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Digital Domain Animation Studio Cheated Taxpayers Out of $80 Million, Lawsuit Says

Yesterday the State of Florida sued the principals of Digital Domain to recover tens of millions of dollars in taxpayer-funded incentives that they claim were “fraudulently” obtained from the state.

“The script had the makings of a big-budget Hollywood blockbuster: greed, corruption, special effects, and a star-struck audience willing to suspend belief,” according to the lawsuit. “In the real world, there was no Hollywood happy ending. The hero did not save the day. The villain was not defeated. Instead, the story ended with Florida taxpayers being cheated out of over $80 million dollars.”

Filed by the State of Florida and its Department of Economic Opportunity, the suit (DOWNLOAD the 71-page PDF of the complaint) lists 23 different parties as defendants. The most serious charges of fraud were leveled against two individuals: former Digital Domain CEO John Textor and the company’s president and chief financial officer Jonathan F. Teaford. The other defendants in the suit—who include former state Rep. Kevin Ambler; the company’s secured lender Falcon Mezzanine Partners; the members of Digital Domain’s board of directors; and various accounting and investment firms associated with the company—were cited for civil conspiracy to commit fraud, gross negligence, aiding and abetting fraud, and tortious interference with grant fund agreement.

The lawsuit maintains that the pre-Textor Digital Domain in California was a “de facto Ponzi scheme” that stayed afloat by constantly borrowing money to replace old debt with new debt, and “like all Ponzi schemes, Digital Domain’s demise was a certainty.” Textor’s strategy, according to the state, was to merge the debt-ridden Digital Domain California with the new Digital Domain Florida that would be funded by taxpayer dollars:

Digital Domain’s fraud on the State began in earnest in 2007. For some time, Digital Domain California had been seriously indebted, including to Falcon Mezzanine Partners, its principal lender. Through a series of loans and debt restructuring, Falcon came to hold various notes, stocks, and warrants that by 2009 enabled it to take over the company in the event of a default and call in millions of dollars of personal guarantees. Before 2009, Digital Domain California hatched a new plan to rid itself of debt: 1) start a brand new company (Digital Domain Florida) with no debt on its books; 2) use Digital Domain California’s credentials, together with promises of new high paying jobs for Floridians, as security to obtain grant money for Digital Domain Florida; and 3) use the grant to partially bail out Digital Domain California (who, by June 2009, was on the verge of defaulting with Falcon); then 4) merge Digital Domain California with Digital Doman Florida to keep the failed business model going.

The pitch-man for the plan — code named “Project Bumblebee” — was John Textor, a Florida native turned wannabe Hollywood movie mogul who (together with other notable investors) had purchased an interest in Digital Domain California in 2006. He and others within the company portrayed Digital Domain Florida to the State as a start-up with no debt whose ties with Digital Domain California were its management and visual effects credentials. The script included Textor promising that Digital Domain would bring thousands of high paying jobs to Florida during a devastating recession. But, there was just one catch: it needed millions of dollars in State grant money first. Textor never told the State that as soon as Digital Domain Florida obtained the grant, the money would be committed to repay Falcon. He and others within Digital Domain Florida deliberately withheld that information.

Florida has a system in place to ensure that grant applicants like Digital Domain Florida 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. Much to the dismay of Textor and others fraudulently attempting to portray Digital Domain Florida as a start-up, Enterprise Florida scrutinized Digital Domain California, whose reputation Textor was using as currency for the grant. Pursuant to Enterprise Florida’s normal process — due diligence and consideration of statutory requirements for economic incentives — it found “the financials for the company were ‘extremely weak’” and specifically noted concerns over “profitability, income, equity and debt financing, revenue projections, cash position, executive compensation, and recent litigation” involving Digital Doman California (many of the same “risk factors” it identified as part of its 2007 IPO). Enterprise Florida found that Digital Domain’s unsound business model could not meet the statutorily required five-to-one payback ratio. Accordingly, Enterprise Florida refused to recommend the funding of $20 million for the project.

The state says that after the rejection of funds, Textor illegally lobbied then-Florida governor Charlie Crist. The lawsuit, however, does not include any major legislative figures as defendants. According to the state’s attorney, Bill Scherer, he didn’t find any evidence that Crist or other major figures were pushing for these projects, or that politics played a role in the suit.

John Textor speaking in 2011.

Textor maintains that the lawsuit is politically motivated. In a statement to Cartoon Brew, he reveals that the law firm currently representing the state had earlier agreed to represent him in a case. Here is the full text of Textor’s statement:

This lawsuit reads as a politically motivated fiction. The Studio was built, the workers were hired, the State audited and confirmed that DDMG met all of the grant requirements. After the bankruptcy, Governor Scott’s Inspector General conducted a thorough investigation and found no wrong-doing by me or any of those involved in awarding the grant. Now months before a close election, I am surprised to see the Governor hire a law firm that only recently chose to represent me in the same matters. When acting as my lawyers, they believed the public was not aware of the facts. They met with me several times, received confidential information and agreed to represent me in my efforts to investigate the actions of hedge fund lenders whose predatory actions shut down a performing economic development project. The politics of this lawsuit cannot change those facts. The State’s law firm has knowingly violated their ethical duties as lawyers.

I support the review of DDMG’s overall jobs initiatives. We built two separate programs to deliver on the jobs promise…a studio for 500 jobs and a college to inspire thousands of jobs. The studio did fail, but the college was prospering, even after DDMG filed for bankruptcy. Maybe this lawsuit will force the Governor to explain his own actions in closing the college in South Florida — the biggest part of our jobs program.

  • Toonio
    • Barrett

      That particular cartoon would be more relevant to the whole Curt Schilling/38 Studios game company mess, which managed to bankrupt the entire state of Rhode Island.

  • Pedro Nakama

    The lawsuit maintains that the pre-Textor Digital Domain in California was a “de facto Ponzi scheme”

    Is this studio still in business?

    • I take great umbrage with the above comment. Digital Domain ( under my watch ) was most definitely not a Ponzi scheme and after Mr. Cameron’s departure was mostly profitable. When the Company was sold to Mr. Textor, the Company had over $18 million in treasury and was a well run enterprise.

      • Robert Holmén

        I recall how one of DD’s VFX executives came through Dallas to talk about the studio’s work on “Titanic”. During the Q&A portion of the event an audience member noted that she had repeatedly raved about how young her crew was (26!… 22!… 18!…) and asked her “if there was any place in this industry for someone over 30?”

        She gasped and asserted that they “would NEVER engage in age discrimination,” then in the same breath added, “but I don’t think anyone over 30 would be able to keep up.”

        That was a very disappointing thing to hear from a leader in that business particularly since she was obviously way over 30 herself. I suspect that sort of thoughtless attitude was commonplace and I’m not surprised to hear that things have since gone off the rails for that company.

      • Chapter 11

        If by “Well Run by Mr. Textor” you mean, “Well Run into the Ground”…..Then yes. Well done sir.

  • bob

    but but but… he was so niiiiice.

  • sick_of_the_industry

    Poor Trexor! Why is EVERYONE out to get him?

  • Chapter 11

    And in 2012, DDMG Claimed Chapter 11 Bankruptcy. DD Moving to Vancouver, and taking on Chinese Investors to stay afloat.
    Its Finances and Reputation have been run into the ground since you’ve left Mr. Ross.

  • David Webb

    Considering all that Digital Domain has provided us, they can keep the money! It isn’t even “taxpayer” money, anyhow. In Florida, it’s Republican blood-money taken from private prisons and illegal privatization of public trusts and utilities.

    Why was it only until the money wasn’t being paid back that Florida bothered to investigate DD financials; or, rather, decide to use their financials against them? This is what happens when Republican’s “invest” with the public’s money.

    And, yes, Florida law firms will represent you ONLY to acquire information on your case, then dump you and approach the other side with offers to insider access to use your information against you. So, remember to always get an NDA binding your lawyer!