i s report said the Worcester County Trust Co. had advised the agency "that they were not interested i n the proposed loan." The same was said of the Merchants National Bank of Boston, a creditor of Harrington & Richardson Arms Co. at that time. The company owed it a remainder of $75,000 on a $300,000 working-capital loan which had been renewed from time to time. According to Bergen, the applicant had approached 15 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION the Merchants National Bank seeking to restore this loan to its original $300,000 level, but the bank "has been noncommittal and has informed the applicant that, when it has repaid its outstanding loan, it will then take up the question of extending further credit i n the increased amount desired." T h e comments of the two banks were accepted b y R F C as conclusive showing that financial assistance was not available to Harrington & Richardson from other sources. T h e same two banks collaborated to supply M r . Rowe's company with the assistance it was seeking immediately after he was appointed a director of R F C . This may have been because of changes i n economic circumstances brought about by the Korean conflict which developed i n the interim. Harrington & Richardson is 80 yedrs old T h e business of Harrington & Richardson Arms Co. was first organized i n 1871 by Gilbert H . Harrington and Franklin Wesson. A new firm was formed i n 1874 b y Gilbert H . Harrington and W i l l i a m H . Richardson, this partnership continuing until the corporation was organized under Massachusetts law on January 24, 1888. I n 1938 the corporation went into bankruptcy under section 77B of the Bankruptcy Act. Its reorganization was completed on M a y 6, 1940, the creditors accepting 25 percent of their claims i n cash and 75 percent in preferred stock, which was redeemed i n 1941. T h e present management and principal ownership dates from 1944. C. Edward Rowe owns 83,000 shares of common stock out of 166,758 shares outstanding. I n addition, there are 35,183 shares of class A stock outstanding, and 42,723 in the company's treasury. Rowe owns 100 class A shares. Because of a dividend arrearage, the class A shareholders have had voting rights for about 7 years. Although the class A shareholders received the right on M a y 15, 1945, to exchange their shares for common stock on the basis of one for two, the 77,906 class A shares mentioned had not been presented for exchange b y January 28, 1950, the date of the financial information contained i n the application filed w i t h R F C on February 6, 1950. Favoritism is implied L i k e the loans to Texmass Petroleum Co. and to Central Iron & Steel Co. the R F C loan to Harrington & Richardson Arms Co. is an instance in which the Board of Directors acted i n opposition to the advice of all lower levels in the R F C excepting only the examiner for the Washington office. I n doing so, the Board made concessions which ordinarily, under its policies, it would not have made. T h e subcommittee understands further that, like the loan to Central Iron & Steel, the loan to Harrington & Richardson Arms Co. is an instance i n which the Washington examiner, who made a favorable report, was selected for the assignment b y Director W i l l i a m E . Willett. The record indicates that the selection may have been made on M a r c h 23, 1950. The selection of examiners is not normally made by Directors. I t is one of the responsibilities of the Manager of the L o a n Division. C. Edward Rowe began to be mentioned as a candidate for membership on the R F C Board a full year or more before his loan application was filed. This was well known to the Directors and some key employees in the R F C , and so was Willett's long-time friendship for Rowe. F o r these reasons and because of Willett's intimate contact 16 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION with Rowe, particularly during the period of the loan negotiations, it seems that the best interests of R F C would have required the careful preparation of an incontrovertible record of arms-length dealings in this case. N o such record was created, however, and the R F C is exposed to whatever implications may be drawn from the circumstances surrounding the negotiations and the loan. Bergen thought the collateral was insufficient Examiner Bergen reported on M a r c h 22, 1950, that "the bulk of applicant's business is devoted to the manufacture and sale of lowpriced sporting fire arms. While some submachine guns, handcuffs, leg-irons, etc., are manufactured for sale to law-enforcement agencies, the comparative volume of these latter items is relatively small. During the late war, the applicant manufactured large numbers of Reising submachine guns which were standard equipment for the United States Marine Corps and which are still used by that branch." T h e inventory of finished shotguns, rifles, and revolvers was offered b y the applicant as the sole collateral for repayment of the R F C loan. These items had been manufactured at a cost of $434,000. They were marked for sale at retail for $642,000 and they were given a liquidating value of $197,000 by the appraiser for the Boston Loan Agency. T h e appraiser was of the opinion that the collateral could not be liquidated satisfactorily on a piecemeal basis. T h e value which he assigned contemplated that the inventory would be disposed of as a unit in the event of foreclosure. W i t h respect to the inventory, Bergen reported: In conclusion, the examiner is of the opinion that the collateral offered consisting of finished inventory alone is unsatisfactory in type and not of such sound value as reasonably to assure repayment of the loan requested. Bergen closed his report with the recommendation that the application be declined and his report convinced both the review committee and the advisory committee in Boston. They also recommended decline. Inadequacy of collateral was the principal reason, but nine separate unfavorable factors were cited. They outweighed the two favorable facts (a) that employment would be afforded i n a critical unemployment area, and (b) that the applicant's management was regarded generally as capable and efficient. O'Keefe checked the inventory carefully Bergen's report is supported by the report of Vincent P . O'Keefe, engineer-examiner attached to the Boston loan agency. O'Keefe was the man who took the view that the liquidating value of the inventory should be determined on the basis of its disposal as a unit rather than its disposal piecemeal. The first 5 of his 10 conclusions are quoted below: 1. That the greater portion of the inventory now on hand is of the 22-caliber type that is not as popular as the higher caliber, and therefore might be difficult to liquidate. 2. That the business in general is depressed because of greatly diminished sales and demand for this type of commodity and because the market is saturated. 3. That other manufacturers are discontinuing the manufacture of 22-caliber guns on a mass-production scale, because of a lack of demand for this type of firearm. 4. That the sales of firearms has become keenly competitive. 5. That the demand for Harrington & Richardson products in this area is not good as compared to Colt, Savage or Remington Arms firearms, according to a careful check made by the writer. 17 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION T h e R F C official Washington office file copy of O'Keefe's report has the penciled notation "wrong" concerning the first item. Item 2 is also marked "wrong." T h e word "popular" is written beside item 3, the word "okeh" is written beside item 4, and the words "different products" are written beside item 5. These may be notations made by James O. Hoover, the Washington examiner. H e took exception to O'Keefe's views notwithstanding the fact that O'Keefe had made a careful check. T h e source of the information which the notations reflect is not stated, and there is no indication of when the notations were made. James 0. Homer was the Washington examiner Bergen's report was received i n Washington on M a r c h 28, 1950. I t may be a coincidence that Rowe telephoned Willett about the loan on that same day, and that he did so again 3 days later. I t may also be a coincidence that he had visited Willett on M a r c h 23 and on that occasion was accorded the opportunity to talk to James Hoover. I n his report on the loan application, Examiner Hoover said with reference to O'Keefe's report: It appears to undersigned that Appraiser O'Keefe is considering sale of inventory in a distressed situation, that is, that only $197,000 would be recovered if applicant discontinued operations. * * * The undersigned believes the approach of appraiser is extreme in establishing liquidating value of inventory. It is anticipated that this enterprise will continue and that in any event, firearms will be manufactured under the trade name H & R, which has been established since 1871. T h e point of view employed b y O'Keefe is consistent with R F C policy i n the establishment of liquidating values. T h e point of view taken by Hoover is not. Hoover's work was done without delay. H e talked to Rowe on M a r c h 23,1950, then received the assignment as Washington examiner on the application on or after M a r c h 28, 1950, a Tuesday, when Bergen's report first became available i n Washington. I n the next 13 days which included 2 week-ends, he made an examination which controverted Bergen's findings to his satisfaction, he prepared his report and he submitted it for review and got it presented for Board action. Hoover's report has the unqualified concurrence of Frank Prince, Chief of the Loan Operations Division in the Washington office of R F C . W h y it does is not clear, since this is not usually required— presumably it strengthened Hoover's affirmative findings. Prince served with Rowe as an official of Smaller War Plants Corporation before that instrumentality was merged with R F C . H e was present on M a r c h 23, 1950, when Kowe conferred with Hoover. A t the meeting held on A p r i l 10, 1950, the Board voted to grant the loan. Henry Mulligan was not present at the meeting but the other four Directors were, and all voted affirmatively. Willett telephoned Rowe on A p r i l 10, 1950, presumably to advise him of the success of his application. The properties were not pledged—too great a task: Harrington & Richardson did not offer to pledge its physical properties as collateral to the R F C loan. These properties were unencumbered but, quoting from Bergen's report: * * * owing to the widespread distribution of the class A stock and the reported apathy on the part of that class of stockholder, the obtaining of a two- 18 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION thirds assent to the pledging of fixed assets from the class A stockholders is claimed to be a task which would take some months of intensive effort to accomplish. For this reason therefore, the fixed assets are not offered as collateral. Bergen suggested that it would not have been unreasonable for the applicant to have anticipated the need for the pledging of the plant properties. H e suggested that the necessary steps to obtain the stockholders' assent should have been taken "sometime ago." Bergen's report went on to point out that R F C might be exposed to an unnecessary hazard if it did not insist on the pledge of the properties. I t says: Merely as a casual observation, it will be noted that the State and Federal excise and income taxes as of December 31, 1949, exceed the liquidating value of the fixed assets and were this Corporation to make a loan solely on inventory and then have the Government place a tax lien on the fixed assets, a most unsatisfactory situation could ensue. A t the time the loan application was filed with R F C , 77,906 class A shares were outstanding and 42,723 had been reacquired and were held, uncanceled, i n the company's treasury. Two-thirds of the outstanding class A stock would be 51,938 shares. T h e company could have voted its treasury stock. This being the case, it seems that the practical problem of obtaining the assent of two-thirds of the class A shareholders consisted of lining up 9,216 out of 35,185 votes. T h e 35,185 shares were held b y 307 people, but 11,418 shares were held b y only 20, a circumstance which indicates that the problem may not have been as serious as it was indicated. O n M a y 15, 1945, when the corporate charter was amended, 61,505 votes were cast b y or on behalf of the then holders of 104,678 class A shares. I n any event R F C finally went along with the applicant, and with the Washington examiner, and waived the pledge of plant properties. Ordinarily it would not have done so. No guaranties were offered Another waiver of R F C ' s normal requirements as to collateral had to do w i t h the personal guaranties of the principal owners of the company. Bergen's report said: N o guaranties are offered. Personal financial statements of principals were requested by examiner but not furnished. It was indicated that principals were unwilling to guarantee any part of the loan. Hoover did not mention the matter of personal guaranties i n his report although he did comment on the management people. H e referred to C . E d w a r d Rowe as "the driving force'' and he said Rowe "has the assistance of M r . Cowdrey, Jr., vice president." H e did not undertake to explain his omission to deal with the subject of guaranties. T h e Washington Review Committee concurred with Hoover's recommendation that a $300,000 2-year inventory loan should be made. However, the review committee conditioned its concurrence on the further recommendation that "President C. F . Cowdrey, Jr., and Chairman of the Board, C . E . Rowe, to guarantee in the ratios of their stockholdings (total approximately 75 percent.)" I n approving the application the R F C Board went along with Hoover and omitted the personal-guaranty requirements. N o reason was recorded for its election to do so. 19 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION Willett and Rom The subcommittee has had the opportunity to review the entries i n Director Willett's office records and this was the source of the information stated earlier in this report, that Rowe telephoned Willett the day the Boston examiner's report reached Washington. Kowe was in relatively frequent contact w i t h Willett during the entire period covered by the office records. H e phoned and visited Willett every now and then during 1949, sometimes about the Waltham Watch Co. loan and sometimes about other matters. I t seenis from the entries that Willett may have proposed Rowe's appointment as a trustee for Waltham W a t c h Co. i n M a y of 1949 but Rowe declined the honor and the responsibility. During the period of the Harrington & Richardson loan negotiations, the contacts became more frequent. RFC L O A N TO NATIONAL UNION RADIO CORP. National Union Radio Corp. of Orange, N . J., is a manufacturer of radio, radar, and cathode ray tubes for radio sets, radar equipment, and television sets. Also, it is a distributor of panel lights, batteries, and related items. T h e corporation applied for an 8-year R F C loan of $1,750,000 on August 29, 1949, intending that the proceeds be used for working capital to the extent of about $900,000, the payment of $670,000 i n debts and the purchase of equipment costing $180,000. I n reporting on this application, the examiner for the R F C loan agency i n New Y o r k proposed that a loan of $1,500,000 be approved if C. Russell Feldman, the applicant's chairman would agree to give his guaranty for 60 percent of the total. N o guaranties had been offered. T h e agency review and advisory committees recommended that the application be declined for lack of assurance that the loan could be repaid from earnings.. Washington examiner James O. Hoover recommended that a loan of $1,400,000 be approved, substantially under the conditions outlined by the agency examiner. The Washington review committee recommended "decline for agency's reasons." O n December 12,1949, the R F C Board granted a loan of $1,400,000. T h e loan resolution required that Feldman provide a 60-percent guaranty as suggested by the examiners, and also that he provide a personal financial statement to indicate the worth of the guaranty. Feldman objected to the latter requirement and on M a r c h 15, 1950, Robert Dudley, of the firm of Goodwin, Rosenbaum, Meacham & Bailen, wrote to Willett expressing his hope that the Board would not insist. O n M a r c h 16, 1950, R F C amended its resolution. Under the amendment Feldman's affidavit was deemed satisfactory evidence of the worth of the guaranty. Goodwin, Rosenbaum, Meacham & Bailen acted as advocates for the applicant. Their fee was set at $15,000. I n addition, according to a letter written by Joseph H . Rosenbaum on M a y 29, 1950, there was an agreement that the firm would receive a retainer of $500 per month for general legal services. T h e N e w Y o r k L o a n Agency of R F C reviewed the Rosenbaum fee billing i n considerable detail and concluded w i t h respect to the legal work of which it was aware, that it could approve a fee of only $5,000 20 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION i n s t e a d of t h e $15,000 proposed. T h e difference w a s referred t o t h e R F C office i n W a s h i n g t o n f o r a p p r o v a l . I t was i n abeyance i n W a s h ington for about 2 months. O n D e c e m b e r 15, 1950, R o b e r t D u d l e y a d v i s e d R F C t h a t t h e l o a n h a d b e e n r e p a i d i n f u l l and, a c c o r d i n g l y , t h e m a t t e r w a s d r o p p e d w i t h o u t decision. T h e s u b c o m m i t t e e h a s n o t m a d e a detailed s t u d y of t h e l o a n t o National U n i o n Radio Corp. T h e p r i n c i p a l purpose of t h i s s e c t i o n o f t h i s i n t e r i m r e p o r t is t o present t h e f o l l o w i n g m e m o r a n d u m f r o m t h e files o f t h e R F C l o a n agency i n N e w Y o r k . I t contains a detailed c o m m e n t a r y o n t h e fee c h a r g e d f o r its services b y G o o d w i n , R o s e n b a u m , M e a c h a m & Bailen, a n d it points out that the applicant's other counsel d i d most of the legal w o r k o n the application of w h i c h the N e w Y o r k l o a n agency is aware: MEMORANDUM OCTOBER 10, 1950. To: Messrs. J. P. Ringen and J. W. Myers. From: Harold E . Jacobsen. Re: National Union Radio Corp. (Orange, N . J.). Loan No. 5931. Authorized amount $1,400,000; amount disbursed, $1,211,603.36. Legal fees. In connection with the bills for legal services in the above loan, we have examined and for various details of the services, refer you to the following: 1. A bill dated June 6, 1950, of Goodwin, Rosenbaum, Meacham & Bailen, Washington, D. C. (hereinafter called "Washington counsel") in the amount of $15,000, forwarded with borrower's letter to the agency dated June 29, 1950. 2. A bill dated June 20, 1950, of Pitney, Hardin & Ward, Newark, N. J. (hereinafter called " N e w Jersey counsel"), in the amount of $900. 3. A letter of borrower, dated August 11, 1950, advising that its Pennsylvania counsel, Souser & Schumacker, Philadelphia, Pa., will make no charge for their services rendered in connection with this loan (apparently in view of their regular retainer). 4. A copy of a letter from Washington counsel to borrower, dated June 6, 1950, containing an itemization of the time spent by various representatives of the firm in the performance of their services pertaining to the loan. 5. A letter dated July 28, 1950, addressed to borrower by Daniel O. Dechert, of Washington counsel, attached to which is a detailed statement of the services rendered by M r . Dechert and the number of hours involved. 6. Letter from New Jersey counsel to borrower, dated July 31,1950, concerning their bill for $900. 7. Memorandum dated August 16, 1950, of Robert W. Dudley, of Washington counsel, containing a brief general statement of the nature of his services and the time he spent in their performance, attached to which is a schedule of the dates on which such services were rendered and of the time spent on each such date. 8. Memorandum dated August 16, 1950, of Stephen G. Lax, of Washington counsel, containing a brief general statement of the nature of his services and the time he spent in their performance, attached to which is a schedule of the dates on which such services were rendered and of the time spent on each such date. 9. A memorandum dated August 15, 1950, with respect to services rendered by Joseph E. Casey, of Washington counsel. 10. A letter from Washington counsel to this Corporation dated September 22, 1950, containing an itemized statement of their disbursements in the amount of $1,573.41. It states the amount has been paid by borrower. The loan was authorized by resolution of the Board of Directors of this Corporation adopted on December 12, 1949, which we received on December 23, 1949. The first advance of $1,211,603.36 was made on June 1, 1950. The collateral for the loan consists of a mortgage of real property and plant machinery and equipment in Pennsylvania, a mortgage of real property in New Jersey, and a mortgage of chattels in New Jersey. In addition, a guaranty of payment of the loan was required on one individual and lessor's agreements were obtained from the owners of premises occupied by borrower in New Jersey, as lessee. No extraordinary legal problems arose in this loan as far as we know, except one or two title problems involving Pennsylvania law which we understand were effectively cleared by borrower's Pennsylvania counsel and our Philadelphia agency counsel. The lapse 21 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION of time between receipt of the loan resolution and disbursement, was not the result of any serious legal complications with which borrower's counsel had to contend. $900 F E E OF NEW JERSET COUNSEL New Jersey counsel, as indicated in their bill, did the bulk of work necessary to clear up various exceptions which appeared in the title report pertaining to borrower's real property in New Jersey, as well as the obtaining of various lessor's agreements required in connection with the loan. Some of the title exceptions required considerable effort in their clearance and the services rendered by New Jersey counsel were performed in a competent and efficient manner. Considering the standing of New Jersey counsel (one of the leading law firms in Newark), the nature of the services rendered, the summary of the services set forth in the bill, our estimate of the time involved, the efficient manner in which they were performed and the other factors usually taken into consideration by us, it is our opinion that the amount requested namely $900, is reasonable. This amount includes incidental disbursements, not separately itemized, according to a statement in the bill. The above letter of New Jersey counsel dated July 31, 1950, states that the amount does not include services for any subsequent advance. SERVICES OF BORROWER'S PENNSYLVANIA COUNSEL With respect to all matters in this loan involving the law of Pennsylvania, borrower engaged the services of the law firm of Souser & Schumacker, Philadelphia, Pa. As indicated in the aforesaid letter of borrower dated August 11, 1950, we understand that such counsel will make no charge for services rendered in Connection with the loan. $15,000 F E E OF WASHINGTON COUNSEL The total time stated to have been spent in the performance of services pertaining to the loan by Washington counsel is 730 hours. In their above letter of June 6, this time is allocated as follows: Name J. H. -Rosenbaum Joseph F.. Ca«cv Robert W. Dudley Stephen G. Lax Daniel 0. Dechert Out of Washington In Washington 2 0 21 46 397 38 16 79 122 9 Total 466 264 264 Grand total 730 Mr. Cartenuto, a member of our legal staff who was in charge of the loan closing, had no dealings in this loan with any members of the firm other than Mr. Dechert, although Mr. Dudley did stop in to see M r . Cartenuto for about 5 minutes on one occasion, accompanied by Mr. Dechert. Messrs. J. E. Flynn and Ludwig Lewis, examiners, reported to us that the total time spent with them by members of the firm other than Mr. Dechert, did not exceed hours. Except for the extremely brief statements of the nature of their services and the time spent, we have no information upon which we could, in all fairness, pass upon those portions of the bill allocable to the services performed by Messrs. Dudley, Lax, Casey, and Rosenbaum. Their services involved approximately 324 hours. The only statement of Mr. Rosenbaum's services is the general one set forth in the above-listed letter of June 6. The remaining three attorneys submitted their statements of services listed above. You will note from such statements and letter that most of the services rendered by these four last-named individuals, were performed in Washington and had to do mostly with the filing of the loan application and in conferring with representatives of R F C in the Washington office and with others, and in furnishing information with respect thereto. We believe, therefore, that counsel or other representatives of this Corporation in the Washington office are in a far better position to pass upon such phase of the services because of their knowledge thereof, and we recommend that copies of the relevant papers listed above be sent to Washington for such purpose. 22 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION Under the circumstances our comments on the so-called application phase of the services of Washington counsel, are limited to the following: As we analyze the statements supporting their charge various representatives of the firm (some partners and others, associates), other than Mr. Dechert, spent approximately 250 hours in compiling the application, in conferences with respect thereto and in furnishing information requested in connection therewith. It is most difficult to conceive of the necessity for devoting so much time to this work. In effect, it amounts to more than 30 days (each of 8 hours) of continuous work. It is also difficult for us to understand why so much time was necessary, since we were informed by M r . Lewis, the examiner, that all of his requests for information needed i n connection with the processing of the application were made to and apparently complied with by M r . W. H . Carey, borrower's treasurer. As I have stated, however, these are matters which primarily concern the Washington office. With respect to the services stated to have been rendered by Mr. Dechert after the loan was authorized, with which this office is familiar and which, according to his statement (referred to in his above letter of July 28) required 406% hours, we again cannot understand the necessity for devoting so much time thereto, particularly since, as indicated above, the legal problems involved in this loan were not particularly complicated, and any problems which did arise were, we understand, taken care of primarily by either New Jersey counsel or Pennsylvania counsel. Most of the required legal documents were drafted by Mr. Cart en1 it o. Washingtion counsel rendered no opinion with respect to those phases of the loan involving New Jersey or Pennsylvania law. This left very little to be covered in the opinion they did give. M r . Dechert's statement indicates that he spent a large amount of time in telephone calls and conferences, the need for which is not reacjily apparent. For instance, with respect to the New Jersey phases of the loan Mr. Cartenuto dealt with M r . O'Brien, of borrower's New Jersey counsel, who did the necessary work in connection therewith. In almost every instance where a problem was raised and explained to borrower's New Jersey counsel, Mr. Dechert saw fit to discuss the problem in its entirety with Mr. Cartenuto and apparently with borrower's New Jersey counsel. It appears to us that this duplication was to a great extent unnecessary and did not serve any useful purpose. In fact, it may have had a delaying effect because of the time consumed in going over with Mr. Dechert matters which had been discussed with borrower's New Jersey counsel. While the Pennsylvania phases of this loan were handled in our behalf by our Philadelphia agency counsel, M r . Frantz, I understand that Mr. Dechert followed the same procedure there as he did in New Jersey. We believe that most of the telephone calls and conferences enumerated in Mr. Dechert's statement were devoted to efforts to expedite the closing of the loan, all of which are commendable, whether or not necessary, but in and of themselves they did not, to any great extent, speed up the clearance of the various problems involved nor the preparation of the closing documents. More important, they are not of such nature that will support as reasonable a substantial fee based primarily on additional time spent in these pursuits. We are not saying that Washington counsel should not be paid for services of this nature rendered by Mr. Dechert, or any other of their representatives, but time so spent does not have the value of time devoted to strictly legal service. Another item on page 11 of Mr. Dechert's statement should be noted. After setting forth in the first 10 pages thereof what seems to be a minutely detailed record in diary form of all conferences, telephone or otherwise, and of other telephone calls and the dates and amount of time spent on each item, on page 11 he lumps together, in one item of 125 hours, services described as "receiving telephone calls" and ''unallocated time spent in conferences, study of files and study of law." Allowing 8 hours for each day, which we believe is a generous average work day for an attorney, M r . Dechert apparently spent about 51 days in the performance of his services. From the date M r . Dechert came into the picture, namely, December 16, 1949, to the date of disbursement of the loan, June 1, 1950, there were only approximately 110 business days. It would appear, therefore, that Mr. Dechert devoted almost half of his working time to this particular loan. Considering the problems involved in the loan, the fact that the clearance of most of such problems was handled by borrower's New Jersey and Pennsylvania counsel and allowing for a general supervision of all the legal work of other counsel for borrower, it is our opinion that M r . Dechert devoted much more time to the performance of the services than was warranted by the need therefor and the results achieved. Considering the $15,000 fee as a whole and the 730 hours involved, the charge on an hourly basis is approximately $20 an hour. On such basis the fee may not 23 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION generally seem excessive, particularly where the services are performed by partners or senior attorneys of the firm. However, an hourly charge is only one of the criteria to be considered. The above-mentioned letter of Washington counsel dated June 6 stated that their usual hourly charge is $35 and that on such basis the fee would be $25,500. Since the total amount of time involved is, i n our opinion, not shown to be reasonably necessary under all the circumstances, we cannot conclude that $20 an hour is a reasonable charge for the services i n question and thus cannot approve the fee charged on such a basis. The location of the property required to be mortgaged i n this loan made it necessary for borrower to retain counsel i n different jurisdictions, i n addition to borrower's Washington counsel, who represented it generally i n this loan. Obviously, to the extent that adequate services are rendered by other counsel, a borrower's general counsel is not justified i n charging for a duplication of the services performed by such other counsel. We believe that much of the time i n fact spent by Washington counsel overlaps services efficiently performed by borrower's other counsel. I n a similar manner four attorneys i n the office of borrower's counsel worked on the application phase of the loan. This would seem to involve necessarily a certain amount of overlapping of services. It may well be, as is the case here, that borrower does not object to any of the charges of its several counsel but this has only a slight bearing on the point at issue, namely whether R F C determines that the charges are reasonable. We do not doubt i n the slightest the statement of the number of hours spent by counsel but feel that where the time appears excessive, it relates to the efficiency of the services performed and consequently does have a bearing upon the amount of a reasonable fee. What services were rendered by M r . Dechert, as far as we can determine from personal contact, were competently performed. Based upon the above-mentioned statements of services rendered by M r . Dechert and other representatives of his firm i n connection w i t h the legal requirements for closing the loan, the nature of such services, the time spent by him and others i n rendering them, the legal work required of Washington counsel i n connection with the closing, the amount of the loan, the reputation and standing of the firm among the bar i n Washington, D . C., the generally competent manner i n which the services were performed, and other usual factors, i n our opinion a fee of $5,000 for that part of the services of Washington counsel rendered by M r . Dechert would be a generous one under the circumstances. T o such amount as may be approved with respect to the services rendered by M r . Dechert, there should, of course, be added whatever amount may be determined as reasonable for the services stated to have been rendered by the representatives of Washington counsel other than M r . Dechert. We assume that you will refer to the Washington office for determination, the reasonableness of the remaining portion ($10,000) of the total fee of $15,000 charged. DISBURSEMENTS B Y WASHINGTON COUNSEL Disbursements made by Washington counsel i n connection with the loan aggregated $1,573.41 as reported in their above letter of September 22, 1950. T h e letter also states that such disbursements have been paid by borrower. While, as indicated above, we believe that many of the long-distance telephone calls and possibly trips, could have been dispensed with, they were apparently i n fact made and approved by borrower. Since borrower, whose place of business is near N e w Y o r k City (Orange, N . J.), found it desirable to retain counsel whose principal office is i n Washington, D . C., it must necessarily expect to pay substantial disbursements caused by travel between Washington, N e w Y o r k City, Orange, N . J., and borrower's place of business in Pennsylvania. Based upon the disbursements listed in said letter and the circumstances involved i n this loan, we cannot say that the total amount is unreasonable. HAROLD E. JACOBSEN, [S] H . E . Agency S A L E OF FACILITIES OF A I R E O N M A N U F A C T U R I N G J., Counsel. CORP. O n January 23, 1947, by action of its executive committee, the R F C lent $1,500,000 (75 percent of a participation loan of $2,000,000) to the Aireon Manufacturing Corp. of Kansas City, Kans., a manufacturer of juke boxes. Board approval followed. Because of questionable repayment prospects, the loan bordered on abuse of the 24 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION Corporation's authority and it was criticized in the audit report of the Comptroller General of the United States covering the 2-year period ended June 30, 1947. Only 8 months or so after the loan had been made, the borrower was bankrupt, and eventually R F C became the owner of the assets which had been pledged to* secure repayment. After the Korean conflict broke out in the summer of 1950, considerable interest in the Aireon facilities began to be displayed by prospective purchasers, and the time seemed right for their sale. R F C first received offers to dispose of them by negotiated sale. I t was then decided that the properties should be advertised for sale to the highest bidder on a sealed-bid basis. However, the manager of the Kansas C i t y agency contended that the sale should be by negotiation, and the R F C changed its plans a second time. This apparent indecision brought sharp criticism from Senator Hubert Humphrey, who wrote on behalf of a prospective purchaser from Minnesota on August 23, 1950. T h e Senator complained specifically that— the procedure followed to date is surely not a businesslike one and can lead to all sorts of conclusions in the minds of people who have suffered because of the procrastination, delay, and inconsistency. T h e final decision to sell by negotiation was made because of technical difficulties which might interfere with the effectiveness of any offer to sell on sealed bids. The Aireon facilities stand on land leased from the city of Kansas City, Kans. The plant itself is owned by the land-lessee, a corporation, which had leased it first to Aireon, and then by succession and assignment to the R F C . The lease on the lant contains a scale of rentals which is seriously outdated and would e disadvantageous to the lessor at present-day price levels. This circumstance interfered with secondary assignment of the lease and threatened to precipitate litigation if attempts were made to consummate a sale not wholly satisfactory to the lessor. I n the face of this complication the R F C finally decided that a negotiated sale would be preferable to a sale on sealed bids. T h e Corporation has the authority to make such an election. O n September 25, 1950, the subcommittee learned that R F C was about to consummate sale of the Aireon properties to the Starrett Television Corp., a corporation owned by one Jacob Freidus and his wife, Claire F . Freidus. Freidus and his father-in-law, Sam Aaron, were under indictment for income-tax evasion. T h e indictment charged that taxes totaling about $218,000 were evaded, for the years 1942 and 1943. I t appears that Freidus and Aaron, doing business as Aaron Machinery Co., had purchased and sold equipment in 1942 and 1943 at black-market prices in violation of the criminal provisions of O P A regulations. T h e y willfully failed to record these transactions in their accounts and to pay taxes on the profits. T h e case had been set for trial in February 1951 in the United States District Court for the Southern District of N e w York. Learning this, the subcommittee made inquiries about R F C ' s intention regarding completion of the sale. The inquiries precipitated postponement of the closing of the transaction, and the Board of Directors undertook to reconsider the matter. 25 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION Immediately after the subcommittee had begun to question the propriety of the transaction the R F C Investigations Division and an R F C auditor made inquiries and issued the following report: O C T O B E R 5, 1950. Memorandum to the Board. Re Aireon Manufacturing Corp. By Secretary's letter dated September 1, 1950, the Kansas City agency was advised of the terms and conditions which the R F C Board of Directors imposed in connection with the sale for $700,000 of the property acquired from the captioned concern to a corporation to be formed by Starrett Television Corp. The more pertinent of these conditions are (a) the injection of $200,000 in working capital into the corporation to be formed; (b) a cash down payment of $100,000; (c) the balance secured by mortgage and assignment of lease; (e) the unpaid portion unconditionally guaranteed by Starrett Television Corp.; (f) agency counsel's opinion as to (1) whether the guaranty executed by Starrett Television Corp. is a valid and binding obligation, and (2) whether the purchasing corporation had been legally formed and the obligations undertaken by it were valid and binding; and (m) the financial condition of the purchaser* must be satisfactory to the agency. In connection with the proposed offer to buy, Starrett Television Corp., the guarantor, on August 2, 1950, submitted a financial statement as of February 28, 1950, signed by Mitchell Fein, former vice president, under date of May 4, 1950, which reflected total assets of $659,145.19; total liabilities of $209,725.18; capital stock of $340,000; and surplus of $109,420.01. Further representations made by the purchasing company and guarantor, through its principals, are as follows: By letter dated July 26, 1950, Larry Knohl, vice president of Starrett Television Corp. and proposed president of the recently formed Aireon-Starrett, Inc., stated that Starrett Realty Corp., having substantial assets, was a subsidiary of Starrett Television Corp.; that at least $200,000 would be made available in operating capital for the new enterprise, in addition to the down payment. By correspondence dated August 2, 1950, Mr. Knohl further represented to R F C that $200,000 had been added to the capital structure of Starrett Television Corp. since its last financial statement, making its net worth approximately $650,000; that Starrett Television Corp. proposed to spend $350,000 in Aireon-Starrett, Inc., formed to operate the new venture, and that this expenditure would not deplete the assets of Starrett Television Corp., the bidder and guarantor. Prior to the consummation of the sale, or its final approval by the Kansas City Agency, investigation disclosed that Jacob Freidus, who, with his wife, is the sole owner of the stock of Starrett Television Corp. was under indictment in the United States District Court for the Southern District of New York, charged with tax frauds aggregating nearly a quarter of a million dollars; that Department of Justice officials in charge of this prosecution reported they had a very substantial case against Freidus; that Larry Knohl, vice president of Starrett Television Corp. and proposed president of the New Aireon-Starrett, Inc., had a criminal record, having served from 15 months to 2 years in the United States Penitentiary at Lewisburg for bankruptcy violations; and that Murray Daniels, former president of Starrett Television Corp. had a criminal record also. Investigation further disclosed that representations made to the R F C by Starrett Television Corp. and its principals were not in accord with the facts. (1) With respect to the financial statement of February 28, 1950, examination of the books and records of the guarantor by representatives of the Investigation and Audit Divisions disclosed that, although this financial statement submitted to R F C set forth under "Surplus" the amount of $109,420 01, actually a book deficit of approximately $191,000 existed as of that date, and that this "Surplus" was created by capitalizing "Loans payable" in the approximate amount of $300,000. These loans payable for the most part, represent advances made by Jacob Freidus from other corporations under his control. (2) The financial statement of February 28, 1950, listed $340,000 in capital stock, $200 representing 200 shares of common stock and $339,800 representing 200 shares of preferred stock. Although the books of the corporation reflect the issuance of the stock as set forth in the financial statement, the corporation's stock-certificate books show no issuance of preferred stock, and correspondence in the corporation's files reflects that the secretary of state of New York has not, to date, approved such issuance, which fact was confirmed at said office. 26 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION (3) (a) The statement of M r . Larry Knohl made in letter to the R F C dated August 2, 1950, to the effect that $200,000 had been added to the capital structure of Starrett Television Corp. since its last financial statement, making its net worth approximately $650,000, also appears to be contrary to the facts. The Starrett records as of this approximate date do reflect that additional advances had been made to the corporation, but these advances are recorded as a liability under " L o a n s payable" to Jacob Freidus and Claire Freidus. (b) The statement of Larry Knohl in letter dated July 26, 1950, to R F C , to the effect that the Starrett Realty Corp. was a subsidiary of Starrett Television Corp., on the basis of Starrett Television Corp.'s records also appears, to be a misstatement. (4) W i t h respect to the statements of M r . Knohl as set forth in his letter of August 2, 1950, to the R F C , to the effect that Starrett Television Corp. proposed to spend $350,000 in Aireon-Starrett, Inc., which expenditure would not deplete the assets of Starrett Television Corp., bidder and guarantor, it should be noted that, upon interview of Jacob Freidus in New York on October 2, 1950, he advised that no money had been advanced to Aireon-Starrett, Inc., as yet; that he considered R F C ' s condition that $200,000 in addition to the down payment be injected into this new corporation unreasonable; and that he had not definitely made up his mind, but believed they would operate the Aireon facilities as a division of Starrett Television Corp. (5) It is the conclusion of the auditors and investigators, based upon their examination and analysis of the books and records of the Starrett Television Corp., that sustained losses have occurred throughout its operation; that at the present time it is insolvent and that its continued operation, or the operation of Aireon-Starrett, Inc., is wholly dependent upon M r . Freidus' ability and willingness to supply the necessary funds. OPINION Based upon the foregoing, it is the undersigned's opinion that even though Starrett Television Corp., may be able to comply with the conditions of the sale, which there is reason to doubt, the Reconstruction Finance Corporation may rescind its action taken on August 31st, as contained in M r . Nielson's memorandum of September 1, 1950, without incurring the possibility of being answerable i n damages to the purchaser. J A M E S L . D O U G H E K T Y , General Counsel. I t is difficult to understand how the R F C permitted itself to be placed i n such a position, particularly since a routine D u n & Bradstreet report would have shown the background of Freidus and Aaron and the fact that they were then under indictment on the tax-evasion charges. T h e following quotations from the office records of Director Walter L . D u n h a m may supply the answer i n part. M r . Leo B . Parker, who is mentioned i n these excerpts, is the attorney who represented the Starrett Television Corp. i n the negotiations with R F C : Wednesday, July 12, 1950.—Mr. B i l l Boyle's office telephoned. Made appointment for M r . Leo B. Parker, of Parker & Knipmeyer, attorneys, Kansas City, Mo., to see M r . Dunham at 3 o'clock. Talked with M r . Dunham re Preferred Accident. Friday, July 14, 1950.—Mr. Leo B. Parker, of Kansas City, again called on M r . Dunham at the suggestion of M r . Bill Boyle. Tuesday, July 25, 1950.—Mr. Leo B. Parker telephoned from Kansas City re purchase of Aireon plant. Said he had talked with M r . Jobes but could not get sufficient information from him. M r . Parker said his party would be prepared to meet every requirement; will offer $500,000 for the plant, with $50,000 down, the balance to be amortized over a period of 15 years. Interested party also prepared to put an additional $250,000 into the business for working capital. M r . Dunham stated to M r . Parker that the R F C has had several offers for this plant and i n most cases the down payment was much larger than $50,000. Furthermore, the deal has to be handled in the full light of publicity, so, suggested to M r . Parker that he discuss the matter at length with M r . Jobes, so that he could get an idea of just what has taken place up to the present time. Mr. Dunham said we would, of course, have to wait until all the offers are in before 27 -STUDY OF RECONSTRUCTION; F I N A N C E CORPORATION anything could be done and we would also have to consult the National Security Resources Board before disposing of any plant. Thursday, July 27, 1950.—Mr. Leo Parker telephoned from St. Louis. Said he had talked further with M r . Jobes re Aireon Plant. M r . Jobes suggested he submit a bid in writing, as H F C will consider all bids on Monday. M r . Parker stated his people spe now prepared to offer $600,000—$100,000 down and the balance amortized over a period of 10 years at 4 percent. M r . Dunham said this sounded reasonable to him—thinks they now have a chance. Suggested t o M r . Parker that he submit his bid immediately. Monday, July 81, 1950.—Mr. Leo Parker, of Kansas City, came i n t o see M r . Dunham. Mr. Dunham called Tom Williams and asked him to see M r . Parker, which he did. Monday, July 81, 1950.—Mr. T o m Williams phoned M r . Dunham re his talk with M r . Parker. Thursday, August 81, 1950.—Mr. Leo Parker called with regard to Board action on Aireon Manufacturing Co. M r . Dunham told him this had been deferred at the Board meeting this morning but that they were holding a special meeting today at 3 for action. Thursday, August 81, 1950.—Mr. Leo Parker called with regard to Board action on Aireon Manufacturing. M r . Dunham said that the sale price of $700,000 had been acceptable to the Board. Only two prospective purchasers were i n the running when negotiations for sale of the Aireon facilities entered their final stages. Starrett was one of them, and the New England Industries, Inc., was the other. D u n & Bradstreet reports had been requested and obtained on N e w England, but none were requested on Starrett. F r o m this, it would seem that Parker's introduction to Dunham b y the Democratic National Committee may have been deemed a sufficient warranty of the character and financial responsibility of his principal. I t would seem also from this fact, and from the details reported i n his office records, that Dunham was concerned directly w i t h negotiations of the deal notwithstanding the fact that the necessary details were not at his disposal and the further fact that this responsibility had been delegated to D a v i d H . Powell, manager of the Kansas C i t y L o a n Agency. Selection of Starrett as the successful bidder has another unusual aspect. Powell wrote to Washington on August 28, 1950, saying: It is my firm opinion that the offer of Starrett Television Corp. * * * should be approved. This offer, in the amount of $630,000 is the most favorable offer we have received, and I think the sale should be consummated immediately unless a better offer has been received by August 31. However, this was not his final opinion for on August 29, 1950, the next day, Powell sent Washington a telegram which said: Recommend offer of New England Industries to purchase assets Aireon Manufacturing Corp. in the amount of $770,000 in accordance with our telephone conversation with you and Mr. Schumer attorney be accepted. This was the agency's latest recommendation. Washington Examiner W . P . Watson compared the offers i n some detail and concluded on August 31, 1950— that the offer of Starrett Television Corp. is preferable and, therefore, is being recommended for acceptance. T h e Washington review committee concurred i n Watson's recommendation— except that the sales price shall be $700,000. The deal was approved by the Board on this basis, and accepted by Starrett. This seems on its face to be an inconclusive way to terminate negotiations seeking a sale on the most favorable terms obtainable. 28 -STUDY OF RECONSTRUCTION; FINANCE CORPORATION O n October 6, 1950, R F C Director Gunderson said that attempts were being made to persuade Starrett to release R F C from its commitment without the necessity for defending itself in litigation alleging breach of contract. H e didn't know what R F C would do if Starrett refused to be persuaded. Apparently no action has been taken to date against Starrett and its principals on the ground that misrepresentations were made in their proposal to buy the facilities. Under section 11 (a) of the R F C Act, specific penalties are provided for anyone who makes a false statement "for the purpose of influencing in any way the action of the Corporation * * *." O n November 3, 1950, the new Board of Directors rescinded the action which its predecessor had taken in approving the sale. Freidus and Aaron were sentenced to prison a few days later. O n December 7, 1950, the Marketing and Liquidation Division of R F C recommended that the Aireon facilities be reoffered for sale on a sealed-bid basis. It is the function of this division to conduct such sales. However, on December 15, Aaron Krock & Co., auctioneers, submitted a proposal that they be employed to conduct a public sale, and this offer was accepted by the Board of Directors on December 19, 1950, on the recommendation of Vice Chairman C . Edward Rowe. Rowe knew of the auctioneers. They are located i n Worcester, Mass., which is also the site of Rowe's business enterprise, the Harrington & Richardson Arms Co. If Aaron K r o c k & Co. are successful in disposing of the properties they will be paid a commission equal to 5 percent of the sales price. T h e y will also receive reimbursement of all advertising expenses, estimated at not to exceed $8,000. If no sale is made at the offering to be held on January 29, 30, and 31, the auctioneer is to be reimbursed for out-of-pocket expenses estimated at about $5,000. R F C has authority to make such arrangements as these but it has used this authority heretofore only in unusual cases involving relatively small amounts of money. Among the prospective purchasers whose inquiries were forwarded to Aaron K r o c k & Co. by R F C were the New England Industries, Inc., the unsuccessful bidder in the previous offering, and Edward Krock, who inquired on behalf of Edward Krock Industries, Inc., of Worcester, Mass. E d w a r d Krock is said to be the brother of Aaron Krock. o
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