Congressional Hearing of December 15, 1967

To regulate broadcast services in 1967, the FCC had seven commissioners—the Commission—appointed by the president and assisted by the Broadcast Bureau (Bureau); the Bureau investigated applications and made recommendations to the commissioners who vote on final decisions.^[168] The Commission had cast a four-to-three vote approving the sale of majority control of five Overmyer subsidiary corporations to U.S. Communications Corporation. Written statements of the FCC commissioners formed much of the basis for a subsequent congressional investigation.

Rep. Harley O. Staggers (D-WV), chairman of the Special Subcommittee on Investigations of the Committee on Interstate and Foreign Commerce House of Representatives (Subcommittee), called the commissioners to a hearing regarding their consent to the transfer. The meeting was held on December 15, 1967, with the commissioners—all were present except Wadsworth—covering the concerns expressed by the minority in their dissenting statements regarding the waiver of the Top Fifty Interim Policy and the resulting profit potential for Overmyer.^[169][170] Staggers said the hearings would continue in the next congressional session, where the principals involved in transferring the construction permits would be asked to testify.^[171][172] Hyde reminded the Subcommittee that the FCC had a priority in assisting the development of UHF:

In the interest of diversity, in the interest of competition, the Commission has sponsored the development of the UHF channels. Congress has responded to this in enacting the all-channel legislation which requires that any consumer buying a TV set sold in interstate commerce must be given reception of UHF as well as VHF. Consumers are making their investment in UHF. Consistent with that policy, the Commission must give encouragement to the development of the UHF stations. In this situation here that we are examining, we have a proposal of the AVC Co., with the assets to do so, to put new life into stations which may otherwise fail completely. . . .  What we have here is a possibility of introducing some viable operations which will provide diversity. And back of the whole thing is the necessity, I believe, of giving every assistance possible, every encouragement possible to the development of 70 channels [UHF], to be used in addition to the 12 VHF. I think that the committee should have this perspective of it as you look at the problems related to this particular case, where as I pointed out in my first statement, the majority of the Commission found it appropriate to authorize the investment of new capital lest the UHF should fail completely.^[173]

In a dissenting statement submitted during a previous case similar to Overmyer, Cox cautioned the commissioners regarding their repeated accommodation in the interest of UHF: "I favor expanded UHF service like my colleagues, but I think we sometimes fall into the error of allowing almost anything in the name of UHF. We should not be emotionally predisposed to accept every argument which seeks to use UHF's cause for short range private benefit."^[174]

In the Overmyer transfer case, the FCC’s desire to encourage rapid UHF television development conflicted with its Top Fifty Interim Policy on the concentration of ownership and the need to investigate this transaction further.

Several Subcommittee members questioned Hyde regarding the decision of the majority of the commissioners not to hold hearings; indications were that a more extensive investigation into transferring the construction permits was warranted. Hyde testified that—in his opinion—if a hearing were ordered, the transfer would have been abandoned.

The following exchange between Staggers and Hyde pointed to the primary reason an FCC hearing was not ordered:

  The Chairman. I should think in a transfer of this magnitude it
would have been wise at least to have held a hearing.
  Mr. Hyde. Chairman Staggers, I believe that the possibility of
refinancing the UHF stations would have failed had we designated
the matter for hearing.^[175]

A question from Subcommittee member Rep. James J. Pickle (D-TX) revealed that an FCC hearing could create significant delays in getting the TV stations in operation:

  Mr. Pickle. Would full hearings have caused unusual delays?
  Mr. Hyde. I think so. I believe it might very well have defeated
this effort to salvage a sinking enterprise.^[176]

Subcommittee member Rep. Paul Rogers (D-FL), suggested an FCC hearing was needed to investigate Overmyer's efforts to finance the TV stations:

  Mr. Rogers. By a public hearing you could have questioned Overmyer
and found out if he had tried to raise cash, how much assets
he needed. He must have had considerable assets to get a $3 million
loan.
  Mr. Hyde. I believe to have ordered a hearing in this case would
have been the finish of the whole project.^[177]

Hyde explained why holding a hearing would jeopardize the transfer proceeding:

A hearing is a very severe sanction. I have participated in a number of efforts to simplify the hearings procedure, to limit the costs, and to expedite the whole business. There has not been any real success in the endeavor. Notwithstanding the efforts, they become longer, and more expensive, and in my judgment we have to find ways to get at the essential facts and conclude matters without the ordeal of hearings which exhaust the resources of both the applicant and the agency.^[178]

In his dissenting opinion, Cox addressed the possibility of delays associated with hearings and how Overmyer's approach to the transfers was the primary reason a hearing was required:

[Commissioner Loevinger expressed an opinion that a] cost in manpower, money, and time . . . would be involved in a hearing on this matter, and the delay in institution of new service in these five markets that would result. In the first place, if Overmyer had been content to sell his permits to two different buyers for no more than he reasonably expended in obtaining them, he could have obtained approval of the transfers, without hearing, some time ago. He, not the Commission, chose to follow a course which presents the problems I have discussed. Even now, he need not go to a hearing and I doubt if he would, though we cannot deny his applications without affording him that opportunity. He can still comply with our rules and policies and get rather routine approval for the disposition of his permits. If delay in instituting a service is to be advanced as an argument against resort to the hearing process when serious issues are presented, then we simply cannot discharge our obligations.^[179]

Subcommittee member Rep. John Dingell (D-MI) asked Hyde for more specific reasons why a hearing was not held:

  Mr. Dingell. What consideration went into the consideration of
the matter that no hearing was required in this matter?
  Mr. Hyde. One, we felt we did have full information.
Two, it is a matter where in the nature of things expeditious action
is required if the Commission is, in fact, going to act.
  Mr. Dingell. What is in the record to show expedition was
required?
  Mr. Hyde. The financial distress of the permittee.
  Mr. Dingell. You are required under the FCC Act to make a finding
in the public interest?
  Mr. Hyde. Yes.
  Mr. Dingell. Where is there the requirement that you come to the
conclusion that the permittee is under financial stress? There is no
place in the act where this is required, is there?
  Mr. Hyde. No.
  Mr. Dingell. Public interest is the sole test.
  Mr. Hyde. That is right, but I am suggesting to you that the plight
of a station and the effect of the distress of the operator upon the
public service is a relevant consideration.^[180]

The Stock Purchase Agreement between Overmyer and AVC included a stipulation allowing either party to end the agreement if the FCC did not approve the sale of the construction permits within six months of filing the transfer applications.^[181] The delay would have been substantially beyond six months and perhaps years if the FCC ordered a hearing.^[182]

Dingell pressed Hyde on the lack of investigation by the FCC regarding the Overmyer permit transfers to U.S. Communications:

  Mr. Dingell. Here you have something that contravenes the 3-year
rule [FCC Rule 1.597, originally 1.365], the rule with regard to concentration of ownership in the 50 top markets, and these are only the top 25. You have also allowed the evolution of a rather interesting financial arrangement on which
there is broad controversy as to whether or not it is a $4 million
compensation or not.
You had no scrutiny in the form of an objective hearing to find
out the real circumstances. You concede you have engaged in no independent
scrutiny of the truth or falsity of the papers submitted to the
Commission.
You further say the way you will police this is by waiting to see
whether or not these statements were true or false with the later hope
that perhaps you will consider these in some relicensing
proceeding that will take place in the vague future.
  Mr. Hyde. I don't want to give the impression that I have any
doubts about the validity of the showings before us or that I feel it
is necessary for us to police it to make sure that the representations
they made were true.
I am saying that should they, unknown to us, have made misrepresentations,
there are sanctions adequate to deal with it.
  Mr. Dingell. Don't you think you have a responsibility as Chairman
of that Commission to ascertain the truth or falsity of statements
where there are questions of the kind we see here and where the rules
of the Commission regarding hearings are being so broadly and
wantonly waived by the Commission?
  Mr. Hyde. I think we have a responsibility to see that the documents
on which we act are truthful.
I also think we are not required to go out and investigate to see
whether there are—go out on a witch hunt ——— 
  Mr. Dingell. I am asking whether you made an independent investigation.
You said you have not?
  Mr. Hyde. There is no evidence of irregularity that would warrant
a special investigation.
  Mr. Dingell. How do you know there is no evidence of irregularity
You conducted no hearing and made no independent scrutiny?
  Mr. Hyde. This is the way we must act. We do not undertake field
investigations of every application filed with us. We could not do our
business with the resources we have if we had to proceed in that way.
  Mr. Dingell. But you have an extraordinary situation. Commission
rules say you will have a hearing in circumstances where the
license is under 3 years old when transferred, and you will have a
hearing where there is a tendency toward concentration because of
the excessive number of licensees operating in five or whatever the
number is of the top 50. Here you have five of the top 25. You made
no independent investigation and had no hearing.
  Mr. Hyde. There is no tendency to monopoly or concentration here
in the transfer of five UHF stations in markets where they will be
competing with the strongest forces in the broadcasting industry.^[183]

Hyde concluded that Overmyer's application was sufficient for the Commission's approval of the transfers without additional investigation: "We have examined the whole matter carefully to assure ourselves that we have full information. If we felt we did not have it we would either undertake further inquiries or have a hearing."^[184]

FCC Rule 1.597 (initially 1.365), Amendment of Part I of the Commission's Rules Adding Section 1.365 Concerning Applications for Voluntary Assignments or Transfers of Control (Docket No. 13864, Adopted March 15, 1962), was erroneously cited by Dingell as applicable in this case. The amendment required operational TV stations to be held for three consecutive years before being sold to a new owner.^[185][186] This new regulation intended to stop the high turnover rate in ownership of stations used to produce quick profits rather than providing the long-term continuity of service necessary to serve the public interest. It did not apply to transferring construction permits, so it was irrelevant in the Overmyer investigation. The FCC intended the out-of-pocket expense policy to limit trafficking in construction permits.^[187][188]

Dingell asked Cox about the need to examine Overmyer's out-of-pocket expense submissions in a hearing:

  Mr. Dingell. I would like to direct the first question to Commissioner
Cox who discussed rather eloquently a statement on page 2, referring
to permits being held to actual expenses.
The statement goes on to say "Certainly it represents a novel approach
which I think would have to be tested in a hearing before it
could be accepted."
Then he goes on to make further statements and makes a further
comment with regard to the nature of these expenditures and how they
conform to previous Commission practices.
  Mr. Cox. I don't believe we have ever had this method of justifying
expenses used before. That does not mean it may not be valid, but I
feel before it is accepted in such a significant amount it would have
been desirable to test it in a hearing.
As I understand the procedure, they took a part of the period during
which Overmyer was acquiring and holding these permits for which
they had some records as to the services provided by other parts of his
empire. They then applied a certain percentage factor to these for
other parts of the period, for which records were not available. This is
all supported by affidavits of individuals in the Overmyer enterprises
as to what part of their time they devoted to broadcast aspects of his
operation.
To simply accept the aggregate of these figures without detailed testing
seems to me to be unsound. That is why I suggested a hearing
would have been appropriate.^[189]

Hyde gave his opinion of why Overmyer did not sell all of his stock in the stations: he agreed with Cox's statement that the true nature of the Stock Purchase and Loan Agreement was to raise funds to save the warehouse business.

  Mr. Rogers. He did not have a competitive agreement. Why did he
have to get into the other properties? If this was to be a clean deal,
if the sales price was only for out-of-pocket expenses, why did he not
just mortgage the other 20 percent for the remaining $300,000 of
out-of-pocket expense?
  Mr. Hyde. I do not know, but it would appear that Mr. Overmyer
had found a source of capital to also rescue some other operations.^[190]

In a subsequent exchange with Hyde, Rogers observed that the FCC had made it possible for Overmyer to recover more than the stated out-of-pocket expenses using the loan and stock option arrangement with AVC:

  Mr. Rogers. Is it true that under the agreement that you approved it
is stated it is understood the price to be paid for the stock shall not in
any event exceed $3 million?
  Mr. Hyde. Yes.
  Mr. Rogers. The price for the stock. Now the stock is the 20 percent
of the permit that the out-of-pocket expense amounts to about $300,000
on?
Why didn't the Commission restrict that price of the 20 percent
stock to $300,000? You restricted the first 80 percent to $1 million.
If you really are carrying out the intent to hold these transfer
permits to out-of-pocket expense you should have restricted the 20
percent to what the out-of-pocket expenses were.
Otherwise any one can come in, make a mortgage agreement, and
get whatever money they want.
You say "Well, it is later on."
  Mr. Hyde. AVC Corp. has not contracted to pay $3 million for it.
They have an option to pay ——— 
  Mr. Rogers. They didn't contract to pay out-of-pocket expenses for
it, either. You have not seen to that.
  Mr. Hyde. I think we have.
  Mr. Rogers. Show me the language.
  Mr. Hyde. We have required a submission of their costs so that we
could make a determination as to whether or not an amount ——— 
  Mr. Rogers. In their own agreement it says they can pay up to $3
million for that 20 percent but no more.
  Mr. Hyde. They can.
  Mr. Rogers. I thank the gentleman.^[191]

Rogers suggested to Hyde that Overmyer's 20 percent stock, combined with the option for U.S. Communications to purchase later, was a device to circumvent the Commission's out-of-pocket expense policy. Dingell asked Hyde about the reasons for waiving several Commission policies:

  Mr. Rogers. So you would have allowed only out of pocket?
  Mr. Hyde. Yes.
  Mr. Rogers. As I understand it from the agreement, when that
permit was to change hands, they said, "We will pay you for only
80 percent of it right now"?
  Mr. Hyde. Right, sir.
  Mr. Rogers. "I am giving you $1 million for this."
  Mr. Hyde. Yes.
  Mr. Rogers. "But this 20 percent I will pay you $3 million for under
the agreement."
  Mr. Hyde. The buyer has an option to pay $3 million for it—up to
that or less—which he is not obliged to exercise.
  Mr. Rogers. I agree he does not have to.
Why did you not, in your investigation, require that to be restricted
for the 20 percent of the stock, restricted to the actual out-of-pocket
expenses prorated.
  Mr. Hyde. I don't think it would have been appropriate or necessary
for this reason:
Overmyer does not get his full out-of-pocket expenses. There are
$332,000 left uncompensated.
If he wants to risk that for 4 years as an investment, a venture in
UHF, why should he not be permitted to do it?
  Mr. Rogers. Why should not everybody do the same thing any time
they want to buy a permit, sell a 60-, 70-, or an 80-percent interest,
which controls the permit, and simply say after 3 years you can buy the
rest, up to $3 million, $4 million, $5 million? Does this really not get
around your policy of trying to hold it to out-of-pocket expense?
  Mr. Hyde. I don't believe the arrangements in this get outside our
policy.
  Mr. Dingell. Suppose you run into this circumstance again: are
you going to waive a hearing in that proceeding too? You have already
approved this set of circumstances which seem rather extraordinary.
  Mr. Hyde. This is a unique situation. There is a combination of
factors here of great significance. One is the impact upon the development
of UHF stations and the development of competitive network possibilities.
There is the unusual situation of an enterprise which started out with
substantial resources at the time suddenly meeting adverse circumstances
such as we have here. I do not know of any applications at all like this.^[192]

Rogers questioned Hyde for the specific justification made that satisfied the "compelling affirmative showing" standard required for a waiver of the Top Fifty Interim Policy:

  Mr. Rogers. In any waiver, there must be an overwhelming showing,
I should think, that it should be waived in order to show an
overriding public interest.
  Mr. Hyde. Yes, sir. We believe that such a showing was made for
the purpose of this transfer.
I did want to mention to you that when Overmyer got his original
permit, there was no such policy. What has happened to Overmyer
is that he has found himself subjected to a procedural policy adopted
after he made his acquisition.
  Mr. Rogers. This often happens. He has protected himself. But
this does not mean someone else can come in and violate the policy;
does it?
  Mr. Hyde. It does not mean someone else can come in unless it can
be shown in a compelling way that the public interest would warrant
a waiver of that policy.
  Mr. Rogers. I do not see the showing in the record.
  Mr. Hyde. The basis on which the majority finds such a showing
is that you have the UHF stations in five more markets unable to
go ahead with the capital available, and another source of capital
available which will assure their operation.^[193]

Congress and the FCC have been concerned about trafficking in broadcast station permits and licenses for many years. Trafficking occurs when construction permits, or operational stations, are traded primarily for profit rather than providing service to the public as required by the Communications Act of 1934.^{[194][195][196]} The FCC's approval of the option and loan enabled the possibility of trafficking because Overmyer never placed the stations on the air and could sell the stock he retained to U.S. Communications Corporation at a profit.

The Subcommittee investigated the Overmyer transfers and held hearings in 1968 to determine if the FCC had fulfilled its responsibility to protect the public interest while processing the applications and decide if any changes to the Communications Act of 1934 were needed to prevent trafficking.^[197]

In February 1968, two members of the Subcommittee, Dingell and Rep. John E. Moss (D-CA), introduced House Bill H.R. 15266, addressing concerns expressed by the Subcommittee during the initial hearing regarding the Overmyer construction permit transfer to U.S. Communications. The legislation proposed changes to the Communications Act of 1934—the statutory basis for the FCC's regulatory authority over broadcasting—governing the transfer of FCC construction permits and licenses. The terms included mandatory FCC hearings on transfers, limiting sale prices of permits and stations to an FCC-determined fair market value, strengthening financial disclosures for transferors and making transfers open to any interested parties rather than being restricted, under then-current law, to one selected by the transferor. An additional stipulation of the proposed legislation, unlikely to survive a court challenge, removed all legal shields protecting confidential communications between principals of the transfers and their advisers. The Communications Act of 1934 required the FCC to determine that each construction permit assignment was in the public interest rather than a finding for the entire group in a multiple permit transfer. Under the proposed legislation, the FCC must further express in its decision the specific justification for each permit transferred, illustrating how it served the public interest.^{[198][199][200]}

On February 7, 1968, the FCC terminated the Top Fifty Interim Policy, which limited TV station ownership in the largest TV markets. Although the proposed rule was dropped, the FCC kept the clause requiring a public interest showing in transfers exceeding the limit of the Top Fifty Interim Policy: "[W]e will expect a compelling public interest showing by those seeking to acquire more than three stations (or more than two VHF stations) in those markets."^{[201][202][203]}

The Commission noted that the success of UHF television expansion was a fundamental reason for terminating the Top Fifty Interim Policy:

[I]t is observed that insofar as UHF stations are concerned, an absence of the type of restriction proposed in the rule herein may well serve to make for a more rapid development of such stations and enhance the chances for development of a fourth commercial TV network. It would significantly contribute to the entry of persons who have the know-how and the financial resources to enter into and carry on UHF television broadcasting during this most crucial period. . . . 

. . . [W]ithin the total limits now contained in the rules, we believe an ad hoc approach will better enable us to deal with particular situations in particular communities than would a new fixed limit. Our conclusion in this respect is further reinforced by the present critical phase of UHF development and the need to have the flexibility to take action which on balance promotes the public interest in this vital area upon which the Congress and the American people, through purchase of all-channel receiver sets, have staked so much.^[204]

In his dissenting statement regarding the termination of the Top Fifty Interim Policy, Commissioner Johnson said that this was another act of many intended for the benefit of UHF television:

The majority's reliance on the shibboleth "benefit to UHF" is not unusual. This Commission has hung so many decisions on the UHF peg that one wonders if the day will come when the whole hatrack will come tumbling down from its own weight. Restrictive CATV [Cable TV] rules are to benefit UHF. Increased consumer costs of all-channel sets are to benefit UHF. Large chunks of spectrum are denied to other potential users in order to benefit UHF. The ITT-ABC merger was justified, in part, as a benefit to UHF. And now the demise of the top-fifty rule will hopefully benefit UHF. It is almost a knee-jerk reaction.^[205]

Overmyer and U.S. Communications Corporation

On January 15, 1968, the closing for the sale of majority control of the five construction permits to U.S. Communications Corporation was held at Overmyer's New York City headquarters.^[206] At the closing, Overmyer received the second $1.5 million portion of the total $3 million agreed to in the loan contract signed on March 28, 1967.

Because AVC was an investment company with no experience in television broadcasting, its relationship with U.S. Communications was limited to providing financing.^[207] An article in Broadcasting magazine on June 19, 1967, stated, "U.S. Communications will represent a merger of AVC capital and WPHL-TV know-how to get the five CP's [construction permits] on the air."^[208] Two of the former owner-managers of WPHL-TV, Leonard Stevens and Aaron Katz, were included in the management team of U.S. Communications Corporation. They brought their broadcasting experience to the station group as vice presidents and members of the board of directors.^{[209][210][211][212][213]} Castle became a partner in Butcher and Sherrerd and was appointed chairman of the board of directors of U.S. Communications Corporation.^[214] Frank H. Reichel Jr., president of AVC, was appointed president and treasurer of U.S. Communications Corporation and a board of directors member. Reichel also owned 6.33 percent stock in U.S. Communications Corporation.^[127] After completing the transfers, AVC owned 70 percent of U.S. Communications Corporation. The former owners of WPHL-TV, including Castle, Katz, Stevens and others, held 30 percent of the company.^[215][127]

Overmyer had no ownership interest or management role as an officer in AVC or U.S. Communications Corporation; he was also not a member of the board of directors for either company. His involvement was limited to holding 20 percent of the stock in each of four subsidiaries of U.S. Communications Corporation: U.S. Communications of Georgia, Inc. (WATL-TV in Atlanta); U.S. Communications of Pittsburgh, Inc. (WPGH-TV in Pittsburgh); U.S. Communications of Ohio, Inc. (WXIX-TV in Cincinnati); and U.S. Communications of Texas, Inc. (KJDO-TV in Houston).^{[216][217][218][219][136]} Overmyer was not an officer of the U.S. Communications Corporation subsidiaries.^[220] He did not own any interest in WPHL-TV in Philadelphia or KEMO-TV in San Francisco. Corwin—Overmyer's original partner in KEMO-TV—held twenty percent of the U.S. Communications of California, Inc. U.S. Communications Corporation included a provision in the contract that could compel Overmyer to sell his 20 percent interest in the stations to them and an assignment of his option to purchase Corwin's interest in KEMO-TV.^{[221][222][136][223][224][225][226][227][228]} U.S. Communications Corporation could choose to buy Overmyer's 20 percent stock between January 16, 1971, and January 15, 1972.^[229] Overmyer had to pay interest on the $3 million loan until U.S. Communications exercised the option or the period expired. If U.S. Communications decided not to purchase Overmyer's stock, the $3 million loan principal would be due. If U.S. Communications Corporation exercised the option, the loan principal is also payable; however, the $3 million would be reduced by a purchase price determined by using one of two methods as outlined in Overmyer's contract with AVC:

The price shall be fixed by multiplying 20% by five times the gross receipts of the TV Companies during the 12 full calendar months immediately preceding the date on which the option shall be exercised, provided that if any of the television stations of the TV Companies has not been continuously operating on a schedule of at least 112 hours per week throughout the 18-month period immediately preceding the date on which the option shall be exercised, or if the gross receipts of any of such stations cannot be or are not for any reason included in this computation, then the gross receipts for such 12-month period for such station shall be deemed to be that share of the "total broadcast revenues" in the latest report then available of TV Broadcast Financial Data published by the Federal Communications Commission for the several markets as indicated below:

San Francisco 3%
Houston 5%
Atlanta 5%
Cincinnati 8%
Pittsburgh 8%

To the foregoing shall be added or subtracted, as the case may be, 20% of the net amount for all the TV Companies of the aggregate amount of cash on hand or on deposit, accounts receivable, prepaid expense and other current assets on the one hand, and of the aggregate of all debts and liabilities of the TV companies, such amounts to be determined as of the last day of the 12-month period immediately preceding the exercise of the option provided that the aggregate of all debts and liabilities for any one of the TV Companies shall for purposes hereof be considered not to exceed $500,000.^[230]

Overmyer could require U.S. Communications to make an immediate decision whether to purchase his 20 percent interest during the option period. If U.S. Communications declined, the loan principal would be due. If U.S. Communications agreed to buy Overmyer's stock, the purchase procedure described previously would be activated.^[231] The contract limited the highest purchase price to $3 million, the same amount AVC had loaned to Overmyer. The loan was secured by second mortgages on twenty-three of Overmyer's warehouse properties and his 20 percent interest in the TV stations.^[232][233] U.S. Communications Corporation never executed its option to buy the stock owned by Overmyer and Corwin in the stations.^[234] Overmyer repaid the $3 million loan.^[235]

Four of the five stations where majority control transferred from Overmyer to U.S. Communications Corporation signed on in 1968–69:

• KEMO-TV channel 20 in San Francisco on April 1, 1968
  
• WXIX-TV channel 19 in Cincinnati on August 1, 1968
  
• WPGH-TV channel 53 in Pittsburgh on February 1, 1969
  
• WATL-TV channel 36 in Atlanta on August 16, 1969

The U.S. Communications group also included WPHL-TV channel 17 in Philadelphia, which began operation on September 17, 1965.^{[236][237][238]} On October 13, 1971, the FCC deleted the construction permit of KJDO-TV channel 45 in Houston.^[239][240] Except for the studio location for WXIX-TV in Cincinnati, U.S. Communications used the studio and transmitter locations selected by Overmyer.^{[241][88][242]}

1968 Congressional Investigation and Hearings

Dissenting statements written by the FCC commissioners suggesting that the FCC failed to protect the public interest by approving the transfer of control of the Overmyer permits to U.S. Communications attracted the attention of the House of Representatives, resulting in a congressional investigation in 1968.^{[243][244][135][245][246][247][248]} The hearings continued on the Acquisition and Transfer of Five Overmyer Television Construction Permits.^[249] Sessions were held in Washington, D.C., on July 16, 17, 19, 31, and August 1, 1968. Overmyer, several associates, the FCC Broadcast Bureau's staff, and five of the seven commissioners testified before the Special Subcommittee on Investigations.^{[250][251][252][253]} The Subcommittee took testimony from the commissioners on August 1, 1968. Commissioners Wadsworth and Loevinger were not present: Wadsworth was ill, and Loevinger had left the Commission at the expiration of his term on June 30, 1968.^[254][255]

The investigation was wide-ranging: it expanded beyond the initial concerns of the dissenting FCC commissioners by examining Overmyer's financial qualifications to get the original construction permits and irregularities regarding applications for additional time to construct the stations. Subcommittee investigators also looked into the Stock Purchase and Loan Agreements and the potential profit for Overmyer in violation of FCC policy. Overmyer's method of calculating out-of-pocket expenses was essential in the hearings because half of the amount was based on opinion instead of documented evidence.^[256] In Memorandum 6738 (November 8 and 15, 1967) to the Commission, the Broadcast Bureau recommended approval of the transfer and acknowledged that Overmyer's approach of determining expenses was unusual but did not advise a hearing to examine the method.^[257] However, instead of performing an in-depth analysis, the Bureau's primary justification was "the enthusiasm of Overmyer's commitment to entering UHF":

The claim for expenses falling in the second category presents a novel question, i.e., the right to reimbursement for "out-of-pocket" [expenses] which are substantiated by opinion evidence. The Bureau believes that in the particular circumstances here reimbursement for expenses in this category should be allowed. Considering the enthusiasm of Overmyer's commitment to entering UHF, there is no question that substantial expenses were incurred in attempting to get the station on the air. The extent of Overmyer's efforts here (which include putting the San Francisco and Newport [Cincinnati] stations in a position where they are almost ready to go on the air) is made clear by supporting exhibits. And the supporting affidavits of the various department heads (General Counsel, etc.) who rendered staff services to the permittees reveal, on close readings, that every effort has been made to be completely fair and objective in appraising the value of departmental contributions to the permittees. In view of this, the fact that expenses were incurred (a) under a former organizational setup which did not maintain complete cost records, and (b) were incurred at a time when transfer of the permits was the last thing in Overmyer's mind, should not bar recovery here.^[258]

This memorandum to the Commission also stated, "In the Bureau's view the financial arrangements here are compatible with the public interest, and out-of-pocket expenses (which are subject to a question of proof) have been proven adequately."^[259] During the congressional hearings, the following testimony given by Edward Hautanen, an attorney with the Bureau, responding to Robert Lishman, chief counsel for the Special Subcommittee on Investigations, revealed the Bureau did no investigation on the out-of-pocket expenses claimed by Overmyer:

  Mr. Lishman. Couldn't the Commission have made some kind of investigation as to whether or not these out-of-pocket expenses had actually been incurred?
  Mr. Hautanen. I suppose such an investigation might have been made.
  Mr. Lishman. Has the Commission made it in other cases?
  Mr. Hautanen. Not that I am aware of, any case I have worked on.^[260]

After examination by Subcommittee member Rep. Hastings Keith (R-MA), Hautanen disclosed that because of certification by the applicant and criminal penalties, the documents submitted to the FCC are usually accepted at face value with no further investigation:

  Mr. Keith. How did you satisfy yourself that these were bona fide out-of-pocket expenses? What procedures did you use?
  Mr. Hautanen. In this particular case, it was a rather lengthy document, let us say seven or eight pages, on which Mr. Overmyer substantiated his various out-of-pocket expenses. It was on the basis of this document which, as I say, was part of the certified applications, that we concluded ——— 
  Mr. Keith. What kind of certification was on that application?
  Mr. Hautanen. The certification I refer to is the warning on the cover of the application which states that any false statements subject you to criminal punishment under section 1001 of title 18.
  Mr. Keith. Does that include also omissions as well as errors of commission?
  Mr. Hautanen. Yes, sir.
  Mr. Keith. You have to take that at its face value because you have to have something to go on and these men do this under a certain penalty.
  Mr. Hautanen. That is the assumption. When they file an application, and so certify it as a responsible application, they will be held to it.
  Mr. Keith. You never seek to go back of that to check into the validity of that document?
  Mr. Hautanen. Generally speaking, no.^[261]
 

The documents Hautanen referred to were affidavits from managers of The Overmyer Company, Inc. justifying their departments' out-of-pocket expenses. Their statements were filed with the FCC on June 30, 1967, in the certified applications to transfer control of the construction permits.^[262]

While under oath, Thomas J. Byrnes, executive vice president of The Overmyer Company, Inc., answered a question regarding the justification for using the out-of-pocket expense approximation formula and confirmed his previous assertion that no usable expense records existed outside of the four-month base period from September through December 1966:

  Mr. Lishman. Can't we test fairness and propriety of this base
period allocation approach by pointing out various examples of the
real foolishness of it? For example, here is an employee, Albert E.
Owens. He is letter No. 17. He was employed only 1 month. He earned
$665. Now a total of $5,428 was charged to the communications companies
for the services of this employee which is $4,763 more than
his total earnings.
In the first place, I don't understand why you have to have a base
period at all. Out-of-pocket expenses are out-of-pocket expenses. When
you run it up on an estimated allocated basis of $666,000 and work out
some kind of formula that will take a peak period, I certainly don't see
any equity or justice.
  Mr. Byrnes. It was the only period in which these allocated expenses
had been set out in such a way that they could be used, sir.^[263]

Keith inquired about Overmyer's out-of-pocket expenses; Cox replied that the FCC should have held a hearing to examine the method more closely:

  Mr. Keith. Under those circumstances, Commissioner Cox, you
made what I thought was an extraordinarily well written justification for
the minority view. How did you go about getting your facts? How did
you resolve the questions that must have been in your mind and were
at variance with those of Mr. Hyde?
I have in mind particularly the out-of-pocket expense which seemed
to be extraordinarily poorly documented, and which would have alerted
me at once that this whole matter should be studied more closely.
I wondered how you went about satisfying yourself that your minority
views were well founded.
  Mr. Cox. I proceeded, Congressman Keith, basically on the
document, the [Broadcast Bureau] staff report, that was before the Commission
and on the answers I got from questions to the [Broadcast Bureau] staff in
the course of our deliberations. I did not have the opportunity to dig into the
applications themselves. It seemed to me, on the face of the analysis
that the [Broadcast Bureau] staff had made, that this was the first instance
in which we had had this kind of effort to establish out-of-pocket expenses.
Also, the method they outlined, as I understood it, seemed to be open
to serious question. The position I took was not that I had gone into the
files and really satisfied myself that the out-of-pocket expenses were
something else, but that it appeared to me that if this was really what
the applicant was doing, we clearly needed a hearing to explore this,
because it seemed to me it would probably require more than simply
the analysis and study of the application to find out what was the actual
basis for some of the estimates that went into the out-of-pocket calculations.
^[264]

In later testimony, Cox said that the Bureau's staff could not adequately investigate Overmyer's out-of-pocket expenses outside of a hearing:

[I]t was the lack, really, of precise information that made me feel we should have a hearing. We don't really have [Broadcast Bureau] staff enough to explore all of these things in the field, as perhaps might be desirable. If we are not able to satisfy ourselves on the basis of the information supplied by the parties, we would normally designate the matter for hearing, and call witnesses.^[265]

The Subcommittee also considered Overmyer's failure to include the information in applications filed with the FCC for an extension of time to complete the construction of the stations. Investigators suggested that the applications should have divulged—by Overmyer filing an amendment to them—the financial conditions preventing the completion of the stations and the intention to sell the construction permits. Applications were never amended to disclose that a contract was entered where majority control of the construction permits had been sold to AVC. The Subcommittee said that these omissions violated FCC Rule 1.65, which notified the Commission of all changes in the information needed to decide on the applications.^[266] Rule 1.65 specifically required filing amendments to applications notifying the Commission of pertinent changes. Investigators viewed this failure as a concealment of facts to keep the permits in salable condition.^[267] The Bureau regarded the violation only as a technical infraction. Although Overmyer had not submitted the transfer contracts by an amendment to the extension applications, he filed them with the ownership section of the FCC on April 28, 1967, within thirty days, as stipulated by Rule 1.65. However, the FCC was initially unaware the letter and contract were filed; their receipt was overlooked in supplying information to the Subcommittee.^[268][269] Extensions for additional time to construct the stations were not immediately granted upon receiving the applications; according to standard practice, they were later considered at the same time as the applications for transfer of the construction permits to the U.S. Communications Corporation.^{[270][271][272]} Hyde stated, "I will agree that there ought to have been an appropriate reference in the [extension] applications to the filing of material in the ownership file. The fact it wasn't there does not mean that the Commission would not be on notice."^[273] Despite the Subcommittee's accusation that the applications for extension of time to complete construction were intentionally misleading to keep the permits active, the FCC was fully informed of Overmyer's financial difficulties and intention to sell control of the permittee corporations before approving the extension applications.

Hyde maintained that the Top Fifty Interim Policy was waived to ensure the five stations could quickly begin operation. He also cited the All-Channel Receiver Act as justification for the waiver because it prioritized UHF-TV development. Subcommittee member Rep. Brock Adams (D-WA) questioned George Smith, chief of the FCC's Broadcast Bureau, regarding the Top Fifty Interim Policy relative to UHF television development:

  Mr. Adams. What was your position on the top 50 market principle being set
aside for AVC and the fact that you would ordinarily not allow a nonlocal
corporation, with no previous broadcasting experience to stand
first in line for an application in the market?
  Mr. George Smith. Mr. Chairman, ever since the Congress passed
the so-called all-channel receiver law, the Commission has continued to
follow a policy of doing everything it could to foster the development
of UHF television.^[274]

Subcommittee member Rep. Clarence J. Brown Jr. (R-OH) asked Martin Levy, chief of FCC Broadcast Facilities, about the expedition of construction permit transfers:

  Mr. Brown. Is this what FCC is faced with on this particular problem of
construction permits granted to someone who then runs out of money
and can't put it on the air?
  Mr. Levy. I think it is fair to say that the present Commission policy
is that once it has granted a construction permit and then before any
really substantial construction has been undertaken or money spent in
great amount, if that permittee decides to assign that permit to a third
party the Commission's policy has been to go ahead and permit the
assignment of the permit so long as the reimbursement does not exceed
the out-of-pocket expenses. That has been the general policy.
  Mr. Brown. What is the Commission's rationale?
  Mr. Levy. I think the Commission's rationale is that it is more likely
to get a station on the air sooner that way.
  Mr. Brown. And this is desirable, getting the stations on the air is
desirable?
  Mr. Levy. Yes, sir, particularly the UHF, the Commission has
thought this was desirable.^[275]

Hyde had testified in the Subcommittee session held on December 15, 1967, that imposing a hearing in the Overmyer construction permit transfers to AVC would have increased costs and caused a lengthy delay. The delay would have likely resulted in the withdrawal of the transfer application; comparative hearings might then be required to examine new applications, creating long waits to start a new TV service. He also said further investigation was unnecessary because all the information needed for the Commission to vote on the transfer was available. Hyde summarized his views on the Commission waiving the Top Fifty Interim Policy hearing:

When you do designate a matter for hearing you have to take into consideration the consequences of that action. It may mean in some instances a hardship, the complete destruction of a project. It will in almost any instance mean a considerable delay in any construction or implementation of a permit. You would have to consider these factors against the background of the Commission's interest in encouraging the investment of funds in the development of UHF stations so that people buying all-channel sets under the all-channel law would get something for their investment in UHF. In the overall of this particular case representing one where you had an applicant who the Commission was satisfied had a bona fide interest in exploiting UHF stations, who had the money, at least a million and a half dollars in liquid assets when he entered the business, to put stations on the air. Our experience in UHF has been somewhat discouraging We have issued permits in many instances where no construction took place. In this instance the permittee did proceed and his record is rather better than many UHF holders. Then he did come into financial difficulties. At that point he undertook this assignment to the AVC people. When this matter of assignment came up the Commission would have to consider, should we proceed on these applications for extensions, or should we look toward the possibility of some constructive course which would see these stations on the air promptly. You have an applicant, AVC, which is in strong financial position and in the judgment of the majority it was in the public interest to get these TV stations going rather than to undertake deletion of permits and invitations to newcomers.^[276]

Commissioner Lee testified regarding the likely effect of holding a hearing for the construction permit transfers: "The alternative of setting up a hearing and delaying service to some 30 million people for 4 or 5 years was something I did not care to face."^[277]

Lishman asked Hyde for the public interest determination that an urgent need for additional television service existed in all five markets, which justified the waiver of so many FCC policies:

  Mr. Lishman. One question. On what basis did the Commission determine
that each of the communities involved in the Overmyer transfer
had an unusual and urgent need for additional television service?
  Mr. Hyde. I think that this decision was discussed in the overall. In
each instance it was a UHF station in an important market.
Commissioner Bartley reminds me that the Commission has made a
UHF station allocation to each one of these communities and there
would be, of course, an interest in seeing that made useful to the public.
As I indicated in the very first day of the hearings in this matter, we
had a situation where the grantee had found himself unable to proceed
and here was an opportunity to approve a transfer to new interests
who did have the substance to complete the construction and we thought
this indicated an urgent need.^[278]

The Broadcast Bureau found the loan agreement was acceptable based on collateral and interest charges at the prevailing rate.^{[279][280][281][275][21][282][283][284]} In its memorandum to the Commission recommending approval of the transfer, the Bureau said the loan was partially justified by "his [Overmyer's] dedication to UHF and losses suffered in efforts to establish a fourth network":

The Bureau recognizes that the extension of loans by a transferee to a transferor presents an unusual situation, which should be approached with some skepticism. With this in mind, the Bureau has carefully scrutinized the underlying loan agreements and is satisfied that they are consistent with the public interest. The loans are fully collateralized by mortgages and notes on various Warehouse properties: they bear interest at the prevailing market (Philadelphia) rate plus a quarter of a percentage point premium; interest is payable currently; and principal is repayable in three years. These considerations justify the conclusion that the loans are bona fide transactions involving the warehouse properties, and are designed to permit Overmyer to save the Warehouse group. Beyond these strictly legal considerations, there are—in the particular factual setting here—certain equities which weigh in Overmyer's favor. We have in mind here his dedication to UHF and losses suffered in efforts to establish a fourth network. The genuineness of his dedication to UHF is unquestioned, and there is nothing to suggest the permits were acquired as mere paper speculations, with no intention of building.^[285]

Cox testified in the congressional hearings regarding his view of the loan and stock option:

Aside from the out-of-pocket expenses, this aspect of the transaction also bothered me greatly. It seems that, even assuming that Mr. Overmyer had had expenses of $1,300,000, the most he could have obtained under the Commission's policy was that amount, but that in effect, . . . by taking two steps he has gotten a million dollars in cash for out-of-pocket expenses, 80 percent. He has kept a 20 percent stock equity, on which he gave an option to AVC. They were to provide all further financing, so that if these businesses thrived and his stock would increase in value it would be due to no contribution on his part. Meanwhile, not only did he receive $1 million on the day of signing the contract, and before it was filed with the Commission, he also received $1.5 million of the $3 million that was later to be loaned on the security of his stock and of the second mortgage on the warehouses at about the time, or before, the contracts were filed and months before the Commission acted. It seemed to me in effect that he, rather than selling for $1.3 million, had held out for $4 million for his interest in these permits, which clearly would represent a profit and violate our policy. And while it was cast in another form, that seemed to me to be the reality of what had happened.^[286]

Adams expressed his view of the loan and stock option contract: "It appears to me in it that you have, through the retention of the 20-percent interest and the basing of an option and repayment system on gross revenues rather than on any type of operation profit, an almost assurance of Mr. Overmyer receiving $1 million down and $3 million in a period of time on a half million investment, basically because we got a package of licenses."^[287]

During questioning by Adams, Cox commented the FCC had been so accommodating to UHF that basic policies were not observed:

  Mr. Adams. Commissioner Cox, is my characterization of the fact
that Overmyer in effect out of this picked up $4 million with every
expectation that he is going to net that out of it rather than being
a loan, is that characterization in part true?
  Mr. Cox. We are predicting. My analysis, like yours, is that the
way the transaction is framed, this is the way it seems most likely to
me to work out. And certainly at a time when he apparently felt he
needed large sums of money, instead of simply getting back what he
had invested in these permits through an outright sale of them, he
got back 80 percent of what he claimed he had put into them plus a
loan of $3 million which I am morally certain AVC would not have
made to him if he had not been in a position to transfer the permits.
I don't think if he had been willing to sell all these permits to them
for $1,300,000 in one transaction and if he had gone back to AVC
the next week and said he would like to borrow $3 million on the
security of second mortgages on the warehouses, that they would
have been at all interested in that transaction. I think he was able to
get $4 million within a period of a relatively few months here, to
help him in the difficulties he had gotten into in his warehouse business
simply because he had the permits. Now I was anxious, as was the chairman
and the other members of the majority to see UHF succeed, to see the public
get more service, but I am not so anxious for that that I am willing to forgo
all our other policies. . . . It seems to me that the Commission
was so concerned about expediting UHF service that they did not maintain a proper
regard for these other two policies [Top Fifty Interim and out-of-pocket] which
I feel are equally important.^[288]

In his dissenting opinion, Cox considered the rigged nature of the option price formula:

[I]t is argued that the option price may be less than $3,000,000 since that is stated as a ceiling. But as pointed out above, the formula for calculating the price is an unusual one, based on gross receipts instead of income. If the five stations have combined gross revenues of just $3,000,000 in the fourth year after closing under the stock purchase agreement, then the maximum price is payable. I think the parties fully intend this result and that Overmyer—having gotten the $3,000,000 in advance—will never be required to repay the purported loan in that amount.^[289]

On the last day of the congressional hearings, August 1, 1968, Keith challenged Hyde regarding Overmyer's use of the loan and option arrangement with AVC to evade the FCC out-of-pocket expenses policy:

  Mr. Keith. It was really too much for me to comprehend how this
$3 million figure was arrived at. I was told yesterday by witnesses for
the AVC interests that they were willing to buy the stations for the
full out-of-pocket expenses a revelation which leads me to believe that
it must have been advantageous for Overmyer to take the 20-percent
figure and use it as collateral to get a settlement more favorable than
cash, itself.
There must be some value that could be assigned to that particular
20 percent, over and above what it represented in alleged out-of-pocket
expenses. Was the Commission aware that the buyer was eager to pay
the full price of the out-of-pocket expenses?
  Mr. Hyde. Our information was limited to what was in the application
and the additional information that the staff had submitted.
I had no contacts with the transferee at all. I never met them.
  Mr. Keith. This is a unique arrangement where the original licensee
retains a minority interest in the five stations, reserving for himself
the right to influence the decisions of those stations as a minority
stockholder.
I would think it preferable that if there is to be a transaction, the
stations should be bought outright.
  Mr. Hyde. This would undoubtedly be an easier case to handle.
  Mr. Keith. I think that you should have said to the buyer: "Customarily
we require that the transfer be complete. Why if you are
willing to pay the cash don't you do just that and make it a clean
deal?"
  Mr. Hyde. I would suppose that this would be, as you put it, a
cleaner way to handle it but there have been other instances where
permits were assigned and the previous owner retained a minority
interest.
Sometimes the original permittee has found it necessary to engage
the help of other people that have more money as the expense of the
operation became apparent.
There are several other cases where a minority interest was reserved
in connection with the sale.
  Mr. Keith. Is a loan with an option proviso something you are
customarily confronted with?
  Mr. Hyde. I can't recall any other instances where there was a loan
such as this.
  Mr. Keith. The thing that disturbs me, Mr. Chairman, is that you
have approved a package of questionable items, not the least of which
is this loan and option.
  Mr. Hyde. You will recall that this loan was secured by mortgages,
I believe second mortgages, but apparently fully secured by
security.
My suggestion is that this is the counterpart of the offeror who
makes the loan. The loan was not made solely as an inducement to
make the assignment. It was made on the basis of adequate security.^[290]

The Stock Purchase and Loan Agreement between Overmyer and AVC stated that "[t]he Commission shall have granted its approval to the transfer of control of all five of the TV Companies to AVC without conditions or modifications in the terms of Commission authorizations materially adverse to AVC and shall have extended the expiration dates of each of the construction permits referred to in Paragraph IV 5 so that each such date shall be at least ninety (90) days from closing."^[291] In addition, a condition required before closing was that "AVC shall have made the loans to Overmyer Inc. or its subsidiaries called for under the Loan Agreement." The loan to Overmyer was—in fact—a condition of the sale.^[292][293]

Hyde’s testimony alluded to previous cases involving construction permit transfers approved by the Commission where partially withheld stock with an option potentially resulting in a profit to the optionor was present: the transfers were WKBF-TV, Channel 61, Cleveland, September 19, 1967; Overmyer's arrangement with Corwin for KEMO-TV, Channel 20, San Francisco, October 20, 1965; and WOGO-TV, Channel 32, Chicago, January 19, 1965. Further testimony by Hautanen confirmed the Bureau recognized the Commission had established a precedent in approving these cases. Because of the previous acceptance by the Commission of construction permit transfers with an option that included the possibility of a profit above the out-of-pocket expenses, the Bureau assumed this practice was acceptable; no opinion on the subject was made in its report to the commissioners recommending approval of the applications to transfer control of Overmyer’s permits to U.S. Communications Corporation.^{[294][295][296][297][298][299]} Using this precedent, Overmyer's retention of a minority interest in the stations meant he could receive—but only during the option period after several years of delay—a payment far higher than the 20 percent of the out-of-pocket expenses the FCC would allow if the stock were included in the initial sale. However, a loan provision was not present in any of the three previous cases approved by the Commission that included options: the loan gave Overmyer advance payment of the maximum value of his 20 percent share specified in the contract—rather than waiting for U.S. Communications to exercise the option over three years later—to help resolve the warehouse company's immediate financial difficulties. Commissioner Cox had pointed out in his dissent to the WKBF-TV transfer that the approval would create a precedent conflicting with the Top Fifty Interim Policy:

Perhaps the majority will eventually abandon that [Top Fifty Interim Policy] proposal, but if so, that action should be taken consciously and for stated reasons after full consideration of the problem. It should not be slipped into, without explanation, in the course of disposing of particular applications on an ad hoc basis, thereby creating precedents which must control future actions, unless we are to be completely arbitrary and treat others differently than we treat Kaiser [Corporation].^[300]

The Broadcast Bureau's memorandum to the Commission recommending approval of transferring the construction permits, quoted from Overmyer's application that "future financing will be largely the obligation of [USCC]"^[301](brackets in the original). In his dissenting statement, Commissioner Cox noted that "the increase in value [of Overmyer's stock] will be largely due to additional investment by AVC in the construction and operation of the stations."^[289] Answering a question from Keith, Cox maintained that this arrangement where Overmyer held an interest with no expectation of providing further financing should be forbidden by FCC policy:

  Mr. Keith. Another area of concern to me is the fact that here you
have a buyer who wants to obtain the stations for cash. Fictitious or
not, the list price of out-of-pocket expenses, he [U.S. Communications Corporation] had the money and he was eager to do it and the Commission apparently did not inquire as to why he would make that kind of deal instead of this one.
The easiest way to do it is selling it out and going into the trucking
business.
  Mr. Cox. I am interested in the Commission considering a policy
that would announce that we will not permit this division of interest;
that if a man has decided he doesn't want to continue with his permit,
he should either sell it outright, or if he sells part of it and retains
an interest that he should be obliged to bear the burdens of the
business proportionately with the other parties. If he is willing to lend
money to the corporation, if he is willing to put money in to replace
losses, then that is fine.
I can see a case where a man started out in good faith and then did
need assistance. I don't think that is the case in these transactions
where the optionor [Overmyer] is free of any obligation to help
finance the further operation.^[286]

Commissioner Bartley had discussed this same point in his answer to a query from the Subcommittee earlier in the investigation regarding FCC Rule 1.597 (originally 1.365), which requires holding an operating station for at least three consecutive years before selling:

The policy basis of the rule does have application to stations not constructed, because trafficking in Commission authorizations takes place through permittees of bare CP's [construction permits] bringing in, by transfer or assignment, new partners or stockholders with additional money. The original permittee profits by the additional money and increased value of the permit.^[302]

By approving this transfer, the FCC allowed Overmyer to avoid the risk and expense of developing the permits and enabled him to get an interest in a far more substantial enterprise for much less money than was committed initially. He could then wait for U.S. Communications to advance the stations and enjoy the increased value with no further investment or effort on his part. The loan immediately realized Overmyer's portion of the possible increased future worth of the stock he could use to rescue the warehouse company. The Broadcast Bureau's memorandum to the Commission recommending approval of the transfer referred to Overmyer's need for the loan to save the warehouse company as a partial justification for the Commission to consent to transfer the permits.^[303] The Commission had approved an arrangement that could bypass the policy of not recovering more than out-of-pocket expenses. The FCC had no public interest obligation to compromise its rules, policies and procedures for the construction permits to be used to resolve Overmyer's other business difficulties. The Commission had also sanctioned the acquisition of a large group of stations—discouraged, if not forbidden by an interim policy—by U.S. Communications Corporation, which it could not get by the usual method of prevailing in a public interest test involving comparative hearings against competitors. The dissenting commissioners felt that in the desire to encourage rapid UHF development, the Broadcast Bureau and a majority of the Commission had compromised their mandate to protect the public interest.

Despite its justifications for approving the transfer, the FCC proposed new rules to tighten control over construction permit transfers. On August 28, 1968, the FCC issued a notice of proposed rulemaking addressing several concerns revealed during the congressional investigation of the Overmyer construction permit transfers to U.S. Communications. The statement invited public comments suggesting changes or additions before adopting the regulations.^[304] The FCC suggested changing the out-of-pocket policy into a rule that would strengthen the prohibition of using permits to profit without providing service to the public. In addition, new guidelines would control the stock retention by sellers and any options that could provide a profit over legitimate out-of-pocket expenses. The FCC would subject these contract provisions to "the most searching scrutiny" and test the "true significance and character of the retained interest."^[305] The FCC adopted these new provisions the following year.

Congressional Hearings Report

On May 19, 1969, The Subcommittee Report, Trafficking in Broadcast Station Licenses and Construction Permits—Acquisition and Transfer of Five Overmyer Television Construction Permits, was published. It was a critical review of the FCC's grant of the construction permits to Overmyer and the subsequent transfer of control of those permits to the U.S. Communications Corporation.^[306]

The report criticized the FCC's issuance of the permits to Overmyer in 1965 without adequately examining the applications and not holding hearings to investigate their apparent deficiencies. It expressed that the FCC had not fulfilled its statutory obligations: "Instead of basing its findings upon an evidentiary record, the Commission relied upon unsubstantiated representations and refused to subject them either to staff analysis or to the scrutiny of the hearing process."^[307] The Subcommittee stated, "Each of his applications submitted to the Commission failed to supply the appropriate financial information required."^[308] The Subcommittee's investigators discovered that the warehouse company's financial statements submitted by Overmyer to the FCC to prove the financial ability to construct and operate the stations were not audited by outside accountants, which created doubts regarding the assets. Before considering loans for the television stations, outside examination of the warehouse company and Overmyer's personal finances were called for by lending institutions; however, after questioning the banks, the Subcommittee's investigators determined Overmyer had submitted none of this information. As a result, the letters from banks used by Overmyer to show loan commitments were not solid binding agreements to lend funds, as prescribed by the FCC, but were only an offer to consider the loans if the audited statements were acceptable.^[309] Overmyer's personal balance sheet, which was never submitted to the banks or the FCC, showed assets over liabilities of only $963.^[310]

The Subcommittee noted the Broadcast Bureau had stated that Overmyer's applications for the initial grants did not provide sufficient evidence for the estimated first-year income from station advertising; this justification is necessary when including the advertising income in the financing plan for the construction and operation of the stations.^[311] The FCC established this new financial standard in the Ultravision Broadcasting Co. ET AL Memorandum Opinion and Order Amending Issues (FCC 65-581),^[312] released on July 2, 1965. The Ultravision proceeding concerned the financial qualifications of UHF stations operating in markets competing with VHF TV stations. The FCC wanted to avoid repeating the widespread failures experienced by UHF stations in the 1950s when many stations ceased broadcasting:

[W]e shall hereafter require all applicants for commercial broadcast facilities, whether AM, FM, VHF-TV or UHF-TV, to demonstrate their financial ability to operate for a period of one year after construction of the station. In those instances where operation during the first year is dependent upon estimated advertising revenues, the applicants will be required to establish the validity of the estimate.^[313]

The Ultravision standard increased the period an applicant must show financial ability to operate the station without income from three months to one year. The origin of this revised standard was in a decision issued by FCC Commissioners Bartley, Lee, and Cox. On March 12, 1965, they released Memorandum Report and order FCC 65M-282 stating that

we must seek to strike a balance between our desire, on the one hand, to stimulate the earliest possible development of the UHF medium, and the danger, on the other hand, that attainment of our alternate goal may be impaired if there should be any broad-scale repetition of the financial failures of the early UHF years.^[314]

The panel had initially recommended that the applicant show a three-year estimated revenue and establish the basis for that projection; the Commission reduced the requirement to one year.^[315][316] In the Overmyer applications, the Ultravision standard applied to the Pittsburgh, Houston and San Francisco applications because they were pending when the new standard was adopted. The Atlanta, Cincinnati and Toledo applications were under the original three-month policy since they had been awarded before the Ultravision standard was instituted. Although the new financial requirement was ultimately expanded to all broadcast station applications and the revenue projection period was reduced to one year, it was clear the Commission had long-term concerns regarding the success of UHF TV.^[317]

Overmyer's applications with the FCC contained estimates for construction costs and first-year operation that exceeded the funds he represented as reasonably available to meet the Ultravision standard.^[318] Despite Overmyer's lack of financial showing, the Bureau made estimates of station income to justify there was adequate financing to award the permits: their report to the Commission stated, "Furthermore, it is not unreasonable to expect his six stations, all located in major markets, to generate total first-year revenue of $1,000,000."^[319] The Subcommittee noted the Broadcast Bureau's estimates of advertising income were made with no more evidence than Overmyer submitted in his applications: their report stated, "If broadcast station applicants must make a strong evidentiary showing to support their projections of advertising revenue, surely the Commission is under an obligation to do no less when it, too, engages in projection-making."^[320]

Despite FCC requirements, Overmyer did not provide statements showing the net income after taxes for the previous two years for himself and the warehouse company.^[321] The Bureau ignored the omission of these statements and never requested the information before recommending the Commission approve the construction permits. The Subcommittee examined the tax returns filed by Overmyer's warehouse company with the Internal Revenue Service in 1964 and 1965, which revealed operating losses of $29,000 and $94,000, respectively.^[322]

The report characterized the FCC's examination of Overmyer's initial applications:

Commission testimony concerning each one of the five Overmyer CP [construction permit] applications, including Cincinnati, disclosed that the Commission not only failed to perform its legal duty to carefully examine all of his [Overmyer's] submissions presented for the record, but, more inexplicably, failed to take any action whatsoever in connection with the very obvious defects appearing on the face of the applications themselves. Such glaring inconsistencies surely would have been noticed if only the most superficial review had been rendered. An awareness of these patent deficiencies, in turn, perhaps would have cautioned the Commission’s [Broadcast Bureau] staff to scrutinize, in some detail, other portions of Overmyer’s presentations.

"We didn’t go behind the document submitted in the application,”^[323] Martin I. Levy, FCC Chief, Broadcast Facilities Division, stated. None of the five applications contained written evidence that the required analysis had been performed. ^[324]

The Subcommittee observed the FCC's intention was that

the private interests associated with UHF should be afforded special treatment if the public's interest in this broadcasting band is to be fully satisfied. Thus, in the eyes of the Commission, it was more important to expedite approval of Overmyer's original CP [construction permit] applications than adhere to the legal qualification standards for constructing and operating such channels if the UHF vacancies were to be filled—that is, the success of UHF at any cost.^[325]

The report further stated, "A review of the facts pertaining to each of the CP [construction permit] applications led to one conclusion only: The Commission carelessly and in disregard of the law and its own requirements, committed serious errors in making permit grants to Overmyer in the first instance, and compounded that error by subsequently approving their transfers."^[308]

The Subcommittee described the loan and stock option arrangement with the U.S. Communications Corporation as a "sham," guaranteeing Overmyer a profit violating the FCC's out-of-pocket expense policy.^[326] Under the Communications Act of 1934, the FCC can consent to a construction permit transfer only after determining it is in the public interest.^[327] The Subcommittee insisted the FCC abdicated their responsibility by not adequately investigating the transaction's profit potential inside or outside a hearing.^{[326][328][329][330]} Subcommittee investigators' analysis revealed that if the U.S. Communications Corporation picked up the option, using either method of calculation, the purchase price should exceed $3 million, so the loan would not have to be repaid.^[331][332] The report stated, "The option price formula was an ill-disguised means of circumventing the Commission's out-of-pocket expenses policy—a paper attempt to legitimize for FCC consumption the unauthorized $3 million stock payment afforded earlier to Overmyer under the mask of a loan."^[333] The Subcommittee concluded the stock option and loan arrangement was a profit-taking device:

Such a pecuniary scheme should have immediately raised the spector of trafficking and called for a full-fledged review in a public hearing of Overmyer’s activities. Failure of the FCC [Broadcast Bureau's] staff to conduct an analysis of the price formula, among other essentials of this loan arrangement, was contrary to the public interest mandate of the Communications Act [of 1934]. And, the nature of this option arrangement, which places beyond doubt its exercise at a price of $3 million, results in a flagrant violation of the Commission’s out-of-pocket expense policy. By any standard, $3 million for five bare CP’s [construction permits] would be sheer profit taking even assuming the validity of all out-of-pocket expenses which Overmyer has claimed.^[326]

The report included a detailed examination of the out-of-pocket expenses claimed in the sale of permits to the U.S. Communications Corporation. Investigators found overcharges for services, services never rendered, and expenses listed that did not apply to the actual permits transferred.^[334] The Subcommittee stated the FCC had "accepted without question the unverified material Overmyer submitted in support of these expenditures."^[335] The Subcommittee described the FCC's failure to examine the transfer applications:

[T]he Commission chose here to rely completely on the information submitted by the applicant without conducting its own independent staff inquiry to determine the validity of the presentation. . . . [W]hen discrepencies [sic] developed or facts were lacking in Overmyer's applications, the Commission failed to require evidentiary hearings prior to making its determination. This refusal to subject unsupported claims to the test of proof was particularly flagrant in light of the many novelties involved in Overmyer's expense submissions.^[335]

The report commented on the Broadcast Bureau's practice of accepting the certification of applications rather than performing a closer investigation:

[T]he idea prevailed that close scrutiny of broadcast applications by the Commission is not compelling. In the Commission's view, if an applicant misrepresents facts the criminal penalties for such an offense will somehow rectify the situation and safeguard the public interest. Such a view makes a mockery of the law and of the regulatory process. Congress created the FCC to carry out certain critical responsibilities in the public interest. To unlawfully evade such a mandate would be a breach of trust of the most serious consequence. Commission members take an oath to faithfully administer the Communications Act [of 1934]. The fact that there are criminal penalties for misrepresentations in a license application cannot relieve the Commission from its duty of making findings supported by evidence and founded upon the public interest.^[336]

The Subcommittee Report responded to the Commission's testimony that inadequate resources were available to examine the typical applications in-depth:

[T]he idea prevailed that the Commission does not have the manpower or budget to adequately inquire into every application. [FCC Chairman Hyde stated,] "With the resources we have in our place, we don't undertake to substantiate the usual application. We examine them and if we find indications of any irregularity we make a study."^[337] Whatever the Commission's budgetary and manpower difficulties, the largest portion of Overmyer's application flaws were visible without intensive investigation. Therefore, failure to resolve these could not be blamed on any internal organizational needs.^[338]

The Subcommittee noted that Overmyer had not filed the required amendments to applications for an extension of time to construct the TV stations:

Although there was some doubt whether Overmyer filed a copy of all the pertinent contracts and agreements involved in the AVC stock sale and loan, pursuant to FCC Rules 1.613 and 1.615, such filings, in any event, would not have satisfied the disclosure requirements of Rule 1.65. To discharge its duties under this rule, a permittee must file an amendment to the pending application. . . . 

. . . Overmyer's violation of this essential rule should have caused the Commission to hold an evidentiary hearing on his qualifications to continue as a permit holder. Instead, the Commission ignored Overmyer's rule infraction and approved his transfer application, thus breaching its own regulations and policies and enabling Overmyer to evade the legal consequences of his misdeed.^[339]

The FCC's Top Fifty Interim Policy called for a hearing if an application's approval would produce ownership of more broadcast properties than the proposed rule would permit. A hearing would be waived if the applicant met the standard of a "compelling affirmative showing" that the public interest would be served: to satisfy the requirement, Overmyer maintained each UHF station would be in a market facing substantial competition. The Broadcast Bureau stated, "[T]he position of the applicants is that given the array of competition which the permitees here will face once they go on the air (and which WPHL-TV now faces), transfer of the permits to individual buyers is impractical, and the resources of a financially strong owner are needed to meet competition."^[340] However, Overmyer's justification could apply to every competitive situation a UHF station in a major market would encounter. The Bureau noted that Overmyer's request to waive the Top Fifty Interim Policy's hearing met the standard established by prior exemptions granted by the Commission.^[341] The Bureau told the commissioners that "the 'compelling affirmative showing' made here rises to the level of other showings which have been considered adequate to justify a grant without hearing. In view of this and other matters discussed earlier, the Bureau recommends the Top Fifty Interim Policy be waived."^[342] Essentially, the Bureau's justification was that the Commission had set a precedent with earlier waivers of the hearing requirement and that creating a group owner was needed to ensure the stations were successful. The Subcommittee Report further commented on the previous waivers of the Top Fifty Interim Policy:

[T]here had been eight waivers of the 50-market rule. But, even in those cases, there had been some showing that before selling to a multiple [station] owner, the transferor had first tried to sell to a party whose acquisitions of the stations would not violate the interim policy. Such factual support was not present here. Moreover, many of those prior decisions involved licensees of operating stations, not holders of bare CP's [construction permits], who had proven losses of substantial sums. This condition was also not present in the Overmyer transfer, where the majority of stations were only in the earliest stage of construction, despite the lengthy period which had elapsed since the permits first had been granted.^[343]

The Commission's order approving the transfer of control stated, "The Commission is of the view that a grant of this application would foster the development of UHF stations. This would be consistent with the Commission's efforts to provide a more competitive nationwide television service to the public. It is therefore believed the public interest would be served by a waiver of the Interim Policy."^[344] Previously, the FCC stated that the success of UHF stations should not depend on group ownership. In part, the Top Fifty Interim Policy limited the concentration of ownership in the expanding UHF service.^[345] However, the acceptance by the commissioners of the Bureau's justification for the waiver based on the need for group ownership went directly against the policy's stated aim. An inference was that—in this situation—the FCC's goal of quickly expanding UHF service superseded the Top Fifty Interim Policy. The Subcommittee noted the FCC abdicated its duty to protect the public interest by not subjecting this Top Fifty Interim Policy waiver request to a hearing. The report stated, "[T]he FCC proceeded to violate the letter and intent of its own rules, simply by disregarding them, and the Communications Act [of 1934] by failing to base its public interest determinations on findings of fact."^[304] Subcommittee investigators maintained that by using the All-Channel Receiver Act to justify the transfer, the FCC's "main concern here was to safeguard the UHF investments of broadcast entrepreneurs and insure [sic] new sources of UHF capital are given regulatory accommodation even over the proper administration of the law."^[346]

The Subcommittee Report mentioned the absence of a vital public interest finding required by statute before the FCC can approve any construction permit transfer. Section 310 (b) of the Communications Act of 1934 mandates a separate determination of the public interest for each construction permit transfer before FCC approval can be given. During testimony in the Subcommittee hearing session of December 15, 1967, FCC Chairman Hyde insisted that separate public interest findings had been made and outlined in the Bureau's memorandum to the Commission recommending the transfer be approved.^[347] However, testimony was given on July 31, 1968, by the chief of the Broadcast Bureau, who sanctioned the Bureau's memorandum, contradicting Hyde's assertion. Responding to questioning by the Subcommittee, Smith said they made no separate determination for each market:

  Mr. Lishman. Where in the staff memorandum approving this
transfer is there any determination that the public interest for each
of the five CP's [construction permits] would be served by the transfer?
  Mr. George Smith. Paragraph 26 on page 12 contains the recommendation
that the above-captioned applications be granted^[348] and the
Commission of course is aware that it can only grant if it makes a
finding that it is in the public interest. We try to save a little work
where we can and that is the law.
  Mr. Lishman. Is it a fact that there is no determination with respect
to any individual location here as to whether the public interest would
be served or not?
  Mr. George Smith. That is inherent in the memorandum.
  Mr. Lishman. I don't understand that. Aren't conditions different
in each market?
  Mr. George Smith. We recommended that the Commission grant these
transfers for all five.
  Mr. Lishman. Did you make a study of the market conditions in
Cincinnati?
  Mr. George Smith. No, sir.
  Mr. Lishman. Was any submitted to you by the applicant?
  Mr. George Smith. I don't believe so.^[349]

The Bureau considered the transfer of control for these permits as a group rather than making a public interest determination for each station required by the Communications Act of 1934. Overmyer did not justify transferring the individual stations; the FCC never sought that information inside or outside a hearing.^[350] Given these considerations regarding the public interest mandate of the Communications Act of 1934 and the Top Fifty Interim Policy, Commissioner Cox, in his dissenting opinion, stated the actual test before approving these transfers: "I do not think the majority [of the commissioners] can make a finding, on the basis of what is now before us, that there is such an unusual and urgent need for additional television service in these five communities that we must disregard important policies in other areas in order to rush these stations to completion. UHF is important, but not all important."^[351]

The lack of hearings by the FCC was of particular concern:

In preceding paragraphs, the Commission’s own descriptive terminology for certain more obvious uncertainties about the transaction have been underscored. "A novel question," "an unusual situation" was the way some of these very apparent and unprecedented features were referenced. Yet, despite this realization that Overmyer’s submissions might not, on closer examination, measure up to the law and its own standards, the Commission refused to effect the needed review in or out of the hearing process. Indeed, FCC [Broadcast Bureau's] staff refused to recognize the many incompatibilities and discrepancies evident on the face of the documents presented. These issues alone should have provoked a hearing, not to mention the larger policy and public interest implications of the transfer which should have mandated an evidentiary review.

In lieu of facts. the Commission substituted "belief" and "dedication" and "enthusiasm." In place of findings, the Commission recited a string of contentions supported by no factual evidence of record.^[352]

The Subcommittee recommended that "[t]he FCC should set aside its order of December 8, 1967, consenting to the transfer of Overmyer's five CP's [construction permits] to U.S. Co., and hold public hearings in the community where each station is located to determine whether Overmyer should be authorized to continue as a permittee of the five stations."^[353] Also suggested were new legislation and changes in FCC regulations that would prevent profit from construction permit transfers.^[353]

Although Congress did not pass any legislation changing the Communications Act of 1934, on March 5, 1969, the FCC changed many policies and rules to prevent the methods exposed during the investigation that afforded a profit to Overmyer. When selling a construction permit, a hearing is prescribed if there is a possibility of actual or potential financial gain above the provable out-of-pocket expenses. In particular, scrutiny will be given to cases where a seller keeps an interest in the construction permit, which may be disposed of later at a profit. Sellers are not barred from retaining some stock in the construction permit; however, a hearing can only be waived if they contribute capital to the further construction and operation of the station proportionate to their withheld interest. Hearings would be mandatory, with no waiver allowed, for cases involving a construction permit sale where the seller keeps some portion of the stock combined with an option for the transferee to purchase any part of the stock held by the seller. A hearing is also compulsory if the transfer agreement includes an option for the seller of a partial interest to purchase additional stock in the station later from the transferee. FCC Rule 1.597 (e) and (f) were enacted to carry out these provisions. Section (f) (4) addressed the need for hearings if options are included in the sale:

Applications subject to this paragraph (f) will, in any event, be designated for evidentiary hearing in any case where the agreements, arrangements or understandings with the seller provide for the seller's option to acquire equity in the station or to increase equity interests he retains at the time of the assignment or transfer of control. An evidentiary hearing will similarly be held in any case in which the assignee(s), transferee(s) or any of their principals, or any person in privity therewith, has an option to purchase all or part of the seller's retained or subsequently acquired equity interests in the station.^[354][355]

These new regulations would have forced a hearing of the Overmyer transfer case because of the option in the contract for U.S. Communications to purchase later Overmyer's 20 percent interest. A mandatory hearing is called for only if an option exists in the agreement involving the sale of a partial interest in the permit. Interestingly, the regulation would not prevent a seller who keeps a minority interest from selling it later in a separate transaction at a profit. The FCC does not require permission to sell a minority interest, which does not involve a transfer of control of the station—the only obligation is to file the sale details with the FCC.^[356] In addition, the existing policy that prevents the recovery of more than the out-of-pocket expenses in the sale of construction permits was codified into a rule. A new condition was included for transfer applicants to file an itemized out-of-pocket expense list. Further, it defined the specific expenses the FCC would approve. The transfer applicants must also declare no other agreements exist outside those disclosed in the application.^[357][358]