Debate over Rhode Island's 38 Studios bond fiasco smoldered late Tuesday night as a state lawmaker offered the House Finance Committee a bill to bar a scheduled payment of $12.5 million on moral obligation debt issued for the failed video-game company.
The same panel had approved the payment by a 14-2 vote last week as part of Gov. Lincoln Chafee's proposed $8.7 billion budget. The full House is expected to vote on it Thursday.
But committee member Rep. Karen MacBeth, D-Cumberland, called for the ban anyway.
MacBeth, also chairwoman of the House oversight committee, wants her panel to have subpoena power its now lacks to further investigate the controversial bond deal that has left Rhode Island taxpayers on the hook for the $75 million bond deal, and put a capital markets spotlight on the Ocean State.
"We've had experts say we should conduct due diligence and our speaker went to New York to meet with the bond-rating agencies, but that's only one piece of the puzzle," MacBeth told colleagues before an overflow crowd in Room 35 at the State House in Providence. "We still need to hear from bond buyers and bondholders."
House Speaker Nicholas Mattiello, D-Cranston, urged the state to pony up after visiting the rating agencies in New York three weeks ago. Fitch Ratings and Standard & Poor's rate Rhode Island's GO bonds AA, while Moody's Investors Service assigns an Aa2 rating.
The state is suing multiple parties, including 38 Studios founder Curt Schilling, the former Boston Red Sox pitcher, and a plethora of financial advisors, accusing them of negligence, fraud and breach of financial duty.
Last month, the personal lawyer for former House Speaker Gordon Fox, whose Providence home and State House office were raided by law enforcement officials in March, sought to quash a subpoena calling for Fox to testify in that lawsuit, saying a "wide-ranging" grand jury investigation may include the 38 Studios financing.
In addition, the Securities and Exchange Commission is examining the deal.
Rep. Michael Chippendale, R-Foster, also a House finance member, wants to appoint a select commission to investigate the deal as well as "the enactment and administration" of the Rhode Island jobs guaranty fund, which spawned the financing.
"Regardless of whether we pay or not pay, let's blow this thing wide open," Chippendale said Tuesday night. Chippendale, like Macbeth, opposes paying the debt. Both received threatening letters over their desire to further investigate.
MacBeth said she still seeks documents pertaining to a yet-completed forensic audit that Chafee ordered the Rhode Island Commerce Corp. to undertake. "This has certainly been a bone of contention for me and an issue given the threats that I received after that," said MacBeth.
Director of Administration Richard Licht told MacBeth he would follow up with Commerce Corp.
MacBeth said she received a letter from Commerce Corp. officials Tuesday asking for 20 more days to produce the documents, saying "the voluminous nature of the request" would place an "undue burden" on the Rhode Island Commerce Corp. That agency in 2010 -- as the Rhode Island Economic Development Corp. -- made the $75 million loan guarantee, and issued the bonds they back, to lure Schilling's company to move to downtown Providence from Maynard, Mass.
38 Studios filed for Chapter 7 liquidation in 2012.
MacBeth urged her colleagues not to rush to pay a debt not due until November. "They want more time, then we should have more time. We can put this off and we can do a supplemental budget in the very least, to get more information."
MacBeth said businesses have been reluctant to invest in the state, citing a toxic political and economic environment.
"I've had that happen twice, and it wasn't because of 38 Studios bonds, it was because they don't want to pay, as they call it, the 'initiation fee' to come into this state," she said. "It's absolutely imperative that we clean up this state. I don't think it's just with 38 Studios, I think it's a cleanup overall."
Rhode Island should negotiate with bond insurer Assured Guaranty Municipal Corp. for reduced payments, MacBeth added.
The Providence Journal, citing documents received under the Freedom of Information Act, reported Tuesday that the original 38 Studios investors included the Attorney's Liability Protection Society, the South Dakota State University Endowment Foundation and the Wells Fargo Corporation Pension Plan. It reported that the letters, required as part of the bond sale and signed by their portfolio managers, said they were each "sufficiently knowledgeable and experienced in financial and business matters, including the purchase and ownership of taxable bonds, to be able to evaluate the risks and merits of the investment.''
A report by SJ Advisors of Eden Prairie, Minn., commissioned by the state at a cost of $75,000, warned that nonpayment could trigger a GO downgrade to junk.
The same pro and con arguments about paying the debt resurfaced Tuesday. State officials and business leaders admonished the state to pay the debt amid dire warnings from agencies that they would lower Rhode Island's general obligation rating.
According to Peter Marino, director of the state Office of Management and Budget, nonpayment would reverse the goodwill Rhode Island generated in the capital markets through such measures as the 2011 bondholder protection law that set up Central Falls to file bankruptcy and exit from Chapter 7 within 13 months. "Not making this payment will make Rhode island famous for all the wrong reasons," he said.
Brian Bishop, legal researcher for the libertarian-leaning Stephen Hopkins Center for Civil Rights, suggested putting the money in escrow pending an investigation by the state attorney general's office for possible deceptive practices by the rating agencies.
He said that was the genesis of a lawsuit by Connecticut Attorney General Richard Blumenthal on behalf of that state's municipalities that resulted in a $900 million settlement by the rating agencies.
"The state has to respond the way it should when its interests are threatened," said Bishop.