SEC subpoenaes RICC for more information pertaining to 38 Studios investment, subsequent lawsuit

Friday, 3 January 2014 20:53 GMT By Stephany Nunneley

In September, the US Securities and Exchange Commission (SEC) began an investigation into the $75 million loan handed to 38 Studios by the state of Rhode Island’s Economic Development Corporation (EDC), which as of January 1 was renamed the Rhode Island Commerce Corporation (RICC). Today, it has come to light that the SEC has subpoenaed the RICC for more information pertaining to the investment and the ongoing lawsuit.

According to a report on The Providence Journal, via Polygon, last month the SEC requested depositions and exhibits from the lawsuit against Curt Schilling and 38 Studios.

The RICC sold $75 million worth of in bonds to private equity firms and corporations in order provide enough cash to lure Schilling’s company from Boston, Massachusetts.

The SEC’s December request was sent to a New-York based law firm well-versed in SEC law and inquiries, which was hired in 2012 by the state of Rhode Island.

It’s likely that the SEC is seeking more information pertaining to the bonds sold to Texas-based financial firm USAA ($35.96 million) and nine other bondholders which purchased 90% of “the outstanding debt Rhode Island leaders used.” There’s also been rumblings that the interest rate on the bonds was “triple” what it should have been.

Other bondholders include Netherlands-based Transamerica Corp ($19.33 million), three subsidiaries of Connecticut-based insurer W.R. Berkley ($8 million), Country Financial of Illinois ($1 million), Wisconsin mutual insurer Acuity ($1 million), Florida’s Carolina Casualty Insurance Co. ($860,000) and Wisconsin-based Germantown Mutual Insurance ($240,000).

Three others purchased $500,000 each in bonds: United Heritage Mutual Life Insurance of Idaho, Attorneys Liability Protection Society of Montana and Minnesota Lawyers Mutual Insurance Company.

As of April 2013, the remaining owners of the $7.32 million in 38 Studios bonds remain unaccounted for, according to WPRI.

Some advisers familiar with the legalities behind such bonds, legally classified in this case as moral-obligation bonds instead of general-obligation bonds, state the Rhode Island government is under ‘no moral obligation’ to pay by default, and all bond holders will recoup perceived losses due to being insured.

Such insurance “guarantees the scheduled payment of principal of and interest on the 2010 Bonds when due,” via the investor documents

Should RI default on the 38 Studios bonds, it ‘could’ make it difficult to borrow money in the future without high interest rates (it lowers the bond rating – snn), but if history proves anything, such an effect would not be massive nor would it last. But again, these are moral-obligation bonds – not general obligation bonds. There’s a big difference.

According to RI Future, state law does not require RI it to “back up” RICC in this particular case, because the state has not defaulted on obligation – there’s nothing for it to be defaulting on.

Therefore, the state does not need to repay the bonds; however, despite this, governor Lincoln Chaffee said he has no plans to default as he takes the clause ”moral-obligation’ to the fullest extent of those words.”

“We made a moral obligation and I’m going to live up to it,” he said.

Don’t expect this to mess to be cleaned up any time soon, then. Meanwhile, to get caught up on everything pertaining to the 38 Studios lawsuit, be sure to look over our hub.