By Ted Nesi and Tim White
PROVIDENCE, R.I. (WPRI) – The U.S. Securities and Exchange Commission is investigating the $75-million taxpayer-backed loan that the R.I. Economic Development Corporation gave to Curt Schilling’s failed video-game startup 38 Studios, WPRI.com has learned.
The SEC’s 38 Studios probe, which has not been previously reported, is the latest twist in the ongoing saga of how former Gov. Don Carcieri’s expensive bet on the one-time Red Sox ace ended with the company’s spectacular public collapse in May 2012.
The EDC hired attorneys from the law firm Cohen & Gresser LLP to help respond to the SEC’s staff over a five-month period last fall and winter, according to documents WPRI.com obtained by filing a request under the Access to Public Records Act.
EDC spokeswoman Melissa Czerwein confirmed that lawyers from Cohen & Gresser “were retained based on their expertise in relation to an inquiry from the SEC.”
The EDC declined to make available Marcel Valois, who took over as its executive director earlier this year, to answer questions about the SEC inquiry. The agency also declined to answer detailed questions about the probe.
The EDC “doesn’t discuss ongoing matters related to 38 Studios and maintains a level of confidentiality as requested by the SEC,” Czerwein told WPRI.com.
Cohen & Gresser describes itself as a boutique Manhattan law firm whose specialties include defending corporations from the SEC and other top regulators, according to its website. The EDC paid the firm $102,615 in five installments between Feb. 27 and March 31, documents show. The bulk of the money was for work performed last October and November, which may indicate when the SEC probe began.
The Securities and Exchange Commission was created by President Franklin Roosevelt in the wake of the 1930s Great Depression to police the financial sector and protect investors from fraud. John Dugan, who leads the SEC’s regional office in Boston, did not respond to an email Tuesday requesting comment about the 38 Studios inquiry.
It’s unclear what exactly the SEC is investigating about the 38 Studios transaction, which was finalized in the final months of Carcieri’s second term. A lawsuit filed by the EDC last November alleges two top EDC employees, 38 Studios executives and outside advisers all withheld information from the agency’s board to win approval of the deal.
The SEC’s 38 Studios inquiry was not disclosed to investors in documents Rhode Island published in April ahead of a $114.9-million bond transaction. Joy Fox, a spokeswoman for Treasurer Gina Raimondo, told WPRI.com: “Treasury was not aware of the SEC investigation.” She declined to comment further.
Christine Hunsinger, a spokeswoman for Gov. Lincoln Chafee, directed questions about the SEC inquiry to the EDC. Chafee was a vociferous opponent of the 38 Studios deal.
State Sen. Dawson Hodgson, who has called repeatedly for an independent commission to look into how the 38 Studios deal came together, said he wasn’t surprised to learn that the SEC is investigating the matter.
“There are so many contours to how this deal was constructed I wouldn’t know where to start,” Hodgson, R-North Kingstown, told WPRI.com. “It seems clear there was a lot of self-service as to how this deal was put together, and that is usually the starting point.”
The EDC has spent a total of $707,691 on legal fees and other payments to lawyers related to 38 Studios since June 2012, the documents show.
The lion’s share of the money – $517,453 – has gone to Shechtman Halperin Savage LLP, whose founding partner Jonathan Savage took over as the EDC’s general counsel after 38 Studios’ collapse last year. Savage is also the court-appointed receiver overseeing Landmark Medical Center, the cash-strapped hospital in Woonsocket.
The EDC paid an additional $87,622 to the Providence law firm Wistow, Barylick, Sheehan & Loveley PC, whose principal Max Wistow was hired by the EDC last year to lead Chafee’s push to recoup some of the money taxpayers will spend repaying the 38 Studios bondholders.
Wistow, who won a $176-million settlement for victims of the Station nightclub fire in 2009, is now leading the EDC’s lawsuit against the architects of the 38 Studios deal. A Rhode Island Superior Court judge ruled last month that the bulk of the suit can move forward to trial. A trial date hasn’t been set.
The $87,622 paid to Wistow’s firm from last October through last month “represent only out-of-pocket expenses, as their legal fee is based upon a successful outcome to the litigation,” the EDC’s Czerwein told WPRI.com. Wistow will keep 16.67% of any damages he wins in court as the bulk of his legal fee.
The 38 Studios transaction continues to be a flashpoint in Rhode Island politics.
After a heated, months-long debate – during which some lawmakers openly speculated about whether the SEC should look into the deal – the General Assembly voted in July to put $2.5 million into the new state budget to fund taxpayers’ first payment to the 38 Studios bondholders. The state is supposed to pay them roughly $90 million through 2020.
Target 12 previously revealed that as of Dec. 31, two large financial firms – USAA and Transamerica Corp. – owned more than half the $75 million in high-interest bonds that Rhode Island taxpayers backed on behalf of Schilling’s company. The bonds are insured by a subsidiary of municipal-bond insurer Assured Guaranty.
The EDC has come under heavy fire for management failures in the wake of the 38 Studios deal, which was finalized as Rhode Island struggled with a rising unemployment rate that peaked at nearly 12%. Lawmakers voted this year to rename the agency the R.I. Commerce Corp. and institute new oversight rules starting next January.
Separately, the R.I. House Oversight Committee is scheduled to hold a hearing Wednesday afternoon to continue its review of internal EDC documents related to 38 Studios.
Hodgson said that while he’s reserving judgment on the House committee’s work until it’s finished, the panel should be bringing in the key players in the deal to testify.
“You’ve never seen a scandal of such historic proportions essentially disappear with little or no accountability for the havoc that was wreaked,” Hodgson said. “The amount of … taxpayer money that was put at risk and ultimately lost in the 38 Studios saga is on the same scale as the RISDIC commission, the banking crisis.”
“We saw a very different government and public reaction, holding people accountable, in those circumstances,” he said. “And here’s it’s business as usual – continue on without any full elaboration or postmortem of how this happened.”
“There is an incredible sense of disillusionment when I speak to the public about what happened with 38 Studios,” Hodgson added.
The 38 Studios inquiry is at least the second time in recent years Rhode Island’s state government has come under the scrutiny of the SEC, which is better-known for prosecuting powerful investment banks and rogue hedge funds.
In July, the SEC closed a two-and-a-half-year investigation into Rhode Island’s pension disclosures without filing charges. The probe examined whether the state provided complete and accurate information about its retirement funds to investors between 2007 and 2011.