State responds to First Southwest challenge: it’s ‘inflammatory’

THE STATE HAS RESPONDED to allegations by former financial adviser First Southwest that the proposed settlement with some defendants in the 38 Studios lawsuit is unconstitutional by saying the legal filing is "inflamatory" and "clearly intended for the media rather than for the Court."
THE STATE HAS RESPONDED to allegations by former financial adviser First Southwest that the proposed settlement with some defendants in the 38 Studios lawsuit is unconstitutional by saying the legal filing is "inflamatory" and "clearly intended for the media rather than for the Court."

PROVIDENCE – The R.I. Economic Development Corp. is urging the R.I. Superior Court to approve a proposed settlement in the ongoing 38 Studios LLC lawsuit, despite a recent legal objection that the state is calling “inflammatory.”

The EDC, the plaintiff that’s since changed its name to the R.I. Commerce Corp., on Wednesday filed a response to an objection made by First Southwest Co., a financial planning company and one of the defendants in the ongoing civil suit. First Southwest was the financial adviser to the state in 2010 when it issued $75 million in taxpayer-backed bonds for the now defunct video game company founded and owned by former Boston Red Sox pitcher Curt Schilling.
The company went bankrupt two years after the bonds were issued, leaving Rhode Island taxpayers to pick up the tab. The EDC later filed a lawsuit against company principals, underwriters and economic development officials alleging it was misled by them when it was making the decision to issue the bonds.

First Southwest earlier this month filed an objection to a proposed $25.6 million settlement between the EDC and two other defendants in the case: Wells Fargo LLC and Barclays Capital Inc.

But the EDC shot back with its own filing, saying First Southwest’s objection was “clearly intended for the media rather than for the court.”

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“First Southwest raises various constitutionality arguments as if entirely for the first time,” according to the filing. “These arguments, which simply reiterate the arguments previously considered and rejected in the court’s prior rulings, are apparently in order to preserve these constitutionality issues for appeal.”

The financial planning company accused the state of trying to “strong-arm private parties to pay for its mistakes,” saying the settlement violates the company’s process rights and is unconstitutional. The company argues Rhode Island lawmakers have changed legislation to benefit the EDC and the state in this particular lawsuit.

“After electing to pay the 38 Studios bondholders, the state enacted settlement statute to help its putative collections agency, the [EDC], recover the bond payments made by the state and then return those payments to the state,” according to a court filing released Monday. “The fundamental unfairness of this rigged game is amplified by the governor’s role in this failed loan.”

The proposed $25.6 million settlement, if approved by the court, would bring the state’s totaled recovered funds to about $42 million, excluding however much the state has spent on legal fees.

Retired Superior Court Judge Francis J. Darigan Jr., who mediated settlement meetings between the state and Wells Fargo and Barclays, earlier this month said the state was exposed to about $88 million, although some estimates put the number closer to $100 million.
The court is expected to rule on the proposed settlement on Sept. 6.

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