Rhode Island’s $75 million loan guarantee to 38 Studios LLC was already synonymous with bad judgment. The state’s lawsuit against the deal’s participants now attempts to link it with fraud and incompetence.
In an effort to recover some of more than $100 million in potential taxpayer losses from the loan guarantee, the lawsuit blames approval of the 38 Studios deal on a broad conspiracy between R.I. Economic Development Corporation leaders, its advisers, lawyers, financial institutions and company executives such as former Red Sox pitcher Curt Schilling.
Whether or not the allegations are true, people familiar with the state’s economic-development apparatus say the legal action risks collateral damage to the state’s already checkered business reputation and efforts to boost the sluggish economy.
“I think it is a very bad move,” said Michael McMahon, a former EDC executive director and now managing director of Pine Brook Partners, a New York private-equity firm. “I think it smacks of a cheap political trick and is not going to help. It is just going to position Rhode Island in the minds of CEOs thinking of moving a business as a place you don’t want to set foot in.”
On top of furthering Rhode Island’s persistent image problem, McMahon said inside the state the suit could scare away potential talent from working or volunteering on future economic-development projects for fear of similar legal reprisals if something goes wrong.
“If I think of the people who volunteer to make Rhode Island grow economically: Why would they stick their necks out to help when there is the risk it can turn out this way?” McMahon said.
McMahon led the EDC from 2003 to 2006, one directorship removed from the tenure of Keith W. Stokes, the executive director who was named as a defendant in the suit for shepherding the 38 Studios deal through the quasi-state agency’s board of directors. Attempts to reach Stokes were unsuccessful last week.
“I think it will have a chilling effect,” said former EDC Executive Director Marcel Valois, now vice president of the private Rhode Island Economic Development Foundation in Cumberland. “We have to be careful we don’t extinguish volunteerism in the state.”