Rhode Island Economic Development Corporation Files Suit Over Failed 38 Studios
By Stephanie M. Acree
The Rhode Island Economic Development Corporation (RIEDC) Nov. 1 filed a complaint against Wells Fargo Securities LLC, Barclays Capital PLC and former Major League Baseball pitcher Curt Schilling, among others, in Rhode Island Superior Court (Rhode Island Economic Development Corporation v. Wells Fargo Securities LLC, R.I. Super. Ct., docket number not available, complaint filed 11/1/12).
The allegations in the complaint arise from the RIEDC’s issuance of $75 million in bonds to Schilling’s 38 Studios LLC, a video game development company, which filed for Chapter 7 protection June 7 in the U.S. Bankruptcy Court for the District of Delaware along with three affiliates (24 BBLR 822, 6/21/12).
38 Studios is not named as a defendant in the complaint.
Issuance of Bonds
The RIEDC is a “quasi-public corporation created … to promote certain economic policies of the State of Rhode Island,” according to court documents. The complaint alleges that defendants Wells Fargo and Barclays acted as “placement agents” in connection with the issuance of the bonds to 38 Studios.
In 2012, the RIEDC issued the bonds to “finance a loan to enable 38 Studios LLC to relocate to Rhode Island, complete production of a massive multiplayer online video game called Copernicus, and to capitalize the company’s growth and expansion in Rhode Island,” according to court documents. However, 38 Studios subsequently filed for bankruptcy in June 2012.
The RIEDC alleges that 38 Studios’s failure was due to “risks that had not been disclosed to the [RIEDC] board, but were or should have been known by” 38 Studios and the defendants. The complaint alleges that the defendants knew that “even with the loan from the [RIEDC], 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 complaint also alleges that “Wells Fargo was earning nearly $500,000 in hidden commissions from 38 Studios at the same time that Wells Fargo owed fiduciary duties to the [RIEDC] Board to disclose all negative material information concerning 38 Studios’ business plan and financial projections, including the shortfall.”
The complaint alleges 17 counts against the defendants, including, among others, breach of fiduciary duty, fraud, negligence, legal malpractice, and breach of implied covenant of goof faith and fair dealing.
Rhode Island Governor Lincoln D. Chafee, who serves on the RIEDC’s board, issued a video statement on the RIEDC’s website Nov. 1 regarding the suit.
“As you know, in the past, I have raised many concerns regarding the 38 Studios deal,” Gov. Chafee said in the statement. “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.”
Gov. Chafee said that the 38 Studios “saga” has generated a great deal of media attention and that the litigation is expected to be “long and tedious.” Gov. Chafee said the suit was filed in order to “rectify a grave injustice put upon the people of Rhode Island.”
Gov. Chafee also stated that Max Wistow of Wistow & Barylick Inc., Providence, R.I., has been retained to represent the RIEDC.
By Stephanie M. Acree
Full text of the RIEDC’s complaint is available at: http://about.bloomberg.com/blaw2/files/2013/01/RIEDC-Complaint.pdf.