38 Studios: So many questions, not many answers

The game's not over — trying to make sense of the ongoing debacle
By PHILIP EIL  |  August 13, 2014

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STRUCK OUT Schilling leaving the RI Economic Development Corporation headquarters on May 21, 2012. [Photo by AP Photos/Steven Senne]

Someday, someone will write a book about 38 Studios that delivers, in comprehensive and unsparing detail, the story House Speaker Nicholas Mattiello recently called “one of the biggest debacles in the country’s history.”

Today is not that day.

Although Rhode Island’s most infamous company filed for bankruptcy more than two years ago, its story is far from over, and many — arguably, most — of those critical details remain locked away. The state’s epic 38 Studios lawsuit marches on behind closed doors, with 50 depositions already conducted during pre-trial “discovery” proceedings, and at least 18 more scheduled before the August 31 discovery deadline. Meanwhile, no criminal charges have been filed. (More on this in a moment.) And, while there have been resignations, lives ruined, and at least one case of public verbal self-flagellation (“I’d be inhuman if I wasn’t worrying about this stuff and beating the hell out of myself over it,” former Speaker Gordon Fox told The Providence Journal in 2012), none of the folks who made this deal happen appear to have faced any formal, completed process of accountability. Heck, the guy who sponsored the bill paving the way for 38 Studios, former State Representative and House Finance Chair Steven Costantino, now collects a $140,000 taxpayer-funded salary as RI’s Secretary of the Executive Office of Health and Human Services.

With all of that said, a lot has happened on the 38 Studios front in the last few months. And, this week, we tried to make some sense of it all.

THE CRIMINAL CASE

Will anyone go to jail for 38 Studios?

It certainly hasn’t happened yet, more than four years after the swift sequence that brought the General Assembly’s passage of a $125 million loan program, the signing of that bill by then-Governor Donald Carcieri, and a vote by the Economic Development Corporation’s nine-member board to funnel $75 million into the waiting hands of a ballplayer-turned-video game-entrepreneur.

The US Attorney’s Office for the District of Rhode Island (the folks who sent Buddy Cianci and former Central Falls mayor Charles Moreau to prison, among many others) has basically said they’re not pursuing the case. “The office did take a very narrow review of matters that could have been of federal interest, such as potential for bank fraud, or any related federal violations,” spokesman Jim Martin tells us. “That was done early on, and that review has concluded, and as a result of that review. . . there is no further federal action planned in this matter.”

Meanwhile, Amy Kempe, spokeswoman for Rhode Island Attorney General Peter Kilmartin’s office, confirms there is “an ongoing investigation into 38 Studios by the Rhode Island State Police and the Office of Attorney General,” though she is prohibited from getting into specifics.

It’s worth noting that in June, the RI State Police publicly — and slightly awkwardly — echoed this acknowledgement of an investigation, after news broke that Speaker Mattiello had sent an email to legislators notifying them State Police intended to “ask questions of every member, past and present, who participated in the voting” on the infamous 2010 Job Guaranty Creation Program bill. Later in the day the email leaked, State Police Superintendent Colonel Steven O’Donnell issued a statement titled “38 Studios Clarification.”

“This request was intended to ensure that any legislator, who has relevant information regarding the 2010 vote on the ‘Job Creation Guarantee Program,’ provides that information to investigators,” it read. “The investigation of this loan, being conducted by the State Police and the Attorney General, remains active and ongoing. It is important to recognize that the goal of this request is to ensure that anyone with information, who has not been previously contacted, has the opportunity to present it.

“No member of the legislature is suspected of wrongdoing simply because of their vote,” the Colonel added.

No timeline has been given for the AG/State Police investigation.

THE CIVIL SUIT

The second question, then, is: will we, the people of Rhode Island, ever get our money back?

To this, the answer is: “People are working on it.”

In November of 2012, the Rhode Island Economic Development Corporation, via attorney Max Wistow (one of the lawyers who helped secure a $176 million settlement for victims of the Station Fire), filed a 95-page lawsuit in Rhode Island Superior Court that essentially demands back the money that Rhode Island taxpayers money lost, plus additional fees for damages, from various people connected with the 38 Studios deal.

The suit names 14 total defendants, including Curt Schilling (who was technically 38 Studios majority stockholder and board chair), 38 Studios executives and board members (CEO Jennifer MacLean, CFO Richard Wester, board member Thomas Zaccagnino), various EDC staffers and lawyers (executive director Keith Stokes, deputy director J. Michael Saul, secretary and general counsel Rob Stolzman), and two banks that helped to sell 38 Studios-related bonds (Wells Fargo Securities, Barclays Capital). In the most basic sense, the complaint argues that these various defendants knowingly duped the EDC board into voting in favor of the $75 million 38 Studios loan even when they knew that the deal was doomed.

“38 Studios failed because of risks that had not been disclosed to the EDC Board, but were or should have been known by. . . Advisors [to the EDC’s board], and by 38 Studios, and Defendants Schilling, Zaccagnino, Wester, and MacLean,” the suit reads at one point. Formal allegations listed at the end of the complaint include “Breach of Fiduciary Duty,” “Legal Malpractice,” “Negligence,” “Fraud,” “Breach of Implied Covenant of Good Faith and Fair Dealing,” and “Unjust Enrichment.” (There is much, much more to the complaint than we have space to discuss here. It can be accessed via commerceri.com/government/38studios.php.)

At this point, there is no trial date set for the case — and there may never be a trial if all of the defendants decide to settle. So far, however, all but two of the defendants are vigorously denying the allegations and fighting back. The exceptions are attorney Antonio Afonso Jr., and his firm Moses Afonso Ryan, former bond advisors to the EDC, who reached a $4.4 million settlement agreement with the EDC approved last month.

If you’re interested in the developing details of the case, you’re free to access the docket (essentially a timeline of all legal actions that have taken place) at the Superior Court public information terminal inside the Benefit Street judicial complex in Providence. While you’re there, you can also inquire about periodic, open-to-the-public status conferences on the progress of the case.

For those of you who aren’t that motivated, perhaps you’ll appreciate a brief assessment of the scale of what’s taking place. According to RI Courts spokesman Craig Berke, there are a total of 37 lawyers working on the case, from 15 firms. Max Wistow estimates that there have been more than 450 hours of interviews clocked during 74 days of depositions. (In a recent letter to The Providence Journal, Donald Carcieri said he had been deposed for 10 hours over two days, with a third day scheduled.) Considering that a day of depositions usually equals about 250 pages of typed transcripts, Wistow estimates that these proceeding have yielded some 18,000 pages of material and, by the end of discovery, he believes that total will easily top 20,000.

This, of course, triggers a major question about public information: will this mountain of dirt on the 38 Studios deal ever be released?

“Maybe,” says Berke, who says that Judge Michael Silverstein will ultimately make a ruling on this.

Wistow, meanwhile, is very confident those transcripts — and the exhibits that accompany them — will be released.

THE SECRETARY OF STATE’S LOBBYING VIOLATIONS INQUIRY

In May, Channel 12 WPRI reporters Tim White and Ted Nesi broke a series of stories based on a leaked 38 Studios “Consulting Services Agreement.” Dated January 1, 2011, the document was sent from the desk of COO Bill Thomas (who, by the way, is Curt Schilling’s wife’s uncle), and apparently signed by Providence attorney Michael Corso. It proposes $300,000 payment for one year of work described as:

general business consulting services, including but not limited to, public and government relations services, media interactions, reviewing press releases and other media statements, community integration with the local business community, interactions with government agencies and various public officials, as when reasonably requested by Client.

In other words, it sounds a heck of a lot like 38 Studios is hiring a lobbyist.

There is just one problem.

“No one, absolutely no one, registered as a lobbyist in this deal,” says John Marion, executive director of the nonprofit good government advocacy group, Common Cause RI. “Curt Schilling literally went before the EDC and begged for money. . . [If that’s] money for his business, which he stood to profit from. . . to me that’s sort of the common sense definition of what lobbying is.”

Marion expressed similar worries when he spoke with Nesi in 2012 for an article titled “38 Studios Never Registered to Lobby Officials in Rhode Island.” At the time, Nesi received one of the single most brain-exploding quotes from this saga, when he asked Secretary of State Ralph Mollis’s office, which is charged with keeping tabs on lobbying, about this curious absence of a 38 Studios lobbyist. Chris Barnett, then a spokesman for the Secretary of State, told him: “State law defines lobbying as influencing action on legislation by the General Assembly or the governor or on policy-making by the executive branch . . . We have received no evidence or allegations of any such activities by 38 Studios that would trigger the requirement to register.”

The recent release of the Corso/Thomas agreement apparently changed the equation for the Secretary of State, though. After White and Nesi’s story, Mollis opened an inquiry into possible 38 Studios-related lobbying violations by Corso, Schilling, and Zaccagnino. Given that there’s little precedent for the situation — there has only been one similar inquiry in recent decades, involving the Providence Place Mall, but that was settled before any punishment was levied — the inquiry hasn’t proceeded swiftly or smoothly. There have been hearings, which have yielded more hearings, which have yielded criticism from the Secretary of State’s office that Corso hasn’t shown up to the hearings, followed by rejoinders from Corso’s attorneys about the legitimacy of the proceedings and the validity of the Thomas/Corso document.

What are the possible outcomes? If successful in arguing that lobbying violations did take place, the Secretary of State’s office could levy fines. And if they found sufficient evidence to indicate laws were broken, the Secretary can pass that information on to the Attorney General. But the Secretary of State’s office, itself, was the one to request a delay at the last Corso hearing, so that they could request authorization from Superior Court to conduct depositions of Schilling and others.

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