Florida Claims Filmmakers Defrauded It
PORT ST. LUCIE, Fla. (CN) - Executives from special effects powerhouse Digital Domain duped Gov. Charlie Crist and other Florida politicians into awarding the company a $20 million grant as it descended into bankruptcy, Florida's Department of Economic Opportunity claims in court.
The Florida Department of Economic Opportunity sued former Digital Domain executives John Textor and Jonathan Teaford, et al., claiming they sidestepped the screening process for grant recipients and "illegally lobbied" for millions of dollars in government funding.
Textor and Teaford promised Digital Domain would bring high-paying jobs to Florida, but concealed the Academy Award-winning company's financial problems and misled Gov. Crist and the Legislature about how the grant money would be used, the state agency claims in a 71-page lawsuit in St. Lucie County Court.
The events described in the lawsuit stretch back to 2007, the year after Textor bought Digital Domain with the help of movie producer Michael Bay, who is not a party to the case.
Digital Domain had a long list of movie credits - "Titanic," "Fifth Element," and "Transformers," to name a few - but it was by all accounts carrying millions of dollars in corporate debt when Textor purchased it.
According to the lawsuit, Textor and his associates planned to form a new company in Florida with the Digital Domain name, so they could distance themselves from the corporate debt and have a clean balance sheet that would entice politicians to give them government funding.
"Florida has a system in place to ensure that grant applicants ... are scrutinized to prevent the State from being defrauded like this. At first, the system worked. Digital Domain Florida's proposal for a $20 million grant was rejected by Enterprise Florida, the State's public-private partner charged with vetting potential economic development projects," the lawsuit states.
So Textor made an "end-run" around Enterprise by "wooing then-Governor Crist and the Florida Legislature," according to the complaint. When he and Teaford met resistance in their pursuit of grant money, they "ran to legislators and Governor Crist complaining and lobbying," the lawsuit states.
"Textor's scheme found success because the high-level officials he courted ignored the warnings of agency professionals charged with protecting the State," according to the complaint.
In February 2009, a $6 million package for Digital Domain was approved, but Textor allegedly wanted more money.
Pushing for a larger grant, Textor garnered the help of defendant Kevin Ambler, a state House representative who "illegally received significant stock options" in the company, the lawsuit claims.
Ambler ramped up pressure to fund Digital Domain, and in the spring of 2009 he introduced a budget provision that allowed Digital Domain to circumvent statutory requirements for state funding, according to the lawsuit.
Ambler later took a position on Digital Domain's board of directors.
Crist and the Legislature approved the $20 million grant for Digital Domain as part of the 2009 budget.
From there, the supposedly debt-free corporation that Textor had been touting was merged with Digital Domain's debt-strapped California entity, and the grant money was exploited to stave off an imminent loan default, the lawsuit contends.
Textor and Teaford lobbied for millions of dollars in additional government commitments from the City of Port St. Lucie, where Digital Domain's new, cutting-edge studio would be built. The city backed a $39 million bond issuance for the facility and provided land, low-interest financing, and $10 million in cash for Digital Domain's benefit, according to the company's financial records.
Digital Domain posted hefty losses in subsequent years, and its 2011 initial public offering on the New York Stock Exchange raised less money than it anticipated, SEC filings show.
Though Digital Domain continued to do special effects work on big-budget films such as "Tron Legacy," "Thor" and the "Transformers" sequels, the company was saddled with financial liabilities, the filings show.
The lawsuit claims that Textor, Teaford, the two public offering underwriters (defendants Roth Capital Partners and Morgan Joseph TriArtisan) and several Digital Domain higher-ups all concealed the company's liquidity crisis.
In September 2012, Digital Domain went belly up.
Its new St. Lucie studio was shut down, and hundreds of employees were laid off.
The lawsuit alleges that in the time leading up to the collapse, Textor and his associates kept state officials in the dark about a "death spiral" loan arrangement between Digital Domain and a group of nonparty institutional investors. Those investors forced Digital Domain into bankruptcy and collected $35 million from an expedited sale of the company, while the State of Florida was left to count its losses, according to the pleading.
Defendant accounting firm Singer Lewak all along had been providing "false and misleading" audit reports for Digital Domain, which further obscured Digital Domain's impending insolvency, the lawsuit claims. A clean audit opinion was delivered six months before the company went bankrupt, according to the lawsuit.
After the bankruptcy, Gov. Rick Scott, Crist's successor, initiated an investigation into the state's funding of Digital Domain.
A portion of the lawsuit is based on testimony and evidence from that investigation.
At the center of the inquiry was Dale Brill, the head of the Office of Tourism, Trade and Economic Development under the Crist administration. Brill is not a party to the lawsuit.
According to the inspector general's report, Brill told investigators that he opposed the $20 million Digital Domain grant, but faced the prospect of being fired if he did not support it. He said that rather than throwing himself "on the sword," he buckled and recommended the grant, according to the report.
Brill testified that Crist insisted on the Digital Domain incentive program being vetted in public view; however, he also testified that the statutory grant-screening process was sidestepped, the report states.
"Great energy was put into play" to "intentionally sidestep the process," Brill said, according to the report.
In the course of the investigation, Textor's attorney offered a different narrative. He challenged Brill's testimony and the notion that Textor and his Digital Domain peers had dodged the grant-screening process.
"Any hindsight regrets that Mr. Brill now has about his role in securing funding ... do not change the fact that at the time he expressed nothing short of his full support," Textor's attorney said in a letter to the inspector general .
Textor's attorney wrote that the budget language for the Digital Domain grant was drafted and approved through a "robust and open process." He added that "the record is clear" that Enterprise Florida (the grant-screening firm) approved funding for Digital Domain, albeit in the amount of $11.4 million rather than $20 million.
Ambler's attorney mounted a defense amid the investigation, telling the inspector general that Ambler had not been not promised "any personal benefit as a result of any of his actions in the Legislature."
Regarding Ambler's position on the Digital Domain board, his attorney stated that "the opportunity ... was first presented to [Ambler] long after his tenure in the Legislature ended in November 2010."
Ambler's attorney claimed that "contrary to what has been widely reported," it was Brill and other officials, not Ambler, who wrote the final budget proviso connected to the grant.
Scott's investigation was completed last year. The state's lawsuit was filed on July 22 this year. Crist will seek to retake the governorship from Scott in the November general election.
Florida demands damages for conspiracy to commit fraud (all defendants) and fraud (against Textor and Teaford).
In addition to Textor, Teaford and Ambler, the lawsuit names the following former Digital Domain directors and officers as defendants: John Nichols, Kaeil Isaza Tuzman, John Kluge, Jeffrey Lunsford, Keith "Casey" Cummings, Mark Miller, Rafael Fogel, Cliff Plumer and Carl Stork.
Singer Lewak (Digital Domain's auditor), Falcon Mezzanine Partners II (a Digital Domain lender), Cowen & Co. (Digital Domain's debt placement agent), and private equity firm Palm Beach Capital also are named as defendants, as are Roth Capital Partners and Morgan Joseph TriArtisan (the underwriters for the initial public offering).
Florida is represented by William Scherer, with Conrad & Scherer, of Fort Lauderdale.