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Fraud, Legal Malpractice, and Curt Shilling’s 38 Studios in Rhode Island

On Behalf of | May 14, 2014 | Uncategorized |

Allegations of Wall Street influence, fraud, and legal malpractice surround former pitcher Curt Shillings now-bankrupt 38 Studios. 

Candidates for R.I. governor disagree on whether to pay 38 Studios investors

May 12, 2014. By Katherine Gregg, Providence Journal, via providencejournal.com.

PROVIDENCE, R.I. – Rhode Island’s candidates for governor are split on the state’s obligation to pay – or not pay – the private investors who bought the state-backed bonds that financed retired Red Sox pitcher Curt Schilling’s now-bankrupt 38 Studios.

With a decision looming on whether to pay the next $12.3 million due the bondholders, Republican contender Ken Block on Monday urged state lawmakers to “reject calls to repay the 38 Studios bonds.”

A short time later,  his Republican primary opponent – Cranston Mayor Allan Fung – issued this statement :  ”In the past, Mayor Fung has consistently opposed repayment and nothing raised in this report would change his position at this time.”

Fung’s statement: “I am repeating my opposition to the 38 Studios loan guaranty and to the use of taxpayer dollars to repay those moral obligation bonds. The Chafee Administration’s report that was released last week offers a number of alarmist conclusions, which I believe are speculative in nature.

“Nothing in this report substantiates those dire conclusions and at this time, I believe that it is critical to protect the taxpayers of Rhode Island and I remain opposed to paying the moral obligation bonds issued in connection with the 38 Studios loan guaranty,”  Fung said.

But Providence Mayor Angel Taveras, who is one of the Democrats running for governor, disagrees.

“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain,’’ he said Monday.

His reasoning: “We cannot afford to default on our obligations…As nayor of Providence, I know how important it is to maintain our fiscal reputation and build confidence in our economy.’’

His Democratic primary opponent Gina Raimondo, the current state treasurer, agrees the state needs to pay the bondholders, no matter how distasteful.

Asked for Raimondo’s view last Friday, when the Chafee administration released a consultants’ report warning the state’s bonds would be reduced to junk bond status if Rhode Island defaults on the payments, the treasurer’s spokeswoman Joy Fox said:

“The treasurer opposed this risky investment from the start because it put too many tax dollars at stake in one deal. While the treasurer is disappointed and frustrated, paying these loans is in the best long-term interest of Rhode Island.’’

Asked why Raimondo believed that making the payments would be in the state’s best interest, her spokeswoman said: “Default will likely mean passing on additional borrowing costs for generations of Rhode Islanders to come.’’

Devin Driscoll, a spokesman for Democrat Clay Pell, issued this statement: “Clay does not believe Rhode Island should default on its moral obligation bonds when they come due. 38 Studios was a terrible mistake – and another example of why we need to change the culture of politics in Rhode Island.”

Pell also said  the state “must strongly pursue recovery of its original investment to the fullest extent of the law.”

Republican Block’s contrary point of view: “The threats coming from Wall Street insiders of dire consequences for the state if they fail to make good on the 38 Studios bond is an attempt to shift the risk of that investment onto the state’s taxpayers instead of where it belongs — with the people who bought the bonds. ‘’

The debate centers on the $75 million in high-risk, high-yield bonds that financed Schilling’s failed video-game company. Then-Gov. Donald L. Carcieri’s administration offered the loan as an inducement to Schilling to move his company from Maynard, Mass., to Rhode Island, and bring 450 jobs to the state by the end of 2012.

The taxpayer debt, over and above amounts set aside in reserve at the outset of the doomed venture, was approximately $89 million in principal and interest, on bonds paying interest rates of 6 percent, 6.75 percent and 7.75 percent.

The company’s June 2012 collapse has already cost Rhode Island taxpayers $2.4 million. Continuing to pay the private investors who purchased the high-yield bonds will siphon anywhere from $12.3 million to $12.5 million out of the state budget every year through 2021.

The Chafee administration is suing the key behind-the-scenes players who crafted the doomed loan deal, including Schilling and the former head of the state’s economic development agency, for alleged fraud, negligence and legal malpractice.

The Minnesota-based consultant the Chafee administration hired to assess the risk of non-payment nonetheless warned that default could have severe consequences. Rhode Island’s current and future bonds will likely be downgraded to “junk bond” status, raising borrowing costs and hurting the state’s reputation.

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