PROVIDENCE, R.I. - Rhode Island's economic development agency on Thursday sued former Red Sox pitcher Curt Schilling and some of its former officials, saying they committed fraud and other acts that misled the state into approving a US$75 million loan guarantee to his failed video game company.
The suit was filed in Rhode Island Superior Court four months after 38 Studios filed for bankruptcy following a spectacular collapse that has likely left the state on the hook for as much as $100 million.
Among other things, the lawsuit claims that executives at 38 Studios, as well as former Economic Development Corp. Executive Director Keith Stokes and others, knew the company would run out of money by 2012, but concealed that from the EDC board, which made the final decision on whether to back the deal.
The board in 2010 lured 38 Studios to Providence from Massachusetts with the loan guarantee.
The lawsuit also alleges that Schilling, 38 Studios executives and others engaged in racketeering and conspiracy. The suit does not ask for a specific dollar amount but wants Schilling and others to repay the bonds and seeks triple damages.
In addition to Schilling, who founded the company, and Stokes, the suit names Michael Saul, a former top official at the EDC; two law firms that worked with the agency; a financial adviser for the state; Wells Fargo Securities and Barclays Capital, investment banks hired by the EDC to assist in issuing bonds for the deal; and an insurance company for 38 Studios.
Gov. Lincoln Chafee said the EDC board, of which he is the chairman, authorized the legal action in an attempt to recoup some of the state's money.
"My message to Rhode Islanders is this: I know that you work hard for your paycheques, and for your tax dollars to be squandered is unacceptable," Chafee said in a video statement. "The Board's legal action was taken to rectify a grave injustice put upon the people of Rhode Island."
Chafee said he would not comment further.
Messages left for Schilling, Stokes and Saul weren't immediately returned.
38 Studios collapsed into bankruptcy in June. Rhode Island is likely responsible for about $100 million when interest is factored in on the bonds the state issued on the company's behalf.
The suit says that EDC board members were not experts in "law, lending, video gaming or economic development" and relied on information from Stokes, Saul, Schilling and others at 38 Studios. The suit says the company failed because of risks that were not disclosed to the board "but were or should have been known" by the defendants.
The suit also says the EDC board was misled about whether 38 Studios would have enough money to finish the video game, codenamed Copernicus, that was critical to its success. It says the company's own financial projections showed a shortfall of about $22 million of the estimated $75 million needed. The company got only about $50 million of the $75 million in bond funds because some was kept in reserve.
The suit says the defendants should have known it was "likely that 38 Studios would run out of cash and go out of business by 2012."
Schilling's firm tried to raise outside capital but was unable.
The suit also says that an EDC analyst who raised questions about the loan guarantee — and suggested he could not support it — was later excluded from doing further work on it by Saul, who oversaw the agency's financing programs at the time. As a result, the agency's customary risk analysis of the deal was never completed or submitted to the board, according to the suit.
The suit accuses Saul and attorney Robert Stolzman, who served as EDC secretary, of withholding from the board "negative" opinions about the proposed deal, including from two consultants who said they wouldn't invest $75 million in 38 Studios if they were in the EDC's position.
In May, the company laid off its nearly 300 employees in Providence and more at a studio in Maryland it acquired in 2009.
The suit says Wells Fargo also earned $473,000 in "hidden commissions" from 38 Studios that the state didn't know about — and which ate into the total available to run the company.
Dana Crothers Obrist, a spokeswoman for Wells Fargo, said the company does not believe the lawsuit has merit, and it is prepared to defend itself vigorously.
A spokesman for Barclays had no comment.
One of the law firms named in the suit, Adler Pollock & Sheehan, which had served as general counsel to the EDC, and employs Stoltzman, said the suit reflects a "misappreciation" of its role and that it would "vigorously" defend itself.
Thomas Moses, president of Moses Afonso, which worked on the bond sale and was named in the suit, said he had not seen the suit as of Thursday afternoon. But he called any lawsuit involving his firm "frivolous and without merit."
Associated Press writer Michelle R. Smith contributed to this article.