38 Studios saga still alive in civil suits

BIT BY BIT: Niki Kuckes, a Roger Williams University School of Law professor, says the 38 Studios Settlement Act allows the state to break up the case and process settlements in piecemeal fashion, rather than having to settle it all at once. / PBN PHOTO/MICHAEL SALERNO
BIT BY BIT: Niki Kuckes, a Roger Williams University School of Law professor, says the 38 Studios Settlement Act allows the state to break up the case and process settlements in piecemeal fashion, rather than having to settle it all at once. / PBN PHOTO/MICHAEL SALERNO

When Attorney General Peter F. Kilmartin and State Police Superintendent Col. Steven G. O’Donnell on July 29 decided not to bring criminal charges in connection with the state’s involvement in a loan guarantee for 38 Studios LLC, the decision ended one chapter in the long-running saga of the demise of the bankrupt video game company.

Still to play out, however, is the legal case brought by the state seeking repayment of up to three times its loan liability.

On Aug. 23, a proposed settlement was struck between R.I. Commerce Corp. and defendants Wells Fargo Securities LLC and Barclays Capital Inc. for $25.6 million. If accepted, that would increase to $42.5 million the amount the state would receive from settlements in the case, including $12.5 million with Adler, Pollock & Sheehan P.C., Robert I. Stoltzman, Keith W. Stokes and J. Michael Saul and $4.4 million from Antonio Afonso Jr. and Moses Afonso Ryan Ltd. Remaining defendants include the founder of 38 Studios, Curt Schilling; First Southwest Co. [which has objected to the settlement]; Thomas Zaccagnino; Jennifer MacLean; Richard Wester and Starr Indemnity and Liability Co.

The state’s exposure in its financing of the failed company was $88 million, according to retired Superior Court Judge Francis J. Darigan Jr., who led mediation efforts in the proposed $25.6 million settlement.

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Even with the number of defendants dwindling, the state’s civil suit remains complicated, said Roger Williams University law professor Niki Kuckes.

“In a situation where you have criminal and civil cases simultaneously, the lawyers defending the cases have to coordinate because things that happen in either case can impact the other,” she said.

For example, she explained, Commerce RI, which is a plaintiff in Rhode Island Superior Court, is a defendant in a separate civil case filed by the Securities and Exchange Commission in federal court.

What has made things somewhat manageable for the state in its civil suit was the 38 Studios Settlement Act passed by the General Assembly in 2014. This act, Kuckes explained, allows the state to break up the case and process settlements in piecemeal fashion rather than having to settle the entire case all at once. Additionally, any individual or corporation who settles with the state and gets court approval cannot by sued by co-defendants.

“The statute and the protection it gives allows the state to pursue the successful strategy of settling with separate groups. Otherwise this case would be much more difficult to settle – no defendant would want to settle if they knew they would face additional claims,” said Kuckes.

She says the state has done well in the settlements it has been able to reach so far.

“You have to look at it as a definite success,” she said.

By settling with separate groups, Kuckes believes, more pressure to settle will be put on those defendants who have held out.

Kuckes could not estimate the likelihood of the state’s success if the case goes to trial but did say those cases that end up in court are often too close to settle.

“If it’s a very clear case they’ll settle,” she said. “Cases that actually go to trial tend to be cases in which they could go either way.”

The outcome will come down to “evidence, effectiveness of presentation and how the different sides can resonate with the jury,” she added.

Many in the business community would like to see the state move on from the 38 Studios debacle.

“Our focus is the future,” said Laurie White, president of the Greater Providence Chamber of Commerce, in a statement. “Fortunately, the state has developed a new set of tools over the past couple of years to help retain and attract businesses.”

Others though, including Ken Block, president of Warwick-based Simpatico Software Systems, remain unhappy with what they perceive as a lack of accountability in the 38 Studios case.

“At some point Rhode Island’s voters deserve to know the truth … and I’m waiting for the politically courageous politician to step forward and make that happen,” he said.

Block said there is little hope the civil case will bring those politically responsible to justice. He said the civil case is focused on the state recouping “as much money as possible, [but] there is a world of difference between engaging in a transparent public accounting of what happened” and recouping a failed investment, he said.

“As a taxpayer and a business owner, I certainly would like to see others pay for this fiasco if they’re legally liable,” he said. “At the end of the day, what I most want is the truth.” •

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