Architects of 38 Studios' $75M loan sued by Rhode Island EDC
The Rhode Island Economic Development Corporation (EDC), the quasi-public group that granted the $75 million taxpayer-guaranteed loan to 38 Studios, has filed a lawsuit against the architects of the 2010 deal. WPRI reports the defendants include 38 Studios founder Curt Schilling and CEO Jennifer MacLean, former EDC executive director Keith Stokes, Wells Fargo Securities, Barclays Capital and many, many more.
"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," said Governor Lincoln Chafee in a prepared two-and-a-half-minute statement posted on YouTube (found after the break, with text transcript).
The full complaint [PDF] alleges the former EDC board never ordered an independent assessment of 38 Studios' capabilities to finish Project Copernicus before the loan was approved, even though it was to do so. It also claims Wells Fargo received nearly $500,000 "in hidden commission from 38 Studios" that weren't disclosed to the EDC board.
The recent public auction at 38 Studios' former Providence HQ grossed approximately $650,000. The auction at 38 Studios' Big Huge Games division in Maryland brought in $180,000. It's estimated 38 Studios owed $150.7 million when it declared bankruptcy, so far the state of Rhode Island has recovered about $830,000.
Update: We got in touch with Law of the Game attorney Mark Methenitis to boil down exactly what Rhode Island is seeking in the suit. We've placed his analysis after the break.
Mark Methenitis helps explain what Rhode Island is seeking:
In short: Rhode Island wants their money back. Or, the government officials at least want to look like they're doing what they can to get the money back to save face for election purposes. Practically speaking, I don't think they'll recover anything, but here's the gist of the claims.
First, they're claiming breach of fiduciary duty, which basically means the people named didn't act in the best interest of the entity they were working for. It's a way to try to hold people liable for what happened to the company, and one of RI's only ways to get to the people behind 38 Studios. The next claim is fraud, which is another means to that ends, but it's harder to prove.
The next claims get into misrepresentation, which is pretty much more of the same – though each of these seems to get to some overlapping and some different parts of the underlying facts. Then they claim their attorneys committed malpractice, and many of the financial institutions are at fault as well.
Without commenting on the merit of the claims, I would think this is part of a common strategy to "sue those who have deep pockets," since any judgment against 38 Studios worthless at this point. There are some subsequent state claims I'm not as familiar with. The RICO claim is basically alleging many of these parties were running a scam to get money from this system (larceny). The conspiracy claim furthers this idea. The further claims are asking for more monetary relief, including money to cover potential suits by third parties over these facts. Indemnification beyond the millions they're asking for on the loan.
As you know, in the past I have raised many concerns regarding the 38 Studios deal. When it became clear that the company would not survive, I publicly stated my commitment to you that my primary goal would be to do everything within my power to protect the taxpayers of Rhode Island. I will work to minimize any loss of your hard earned taxpayer dollars.
With that goal guiding us, we engaged Max Wistow, a seasoned attorney with decades of experience in complex litigation matters, including financial restitution and settlements.
Over the past four months, Mr. Wistow and his team have thoroughly examined the 38 Studios situation and the state's position.
In executive session of the Economic Development Corporation Board, we received an extensive briefing from Mr. Wistow on his findings. In that meeting, the Board voted without opposition to authorize legal action.
This vote was not taken lightly, and it was taken with the clear goal of protecting the taxpayers of Rhode Island.
The 38 Studios saga has understandably generated a great deal of attention from the media and the public at large. I know, therefore, that there will be pressure to discuss the complaint. However, neither I, nor the other members of the EDC Board, nor the attorneys representing the EDC in this matter will be able to do so. Further discussion of the complaint could jeopardize this process and endanger our ability to recoup taxpayer losses. The complaint on its own contains a great deal of important and illuminating information on how this deal unfolded.
Litigation is often long and tedious. The filing of this complaint is only the beginning. I know therefore there still will be many unanswered questions as the legal process continues and if and when other information comes to light it will be appropriately addressed.
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. You have my commitment that I will continue fighting to protect the interest of all Rhode Islanders every day that I am Governor.
