EDC Board Told Legislature Knew About And Vetted 38 Studios

Sep 24, 2015

During a closed session on June 9, 2010, the board of Rhode Island's Economic Development Corporation received a briefing on what then-Governor Don Carcieri suggested was a "fairly significant transaction" that had presented itself to the EDC.

That transaction was, of course, the idea to provide financial assistance to the now-defunct video game company 38 Studios. The special session may be the first time the proposition had been formally presented to the EDC Board.

According to executive minutes from the meeting, released this week among thousands of documents unsealed by the court, the board heard a now-familiar story. EDC Attorney Robert Stolzman explained that Carcieri had met Curt Schilling, the retired Red Sox pitcher, earlier that year and learned of his ambition to make and sell video games. He had also learned of Schilling's need for capital investment in his company.

Then the meeting really gets interesting. Stolzman tells the board that the state legislature has suggested a program that would allow the EDC to guarantee debt for companies like 38 Studios, up to $125 million. He even takes some time explaining how the loan guarantee would work.

"He reported that both the House and the Senate Finance Committee have passed this legislation," the minutes said. "He also noted that the legislature is aware of the Schilling matter and has done some due diligence in its consideration of this program." 

This seems a stretch at best given the fact that the vast majority of legislators knew nothing about 38 Studios. But Stolzman goes on to say "the legislation is a separate issue from 38 Studios."

Stolzman is one of the defendants in the state's lawsuit claiming the EDC was misled on crucial details about 38 Studios.

Then-governor and a director of the EDC Board, Don Carcieri's advice to the board: "consider the video gaming industry first and then take a look at 38 Studios."

As the meeting continues, next up to the plate comes J. Michael Saul, the EDC's deputy director. Saul paints a rosy picture of the video game industry, noting that gaming dovetails well with existing Rhode Island assets, including RISD, toy giant Hasbro and lottery company GTECH.

When a member of the board notes that retired Hasbro CEO Alfred Verecchia is present and inquires about his knowledge of the company's involvement in video games, Verecchia shows himself to be relatively well-informed. Referring to multi-player games like the one 38 Studios was developing, Verecchia is reported to have commented that it is "similar to the creation of a movie, in that a lot of money can be spent in production, but the product may or may not be successful."

Later, Verecchia commented that "betting on the [gaming] industry is a 'slam dunk', but betting on specific games is where the gamble lies."

These are meeting minutes, not a transcript, but if Verecchia said anything close to that, his comments would turn out to be prescient. Unfortunately, the board ignored his advice, later approving the deal for 38 Studios with just one dissenting vote, which did not come from Verecchia.

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Raimondo: RI Needs to Learn from 38 Studios Mistakes And Move On

Governor Gina Raimondo said the latest revelations about 38 Studios should be used to keep Rhode Island from making similar mistakes again in the future.

“I was against this deal from the beginning, and we’re not going to allow something like this to happen again. The citizens of Rhode Island need to get a good look at all of the facts, which is why the Commerce Corporation during my administration made the initial motion to start unsealing documents," Raimondo said in a statement Friday.

"We need to learn from mistakes, and we need to move forward," Raimondo continue. "We cannot be afraid to take action on economic development because too many Rhode Islanders are still out of work. I am going to stay focused on our core mission of growing the economy and making sure that everyone can make it in Rhode Island.”

House Speaker Nicholas Mattiello said he supports additional hearings by the House Oversight Committee.

“The release of the depositions has provided us with an enormous amount of information that we will assess and study over the next several weeks," Mattiello said in a statement. "I have already conferred with House Oversight Committee Chairwoman Karen MacBeth and once she and her committee members review the documents, our plan is to hold oversight hearings.

"We want to assess what went wrong and why it went wrong so those mistakes are never repeated," Mattiello said. "If there was criminal wrong-doing, I continue to have faith in the on-going State Police investigation.”

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38 Studios Documents Released Thursday

Legislative involvement in Rhode Island's ill-fated investment in 38 Studios began earlier than previously thought, possibly in the fall of 2009, according to newly released court documents. 

In a deposition, lawyer William Murphy -- who was House speaker at the time -- said he stumbled upon a fall 2009 Statehouse meeting between then-Majority Leader Gordon Fox, tax-credit broke Mike Corso (who was also a friend of Fox's), and Thomas Zaccagnino, a senior official with 38 Studios.

For years, a spring 2010 fundraiser at the Massachusetts home of Curt Schilling, attended by then-governor Don Carcieri, was considered the starting point of Rhode Island's interest in 38 Studios.

But Murphy said that Zaccagnino was among those meeting at the Statehouse when he encountered the three men.

According to the deposition, "I don't have a specific day in the fall of 2009, and I was told that he was a real estate developer who had either partnered up with somebody or a group and had redeveloped a mill in Massachusetts, and two of his tenants, one was Monster.com and the other one was Mr. Schilling and 38 Studios, and Mr. Schilling had a video-game business in Massachusetts that he was looking to expand, grow, what have you."

Word of the 2009 meeting was first reported by WPRI.com.

Murphy said in his deposition he toured 38 Studios at its Maynard, Massachusetts, location in the fall of 2009 and met Schilling. He said he was unaware of Zaccagnino's involvement with 38 Studios,

Fox pleaded guilty in an unrelated corruption case earlier this year and is serving a three-year prison sentence in Pennsylvania.

In his deposition, Murphy said, "Not to my knowledge" when asked if at the time of his fall 2009 tour whether 38 Studios had approached Rhode Island officials. He offered the same response when asked if Carcieri knew of the company at that time.

Murphy said his intention in taking the tour in Maynard was to make an introduction to the House speaker of Massachusetts.

Murphy responded, "Never, never," when asked if Fox and he ever talked about Rhode Island becoming involved with 38 Studios.

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Why Chafee Kept Stokes As Head Of EDC

In his deposition, former governor Lincoln Chafee acknowledges that he did not want to keep Keith Stokes of Newport, who had a public role in shaping the 38 Studios deal, as head of the EDC. At the time, in January 2011, Rhode Island Public Radio reported that Chafee wanted to appoint Republican Jim Bennett to be state economic development director.

But, according to Chafee’s testimony, Senate President Teresa Paiva Weed, D-Newport, a longtime friend of Stokes, intervened with the governor to keep Stokes. Chafee acceded to her wishes, he said.

The lawyer deposing Chafee asked the former governor, ``You left Mr. Stokes in charge of monitoring the 38 Studios deal because he was a long-term friend of the state Senate’s president and moving him would have required more political capital than it was worth?’’

Chafee’s answer, ``That’s accurate.’’

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The Fox Depositions

Former House Speaker Gordon Fox invoked his Fifth Amendment right against self-incrimination more than 100 times during a deposition on August 18, 2014. He gives his address, at that time in Providence, but refuses to answer even a question about where he went to school. The deposition came roughly five months after the State Police and the IRS raided Fox's home and Statehouse office. At the time, the reason for the raid remained unknown. 

In a second deposition dated February 11th, 2015, Fox again pleaded the Fifth to a raft of questions about his involvement in the 38 Studios deal. When asked at the start of the deposition whether he remembered his prior deposition in August, Fox said, "I recall a deposition. I leave it to you that that was the date or not. It's been a blurry kind of a year."

In June of 2015, Fox was sentenced to serve three years in federal prison on bribery and corruption charges unrelated to 38 Studios.

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Chafee Describes 'Fine Line' of 38 Studios

In deposition testimony, Lincoln Chafee said that he tried as governor to walk a fine line when it came to the 38 Studios deal he inherited. Chafee said he did meet for two hours with Schilling and his management team shortly after he became governor and came away impressed with top management’s experience in the video game industry.

But he said he largely relied on EDC staff and Stokes to keep him informed of developments. Chafee said the early days of his governorship were consumed with such big challenges as a $300 million state budget deficit, the red ink running through the state employee pension system, and the shaky finances of communities across the state, especially Central Falls, which eventually ended up in receivership.

Noting his vocal opposition of the deal during his campaign for governor, Chafee said that he didn’t want to be seen as `micro-managing’ the state’s relationship with the video game company. He also maintained that he wanted the company to be successful, because he knew the state was on the hook for millions in bond payments.

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Tens of thousands of pages of documents related to the state's lawsuit over 38 Studios were made public at 3 pm Thursday.

Here's the full statement from RI Courts spokesman Craig Berke:

"September 24, 2015: In the matter of the Rhode Island Economic Development Corporation v. Well Fargo Securities, et al., the so-called 38 Studios lawsuit (Case No. PB-2012-5616), previously sealed documents in the court file, as well as depositions that are not part of the court file, will be released to the public at 3:00 p.m. on Thursday, September 24, 2015.

Initially, the documents will be available on DVDs to be handed out at that time by the Superior Court in the Administrator’s Office, Room 506, on the fifth floor of the Licht Judicial Complex in Providence. The Judiciary expects to have a sufficient number of discs for media outlets and the public at the time of initial distribution. More copies may be produced if the demand warrants. However, shortly after the initial distribution of discs, the files will be posted on the Internet at a time and web address to be announced.

Each disc will be divided into two main folders. The depositions, which are not part of the court record, contain more than 1,300 files in 66 folders. The deposition files include transcripts and exhibits. The unsealed court records include 242 files. Some of the unsealed court records will be related to motions that are already part of the public record. Those public motions will not be included with the documents released today. Files that were already part of the public record in the case are available for viewing at public computers at Superior Court clerk counters in each county courthouse."

Rhode Island Public Radio will begin reviewing the documents immediately after their release.

This post has been updated.