The Airlie Foundation "illegally sold" three films belonging to the federal government to Blue Cross-Blue Shield for more than $100,000, according to a 1974 government memorandum.

The foundation had produced the films under government contract, and its distribution methods were 100 times as expensive as normal, the memo said.

The series of half-hour motion pictures, dealing with drug abuse problems round the world, actually "belonged to the government, as did all rights to the films," but the foundation was never prosecuted, reprimanded or required to make restitution, the memo said.

The FBI this week began looking into government contracts awarded to Airlie Foundation and an allied George Washington University Medical Center group as part of a spreading investigation of infuence-peddling centering on Rep. Daniel J. Flood (D-Pa.).

The sharply worded report on the foundation's film-making endeavors was written on May 16, 1974, by Maurice J. McDonald , then the Department of Health, Education and Welfare's director of audio-visual communications.

He repeatedly criticized Airlie House and the GWU group affiliated with it for "avoidance of competition" in producing and distributing films for the Government.

In documenting how Airlie Productions' high-priced distribution methods were "as much as 100 times as expensive" as normal commercial procedures, McDonald reported that distribution costs for one film made and distributed by Airlie House - a TV show called "Reprieve" - averaged out to $2,400 for each city in which it was broadcast.

Another entitled "The Wasted Ones" - which the report called "a poor film in almost every respect" - cost $2,000 "per city per showing," according to Airlie House's own figures.

"Keep in mind that commercial distributors charge only between $12 and $15 per station to place a film

Regarding "The Wasted Ones," McDonald said, "the quality was so bad that it probably would have had little air time without considerable arm twisting and other forms of persuasion."

Distribution rights to the drug abuse series, the report pointed out, were sold by Airlie House "as an exclusive to Blue Cross-Blue Shield at the same time that Airlie House was being paid by HEW to distribute it."

Blue Cross-Blue Shield was not told that the films were "the property of the government." the memo continued, "and the credit lines promised to BC/BS were to include a university and a medical society."

McDonald noted that most of the allegations continued in his report had been "denied by Airlie House" but he denounced the sale to Blue Cross-Blue Shield as "a flagrant violation of contract and of federal regulations." Airlie's lawyer said he would have no further comment yesterday.

Originally designed as a $135,000 project dealing with drug abuse in the United States, the films grew into a $390,572 worldwide trilogy under a contract with the National Institute of Mental Health. However, the report noted, the movies "were made available to Blue Shield before they were made available to NIMH."

Beyond that, McDonald wrote, basing his remarks on a series of HEW audits:

"Even though the drug abuse films belonged to NIMH in their entirely, Blue Shield bought prints of them from Airlie House in order to carry out their exclusive distribution. Prints were valued at $85.50 each in the NIMH contract, but Airlie House sold prints to Blue Shield at $133.48 per print."

Under the NIMH contract, Airlie House was also supposed to produce and distribute printed material about the films but when they were produced, with Blue Shield financial support, they "gave credit to George Washington University, Airlie Foundation, and Murdock Head. Only occasional and incidental credits were given to NIMH."

Mudrdock Head is the director of the Airlie Foundation. A former aide to Rep. Flood, Stephen Elko, has alleged in court records that Head paid Flood and Elko a total of $77,000 between 1971 and 1973 in exchange for Flood's assistance on another matter.

Head has made no comment beyond a prepared statement saying that the Airlie Foundation itself "has made no contributions to any elected official, political party or political campaign."

In the early 1960s, the foundation's TV film making and distribution was carried out by a division known as Airlie Productions, but it was replaced in 1963 by Ravens Hollow, Ltd., which then rented land, some buildings and an airplane from the Warrenton, Va., foundation. Following one HEW audit, according to a statement by the foundation around 1970, it was decided "that all subsequent contracts would be more appropriately placed in The George Washington University."

"Shortly thereafter," the foundation explained, "Dr. Murdock Head accepted the chairmanship of the Department of Medical and Public Affairs and all subsequent contracts/grants with the DHEW have been awarded to The George Washington University."

A 1970 HEW audit showed a total of $3,027,692 in grants and contracts to Airlie House or GWU between 1964 and 1969. More recent figures were not immediately available although McDonald, who is still with HEW, said yesterday he knew of no recent film contracts between HEW components and the Airlie group. He suggested they might have been preoccupied by work for other federal agencies such as the Agency for International Development.

In assailing what it described as Airlie House's "locked-in distribution system," the 1974 HEW memo said an Airlie representative was required to take the finished film to each city in which it was to be shown, "persuade (in one way or another) the local medical society to sponsor the film on a local television station, and have the film broadcast (usually in prime time) . . ."

Under that setup, the report said, it took six trips to Houston to arrange for a showing in that city.

McDonald also questioned the wisdom of seeking prime time for government film, "particulary films whose quality would not automatically qualify them for showing in a prime time slot."

According to the report, Airlie House was always unwilling to submit to competitive procedure to secure HEW contracts and apparently managed to avoid them through a combination of actors, such as "contrived criteria" depicting Airlie House as having "the unique capability . . . to perform the work desired.

In addition, McDonald complained, "there has been strong pressure put on the department and its agencies from time to time to waive competitive procedures in the case of Airlie House. Letters, telephone calls, and personal communications have been received by HEW officials demanding that regulations and procedures which were instituted to protect the taxpayer and the integrity of the federal procurement system be put aside."

The memo indicated that prosecution or some form of legal action had been considered within HEW in the case of the drug abuse films, but that nothing was done.

"The only action taken as a result," McDonald recounted in 1974, was a decision by then-Secretary Elliot Richardson "to notify agencies in the department of the facts in the case in the event that they should contemplate future dealings with Airlie House."

McDonald said in his memo that he did not know if this was ever done and he said yesterday that he still does not know.

Richardson did not return several phone calls to his office yesterday.

In interviews yesterday three former senior HEW officials confirmed much of the memo's contents. One of the officials who asked not tobe named, said it was his understanding that pressure "from the Hill" was being applied to HEW in the late 1960s on behalf of Airlie Foundation. He said the pressure apparently involved others in Congress besides FLood.

James Kelly, former assistant HEW secretary and controller, and Manuel Hiller, former deputy HEW general counsel, said top HEW officials discussed with Richardson the idea of taking some of the allegations against Airlie to the Justice Department for further investigation and possible prosecution.

"As best I recall," said Hiller, "Richardson didn't feel that what we had would have warranted legal action."

In related events yesterday, a knowledgeable AID official confirmed that the FBI's investigation into that agency involves possible influence peddling by Flood and former Rep. Otto Passman (D. La.).

HEW officials declined to say whether federal investigators are looking at their files.

AID spokesman also disclosed that a $2 million contract was awarded to Airlie last month without competitive bidding. The award was made despite a letter last October from AID Assistant Administrator Sander Levin to Head saying that future contracts to Airlie would be let on a competitive basis.sday night.

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