Wells Fargo Refuses to Discuss ‘Secret’ Cash from Curt Schilling’s 38 Studios
Wednesday, November 14, 2012
Wells Fargo refuses to comment on accusations that it “secretly” received nearly $500,000 from Curt Schilling’s failed video game company at the same time that it was supposed to sell $75 million in bonds to investors on behalf of the Rhode Island Economic Development Corporation (EDC).
The bank is among 14 defendants named in a lawsuit filed nearly two weeks ago by the state of Rhode Island as it attempts to recoup a portion of the $75 million taxpayer-backed loan it awarded Schilling’s 38 Studios in 2010. Other defendants in the suit include Schilling, former EDC director Keith Stokes and several prominent Rhode Island law firms.
“We are currently reviewing this matter and have no comment at this time,” said Wells Fargo spokesperson Dana Crothers Obrist.
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Schilling’s company received the $75 million loan guarantee in 2010 and agreed to move its headquarters from Massachusetts to the Ocean State and create hundreds of jobs while it worked on Project Copernicus, a massively multiplayer online role-playing game.
The funding was made possible when state lawmakers created the $125 million Job Creation Guaranty Fund for the EDC. Rank-and-file legislators have criticized House leadership for essentially earmarking the funds for Schilling’s company without stating their intentions, but House Speaker Gordon Fox has denied those claims.
Wells Fargo Received “Hidden Commissons”
38 Studios filed for bankruptcy this summer after it was unable to secure additional outside financing or receive more help from the state in the form of tax credits. The suit also claims that Schilling and other executives knew the company would need more than $75 million to keep the company from go under.
According to the suit, Wells Fargo and Barclays Capital were bond placement agents for the EDC, but Wells Fargo failed to disclose that it had a financial relationship with 38 Studios. The bank also gave a presentation to EDC board members to convince them to sign off on the deal.
“These undisclosed risks also included the fact that Wells Fargo was earning nearly $500,000 in hidden commissions from 38 Studios at the same time that Wells Fargo owed fiduciary duties to the EDC Board to disclose all negative material information concerning 38 Studios’ business plan and financial projections, including the shortfall,” the suit states. “Rather than disclosing this information, Wells Fargo secured its hidden commissions by concealing these facts from the EDC Board, notwithstanding that the undisclosed information showed that the loan was not in the interests of the EDC and probably would never be paid back.”
As it stands, taxpayers could be on the hook for nearly $100 million if the state is unsuccessful with its lawsuit, an amount some taxpayer watchdogs find unacceptable.
Donna Perry of the Rhode Island Statewide Coalition (RISC) said her concern is that Rhode Islanders aren’t simply being asked to pay for the price of a failed business, but for an insider deal gone wrong.
“The facts that are coming to light surrounding this whole deal are not only outrageous, it’s also becoming clear that many players involved, including Wells Fargo it seems, took full advantage of the fact that leadership at the EDC was way in over its head from the start on this project,” Perry said. “The fact that Wells Fargo was acting as adviser to the EDC on the bond transactions while simultaneously collecting fees for consulting 38 Studios really illustrates that a critical conflict of interest existed. It shows how the state’s investment was not properly monitored right from the beginning.”
Mazze Blames EDC
Still, at least one expert believes that while the 38 Studios deal may have been a poor decision, the state’s lawsuit provides no “smoking gun” to suggest anything nefarious took place.
“Wells Fargo is cited in the Complaint because they ‘knew’ in 2010 that 38 Studios was going to go out of business in 2012 and did not reveal this information to EDC's board before the board approved the transaction,” said University of Rhode Island business professor Dr. Edward Mazze. “This is nonsense.”
Mazze said it is not unusual for 38 Studios to try to get Wells Fargo named by the EDC as the lead, agent and underwriter for the issuance of the bonds. He said the EDC was never forced to agree to work with Wells Fargo, but did so to help “move the deal along.”
“There were no secret funds,” Mazze said. “They were listed in the agreement between 38 Studios and Wells Fargo. The moral to the story is that EDC did not do enough due diligence, did not ask the right questions, did not collect the right information and did not assign the right people who knew how to handle this type of deal.”
More Oversight Needed
No matter the outcome of the suit, state lawmakers say they plan to make government oversight a top priority during the 2013 legislative session. Republican State Senator Dawson Hodgson said the Senate Committee on Government Oversight has not followed through on its responsibility to monitor the performance of quasi-public agencies.
“While Senate leadership's refusal to conduct hearings in the wake of the 38 Studios scandal has received significant media attention this fall, the real breakdown of the system lies in the committee's complete failure to monitor what was always a very risky, very high profile state investment from the start,” Hodgson said. “In fact, the Oversight Committee has not met once to consider this or any matter since Senator [Frank] Ciccone removed himself as its Chairman after the Barrington DUI Scandal.
Hodgson, whose calls for hearings on 38 Studios fell on deaf ears with Senate leadership earlier this year, has now requested to be assigned to the Oversight committee in 2013.
“Clearly the tools are already in place. What has been missing is the political will and leadership to use them,” he said.
Dan McGowan can be reached at [email protected]. Follow him on Twitter: @danmcgowan.
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