A bribery scandal that rocked Louisiana’s burgeoning film industry in 2007 may cost state taxpayers another $6.5 million.
An independent arbitrator has ordered the state to fork over that amount in disputed film tax credits to Malcolm Petal, a former New Orleans lawyer who was convicted of paying off the state’s film commissioner in exchange for millions of dollars in tax credits based on inflated expense reports.
A Feb. 12 letter from the arbitrator directs the state’s Department of Economic Development, which oversees Louisiana’s film incentive program, to issue the credits to Petal within 10 business days.
Through his firm, LIFT Productions, Petal was a dominant player in Louisiana’s film incentive program after the Legislature set it up in 2002. He handled the tax credit applications for many of the films that used the program in its early years.
But in 2009, he was sentenced to five years in federal prison for bribing Mark Smith, who oversaw the film program for the state and admitted signing off on inflated expense reports submitted by Petal so that Petal would receive extra tax credits. Petal has since gotten out of prison.
Smith also admitted to taking a generally lenient view on approving film expenses at a time when the law governing the program was relatively new and unclear on some crucial points.
Smith had initially approved at least some of the credits in dispute, but the state disallowed them after further review, and Petal was never able to cash them in.
One of Smith’s liberal interpretations — encapsulated in a June 8, 2004, letter to Petal — appears to have played a key role in the arbitrator’s decision to award Petal the disputed credits. That raises the specter that Petal’s bribes, paid around that time, are continuing to pay him dividends today.
“So, if you bribe a public official, which Petal admitted to, you can still collect on the favors the public official gave you,” said Robert Travis Scott, president of the watchdog Public Affairs Research Council, who covered the film scandal as a reporter for The Times-Picayune. “Although the arbitration document unfortunately doesn’t address that question directly, that’s essentially the impact of its conclusion. This is a giant, unexplained, gaping hole in the arbitration document and, unfortunately, another sorry chapter in how this film tax credit program has been abused and has damaged the public trust.”
The central issue in the dispute is which version of the state law governing tax credits should be applied to two films — “Mr. Brooks” and “Pride” — and whether the millions of dollars spent to market and distribute those films should have qualified for Louisiana tax credits.
The law was amended in 2006 to make clear that such expenses do not qualify.
But an earlier version of the law was murky on that point, and Petal cited a June 2004 letter from a Department of Economic Development official that said such expenses would qualify. The arbitrator, Lawrence Saichek, quoted the letter in his ruling but did not identify the official.
However, a June 2007 Times-Picayune story mentioning the same letter — which also authorized the “double-counting” of certain expenditures — says it was signed by Smith and his then-boss, Don Hutchinson, who was secretary of the Department of Economic Development at the time. By then, the newspaper reported, the department had basically disavowed the letter; its executive counsel, Richard House, said Smith wrote it and “controlled the entire process, period.”
In his decision, Saichek wrote that the letter is a “written directive” that amounts to a policy interpretation and that the state should therefore be held to it. He also found that the makers of the two films in question had done enough work in 2005 to be “grandfathered” under the law as written then.
Saichek notes Petal’s checkered past, saying his word should not be taken at face value, but he writes that the state did little to rebut the lawyer’s claims about how the law should have been applied in this case.
“Mr. Petal’s credibility is certainly suspect, but it is hard for this arbitrator to reconcile that no one from the state could testify as to the specific criteria considered in December 2005,” he wrote.
It is unclear from the documents provided by the state to The New Orleans Advocate whether state officials tried to argue that Smith’s 2004 guidance had been influenced by the bribes he took from Petal.
State officials issued a prepared statement late Friday on the ruling.
“Prior to 2006, the state law governing the film production tax credit program did not expressly disallow tax credits for marketing and distribution expenditures,” said the statement, attributed to Chris Stelly, director of the state’s entertainment incentives. The state’s “consistent position has been that incentivizing marketing and distribution expenditures was never an intended purpose of the program. However, under the terms of binding arbitration that apply to LIFT’s projects, the arbitrator has directed issuance of tax credits for marketing and distribution expenditures despite LED’s objection.”
State officials did not answer questions about whether they can or will appeal the arbitrator’s ruling. Neither the state’s lawyer nor Petal’s lawyer returned phone messages left Friday.
Under the program’s original rules, a film could receive tax credits equaling 15 percent of its total cost as long as it was filmed in Louisiana. Current rules allow films to get credits for 25 percent of all costs incurred in Louisiana. The tax credits are transferable and have a cash value, typically between 80 and 85 cents on the dollar.
While the program has helped make Louisiana a filmmaking capital, it also has been a source of constant controversy, both because of corruption and because of questions about whether the generous nature of the subsidy makes the program a net money loser for the state.
The Legislature is expected to take up reforms to the program when it meets in April.
When federal authorities began scrutinizing the program in 2007, “Mr. Brooks” was one of the films at the center of the investigation, although it was never mentioned in any indictment.
The film attracted controversy because Petal sought credits based on expenses of $34.1 million, even though star and co-producer Kevin Costner said it cost less than $20 million to make.
Petal and Smith eventually both admitted that Petal paid $135,000 in bribes to an intermediary, William Bradley, who then passed half that amount to Smith. In exchange, Smith — who was sentenced to two years in prison — said he signed off on inflated expense reports for various films, allowing Petal to collect tax credits he didn’t earn.
Just how much the scheme perpetrated by Petal and Smith cost Louisiana taxpayers was never clear. Then-U.S. Attorney Jim Letten said at the time that Petal received “way more” credits than he deserved, but there was never an effort to account for all the missing dollars.
Petal was ordered to pay $1.35 million in restitution to the state.
Louisiana’s film program has been dogged by other scandals, some involving the sale of phony tax credits and others involving the issuance of unearned tax credits based on inflated expenses or the use of pass-through companies.
(Courtesy of theadvocate.com)