May 26, 2012

(Lack of) Monitoring - What Happened to IBM's Monitoring Reports Once They Hit the EDC?

Monique Chartier

First of all, I agree with the leap-off point of Travis Rowley's column this week: vilification of Kurt Schilling is completely misdirected.

Responsibility for the 38 Studios mess - "mess" as in, who is to blame that taxpayers will probably end up paying $90-100 million hard earned dollars with nothing to show for it - does not rest with Kurt Schilling but with our then-elected officials (G.A. leadership and the Governor; not rank-and-file legislators). Kurt Schilling - and any other businessperson - was perfectly within his rights to come to Rhode Island for a loan guarantee. It was up to us to properly evaluate and then either approve or reject the request. It is not Kurt's fault that our elected officials apparently failed to carry out - or disregarded the results of - due diligence on our behalf.

So state officials failed miserably on advance due diligence. What about diligence and monitoring once the project was underway? From the AP.

The EDC and 38 Studios signed a monitoring agreement in November 2010 under which IBM would provide 38 Studios with an initial assessment of "Project Copernicus" — the development of the company's second game — and quarterly "milestone verification" reports, according to a copy of the agreement.

The initial assessment was to include a review of project plans, financials and financial management as well as an analysis of risks and recommendations on how to mitigate them. Subsequent reports would essentially be progress checks, which IBM suggested would include a review of the project's financial status and a list of results "relevant to Rhode Island's interests."

The agreement said 38 Studios would provide to the EDC copies of all materials prepared by IBM and invite EDC to attend all discussions between 38 Studios and IBM.

But in August, the EDC and 38 Studios signed a "modification and waiver" to the agreement saying that, instead of being provided with IBM's actual reports, the economic agency would agree to briefings from IBM on the findings. This came at the request of 38 Studios.

Observers have pointed out that Governor Chafee has been restrained in not crowing about the failure of a tax-payer backed arrangement which he so vigorously opposed. He has been wise to do so and not just for the sake of decorum but because two of the major questions that have emerged from this mess pertain to his administration:

1.) Who in Governor Chafee's EDC agreed to with 38 Studios' request that IBM switch from written to verbal reports and why did they do so?

2.) What happened to that information once it reached the EDC? Who at the EDC was receiving those reports, written and subsequently verbal? Did those reports contain information that foreshadowed the events of the last two weeks?

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It's clear there was no oversight with this company from the very beginning. Was surprised to learn that Schilling was the lone investor in 38 Studios. Started it with his own money back in 2006 and never had other investors (red flag) until the state came in. No question Schill has lost tens of millions of his own money. He was financing his own start up company/project for several years.
Also no question we taxpayers will lose tens of millions of dollars. What's outrageous is how the only investor in Schilling's company, the state of RI, seemingly never demanded a seat at the 38 Studios table. The lack of oversight is absolutely amazing to me though I don't know why it would be. Government entities are not good at oversight in any arena.
Love the concept of developing a high tech business core in downtown Providence. Tech jobs are good paying jobs and will only grow in the future as technology grows. Obviously what's needed is to find other ways to lure start-up companies to this area.

Going after Schilling is like picking low hanging fruit. It's the easy way out and our media loves easy street particularly when the target is a political enemy to 99% of them.
The hard work is to find the story behind the story. As Monique points out with the IBM story, why were provisions for badly needed oversight altered and who agreed to it? Were promises made to Schilling (future tax credits, etc) in the past that encouraged the fiscal aggressiveness of 38 Studios vis-a-vis their major project - Copernicus?? And if promises were made to Schilling who made them and when??
Sadly as with most events I don't think we'll ever find out the whole story but I do think there is so much more that will come to light.
Kudos to whoever lands the first Schilling interview. Have a feeling that Schill is going to have some very provocative and eye opening things to say about what went down between his company and the state.

Agree with much of Travis Rowley's commentary. However what's so troublesome here is that Travis a) actually bothers to read the Providence Phoenix and b) cares one iota what losers like Chip Young and Rudy Cheeks aka Phillippe and Jorge have to say about anything. There are many media targets Travis could cite for their politically motivated and highly jaded coverage of Curt Schilling but he goes with Beavis and Butthead??
Come on Travis, please elevate your game.

Posted by: Tim at May 27, 2012 9:03 AM

Hmm, "well within his rights" and "not his fault, it's the politicians..." That's a new tune, it sure as hell is te one often sung around here when it's the big bad union members who "are culpable" and "the pigs at the trough"... I guess it's a different song when it's millionaire conservatives doing the plundering.

Posted by: Rich at May 27, 2012 1:01 PM

"I commend the RIEDC Board for its extensive due diligence and for taking this significant step to bring jobs to Rhode Island," Carcieri said the night the agency approved the loan to Schilling. "I welcome 38 Studios and am confident Rhode Island will provide the environment and workforce to make the company a leader in the interactive entertainment and video game industry"

Posted by: Sammy in Arizona at May 27, 2012 1:12 PM

Sammy...never heard your take on Solyndra. Oh that's right it was a liberal boondoggle wasn't it. The "green" fraud has cost a ton more. Not letting old #38 off the hook but fraud and incompetency are not partisan issues.

Posted by: ANTHONY at May 27, 2012 4:37 PM

Why is everyone trying to find depth in this, it is obvious that the EDC was "off on a lark".

At one law firm I was with, we set up a federal bank. It was decided to hire a Red Sox player as the President. Everyone thought that was very prestigious and great fun, everyone wanted their picture taken with him. I think he lasted a year. Then everyone was on the bandwagon making fun of his ineptitude.

What you did to set up a federal bank in Massachusetts when Ted Kennedy was a senator is another whole story.

Posted by: Warrington Faust at May 27, 2012 6:49 PM

I don't see how Chafee can't take some of the heat for Monique's questions 1 and 2. The Governor is the chairman of the board at the EDC and Chafee hand picked the vice-chair of the EDC board.

So how did this agreement get changed without the knowledge of the chairman and vice-chair? Or if both knew about it, what were they doing with this verbal information from IBM?

Or was the chairman of the EDC board negligent in his duties?

Posted by: Patrick at May 27, 2012 9:23 PM

How would monitoring change the outcome here? Wasn't the money already in the company's hands?

Posted by: David S at May 28, 2012 7:52 AM

"well within his rights"

Complete the sentence, Rich: "Well within his rights" to ASK for state loan guarantees. As it is the right of any businessperson, rich or poor; conservative or liberal. It is then the obligation of the state (in most cases) to say "No!"

"Going after Schilling is like picking low hanging fruit."

Well ... it looked like fruit only if it wasn't examined closely, which, unfortunately, is what happened.

"Were promises made to Schilling (future tax credits, etc) in the past that encouraged the fiscal aggressiveness of 38 Studios vis-a-vis their major project - Copernicus?? And if promises were made to Schilling who made them and when??"

Yes, one wonders if verbal representations were made at some point.

Posted by: Monique at May 28, 2012 7:57 AM
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