Does RI Have a Moral Obligation on 38 Studios?

C. Kevin McCarthy, Guest MINDSETTER™

Does RI Have a Moral Obligation on 38 Studios?

It seems an appropriate time to revisit the issue of 38 Studios and the Moral Obligation bonds which I wrote about in GoLocalProv one year ago “Is the Obligation Legitimate and Should We Honor It?”  (May 20, 2013)  This may be a perennial discussion  for the remaining six years of the life of the bonds.  It’s striking to see how much more we now know, but also to realize how much  remains to be uncovered.  The political establishment seems to have accepted the Manichean view put forth by the proponents of an annual 12.5 million appropriation. If we don’t do it, it would be financially catastrophic, we would be punished severely for decades, our GO bonds would fall to junk status, planes will fall from the sky, cats will lie with dogs, etc.. This is largely based on a $75,000 study by SJ Advisors, a Minnesota research firm the Chafee administration retained to do the study.

One year ago, Matt Fabian of Municipal Market Advisors in testimony before the House Finance Committee,  also cautioned that there would be consequences for not budgeting the 2.5 million dollar payment which was then at issue. Fabian said that it is unlikely that the state’s general obligation rating would be lowered below investment grade, but it could be knocked down one, two or three notches. He said  “It could go down to a BBB, the lowest investment grade rating …  it is a scenario but not most likely.” He thought it could result in an interest penalty on future borrowings of 50 to 100 basis points (½ to 1 percent), a far cry from the junk status suggested by SJ Advisors.To be fair, he was just opining based on his years of experience in the municipal market, he hadn’t done any extensive financial modeling to come his conclusion.

Fox's Office Raid

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In the last year Rhode Island has lost its Speaker after an extraordinary State House raid by federal and state law enforcement. The deep involvement of Michael Corso in the 38 Studios plan has begun to be realized. Former Speaker Fox has wed his partner Marcus LaFond, who was a commercial tenant of Corso, and the Fox/LaFonds are entitled to the Marital and Spousal testimonial privileges afforded to all married couples, which could be significant depending on the eventual result of the investigation into Gordon Fox.

Christianity has the secrets of Fatima, Islam its “Hidden” Imam and Judaism  the mysteries of Kabbalah. Rhode Island’s Economic Development Corporation also has its foundational secrets. We still don’t know who bought the 38 Studios bonds at the time of their issuance in November 2010. The buyers of approximately 68  million of the 75 million have been identified, but the purchasers of the remaining 7 million remain unknown (at least to the general public). This despite the fact that buyers were required to execute and return to several parties to the transaction letters of risk disclosure and acceptance, which EDC was unable to produce a year ago. Do those letters not exist? Were they deliberately omitted or suppressed to hide the identity of the unknown buyers? If so, whose fault is that, and does it cloud the bond insurance? Note: there was a $7,440,000 redemption (call) of the five year tranche on November 1, 2013, so the amount outstanding has been reduced accordingly. Do not confuse that with the unknown $7 million at original issuance.

Governor Chafee is leaving office in January with a 1.41 million debt still owed to him in the form of a loan he made to his election campaign. He has no electoral future and  few apparent sources of political contributions as a lame duck with strong competition from other politicians in this campaign year. He casts his strident support for the paying of the bonds in terms of fiscal necessity and responsibility, and that may be true. But forgive me if I observe that there are lots of financial advisers, lawyers, contractors, politicians and others - in state and out -  who would dearly love to see  38 Studios go away, and might be inclined to fond feelings toward anyone who facilitated that.

There is at least one truth in the 38 Studios saga which I believe no one would dispute. The issue could never have been done without bond insurance. One of the rationales for the added cost of bond insurance is that it allows for a lower more favorable rate of interest, because the buyers know the Insurer ultimately stands behind the debt both to principal and interest. This does not appear to have been particularly effective in 38 Studios. The bonds carried rates of 6%, 6.75% and 7.75%, for five, six and ten year periods, nobody’s idea of cheap financing.  The truth is that this highly speculative business prospect could never have gotten debt financing at any rate, it could only be done, if at all, with equity investors, and those investors would have insisted on large ownership stakes, something that Schilling was unwilling to do.

Assured Guaranty, the bond insurer, has been in business since 1985, first through its predecessor company, Financial Security Assurance, which was acquired by Assured Guaranty in 2009. It insured 1697 issues in 2010, with a par value of 27 billion, and had claims paying resources of 12.6 billion. The question has to be asked.  How much underwriting and  due diligence did Assured actually do before writing this policy on a highly speculative venture which exposed them to potential liability of 112 million in principal and interest for a one time premium of less than 600,000 dollars? Assured claims expertise in addition to the aforementioned credit, underwriting and due diligence in the areas of negotiation, surveillance and remediation. I have no doubt that this is true.

Did EDC Suit Go Far Enough?

Assured is not a defendant in the EDC suit filed by the Chafee administration. Its interest are not necessarily inimical to ours, and there is no reason why our dealings with them have to be conducted in an atmosphere of hostility, even though  at first glance it might seem so. Detroit has spent the last year negotiating a billion dollar bankruptcy evidently with some success. We have done nothing but sit back, assume the EDC lawsuit will cure all our problems and compensate our losses. The Loan and Trust Agreement governing this issue gives total veto power over any attempt at settlement or renegotiation to  the Insurer. We need to explain the situation to them with all its byzantine layers of cronyism and negligence and enlist them as partners in a fact finding process which should ultimately mitigate whatever losses both parties might incur. With apologies to Attorney Max Wistow, there is no need to needlessly incur losses, simply to keep our damages high for an eventual recoupment. Attorneys always know there is a risk of a case settling out from under them, and he can be appropriately compensated for his efforts.

Finally, on the question of credit availability, consider the recent statement of William Conway, co-founder of the Carlyle Group. He said,  "The world continues to be awash in liquidity, and investors are chasing yield seemingly regardless of credit quality and risk."  The 38 Studios bonds are not actively traded, but the last reported sale I saw was last summer for 114 cents on the dollar. Rhode Island has never shirked from meeting any honest, ethical obligation and never will, but that is no reason to play the patsy and succumb to the financial hyperbole and histrionics of those attempting to sweep this mess under the rug.

C. Kevin McCarthy is a Guest MINDSETTER™. He is a resident of Lincoln, Rhode Island.

INVESTIGATION: Fox, Corso and 38 Studios

The Early Years

Early 2000s

Fox was emerging as a powerful leader in the House via his role on the Finance Committee and later as Finance Committee Chair. Corso served on the management team at developer's Buff Chace's Cornish Associates.

The two worked together to write and pass the Historic Tax Credit Legislation.

Bio attached from the early 2000's - Cornish Assoicates Website.

Insiders

Insiders Had Hands All Over Schilling’s 38 Studios Deal

The owner of the construction company that was awarded a contract to work on the interior of 38 Studios’ downtown headquarters has close ties to House leadership and other prominent local politicians, GoLocalProv has learned.

Steven Nappa, who owns Nappa Construction Management, has contributed over $16,000 over the last decade to top politicians including House Speaker Gordon Fox, Congressman and former Providence Mayor David Cicilline, Providence Mayor Angel Taveras, former House Speaker William Murphy and former House Finance chairman Steven Costantino. In June 2011, Nappa also contributed $1,000 to the Fund for Democratic Priorities, a political action committee maintained by House leadership.

Nappa is also connected with Michael Corso, a Providence lawyer who has made a fortune helping to sell state tax credits and was involved in the earliest meetings between Schilling and Rhode Island officials. The two hosted a private fundraiser at the Peerless Lofts for then-Majority Leader Fox in 2007. Nappa also helped build the movie screen located in the open space next to Tazza, the downtown café owned by Corso.

Corso himself has contributed $11,625 to Fox, Cicilline, Taveras, Murphy and other local politicians in recent years.

Movie Tax Credits

Corso and Movie Tax Credits

The Providence lawyer who pledged more than $14 million in Rhode Island motion picture tax credits that had not actually been issued as collateral in order to obtain an $8.5 million loan for Curt Schilling’s 38 Studios is now playing a behind-the-scenes role in a Michael Corrente movie that is slated to receive $625,000 in state tax credits, GoLocalProv has learned.

Michael Corso, a top tax credit broker whose loan agreement with BankRI is among several 38 Studios-related matters currently being investigated by state and federal authorities, is one of seven producers for “Backmask,” a horror film currently being shot in Exeter, according to IMDB. Corso’s business partner, Anthony Gudas, is listed as the executive producer and former State Rep. John Loughlin has a small role in the film.

 

On Monday, the Rhode Island Film and TV Office confirmed the film has received an “Initial Certification Letter” for the tax credits. Corso did not respond to a request for comment.

Tazza Fundraiser

Questions Surround Speaker Fox’s Relationship with 38 Studios Insider

Several weeks after initial inquiries from GoLocalProv, House Speaker Gordon Fox still isn’t answering questions about a 2007 fundraiser held for him by the lawyer who would play a pivotal role in bringing Curt Schilling’s 38 Studios to Rhode Island three years later.

In March 2007, Michael Corso, Steven Nappa and Robert Britto of Nappa Building Corp. and former State Representative Ray Rickman were listed as the hosts of a private fundraiser held in the Peerless Lofts for the then-Majority Leader. The event, which helped Fox rake in approximately $10,000, was catered by Tazza, the downtown café owned by Corso.

But while Fox’s campaign finance reports from the time include details about several other fundraising events held during the first quarter of 2007, there is no information listed about expenses incurred for the Corso-hosted event, which may constitute a campaign finance violation.

“Speaker Fox has been extremely busy entering the final two weeks of the session, but he will soon be checking the campaign records from five years ago,” Fox spokesman Larry Berman told GoLocalProv on June 4. “If corrections are necessary to the report, he will make them.”

Fox and Corso

38 Studios Insiders Have Been Connected Since May 2009

The lawyer at the center of the deal that brought Curt Schilling’s 38 Studios to Rhode Island had a business relationship with a top executive at the video game company a year before a piece of legislation that expanded the EDC’s Job Creation Guaranty Program was pushed rapidly through the General Assembly.

On May 29, 2009, Michael Corso, a top tax credit broker whose relationship with House Speaker Gordon Fox helped steer 38 Studios to the Ocean State, struck a deal to purchase credits handed out for the multi-million dollar Stone House hotel project in Little Compton from the Round Pond Management Corporation, whose President was Tom Zaccagnino.

 

By June of that year, Zaccagnino, who was also the co-managing director at the Wellesley Advisors Corporation in Maynard, MA, had become Vice Chairman and Lead Director of 38 Studios. A month later, Haymarket Capital, an LLC with the same address as the Wellesley Advisors Corporation, was involved with the seven-figure bridge loan a group of Rhode Island investors provided to 38 Studios.

In March of 2010, Zaccagnino and Schilling met with Speaker Fox and former EDC director Keith Stokes in Corso’s downtown law office. By May, the General Assembly had expanded the EDC’s loan guarantee fund from $50 million to $125 million, the exact amount the EDC awarded to 38 Studios later that summer.

Crony's Bar

38 Studios Contractor Ordered to Install Equipment in Fox’s Crony’s Bar

 
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."
 
Representative Mike Chippendale, Senior Deputy Minority Leader and Secretary of House Oversight who is leading the investigation into 38 Studios along with Rep. Karen MacBeth, told GoLocal, "[Rossi] has hit a number of things on the head, things he wouldn't have been able to have known otherwise. He was able to validate some things, and the State Police has said they have determined the [budget] document has credibility."
"We're moving in the right direction," said Chipendale, who along with Macbeth have both been the target of mail threats in the past month. "We've kicked the hornets' nest."
 
Rossi said when he was working at SyNet, he was aware the 38 Studios work could be a possibility. "When my boss called me to say we got the project, that I was going to oversee the [network infrastructure] work, I thought, "Wow...38 Studios. This is big."
 
"As soon as I started working, they told me to order cable right away," continued Rossi. "I didn't have a permit. Arguments went back and forth. I walk out, I say I don't have a budget, I'm not doing it. I get berated by my boss to get back on the job. Next day, I get the budget, I'm back on the site -- and there are walls up already, with no permits pulled."
 
A portion of the SyNet 38 Studios budget document with a line item for work on Corso's Tazza bar and restaurant.

Galasso

Rhode Island Cartoonist Takes Aim on Fox and Corso

In the midst of Gordon Fox's 2012 re-election effort, he distanced himself from his longtime friend, Mike Corso.

Rhode Island's iconic catoonist took aim at Fox's claim and artfully tied Corso and Fox together.

Selected Image

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