The Rhode Island Economic Development Corp. sued Wells Fargo & Co. (WFC:US), Barclays Plc (BARC) and Curt Schilling, the former chairman of video-game maker 38 Studios LLC, claiming that undisclosed risks led to the bankruptcy of the company.
The banks and Schilling, the former Boston Red Sox pitcher who founded 38 Studios, didn’t disclose to the state’s economic development organization the negative information about the company’s financial projections and business plan, according to a filing today in Rhode Island Superior Court.
“38 Studios failed because of risks that had not been disclosed to the EDC board, but were or should have been known by” the defendants, the state said in the complaint.
The EDC board in 2010 approved the issuance of $75 million in bonds to finance a loan to allow 38 Studios to move to Providence, Rhode Island, from Massachusetts and complete a multiplayer online game called Copernicus. The company hadn’t yet published a video game, according to the complaint.
The board’s advisers mentioned the risks and the board concluded that the “merits and benefits of the transaction were sufficient” to justify taking them, the EDC said. Those risks included the company’s lack of a track record and its ability to finish developing the game on time and within its budget, according to the complaint.
38 Studios filed for liquidation in U.S. Bankruptcy Court in Delaware in June.
“Even with the loan from the EDC, 38 Studios was undercapitalized by many millions of dollars and would not have nearly enough money to relocate to Rhode Island and complete Copernicus,” according to the complaint.
Wells Fargo and Barclays were the placement agents for the $75 million loan.
“We are reviewing this matter and have no comment at this time,” Dana Obrist, a spokeswoman for San Francisco-based Wells Fargo, said in an e-mail. Mark Lane, a spokesman for London- based Barclays, declined to comment.
Katie Leighton, a spokeswoman for Schilling, didn’t respond to messages seeking comment on the suit.
“For your tax dollars to be squandered is unacceptable,” Rhode Island Governor Lincoln Chafee said in a statement today. “The board’s legal action was taken to rectify a grave injustice put upon the people of Rhode Island.”
Among those also sued were First Southwest Co., the EDC’s financial adviser for the loan; Starr Indemnity & Liability Co., an insurer for 38 Studios; Adler Pollock & Sheehan, the law firm that represented the board; Keith Stokes, the EDC’s former executive director; and other officers and directors of 38 Studios.
The EDC and Bank of New York Mellon Trust Co. won court approval in August to take possession of 38 Studios’ assets.
The bankruptcy case is In re 38 Studios LLC, 12-11743, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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