Legal fees in ongoing 38 Studios cases approaching $9M

PROVIDENCE, R.I. (WPRI) – Lawyers representing the state of Rhode Island in three separate 38 Studios cases are on track to collect roughly $9 million in fees already, and the cases are still ongoing.

The lion’s share of the money is set to be paid out to attorney Max Wistow’s law firm – Wistow, Sheehan and Loveley – which was hired by Gov. Lincoln Chafee in 2012 to spearhead the state’s lawsuit against architects of the failed deal.

According to records from the R.I. Commerce Corp., Wistow’s firm will receive $7.07 million as their share of the money recovered in three legal settlements with some of the 14 defendants in the suit, as long as the latest settlement with two major banks is approved by the courts.

The Commerce Corp. has also paid the firm $893,206 to cover out-of-pocket expenses, which will be reimbursed to the agency using settlement proceeds.

In 2012 – when the suit was filed – Wistow’s firm agreed to accept a reduced contingency fee of 16 percent of all money recovered as its compensation for handling the case. Firms commonly charge a contingency fee of 30 to 35 percent, according to state officials.

But the civil suit isn’t the only case where the state is racking up legal costs.

Records show taxpayers have paid $460,088 to the firm Shechtman, Halperin and Savage for representing the state’s interests in the 38 Studios bankruptcy case. Jonathan Savage, a founding partner at the firm, took over as legal counsel for Commerce Corp. after 38 Studios collapsed.

In addition, the New York firm Cohen & Gresser has also received $391,794 for representing the state in a U.S. Securities and Exchange Commission investigation, which resulted in civil fraud charges in March.

All three cases remain active.

State Rep. Michael Chippendale, R-Foster, a member of the R.I. House Oversight Committee that investigated the 38 Studios deal, said he is uncomfortable with how much the state is paying out in legal fees.

“When you look at the court costs and legal fees, someone is getting rich off of 38 Studios all over again,” Chippendale said. “Unfortunately it’s not the taxpayers.”

He said he understands lawyers need to be paid, but the amounts would sit better with him if the cases led to more answers about exactly what went down with the failed deal.

“I would be more appreciative of a process that was more thorough,” he said. “Let everyone testify and get the entire picture out in the open.”

On Tuesday the state announced an agreement reached with Wells Fargo Securities and Barclays Capital to pay the state $25.6 million in exchange for ending litigation. It is the third settlement reached with some of the original 14 defendants in the lawsuit and brings the total of settlements to $42 million before legal fees.

The state’s lawsuit was brought by Chafee in November 2012, about six months after the video game company collapsed and left taxpayers on the hook for about $89 million in bond payments. The six defendants in the lawsuit who have not yet settled are set to go on trial in October.

Mike Raia, a spokesperson for Gov. Gina Raimondo, said she is comfortable with the fee structure negotiated by Chafee.

“To date, we’ve recovered roughly $42 million and netted taxpayers nearly $35 million, which can now be put toward other priorities like education, infrastructure and workforce development,” Raia said in an email. “As you know, the Governor was against the 38 Studios deal from the beginning and she and her team remain focused on the ongoing litigation against the remaining defendants.”

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter and host of Newsmakers for WPRI 12 and Fox Providence. Follow him on Twitter and on Facebook

Ted Nesi contributed to this report.

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