EXCLUSIVE: Schilling Responds to 38 Studios Law Suit

Thursday, October 03, 2013

Kate Nagle, GoLocalWorcester Contributor

In a blistering response to the State of Rhode Island's lawsuit over 38 Studios default on $75 million in state funding, the defendants led by former Red Sox great Curt Schilling, then-Economic Development Corporation Director Keith Stokes, and prominent Providence law firm Adler Pollock & Sheehan denied the charges, attacked the State's suit -- and blamed Governor Lincoln Chafee.

GoLocalProv secured 440 pages of responses filed in Superior Court. These answers filed by the defendants respond to the State of Rhode Island's suit initially filed on November 1, 2012 by Max Wistow, the State's attorney.

The collapse of 38 Studios and the corresponding lawsuit were global news due to the celebrity status of the founder of the company and the amazingly quick collapse of the company that burned through $75 million in state funds in less than 18 months.

Curt Schilling Disputes Every Claim

The documents secured by GoLocal include responses to the suit by Schilling, who consistently claims that the documents that his company provided to the State to secure the loan were not misleading.

In the documents filed in response to the State of Rhode Island's suit, Schilling claims repeatedly that the term sheet, investment materials and PowerPoint presentations presented to the Rhode Island Economic Development Corporation were appropriate. "Schilling states that the referenced Term Sheet speaks for itself, respectfully refers the Court to the document for its content and denies any characterization inconsistent with its terms…," said Schilling in his answer to the State's complaint.

Repeated efforts to reach Schilling and his co-defendant and then CEO Jennifer MacLean's local legal counsel Jeffrey Schreck were unsuccessful.

In Schilling's 91-page filling, the now-ESPN baseball analyst disputed each of Rhode Island's allegations.

Core Issue at Dispute

In Rhode Island's suit, the State affirms that Schilling and the others mislead the State as to how much the company needed -- and whether the $75 million was enough to relocate the company, finish the game Copernicus and capitalize 38 Studios.

At the time of the suit, Governor Lincoln Chafee, an outspoken critic of the financing that brought Schilling's company to Rhode Island, said, "My message to Rhode Islanders is this: I know that you work hard for your paychecks, and for your tax dollars to be squandered is unacceptable. The Board's legal action was taken to rectify a grave injustice put upon the people of Rhode Island."

The State's suit claims:

The undisclosed risks included the express admission, made by 38 Studios’ directors and chief executives directly to these Advisors, and by 38 Studios’ own financial projections that were disclosed to the Advisors, that, even with the loan from the EDC, 38 Studios was undercapitalized by many millions of dollars and would not have nearly enough money to relocate to Rhode Island and complete Copernicus, and that, as a result of this cash shortfall, 38 Studios was likely to run out of money in 2012.

The EDC Board understood that 38 Studios’ capital requirements to complete Copernicus were approximately $75 million, and that the net proceeds to be lent to 38 Studios would be less than $75 million. Nevertheless, the EDC Board was also told that the net proceeds 38 Studios would receive, along with other sources of funds set forth in 38 Studios’ financial projections, “would provide necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company’s growth and expansion in Rhode Island.” In fact, the Advisors knew or should have known that this was untrue, and that even if all of 38 Studios’ financial projections proved true, the net proceeds would not be sufficient to fund 38 Studios’ relocation to Rhode Island and completion of Copernicus.

Moreover, the State claims that the company and some of the other defendant's intentionally mislead Rhode Island and specifically the EDC as to how much investment it would take to build the company.

In his response, Schilling "admits that 38 Studios disclosed the Company's financial projections and financial needs to the EDC's representatives, the EDC and its representatives understood that 38 Studios capital requirements to complete production of Copernicus (not including the launch of Copernicus) were at least $75 million, the EDC and its representatives understood that the net proceeds to be lent to 38 Studios would be less than $75 million, and the EDC and its representatives knew that 38 Studios would need funding in addition to the net proceeds of the EDC's loan."

Moreover, Schilling denies the assertion made by the State that no members of the EDC Board "were experts in law, lending, video gaming, or economic development."

Schilling, former Red Sox great and founder of 38 Studios, was financially crushed by the failure of his gaming company and recently said in an interview with the Boston Globe that he suffered a heart attack due to the stress tied to the collapse of the company and the loss of tens of millions of dollars of his own personal wealth.

Adler Pollock & Sheehan Blames the Collapse on Chafee

One of Providence's most prominent law firms, Adler Pollock & Sheehan, served as counsel to the EDC board at the time of the financing of 38 Studios and during the collapse of the gaming company. The law firm in the response to the suit filed by the State says the loss of millions was caused by Governor Chafee's actions -- who served then, and continues to serve, as Chairman of the EDC Board.

Adler Pollock & Sheehan said in the response, "By way of example only, at the express instruction of its Chairman and ex officio, Governor Lincoln Chafee, the Rhode Island Economic Development Corporation (EDC) failed and refused to even speak to, meet with, or engage representatives of 38 Studios in 2011 and early 2012 about restructuring the existing debt obligations of 38 Studios to EDC. Further, Governor Lincoln Chafee prohibited discussion of such issues by the EDC board. Such conduct constitutes a violation of EDC's obligations to act in good faith and deal fairly with its borrower and of its duty to mitigate damages."

Governor Chafee's office referred GoLocal's questions to attorney Max Wistow.

Former EDC Director Stokes' Places Blame Squarely on Chafee

Stokes, like Adler Pollock & Sheehan, in his response places the blame on the demise of 38 Studios, not on mismanagement by Schilling and his management team, but on Chafee's actions.

"These actions, among others, by Governor Chafee and as Chair of the EDC Board forced 38 Studios into bankruptcy, breached its fiduciary duties owed by the Governor to the EDC and State of Rhode Island, breached the EDC's obligations of good faith and fair dealing with 38 Studios, and breached the EDC's obligations to mitigate its damages and ultimately the damages to the State of Rhode Island."