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Back in 2010, the Great Recession was hammering Rhode Island and the state was desperate for jobs. In hopes of sparking a new economic sector, Rhode Island lured Curt Schilling’s video game company, 38 Studios, with a $75 million state-backed loan guarantee.
"We are no longer slaves to the winds of fate," vowed a character in "Kingdoms of Amalur: Reckoning," the only game produced by 38 Studios.
But after making that game, 38 Studios ran out of the money it needed to keep going. It went bankrupt in 2012. That left Rhode Island taxpayers on the hook for a total of $88 million.
Schilling told Providence radio station WPRO-AM last year that it still hurts to think about what happened. "Every time I reminisce or talk about this, there’s a lot of pain involved because of the people that worked at the company and what it went through and how it ended. … It ended in a real fiery wreck."
The loan was one of the worst financial decisions in Rhode Island history. Yet the company that served as the state’s financial adviser on the deal has continued doing business throughout the state.
First Southwest worked with the state’s economic development agency on the 38 Studios deal. The state responded by filing a lawsuit accusing First Southwest and other defendants of negligence. The lawsuit alleged they withheld key details about how 38 Studios would run out of money before achieving its business plan.
Rhode Island Treasurer Seth Magaziner led a move to replace First Southwest as the state’s financial adviser in 2015. Magaziner said it didn’t make sense to keep doing business with a company being sued over the state’s misadventure with 38 Studios.
"It was not appropriate for the state to continue its relationship with First Southwest," he said.
Despite that, First Southwest has served as a financial adviser on bond issues for one-third of Rhode Island’s 39 cities and towns since 2014, according to an exclusive review of financial documents by Rhode Island Public Radio. Bonds are a form of debt issued by government entities to pay for various capital expenditures.
The company, now known as Hilltop Securities, has also worked as a financial adviser for seven quasi-public Rhode Island state agencies in recent years, on bond issues encompassing tens of millions of dollars.
Hilltop Securities has been involved with at least two big proposals with uncertain impacts for taxpayers.
The company developed a request for proposals, or RFP, for an unrealized plan to regionalize Providence’s water supply. And Hilltop advised the city of Pawtucket on its debt for a proposed new stadium for the PawSox. The concept is controversial because Pawtucket and the state would borrow a combined $38 million to help pay for the stadium.
"I think it puts the taxpayer on the hook for a private venture’s profits," said Rhode Island House Minority Leader Patricia Morgan.
Morgan is dumbfounded that the same fiscal adviser that worked for the state on the 38 Studios deal has a connection to the PawSox stadium proposal. "It’s ludicrous, isn’t it?" she said. "The state is now basing a financial decision on a firm that they no longer will do business with, because that firm gave them bad advice before. It’s ludicrous."
A court has never determined if Hilltop gave Rhode Island bad advice on 38 Studios.
In February, Hilltop became the last in a series of defendants to settle with the state. The Dallas-based company agreed to pay $16 million without acknowledging any liability or wrongdoing.
Hilltop Securities does business in 17 states, including Connecticut and Massachusetts. The company did not respond to multiple requests for comment for this story.
The Rhode Island communities that have used Hilltop as a financial adviser on bond issues since 2014 are Cumberland, East Greenwich, East Providence, Lincoln, Newport, Middletown, Pawtucket, Providence, Warren, Warwick, West Greenwich, West Warwick and Woonsocket.
The seven quasi-public agencies for which Hilltop has been a municipal adviser since 2014 include the Tobacco Settlement Financing Corporation, the RI Turnpike and Bridge Authority, the RI Infrastructure Bank, the RI Health and Educational Building Corporation, the Providence Redevelopment Agency, and the state portion of a bond issued by the Rhode Island Convention Center Authority; the RICCA used a different financial adviser, PFM.
In Pawtucket, Mayor Don Grebien doesn’t draw a connection between 38 Studios and the work done by Hilltop Securities.
"The deal of 38 Studios was more about economic development and bad decisions," Grebien said. "I don’t believe that they impact that economic development value, if you will, or that decision. They were given the numbers and then the powers to be made the decisions based on some of the information."
In fact, court documents released in the 38 Studios case reveal a lot of finger-pointing about who was responsible for vetting the financials on the costly boondoggle. The company then known as First Southwest was paid $120,000 for its work on the deal.
Grebien credited Hilltop Securities with helping to improve Pawtucket’s bond rating. That makes it less costly for the city to borrow money. For that kind of work, Pawtucket paid Hilltop Securities about $22,000 in 2015.
Grebien says Pawtucket has not considered hiring a different financial adviser since he took office in 2011. And the mayor, the current president of the Rhode Island League of Cities and Towns, is not aware of any Rhode Island communities cutting ties with Hilltop Securities since 38 Studios went bust.
“It’s not something that we’ve gotten into," Grebien said. "You know, each community has their own relationships and responsibilities. Nobody has ever brought up, ya know, I’m not going with Southwest because of, or Hilltop because of … They’re still very involved and very respected throughout the state.”
In Providence, Mayor Jorge Elorza said the city evaluates Hilltop Securities based on its work.
"All the work that they’ve done for us, we’ve been very satisfied with it," Elorza said. "They've helped us save about $12 million over the past couple of years. And every time that we ask them for an actuary run, any time that we ask them for some sophisticated analysis that’s beyond our capacity, they’ve been right, they’ve been responsive, and they’ve turned it around quickly."
Magaziner, Rhode Island's treasurer, sees the issue differently. He said he was amazed when he took office in 2015 by how many important contracts across state government were renewed without going out to bid.
"I don’t know how often that has been the case for financial advisers at the municipal level, but I wouldn’t be shocked if that’s an issue as well -- that some of these relationships have existed for decades and just haven’t been put out for a publicly competitive bid in a long time," Magaziner said.
Magaziner said the state’s selection of a different financial adviser in 2015 shows how many outside firms will bid for business in Rhode Island.
To some, Hilltop Securities' $16 million settlement in the 38 Studios shields the company from criticism, since the allegations in the state's lawsuit are merely accusations.
But another critic sees Hilltop Securities' ongoing role as a financial adviser as emblematic of a broader lack of accountability for 38 Studios.
"It indicates an absence of any conclusions, an absence of answers that were just consistent with the total experience of 38 Studios," said former GOP state Sen. Dawson Hodgson, who unsuccessfully tried to pass legislation to create an independent review of how the 38 Studios debacle happened.
Magaziner said it's up to local municipalities and quasi-public agencies to determine for themselves if Hilltop Securities is the right financial adviser.
"But what I would insist on is, do the process the right way -- put these contracts out to bid periodically at regular intervals; have a real open transparent competitive process for your contracting," Magaziner said. "And cast a wide net -- that’s what we did at the state level."
It took the meltdown of 38 Studios to cause the state of Rhode Island to sever its ties with the company now known as Hilltop Securities. Whether other government entities in the state will now cast a wider net for their financial advice remains an open question.
This segment aired on July 12, 2017.
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