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EXCLUSIVE: Schilling, Stokes & others File Response to RI’s Suit

Thursday, October 03, 2013


In a blistering response to the State of Rhode Island's lawsuit over 38 Studios default on $75 million in state funding, the defendants led by former Red Sox great Curt Schilling, then-Economic Development Corporation Director Keith Stokes, and prominent Providence law firm Adler Pollock & Sheehan denied the charges, attacked the State's suit -- and blamed Governor Lincoln Chafee.

GoLocalProv secured 440 pages of responses filed in Superior Court. These answers filed by the defendants respond to the State of Rhode Island's suit initially filed on November 1, 2012 by Max Wistow, the State's attorney.

The collapse of 38 Studios and the corresponding lawsuit were global news due to the celebrity status of the founder of the company and the amazingly quick collapse of the company that burned through $75 million in state funds in less than 18 months.

Curt Schilling Disputes Every Claim

The documents secured by GoLocal include responses to the suit by Schilling, who consistently claims that the documents that his company provided to the State to secure the loan were not misleading.

In the documents filed in response to the State of Rhode Island's suit, Schilling claims repeatedly that the term sheet, investment materials and PowerPoint presentations presented to the Rhode Island Economic Development Corporation were appropriate.  "Schilling states that the referenced Term Sheet speaks for itself, respectfully refers the Court to the document for its content and denies any characterization inconsistent with its terms…," said Schilling in his answer to the State's complaint.

Repeated efforts to reach Schilling and his co-defendant and then CEO Jennifer MacLean's local legal counsel Jeffrey Schreck were unsuccessful.

In Schilling's 91-page filling, the now-ESPN baseball analyst disputed each of Rhode Island's allegations.

Core Issue at Dispute

In Rhode Island's suit, the State affirms that Schilling and the others mislead the State as to how much the company needed -- and whether the $75 million was enough to relocate the company, finish the game Copernicus and capitalize 38 Studios.

At the time of the suit, Governor Lincoln Chafee, an outspoken critic of the financing that brought Schilling's company to Rhode Island, said, "My message to Rhode Islanders is this: I know that you work hard for your paychecks, and for your tax dollars to be squandered is unacceptable. The Board's legal action was taken to rectify a grave injustice put upon the people of Rhode Island."

The State's suit claims:

The undisclosed risks included the express admission, made by 38 Studios’ directors and chief executives directly to these Advisors, and by 38 Studios’ own financial projections that were disclosed to the Advisors, that, even with the loan from the EDC, 38 Studios was undercapitalized by many millions of  dollars and would not have nearly enough money to relocate to Rhode Island and complete Copernicus, and that, as a result of this cash shortfall, 38 Studios was likely to run out of money in 2012.

The EDC Board understood that 38 Studios’ capital requirements to complete Copernicus were approximately $75 million, and that the net proceeds to be lent to 38 Studios would be less than $75 million. Nevertheless, the EDC Board was also told that the net proceeds 38 Studios would receive, along with other sources of funds set forth in 38 Studios’ financial projections, “would provide necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company’s growth and expansion in Rhode Island.” In fact, the Advisors knew or should have known that this was untrue, and that even if all of 38 Studios’ financial projections proved true, the net proceeds would not be sufficient to fund 38 Studios’ relocation to Rhode Island and completion of Copernicus.

Moreover, the State claims that the company and some of the other defendant's intentionally mislead Rhode Island and specifically the EDC as to how much investment it would take to build the company.

In his response, Schilling "admits that 38 Studios disclosed the Company's financial projections and financial needs to the EDC's representatives, the EDC and its representatives understood that 38 Studios capital requirements to complete production of Copernicus (not including the launch of Copernicus) were at least $75 million, the EDC and its representatives understood that the net proceeds to be lent to 38 Studios would be less than $75 million, and the EDC and its representatives knew that 38 Studios would need funding in addition to the net proceeds of the EDC's loan."

Moreover, Schilling denies the assertion made by the State that no members of the EDC Board "were experts in law, lending, video gaming, or economic development." 

Schilling, former Red Sox great and founder of 38 Studios, was financially crushed by the failure of his gaming company and recently said in an interview with the Boston Globe that he suffered a heart attack due to the stress tied to the collapse of the company and the loss of tens of millions of dollars of his own personal wealth.

Adler Pollock & Sheehan Blames the Collapse on Chafee

One of Providence's most prominent law firms, Adler Pollock & Sheehan, served as counsel to the EDC board at the time of the financing of 38 Studios and during the collapse of the gaming company. The law firm in the response to the suit filed by the State says the loss of millions was caused by Governor Chafee's actions -- who served then, and continues to serve, as Chairman of the EDC Board.

Adler Pollock & Sheehan said in the response, "By way of example only, at the express instruction of its Chairman and ex officio, Governor Lincoln Chafee, the Rhode Island Economic Development Corporation (EDC) failed and refused to even speak to, meet with, or engage representatives of 38 Studios in 2011 and early 2012 about restructuring the existing debt obligations of 38 Studios to EDC.  Further, Governor Lincoln Chafee prohibited discussion of such issues by the EDC board. Such conduct constitutes a violation of EDC's obligations to act in good faith and deal fairly with its borrower and of its duty to mitigate damages."

Governor Chafee's office referred GoLocal's questions to attorney Max Wistow.

Former EDC Director Stokes' Places Blame Squarely on Chafee

Stokes, like Adler Pollock & Sheehan, in his response places the blame on the demise of 38 Studios, not on mismanagement by Schilling and his management team, but on Chafee's actions.

"These actions, among others, by Governor Chafee and as Chair of the EDC Board forced 38 Studios into bankruptcy, breached its fiduciary duties owed by the Governor to the EDC and State of Rhode Island, breached the EDC's obligations of good faith and fair dealing with 38 Studios, and breached the EDC's obligations to mitigate its damages and ultimately the damages to the State of Rhode Island." 


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typical rhode island deal....

insiders make money off it, everyone is out front in the beginning and when it fails, they all run and nobody is accountable.

and taxpayers foot the bill.

Comment #1 by john paycheck on 2013 10 03

Let me see if I've got this right! The defendants all say the blame here lies with Gov. Chafee because he essentially wouldn't throw anymore RI taxpayer dollars down the 38 Studios rathole. How about the defendants take a remedial course in elementary school arithmatic. The cost just to complete Copernicus was 75 million and that didn't include the move to RI. Anybody see a glaring problem here? Anybody? Stokes, Carcieri, Schilling...anybody? It was clear from the start of this fiscal fiasco that the EDC didn't adequately fund the project. What were board members hoping? Would they get the ball rolling and pony up more later on? And finally the one question that has bugged me about this story from the beginning is if this were such a good idea why didn't Massachusetts officials step up to try and keep Schilling there? Maybe...just maybe they can count!

Comment #2 by Thomas Kolodziejczak on 2013 10 03

Why can't get over the idea that the failure rate for something like 38 Studios is something like 85%. That, and the fact that this failure rate was not a secret.
Hell of a way to run a state!

Comment #3 by Patrick Boyd on 2013 10 03

Reminds me of the Three Stooges. Whenever their antics got them into trouble each would point to and blame the other. A hundred million dollar comedy. Everyone is responsible and no one is responsible. A lot like the Wall Street meltdown - it just happened.

Comment #4 by Johnny cakes on 2013 10 03

Actually the blame is not Curt Schillings...he was a believer in his business he put his whole life into it. In America you are allowed to pursue a dream and take chances. So also, are you allowed to invest in a bond that is NOT GUARANTEED IN ANY WAY.
Schilling was a borrower the bondholders are the lenders. Schilling lost, ok hes allowed to fail . Bond holders should have lost also. RI has no business paying off these bonds or Suing Curt Schilling. Chafee was negligent in not monitoring the EDC.That was a huge problem. But not illegal. The overall result would be poetic and just all around, except for the screwing of the taxpayers. One other outcome would be appropriate ,Paiva Weed and Gordon Fox should pay for illegally guaranteeing payback on a non guaranteed loan.

I respect Schilling for trying to fulfill a dream and losing. That's how America became great, we need risk takers not leeches or lemmings. I condemn the actions of Weed and Fox as being underhanded , immoral and possibly illegal about how the represented the bonds. Lincoln Chafee was simply absent, but is that really a surprise? Rhode Island taxpayers should not pay a dime. Let the bondholders go directly to Fox or Weed if they gave personal Guarantees.Failing that they have insurance. I say this as an ex wall Streeter, "Those Bond holders should not be repaid". The underwriters are laughing at our States stupidity right now after they collected all kinds of fees. The same Wall Street Fees which the left whines about when they talk about Gina.

Comment #5 by michael riley on 2013 10 03

Its one thing to shut it down after you have the meetings and get all the facts. Committing willful ignorance and shutting it down for spite was a criminal act against the tax payers.

Comment #6 by John Waddington on 2013 10 03

the assertion made by the State that no members of the EDC Board "were experts in law, lending, video gaming, or economic development."

So let me understand what Gov Chafee is saying -- that he as Chairman of the board is no expert on economic development..well, we already knew that, don't we?

Seriously..the Governor is saying he appoints a board to oversee "economic development" and that nobody he appoint to a board of 'economic development' has expertise in well, economic development? Gov Chafee reappointed Keith Stokes -- is Linc saying that he reappointed Mr. Stokes as *head* of economic development even though apparently Mr. Stokes was not an expert in economic development? Did the Governor attempt to clean house at EDC in 2010 because "nobody on the board apparently had any expertise in economic development?"

I suppose next he'll say if the state loses the ACLU lawsuit about NECAPS that well "nobody on the board of education is an expert in education" either...

Comment #7 by Prof Steve on 2013 10 03

re Don Carcieri
"" I commend the RIEDC Board for its EXTENSIVE DUE DILIGENCE and for taking this significant step to bring jobs to Rhode Island," Don Carcieri THE MAN WITH THE VETO PEN said the night the agency approved the loan to Carcieri's fellow conservative Republican Curt Schilling.


Rhode Island's then director of revenue said she "was not in favor" of the 38 Studios deal and and expressed those concerns DIRECTLY to Gov. Don Carcieri.
Gov. Carcieri still won't face taxpayers despite the stunning implosion of the $75 million loan guarantee he got them to give Curt Schilling's video game company,

Is Carcieri hiding-out in VP Dick Cheney's bunker ?... LOL

Comment #8 by Sammy Arizona on 2013 10 03

Chafee's goofball Howdy Doody persona is just cover for a vindictive ego maniac. Not that I'm defending Schilling but if you don't believe Chafee purposely refused to discuss restructuring the obligations so that Schilling could get private financing then you're living in a fantasy world. Failure was the governor's validation.

Comment #9 by Max Diesel on 2013 10 05

Being in business I can tell you it takes cooperation from all to make a business venture succeed. What gets in the way is the political hacks that start skimming for themselves whether its money of claims of not agreeing with former decisions as Chafee has so delinquently tried to do. This could have been a successful deal all around with cooperation but the GA with Fox and his right hand lawyer and Chafee are the real culprits and of course they will go on without any blow back of criminal charges. In hind site one could always say Schilling should have done things different but that is the advantage of hind site.
The politicians are making this point away from them, that what they do when they screw the tax payers. Why there has not been an investigation into the dealings at the GA are beyond reason.

Comment #10 by Gary Arnold on 2013 10 08

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