Updated March 29 at 6:27pm
38 studios

Bloomberg analyzes 38 Studios lawsuit


BOSTON - Curt Schilling, the former baseball All-Star, struck up a conversation at a March 2010 fundraiser that would sow the seeds of financial ruin and has led to claims of a $75 million fraud.

During the event to benefit veterans at the ex-Boston Red Sox pitcher’s suburban Boston mansion, Schilling chatted with Donald Carcieri, a Republican in his final year as Rhode Island’s governor. Schilling offered to move his 38 Studios LLC video-game startup to Providence in exchange for taxpayer help, according to a state lawsuit filed Nov. 1 in the capital city.

Following their discussion, Schilling conspired with Wells Fargo & Co. bankers and other advisers to persuade the state to loan the company $75 million, knowing it wouldn’t be enough to finish development of Project Copernicus, a new game, according to the civil complaint brought in Rhode Island Superior Court. The deal won approval in July 2010. By May 2012, 38 Studios went bankrupt, leaving taxpayers on the hook for the loan.

“It’s just astounding what was going on here,” said state Representative Larry Ehrhardt, a Republican and former corporate treasurer from North Kingstown who opposed the program used to provide the game maker with a loan. “It was condemned to failure from the get-go.”

Risky business

The collapse left almost 400 people out of work, including 300 in Rhode Island. It shows the risks confronting states and cities in doling out corporate incentives, which amount to about $70 billion a year, according to Kenneth P. Thomas, who teaches politics at the University of Missouri-St. Louis. Promising to bring as many as 450 jobs, Schilling extracted an unprecedented commitment from the Ocean State as it struggled to recover from the longest recession since World War II.

Rhode Island, with a jobless rate of 10.4 percent in October, is stuck with paying off $75 million of taxable debt taken on by its Economic Development Corp. on behalf of 38 Studios. Following the company’s collapse, the state drew from reserves funded by the borrowing to make bond payments through next year. It’s up to the Legislature to appropriate money needed to cover the remaining obligation.

Bonds maturing in November 2015 were the most recently traded among securities tied to the deal. The debt yielded 4.27 percent Oct. 15, compared with 6 percent when issued two years ago, according to data compiled by Bloomberg.

Insured debt

The securities, which are federally taxable, have an Aa3 rating from Moody’s Investors Service, fourth-highest, when taking into account insurance from Assured Guaranty Ltd.

The Rhode Island Economic Development Corp. named 14 people and companies in its amended Nov. 16 complaint, including Schilling, Wells Fargo, London-based Barclays Plc and Dallas- based First Southwest Co. The state claimed they conspired to get the agency’s board of directors, which is led by the governor, to authorize the deal based on fraudulent information.

“The board’s legal action was taken to rectify a grave injustice,” Governor Lincoln Chafee, an independent who succeeded Carcieri in January 2011, said in a video posted on the state’s website last month after the lawsuit was filed. “For your tax dollars to be squandered is unacceptable.”

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