My Back Story
“There is no
financial information discussed at all and no analysis on the ability of the
company to perform. …To be honest, I have more information on the typical $10k
micro loan than I have on a $75 million request. This is a problem.”
–
from e-mail sent by Economic Development Corp.
financial analyst Sean Esten to J. Michael Saul, the EDC’s deputy director,
but hidden from the EDC board of directors.
MY BACK STORY ABOUT RHODE ISLAND’S DEBACLE OF A DEAL with Curt Schilling and his 38 Studios begins with
a $10,000 small micro-business loan to a surfboard manufacturer, Kevin
Cunningham, a Rhode Island School of Design graduate who saw in surfboard
creation a highly functional form of art.
The R.I. Economic Development Corporation’s public relations
firm, Duffy & Shanley, sent out a news release in early 2010 promoting the
deal as an example of the state’s investment in small business entrepreneurs,
hyped by the agency as an example of a smart investment in small businesses,
the veritable economic engine of Rhode Island’s economy. (Why does a state
agency with its own communications staff need to hire a public relations firm?
That’s a good story for another day.)
My editor at the Providence Business News assigned me the surfboard story. (I had been hired
the second week in January of 2010, filling in full-time for a staff writer who
had taken a medical leave.)
I diligently began to research my story about Cunningham, an
artisan who was creating his custom surfboards in a rented workspace on Allens
Avenue, across the street from the garish pink Cheaters strip club. (I wondered
out loud, jokingly, in the newsroom at that time: “Are strip clubs in
Providence an economic engine?” The response in the newsroom was a stony
silence.)
Digging into the story, I uncovered that there had been only
two such loans made between 2008 and 2010, $10,000 for Cunningham and $30,000
for a day care business, for a total of $40,000, a paltry amount.
The reason: the state’s Micro-Business Emerging Growth Fund,
set up in 2005 with $1 million as a separate allocation stream within the
larger Small Business Loan Fund, now had only about $120,000 left to lend to
startups, according to EDC officials. As a result, micro-loan applicants were
being referred elsewhere, according to EDC Deputy Director J. Michael Saul.
In terms of available capital to lend out, things were even
worse at the Small Business Loan Fund, which was also running out of money. It
had only about $630,000 available for lending in the $13 million fund, given
commitments and reserves needed to operate the fund, according to Saul.
Keith W. Stokes, the newly appointed EDC director (another
candidate, who had been recruited from Arizona, suddenly withdrew after the
accepting the job despite a starting salary of more than $400,000, citing
personal reasons), had asked the Rhode Island congressional delegation to
create a legislative earmark of $5 million to recapitalize the fund, according
to Saul. Saul said the EDC hoped to see the money by Oct. 1, 2010 (the
beginning of federal fiscal year 2011).
I think there is a much larger story here, I told my
editors. They told me to pursue it; I began some old-fashioned “enterprise”
reporting.
When I asked the EDC for details of the investments made for
the last three years by the small business loan fund, after a delay of about
three weeks, I was finally provided a basic list of companies which had
received loans, the amount, along with prospective figures for the amount of
jobs retained and jobs added as a result of the loans. The problem, as I soon
discovered, is that a number of these businesses had gone belly up during that
time period.
I asked for additional information, related to the companies
that had gone out of business and defaulted on their loans. The EDC under
Stokes refused, stonewalling. The newspaper had to make a formal public
information request for the public documents before the information was
forthcoming, one of the few times in the newspaper’s 25-year history it had to
do so.
What emerged from the documents was the fact that the EDC
had made a number of investments that had gone south into bankruptcy, but that
the job statistics for these defunct businesses were still being included and
tallied as part of the agency’s overall record.
Digging further, I found out that the agency’s statistics
for new jobs created were taken directly from the companies’ own projections,
and had never been updated since the initial loan had been granted. The agency
had mailed out a questionnaire to the companies that received loans, but only
about 50 percent had responded, and the information had yet to be compiled. It
was sitting in a manila folder, according to an EDC financial analyst, Sean
Esten.
[It was Esten’s critical comments in an e-mail to Saul,
about the lack of financial documentation for the Schilling loan, saying that
approval of an EDC $10,000 microloan had more financial documentation, that has
become the critical piece of evidence in a lawsuit charging fraud against
Schilling, Saul and Stokes, among others. Esten’s e-mail and comments were
purposely withheld from the EDC board of directors, according to the lawsuit.]
The Slater Fund, a state investment fund for new technology
start-ups in Rhode Island, had addressed the jobs data issue by changing the
way it calculated jobs – on the basis of person hours per year – as a way to
deal with frequently changing metrics with new entrepreneurial firms. But the
EDC under Stokes had apparently refused to adopt a similar approach; Stokes even
blocked Slater from issuing a report with its jobs analysis, according to one
of the Slater Fund principals.
[For example, before its plunge into bankruptcy, the figure
given by Schilling and his shills at the EDC is that his 38 Studios created
some 300 jobs to date, out of a promised 450. Now, all the employees have been
laid off. So, how many jobs were actually created? Using the Slater Fund
formula, it can be calculated in person hours per year, an accurate measurement
of the jobs created.]
But, let’s get back to the narrative. The prospects for
getting a Congressional earmark to recapitalize the small business loan fund
did not seem very promising, so, in early March, Stokes approached a number of
state legislators and EDC board members about creating a state bond initiative
for investments in small businesses, for the sum of $50 million, tantalizingly
calling it the Jobs Creation Guaranty Program.
The mantra was that this was all about “jobs, jobs, jobs,
jobs, jobs,” as EDC’s Saul told me during a two-hour interview the first week
in March of 2010, hammering away with the pitch that small businesses were the
major economic engine for the state, even going to a white board to lecture me
patronizingly on small business loan funds worked.
What happened next was a classic bait-and-switch engineered
by then-Gov. Donald Carcieri and Stokes, who turned the $50 million “Job
Creation Guaranty Program” into a $125 million boondoggle, with $75 million
earmarked to bring Schilling’s fantasy game company to Rhode Island.
Carcieri, attending a fund-raiser at Schilling’s palatial
home, was told by Schilling that he was willing to move to Rhode Island with
the proper investment incentive. Carcieri then put the idea into motion.
A plan of action was reportedly hatched at a meeting in
March 2010 at 38 Studios offices in Maynard, Mass., attended by R.I. House
Speaker Gordon Fox and then state Rep. Steven Costantino. Costantino suggested
adding the $75 million sought by Schilling to the Jobs Creation Guaranty Program.
A lawsuit is now before Superior Court Michael A.
Silverstein, charging Stokes and Saul and attorney Robert Stolzman with fraud,
claiming that they purposely deceived the EDC Board of Directors about the
terms of the deal giving $75 million to Schilling’s game company.
Back to my narrative. In mid-May, as my story moved forward
at PBN, approaching publication, I was asked by the editor on Tuesday, May 18,
to call Carcieri’s office to get a comment on the bond proposal0. What I got in
response was an irate Amy Kempe, the governor’s spokeswoman, yelling at me on
the phone, telling me I had gotten the story wrong and didn’t know what I was
talking about.
“I thought we got this taken care of,” Kempe told me,
alluding to an answer given to me by a R.I. House spokesman Larry Berman,
denying that there was any such effort underway to float a proposal for a state
bond initiative.
I calmly
informed Kempe that I had three EDC board members and two state senators
confirming the story of a $50 million jobs program bond, and if she wanted to
call them liars, I would be happy to quote her.
Changing her tune, Kempe told me: “You need to talk with
Keith.” I replied that I had been trying to talk to him for two months.
Within 15 minutes, Stokes called me, once again, taking the
initial same tack of denial as Kempe, until I told him he was contradicting
information from legislators and his own board members. On a dime, Stokes
changed his tune and said that the planned policy on the bond had changed. The
exact details of how it was changing, however, were not explained.
What had happened, I believe, was that Stokes, going along
with Carcieri’s push on behalf of Schilling, had changed the entire m.o. behind
the program to include funding for Schilling’s enterprise.
I also believe the absurdly strong push back from Carcieri’s
office and Stokes had been a result of their efforts to keep their support for
the pending Schilling investment under wraps.
Further, the House leadership, under Rep. Gordon Fox and
then House Finance Committee Chairman Steven Costantino, was well aware of what
was going on. There appeared to have been some kind of coordinated collusion
between the House spokesman, the EDC and the governor’s office to put out
misleading and inaccurate information in answer to my questions.
Indeed, on May 19, one day after my interview with Stokes,
Costantino moved the EDC loan guarantee program into a separate bill, with up
to $125 million in economic development bonds to be paid for by Rhode Island
taxpayers. The House passed the bill on May 25, and the Senate followed on June
11, enacting the Jobs Creation Guaranty Program
However, the Schilling part of the program didn’t become
fully apparent until three days after Carcieri signed the bill, when the EDC
board of directors voted preliminary approval of the loan to Schilling.
Surprise, surprise, surprise, as Jim Nabors’ TV character, Gomer Pyle, used to say.
You may ask: How come I didn’t pursue the story, once the
investment in 38 Studios became public? On May 20, my stint as a full-time
reporter at Providence Business News came to an end, as the staff writer
returned to work from her medical leave.
I was asked to continue as a freelance writer for the
newspaper; I agreed, but my beat switched to health reporting. My two-part
story, which ran on the front-page of consecutive issues, ran in June.
Alas, no one at the newspaper ever followed up on my story.
At various times, when I asked to pursue the story, I was politely told no, it
was the provenance of other reporters now.
[It’s not the first time in my career that I have
experienced the fate of uncovering a great story, only to have it fade away. In
Washington, D.C., in early 1984, I heard from one of my housemates that U.S.
soldiers were secretly fighting, in combat, in Nicaragua, with casualties. He
found this out because he taught a history course for recovering soldiers as an
adjunct professor at Walter Reed Hospital, and some of his students told him
they had been shot up fighting in Nicaragua. If this were true (and it was), it
was a huge story, because it would violate U.S. law and contradict the
statements of President Reagan. Because I was an editor with an environmental
magazine, I gave the story to the husband of a colleague, a producer at ABC-TV
News. He dug into it for all of a day, got the usual government denials, and
said there was no story. The producer never talked to my housemate, I found out
later. Two years later, however, when the Iran-Contra story broke, and American
Eugene Hasenfus was shot down over Nicaragua, it was a huge story.]
In the end, sadly, no one else in the local news media
pursued my stories focused on job creation and the small business loan fund:
not The Providence Journal, not the local TV stations, Channels 6, 10, 11 and
12, not the local news radio operations, WPRO and public radio’s WRNI, not
Patch nor GoLocal, online news ventures. Not Ted Nesi, not Ian Donnis, not Mike
Stanton, not Buddy Cianci, no one. And, not PBN.
Now, they would have you believe that they are all over the
story as the tragic (or is that comedic) 38 Studios story unravels.
How close did I come to unraveling the Schilling escapade?
I’ll never know; given the way that Amy Kempe was screaming at me, it may have
been very close.
What has been learned about job creation from this
disastrous investment? And the need for better job creation metrics? Not much,
if anything, I’m afraid.
Any regrets? Not really. I did a good piece of work; my
stories were very well done.
Here are the links, if you want to read them.
http://pbn.com/EDC-business-loans-run-the-gamut,50698?content_source=archive&search_filter=asinof&search_filter_mode=and&search_range_option=entire_site&sub_type=stories,packages
And the first micro-loan story:
ECONOMIC DEVELOPMENT
EDC loan funds running on empty
LOAN
WOLF: Kevin Cunningham checks the line detail on a custom surfboard built at
his Providence company, Spirare Surfboards. The startup was a recent recipient
of an EDC micro-loan. PBN PHOTO/FRANK MULLIN
BY RICHARD ASINOF
PBN
CONTRIBUTING WRITER
3/1/10
With the help of a $10,000 micro-business loan from
the R.I. Economic Development Corporation, Kevin Cunningham hopes to carve out
a niche in the $150 million national market for manufacturing surfboards.
In many ways Cunningham, a 2005 Rhode Island School
of Design graduate in architecture, is a poster boy for the state’s newfound
emphasis on small-business creation – and especially helping young
entrepreneurs create businesses and jobs in green, sustainable industries here in
Rhode Island.
Yet EDC Deputy Director J. Michael Saul says the
state’s Small Business Loan Fund has only about $630,000 available for lending
in the $13 million fund, given commitments and reserves needed to operate the
fund.
Keith W. Stokes, the new EDC director, recently
asked the Rhode Island congressional delegation to create a legislative earmark
of $5 million to recapitalize the fund, according to Saul. “It’s a brand new
request,” Saul said. The EDC would like to see the money by Oct. 1, 2010 (the beginning
of federal fiscal year 2011).
U.S. Rep. James R. Langevin, D-R.I., is weighing
the merits of EDC’s request. “Small businesses are the backbone of our state’s
economy, and we must work together on solutions to ease their access to
capital,” Langevin said.
Similarly, the state’s Micro-Business Emerging
Growth Fund, set up in 2005 with $1 million as an allocation within the larger
small-business loan fund, now has only about $120,000 left to lend to startups.
Since 2005, the state has closed 30 micro-business
loans, totaling $880,000, according to Meaghan Wims of Duffy & Shanley, a
public relations consultant working with the EDC.
But in the last two years only two micro-business
loans have been made – $30,000 in July 2008 to A Family Tree, a child-care
business in Warwick, to help with a down payment to buy a building and expand
operations, and $10,000 last month for Cunningham’s environmentally friendly
surfboard-manufacturing company.
Since the beginning of 2009, however, according to
the EDC, the lack of resources has caused between 20 to 30 potential applicants
to be referred to two new micro-business lending options – SEED, the
Southeastern Economic Development Corp., which provides micro-loans via the
U.S. Small Business Administration, and ACCION USA – because they “have better
funding than we do,” said Sean Esten, the financial portfolio manager.
Even so, according to Saul, demand for micro-loans
is not overwhelming. “These loans go to business startups, and most people are
not starting businesses in a deep recession.” In fact, about one-quarter of the
$840,000 loaned between 2005 and 2007 – $220,000 – have had to be charged off,
because of business failure, he said.
For the last two EDC micro-loan recipients, at
least, the funding is doing the one thing on which most state business and
political leaders have agreed is crucial to turning the economy around –
growing small businesses in Rhode Island.
From his cubbyhole in a woodworking shop in
Conley’s Wharf on Allens Avenue in Providence, Cunningham designs and
manufactures surfboards for his startup company, Spirare Surfboards,
established in 2009. “I make functional art – art that is designed to get wet,”
he said.
His “just-me operation” is still a night and
weekends business, as he continues to work his day job as a construction
manager in Framingham, Mass. His wooden surfboard designs, however, have
attracted the attention of the Nike 6.0 surfing team members, Coco Ho and
Carissa Moore, a surfer and documentary filmmaker who is planning to feature
Spirare’s surfboards in an upcoming film, Cunningham said.
“It’s a pretty big deal,” Cunningham continued, “to
get a professional-level surfer on your boards. … A cover shot in a surfer
magazine, that’s going to create a huge influx of interest.”
He currently manufactures three environmentally
friendly surfboard models: recycled foam, which retails starting at about $600;
a wood and recycled foam composite, which runs between $800 and $1,200; and a
wood honeycomb, which starts at $1,500.
The global market demand for environmentally
friendly surfboards has soared since 2006, after Clark Foam, a California
company that supplied about 80 percent of the foam for the world’s surfboards,
suddenly shut down under pressure over environmental restrictions for its use
of the chemical TDI, or toluene diisocyanate, according to Cunningham. The
firm’s abrupt demise created a big hole in the marketplace.
When he applied for loan support from the EDC,
Cunningham said, coming from an art school, he had never done a business plan
before. He says the EDC staff was helpful in preparing the financials. His
three-year, $10,000 loan is at 6.25 percent.
Ironically, Cunningham also received help from a
$5,000 fellowship in 2008 from the Rhode Island State Council on the Arts, from
a program that Gov. Donald L. Carcieri now seeks to end in his latest proposed
budget.
A Family Tree, which opened its doors in April
2008, now runs three child-care centers in Warwick, serving about 220 students
in before- and after-school and preschool programs, according to co-owner Erica
Saccoccio. It currently employs 18 people – having added five new full-time
positions when the business opened its third center in October 2009.
Within its first two months of operation, her
child-care business had reached its capacity for enrollment, and Saccoccio saw
that she would need to expand. At a course run by the Center for Women &
Enterprise, Saccoccio learned about the micro-business loan program – and
applied for $30,000 – about half of the down payment she needed to purchase a
new building.
“Without the loan, we would not have been able to
expand,” Saccoccio said.
Until there is new money in the Small Business Loan
Fund, there will be a crimp in lending to small businesses, according to Esten.
Saul called the recapitalization critical to the
state’s efforts to grow small businesses. “The most critical component to start
or expand a small business in Rhode Island which will create jobs is capital,”
he said.
“Right
now,” Saul added, “we are in what I would call a tight capital market.” •
