Metro

EDC suit targets 38 Studios executives

By
Senior Staff Writer
Tuesday, November 13, 2012

The Rhode Island Economic Development Corporation filed a lawsuit last week against 38 Studios founder Curt Schilling, as well as other top officials at the company and former EDC leaders Keith Stokes and Michael Saul. The suit comes almost five months after 38 Studios – the taxpayer-funded video game development firm founded by Schilling, a former Red Sox pitcher – declared bankruptcy and defaulted on its $75 million loan from the EDC

The suit, which was filed in Providence, claims the defendants deliberately misled and withheld pertinent information about the loan from the EDC Board in 2010, which led the board to unknowingly lend millions to a company destined to fail.

38 Studios received the $75 million loan from the EDC as part of the Job Creation Guarantee Program, an initiative created through legislation passed in the Rhode Island General Assembly only weeks prior. The program was intended to bring jobs and economic growth to the state by offering loans for start-up companies as incentives. The program would eventually fund only two other loans, neither of which exceeded $5 million.

Rhode Island currently owes more than $100 million on the 38 Studios loan, a sum that will most likely burden the state’s taxpayers. In a video statement, Gov. Lincoln Chafee ’75 P’14 said his administration is dedicated to reducing this burden.

“I know that you work hard for your paychecks, and for your tax dollars to be squandered is unacceptable,” Chafee said in the video. “The board’s legal action was taken to rectify a grave injustice put upon the people of Rhode Island.”

According to the suit, the board – composed of prominent state business leaders – did not have the requisite expertise to objectively analyze the loan and based its understanding of the company’s finances “upon information provided by a number of individuals and companies who acted as advisors.”

The EDC and its legal representation, led by Max Wistow of Wistow Barylick, Inc., in Providence, conducted an investigation into the loan agreement after 38 Studios declared bankruptcy to determine fraudulent advisers to the board. Along with the top officials at 38 Studios and the EDC, the suit names two law firms, one of the state’s financial advisers and an insurance company for 38 Studios, as well as both Wells Fargo Securities and Barclays Capital – investment banks brought in by the EDC to guide the bond process. 

The suit alleges that these advisors had explicit knowledge indicating that 38 Studios was a financially struggling firm that was “undercapitalized by many millions of dollars.” According to the EDC’s investigation, at the time of the loan, financial projections showed that even $75 million would not be enough to fund the relocation of the company and the completion of Project Copernicus – a Massively Multiplayer Online game that was Schilling’s central focus and thought to be the key to the company’s eventual success.

In his video, Chafee told residents that while the litigation process for this suit may last many months, his office and the EDC will not be commenting on the case as it progresses. 

“I know therefore there still will be many unanswered questions as the legal process continues, and if and when other information comes to light it will be appropriately addressed,” Chafee added.

Wistow told The Herald that the case is currently on the Providence County court schedule, but that the plaintiff is waiting for the judge to determine how to proceed with such a public case involving a large number of defendants.

Speaker of the House Gordon Fox has also announced the General Assembly will hold its own legislative hearings to investigate the 38 Studios saga during its next session, which is set to begin Jan. 1.

Larry Berman, Fox’s press secretary, told The Herald that no plans have been made for the hearings yet. Details will be finalized at the beginning of 2013, following the induction of newly elected public officials, he added.