RI sues Schilling, Stokes, others over 38 Studios deal

PROVIDENCE, R.I. (WPRI) - Lawyers for the R.I. Economic Development Corporation filed suit in R.I. Superior Court on Thursday against some of the architects of the 2010 deal that gave Curt Schilling's ill-fated video game company a $75 million taxpayer-guaranteed loan.

The EDC, the quasi-public agency that formally granted the loan, announced the lawsuits over the 38 Studios deal on its website Thursday. The defendants include Schilling and Keith Stokes, the former EDC executive director whom Gov. Lincoln Chafee fired in May.

In June, the EDC board bowed to Chafee's wishes and hired lawyer Max Wistow of the Providence law firm Wistow & Barylick to review documents and conduct interviews to determine whether the state could seek damages to offset the roughly $100 million bill taxpayers face to pay off the 38 Studios loan.

• PDF: Read the 38 Studios legal complaint

The 17-count suit was filed one day before the two-year anniversary of the EDC deal's closing on Nov. 2, 2010. In a two-and-a-half-minute video statement posted on the EDC website Thursday, Chafee said the EDC board voted unanimously to authorize legal action after receiving a briefing from Wistow.

"This vote was not taken lightly and it was taken with the clear goal of protecting the taxpayers of Rhode Island," Chafee said. The governor said he and other members of the board, as well as the attorneys, will be unable to discuss the lawsuit because it could jeopardize the legal challenge.

"My message to Rhode Islanders is this," Chafee said. "I know 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."

Chafee stuck by his guns Thursday at an unrelated State House event, telling WPRI.com: "I cannot comment on this." Asked if he was optimistic, the governor said: "I cannot comment, but I'm always optimistic." Wistow will receive 16.67% of any damages he wins for the EDC.

Alongside Chafee at the event were members of his cabinet including Steven Costantino, who co-sponsored the law that allowed 38 Studios to get the $75 million loan when he was a state representative.

In addition to Schilling and Stokes, other individual defendants named in the suit include Thomas Zaccagnino, a 38 Studios board member; Richard Wester, who was 38 Studios' chief financial officer; Jennifer MacLean, who was 38 Studios' CEO; J. Michael Saul, who was the EDC's deputy director when the deal was struck; and Antonio Afonso Jr. and Robert Stolzman, who were lawyers for the state as the deal was put together.

"38 Studios failed because of risks that had not been disclosed to the EDC board, but were or should have been known by all of these advisors, and by 38 Studios, and defendants Schilling, Zaccagnino, Wester and MacLean," the 98-page complaint says early on before describing in detail what went wrong.

Stokes' wife told WPRI.com he had no comment on the suit. Additional defendants are banks and law firms involved in structuring the deal: Wells Fargo Securities, Barclays Capital, First Southwest Co., Starr Indemnity and Liability Co. and Adler Pollock & Sheehan. The EDC is seeking a jury trial.

Adler Pollick & Sheehan quickly issued a statement saying the suit "demonstrates a fundamental misunderstanding of the role of EDC, its board of directors, and its prior legal counsel, Adler Pollock & Sheehan."

"The firm has never provided, was never asked to provide, nor would it ever provide business or credit advice or analysis to the EDC," the statement continued. "This suit clearly reflects a misappreciation of the role of legal counsel, and Adler Pollock & Sheehan will vigorously defend itself against this claim."

House Speaker Gordon Fox defended his decision to support the loan program that helped 38 Studios, saying state lawmakers never earmarked the funding for a single company. He also committed to holding "substantive and thorough" oversight hearings when the legislature reconvenes next year.

"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," Fox said in a statement. His election opponent, Mark Binder, seized on the lawsuit to criticize the speaker once again for the assistance he provided 38 Studios.

The complaint says 38 Studios officials failed to disclose that the company was "undercapitalized by many millions of dollars" and therefore "was likely to run out of money in 2012." It also warns that EDC board members who approved the deal could be liable themselves if the legal discovery process uncovers evidence that they knew the risks and signed off on the $75 million loan guarantee anyway.

It quotes an email from an unnamed EDC loan analyst who told his bosses: "I don't think I can support a $75 million loan guarantee to any single company in this industry," referring to video games.

The EDC never ordered an independent assessment of whether 38 Studios would be able to finish the game after the board voted to approve the deal on July 26, 2010, even though board members were told the agency would do so, the complaint alleges.

It says Wells Fargo earned nearly $500,000 "in hidden commission from 38 Studios" that were not disclosed to the EDC board at the same time the bank was also supposed to be looking out for the agency's interests.

38 Studios spent more than $10 million relocating from Maynard, Mass., to Providence after budgeting only $5 million, according to the complaint. It also says the company's leaders knew they needed all $75 million from the loan to survive, not the $50 million it got after fees and the funding of a reserve account.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi

Walt Buteau and Tim White contributed to this report.