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RICO, Fraud & Negligence Claimed in 38 Studios Lawsuit

Friday, November 02, 2012

 

The state of Rhode Island on Thursday filed suit against former Red Sox pitcher Curt Schilling, former Economic Development Director (EDC) Keith Stokes and other prominent financial institutions and law firms in its effort to recoup millions of dollars from the failed 38 Studios deal.

The 97-page suit names more than a dozen defendants, including Schilling; Stokes; 38 Studios executives Jen MacLean, Tom Zaccagnino and Richard Wester; the law firms Moses Afonso Ryan and Adler Pollock & Sheehan; former EDC legal counsel Robert Stolzman; lawyer Antonio Afonso Jr.; Wells Fargo; Barclays Capital; First Southwest Company; Starr Indemnity and Liability Company; and former EDC Deputy Director J. Michael Saul.

The suit suggests the defendants knew or should have known that Schilling’s video game company was undercapitalized and would likely run out of money by 2012. The company received a $75 million loan guarantee from the state two years ago, but filed for bankruptcy in June after defaulting on the loan. The company had less than $22 million in assets and owed just over $150 million to over 1,000 mostly-unsecured creditors, according to court records. The state is the largest secured creditor at $115.9 million.

In June, Governor Lincoln Chafee tapped lawyer Max Wistow to investigation the 38 Studios deal. The 17-count suit includes RICO, fraud and negligence and also accuses Wells Fargo of “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.”

In a YouTube message to Rhode Islanders Thursday, Chafee pledged to protect the taxpayers.

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

Two notable names not included in the suit were former Governor Don Carcieri and Michael Corso, the tax credit broker who helped broker the deal to bring 38 Studios to Rhode Island and later pledged million of dollars in tax credits that hadn’t been issued as collateral for a loan from the BankRI.

There were no lawmakers included in the suit either. House Speaker Gordon Fox, who has been criticized by some rank-and-file members for not being more transparent with legislation that paved the way for 38 Studios, said he plans to hold oversight hearings on 38 Studios when the legislature returns in January.

"For the past several months, I have repeatedly stated that the General Assembly funded a program to create jobs,” Fox said. “It did not earmark funding specifically for any one company. Today’s developments reinforce my decision to hold oversight hearings in the coming legislative session. We need to understand what transpired during the vetting process at the EDC, what its review entailed and what occurred after the loan was approved. These oversight hearings will be substantive and thorough.”

Dan McGowan can be reached at [email protected]. Follow him on Twitter: @danmcgowan.

 

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