Mystery Flight : Plane Lands Investors in Confusion
The news literally fell out of the blue, landing on furniture company executive John Blackwelder and his wife as they watched television on a warm summer’s evening in Charlotte, N.C.
A Washington lawyer named Thomas Root had been miraculously plucked from the Atlantic Ocean, the newscast said, after a bizarre six-hour airplane flight in which he slumped unconscious in his Cessna 210 while the automatic pilot carried him toward what seemed certain death.
For the Blackwelders, Root’s name rang a bell. Indeed, a letter from him was lying on their armoire at that very moment--a letter related to thousands of dollars they had invested in applications for federal licenses for new FM radio stations. Root was their lawyer in the deals.
About to Call
“I was just about to call that guy again,” Blackwelder told his wife. What was going on?
Why had Root’s strange flight taken place--what was he doing, what caused him to lose consciousness, how did he survive the crash and how had he been wounded in the abdomen by a gunshot? No one, except perhaps Root himself, could say for sure.
What was going on with the Blackwelders’ investments in radio station applications, on the other hand, was in some ways a mystery only to the Blackwelders and other unwary investors in cities and towns scattered across the land.
In Washington, a city of insiders, the business about the radio stations had been a subject of knowing glances for quite a while.
And the revelations that have followed Root’s ill-fated flight appear to be a classic illustration of the perils that await ordinary investors when they venture into an esoteric field dominated by a relative handful of sophisticated insiders. It is also a story of deregulation run amok.
Piled in Stacks
At the Federal Communications Commission, which controls radio station licensing in the nation, applications for FM radio licenses filed by Root together with a little-known Georgia company called Sonrise Management Services, Inc., were piled in stacks. So numerous were they that they formed a significant part of the 2,300-case backlog that developed during the FCC’s eight-year rush toward deregulation.
Sonrise was a company with problems. To insiders--the communications lawyers, federal regulators and others in the field--Sonrise’s success at finding investors who would pour money into quests for licenses that almost never materialized was a subject of derision.
Within the fraternity, Sonrise was known to be a company under investigation for possible securities-law violations and for running what one formal FCC legal opinion months ago termed a possible “scam on innocent investors.”
To thousands of investors like the Blackwelders, on the other hand, investors who have sunk more than $15 million into Sonrise-organized license application efforts, the firm’s troubling record was a secret, veiled behind a web of evasions and a bureaucracy with little time to look out for the investors’ interests.
To the investors, Sonrise was a company that promised management with a “Christian ethic.” For some, it simply offered an opportunity for profits. For others, Sonrise offered a special, more personal inducement: many of the licenses it was avowedly seeking were to be used for religious broadcasting; many who put money into Sonrise’s projects saw them in part as an opportunity to advance their faith via the airwaves.
And--but for Tom Root’s strange adventure--all the investors might still remain in the dark about the activities of Sonrise.
When Root’s plane plunged into the Atlantic last Thursday near the Bahamian island of Eleuthera, he had filed a flight plan for Rocky Mount, N.C., where he was to participate in a legal proceeding involving one of the more than 160 Sonrise-related FM partnerships. As news of the crash spread, members of Washington’s tight-knit fraternity of communications specialists began to wonder: Was this really an accident?
The questions became public the next day, when police in Hollywood, Fla., where Root had been taken to the hospital, revealed that he had been shot. “It appears to a self-inflicted gunshot wound,” police spokesman David Steele said. Root and his family have denied this adamantly ever since.
If Suicide, Why?
But the possibility raised another intriguing question: If it was a suicide attempt, why?
Interviews with more than a score of communications lawyers, past colleagues of Root’s and current clients, together with an examination of hundreds of pages of FCC documents have disclosed repeated difficulties in Root’s law practice.
But even more, the evidence has raised disturbing questions about Sonrise, Root’s current chief source of business.
Over the last two years, Sonrise has been in the business of organizing groups of investors to apply for radio licenses. At least 163 such applications have been filed so far. Virtually all are now under scrutiny at the FCC. None of the applications have yet been fully approved and the handful that have received first-stage clearance by the FCC are now under renewed challenge.
To date, although some investors have succeeded in getting refunds, none seems to have earned any return on investments that in some cases exceeded $150,000.
A senior FCC official, Administrative Law Judge Walter C. Miller, has labeled the company an “application mill” and raised questions about whether its applications for licenses were “shams.” North Carolina securities regulators have been investigating possible securities violations by the company in that state, where many of its investors reside. And a Tennessee law firm, representing a group of Georgia investors in Sonrise partnerships, accused the firm--in a complaint to Georgia consumer protection officials--of “apparently fraudulent and illegal actions” taken in inducing “unsophisticated investors” to place money in its projects.
Sonrise officials declined repeated requests to be interviewed for this story. A company receptionist said Tuesday that the firm would not comment beyond a brief statement that it released Friday. In that statement, the company noted that it “has never been found guilty of any securities-related violation or wrongdoing, nor has any enforcement proceeding been instituted or charges brought.”
Root and his family members did not respond to a series of written questions sent by telefax to him at the Florida hospital where he is recuperating.
Root began his work in communications law in the early 1980s. He was “a super, super intelligent person,” recalled his employer at the time, Edward M. Johnson, a controversial Tennessee businessman and promoter. “Tom always knew how to get what he wanted,” Johnson said. “If he couldn’t get it through the front door, he’d get it through the back.”
At the time Root entered the communications field, the Reagan Administration’s drive for deregulation--along with changing technology--was revolutionizing the field. And one of the Reagan Administration’s policy changes transformed the landscape of radio licensing:
FCC rules had long given preference in handing out broadcast licenses to people who live in the area to be served by a new station. But in 1981, the commission decided that if a partnership applied for a license, only the residence of the general partner would be considered. Limited partners--people who put up money but take no active role in management--could live anywhere.
Then, in 1982, the Administration backed changes in communications law that allowed applicants to pay unlimited sums to buy out competitors seeking licenses. Such settlement payments quickly ballooned, often reaching into the mid-six-figures, sometimes higher.
The combination of those two changes was dramatic.
Suddenly, a group of investors from any part of the country could find out about a broadcast opening, form a partnership, find a local resident to serve as the general partner--preferably a woman or a member of a minority group or a person with some broadcast experience to take advantage of preferences in FCC policy--and bid for a license. If they won, they would own a valuable franchise.
Even if they didn’t win--even if their chances of winning were small--they often could count on other, more serious, applicants to pay large sums to get rid of them.
And consultants, by putting together such partnerships and helping them through the process, could make large profits.
That is Sonrise’s business. In 1986, two men from Georgia, Ralph M. Savage and Eugene B. White, and one from North Carolina, Charles D. McFall, along with several partners incorporated Sonrise Management Services.
McFall, like several other people who would work as salesmen for Sonrise over the next three years, had owned a distributorship with Amway, the home products company known for its aggressive marketing and for complaints that its structure amounted to a pyramid scheme.
Sonrise, according to sworn statements by McFall and Savage in FCC proceedings, was organized similarly: regional sales representatives who provided distributorships to area representatives who in turn provided distributorships to local representatives.
When Sonrise was formed, the hottest field at the FCC was the lottery for cellular telephone franchises. The firm organized 30 partnerships that applied in hundreds of markets. Several made considerable amounts of money. Then, in 1987, when the cellular markets were exhausted, the company switched to marketing applications for FM radio stations and it engaged Root to represent its applicants before the FCC.
The Sonrise system, as outlined in depositions and the company’s own promotional material, was simple. Sonrise, acting through a pyramid of salespeople, would seek out investors. Most lived in the Carolinas, Georgia and northern Florida, although some are to be found spread across the nation from Virginia to California. In sales meetings and promotional videotapes, White and Savage would tout the potentially huge returns that investors could earn from radio.
Christian Claim
And not only could a person earn money, sales representatives would explain, Sonrise was a Christian company. Why, even its name proclaimed its faith--S-o-n-rise. Many of the partnerships the company would proceed to organize had a religious theme, as shown by the names they chose for themselves: Good News Limited Partnership, Emmanuel FM, Paradise Communications, Holy Spirit, Holy Hands.
“I’d never invested in radio before,” said Dr. Robert L. Groat, a Greensboro, N.C., ophthalmologist who was one of Sonrise’s largest investors, entrusting more than $100,000 to the firm’s care. When questions would come up in sales meetings, “they had good answers,” Groat said.
“Obviously, now, looking back there were discrepancies.”
In hindsight, one of the puzzles was the price. According to several Washington attorneys active in the broadcast license field, a group of investors who wanted to own a radio station probably, on average, could get an application filed, the necessary engineering work done and lawyers paid for about $15,000 to $20,000. Sonrise, by contrast, collected roughly $90,000 from each of its partnerships.
According to a sworn deposition by Savage, the company’s former chairman who now serves as a Sonrise consultant, that money would be divvied up: Sonrise itself would keep $19,700, plus another $27,000 that would go in commissions to its sales staff; $10,300 would go to pay engineers and FCC filing fees; the remaining $32,000 would be held for Root.
In fact, Sonrise would retain virtually all the money in its hands. According to a billing statement inadvertently submitted by Root to the FCC in a Sonrise case, the money provided for Root would be kept by Sonrise and parcelled out to him in $1,500 increments as he billed the firm.
Root, through his brother Todd, told the Washington Post Sunday that he has been paid roughly $1.6 million by Sonrise so far. A source close to Root told The Times that Root recently had said that the company owed him another $2 million in unpaid bills.
A second question involves the structure of the partnerships. Investors interviewed by The Times repeatedly said that their role, as they understood it from the beginning, was to be passive “limited partners.” Only the local “general partner” that Sonrise would locate for each application would have a management role in the station, they were told.
That structure would accord with the FCC’s preference for local control of stations. But the sale of limited partnerships is, under the laws of most states, usually considered the sale of a security, and security sales are heavily regulated, requiring extensive disclosure of risks and costs.
In a move that avoided subjecting itself to those rules, Sonrise would market its packages as general partnerships. Then, later on, it would legally convert them to a limited-partner structure. The question of whether that pattern complies with the law is at the center of the securities investigation in North Carolina, officials say, and has been questioned by authorities in other states.
A third problem involved the general partners. The main benefit of working through Sonrise, investors were told, was the firm’s expertise at locating appropriate individuals in each community where a new station would be located. And in fact, many of the general partners located by Sonrise were highly qualified.
In several cases, however, they were not. In at least two cases, the general partner located by Sonrise later turned out to have a criminal record, dooming the license application. And in virtually all cases, the Sonrise general partners lacked a key criterion: money.
The FCC requires license applicants to certify that they have on hand or committed to them sufficient funds to build a station and operate it for three months before ad revenues begin flowing in. But the Sonrise general partners almost invariably had no funds at hand except the $90,000 that the partnership had raised. And those funds, Sonrise already had taken.
Finally, the Sonrise partnerships have faced a recurring question: Who’s really in charge? FCC rules require that broadcast license applicants actually be the people who are going to run a station if it is licensed. But in Sonrise’s case, the firm’s key role in making decisions--from locating the partners to hiring their lawyer to holding their money and preparing their tax returns--have suggested to FCC officials that Sonrise, not the partnerships, was really in control.
Repeatedly, that question has been raised about Sonrise applications and, routinely, the applications have been withdrawn, preventing the questioning of Sonrise officials in a hearing. Partners who inquired about why their applications had been dropped would be offered “feeble excuses,” said Groat.
The result, in case after case has been that Sonrise-related applications have been dismissed as they have come to hearings. In some cases, investors have been promised compensation after they inquired--usually new shares in another partnership. In most cases, however, investors interviewed by The Times said that they had been given virtually no information about the status of their investments or the legal difficulties that their partnerships were encountering.
And in all that, some of them have begun to wonder, where were the watchdogs?
The answer, communications lawyers say, is that the theoretical watchdogs--the FCC staff--has been so short-handed and overwhelmed by a flood of applications that in recent years it has ceased almost entirely to monitor the bona fides of new applicants. Checking has involved little more than making sure applicants had complied with proper engineering standards and had filled out their forms correctly.
The commission, said attorney J. Richard Carr, a longtime communications-law expert, effectively left the job of policing the process to the private bar, assuming that rival applicants would hunt out frauds. But often, he explained, private attorneys and their clients have found it cheaper to buy out questionable rivals rather than raise questions about them publicly.
The Reagan-era rules changes, a special committee of the Federal Communications Bar Assn. wrote in a recent review of the situation, have “greatly increased the incidence of speculative and sham applications.”
A commission spokesman Tuesday defended the agency’s record, noting that the commission staff has now begun investigating both Sonrise and the whole subject of sham applications.
“We’re following the normal procedures,” Patricia Chew said. “The wheels here turn very slowly.”
Staff writer Michael Ybarra and Times researcher Edith Stanley contributed to this story.
