Rhode Island political pundits, over the last few years, have begun to decry the fact that Rhode Islanders have been shell shocked, or more to the point, driven to paralysis, by the 38 Studios fiasco.
But what's not being talked about is the fact that we're living in what I call a "38 studios economy" at this point. The state is so expensive to do business in, the only way to get new businesses here is to offer special tax breaks or other incentives such as downright funding them.
I remember when then candidate (for governor) Lincoln Chafee, standing in front of United Health Care in Warwick, proudly proclaimed that there would be no special deals for Rhode Island companies when he became Governor.
I asked him how he planned to lure businesses to Rhode Island given the fact that we're a high tax and cost structure state. He didn't seem to want to answer the question. That's the problem with refusing to cut special deals when you're an expensive state to do business in.
But Chafee was correct in principle. When a company is given a special tax break in an attempt to lure the business to Rhode Island, to provide much-needed jobs and economic development, it's inherently unfair to the businesses paying the standard taxes.
Government, Not Venture Capital
A government that is well-run and efficient doesn't need to act like, or create its own state-run venture capital funds or companies.
Businesses throughout the country take a look at 50 state comparisons and compare cost structures. They look at tax rates, health care costs, and energy rates.
Instead of doing the hard work of lowering the cost of government in Rhode Island--and let's just be real, that means lowering labor costs--politicians prefer to just play the game of "let's make a deal". That's how we wind up with 38 studios.
But every touch of grey, may, in fact, have a silver lining. The fact that the so-called $75 million "loan guarantee" in the hair-brained scheme to create a new video game company in Rhode Island failed has led Rhode Islanders to reject ideas for new government investments. Proponents of rehabbing the Superman Building, or using taxpayer money to finance a brand new swanky baseball stadium, and countless other projects, say that the specter of 38 studios has prevented new projects.
A 38 Studios Silver Lining?
They're right. It has. And, I say "good!"
When a state like Rhode Island finds itself ranking poorly in almost all of those areas, it's needs to act desperate to attract attention. Thus comes the "let's make a deal" mentality. And that's what brought us 38 Studios, and Nabsys, which GoLocalProv reported last week has gone out of business, despite a $1 million investment from the state run, and funded, Slater Fund. The state pension fund also had money invested in the company, so that money is gone as well.
Naturally, Barrett Bready, the CEO of Nabsys has close ties to Governor Gina Raimondo. Bready and his wife donated about $15,000 to Raimondo's various political campaigns. He and Raimondo thought they knew better than to listen to the founder of Nabsys, who warned them that the genome mapping company lacked a crucial component of technology and would fail due to that fact.
Bad Deals
Both 38 studios and Nabsys indicate that government should stay out of the venture capital business. When the government is forced to act like a venture capital company, government leaders are waving the white flag. They're basically saying we couldn't create the economic conditions that make up competitive in the market, so we had to start trying to pick winners but ending up with losers.
That's because businesses that cannot receive funding from the financial markets will turn to the government to fund their enterprise. Therefore, when the government gets into the venture capital business, it will always take on the biggest reward, but get the least return on investment.
Lessons Learned?
That's not a problem to most government leaders. All the talk about using government to help Joe Six Pack (the man who isn't connected to government leaders) is just a sweet nothings whispered into the ear of the electorate. But the real priority of most politicians is rewarding their supporters and, when possible, punishing their enemies. At best, the average person is a bystander. At worst, a victim.
Rhode Islanders would do well to remember the lessons of 38 Studios, as well as Nabsys as we move forward. Who knows, it might save us hundreds of millions of dollars.
Russell Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Follow him on twitter @russmoore713. Send him email at [email protected]
Related Slideshow: SLIDES: The Players in the 38 Studios Saga
The two term RI Governor first elected in 2002 and then again in 2006 -- and was at the helm of the state when he first met Curt Schilling at a fundraiser in March 2010. The meeting is part of the focus of questions of how and when the wheels were put in motion to lure Schilling's 38 Studios to RI.
The Carcieri administration announced the proposed $75 million 38 Studios deal in June 2010 -- and in November 2010, just prior to the election, the EDC (which Carcieri as Governor chaired) announced the issuance of $75 million in taxable revenue -- i.e. moral obligation -- bonds. Carcieri is not listed at a defendant in the state's suit, based on immunity, but was deposed in 2014, which could be part of the upcoming document release.
Questions pertaining to the role of the former RI Speaker of the House -- and when he first introduced key players in the 38 Studios deal in 2010 - remain at the center of attention.
The former Speaker continues to wield unparalleled influence as a lobbyist and behind-the-scenes king maker. While he last served as the state's most powerful elected official until 2010, Murphy's ability to exert control at the State House was evidenced by backing now-Speaker Mattiello when the battle to replace Gordon Fox took place. Murphy's lobbying clients range from the corrections officers to payday lending to Twin River.
The former Speaker of the House, who is currently serving a prison term for using campaign funds for personal expenses and accepting a bribe, is inextricably tied to, and at the center of, the 38 Studios deal -- stemming in part from his close personal ties to former Speaker Bill Murphy and tax credit lawyer Michael Corso.
More of his role in the ill-fated deal is expected to emerge as documents are released in the coming weeks, as to what he knew when, and his role in driving the deal through -- and who else know. Fox, like Carcieri, has immunity in the state lawsuit.
The relationship between Former Speaker Gordon Fox and Michael Corso goes back to the early days of both their professional and political careers in the late 1990's after each graduated from New England law schools. Corso joined developer Buff Chace's Cornish Associates - and Fox and Corso both claim to be the author of Rhode Island's Historic Tax Credit Legislation -- which proved to be the ultimate down fall of 38 Studios.
In March of 2010, Tom Zaccagnino and Schilling met with then-Speaker Fox and former EDC director Keith Stokes in Corso’s downtown law office. Despite the meeting taking place after the legislative deadline, just a few weeks later the loan guarantee legislation was submitted by Fox's leadership team and in May the bill was pushed through the legislature. 38 Studios would receive $75 million in loan guarantees. Following the 38 Studios fallout, Corso's Sakonnet Capital Partners, Reel Capital LLC, and Tax Incentive Partners have all removed his name from the sites. Their offices are all located in the same building as Fox's husband's former salon location - 155 Chestnut Street.
The Attorney General, who was in the House of Representatives at the time of the 38 Studios deal, acknowledges that the current state police investigation is "ongoing and active" -- three years after the company went bankrupt, and five years since the original deal.
While his office maintains the neutrality of his position, others question is role in the process. "AG Peter Kilmartin, being both the person who forced the legislation through as Majority Whip then AND the top law enforcement official of Rhode Island today, needs to step aside," said former RI GOP chair Mark Smiley. "Bring in a special prosecutor, no other investigation will ever be trusted as being thorough enough."
Mattiello ascended to the role of Speaker following the resignation of former Speaker Gordon Fox -- who had been in power at the time of the 38 Studios deal.
He has said that he believes the investigatory power lies in the "state police and the courts" -- not the General Assembly.
"I have had to be patient throughout this process because I have said all along that the best approach is for the Superior Court to unseal the documents and for the State Police to continue its investigation. I have tremendous faith in our State Police as the appropriate agency to pursue criminal activity," said Mattiello. "The General Assembly is legislative in nature. While my focus since becoming Speaker last year has been on passing good budgets that encourage a strong economy, the combined efforts of the State Police and the courts will allow us to uncover the facts to learn from the past and never repeat the mistakes that were made."
While the bulk of the 38 Studios developments took place prior to Raimondo taking office, she was still ordered deposed back in 2014, which could surface in the upcoming release of court documents.
"The architect of Governor Gina Raimondo’s truck toll infrastructure plan is the same firm that the State of Rhode Island is presently in litigation against for its role in the state’s loss of over $100 million in the 38 Studios collapse."
The Governor of RI from 2011 through 2015 was originally opposed to the $75 million 38 Studios deal back in 2010, blasted critics for trying to default on the loans in RI, and ultimately was blamed by Sony for 38 Studios failure.
Chafee was also blamed by other parties in the state's lawsuit -- and was deposed by the court, which should be released by the court along with tens of thousands of documents in the coming days.
In June 2012, Governor Lincoln Chafee hired lawyer Max Wistow to investigate the 38 Studios deal - and the 17-count suit included RICO, fraud and negligence and also accused Wells Fargo of earning nearly $500,000 in hidden commissions from 38 Studios at the same time that Wells Fargo owed fiduciary duties to the EDC Board to disclose all negative material information concerning 38 Studios’ business plan and financial projections, including the shortfall.
The Superior Court Judge, who appointed retired Supreme Court Judge Frank Williams mediator of the state's 38 Studios lawsuit back in May, made the move on Friday August 28 to declare that documents were to be unsealed in the case, no later than ten days after his determination.
The Rhode Island world -- and beyond - awaits the content of then tens of pages of files to see how lawyers on both sides couched the collapse and demise of the former gaming company, leaving Rhode Island taxpayers to pay off the moral obligation bonds.
The former EDC Executive Director who oversaw the maturation of the 38 Studios deal in 2010 and was named in the state's lawsuit, reached a settlement with the state along with J. Michael Saul and Adler Pollack and Sheehan on August 9, 2015.
In December 2014, the Commerce Corporation, after considering the extent of the defendants’ insurance coverage, had made a demand of the four defendants above that they settle for $12.5 million, which was ultimately the agreed upon result.
The law firm of Adler, Pollack, and Sheehan was among the group along with Stokes and Saul who settled in August 2015. In 2013, the four had responded to the suit, placing the blame of the collapse of 38 Studios on then-Governor Lincoln Chafee for actions -- and inactions.
One of the RI law firms sued by Rhode Island's economic development agency over the failed $75 million 38 Studios deal, Moses and Afonso was the first defendant to agree to settle in June 2014 -- for $4.4 million.
The state, in its pending lawsuit against its financial advisor, alleged the folllowing:
In a sweeping set of allegations made by the state against First Southwest, the 38 Studios lawsuit blistered the firm for failing to protect the state’s interest and for knowingly making false statements.
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.”
One of the remaining defendants in the state's lawuit.
In 2012, GoLocal's Dan McGowan reported that, "Wells Fargo refuses to comment on accusations that it “secretly” received nearly $500,000 from Curt Schilling’s failed video game company at the same time that it was supposed to sell $75 million in bonds to investors on behalf of the Rhode Island Economic Development Corporation (EDC)."
The former Red Sox pitcher who created the ill-fated video game company 38 Studios, is one of the remaining defendants in the state's lawsuit -- and had been an ongoing advocate for the release of more information to the public
When the states' lawyers wanted to unseal only specific pages of the suit back in May, Schilling said, "I am hoping and anticipating that if/when anything is made public, that everything is made public, so the public - and the press - can finally know what happened and why."
With the release of documents expected shortly, more information will soon be coming to light -- tens of thousands pages of it.
