Most Active Stories
- Nuala Pell, Spouse And Political Partner Of Sen. Claiborne Pell, Dies
- Remembering Local Musician David Lamb Of Brown Bird
- Beer, Wine Bills Backed By Farm Breweries And Wineries, But Not Liquor Industry
- Scott MacKay Commentary: We Remember: Patriot's Day 2014
- Brown University Looking To Become Center For Brazilian Study
Thu June 20, 2013
Testimony: Independent Monitoring Promised to 38 Studios' Investors Wasn't Put in Place
Although investors in 38 Studios were promised prior to the closing of a $75 million state loan guaranty in 2010 that IBM would offer independent third-party monitoring of the company and its performance, IBM didn't sign a contract to provide that monitoring and independent oversight was never put in place, according to testimony presented last week to a legislative committee.
"We do not have a document that conforms to the representation that was made in the bond offering that an agreement was entered into in between EDC [the state Economic Development Corporation and a third party, in this case, IBM," Michael Marcello, chairman of the House Oversight Committee, said June 13.
Marcello was summing up information presented by Max Wistow, the lawyer representing the EDC in its lawsuit over the failure of 38 Studios last year. Although the details appeared fresh for members of the Oversight Committee, they are a part of the lawsuit filed against a series of defendants, Wistow said.
Marcello read this excerpt from a private placement memo, similar to a prospectus, issued by the EDC in connection with Copernicus, the massive multi-player online game planned by 38 Studios:
"In connection with the project and the issuance of the 2010 bonds, the issuer [the EDC] and the company [38 Studios] executed a project monitoring agreement to implement third-party monitoring, reporting and response processes regarding the development schedule and budget for Copernicus in order to assure the company's development of Copernicus remains on time and on budget. The issuer enters into an agreement with International Business Machines Corporation on September 14, 2010 to provide third-party monitoring services."
However, despite that pledge, the monitoring promised to investors who bought 38 Studios bond wasn't signed or put in place, Marcello said in an interview. He calls this the most significant revelation to emerge from House Oversight hearings.
Plans for IBM monitoring popped up in a November 2010 agreement between 38 Studios and the EDC, but the oversight deal was between IBM and 38 Studios, not IBM and the state; few details have emerged about what kind of oversight took place before 38 Studios went into a tailspin last year.
Marcello says the lack of independent monitoring promised to investors when they bought bonds could potentially expose the EDC to litigation, particularly if the General Assembly votes to not repay the bonds. The House is expected to vote in favor of repayment on Tuesday, starting with an initial $2.5 million allotment.
The absence of the third-party monitoring promised to investors was outlined to House Oversight through a 2011 email exchange between lawyer David Gilden of Partridge Snow and Hahn, counsel for the EDC, and lawyer Antonio Afonso Jr., who worked for the state as the 38 Studios deal was in the works.
According to testimony, Afonso was asked by Gilden to locate copies "of the executed project monitoring agreement between EDC and 38 Studios and the executed IBM global services statement of work." After getting an unsatisfactory response, Marcello said, Gilden responded, "The IBM agreement you sent is unsigned. Any chance a signed version would be somewhere else in your files?"
At that point in the committee hearing, Wistow interjected, "The response is really what is very, very important here."
Marcello then continues, reading from an Afonso email: "David, we never had received the IBM agreement signed because Rhode Island EDC is not a party to it. In effect, RI EDC agreed to be a third-party beneficiary of the scope of work of the IBM contract, but without IBM being a party to the project monitoring agreement. EDC attempted to negotiate IBM into the agreement, but IBM refused to be a party and refused to expressly make EDC a third-party beneficiary. The IBM provisions are an exhibit to the project monitoring agreement and hence are unsigned."