Fox in the dark on Schilling deal size

PROVIDENCE, R.I. (WPRI) - House Speaker Gordon Fox on Friday denied that he pushed lawmakers to create a new $125 million loan program in 2010 knowing the R.I. Economic Development Corporation planned to pledge $75 million of the money to Curt Schilling's 38 Studios.

"Did I know Curt Schilling was interested in coming to Rhode Island? Absolutely," Fox said Friday during a taping of WPRI 12's Newsmakers. "Did we mandate that he get $75 million? Never! Never, never, never. Did we vet any of his financials? I wouldn't know if Curt Schilling would have qualified for a dime, for nothing, or for $125 million."

Fox said he discovered the severity of 38 Studios' problems when he was called to a meeting in April where Schilling and Tom Zaccagnino, a 38 Studios board member, asked Gov. Lincoln Chafee to sign two consent agreements, one allowing the company to get tax credits and another to provide bridge financing.

Recent reports about the company had seemed positive, Fox said, with good reviews and solid sales for its first game when it released in February. He recalled what he thought when he received a phone call from Zaccagnino saying the company was in trouble: "I'm like, 'Oh crap,' quite frankly. What in the hell?"

'An absolute huge mistake'

38 Studios filed for bankruptcy on June 7 after defaulting on a $1.1 million payment to the EDC, missing payroll and finally laying off its nearly 400 employees. "It looks like it was an absolute huge mistake on so many levels," Fox said, "and we're going to learn from that, change it and go forward."

The speaker sat down for his first extended broadcast interview since 38 Studios' demise amid public outrage over how the high-profile company was allowed to implode at a potential cost to taxpayers of nearly $100 million. Auditors, lawyers and law-enforcement officials are all examining what happened.

Fox offered an impassioned, animated defense of his decisions during the half-hour program while at the same time expressing deep dismay about the outcome.

"I'm angry. I'm disappointed," he said. "I have all the emotions that everyone else has. I mean, I'm born and raised in Rhode Island. I'm not going anywhere." He said he wanted to speak at length about what happened because "people are being misled, trying to create something that wasn't."

Dismisses involvement of Corso

Fox said he'd never heard of 38 Studios before Michael Corso – a Providence tax-credit broker who owns Tazza Café and is friends with the speaker – introduced him to Zaccagnino in the winter of 2010, following a meeting between Schilling and then-Gov. Don Carcieri.

Fox acknowledged he then organized a March 2010 meeting with Schilling and Zaccagnino at Corso's office where Keith Stokes, the EDC's then-executive director, and Stokes' deputy J. Michael Saul briefed them on its loan programs. "They talk, they make plans to meet again - I'm out of the picture," Fox said.

Fox said Schilling and Zaccagnino didn't make any requests at the meeting. He also said Corso offered his office as a location due to concerns about the attention Schilling would attract in a more public setting.

"Where are you going to move a 6-foot-5 pitcher that won two World Series?" Fox said. "Didn't want to come to the State House. Keith Stokes was like, 'I don't think he can walk into EDC because it's going to be the same thing, and next thing you're going to have press.'"

Fox said the meeting would have happened even if he didn't have an existing relationship with Corso. "I am one of those speakers - I could go in my office and not meet [with companies], but I've met with JetBlue, I've met with Southwest Airlines, I've met with companies near and far," he said.

"Could they have called Keith Stokes personally and interviewed him?" Fox said. "I'm sure they could have. They felt comfortable with me doing it." He also said he doubted Corso, who tried and failed to broker a deal to sell tax credits on 38 Studios' behalf, was looking to profit from the deal.

Economy cited for big bets

Meanwhile, Carcieri and the EDC had proposed a new $50 million Job Creation Guaranty Program that would provide loan guarantees to local high-tech companies with soft assets such as intellectual property, as opposed to hard assets such as factories and equipment.

Fox said previous legislative leaders were cool to the idea, but he decided to support it in light of the state's dismal double-digit unemployment rate. Fox had just become speaker in February 2010 and was also establishing a working relationship with Carcieri as the two agreed to focus on economic policy.

"It was a tool we created to address a monumental problem and the emergency of that," Fox said of the Job Creation Guaranty Program.

After 38 Studios expressed interest, however, the size of the proposed loan program was upped to $125 million – an increase of $75 million, or precisely the amount that Schilling's company eventually received. Carcieri signed the program into law on June 11, 2010, less than two months before the EDC board approved the $75 million loan guarantee for 38 Studios.

"Because of 38 Studios, it has given us the ability to have not a $50 million program but a $125 million program," Stokes told WPRI.com that summer.

Disputes money meant for Schilling

Fox said lawmakers more than doubled the loan program's size in light of advice offered in the past by Christopher "Kip" Bergstrom, the defunct Rhode Island Policy Council's former executive director, and experts at Bryant University who said the EDC needed the capacity to make much larger bets on individual companies.

"Rhode Island needs to be … known for something - a sector - and go big," Fox said he was told. He continues to think there is a need for loan guarantees to technology firms. "The program that we created has merit," he said.

Fox said Friday the EDC never told him the entire $75 million would go to 38 Studios. "I never told the EDC board to give $75 million to Curt Schilling," he said. "I never looked at one of Curt Schilling's financials. ... I never talked to one board member about it."

"I know it sounds like, oh, yeah, this was all earmarked to Curt Schilling, but it was not," Fox said. "It was to set a program large enough to say that let's create room for a company like Curt Schilling's company – without mandating it."

Fox nevertheless hailed the $75 million loan guarantee when the EDC board approved it July 27, 2010, saying in a statement: "The plan approved today fits perfectly with the Assembly’s emphasis on attracting knowledge-based technology companies that offer high-paying jobs that are so sorely needed."

Schilling later praised Fox and his colleagues for their "pure motives," telling Fox News: "I watched the speaker of the House, who is a Democrat in Rhode Island, adamantly push to create this job guaranty program, this job creation program –along with Republicans and independents – to do right by the people."

Pivotal meeting this April

Chafee, an opponent of the 38 Studios deal, succeeded Carcieri in January 2011. Fox said he had "no conversations, no updating" about the company until two months ago, when Zaccagnino called and told him: "We have problems. There's a communication issue. Can you get the governor to come meet with Curt Schilling?"

Chafee agreed to the meeting but told the speaker to come with him. On April 13, they met at 38 Studios with Schilling and Zaccagnino along with George Zainyeh, Chafee's chief of staff, and John Flynn, Fox's legal counsel. According to Fox and Chafee, it was immediately clear the company was facing a cash crunch.

"They start talking about consents to do tax credits and a consent to do bridge financing," Fox recalled, and they eventually slid two documents across the table. "What in the hell?" Fox recalled thinking, adding he was under the impression 38 Studios wasn't eligible for tax credits under state law, and suggesting that may have been why the company wanted Chafee to sign the consent agreement.

38 Studios quickly began to unravel, laying off all its workers by mid-May and finally filing for bankruptcy protection on June 7. Schilling has accused Chafee of deliberately sabotaging the company, while the governor has said he did everything he could within reason. The company is now being liquidated.

Corso, the tax-credit broker, earlier this year secured 38 Studios an $8.5 million loan from Bank Rhode Island in exchange for the tax credits that never came. That and other related matters are now being investigated by the FBI, the U.S. Attorney's office, the attorney general's office and the Rhode Island State Police. Fox said he has not been questioned by law enforcement.

Carcieri 'should come forward'

Fox, who announced this week he'll run for another term as speaker in January, said he wants to see "some real changes" to the House Committee on Oversight in light of 38 Studios, perhaps including new subcommittees. He said Reps. Teresa Tanzi, D-Narragansett, and Edith Ajello, D-Providence, are exploring how to beef up legislative scrutiny of the state's tax credits and loan guarantees.

In Fox's view, part of the problem with 38 Studios may have been the structure its deal with EDC, which required the company to maintain a large payroll. "At the same time, the company's slipping into some sort of bad problem – you've almost got a situation where they can't address it, because they cant lay anybody off because otherwise they're in default," he said.

Fox also said that while he trusted Carcieri's motives in pursuing the deal when he was chairman of the EDC's board, the former governor should break his silence and answer questions about 38 Studios.

"Ultimately the people in the room were the chairman of the board, the vice chair and all the members," Fox said. "What did they see? What financials did they look at? What did they investigate? I wasn't there. I didn't talk to any of these people. Governor Carcieri was there."

"Ultimately I think he should come forward to say what he did and what he knew, because I think it will be helpful for this whole discussion can go forward," the speaker added.

Fox didn't rule out the possibility that Rhode Island will opt to default on the $75 million moral-obligation bonds the EDC issued for 38 Studios, which are not legal obligations of the state and could require lawmakers to appropriate more than $12 million a year for bondholders through 2020.

"That's a discussion that will go forward, because there are implications that if you don't honor the bonds, you'll never be able to sell any more bonds," he said. "All that discussion has to take place, so there's a lot to be discussed. But you're right – it's not per se that we have to pay those bonds, but it's going to be up to appropriation of the future General Assemblies."

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @white_tim