Raimondo Using Same Consultant for Truck Toll Plan that RI is Suing for 38 Studios
Friday, July 10, 2015
First Southwest is a key defendant in the state of RI’s effort to recover the millions in loss loan funds and damages. As the state's financial advisor, First Southwest is currently working with the Governor’s office and the Department of Administration on the controversial plan to put tolls for trucks in Rhode Island to fund a revenue bond of $600 million to rebuild Rhode Island’s decaying highway and bridges. As GoLocalProv reported this week, Rhode Island has the third worst roads in America.
"It is bewildering that Governor Raimondo continues to use the services of First Southwest while a lawsuit by the State of Rhode Island is pending against them. The state's lawsuit against First Southwest alleges that the firm 'intentionally defrauded the EDC Board and the EDC' and that they gave the state advice on the doomed 38 Studios project that was 'fatal to the entire transaction," said Monique Chartier with the advocacy group RI Taxpayers. "Why would Governor Raimondo continue a professional relationship with a firm that the state itself contends rendered advice that was so bad and fraudulent, it will end up costing taxpayers $89 million? Or does the Governor believe that First Southwest gave Rhode Island good advice on 38 Studios, that the state has no case and that it should drop its lawsuit? If she does not, how can she have it both ways?"
The Governor's office did not respond to questions pertaining to the decision to continue to retain First Southwest, but confirmed that the firm is currently advising state departments with the bond proposal, which was part of the truck tolling plan approved by the state Senate during the recent General Assembly session -- but did not see action in the House before both chambers recessed, with talks of a fall session to consider a toll plan still on the table.
First Southwest “Allowed the EDC Board to be Deceived”
In the suit, the State of Rhode Island asserted, "First Southwest knew or should have known that the April 1 Projections did not include those guaranty fees and, therefore, overstated 38 Studios’ projected cash flows by those amounts.”
In addition, according to the lawsuit, “[EDC Deputy Director Michael] Saul discussed the business terms and First Southwest reviewed the risks associated with the transaction, but no one informed the EDC Board of the inevitable shortfall, or acknowledged that the Term Sheet incorrectly stated that the net proceeds would provide sufficient financing to enable 38 Studios to relocate to Rhode Island and complete production of Copernicus, let alone 'capitalize the Company’s growth and expansion in Rhode Island.' At the close of the meeting, the EDC Board authorized the EDC staff and counsel to continue negotiations towards an authorizing resolution. First Southwest received, reviewed, and suggested changes to virtually all of the various revisions to the Term Sheet, including the final several versions that contained the representation that it was understood that the 'net' proceeds would provide the necessary financing to . . . relocate 38 Studios to Rhode Island and complete Copernicus .”
The suit also asserted that, “First Southwest agreed to be the EDC’s 'financial advisor' in the 38 Studios transaction, and First Southwest’s duties to the EDC Board included 'assistance in the development and analysis of the 35 Term Sheet.; The EDC Board also was relying on First Southwest and (Maureen) Gurghigian for the 'development and analysis of the business points and borrower benchmarks.' This false assertion—that the net proceeds 38 Studios would receive from the EDC loan were adequate to finance relocation to Rhode Island and completion of Copernicus— was both a 'business point' and a 'borrower benchmark.' Rather than “analyzing” this statement and informing the EDC Board of its falsity, Defendant First Southwest allowed the EDC Board to be deceived.”
As a result in part of the collapse of 38 Studios, Rhode Island’s economy has been stuck in neutral and residents have been reluctant to support state investments to private projects after the failure of entities like First Southwest. The ground swell of opposition to the request of more than $120 million in public financing for a new stadium in Providence for the Pawtucket Red Sox is the most recent example post 38 Studios.
First Southwest and others including top level officials at RI Economic Development Corporation, bond counsel and Wells Fargo were all scorched in the suit for their failure to identify the risk to the state in the case of a failure by 38 Studios.
"At all times relevant to this complaint, Defendants Stolzman, Afonso, Saul, Stokes, First Southwest, and Wells Fargo knew or should have known that the bonds to be issued by the EDC would not be general obligations of the State of Rhode Island or the EDC; that, in the event that 38 Studios defaulted in its payments to the EDC, the Rhode Island General Assembly would have to decide whether or not to appropriate funds to pay the bondholders; and that each such appropriation process could take up to a year,” said the suit.
The firm of Moses Alfonso and Ryan, which served as bond counsel on the 38 Studios deal did settle with the state of Rhode Island and paid $4.4 million to resolve the case.
First Southwest has worked to block media coverage and has tapped politically connected attorney Gerald Petros.
Ted Nesi of WPRI.com reported on July 7 that the attorney for First Southwest fought to block the press from attending a recent settlement hearing. “At the start of Tuesday’s hearing, Gerald Petros, an attorney representing defendant First Southwest Co., asked R.I. Superior Court Judge Michael Silverstein to make the lone reporter present leave the room so information could be discussed in secret, saying that’s how it’s been so far…Silverstein acquiesced and ordered the reporter to leave the room.”
As GoLocalProv wrote in May 2014, “First Southwest counsel Gerald Petros with Hinckley, Allen, and Snyder has given over $15,000 to Rhode Island candidates, including $4,500 since 2010 to General Treasurer and Democratic gubernatorial candidate Gina Raimondo. Petros' listed contributions are nearly all to Democrats, including $3,000 to former General Treasurer and gubernatorial candidate Frank Caprio, $2,450 to Providence Mayor Angel Taveras, and contributions of less than $1,000 to Governor Lincoln Chafee, and former Speakers of the House Bill Murphy and Gordon Fox."
During his campaign, Rhode Island General Treasurer Seth Magaziner said he didn't believe the state should continue to retain First Southwest, in light of the litigation
START Video at 17:00 Minute Mark
"We shouldn't keep First Southwest...we shouldn't be taking advice from a firm we are suing," said Magaziner during a League of Women Voters debate on August 21, 2014.
However, under Magaziner there has been no change to date. The state will continue to use First Southwest until at least the end of 2015, when the Treasurer's office said it would be putting out a request for proposals for a new financial advisor.
"As you can see in the RFP calendar launched by Treasurer Magaziner, the Treasurer plans to put the financial advisor contract out for bid before the end of the year," said Treasury spokesperson Shana Autiello. Based on similar RFP's it may be mid-2016 before the state engages a new financial advisory firm.
Related Slideshow: Who Wants to Pay and Who Wants to Default on the 38 Studios’ Bonds
GoLocalProv showcases which Rhode Island politicians and organizations want to pay or default on the 38 Studios' Bonds.
Republican candidate for Governor
“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better...As long as there are serious legal questions still to be decided, we need to stop the repayment process."
Greater Providence Chamber of Commerce
Laurie White, President of Chamber of Commerce
“I think it’s important that action occur quickly. Our view is that economic development in Rhode Island has to be the main event. … We need a very dramatic, aggressive effort to change the path that we’re on.”
Democratic candidate for Governor
“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain. We cannot afford to default on our obligations.”
Governor of Rhode Island
“The candidates who can’t understand these two obvious truths are unfit to be Governor. The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to ‘junk bond’ status. We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island. In addition, failure to honor our obligations could have harmful effects on the pending lawsuit.”
Mike Stenhouse, CEO of RI Center for Freedom and Prosperity
"It's not just about not paying off bondholders. Bondholders are adults, they knew the risk. It's not just a question of the credit agencies. It's a question of what would payment crowd out, what reforms could we achieve with that money, such as sales tax reform, which would enable us to create jobs."
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