Connected Lawyer Pledged Tax Credits Before They Were Approved
Tuesday, June 05, 2012
Less than a week before Curt Schilling’s 38 Studios defaulted on a $1.125 million payment due to the Economic Development Corporation (EDC), the state’s Film and Television Office was questioning whether the video game company was even eligible to receive tax credits that might have saved the cash-strapped company, according to e-mails obtained through a public records request.
On April 26, Film and Television Office director Steve Feinberg sent an e-mail to former EDC executive director Keith Stokes asking whether 38 Studios’ agreement with the state qualified the company for tax credits. Feinberg questioned whether the company was entitled to access tax credits based on the $75 million loan guarantee it received from the state.
"According to 38 Studios, and my understanding, 38 could not access the tax credit program based on the funds that were guaranteed by the state," Feinberg wrote to Stokes. "However, they are stating that they are not using funds which were guaranteed by the state. These are new, additional funds."GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST
Stokes never responded to Feinberg’s e-mail. A follow-up e-mail sent on May 7 was also not returned. Nine days later, Stokes resigned from his post.
38 Studios Lobbied for Tax Credits in 2010
Despite the confusion, the Providence Journal reported Saturday that $14.3 million in anticipated tax credits had already been pledged as collateral to secure about $8.5 million in loans for the struggling company, which was unable to make payroll and laid off every single employee in May.
The pledged tax credits and loans were arranged by Providence lawyer Michael Corso, a top tax credit broker with close ties to House Speaker Gordon Fox. The loans came from BankRI, which was co-founded Malcolm G. Chace III. Coincidentally, Corso used to work for Chace’s cousin, Arnold, at Cornish Associates.
Governor Chafee said Monday that he first learned 38 Studios was asking about tax credits last November, but noted that the discussion “went away” quickly. That didn’t stop 38 Studios from continuing to press Feinberg to approve the credits, however. Three days after Christmas, the company’s Chief Financial Officer, Rick Wester, sent a letter to Feinberg claiming the company was eligible under its agreement.
“Specifically, Section 6.02 (u) of the Agreement, which governs the Company's use of Motion Picture Production Tax Credits, permits the use of the tax credit program once the Company has met certain conditions," Wester wrote.
Significant Risk
Still, Corso was taking a significant risk by posting the tax credits as collateral when it had only initial certification from the Film and Television Office. According to the rules and regulations of film tax credits, “the letter of initial certification is only a statement of conditional eligibility for the production and, as such, does not grant or convey any Rhode Island tax benefits.” 38 Studios was also never incorporated in Rhode Island, which is part of the requirements for tax credit eligibility.
“To assume, an individual or an organization will get tax credits is risky just because an application is filed,” said Dr. Edward Mazze, distinguished University Professor of Business Administration at the University of Rhode Island. “There is a considerable amount of information required before any tax credit is granted which may include audited financial statements, payroll records, supplier invoices, company information and personnel records. Anywhere in the review process, the application can be denied.”
Mazze said it would be illegal for unauthorized individuals to promise tax credits.
“Buying or selling tax credits before they are approved is a bad decision because the credit may never come about,” he said. “It would be criminal if someone outside of a tax credit granting authority promises tax credits to individuals and organizations without authority.”
More Oversight
For State Representative Teresa Tanzi, who has consistently called for more oversight over tax credits since she was elected in 2010, the 38 Studios saga is just the latest problems to arise from a tax credit system that has few checks and balances.
Tanzi said that while the film tax credit laws are written “quite well,” only seven percent of all tax credits have “any stated purpose.” She compared the situation at 38 Studios to low-income residents who seek payday loans, noting that Schilling was desperate for any money he could get to keep the company afloat.
“38 Studios puts a spotlight on why we need consistent oversight on these things,” Tanzi said.
Chafee: “We’ve Been Scorched”
Separately, Col. Steven O’Donnell, head of the Rhode Island State Police, told GoLocalProv on Monday that he is still looking into what happened at 38 Studios. He said an investigation is not yet underway. During a press conference Monday, Chafee referred any State Police questions to O’Donnell.
The Governor also nominated three Rhode Islanders (Roland Fiore, Stephen Hardy and William Holmes) to join the EDC board. Coincidentally, Holmes represents Rhode Island Carpenters Local 94, which worked on the interior of 38 Studios’ downtown headquarters.
Chafee pledged a more conservative approach from the EDC when it comes to loaning taxpayer funds in the future.
“We've been scorched, we've been burned,” he said referring to the 38 Studios deal.
Dan McGowan can be reached at [email protected].
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