November 1, 2012

Rhode Island sues Schilling, charging fraud

The state's economic development agency says the former Red Sox pitcher committed fraud that misled the state into granting a $75 million loan to his failed video game company.

The Associated Press

PROVIDENCE, R.I.  — Rhode Island's economic development agency on Thursday sued former Red Sox pitcher Curt Schilling and some of its former officials, saying they committed fraud and other acts that misled the state into approving a $75 million loan guarantee to his failed video game company.

The suit was filed in Rhode Island Superior Court four months after 38 Studios filed for bankruptcy following a spectacular collapse that has likely left the state on the hook for as much as $100 million.

Among other things, the lawsuit claims that executives at 38 Studios, as well as former Economic Development Corp. Executive Director Keith Stokes and others, knew the company would run out of money by 2012, but concealed that from the EDC board, which made the final decision on whether to back the deal.

The board in 2010 lured 38 Studios to Providence from Massachusetts with the loan guarantee.

The lawsuit also alleges that Schilling, 38 Studios executives and others engaged in racketeering and conspiracy. The suit does not ask for a specific dollar amount but wants Schilling and others to repay the bonds and seeks triple damages.

In addition to Schilling, who founded the company, and Stokes, the suit names Michael Saul, a former top official at the EDC; two law firms that worked with the agency; a financial adviser for the state; Wells Fargo Securities and Barclays Capital, investment banks hired by the EDC to assist in issuing bonds for the deal; and an insurance company for 38 Studios.

Gov. Lincoln Chafee said the EDC board, of which he is the chairman, authorized the legal action in an attempt to recoup some of the state's money.

"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," Chafee said in a video statement. "The Board's legal action was taken to rectify a grave injustice put upon the people of Rhode Island."

Chafee said he would not comment further.

Messages left for Schilling, Stokes and Saul weren't immediately returned.

38 Studios collapsed into bankruptcy in June. Rhode Island is likely responsible for about $100 million when interest is factored in on the bonds the state issued on the company's behalf.

The suit says that EDC board members were not experts in "law, lending, video gaming or economic development" and relied on information from Stokes, Saul, Schilling and others at 38 Studios. The suit says the company failed because of risks that were not disclosed to the board "but were or should have been known" by the defendants.

The suit also says the EDC board was misled about whether 38 Studios would have enough money to finish the video game, codenamed Copernicus, that was critical to its success. It says the company's own financial projections showed a shortfall of about $22 million of the estimated $75 million needed. The company got only about $50 million of the $75 million in bond funds because some was kept in reserve.

The suit says the defendants should have known it was "likely that 38 Studios would run out of cash and go out of business by 2012."

Schilling's firm tried to raise outside capital but was unable.

The suit also says that an EDC analyst who raised questions about the loan guarantee — and suggested he could not support it — was later excluded from doing further work on it by Saul, who oversaw the agency's financing programs at the time. As a result, the agency's customary risk analysis of the deal was never completed or submitted to the board, according to the suit.

(Continued on page 2)

Were you interviewed for this story? If so, please fill out our accuracy form

Send question/comment to the editors




Further Discussion

Here at PressHerald.com we value our readers and are committed to growing our community by encouraging you to add to the discussion. To ensure conscientious dialogue we have implemented a strict no-bullying policy. To participate, you must follow our Terms of Use.

Questions about the article? Add them below and we’ll try to answer them or do a follow-up post as soon as we can. Technical problems? Email them to us with an exact description of the problem. Make sure to include:
  • Type of computer or mobile device your are using
  • Exact operating system and browser you are viewing the site on (TIP: You can easily determine your operating system here.)


 

Blogs

More PPH Blogs

Winter sports 2013-2014

High School Football 2013

Fall sports photos