One-on-One: Kilmartin Says 38 Studios Probe Nearing Completion
Monday, May 09, 2016
"I believe the state police are close to a wrap up," said Kilmartin, though he said he couldn't provide a specific time frame. "And we will see how that investigation ends up."
The closing of the Rhode Island State Police investigation into 38 Studios, and the revelations and potential prosecutions that might arise from it, would thrust the highly controversial issue back into the spotlight once again. It could also finally bring some closure to an investigation that's spanned about four years running.
The issue, which originated when associates of former House Speaker Gordon Fox, who is now serving time in federal prison for misusing his campaign funds and taking a bribe while on the Providence Licensing Board, met with a 38 Studios Board member and warmed to the idea of the state providing a method for the company to obtain some much-needed capital.
That year in 2010, the General Assembly created a loan guaranty program through what was then called the Rhode Island Economic Development Corporation (EDC). Shortly thereafter, a $75 million loan guarantee was issued for the company. By 2011, the company was bankrupt.
"The first thing I think about when I think of Peter Kilmartin is the 38 studios issue," said Brandon Bell, the state's Republican Party Chairman.
Bell argues that the fact that Kilmartin voted for the loan guaranty when he served in the Rhode Island House of Representatives that paved the way for 38 studios coupled with the fact that he was close with House leadership at the time are reasons that he should have supported the hiring of an independent prosecutor for the case.
"If we had an independent prosecutor, I think that would have gone a long way," said Bell.
Kilmartin points out that he resigned his position as House Majority Whip several weeks prior to the floor debate on the budget, in which the program that paved the way for the ill-fated deal was passed.
"If I had any knowledge about where those funds were going to be going beyond what was said on the floor of the House, I would have considered bringing in an independent prosecutor. But that just wasn't the case," said Kilmartin.
The Attorney General spoke at length about his accomplishments in office, but said he could not comment about ongoing investigations or even, in some cases, whether his office was involved.
In particular, Kilmartin refused to comment about the resignation of former state representative and House Finance Chairman Ray Gallison. He wouldn't even acknowledge whether his office was assisting in an investigation. The reason he cannot broach the subject, he said, is because commenting could jeopardize the investigation, he said. A good defense lawyer, he argued, would jump all over such a mishap.
"And we've got a lot of good defense lawyers in Rhode Island," said Kilmartin.
Asked about the recent controversy regarding Governor Gina Raimondo's Chief of Staff Stephen Neuman, who GoLocal reported was working with DraftKings lobbyists and managing legislation that could impact the company while his wife was applying for a job with the company, Kilmartin said the issue is in the purview of the Rhode Island Ethics Commission to investigate, not his office, if there is reason to believe there was wrongdoing.
But Kilmartin was readily able to point to some high profile prosecutions that his office either handled or facilitated, involving people with whom he had professional relationships previously. Those examples include former North Providence Police Chief John Whiting, who was convicted of stealing $714 from a woman's purse, and former House Speaker Gordon Fox. (In Fox's case, the statute of limitations had expired on the federal level, but Kilmartin agreed to prosecute him on the local level if he refused to agree to a federal plea bargain that took the crime into account.)
"I believe the US Attorney's Office and my office are, I would venture to say, as close as any two in the country," said Kilmartin. Peter Neronha, the US Attorney for Rhode Island, has himself spoken highly about the collaboration between the two offices in the past.
A Low Profile Politician
Kilmartin lives in Pawtucket's Darlington section. He doesn't grant many press interviews. Kilmartin said he's not interested in claiming the credit for things that happen under his watch. But as a retired police officer, what he's most concerned with is justice, he said.
He pointed out that the RI AG's office and the federal offices of Social Security Administration (SSA), Office of Inspector General, established a Cooperative Disability Investigations (CDI) Unit to investigate and prevent fraud in SSA’s disability programs. The program reviews claims for red flags and prevents payments that would have been paid otherwise. That's saved RI roughly $1.7 million since February of 2015, because in many cases, Kilmartin said, the state pays benefits that have been approved by the federal government.
In 2013, Kilmartin assigned a prosecutor to look into unemployment fraud cases at the RI Department of Labor and Training. From 2013 through 2015, that's resulted in $490,612 in court ordered restitution for unemployment insurance fraud. From 2014 through 2015, courts have ordered $53,740 in restitution to be paid in workers' compensation fraud cases.
Kilmartin said that the reason he hasn't been more aggressive in pursuing civil actions against industries such as the finance industry or the pharmaceutical industry is because a Rhode Island Supreme Court case, RI v. Piedmont, ruled that the Attorney General's Office doesn't have civil jurisdiction to pursue a case that another RI state agency or federal government agency has jurisdiction over.
"That's really limited our ability to initiate suits, particularly in the area of deceptive trade," said Kilmartin.
To circumvent the problem, the RI Attorney General's Office has signed on to multi-state lawsuits in order to achieve similar ends.
The most recent example of that, he said, was last week's announcement of a state and federal $784.6 million dollar settlement reached with Wyeth, a wholly owned subsidiary of Pfizer, Inc. The settlement resolves allegations that Wyeth knowingly underpaid rebates owed under the Medicaid Drug Rebate Program from 2001 until 2006. Of that settlement, Rhode Island will see $5.46 million, which will go to the state's Medicaid Program.
Another multi-state settlement Kilmartin was involved with was the Google suit over allegations that the company sold drugs to Americans without a prescription. The $60 million given to the state has been used for various state building and infrastructure upgrades. A new Attorney General's Building to handle all of the consumer related issues, such as finger printing or BCI checks, will be built in Cranston using the funding, which will make the office more 'customer friendly', Kilmartin said.
He said he's relentlessly sought to make the RI Attorney General's Office more technologically advanced, overseeing computer upgrades, which he believes will make the office more efficient both for the present and for the future.
But Kilmartin said he really hasn't given an over-abundance of thought to his own future--especially politically. In that sense, he's different from some of his predecessors such as Patrick Lynch or Sheldon Whitehouse, both of which eyed the Governor's office, but were weighed down by some high profile cases (the Station Fire for Lynch) or tragedy (the Jennifer Rivera murder for Whitehouse), said University of Rhode Island Political Science Professor Maureen Moakley.
"If things go right, the Attorney General's Office can be a great platform for higher office," said Moakley, pointing to New York Governor Andrew Cuomo as one of many examples. "But things can often go wrong and become a liability."
Yet unlike his predecessors, Kilmartin said that he's not eyeing another run for a higher public office. But he's not ruling it out either.
"I have never been the sort of person who thought 'I am going to run for this office with the intention of running for another office later'," he said.
"And I hope that gives people the confidence that every decision we make here at the Attorney General's office is made in what's the best interest of this office as opposed to politics. Out of all the statewide general offices, I believe this office needs to be the least political," he said.
Related Slideshow: Seven 38 Studios Facts You Would Not Believe
Here are the seven facts that you would not (want to) beleive about the 38 Studios deal.
Meetings Started a Year Before When We Were Told
The first story was that Governor Carcieri went to a fundraiser for a WWII Veteran’s event at Curt Schilling’s home and that served as the spark to a meeting between Keith Stokes and the 38 Studios officials to try and lure the company from Massachusetts to Rhode Island.
Then, it was disclosed that meeting Speaker Fox had had meetings earlier in the spring through his relationship with his close friend Mike Corso.
In the documents released Thursday, Bill Murphy attested to how he sat in on a meeting with Corso, Fox and Curt Schilling while he was still Speaker.
But now, emails starting in July of 2009 between Corso and 38 Studios’ Tom Zaccagnino show the wheels were put in motion even earlier than we thought.
If Not for RI, 38 Studios Would Have Closed Within 1 Month
If RIEDC had turned down the deal in July 2010, documents released showed that 38 Studios would likely have missed making payroll the next month.
In a July 7 email from Rick Wester to Tom Zaccagnino, he wrote, “The latest would be the August 15th payroll at this point. I’m having doubts we can get through the 30th."
The RIEDC board approved the $75 million in bonds on July 26.
The Original 38 Studios Deal Was Small and Inexpensive
An internal email at 38 Studios dated February 18, 2010 outlines a Rhode Island staffing plan starting at 10 employees in 2010 and increasing to 40 in the future.
However, RIEDC mandated a high staffing level and thus a high burn rate.
For 38 Studios to receive its last payment the RIEDC agreement required staffing to elevate to 450 headcount.
38 Studios Knew RI Money Was Not Enough to Fund the Company
An email exchange between top 38 Studio leadership and Mike Corso, confidant to Speaker Gordon Fox, in preparation to meeting with the RIEDC Board led by Governor Don Carcieri showed that 38 Studios wanted to keep certain financial realities under wraps.
Tom Zaccagnino wrote to CEO Jen MacLEan, CFO Rick Webster, and Corso, “I really don’t think we should highlight the fact we might be undercapitalized…won’t go over well with staff or board."
Two and a half weeks earlier EDC Board gave preliminary approval and on July 26, the RIEDC Board gives final approval to the $75 million.
Style Over Substance
In October of 2010, RIEDC was preparing a public relations strategy because “the Gubernatorial candidates have politicized the 38 Studios deal.”
The Strategy document outlined the key messages, and the need to “accelerate development of an in-depth Providence Journal story, including offer of access to Board members. The Providence Journal team will be Andy Smith, Paul Grimaldi and Business Editor John Kostrzewa — we will push for Neil Dowling’s inclusion.”
At the same time as EDC was rolling out its PR strategy to sell to the public value of the 38 Studios deal, 38 Studios internal documents showed that the company was tittering on financial collapse. In fact, a demand for payment from Speaker Fox’s confidant for a $500,000 payment could not be met because it would cripple payroll.
An October 27 internal memo from CEO Jen MacLean to Schilling, Zaccagnino, CFO Rick Wester, and COO Bill Thomas said, “After running payroll, we have less than $500K in our Maynard accounts. We simply can’t pay Mike before the bonds close, no matter how much he might wish otherwise.”
The Deal Was Done Before Anyone Could Imagine
How deep were top EDC staff in on the deal to fund 38 Studios?
In an April 12 (2010) memo from RIEDC’s Michael Saul to Mike Corso and RIEDC’s attorney Rob Stolzman, he proposes “Determine whether any local institutions (RISD endowment, RI Foundation, Hasbro, Brown endowment, State Pension fund, etc) would commit to purchase a share of bond issue.” This is just one of ten “to do’s.”
EDC’s top staff were strategizing on how to sell the bonds, months before the bill ever hit the House floor for consideration.
This April 12 strategy session was supposedly just a little over a month after Governor Don Carcieri and Curt Schilling met and two months before the loan guarantee program is signed into law.
Did Rhode Island Pay for Improvements at Corso's Bar
In one email in May 2011, Mike Corso alerted top 38 Studio officials of over $600,000 in change orders to the build out of the Empire Street 38 Studios’ offices.
The change orders Corso pushed for increased the cost of contractor Nappa Constructions’ project cost from $10.9 million to $11.6 million. As GoLocal reported in 2014:
A former subcontractor for 38 Studios is alleging that his firm was ordered to work on former Speaker of the House Gordon Fox's business colleague Michael Corso's bar as part of their contract - and has produced what he says is documentation to prove it.
Project manager Michael Rossi with SyNet, Inc. has revealed a budget for work which he says shows at $25,000 line item for work to be done at Corso's Tazza Cafe in 2011 -- under a job order for the failed 38 Studios.
Warwick-based SyNet bills itself as "the premier design-build low voltage contractor of structured cabling, access control, surveillance and audio visual systems in the Northeast."
"I'm changing everything on job -- these were all no bids. Nappa construction picked Rossi Electric. I realize the job can't be done the way it's designed," said Rossi. "The money was getting kicked back in the form of goods and services to Corso and Fox. I said I'm not doing this. I knew I was getting set up for jail with this. I went out on sick leave, I was done."
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