Hilltop Securities Settles 38 Studios Suit for $16M

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Financial advisor Hilltop Securities Inc. -- formerly First Southwest – has agreed to pay $16 million to settle the lawsuit Rhode Island Commerce Corp. brought in the wake of the failed 38 Studios deal.

Hilltop was the last remaining defendant in the four-year, lightning-rod case involving former baseball pitcher Curt Schilling's video-game company, whose demise left Rhode Island taxpayers with a $75 million tab for moral-obligation debt issued to lure the firm to Rhode Island.

Raimondo, announcing the settlement Wednesday, urged the court to release all documents related to the bond-financing fiasco.

"We cannot rest on monetary recovery alone. If the court approves this settlement, the civil case will end and I will immediately petition the court for the release of all materials associated with the grand jury investigation of 38 Studios," Raimondo said in a statement.

First Southwest was the advisor to the Rhode Island Economic Development Corp. – the predecessor agency to RI Commerce -- for the deal in 2010. Hilltop completed its merger with First Southwest in January 2016.

"We have reached a settlement with the Rhode Island Commerce Corp. that once approved by the court will resolve the 38 Studios matter," said Hilltop press officer Patti Doyle. "This resolution contains no admission of liability or wrongdoing and it allows our firm to put this matter behind us and move forward on the important work we undertake for municipal clients across the country."

RI Commerce filed the agreement Wednesday in Rhode Island Superior Court, which must sign off. Judge Michael Silverstein has set a Feb. 9 hearing date.

"I am pleased that First Southwest has finally done the right thing and agreed to help recover some of the losses from the 38 Studios debacle, just as every other defendant in the case had already done," said state General Treasurer Seth Magaziner.

Approval would raise settlement money RI Commerce has generated to $61 million.

"This long, sad chapter in the state's history is now finally closed.  And the lesson was learned at a heavy price," said Anthony Sabino, a Mineola, N.Y., white-collar defense attorney and a St. John's University law professor. "When the state makes investments with or accords various benefits to new business ventures, be very sure to openly and honestly appraise their realistic chances of success, and don't be swayed with the fact that some 'star power' is associated with the venture, no matter how appealing that seems."

Neither the state police nor state attorney general's office filed criminal charges, which frustrated many in the state who wanted to know what happened.

"Rhode Islanders deserve to have access to all of the information that is known," said Raimondo. "Complete transparency is the best way to ensure that such a disastrous deal never happens again."

The EDC sold $75 million in bonds in 2010 to entice 38 Studios founder Schilling to relocate his company to downtown Providence from Maynard, Mass. The company was to repay the loan with revenues generated from a multi-player video game project code-named Project Copernicus.

Schilling, who pitched in the World Series for three teams over his 20-year career, is best known for his "bloody sock" victory for Boston in New York's Yankee Stadium while pitching with a torn tendon in his foot. The Red Sox averted elimination that night and went on to their first World Series championship in 86 years. He also helped pitch the Red Sox to another title in 2007.

Schilling, who wore jersey number 38 while pitching, was a video-game enthusiast who used his New England celebrity to promote the deal. He pitched Rhode Island officials and lawmakers, who saw Schilling's company as a linchpin to a tech revival in an economically struggling state.

The company folded two years later, sticking Rhode Island with the bond debt and prompting Raimondo's predecessor as governor, Lincoln Chafee, to file the lawsuit.

"This is hopefully an end to a dark spot on the state's economic development program," said Anthony Figliola, vice president at Empire Government Strategies of Uniondale, N.Y. "Rhode Island has an opportunity to attract quality businesses and foster the birth of new industries, including solar and tech.

"However, they must be careful not to do it on the backs of the taxpayers."

Schilling in September – along with fellow 38 Studios executives Thomas Zaccagnino, Richard Wester and Jennifer MacLean, and their insurer, Starr Indemnity and Liability Co. -- agreed to pay $2.5 million. Other settlements, according to RI Commerce, included $25.6 million with the placement agents on the deal, Wells Fargo Securities  and Barclays Capital; $4.4 million with Antonio Afonso Jr. and Moses Afonso Ryan Ltd.; and $12.5 million with Adler, Pollock & Sheehan PC, Robert Stolzman, J. Michael Saul, and Keith Stokes.

Stokes, the EDC's executive director under Gov. Donald Carcieri when the state executed the transaction, resigned under pressure.

Sports network ESPN fired Schilling last year because of his political rants on social media.

While the controversy simmered, bond rating agencies warned that they considered moral-obligation debt tantamount to general obligation and threatened downgrades if Rhode Island did not pay the debt, as some lawmakers threatened. The state made annual payments for three years. According to Raimondo, the state will not have to make a 38 Studios-related debt payment in its fiscal 2018 budget, thanks to the out-of-court settlements.

Moody's Investors Service rates Rhode Island's general obligation bonds Aa2. Fitch Ratings and S&P Global Ratings assign AA ratings. All three assign stable outlooks.

Rhode Island lawmakers held hearings on the controversy and state representatives Karen MacBeth and Michael Chippendale said they received anonymous threatening letters insisting they "stop poking around."

MacBeth, a Woonsocket school principal who gave up her seat last year during a truncated run for Congress, said Wednesday that the lawsuit "was never about getting answers for the people and making sure those involved were held accountable. … It was about getting as much money as possible and getting answers only after the settlements."

MacBeth added, "The governor states, 'now, Rhode Islanders deserve to have access to all of the information that is known.'  Rhode Island taxpayers deserved this years ago."

Separately, RI Commerce and the Securities and Exchange Commission reached a settlement in principle to resolve SEC fraud charges in connection with a Wells Fargo private placement.

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