Chafee lawsuit pays off

Another grueling June debate over whether the state should repay 38 Studios bondholders gave way to something unexpected: good news in the state’s lawsuit against architects of the failed deal.
Two defendants in the case, the R.I. Economic Development Corporation’s bond counsel on 38 Studios and his law firm, agreed to pay the state $4.37 million to avoid the potential risk of a trial.
The proposed settlement by defendants Antonio Afonso Jr. and firm Moses Afonso Ryan Ltd. includes no admission of wrongdoing in the suit, which alleges the $75 million loan to Curt Schilling’s video game company was a vast fraud. The payment to the state would be covered by the firm’s insurance company. A Superior Court hearing to approve the settlement was scheduled for July 7.
But while $4.37 million puts only a minor dent in the state’s roughly $90 million 38 Studios liability, the settlement raises hope that a lawsuit many described as a long shot when it was filed in November 2012, holds real potential to save tax dollars.
After all, of the 14 defendants named in the suit, several have deeper pockets than Afonso and his firm.
“You can’t guarantee anything, but with multiple defendants, when a rather substantial settlement is reached with one, it is a sign progress is being made with the whole group,” said Michael St. Pierre, a partner at Revens, Revens & St. Pierre in Warwick. “Sometimes there is hesitancy in these cases to be the last one standing. So after a settlement they reassess, and that threat may motivate them to come to the table.”
St. Pierre said as a trial drags on and defendants settle, those who remain risk bearing the brunt of a jury’s judgment, even if it ends up disproportionate to their responsibility in the matter. The legal costs of defending against a lawsuit also mount the longer a case stays alive.
At minimum, even if the state’s case doesn’t end up being strong enough to convince a jury, the settlement should remove concerns that it is frivolous.
“You are not going to come forward with more than $4 million on a frivolous claim,” St. Pierre said. “And this is one defendant when you look at the panoply of defendants who could potentially have more exposure.” Gov. Lincoln D. Chafee and the R.I. Economic Development Corporation (since renamed as the R.I. Commerce Corporation), which he chairs, brought the lawsuit seven months after Schilling’s firm declared bankruptcy.
The state retained Wistow, Barylick, Sheehan & Loveley PC of Providence to recoup as much as possible through the lawsuit with the understanding that the firm would take 16.66 percent of all proceeds.
Based on that percentage, Wistow, Barylick would receive just over $728,000 from the recent settlement.
In addition to Afonso and his firm, other defendants include Adler Pollock & Sheehan PC, the Providence law firm that served as general counsel to the EDC for 20 years until 2011; Robert I. Stolzman, Adler Pollock shareholder and the primary attorney assigned to the EDC during the 38 Studios deal; Wells Fargo Securities LLC and Barclays Capital PLC, the financial-services firms that placed the 38 Studios bonds; First Southwest Co., the state’s financial adviser since 2002 and adviser to the EDC for the 38 Studios bonds; and Starr Indemnity and Liability Co., the insurance company that issued a policy for 38 Studios bonds.
Individual defendants whose ability to pay a large settlement is difficult to gauge include Schilling, 38 Studios former CEO Jennifer MacLean, 38 Studios former Chief Financial Officer Richard Wester, former 38 Studios board member Thomas Zaccagnino, former EDC executive director Keith W. Stokes and former EDC Deputy Director J. Michael Saul.
The lawsuit has been seen as a way to discover how a disaster like 38 Studios could happen and who knew what, when.
Although the state police say they are still investigating 38 Studios, it’s unclear whether anything will come out of the long-running probe. In addition, a “forensic audit” Chafee said would be done of the firm did not happen.
The lawsuit alleges that 38 Studios executives, EDC officials and the numerous firms helping broker the deal knew it was doomed to fail, but withheld key financial projections from the EDC board of directors before their 2010 vote to go ahead with it. Defense attorneys have subpoenaed key figures, including former Gov. Donald L. Carcieri and members of the EDC board.
Max Wistow, the attorney representing the state in the suit, said last week that roughly 20 people already have been deposed in the case, with about the same number scheduled before an Aug. 15 discovery deadline. Carcieri is scheduled to be deposed July 31 and Aug. 1.
After the discovery deadline, Wistow said the two sides will disclose and then begin to depose each other’s experts. Assuming no further delays, Wistow said he anticipates a late fall trial date.
Some members in the business community suggested that the lawsuit would cause a chilling effect on companies considering doing work with the state government.
But Chafee has dismissed those complaints and now points to the Afonso settlement as proof he was right.
“I do feel vindicated by this initial settlement,” Chafee said through spokeswoman Faye Zuckerman. “As with many of the ‘controversies’ that have occurred in my term, immigrant rights, capital punishment and gay marriage. I end up being on the right side of the issue.”
Although certainly a positive development for the state’s case, the Afonso settlement does not necessarily mean the rest of the defendants will fall in line to settle, said Roger Williams University Law School professor John Chung.
Chung said although wanting to avoid being the last defendant standing in a large case like this can be a motivating factor, it’s usually somewhere down the list of multiple factors defendants have to consider.
One of those factors is insurance coverage as a source of funds, as it was in the Afonso settlement, where the defendants had a $5 million policy limit. The 38 Studios settlement went up to that limit with $430,000 used to pay legal bills already incurred by the defendants and another $200,000 set aside for future legal costs.
“An insurance policy is one of biggest factors in decisions to settle,” Chung said. “From the plaintiffs’ perspective – they might think defendants should pay more than the policy limit, but if that is on the table, they have to weigh that against the time and expense of going further.” •

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