A Providence, R.I., legal aid group is accusing Moody’s Investors Service of bias in its reporting about the repayment of moral obligation bonds in the controversy surrounding 38 Studios LLC, the defunct video-game company owned by former Boston Red Sox pitcher Curt Schilling.
“Given that Moody’s doesn’t seem to miss an opportunity to highlight the state’s so-called ‘moral obligation,’ despite municipal bond texts emphasizing the rating of these bonds as based on the creditworthiness of the underlying borrower, it is hard to see their contributions to date as neutral,” Matthew Fabisch, president and general counsel of the libertarian-leaning Stephen Hopkins Center for Civil Rights, said late Thursday afternoon.
Fabisch said a commentary Moody’s issued on May 23, 2012, shortly after reports of the company’s financial problems surfaced, implies a pro-investor slant by the rating agency.
The Hopkins Center said it wants a full discourse on all options regarding the debt, including a discussion on the difference between a moral obligation pledge and a general obligation based on full faith and credit.
“‘Moral obligation’ is in the minds of Wall Street analysts, not in the laws and documents in the state of Rhode Island,” Fabisch said in a statement. “Careful study of state statutes and investor disclosure reveals no obligation whatsoever for Rhode Island to make up the shortfalls to 38 Studios bondholders.”
“It looks as though Moody’s is putting its finger on the scale and trying to influence public policy,” Hopkins Center legal researcher Brian Bishop said in an interview.
Two bills are pending the Rhode Island legislature prohibiting the state from paying 38 Studios debt. State officials, including Gov. Lincoln Chafee, General Treasurer Gina Raimondo and revenue Director Rosemary Booth Gallogly, say they favor the debt, fearing backlash from investors and credit rating agencies.
Schilling’s company filed for Chapter 7 liquidation last June. Court documents revealed 38 Studios owing Rhode Island $116 million, including interest, among its $151 million in liabilities.
Rhode Island, through its economic development corporation, issued $75 million of bonds sold to private investors in 2010 that were backed by moral obligation, to lure Schilling to move his company to Providence from Maynard, Mass.
Fabisch also called on Raimondo, as the state’s top financial official, to distance herself from her previous comments saying the state should pay the debt. “The state has no obligation to 38 Studios bondholders. Once that is established, the state can debate whether to appropriate money for 38 Studios bondholders just as it does for all bondholders, a reflection of out priorities and appropriate public policy.”
A message was left with Raimondo’s office seeking comment.
“Moody’s role in the financial markets is as an independent observer and analyst of credit risk. We are prohibited from providing advice on structuring debt and we do not make recommendations on public policy matters,” vice president and senior analyst Marcia Van Wagner and public finance managing director Robert Kurtter said in their response letter to the center.
“Since we are market observers, our opinions are intended to promote dialogue and debate amongst market participants about the relative credit risk of bonds issued in the public finance marketplace. Our ratings are intended to augment -- not replace -- independent credit analyses by sophisticated investors and other market participants.”
A message seeking further comment was left with Moody’s late Thursday.
Schilling was revered in New England for pitching Boston to victory on a bad ankle, sock bloodied, in Game 6 of the 2004 American League Championship Series, with the Red Sox facing elimination in New York’s Yankee Stadium. Boston went on to its first World Series championship in 86 years.
