38 Studios: Legislators Push to Sue Bond Ratings Agencies

Saturday, June 07, 2014

 

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A legislative proposal to sue the 38 Studios bond ratings agencies has been put forth by Representative Spencer Dickinson, as the Rhode Island House of Representatives prepares to vote on a budget that contains $12.1 million for paying back the debt on the failed video game company's bonds.

"This bill makes it clear we have the intent and ability to sue for damages even if we don't default this year, for intimidation and extortion from the bond ratings agencies," said Dickinson, who noted that in order to introduce the bill after the filing deadline, approval was needed by the Speaker of the House -- which Speaker Nicholas Mattiello granted.

“Representative Dickinson asked for permission to file a bill after the deadline and Speaker Mattiello granted his request.  He has not reviewed the details of it at this time," said Larry Berman, spokesperson for Speaker Mattiello.

Representative Mike Chippendale, the Secretary of the House Oversight Committee who has been investigating 38 Studios, said he was supportive of the measure. 

"I believe the bond ratings agencies have overstepped in their aggressive position towards Rhode Island regarding the moral obligation bonds," said Chippendale.  "I've had issues along the way, and I think suing them is a viable option."

Following Suit? 

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Rep. Spencer Dickinson

House Minority Leader Brian Newberry pointed to examples of other states that have sued over the influence -- and impact -- of bond ratings agencies' decisions.

"The State of Connecticut successfully sued the same Wall Street ratings agencies for improper practices relative to Connecticut’s bond rating. CalPERS, the California state pension system, has also sued those ratings agencies," said Newberry. 

Newberry said that he believed the flag should have been raised in Rhode Island sooner.  "Just before last year's budget vote, Moody's put us on credit watch prior to the vote to paying back the initial $2.5 million. They did something that was clearly a threat.  A "watch"?  Excuse me, at that point, something should have been said," said Newberry. 

"My whole point on the ratings agencies might be esoteric -- you can't explain it in sound bites.  It's complex, and takes time to digest, and the average citizen is busy," said Newberry. "It's become obvious to me the moral obligation industry is a scam, and Rhode Island is being pressured.  Other states have sued, Rhode Island should not be fearful of doing the same."

"The courts in California recently approved the lawsuit and its moving forward," said Dickinson. "These agencies have something to worry about."

Dickinson's legislative proposal outlines "cause of action for improper influence on state actions by credit agencies" in its two pages. 

Section 42-155-3 (a) states, "No credit rating agency shall determine, adjust, or lower the credit or bond rating of the state of Rhode Island, any state agency or municipality or any political subdivision thereof, or threaten to do so, by using reasons other than generally accepted market factors and other generally accepted practices, for the purposes of attempting to intimidate or otherwise influence state action."

"If they want to rate our so-called "end run around the Constitution" i.e. moral obligation bonds as junk bonds, that's fine.  Hopefully we'll never go down this road again," said Dickinson.  "If they want to use that as a basis for our general obligation bonds, that's a problem."

Dickinson said he expects the legislation, currently with the General Assembly legislative counsel, to be introduced shortly.  "It doesn't mean it has time for a hearing, but if we do select to default, that bill may prove handy," said Dickinson.

Budget Vote Looming

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Representative Karen MacBeth, Chairwoman of the House Oversight Committee, said that she was "in agreement" with Dickinson's proposal.

"[Dickinson] said if they downgraded us, we could sue, which I'm in agreement with," said MacBeth.  "No matter what, people still want answers.  Even if [the bond payment] is in the budget, someone has to be held accountable."

As for the payment Dickinson said he believed the issue was far from settled.

"The leadership has a position, and part of that they believe they have the votes to pass budget with the bailout," said Dickinson.  "I don't think those votes are there.  If we sit down and go through the list of members, I believe that it is up on the air.  The votes aren't counted, and there are a lot of people on the fence."
 

 

Related Slideshow: Who Wants to Pay and Who Wants to Default on the 38 Studios’ Bonds

GoLocalProv showcases which Rhode Island politicians and organizations want to pay or default on the 38 Studios' Bonds.

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CON

Allan Fung

Republican candidate for Governor

“I am repeating my opposition to the 38 Studios loan guaranty and to the use of taxpayer dollars to repay those moral obligation bonds.”

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CON

Ken Block

Republican candidate for Governor

“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better...As long as there are serious legal questions still to be decided, we need to stop the repayment process."

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PRO

RIPEC

John Simmons, executive director of the Rhode Island Public Expenditure Council

“We’re not going to punish anybody but ourselves if we don’t pay."

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PRO

Greater Providence Chamber of Commerce

Laurie White, President of Chamber of Commerce

“I think it’s important that action occur quickly. Our view is that economic development in Rhode Island has to be the main event. … We need a very dramatic, aggressive effort to change the path that we’re on.”

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PRO

Gina Raimondo

Democratic candidate for Governor

“Despite my frustration with everything surrounding this transaction, I believe it is in the best long-term interest of the state and all taxpayers to repay these bonds."

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PRO

Clay Pell

Democratic candidate for Governor

“Clay does not believe Rhode Island should default on its moral obligation bonds when they come due. 38 Studios was a terrible mistake — and another example of why we need to change the culture of politics in Rhode Island"-Devin Driscol.

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PRO

Angel Taveras

Democratic candidate for Governor

“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain. We cannot afford to default on our obligations.”

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PRO

Lincoln Chafee

Governor of Rhode Island

“The candidates who can’t understand these two obvious truths are unfit to be Governor. The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to ‘junk bond’ status. We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island. In addition, failure to honor our obligations could have harmful effects on the pending lawsuit.”

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CON

Mike Stenhouse, CEO of RI Center for Freedom and Prosperity

"It's not just about not paying off bondholders.  Bondholders are adults, they knew the risk.  It's not just a question of the credit agencies.  It's a question of what would payment crowd out, what reforms could we achieve with that money, such as sales tax reform, which would enable us to create jobs."

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CON

Mike Riley

2012 Republican candidate for the 2nd Congressional District of Rhode Island.

"If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies."

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PRO

Professor Ed Mazze

Professor of business at University of Rhode Island

"Even though this is a moral obligation in terms of the way the financial deal is set up I still feel the state has an obligation to the bondholders, to make good on their payments."

 
 

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