The computer game studio founded by former Red Sox pitcher Curt Schilling failed two years ago, but controversy over Rhode Island's role in its financing lingers.

PROVIDENCE, R.I. — Bond payment aside, dark intrigue and controversy continue to loom over Rhode Island's 38 Studios saga.

Surrounding the failed $75 million economic development deal for former Boston Red Sox pitcher Curt Schilling's failed video-game company are accusations of insider trading; threats against two state representatives warning them to "stop poking around"; a raid on state Rep. Gordon Fox's home and office that could relate to 38 Studios and which prompted his resignation as House speaker; and objections to the state rehiring its financial advisor even though it's suing it and other banks, looking to reclaim lost money from the deal.

In addition, the State Police want to talk with lawmakers who voted in 2010 in favor of the financing.

"This falls into the 'only in Rhode Island' type of thing," said Michael Chippendale, R-Foster, one of the threatened lawmakers.

The General Assembly on June 16 approved an $8.7 billion budget for fiscal 2015, which included a $12.3 million payment toward 38 Studios moral obligation debt. Gov. Lincoln Chafee signed the budget Thursday, calling the bond payment vital for Rhode Island's reputation in the capital markets.

Standard & Poor's removed Rhode Island from credit watch negative June 18. S&P and Fitch Ratings rate the state's general obligation bonds AA. Moody's Investors Service rates them Aa2.

The Rhode Island Economic Development Corp. — now Rhode Island Commerce Corp. — issued Schilling a $75 million loan guarantee four years ago, backed by the state's moral obligation, to move the company to Rhode Island from Massachusetts and complete the multiplayer online video game "Copernicus."

The 2012 collapse of 38 Studios left Rhode Island on the hook for the loan.

The overwhelming vote in both branches of the legislature for paying the 38 Studios debt belied a heated debate, which included accusations that the rating agencies went over the top by equating moral obligation and general obligation debt and threatening the state with multinotch downgrades.

Outgoing state Director of Administration Richard Licht dismissed the critics.

"My concern is that more ink is being given to a very small minority," said Licht, whom the Senate just confirmed for a Rhode Island Superior Court judgeship. "The naysayers are getting a lot of attention."

The controversy buzzes loud and long.

Michael Riley, who says he buys Rhode Island bonds and is a co-founder of Narragansett, R.I., investment firm Coastal Management Group LLC, has asked the Boston office of the Federal Bureau of Investigation to investigate a sale of $1.2 million in 38 Studios bonds on May 23, 2102, one day before Schilling laid off his employees by email.

Riley, who also asked the Securities and Exchange Commission to investigate, said the unidentified trader made a profit of almost $200,000. "This is known as insider trading. It stinks," he said in an interview at India Point along the Providence waterfront. The Commerce Corp. in 2013 confirmed the SEC is investigating the 38 Studios deal itself.

"It is our policy not to confirm or deny any information we receive from the public," special agent Greg Comcowich from the FBI's Boston office said Thursday.

Riley, who lost a bid for Congress as a Republican in 2012, said he discovered the trade while researching derivatives data for his testimony before a House finance committee hearing two weeks ago. "I wasn't really looking for 38 Studios — there had been only 42 trades in three years — but then this one really jumped out at me."

He told lawmakers: "I did the wrong thing. I didn't buy these pieces of crap, because if I did, I would have made a lot of money. But what I was scared about was that they were insured. They were yielding three to four hundred basis points over the general marketplace and nobody was saying anything and Moody's rated them A. What the hell was going on? So I ran away from it. I assumed it was a time bomb."

Riley, hoping to leverage Schilling's iconic status in New England, has pushed for the former ballplayer to call for a federal investigation into the fiasco. He said he even visited Schilling's home earlier this month, but could not meet with the former star. Schilling, who famously pitched with an ankle injury that turned one of his socks bloody to help the Red Sox in 2004 win their first World Series title in 86 years, announced on Feb. 5 that he was battling cancer.

Chippendale and state Rep. Karen MacBeth, D-Cumberland, both of whom oppose paying the bonds, received threatening letters in late April after inquiring to state officials about an unfinished forensic audit Chafee had ordered from the EDC.

The threats have deepened their resolve, they said in a joint interview at the State House. "Now it's personal," said Chippendale, serving his second term.

Chippendale received his letter first. "I'm a Republican. There are fewer of us here, and the mail is easier to sort," he said, grinning. He's one of six Republicans in the 75-seat House.

According to Chippendale, the letter said: "You have a beautiful family. For their sake, stop poking around."

MacBeth wouldn't specify the wording in her letter but said it was similar. "They used the same font," she said.

They said few inside the capitol knew they were "poking around." Chippendale said he spent $2,000 for a new security system on his home. "I know how to re-key my door lock now," said MacBeth.

The State Police are investigating the threats.

The State Police also want to talk with lawmakers about their vote in favor of the bond deal on May 25, 2010.

"This request was intended to ensure that any legislator, who has relevant information regarding the 2010 vote on the 'job creation guarantee program,' provides that information to investigators," State Police Supt. Steven O'Donnell said Wednesday in a statement. "The investigation of this loan, being conducted by the State Police and the attorney general, remains active and ongoing."

According to O'Donnell, Attorney General Peter Kilmartin, who voted for the deal as a state representative in 2010, has no conflict. "I have full confidence in the professionalism of the career prosecutors he has assigned to this investigation," said O'Donnell.

Kilmartin spokeswoman Amy Kempe told the Providence Journal he assigned "an experienced white-collar prosecutor to assist the state police in their investigation." She added that Kilmartin was not aware in 2010 that 38 Studios would benefit from the loan guaranty program.

Albin Moser, attorney for former House speaker Fox, told a Superior Court judge last month that a wide-ranging grand jury investigation may include 38 Studios.

MacBeth, who became chairwoman of the House oversight committee under Speaker Nicholas Mattiello after Fox resigned in early March, wants all records that relate to the hiring of Deloitte LLP to conduct the forensic audit, the determination not to pursue that audit and any related communications between the Commerce Corp. and Deloitte and with Braver PC. Braver's audit in 2012 found that 38 Studios spent all $50 million it received from the state.

Commerce Corp.'s law firm, Shechtman Halperin Savage LLP, wanted 20 extra days to obtain the information. That irritated MacBeth, because lawmakers were under a tight budget deadline to vote on the bond payment.

"With Karen, it's all about right and wrong," said Riley.

MacBeth, in her third two-year term, hardly fits the municipal bond gadfly prototype. The principal of Harris Elementary School in Woonsocket and a single mother of three children entered politics as a children's advocate. After a stint on the Cumberland school committee, she won an open-seat election for state representative.

"When I first got to the House, I didn't even know what a speaker was," she said.

MacBeth voted for the bill in 2010 but says she has since sharpened her radar. She says the 38 Studios deal doesn't pass the stink test. "I was told this was a jobs-creation bill and I was lied to," she said.

Election-year politics has intensified the controversy. In January, Rhode Island will have a new governor, treasurer and mayor of Providence.

New state leadership could trigger new debate over the bond payments, according to former state treasurer Frank Caprio, who opposes paying the 38 Studios debt.

Caprio is running to reclaim the treasurer's office, which is open as incumbent Gina Raimondo runs for governor.

"This 38 Studios issue is ever-changing as more details come out," Caprio said.

With Chafee not seeking re-election, Providence Mayor Angel Taveras and Clay Pell, the grandson of former U.S. Senator Claiborne Pell, are running against Raimondo on the Democratic side. Republican candidates are businessman Ken Block and Cranston Mayor Allan Fung.

"Everywhere I go, students, barbers, bartenders are talking about 38 Studios," said Gary Sasse, the founding director at the Hassenfeld Institute for Public Leadership at Bryant University in Smithfield, R.I. Add Uno Pizzeria & Grill at Providence Place Mall near the capitol, where a waitress discussed 38 Studios at length with a visiting journalist.

Sasse, a former director of the state administration and finance departments, says he's neutral on 38 Studios repayment. He said lawmakers entered the bond-payment debate with two strikes against them.

"First was the ill-conceived strategy. This was structured like a corporate deal, so what the state should have done is, like a venture capitalist, invest, say, $5 million at first and see if the company was making progress," said Sasse. "Strike two was the way the program was ineptly managed. Then the possible third strike is incomplete information. No one has asked bondholders and bond buyers for their input, even though Speaker Mattiello visited the rating agencies in New York."

Rhode Island's largest bondholders are State Farm Mutual, Thornburg Investment, State Farm Fire & Casualty, Western Surety Co. and Travelers Indemnity.

Sasse suggested lawmakers hire an outside advisor to vet a state-sponsored report by SJ Advisors of Eden Prairie, Minn., that said defaulting could drop Rhode Island GOs to junk, even below Puerto Rico.

Caprio wants to disqualify longtime state financial advisor First Southwest on conflict of interest grounds and issue a new request for proposals. First Southwest, the state's advisor since 2001, is one of several parties Commerce Corp. is suing in Rhode Island Superior Court over lost income from the fiasco.

The complaint accuses First Southwest, advisor on the 38 Studios bonds, and others of misleading the EDC about risks associated with the deal. "Defendants [including First Southwest] knew or should have known that 38 Studios would not be able to repay under either its 'worst case' or even its 'most likely' revenue projections," the lawsuit said.

The official statement with Rhode Island's April $78.7 million GO bond sale, with First Southwest as a financial advisor, did not mention the firm's status in the 38 Studios lawsuit. It did acknowledge five suits by public-sector unions challenging the 2011 landmark pension overhaul law.

Chafee and Raimondo renewed First Southwest for two years. The only other RFP respondent was Public Financial Management Inc., which opened a Providence office in September 2011.

"Everything is not done in a vacuum here," Chafee said in a State House interview on June 17. "EDC filed the lawsuit last July and we just had to continue our function of government." He said First Southwest's track record with the state worked in its favor.

"Our local presence enables us to focus on providing a high quality of service to issuers in the state," First Southwest said in a statement. "Over the last five years, First Southwest has been the number-one ranked financial advisor in Rhode Island.

"First Southwest contests the allegations in the lawsuit but cannot comment further on current investigations or pending litigation."

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