How an investment in a botched video game burned a government startup funding agency so badly it changed its rules

On Nov. 14, 2018, Martin Braganza, a Halifax-based account manager at the Atlantic Canada Opportunities Agency (ACOA), typed up a briefing note as requested by the Minister of Innovation, Science and Economic Development’s office in Ottawa.

The minister, Navdeep Bains, who is responsible for ACOA, would soon be travelling to Nova Scotia for an announcement and had to be briefed on “Hot Topics” that might be raised by reporters.

Part of Braganza’s note concerned Orpheus Interactive Inc., a defunct video-game company that owed ACOA nearly $1 million after badly botching an attempt to build a Sons of Anarchy video game. The memo also focused on James Drage, a Halifax businessman and the main figure behind Orpheus.

According to the memo, ACOA was changing the way it funds startups and had pulled away from funding fledgling video-game companies altogether, seemingly embarrassed by its highly questionable funding of Orpheus Interactive.

At the very least, ACOA was attempting to improve its processes in part to answer questions about its due diligence and stewardship of public money, but some say it has overreacted based on the failings of one smoothing-talking entrepreneur.

There is no doubt that recent reported revelations about Drage had cast ACOA in a poor light and raised obvious concerns about the agency’s ability to select who gets access to its large supply of funding, including grants and no-interest loans.

Though perhaps not well known elsewhere, ACOA is a prominent federal agency in Atlantic Canada, with two-dozen offices across the four provinces that distributed $284 million in the 2017/18 fiscal year.

In November it was revealed that ACOA gave money to Orpheus and two other companies connected to Drage despite his checkered business record.

Drage’s most egregious dealings involved Mary Wood, a British senior who lost her life savings to Drage through two failed mortgage deals while living in Canada. A 2017 court judgement ordered Drage to repay Wood more than $200,000, but she is still waiting for her money. Now in her early 70s, Wood is back in England, relying on the charity of family and friends, doubtful she’ll ever get her money back.

But, according to court records, Drage filed for bankruptcy in 1996 and has been successfully sued numerous times throughout his career by business partners, investors, banks and even his own lawyers. Court records also show that the Royal Bank of Canada’s fraud-detection group in 2012 investigated Drage for suspected cheque kiting, a form of bank fraud.

Court records also show that the Royal Bank of Canada’s fraud-detection group in 2012 investigated James Drage for suspected cheque kiting, a form of bank fraud Cole Burston/Bloomberg

Although RBC ultimately decided not to pursue the matter, the bank lost confidence in Drage and terminated his accounts. He owed the bank $112,000, after Manor Custom Homes — one of his many companies — defaulted on a loan, line of credit and business Visa. Yet he claimed a net worth of $3.8 million at the time.

That history apparently went unnoticed at ACOA. Drage’s associated companies secured nearly $2 million — at least — from ACOA between 2010 and 2015, even though he was facing litigation and a bank fraud investigation.

Internal agency documents, including Braganza’s briefing note, obtained through an Access to Information request, show that ACOA knew that revelations about funding Drage would raise serious questions about the agency’s apparent lack of controls and due diligence.

One document, summarizing the crux of the revelations, asked, “… how did a man with such a questionable legal and business history secure so much money from ACOA?”

Drage, 50, was a known entity at ACOA when he approached the agency in 2013 for money to develop an episodic video game based on the hit cable show Sons of Anarchy, which aired on FX Networks and depicted an outlaw motorcycle club in California.

His company, Orpheus, eventually landed the game’s licensing rights from 21st Century Fox. In August 2013, Drage met with Sons of Anarchy creator Kurt Sutter and executives from FX and Fox to sign the contract in Los Angeles.

Braganza served as a point of contact for Drage at ACOA, and recommended him to Duke Mighten, a comic-book artist and video-game developer who quickly became an Orpheus co-founder. Braganza knew Drage from events and conferences. Drage seemed like a well-connected businessman, an “active investor” who’d worked with ACOA on several projects.

ACOA gave Orpheus $50,000 to get started and later added two interest-free loans totalling roughly $1 million. Nova Scotia Business Inc. (NSBI), a provincial funding agency, provided $21,875, even before Orpheus secured the game rights.

The Sons of Anarchy mobile game episodes were supposed to roll out with the show’s final season in September 2014, but the project was months behind schedule. And the funding Drage promised he’d deliver — $4 million — never seemed to arrive, according to former Orpheus employees.

From the beginning, there wasn’t even enough cash to buy computers, and paycheques were often late or didn’t arrive at all.

In the end, only a single episode of the game was released (Sons of Anarchy: The Prospect), in late January 2015. Gamers who bought season passes, expecting a series of episodes, had to be refunded their money.

A still from the Sons of Anarchy: The Prospect video game by Orpheus. Orpheus Interactive Inc.

In an attempt to save Orpheus, Drage secured a new chief executive, Lance Young. Based in Santa Monica, Calif., Young was a Hollywood veteran who, according to his LinkedIn profile, worked as an executive at Paramount, Warner Bros., and DreamWorks Animation, producing movies such as The Hunt for Red October, Fatal Attraction, Days of Thunder and Free Willy.

But Young couldn’t salvage Orpheus. According to ACOA documents, the company couldn’t fund its day-to-day operations and was overwhelmed by debt.

By September 2016, Nova Scotia’s Director of Labour Standards had obtained a judgment against Orpheus for nearly $120,000 in pay owed to Orpheus employees. ACOA also sued Orpheus that month, securing a default judgment ordering Orpheus to repay nearly $1 million.

Other Orpheus creditors include Ottawa-based OneKey Financial, Green Century Investment Ltd. in Toronto, and Duncan McNaughton, president of Ottawa-based Tiree Facility Solutions Inc., a management consulting and professional services company, who invested $500,000.

In the case of ACOA, the agency isn’t just chasing its Orpheus contributions. The agency is owed hundreds of thousands of dollars by two other companies connected to Drage: Email Opened, an email software company where he was a director and investor; and Dartmouth Medical Research, where he served as president.

All told, ACOA has secured judgements totalling $1.9 million against the three Drage companies.

Drage often worked under the banner of Atlantic Venture Capital Partners (AVCP), which he claims was the first private venture-capital firm in Eastern Canada. He’s still listed as managing partner.

It’s kind of wrong-headed, (this) throwing the baby out with the bathwater approach that they seem to be taking

Darryl Wright, Interactive Society of Nova Scotia board member

Braganza’s briefing note to Minister Bains included the following question: “What are we doing differently as a result of our experience with AVCP/Dradge (sic)?”

The answers to that question were originally redacted, though the department later agreed to release the information.

Braganza outlined four changes, such as retreating from providing game development funding to video-game startups, noting “it’s higher risk than other startups,” and ending the practice of matching funds obtained from outside sources. Instead, ACOA now typically puts up a half or a third of the money already secured from outside investors.

Other changes included less direct “investing” in “pre-revenue” ICT companies, and taking a “phased approach” to funding so that ACOA’s contributions grow as each company grows.

ACOA would only answer questions about the changes on background. Emails and calls made to Minister Bains’s office were not returned. Repeated emails and phone calls to addresses and numbers associated with Drage were not returned.

Despite the wording of the briefing, ACOA said the changes to its funding regime are not directly related to Drage.

“This previously redacted information is not specific to a single event, but rather reflective of the Agency’s natural, on-going evolution of its investment approach,” the agency said when releasing the redacted section.

Regardless, the changes will have an impact on companies seeking funding from ACOA, which is a major source of government money in Atlantic Canada.

“It’s unfortunate to hear. It sounds to me like they’re overreacting a little bit,” said Darryl Wright, who sits on the board of the Interactive Society of Nova Scotia, a video-game industry advocacy group. “It’s kind of wrong-headed, (this) throwing the baby out with the bathwater approach that they seem to be taking.”

Wright was technical director at Orpheus until April 2015, when he quit following four consecutive missed paycheques. He said he was owed about $10,000 and recalls his time at Orpheus as a “harrowing experience.”

This previously redacted information is not specific to a single event, but rather reflective of the Agency’s natural, on-going evolution of its investment approach

Now the managing director at Gogii Lighthouse Studios Inc., he argues the video-game industry is not as volatile as ACOA portrays it to be. Gogii, he notes, has been in business 12 years.

“It’s hard to imagine why (ACOA) would suddenly say we’ve had this one terrible incident so we’re going to curtail a whole industry. It seems off to me,” he added. “Reactionary.”

NSBI chief executive Laurel Broten declined to answer questions about changes her organization could make following its involvement with Drage.

But NSBI noted that its current export and small-business programs require applicants to declare outstanding or pending claims and litigation. The program Drage accessed — the now defunct Global Business Accelerator Program — did not have that requirement at the time.

In 2017, after Orpheus had failed and with creditors still owed money, Drage took part in a delegation — led by NSBI — to a kids’ entertainment summit in Miami, representing a new video-game company, Participant Games. The company, where he was listed as founder, was also part of NSBI delegations to the large Game Developers Conference (GDC) in San Francisco in 2017, and the Miami kids’ entertainment summit again in 2018.

Drage also showed up at GDC in San Francisco in 2018, though he wasn’t part of an NSBI delegation. Nevertheless, Wright was astounded. He turned to a colleague and asked: “Oh my god, is that James Drage? What is he doing here?”

Then Wright moved to the other side of the room.

Financial Post

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