Florida Gov. Rick Scott wants to recover state incentive funds by suing bankrupt Digital Domain, whose abandoned headquarters is shown here. The city of Port St. Lucie is struggling to pay debt service on $40 million in bonds sold to construct the building.

BRADENTON, Fla. — Florida Gov. Rick Scott hired outside legal counsel to sue the bankrupt firm Digital Domain to recover $20 million in state incentive funding even though his own inspector general's inquiry found no wrongdoing.

The state gave the special-effects company funds in 2009 to locate in St. Lucie County under the premise that 500 jobs would be created. Digital Domain filed for Chapter 11 bankruptcy in September 2012, and laid off more than 300 employees.

The failure left the city of Port St. Lucie on the hook for debt service on $40 million in lease-revenue bonds issued to build a state-of-the-art digital production studio. The city, unable to sell the building, is paying debt service and soliciting bondholders' consent to refund the bonds.

Scott, a Republican seeking reelection this year, claims former Gov. Charlie Crist and his administration circumvented state regulatory processes to give the project state funds.

Crist, a former Republican who has since become a Democrat, is also running for governor this year. He hasn't responded publicly to the Digital Domain suit, but he and Scott have traded barbs in television ads over other issues, particularly education funding.

A number of state officials and legislators had a hand in approving the Digital Domain funds outside the normal review process, including Crist when he signed the budget, and Jennifer Carroll, a Republican state representative at the time who resigned as Scott's lieutenant governor last year, according to an investigative report in March 2013 by Scott's inspector general, Melinda Miguel.

"We found no apparent violations of law, rule or regulation in the award of $20 million economic development incentive funds to Digital Domain in 2009," said Miguel's report. It also noted that a similar situation could occur again if the Legislature approves an appropriation and gives the governor discretion to spend the funds.

In a press release by Scott on Wednesday, the governor's general counsel Peter Antonacci said, "The IG investigation into the 2009 Digital Domain deal revealed that the usual state regulatory processes were circumvented to give Digital Domain tens of millions of dollars in taxpayer funds.

"The collapse of the Digital Domain project, which was promoted by the previous administration, then left Florida taxpayers on the hook," said Antonacci. "The state has hired outside counsel to identify any and all legal action available against the company and any other individuals involved in wrongdoing related to this bad deal."

John Textor, who headed up the company, told the Palm Beach Post that it appeared the governor did not read the inspector general's report.

"Given the timing, this is clearly an election ploy targeted at the Crist administration," Textor said.

Port St. Lucie has tried, unsuccessfully, to sell the building.

Earlier this year, the city wanted to refund for debt-service savings the $18.04 million of taxable bonds and $21.86 million of recovery zone facility bonds sold in 2010. The refinancing was called off after it was determined that the indenture only allows a refunding if the building is sold.

In March, the City Council approved hiring New York-based Bondholder Communications Group to help track down investors to get consent from 51% of the bondholders to amend the indenture and remove the requirement that the building must be sold before calling the bonds.

In an April 21 notice to bondholders on EMMA, finance director Edwin Fry explained that the city has used non-ad valorem funds to pay debt service that were not expected to be a long-term source of payment.

"These appropriations have been painful, straining the city's financial resources," Fry wrote. "The city needs to obtain a longer term bond loan with an up-front grace period to give the city the time needed to try to sell the building."

Fry asked bondholders agreeing to amend the indenture to contact the Bondholder Communications Group.

Some of the bonds are actively trading above par.

On June 30, a customer bought $25,000 of recovery zone facility bonds at $104.21 to yield 4.21% at maturity in 2031. On July 1, a customer bought $5,000 of taxable bonds at $101 to yield 6.01% in 2021.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.